McDonald’s Leadership Role in the Fast-Food Industry

Subject: Case Studies
Pages: 7
Words: 2201
Reading time:
8 min
Study level: PhD

Introduction

In 1992 McDonald’s sold its 90 billionth burger and they stopped counting ever since (Shamsie, p.25). But in 2002 the company posted its first quarterly loss amounting to a staggering $343.8 million (Shamsie, p.25). One of the corporate leaders of McDonald’s explained the decline succinctly when he remarked “We were hip 15 years ago, but I think we lost that” (Shamsie, p.27). In other words there was a time when McDonald’s was making huge strides and then because of some forces in the market and some unexpected changes the company has experienced serious problems. In recent years the CEO of McDonald’s tried desperately to turn things around. In this study strategic management principles will be applied to this case to find out if indeed the company can bounce back and assert it leadership role in the fast-food industry.

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Problem Statement

The company began to lower its standards when it decided to expand globally in the 1990s. As a result the head office stopped evaluating its franchises in terms of cleanliness, speed, and service (Shamsie, p.24). The strategy to offer more diversified products such as those that are not related to their main business of selling hamburgers had backfired. This is exacerbated by another problem which is the rapid acquisition of non-burger chains that are not profitable for the company. Finally, the company is struggling when it comes to product development.

Strengths and Weaknesses

The strength of the company is in its brand name. This means that the company is trusted by millions of customers. Secondly, McDonald’s has a global presence and thousands of outlets all over the world. Their global presence and numerous outlets scattered all over the key cities of the world is the reason why their products are easily accessible to the general public. The strengths of the enterprise is countered by weaknesses. First of all, the company has taken in more acquisitions than it can handle. Their position is also weakened by the significant diversity when it comes to the products that they try to sell. The company is trying to do so many things at the same time and therefore unable to focus n the essentials. This gives the illusion that they are doing so many things but in truth the quality of their output is questionable.

Opportunities

The company can utilize strategic management principles such as cost leadership and lower the prices of their burgers and other items in order to attract more customers. It was also pointed out that the company can develop more healthier food products such as the addition of salads and fruits to their menu to make it more appealing to those who are more conscious of what they eat. The company can also capitalize on the company’s newly discovered capability to reduce the amount of fats in the food that they serve. This can be a marketing tool that they can use to attract more customers to their stores. There is also this opportunity to develop the brand even further and capitalize on the fact that McDonald’s is still the global leader when it comes to selling burgers. Finally, the company has acquired enough information and experience on how to transform the image of the store and make the customers feel the improved ambiance.

Threats

The first major threat to future success of the company is the rising cost of doing business. It is doubly hard to lower the prices of goods and therefore it is more difficult to operate on a profit. Another related threat is the financial difficulty experienced by many countries all over the world. As a result people lost their jobs and there generated a sense of insecurity that forced people to hold on to their wallets. Belt-tightening measures are in place so that the idea of eating outside the home is already considered a luxury. Aside from the financial aspect the company also faces threat from rival companies and fast-food outlets that are trying to sell healthier substitutes such as burrito and shushi.

Entry Barriers

In Porter’s 5 forces there is a concept called entry barriers (Hax, p.43). If one will use this theoretical framework to understand the nature of competition in the fast-food industry then he will discover that there is a high barrier for entry when it comes to the development of a fast-food chain. A huge capital expenditure is needed to compete with McDonald’s. The company is relatively safe in this area, meaning it is not realistic for a competitor to suddenly challenge a company as established as McDonald’s.

Substitutes

The more urgent issue to resolve is not the entry of new competitors that can be as massive and as effective as McDonald’s, the more pressing concern is the this company is the threat of substitutes. It is a significantly fragmented market and the company faces competition from restaurants that offer better tasting and more nutritious foods to other fast-food outlets such as quick meals that can be found in supermarkets, convenience stores, and even vending machines (Shamsie, p.23).

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Suppliers

The company does not face any significant problem when it comes to their suppliers. Aside from the fact that the prices of goods are increasing McDonald’s can get better terms from their suppliers because of its size (Kincheloe, p.73). It can demand competitive pricing for the raw materials needed such meat, fruits and vegetables and it can be assured of a good deal from them. The suppliers does not have the capability to pressure McDonald’s to abide by their terms. The size of the company allows it to have a leverage against suppliers. However, even suppliers cannot control external forces. For example the rising prices of fuel will automatically increase the prices of the goods that they will deliver to McDonald’s and as a result the company will have to absorb these price increases.

Buyers

While it is true that McDonald’s does not have to contend with major issues when it comes to their suppliers, it is the buyers that that they have to worry about because they have a wide range of competing products to choose from. As mentioned earlier there are quick meals being offered in supermarkets and even in vending machines. The uniqueness of McDonald’s service is not that attractive anymore. The fast, clean, and efficient service offered by the company can be easily matched by others. It does not even require a competitor to build a system similar to McDonald’s in order to succeed. Even small competitors can easily take a slice of their market share. If the buyers decide to patronize a competitor then this can really hurt the company’s bottom-line.

Rivalry

McDonald’s has to worry about the competition. For instance if rival firms will adopt the cost leadershp strategy of McDonald’s then both firms will suffer significant losses. If a competitor is willing to go down this path then McDonald’s will have to find the competitive edge to stay profitable. One way to do this is to improve their main product which is the hamburger. Therefore, the company does not have to continuously lower the price to match that of the competition. The company has to market their burgers as the best in terms of price and value.

Generic Strategies

The turnaround strategy used by McDonald’s can be traced to the generic strategies formulated by Porter. The first one that McDonald’s utilized was the cost leadership strategy (Porter, p.35). For example, the company created the affordable Dollar Menu selling food products that hare affordable yet of high quality. Aside from this, McDonald’s attempted to incorporate a differentiation strategy by creating a variety of products that consumers can choose from. It is quite apparent that the company is not keen in applying a focus strategy because of the diversified product offerings and the decision of corporate leaders to push the company to different directions in response to the idea that mass marketing no longer works.

Differentiation and Focus Strategy

These two strategies complement each other and it can be argued that McDonald’s did not utilize these strategies. If the company did not adopt these strategies then one should have seen a more deliberate move to improving their burgers. But instead of doing that the company made a series of acquisitions and attempted other measures that made the system more complicated. For example the company is now selling coffee.

Financial Analysis

Danger signs are everywhere for the McDonald’s brand. There are also signs of hope for the struggling company. The positive news of recent years is not enough to assuage the fears of the investors and shareholders. It is true that the company is not yet near bankruptcy. Based on net income between fiscal year 2006 and 2008 it is not a surprise to find that the company is profitable by at least 4.3 billion but since 2006 the growth is minimal. In fact in fiscal year 2007 the company reported that its earning was significantly lower compared to what it earned a year earlier. However, this is not the most disturbing sign for McDonald’s. The real source of concern can be found if one examines the assets of the company. In 2006 the net tangible assets was valued at an estimated $13.25 billion but in 2008 the value is only $11.15 billion. Aside from that the company added more long-term debts. Thus, in 2008 total liabilities amounted to at least $15 billion. It is clear that the value of the company is declining. This is reflected by the price of the stock which in 2002 dropped to as low as $13.50.

Solving the Service Problem

When McDonald’s decided to expand globally in the 1990s the company headquarters found it difficult to monitor every single franchisee. There is no way to grade these outlets in terms of service, speed and cleanliness. This explains the decline. The best way to solve this problem is to re-emphasize the fact that McDonald’s is not just offering food it is also offering a type of service. It is a fast-food chain and therefore there is a need to teach the value of cleanliness, speed and efficient service.

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Solving the Problem of Diversification

It can be argued that the trend was to offer different products. This seems to be a good idea at first because it provides more choices for the customers. However, the quality of these products are suspect. This simply means that McDonald’s is an expert in serving burgers and therefore find it difficult to immediately improve the quality of their new product offerings. It takes time to increase the company’s proficiency when it comes to dealing with the requirements necessary to serve non-burger products.

Solving the Problem of Acquisitions

Aside from increasing the variety of their product offerings, McDonald’s also did something that forced the leaders to deal with so many things at the same time. The company decided to acquire companies that are not related to the core expertise of the company. For example Chipotle Mexican Grill is very different from a McDonald’s store. It is time for the company to stop all these acquisitions and instead focus on improving the system and quality of service for each franchise registered under the golden arches brand.

Solving the Problem of Product Development

McDonald’s cannot afford to launch any new product without going through a thorough and effective development process. Everything must be studied not only in the quality of the food but also on the packaging. The company must renew its commitment in terms of product development. McDonald’s has to provide resources so that the company cn focus on improving the way new products are studied and tested before releasing it to the market. The company cannot afford to offer anything that is half-baked. This lack of attention to detail will backfire on McDonald’s. The customers must not have any excuse to look for substitutes.

Recommendations

It can be said that the best solution is the one concerning a more focused outlook when it comes to transforming the whole system and the whole culture of the company. McDonald’s has tried to make several products hoping to appeal to a greater market. However, this is not the main problem of the company. The main problem has something to do with the lack of focus. There is a need to implement a focus strategy. There is a need for the company to focus on its strength and that is their capability to sell burgers that are still in hot demand. It is time to sell the companies that they have acquired and focus only on the efficiency and quality of service provided by its restaurants all over the world.

Conclusion

McDonald’s is a global conglomerate that has sold billions of hamburgers all over the planet. For many decades shareholders enjoyed a steady return of their investment. But in recent years the value of the company began to nosedive. This can be attributed to an overeager expansion strategy that forced corporate leaders to spread themselves too thin and in the process sacrificed quality over quantity. The CEO has to correct these lapses in judgment. The company must go back to its roots which is the commitment to serve good tasting and affordable hamburgers.

Works Cited

Hax, Arnoldo. The Delta Project: Discovering New Sources of Profitability in a Networked Economy. New York: Palgrave, 2001.

Kincheloe, Joe. The Sign of the Burger: McDonald’s and the Culture of Power. PA: Temple University Press, 2002.

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Porter, Michael. Competitive Strategy. New York: The Free Press, 1980.

Shamsie, Jamal. Competitive Strategy. MI: Michigan State University Press, 2009.