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University of Jordan

Faculty of Business
Strategic Management

“McDonald's”

Case Study
STRATEGIC MANAGEMENT

Prepared By
Fathi Salem Mohammed Abdullah

2009
Table of Contents

Topics Page
Introduction 3
History analysis 3
Vision, Mission, Value 4
The Five Forces Framework 5
PESTEL Framework 6
External Audit 7
CPM-Competitive Profile Matrix 8
External Factor Evaluation (EFE) Matrix 9
Financial Ratio Analysis 10
Internal Audit 12
Internal Factor Evaluation (IFE) Matrix 13
SWOT Matrix 14
SPACE Matrix 15
Grand Strategy Matrix 16
The Boston Consulting Group (BCG) Matrix 17
The Internal-External (IE) Matrix 17
The Quantitative Strategic Planning Matrix 18
(QSPM)
Recommendations 20

Introduction:

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McDonald's Corporation is the world's largest chain of fast food restaurants,
serving nearly 47 million customers daily through more than 31,000 restaurants
in 119 countries worldwide. McDonald’s sells various fast food items and soft
drinks including, burgers, chicken, salads, fries, and ice cream. Many
McDonald's restaurants have included a playground for children and advertising
geared toward children, and some have been redesigned in a more 'natural' style,
with a particular emphasis on comfort: introducing lounge areas and fireplaces,
and eliminating hard plastic chairs and tables.

Each McDonald's restaurant is operated by a franchisee, an affiliate, or the


corporation itself. The corporations' revenues come from the rent, royalties and
fees paid by the franchisees, as well as sales in company-operated restaurants.
McDonald's revenues grew 27% over the three years ending in 2007 to $22.8
billion, and 9% growth in operating income to $3.9 billion.1

History analysis:

 The business began in 1940, with a restaurant opened by brothers Dick


and Mac McDonald in San Bernardino, California.
 Their introduction of the "Speedee Service System" in 1948 established
the principles of the modern fast-food restaurant.

 The original mascot of McDonald's was a man with a chef's hat on top of
a hamburger shaped head whose name was "Speedee." Speedee was
eventually replaced with Ronald McDonald in 1963.
 The present corporation dates its founding to the opening of a franchised
restaurant by Ray Kroc, in Des Plaines, Illinois on April 15, 1955 , the
ninth McDonald's restaurant overall. Kroc later purchased the McDonald
brothers' equity in the company and led its worldwide expansion and the
company became listed on the public stock markets in 1965.

1
http://en.wikipedia.org.
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 With the expansion of McDonald's into many international markets, the
company has become a symbol of globalization and the spread of the
American way of life. Its prominence has also made it a frequent topic of
public debates about obesity, corporate ethics and consumer
responsibility.2

Vision

To be the best and leading fast food provider around the globe

Mission

McDonald's brand mission is to be our customers' favorite place and way to eat,
and improve our operations to provide the most delicious fast food that meet our
customers' expectations.

Values

Our values summarized in "Q.S.C. & V.". Provide good quality, services to
customer. Have a cleanliness environment when customer enjoys their meal.
The value of food product makes every customer is smiling.

Potential
entrants

Buyers
Competitive
Suppliers rivalry

The Five Forces Framework

2
http://en.wikipedia.org.
4
Substitutes
The Threat of Entrants

Large established companies with strong brand identities such as McDonald’s


BKC, YUM, and WEN do make it more difficult to enter and succeed within the
marketplace; new entrants find that they are faced with price competition from
existing chain restaurants.

Bargaining Power of Buyers


Low bargaining power of buyers.

Bargaining power of suppliers

Bargaining power of suppliers within the fast food industry would be relatively
small, unless the main ingredient of the product is not readily available.
Threat of Substitutes

This could range from a competitive fast food restaurant to family restaurant to
a home cooked meal.

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Competitive Rivalry
The strength of competition in this industry is very high; the main rivals are
BKC, YUM, and WEN. They compete with international, national, regional,
local, retailers of food products (restaurants, quick service, pizza, coffee shops,
and supermarkets).

PESTEL Framework:

Political:

• The international operations of McDonald’s are highly influenced by the


individual state policies enforced by each government.

Economic:

• McDonald’s has the tendency to experience hardship in instances


where the economy of the respective states is hit by inflation and
changes in the exchange rates.
• Market leader.
• Very high target market.
• Low cost and more incomes.
• The rate at which the economy of that particular state grows determines
the purchasing power of the consumers in that country.

Social:

• Working within many social groups.


• Increase employments.

Technological

• Advanced technology development.


Environmental:
• Quality standards.
• Quality packing.
• Local manufacture using foreign supplies.

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Legal:

• Legislation for product.


• Sustained logo.

External Audit:

Opportunities Threats
1. Growing health trends 1. Health professionals and
among consumers consumer activists accuse
McDonald's of contributing to the
2. Globalization, expansion in other country’s health issue of high
countries (especially in China & cholesterol, heart attacks, diabetes,
India). and obesity.
3. Diversification and acquisition of 2. The relationship between
other quick-service restaurants. corporate level McDonald's and its
4. Growth of the fast-food industry. franchise dealers.
5. Worldwide deregulation. 3. McDonald’s competitors
6. Low cost menu that will attract the threatened market share of the
customers. company both internationally and
7. Freebies and discounts. domestically.
4. Anti-American sentiments.
5. Global recession and fluctuating
foreign currencies.
6. Fast-food chain industry is
expected to struggle to meet the
expectations of the customers
towards health and environmental
issues.

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CPM-Competitive Profile Matrix
McDonald's Burger King Yum Brands Wendy's
Critical Success Weight Rating Weighted Rating Weighted Rating Weighted Rating Weighted
Factors Score Score Score Score
Price 0.15 4 0.60 3 0.45 3 0.45 3 0.45
Financial 0.08 4 0.32 3 0.32 3 0.24 2 0.16
Position
Consumer 0.10 4 0.40 3 0.40 3 0.30 2 0.20
Loyalty
Advertising 0.10 3 0.30 3 0.30 4 0.40 2 0.20
Product Quality 0.10 4 0.40 3 0.40 4 0.40 2 0.20
Innovation 0.15 3 0.45 3 0.45 3 0.45 2 0.30
Market Share 0.10 4 0.40 2 0.20 3 0.30 2 0.20
Management 0.07 4 0.28 3 0.21 3 0.21 3 0.21
Global 0.15 4 0.60 2 0.30 3 0.45 1 0.15
Expansion
Total 1 3.75 3.03 3.20 2.07

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External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score


Opportunities
Growing health trends among 0.08 3 0.24
consumers

Globalization, expansion in other countries 0.12 4 0.48


(especially in China & India).

Diversification and acquisition of other quick- .04 3 0.12


service restaurants.

Growth of the fast-food industry. .10 3 0.30

Worldwide deregulation .04 2 0.08

Low cost menu that will attract the customers. .08 2 0.16

Freebies and discounts. .08 1 0.08

Threats
Health professionals and consumer activists 0.10 3 0.30
accuse McDonald's of contributing to the
country’s health issue of high cholesterol, heart
attacks, diabetes, and obesity.

The relationship between corporate level 0.09 3 0.27


McDonald's and its franchise dealers.

McDonald’s competitors threatened market 0.12 4 0.48


share of the company both internationally and
domestically.
Anti-American sentiments. .07 2 .14

Global recession and fluctuating foreign .04 3 .12


currencies.

Fast-food chain industry is expected to struggle .04 2 .08


to meet the expectations of the customers
towards health and environmental issues.
Total 1.00 2.85

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Financial Ratio Analysis 12/2007
Growth Rates % McDonald's Industry S&P 500
Sales (Qtr vs year ago qtr) -3.30 4.20 -3.80
Net Income (YTD vs YTD) 84.70 47.90 8.40
Net Income (Qtr vs year ago qtr) -22.60 -59.90 -94.80
Sales (5-Year Annual Avg.) 6.53 8.14 13.26
Net Income (5-Year Annual Avg.) 23.39 15.30 14.45
Dividends (5-Year Annual Avg.) 32.36 22.36 12.30
Price Ratios
Current P/E Ratio 14.7 14.2 13.0
P/E Ratio 5-Year High N/A 9.5 12.5
P/E Ratio 5-Year Low N/A 4.7 2.0
Price/Sales Ratio 2.62 1.88 1.47
Price/Book Value 4.62 3.54 3.00
Price/Cash Flow Ratio 11.20 10.00 9.00
Profit Margins %
Gross Margin 36.7 32.1 39.4
Pre-Tax Margin 26.2 17.2 13.2
Net Profit Margin 18.3 12.0 9.1
5Yr Gross Margin (5-Year Avg.) 33.9 33.3 39.1
5Yr PreTax Margin (5-Year Avg.) 19.8 14.2 16.6
5Yr Net Profit Margin (5-Year 13.7 9.8 11.45
Avg.)
Financial Condition
Debt/Equity Ratio 0.76 .80 1.03
Current Ratio 1.4 1.2 1.4
Quick Ratio 1.3 1.1 1.1
Interest Coverage N/A 1.2 29.9
Leverage Ratio 2.1 -5.3 1.9
Book Value/Share 12.00 10.00 19.75
Investment Returns %
Return On Equity 32.2 44.4 27.9
Return On Assets 14.9 11.3 8.1
Return On Capital 17.0 13.7 11.2
Return On Equity (5-Year Avg.) 19.7 22.8 20.6
Return On Assets (5-Year Avg.) 10.0 8.98 8.5
Return On Capital (5-Year Avg.) 11.4 11.0 11.5
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Management Efficiency
Income/Employee 10,783 9,401 91,499
Revenue/Employee 58,806 98,207 1,000,000
Receivable Turnover 23.7 44.7 15.8
Inventory Turnover 125.7 98.7 12.3
Asset Turnover 0.8 1.1 1.0

Date Avg P/E Price/ Sales Price/ Net Profit Margin


Book (%)
12/07 26.50 3.13 4.49 10.2
12/06 16.10 2.66 3.45 13.7
12/05 15.80 2.25 2.81 13.5
12/04 15.60 2.20 2.87 12.2
12/03 17.10 1.85 2.62 8.8

Date Book Debt/ Return on Return Interest


Value/ Equity Equity (%) on Assets Coverage
Share (%)
12/07 $13.11 0.61 15.3 7.9 9.5
12/06 $12.84 0.54 18.5 9.9 11.0
12/05 $11.99 0.67 17.0 8.6 11.0
12/04 $11.18 0.65 16.0 8.2 9.9
12/03 $9.50 0.81 12.6 5.8 7.3

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Net Worth Analysis 12/2007 (in millions)

1. Stockholders' Equity + Goodwill= 15,279.80+2,301.30 $17,581.10


2. Net income x 5 = 2395.10 x 5 $11,975.50
3. Share price = 58.91/EPS 2.02=$29.16 x 2,395.10 $69,849.18
4. Number of Shares Outstanding x Share price = $68,630.15
1,165x58.91
Method Average $42,009

Internal Audit

Strength Weakness

1. Strong brand name, image and 1. Unhealthy food image.

reputation. 2. High Staff Turnover including Top

2. Large market share. management

3. Strong global presence. 3. Customer losses due to fierce

4. Specialized training for managers known competition.


as the Hamburger University.
4. Legal actions related to health
5. McDonalds Plan to win focuses on
issues; use of trans fat & beef
people, products, place, price and oil.

promotion. 5. Uses HCFC-22 to make


polystyrene that is contributing
6. Strong financial performance and to ozone depletion.

position. 6. Ignoring breakfast from the


menu.
7. Introduction of new products.
8. Customer focus (centric).

9. Strong MCD's performance in the global


marketplace.

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Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted Score


Strengths
Strong brand name, image and 0.12 4 0.48
reputation.
Large market share. 0.10 4 0.40
Strong global presence. 0.04 3 0.12
Specialized training for managers 0.04 3 0.12
known as the Hamburger University.

McDonalds Plan to Win focuses on 0.12 4 0.48


people, products, place, price and
promotion
Strong financial performance and 0.08 4 0.32
position.
Introduction of new products. 0.06 4 0.24
Customer focus (centric). 0.06 4 0.24
Strong performance in the global 0.08 4 0.32
marketplace.

Weaknesses
Unhealthy food image. 0.08 1 0.08
High Staff Turnover including Top 0.04 1 0.10
management
Customer losses due to fierce 0.04 1 0.04
competition.
Legal actions related to health issues; 0.04 2 0.08
use of trans fat & beef oil.
McDonald's uses HCFC-22 to make 0.04 2 0.08
polystyrene that is contributing to
ozone depletion.
Ignoring breakfast from the 0.06 1 0.06
menu.

Total 1.00 3.16


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SWOT Matrix

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Strengths Weaknesses
1. Strong brand name, image and 1. Unhealthy food image.
reputation. 2. High Staff Turnover including
2. Large market share. Top management.
3. Strong global presence. 3. Customer losses due to fierce
4. Specialized training for managers competition.
known as the Hamburger 4. Legal actions related
University. to health issues; use
5. McDonalds Plan to Win focuses on of trans fat & beef
people, products, place, price and oil.
promotion.
6. Strong financial performance and 5. Uses HCFC-22 to make
position. polystyrene that is

7. Introduction of new contributing to ozone

products. depletion.
6. Ignoring
8. Customer focus (centric).
breakfast from
9. Strong performance in the the menu.
global marketplace.

Opportunities S-O Strategies W-O Strategies


1. Growing health 1. Focus on Plan to win to attract customers 1. Minimize customers losses by
trends among and expansion in other countries (S5, O2, provide low cost menu and
consumers. O6). discounts (W3, O6, O7).
2. Expansion in market share by more
2. Globalization, expansion in investments in Asia (S2, O2).
other countries (especially
in China & India).
3. Diversification and
acquisition of other quick-
service restaurants.
4. Growth of the fast-food
industry.
5. Worldwide deregulation.
6. Low cost menu that will
attract the customers.
7. Freebies and discounts.

Threats S-T Strategies W-T Strategies


1. Health professionals and 1. More control on franchise dealers 1. Applying 0 grams Trans fat in
consumer activists accuse to maintain McDonald's reputation all worldwide McDonald's
McDonald's of contributing and quality (S1, T2). (W1, W4, O1).
to the country’s health issue 2. Provide new product and keep 2. Transfer from HCFC-22 to
of high cholesterol, heart innovation (S7, T3). HFC (hydrofluorocarbon)-free
attacks, diabetes, and (W5, T6)
obesity.
2. The relationship between
corporate level McDonald's
and its franchise dealers.
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3. McDonald’s competitors
threatened market share of
the company both
internationally and
domestically.
SPACE Matrix

Financial Strength Rating Environmental Stability Rating


Return on investment 4 Rate of inflation -3
Leverage 4 Demand Changes -3
Net Income 6 Price Elasticity of demand -1
EPS 5 Competitive pressure -3
ROE 5 Barriers to entry new markets -3
Cash Flow 4 Risk involved in business -2
Average 4.67 Average -2.5
Y-axis 2.17
Competitive Advantage Rating Industry Strength Rating
Market share -1.00 Growth potential 5
Product Quality -1.00 Financial stability 5
Customer Loyalty -1.00 Ease of entry new markets 4
Control over other parties -2.00 Resources utilization 4
Profit potential 5
Demand variability 3

Average -1.25 Average 4.33


X-axis 3.08

Directional vector point is :( 3.08, 2.17)


FS
Conservative Aggressive

C IS

Defensive Competitive

ES

Grand Strategy Matrix

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Rapid Market Growth

Quadrant II Quadrant I

Weak
Competitive Strong
Position Competitive
Position

Quadrant III Quadrant IV

Slow Market Growth

The Boston Consulting Group (BCG) Matrix

Relative Market Share Position

MCD
Stars Question Marks
Industry
Sales
Growth
Rate
Cash Cows Dogs

The Internal-External (IE) Matrix


The IFE Total Weighted Score

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Strong Average Weak
3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
I II III

High
3.0 to 3.99

IV V VI

The EFE Total


Medium
Weighted Score
2.0McDonald's
to
2.99

VII VIII IX

Low
1.0 to 1.99

The Quantitative Strategic Planning Matrix


(QSPM)

Strategy 1 Strategy 2

Expand further in Applying 0 grams


Asia by adding 500 Trans fat in all
restaurants worldwide
McDonald's
restaurants

Key Internal Factors Weight AS TAS AS TAS


Strengths
Strong brand name, image and reputation 0.12 4 0.48 4 0.48

Large market share 0.10 4 0.40 2 0.20

Strong global presence 0.04 4 0.12 2 0.08

Specialized training for managers known as the 0.04 - - - -


Hamburger University
McDonalds Plan to Win focuses on people, 0.12 4 0.48 4 0.48
products, place, price and promotion

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Strong financial performance and position 0.08 4 0.32 4 0.32

Introduction of new products 0.06 - - - -

Customer focus (centric) 0.06 1 0.06 4 0.24

0.08 3 0.24 1 0.08


Strong performance in the global marketplace
Weaknesses
Unhealthy food image 0.08 1 0.08 4 0.32
High Staff Turnover including Top management 0.10 - - - -
Customer losses due to fierce competition 0.04 3 0.12 1 0.04
Legal actions related to health issues; use of 0.04 1 0.04 4 0.16
trans fat & beef oil
Uses HCFC-22 to make polystyrene that is 0.04 - - - -
contributing to ozone depletion
SUBTOTAL 1.00 2.34 2.40

Strategy 1 Strategy 2

Expand further in Applying 0 grams


Asia by adding Trans fat in all
500 restaurants worldwide
McDonald's
restaurants

Key External Factors Weight AS TAS AS TAS


Opportunities
Growing health trends among consumers 0.08 1 0.08 4 0.32

Globalization, expansion in other countries 0.12 4 0.48 1 0.12


(especially in China & India)
Diversification and acquisition of other quick- 0.04 - - - -
service restaurants
Growth of the fast-food industry 0.10 4 0.40 4 0.40
Worldwide deregulation 0.04 4 0.16 1 0.04

Low cost menu that will attract the customers 0.08 - - - -

Freebies and discounts 0.08 - - - -

Threats
Health professionals and consumer activists accuse 0.10 1 0.10 4 0.40
McDonald's of contributing to the country’s health
issue of high cholesterol, heart attacks, diabetes, and
obesity
The relationship between corporate level 0.09 4 0.36 1 0.09
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McDonald's and its franchise dealers
McDonald’s competitors threatened market share of 0.12 4 0.48 4 0.48
the company both internationally and domestically
Anti-American sentiments 0.07 - - - -
Global recession and fluctuating foreign currencies 0.04 - - - -
Fast-food chain industry is expected to struggle to 0.04 1 0.04 4 0.16
meet the expectations of the customers towards
health and environmental issues
SUBTOTAL 1.00 2.10 2.01
SUM TOTAL ATTRACTIVENESS SCORE 4.44 4.41

Recommendations

Expand further into Asia markets over a 2-year period by adding 500
restaurants per year at a cost of $4 billion annually, and applying 0 grams
Trans fat in all worldwide McDonald's restaurants.

References
1. www.mcdonalds.com
2. www.moneycentral.msn.com
3. www.mcdonalds.ca
4. Strategic Management concepts and cases by Fred David 12 edition
5. Exploring Corporate Strategy text & cases 8th edition
6. U.S. Environmental Protection Agency

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