McDonalds Corporation Introduction History McDonalds is the worlds largest restaurant chain.

Its innovative marketing, superior products, impeccable operations, and devoted franchisees have set the standard for the fast-food industry. The company philosophy of Q.S.C.&V. (quality food; fast, friendly service; restaurant cleanliness; and a menu that provides value) and its family oriented image are the product of Ray Kroc. In addition, it is one of the worlds most recognized brand names, along with Coca-Cola, Kodak, Gillette, Sony, and Walt Disney. Operations in 119 countries highlight the truly global nature of McDonalds I the new millennium. The first McDonalds was a drive-in restaurant started in San Bernardino, California, by two brothers, Dick and Mac McDonald, in 1948. Ray Kroc, the man who made McDonalds the household name it is today, became a franchising agent for the McDonald brothers in 1954 and opened his first McDonalds in Illinois in 1955. The McDonald brothers sold the company to Ray Kroc in 1961 for $2.7 million. In 1999 alone, McDonalds generated more than $13.2 billion in total revenues. The company menu, which originally consisted only of hamburgers, cheeseburgers, French fries, sodas, milkshakes, milk, and coffee, has grown considerably since. A more technical definition of McDonalds is an organization that develops, operates, franchises, and services a worldwide system of restaurants that prepare, assemble, package, and sell a limited menu of quickly prepared, moderately priced foods. The McDonalds system is the largest and best0known food service organization in the world. The company franchises joint-venture partners, and restaurant managers operate nearly 27,000 restaurants in 119 countries, each offering a limited menu of high quality food that can be part of a well-balanced meal plan. McDonalds has pioneered food quality specifications, equipment technology, marketing and training programs and operational and supply systems, all of which are considered the standards of the industry throughout the world. Q.S.C.&V. Quality, Service, Cleanliness, and Value are the standards upon which McDonalds was built and are the reasons McDonalds continues to operate so successfully today. Financial Information Most aspect of McDonalds consolidated statement of income and

consolidated balance sheet reflect the companys growth. Total revenues in 1999 increased almost 7 percent and net income increased nearly 26 percent. Sales increases in 1999 and 1998 were primarily due to restaurant expansion and positive comparable sales. In 1999, 1998, and 1997, more than 80 percent of systemwide sales were in the following eight markets: Australia, Brazil, Canada, France, Germany, Japan, the United Kingdom, and the United States. Systemwide sales in1999 were affected less negatively by foreign currency translation than were revenues from the stronger Japanese yen and the company affiliate structure in Japan. On a constant currency basis, total revenues increased at a higher rate than sales in 1999 and 1998 because of the higher unit growth rate of company-operated restaurants relative to systemwide restaurants. In both years this was primarily due to expansion in Europe and the consolidation of several affiliate markets because of an increase in ownerships. Lackluster performance of the companys stock has done little to encourage dissatisfied Wall Street analysts. In falling to its lowest closing price since March 1998, the stock is down 34 percent for the year and has lost nearly half its value since reaching all time high of $49.56 November 2009. Because McDonalds believes its stock is undervalued, it is using its substantial and growing free cash flow plus debt capacity to aggressively repurchase shares. In 1999 the company generated more than $1.1 billion in free cash flow, an increase of 29 percent over 1998. In April it increased its three year share repurchase program by $1 billion, bringing it to $4.5 billion. The program is scheduled to be completed by the end of 2001. Historical Growth The McDonalds strategy for growth focuses on three key elements: adding restaurants, maximizing sales and profits at existing restaurants, and improving international profitability. Adding restaurants can be achieved with people and capital resources. Maximizing sales and profits at existing restaurants can be accomplished through better operations, reinvestment, product development, effective marketing, and lower economies of scale are achieved in individual markets. In 1967, McDonalds moved into Canada and Puerto Rico, the first countries outside the United States to have a McDonalds franchise. McDonalds operated 12,629 restaurants in the United States in 1999, a growth of only 2 percent since 1997. In the same timeframe, restaurants in the international market increased nearly 32 percent t number 14,177.

This supports McDonalds continued emphasis on traditional restaurants primarily in locations outside the United States. The unprecedented growth of the McDonalds Corporation is largely due to its successful use of franchisee entrepreneurs to promote the McDonalds product. Approximately 80 percent of McDonalds global restaurants are owned and operated by independent franchisees. McDonalds is highly selective in choosing its franchisees and thoroughly trains them before they join the system. Before franchisees open their restaurant, they generally spend more than two years in training and work about 2000 uncompensated hours in a McDonalds restaurant. A franchise arrangement in the United States is generally for a term of 20 years and requires a minimum of $175,000 of nonborrowed personal resources. McDonalds does not provide financing or loan guarantees. New franchisees enter the McDonalds system by acquiring a franchise for a new or existing restaurant. The purchase price of an existing restaurant is dependent upon a number of factors and is negotiated with the selling franchisee. For a new restaurant, typical preopening costs range from $432,800 to $715,150 60 percent of which may be financed from traditional sources. In a small number of cases, McDonalds sometimes grants a Business Facilities Lease (BFL) franchise to individual who do not have sufficient capital, but who excel in all other criteria. Candidates for this program generally must have liquid assets of approximately $100,000. With limited exceptions, McDonalds does not supply food, paper, or equipment to any of its restaurants but approves suppliers from which franchised and company operated restaurants can purchase these items. Franchisees are required to pay related occupancy cost, which includes property taxes, insurance, maintenance, and a refundable, noninterest bearing security deposit. Revenues from franchised restaurants are based on fees paid as a percent of sales, with specified minimum payments. Expenses associated with these restaurants are rent and depreciation, which are relatively fixed. Accordingly, the franchise margins are positively affected by increases in sales yet protected from rises in operating costs. Fees from franchises to McDonalds typically include rent and service fees. A monthly fee is based n the restaurants sales performance (currently a service fee of 4 percent of monthly sales) plus the greater of (a) monthly base rent, or (b) percentage rent that is at least 8.5 percent of monthly sales.

In the past, some domestic franchisee unrest has developed. In fact, some disgruntled franchisees have banded together in a loose organization called The Consortium The primary source of dissension among franchisees is attributed to an aggressive growth strategy McDonalds decided to pursue in the early 1990s. The strategy involved adding more restaurants and taking on new franchise agreements, and it was successful in terms of domestic growth, but it angered existing franchisees as it cut into their margins. Product McDonalds restaurants offer a substantially uniform menu consisting of hamburgers and cheeseburgers. The menu includes the Big Mac, Quarter Pounder with Cheese, the Big Xtra!, the Filet-O-Fish, several chicken sandwiches, French fries, Chicken McNuggets, salads, low-fat shakes, McFlurries, sundaes, cones, pies, cookies, and soft drinks, as well as other beverages. In addition, the restaurants sell a variety of products during limited promotional time periods. McDonalds restaurants sell a variety of products during limited promotional time periods. McDonalds restaurants operating in the United States and certain international markets are open during breakfast hours and offer a full or limited breakfast menu including the Egg McMuffin and the Sausage McMuffin with Egg sandwiches; hotcakes and sausage, three varieties of biscuit sandwiches; bagel sandwiches; hashbrowns; and apple-bran muffins. McDonalds restaurants in countries around the world offer many of these same products as well as other products and limited breakfast menus. The company tests new products on an ongoing basis. Regardless, McDonalds has not had a successful new product introduction since the Chicken McNugget in 1983. Competition McDonalds restaurants compete with international, national, regional, and local retailers of food products. McDonalds competes on the basis of price, convenience, and service and by offering quality food products. McDonalds views its competition in the broadest perspectives: restaurants, quick-service eating establishments, pizza parlors, coffee shops, street vendors, convenience food stores, delicatessens, and supermarkets. In the United States, the quick service restaurant business consists of about 465,000 restaurants that generate nearly $261 billion in annual sales. McDonalds accounts for about 2.7 percent of those restaurants and approximately 7.3 percent of those sales. That leaves 92.7 percent, or nearly $242 billion, to competing restaurants. Competitors include, but

are not limited to, Burger King, Wendys, Hardees, Taco Bell, and KFC. Employees Employees of eating and drinking establishments are paid considerably less than employees of any other nonagricultural industry. Most of the employees are students and other young people working for the first time. Wages in the fast-food industry in the United States are largely unaffected by collective bargaining or the threat of unionization. The typical McDonalds restaurant does $1.6 million in sales a year. According to Alan Feldman, president of McDonalds USA, the chains stores are better staffed, with the average crew size up to 44 from 40. During 1999 the companys average number of employees worldwide, including company-operated restaurant employees, was approximately 314,000. Currently, the minimum wage is $5.15 an hour, but bills to raise it to $6.15 are pending in Congress. Nevertheless, McDonalds pays its employees what the market will bear, and it pays better than minimum wage. Executive, staff, and restaurant managers participate in profit-sharing contributions and shares released under the leveraged employee stock ownership program, based on their compensation. McDonalds employee strategy hinges on its ability to infuse every store with its gung-ho culture and standardized procedures. Every job is broken down into the smallest of steps, and the whole process is automated. So rule bound is McDonalds that one sociologist claimed jobs in its restaurants are unfit for young people. These are breeding grounds for robots working for yesterdays assembly lines, not tomorrows high-tech post, contends Professor Anitai Ezioni of George Washington University. Agency Costs One relevant market parameter that can make agency costs high is the physical dispersion of operations. Franchising avoids the monitoring costs of specialization because the local manager is now an investor whose wealth is strongly dependent on the performance of her or his local unit, thus making franchising more common with physically dispersed operations, as in rural areas. Also, for a given level of output, monitoring costs will rise with an increasing labor/output ratio. The use of local managers who make heavy site-specific investments and post a large bond in the form of a franchise fee makes quality debasing less likely because a franchisee has much more to lose upon termination than a local

employee-manager. Turnover McDonalds finds a strong link between the quality of its labor force at the store level and the sales of a given restaurant. A key priority for the chain has been reducing restaurant-level employee turnover. According to Feldman, current turnover is about 130 to 135 percent, down from a peak of 170 percent about five years ago. Periodically placemats used on trays are employment applicants every customer is a potential employee! Overall Corporate Strategy McDonalds is the largest food service organization in the world, with nearly 27,000 stores. Its goal has been to provide the highest quality products and friendly service in clean restaurant at good values (Q.S.C.&V.). Internationally, its strategies are to provide 100 percent customer satisfaction, increase market share, and optimize profitability by reducing costs. Its vision is to be the worlds best quick service restaurants experience. To achieve this vision, McDonalds is focused on three worldwide strategies: (1) To be the best employer for its people in each community around the world, (2) to deliver operational excellence to its customers in each of its restaurants, and (3) to achieve enduring profitable growth by expanding the brand and leveraging the strengths of the McDonalds system through innovation and technology. In 2000, McDonalds added about 1,800 restaurants worldwide, with about 200 new restaurants in the United States. To meet this goal, McDonalds current strategies have focused on the following factors. Customer Satisfaction McDonalds was founded on the principle of uniformity. An operations manual of 600 pages ensured the consistency and quality of products served by McDonalds. Although this strategy worked well in the past, customers are now demanding more than consistency. In response to the changing market, McDonalds has taken a do whatever it takes to make a customer happy strategy and has given its employees, managers, and stores the flexibility to carry out this new strategy. Healthier Foods Customers are demanding that restaurants provide healthier foods. McDonalds has heard their cry, and it has changed the way foods are prepared: hamburgers are made with lean ground beef and enriched sandwich bun; french fries and hash browns are fried in 100 percent vegetable oil; milkshakes are made with 1 percent low-fat milk; and the amount of sodium used has been decreased. It has also added more

nutritious foods to the menu: low-fat apple-bran muffins, fresh fruit and vegetables, and low-fat frozen yogurt. As one advertisement stated, McDonalds is committed to making sure that when youve got an appetite for healthy food [McDonalds will] always have the choices to satisfy you. Food Quality and Nutrition The safety and quality of McDonalds food is maintained through a combination of stringent product standards, strict enforcement of operating procedures, and close working relationships with suppliers. Specifications for both raw and cooked product quality are established and enforced by the quality assurance labs in the United States, Europe, and Asia Pacific. This quality assurance process involves ongoing testing and thorough on-site inspections of suppliers facilities. Food preparation is also closely monitored, as well as cooking and equipment maintenance and procedures. Last year, the new Made For You food preparation system was installed in virtually all restaurants in the United States and Canada. It is expected to improve food taste and quality by enabling McDonalds to deliver hot, fresh, made-to-order sandwiches. Through advances in equipment and technology, the new system allows the restaurants to serve fresher, bettertasting food at the customary speed for which McDonalds is known. The system also supports future growth through product development because it can more easily accommodate an expanded menu. McDonalds has nutritional information on products available to customers so that they can make informed decisions about how McDonalds can be part of a healthy, well-balanced diet. Posters are displayed with complete nutritional and ingredient information in U.S. and international restaurants. In addition, this information for stand U.S. menu items; as well as new items, on the McDonalds Web site at www.mcdonalds.com. McDonalds also takes it upon itself to educate healthcare professionals about the menu through advertising, convention exhibits, and patient education materials. Efforts like these have led to partnership program with leading health associations, including the American Dietetic Association for Food FUNdamentals Happy Meal, and Whats on Your Plate? a nutrition education program for children established through the Society for Nutrition Education. Larger Menus

In addition to health foods, customers want more choices. In response, McDonalds added a breakfast menu that included eggs, sausage, biscuits, ham, danishes and hot cakes. Other items, such as chicken sandwiches, Chicken McNuggets, and salads, have also been added. The latest menu items to be added include The Big Xtra!, Chicken McGrill, Crispy Chicken, McSalad Shakers, Breakfast Bagels, and Fruit n Yogurt Parfaits. Restaurant Diversity When Ray Kroc was CEO of McDonalds, each restaurant looked the same and severed the food. He wanted products to look and taste the same no matter where the customer was. In the 1990s, the customer wanted more than just food. McDonalds management recognized these changes and allowed individual stores to experiment with their formats. The new store formats include self-service stores, drive-through only stores, cafes, and customized outlets. The utilization of these small, often limited-menu satellite restaurants has allowed profitable expansion into areas that would otherwise not have been feasible. Generally, satellites are opened in WalMarts, Home Depots, service station and other nontraditional locations. At the end of 1999, satellite unit numbered 3244. The company recently stated that greater emphasis will be placed on the growth of traditional restaurants primarily in locations outside the United States. Flexibility also exists in selecting menu items. Stores no longer have to carry a standard menu. Franchisees can experiment with new items and alter the menu to conform to regional and ethnic tastes. Kids According to projections, the U.S. population in the 5- to 13- year-old age group is expected to grow through the year 2002. In response to the growing influence children have on family dining decisions, McDonalds has targeted them with nonfood-related products. For example, it has installed playlands at its stores and marketed McDonalds clothes and toys. In the past decade the company even started a venture called Leaps & Bounds, a chain of play centers that allowed parents and children to play together, but it was ultimately sold to Discovery Zone. In addition, after witnessing rival Burger King lure kids with product tie-ins from blockbuster movies such as The Lion King and Toy Story, McDonalds entered into a ten-year joint-marketing alliance with Disney. The agreement has also resulted in the building of Ronalds Fun House at Walt Disney World in Florida and the operating of restaurants at Disney theme parks (Disney employees already sell McDonalds French fries at Walt Disney World). McDonalds admits that kids are key to its business and hopes that these strategies will make children think of McDonalds

when it is time to eat. Untapped Markets According to Jack Greenberg, McDonalds Chairman and Chief Executive Officer, even though McDonalds now serves 43 million people a day, the numbers are not big enough. In the vernacular of McDonalds, there are 18 billion meal opportunities a day worldwide. Greenberg states that if McDonalds could obtain just 1 percent of that, the company could triple its sales. In order to achieve that kind of growth, the company is extending beyond its core hamburger business, as well as focusing on international expansion. Diversification Having hit a ceiling in the hamburger-saturated United States, the maker of Big Macs has no choice but to diversify. Recently, McDonalds began a series of acquisitions. Now the company operates several restaurant concepts: Aroma Caf, a small chain of coffeehouses serving prepared sandwiches and pastries in the United Kingdom; Chipotle Mexican Grill, a fresh-mex grill located in the United States serving gourmet burritos and tacos; and Donatos Pizza, a restaurant business located in the United States that sells pizza, subs, and salads. In May 2000, the company also welcomed Boston Market, a U.S. chain specializing in fresh, convenient meals, featuring homestyle entrees, fresh vegetables, sandwiches, salads, and side dishes, to the McFamily. McDonalds nonhamburger brands still represent just a faction of the companys business, accounting for $91 million of its $38.5 billion in systemwide sales last year. The McDonalds brand offers enormous longterm opportunity, and the company believes it can leverage its competencies to add value to those concepts and potentially grow them into major brands. There is little doubt that McDonalds will use its considerable operations expertise to impose the same standards of consistency it maintains with its hamburger restaurants. Clearly, McDonalds is hoping that these smaller chains jump-start its domestic revenues, boost dinner sales, and offer franchisees new growth options. International Systemwide, 1790 McDonalds restaurants were added in 1999, with more than 90 percent of them outside the United States. In 2000 the company added about 1800 restaurants, with only about 200 of those in the United States. In 1999 international systemwide sales posted a 9 percent gain, following

an 8 percent increase in 1998. In addition, last year the international segment comprised 51 percent of systemwide sales and 55 percent of operating income. International growth is expected to continue because McDonalds which currently operates in 119 countries, added about 650 stores in Asia Pacific, 550 in Europe, and 350 in Latin America in the year 2000 alone and plans to add more during 2001. On June 30, 2000, McDonalds Corporation reached a milestone as it proudly opened its 500th restaurant in Brazil. Because of the companys recent outstanding growth in the Latin American country, Brazil has become McDonalds eighth-largest market while McDonalds has become Brazils third-largest corporate employer with 34,800 employees. This is all part of McDonalds carefully planned expansion strategy to double the number of its Brazilian restaurants by 2003. McDonalds brisk growth in Brazil is not met without controversy, however. Its aggressive tactics have created both disgruntled franchisees and unhappy employees in Brazil. The sources of contention for a group of franchisees are the chains fast rate of growth which was meant to preempt competitors and the high rental fees the chain charges for their restaurants. Consequently, these franchisees have taken McDonalds to court. Apparently, at the very core of their lawsuit are the rental fees, which average 17 percent of sales in Brazil but only 8.5 percent of sales in the United States. Meanwhile, some employees have been so dissatisfied with their short work hours that many cooks and counter clerks have filed complaints, prompting an investigation by the Sao Paulo Labor Ministry into McDonalds labor practices. These employees actually want to work longer and more regular hours, but this interferes with the companys global practice of tailoring work shifts around its peak business hours. Therefore, for efficiency, McDonalds employs some staff for as little as eight hours a week. The outcomes of these challenges are uncertain, especially in lieu of Latin American law, which is often considered antiquated and vague. McDonalds does not apologize for its strong growth strategy, and it insists that it will not change its work-shift scheduling system. McDonalds has been in Brazil for 21 years, enduring the high inflation of the Brazilian economy and watching other fast-food business come and go; it is accustomed to hanging tough. Social Responsibility

McDonalds annual report states that being a good corporate citizen means treating people with fairness and integrity, and sharing success with the communities in which we do business. Because of this, McDonalds overall corporate strategy includes many charitable programs. Healthy Growing Up A program designed to encourage students from kindergarten through third grade to adopt lifelong habits of good nutrition, exercise, and positive self-esteem, approved by the Presidents Council on Physical Fitness & Sports. Book Some Time Together McDonalds partnered with the American Library Association to encourage families to read together through their local libraries. Cartoon All-Stars to the Rescue McDonalds sponsored this animated, anti-substance abuse television special, which was broadcast on every major network in North America. Education Supporting and providing education is on way McDonalds helps society. McDonalds is committed to making the work in the restaurant part of the learning process by teaching self-confidence, self-esteem, responsibility, people skills, and time and money management. McDonalds Education Department also works with educators, schools, and its franchises and employees to coordinate the companys diverse educational initiatives. McDonalds has developed a comprehensive variety of educational curriculum and programs for students at all levels. The topics range from environmental awareness, nutrition, and fitness to stay-in-school and drug prevention programs. Some of the programs that educator and students participate in include Black History makers of Tomorrow, the Ray A. Kroc Youth Achievement Award, and the McDonalds Education Award. McDonalds commitment to the responsible student employee consists of balancing part-time work with school by over-complying with minor labor laws, recognizing scholastic achievement, and assisting employees in pursuing their education through book/tuition reimbursement programs and local scholarships. In addition to sponsoring events that encourage and recognize achievement, it has created five programs designed to further education. Two of the programs, When I Grow Up and Stay in School focus on the importance of education, whereas the Its Our Business program teaches economic principles to students in grades 7

through 10 and the Hispanic American Commitment to Education Resources program provides college scholarships. McDonalds Crew College Education program also provides financial aid grants through an agreement with the United Negro College Fund to promote higher education. Equal Opportunity Equal opportunity is also an ideal supported by McDonalds. McJobs, McMasters, and affirmative action programs are aimed at ensuring full and equal participation by all members in society. Equal opportunity is a major issue in todays business world. McDonalds has made it a point to attract and retain a diversified workforce. McDonalds has been listed as one of The Top Companies for Minorities to Work. McDonalds has also received awards for fostering leadership development of women. In the United States, minorities and women currently represent more that 34 percent of franchisees and 70 percent of the applicants in training to become franchisees. Furthermore, in 1999, McDonalds purchased about $3 billion worth of goods and services from women and minority suppliers. Childrens Charities McDonalds is dedicated to helping children achieve their fullest potential. The Ronald McDonald Charities provide grants to programs that support education, drug awareness, health care, medical research, and rehabilitation. To help families of seriously ill children, the Ronald McDonald House program provides a place for families to stay while their children are hospitalized. The Ronald McDonald House program serves some 4000 family members every night. At year end 1999, there were more than 200 houses in 19 countries. Environment Environmental issues have taken a prominent place in todays society, and McDonalds is doing what it can to make the world a better place to live. Ten years ago, McDonalds began a groundbreaking alliance with the Environmental Defense Fund (EDF) to reduce, reuse, and recycle. Since then, it has eliminated 150,000 tons of packaging, purchased more than $3 billion of recycled products, and recycled more than 1 million tons of corrugated cardboard in the United States. Furthermore, McDonalds joined the Paper Task Force to develop recommendations for increasing use of environmentally preferable paperboard products. It

is also working with local communities and teachers in schools by providing educational materials to promote sound environmental practices and values. McDonalds has eve established the McDonalds All-Star Green Teens award, which recognizes and rewards high-school students who have demonstrated exceptional environmental leadership. McDonalds environmental concerns also extend to the conservation of natural resources, protection of the tropical rain forests, preservation of clean air, human treatment of animals, and the pioneering of a smoke-free atmosphere. Human Resource Strategy Managing Diversity/Labor Shortage The economic expansion of the last decade has resulted in the lowest U.S. unemployment rate (4 percent in June 2000) in more than a generation. The labor market has become tighter at a time when the growth in the labor pool has slowed considerably. Well known is the foodservice industrys growing need for workers. One prediction is that by the year 2006, the restaurant industry is projected to need an additional 2 million individuals to round out its ranks. In fact, franchise owners are already going to extraordinary new lengths to find workers. Another prediction is that the majority of the new entrants to the workforce will be minorities, elderly, and women. The buzz word for recruiting, training and retaining this new rainbow coalition of human resources is managing diversity. In recognition of the changing demographics and the shrinking labor force, McDonalds has created programs to deal with employee diversity. In addition to billions of hamburgers every year, McDonalds is serving up employment opportunities to two growing segments of the workforce: the disabled and the elderly. The McDonalds corporate identification is strategically named in these employment programs, which are known as McJobs and McMasters. At sites across the country, more than 9000 mentally and physically disabled people between the ages of 16 to 60 have graduated from the McJobs program and have begun work at McDonalds restaurants. Specially selected and trained managers serve as job coaches and work closely with local vocational rehabilitation agencies to monitor each candidates progress. Job coaches work one-on-one with four or five candidates at a time. Each receives standard McDonalds training classroom instruction, demonstration, and supervised practice at various job stations.

McMasters is a nationwide program that identifies, recruits, trains, and retains workers who are 55 years of age and older. It also features job coaches, who function in much the same manner as the coaches in McJobs, as well as a referral program that alerts older workers to the opportunities at McDonalds. Workers hired through McDonalds referral program are immediately teamed up with a partner an experienced worker who helps the team member through the initial training. McDonalds is looking specifically to increase the share of older workers in its company-owned restaurants. Right now, about 7 percent, or three workers per restaurant, are 60 or older. The corporation offers its managers solid diversity training, including a workshop designed to help managers deal with older workers, minorities, and the mentally and physically handicapped. We believe that management must understand what diversity is, and how it works to the companys and the individuals advantage, said Monica Boles, past director of McDonalds Changing Workforce program. She adds the following: Not only do we want a representative workforce, but we want to clearly empower cultural differences so that we have full advantage of what everybody brings; we want to ensure that people at all levels of McDonalds are free to be themselves and to bring their energy and creativity into the work environment. In addition, McDonalds offers career-development programs designed for various minority groups and training for managers that identifies diversity from a value-added perspective. As a result of their programs, more than half of the top managers at restaurants owned by McDonalds are women and minorities. Training Today, more than 65,000 managers in McDonalds restaurants have graduated with a degree in hamburgerology from Hamburger University, Oak Brook, Illinois. Hamburger U. is now located in a 130,000 squarefoot state-of-the-art facility on the McDonalds Home Office Campus. All of the companys managers and franchise holders must attend. In fact, H.U. teaches about 7000 students a year. Formal classroom sessions are provided in which participants learn management skills, market evaluation, financial budgets, and the reinforcement of Ray Krocs philosophy of Q.S.C.&V. A two-week curriculum covers four major areas: equipment, operations, human relations skills, and interpersonal/communication skills.

Training for employees begins with in-store videotapes and one-on-one instruction even before the crew member cooks their first french fry. The book at McDonalds the companys policies and procedures manual spells out the precise details at each station in the restaurant. Cooks must turn, never flip, hamburgers one, never two, at a time. Or, If they havent been purchased, Big Macs must be discarded ten minutes after being cooked and French fries in seven. The company aims to build its reputation as a premier training organization by creating an environment that encourages career-long training. It is rolling out a new crew and restaurant management curriculum worldwide and redoubling the emphasis on coaching and training. Training programs are always being refined and updated to provide the crew with the tools needed to handle the challenges of operating a McDonalds restaurant. McDonalds has also added a class to its career-development program designed to build leadership and communication skills. Training competencies extend to McDonalds Quality Management (MQM) programs, whereby quality tools such as long-range planning, process reengineering, benchmarking, and continuous improvement are taught. Careers: The Golden Opportunity Under the Arches McDonalds is not only the biggest fast-food restaurant chain in America; it is also the nations largest youth employer. Its impact on the U.S. workforce greatly exceeds its current employment, because it trains so many high school students for their first jobs. In fact, about one eighth of the current American workforce has worked at McDonalds. Every new employee begins as a trainee on the easiest of jobs cooking french fries. Once that station is perfected, an employee moves to the next designated station, and so on. McDonalds functions as a de facto job-training program by teaching youth discipline and the basics of how to work. For workers who show initiative, McDonalds offers opportunities for quick advancement. An employee can work his or her way up to crew chief where he or she can manage an entire operations and its crew. The youth will continue to work as crew chief given that the annual turn-over rate is more than 100 percent until promotion to a manager. McDonalds has a long tradition of promoting from within on the basis of skill and hustle, not academic credentials. More than half of its corporate executives never graduated from college. This fits right into the

philosophy of Ray Kroc on what education should be: Career education, thats what this country needs. Many young people emerge from college unprepared to hold down a steady job or to cook or do housework and it makes them depressed. No wonder! They should train for a career; learn how to support themselves and how to enjoy work first. Then if they have a thirst for advanced learning, they can go the night school. The possibilities for advancing to corporate headquarters are also attainable. More than half of McDonalds top corporate management started out as crew members. However, the organizational chart is flat for being one of the nations biggest employers. As Kroc stated, I believe that less is more in the case of corporate management; for its size, McDonalds is the most unstructured corporation I know and I dont think you could find a happier, more secure, harder working group of executives anywhere. Lately, however, some 500 positions at the home office proved to be not that secure after all. At the end of 1999, McDonalds completed a large productivity initiative which reorganized its home office. The productivity plan was designed to improve staff alignment, focus, and productivity, as well as reduce ongoing selling, general, and administrative expenses. As a result, the company educe home office staffing and restructured the organization to decentralize many core functions. The franchisees were unhappy with the previous structure and pressured the home office to make these changes. Now McDonalds is hoping to capitalize on a more decentralized, entrepreneurial style. McDonalds corporate management does have its critics. Many companies, including IBM and AT&T, have brought in outside managerial talent to cope with the changing marketplace, whereas McDonalds continues to look inward to its McFamily for leadership. The McDonalds board is also a tribute to company loyalty, because only about one third of the members are independent, meaning they do not work for McDonalds, do outside business with the company, nor have a McDonalds executive on their own board. The insular nature of McDonalds board is unusual for such a large company, especially when viewed in light of the evolution of corporate governance standards during the past decade. Most companies of McDonalds size have a majority of board of directors who are independent. In fact, nearly every company that produces a strong brand identity will have the majority of its directors as independent.

Benefits One of the increasing concerns of McDonalds is matching and effectively communicating corporate benefits to all segments of its increasingly diverse workforce. The main emphasis is good communication about the benefits plan itself. McDonalds, which elf-insures its benefits programs, provides health insurance to its full-time employees in the United States. These include the employees of company-owned restaurants, regional offices, and the corporate headquarters. Benefit Communication Planning Teams are established to reflect the employment demographics: an exceptionally young workforce with the average age being in the low 30s, few employees above the age of 65, large employment of minorities, and a domination of women in management. The teams are also designed to include a variety of people from various corporate departments to ensure a diverse representation. These teams simplify and streamline materials to improve communication with the diverse workforce. The accomplishments of the Benefit Communication Planning Team include: Plastic insurance cards with a magnetic strip to automatically bill for prescriptions Coworker communication programs, which allow a group of trained employees to explain the program to other workers. The McDonalds benefit plan also emphasizes the concept of simplicity. Mike Quinlan, McDonalds previous chairman and CEO, simplified health plan enrollment by including a chart in the benefits package that outlines which of the medical plans would be most cost effective for an individual or a family based on anticipated future medical costs. The plans differ only in deductible and coinsurance requirements, and McDonalds pay 80 percent of the premium. Simplicity has also affected written benefit materials. McDonalds provides Spanish-speaking language materials; Spanish-speaking representative to answer questions about the plan; and interactive communication, including telephone enrollment, slide shows and videos. Profit Sharing

The companys program for U.S. employees includes profit sharing, 401(k), McDonalds Employee Stock Ownership Plan (McDESOP), and leveraged employee stock ownership (ESOP) features. McDESOP allows participants to make contributions that are partly matched from shares released under ESOP. Certain foreign subsidiaries also offer profit sharing, stock purchase, or other similar benefit plans. Preferred Provider Organization (PPO) PPO applies to all full time staff and store management selecting McDonalds medical coverage. PPO is a network of hospitals across the United States that provides quality care and a discount to McDonalds employees who use these facilities for either inpatient or outpatient services. Educational Assistance Program McDonalds supports the educational objectives of its employees and offers a job-related education assistance program (EAP). Eligible employees (store management and its assistants with at least six months of service) will be reimbursed for 75 percent of their course fees to a maximum of $400 per course (two courses per semester). Home office approval is required. Sabbaticals McDonalds believes that sabbaticals are the best way to replenish its employees energy. After ten years of services, workers are eligible for a sabbatical leave program acknowledging the need to nurture individuals within a corporate culture dedicated, in part, to mass-producing an identical, high-quality product and service. Child Care McDonalds makes available to all employees, through Kinder Care and La Petite Academy, a tuition discount for child care. Accomplishments Domination of the Industry McDonalds corporation operates, licenses, and services the worlds largest chain of fast-food restaurants and competes with virtually all restaurants (as well as with food stores on certain items). McDonalds corporation has broadened its menu over the years to compete, to some extent, in virtually all area. Although McDonalds market share within the quick serve restaurant business in the United States is about 7.3 percent, it remains king of the fast-food burger segment with 43.1 percent

of the market. Hence, it appears that the company has room to grow from its current base, although it may need to do so in the nonburger fast-food market. Growth In recent years, domestic growth has slowed as a result of market saturation. Transaction s and sales have been described as sluggish. Some store sales in United States have grown only about 1 percent annually in recent years. However, Greenberg commented recently that in the first six months of 2000, McDonalds global food service business delivery good result: systemwide sales increased 7 percent and revenues increased 10 percent. On a global basis the increases in sales and revenue were due to expansion and positive comparable sales. Foreign currency translation had a negative effect on the growth rate for both systemwide sales and revenues for the six months. For the same time period, U.S. sales increased 3 percent because of restaurant expansion and positive comparable sales. For the company as a whole, McDonalds said sales at its restaurants worldwide rose 4.5 percent in August 2000 to $3.6 billion, led by sales in the United States and Canada, as well as sales at such nonhamburger chains as Boston Market, Donatos Pizza, and Chipotle Mexican Grill. For the same time period, U.S. sales rose as much as 2 percent. In the year 2000, sales at all U.S. McDonalds rose just 3 percent and were undercharged in Europe from 1999. International Sector Since the first international restaurant opened in Canada in 1967, McDonalds restaurants have expanded throughout the globe. Between 1994 and 1999, the number of McDonalds international restaurants has more than doubled. By December 31, 1999, there were 14,177 units in foreign countries, mostly in Japan, Canada, Germany, the United Kingdom, France, Australia, and Brazil. Because it presents the most growth potential, the international market is being emphasized to address the sluggish sales problem. McDonalds opened 1831 restaurants outside the United States during 1999 and about the same number in the year 2000. Record first-day sales are common for restaurants located outside the United States. Around 30,000 customers visited McDonalds in Moscow on its first day of operation, and even more waited to try their first taste of McDonalds when it opened in Shenzhen, China. In 1999, international operations accounted for 62 percent of McDonalds systemwide revenues, 55 percent of operating

income, and 58 percent of income before provision for income taxes. In fact, sales for 1999 surpassed those of the much larger U.S. restaurant system. With operations in 119 countries, McDonalds has considerable profit growth potential in the international sector. Its biggest market outside the United States is Japan, which now has more than 3000 outlets. Germany and Britain follow with more than 1000 apiece. Already, McDonalds market share outside the United States is as big as all of its competitors combined. Recently, however, McDonalds acknowledged that a strong dollar compared with local currencies, especially Europe common currency, the Euro, as well as rising fuel costs, would cut into profits more than previously expected. In addition, on the basis of stores open at least one year, analysts estimates that August sales at McDonalds overseas fell 1 percent. McDonalds said European sales fell 4.1 percent while its operations in Asia Pacific and Latin America gained. The impact of currency fluctuations and unfavorable currency translations concerns for any global enterprise will continue to be growing concerns as McDonalds increases its dependence on the income from international operations. In addition, analysts are worried about political instability in some countries. Questions 1. Discuss the inherent conflicts that exist between McDonalds company philosophy and its reformed organizational structure. 2. As McDonalds continues to expand internationally, discuss the many human resource issues that may arise and how the company may manage differences in culture.