McDonalds Corporation (Abridged)

Submitted in partial fulfilment of the requirements of the course

Elephants and Cheetahs: Systems, Strategy and Bottlenecks

Submitted to:
Instructor: Prof Saral Mukherjee
AA: Ms. Anjali Abichandani

Submitted by: Group 23

Sonal Singh (18370)
Madhur Gupta (18342)
Meet Agrawal (18347)
Eshwar Agarwal (18326)
Aman Mansuri (18206)
Achint Parmanandka (18103)

Section B

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

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Executive Summary
McDonald’s established itself as the quick-service industry leader not only through building on

operational efficiencies but via the adoption of ‘Speedee Service System’, which focused on

replicating products across geographies. They focused on promoting long-lasting and not just

transactional partnerships while maintaining quality through inspections by field service consultants.

Continuous commitment to adopt a better way of functioning led to the creation of an Autopoietic

system as well.

However, changing trends in the US market led to a decline in market share and average revenues

per unit even though the offshore sales increased. Major issues in this regard were increased

intensity of competition, the pressure to diversify menu while maintaining operational efficiencies

and responding to developing trends of health-conscious customers and sustainable environmental

practices. Providing modular menu to reap the advantages of mass customization, imparting food

truck services with pre-decided routes based on expected peak demands, tying up with

Complementary food products suppliers to augment revenues through cross-selling and shifting

from plastic-based packaging to packaging could help address the issues. However, in an attempt

to achieve these objectives, it must be made sure that McDonald’s does not forget the ‘Power of

Saying No’ to alternatives of serving dinner menu or entering into the product territories of the

Competitors.

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Autopoietic System
The internal processes, rules, norms, supply chain and franchise network established by

McDonald's makes it an autopoietic self-sustaining system. They ensure that the firm is able to

continuously reinvent itself and provide the best services to its customers. Given this high level of

complexity, the entire ecosystem around McDonald's is a Level 8 social system.

Domains of Operation Strategy

1. Capacity: Production capacity of the supply chain and seating capacity at the outlets are

enough to supply to the existing customer base. Focus on speedy delivery also improved

the serving capacity. This approach is in line with McDonald’s overall strategy of driving

growth via volumes, as ‘lost sales’ due to lack of inventory are minimized.

2. Facility: Relying on the franchise model helped McDonald’s open a large number of stores

in a variety of locations, leading to high penetration and awareness. In line with the trend of

62% quick-service sales coming from off-premise eating, McDonald’s was developing

prototypes for drive-through only and smaller outlets.

3. Scope: McDonald’s worked very closely with both suppliers and franchisees, promoting a

partnership rather than transactional orientation. Close relations with suppliers ensured

consistent and reliable delivery of raw materials meeting McDonald’s production standards.

It also helped in supply chain innovation, leading to a reduction in costs and development of

new products. Working closely with franchisees helped maintain quality control at the retail

level.

4. Technology: McDonald’s has been focused on utilizing technology for improving

operational efficiency, either reducing costs or process time, while maintaining the quality

standards. Examples of technology adoption include new staging equipment, pizza oven etc.

5. Workforce: As the operational procedures were well codified, low degree of prior skill level

could suffice. However, because of the high turnover rate in the industry and novel operating

methodologies at McDonald’s, high training costs had to be incurred to familiarize the new

employees.

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 6. Organization: McDonald’s primarily followed the strategy of outsourcing activities to

specialized partners and working closely with them. It essentially functions as an integrator

of backward and forward links in the value chain.

7. Planning: To effectively plan the inventory and minimise expenditure McDonald’s had

shifted to frozen ingredients on the recommendation of a supplier.

8. Quality: Following an inspections-based approach, McDonald’s patrolled its suppliers and

franchisees scrupulously. It had hired field service consultants and also analyzed its meat in

laboratories.

Dimensions of Quality
Of the 8 dimensions of quality, McDonald’s primarily focused on - performance, reliability,

conformity, and perceived quality (details in Exhibit 2). In the given context, these dimensions are

mutually reinforcing and in line with the overall strategy of McDonald’s to drive growth via volumes.

Diagnosis of the Issue

McDonald’s market share in the US quick-service market declined from 18.7% in 1985 to 16.6% in

1991. The underlying issues are as follows:

1. Increased competition from companies targeting niche segments in the quick-service market

and full-service restaurants

2. Growing need to add variety in products, while maintaining the current operational

efficiencies

3. Rising preference for nutritious food

4. Rising environmental concerns

Recommendations to be Adopted
1. Provision of Modular Menu – By early 1990s, although McDonald’s had increased their menu list

from 10 items to more than 30, the focus was still on evading the variety in order to maintain its

operational efficiency. A solution out of this trade-off is to introduce Modular Menu, wherein a

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 product would be broken down into components and options could be provided for some of the

ingredients of the main product.

Example: Apart from the regular bun option for Cheeseburger, whole wheat bun or garlic bun

could also be offered. This offering would not hamper the operational efficiency by much because

the choice would be made by the customer at the time of placing an order. However, providing such

an option would help in enticing the customers.

Similarly, a bunch of options could also be available for sauces. While placing orders, the

customers decide the sauces to be used in the meal as per their personal preferences.

2. Adoption of new food-service mechanism – In the recent past, the pie for quick-service restaurant

has been increasing, however, the market share declined for McDonald’s. In order to increase their

penetration in the market, McDonald’s could come up with Food Truck Service. Route for such

trucks should be pre-decided based on expected peak demands. For example: During the

lunchtime (12:30 PM to 2:30 PM) the trucks would be near the Corporate areas, whereas post that

serving the school kids/ parents could be a viable option (3:30 PM to 5 PM). Finally, it must be made

sure that the replenishment of the stock is done at the right time, hence co-ordinating with the

Vendors and other Supply Chain partners would also be crucial. These Food Trucks would

provide the exact same offering as prevalent in the Franchise model. However, this option would

result in a reduction of the fixed cost expense because of savings in rental/ electricity/ other admin

expenses. Setting up kiosks is not recommended as some degree of fixed equipment needs to be

installed to prepare food.

3. Establishing relationships with Complementary food products suppliers – McDonald’s should

aim to enter into binding agreements with established players providing complementary products

in the US Market to serve in McDonalds’ outlets. These players would be interested in such an

agreement because they will get access to the large customer base of McDonald’s. Benefit for

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 McDonald’s is that it would improve the customer experience and augment revenues through

cross-selling and commission. For example, McDonald’s may approach Coca-Cola, Dunkin

Donuts, Starbucks to look for an offering of a diversified portfolio of products.

4. Environment-friendly packaging – Focusing on eco-friendly means of serving food would help in

establishing sustainable practices and instil customer confidence. For example: Shifting from

plastic-based packaging to paper-based packaging would be environment-friendly. However,

this might also reduce the contribution margins in the short term.

Recommendations not to be Adopted

1. Do-Not Focus on Dinner: A primary reason for the success of Drive through model and the

breakfast model was that people in hurry saw a McDonald’s meal as something they could

have quickly, on the go. People are often in a hurry during the breakfast and lunchtime, and

therefore, a quick on-the-go meal works, however, the same is not true for dinner. People

prefer to have dinner at peace, either at home or fine dining at a restaurant. Thus,

McDonald’s perception of a place for a quick meal will hinder it to be accepted as the place

for dinner.

2. Do Not Focus on entering the product territories of competitors: McDonald's should

not focus on introducing products which already have established national players, such as

pizza or Mexican food. McDonald's is perceived to be the place for Burgers and Fries. Adding

such products would dilute the current positioning of McDonald's and wouldn’t provide much

marginal benefit, as people would always prefer to go to a specific outlet such as Pizza Hut

for a Pizza. Brand extensions work when the new products are surrounded around the core

offerings. Hence Mcdonald should try offering new products/taste by keeping the base

offering same. For instance - it can introduce a Mexican burger.

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Exhibits
The exhibits are used to the understanding of the analysis of the case.

Exhibit 1: Business Canvas Model

Customer Mass market. The target customer is anyone looking for food options
Segment at a relatively low cost and quick pace

Value
A short but appealing range of products of high quality, served at low
Proposition
cost and quick pace

Quick service restaurants, drive-thru windows to cater to increased

Channels off-premise consumption, and smaller restaurants to serve customers
in ‘seam’ areas at a lower cost.

Customer Self-service model. Purely transactional relationship with the

Relationships customers.

Revenue
Streams Sale of food items and franchise fees

Suppliers supplying the raw material at optimal quality. Franchise

Key Activities owners meeting the 750-page operating manual to achieve quick
service rate and optimal quality.

Suppliers, Franchise owners and carefully crafted procedures which

Key Resources
enable it to maintain consistency

Franchisees and suppliers-referred to as partners are an integral part

Key Partnerships of the model. They have contributed to new innovations in supply
chain and products in the past.

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 Cost Structure High fixed cost and low variable cost because of a lower cost of
operation.

Exhibit 2: Dimensions of Quality

1. Performance: Performance in the industry in which Mcdonald’s operates is defined by quick

service and consistency. Mcdonald’s limited menu coupled with a huge focus on

standardization made it possible for every outlet around the world to maintain consistency

and ensure fast service.

2. Features: Mcdonald’s offered limited variety (revolving around burgers, fries, and shakes),

and did not offer many ‘bells and whistles’ around its core product.

3. Reliability: The reliability is built into the system right from the procurement to the final

delivery of food items to the consumer to consistently offer good food and quick service.

4. Conformance: Mcdonald’s has a 750-page operations manual that is mandated to be

followed at every outlet. On top of that, Mcdonald's routinely analyses the raw material from

the suppliers in its laboratories and spends a considerable amount on its field service

operation which evaluates restaurants on more than 500 items ranging from food quality to

customer service.

5. Durability: Not applicable

6. Serviceability: Not applicable

7. Aesthetics: There is no explicit focus on the aesthetics of the food as well as the outlet

(except for cleanliness) as it is a quick-service food industry. Moreover, the shift towards off

the premise consumption makes aesthetics irrelevant.

8. Perceived Quality: The reliability and consistency, along with the legacy, built a decent

reputation for McDonald’s in the mind of American consumers. The fact that McDonald’s had

been serving 8% of the US population on a daily basis testified high perceived quality.