978-1259278211 Case 25 Solution Manual Part 2

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NOTE – ADDITIONAL EXERCISES, VIDEO VIEWING:

One interesting way to evaluate the competitiveness in the industry is to look at comparative

financial performance from the perspective of an investor. Since McDonald’s (MCD) is a

publicly traded firm, take a look at http://finance.yahoo.com/q/co?s=MCD to see how it

compares with its peers. Regarding

MCD’s performance over the last nine years, see the following:

This commentary from November 2004, after James Cantalupo charted the “Plan to Win”

strategy, argued that McDonald’s stock was potentially a good investment:

http://www.fool.com/news/commentary/2004/commentary04111103.htm. In April of 2007,

McDonald’s had made some changes, and still came out on top

In October of 2007 McDonald’s increased its focus on diversifying its menu offerings by

confirming that it would compete with Starbucks for the specialty coffee market by 2008

http://www.fool.com/investing/general/2007/10/03/mcdonalds-head-of-steam.aspx?

terms=mcdonalds&vstest=search_042607_linkdefault, and in December 2007, it had

outperformed its direct competitors and looked poised to weather the forecasted economic

downturn in 2008 in good shape, thanks in part to its overseas expansion plans:

As MDC announced details of its coffee roll out in 2008, some wondered if this was the right

time to do such an expansion, especially because Starbucks was seeing a decline in business as

more consumers brewed coffee at home, and it would cost the franchisees an average of

$100,000 per location to do the needed remodeling:

Information from McDonald’s history, and interviews with its franchisees, details MCD’s

turnaround strategy in this article: http://www.nytimes.com/2009/01/11/business/11burger.html?

_r=1. Especially noteworthy was MCD’s performance outside the U.S. (See

http://www.nytimes.com/imagepages/2009/01/10/business/20090111_BURGER_GRAPHIC.htm

In 2011 analysts recommended McDonald’s as “a solid defensive stock. It’s a lean, mean

competitive machine, focusing entirely on its core strengths.”

http://www.fool.com/investing/general/2011/01/24/mcdonalds-gets-defensive.aspx?

source=isesitlnk0000001&mrr=0.33

And in 2013, after MCD announced disappointing quarterly results, in the wake of aggressive

competition from Wendy’s and Burger King and the continued economic troubles in Europe, one

analyst pointed out another “challenge for McDonald’s is the growing number of chains that offer

Based on the information provided there, and from other analysts, would you be willing to invest

in McDonald’s stock today? Why or why not?

McDonald’s was criticized in some quarters for providing unhealthy food that contributes to an

obesity epidemic in the United States, most notably in the documentary film “Super Size Me”

and in the book and movie Fast Food Nation. Watch the video trailers here:

See McDonald’s nutritional information from their website

http://www.mcdonalds.com/usa/eat/nutrition_info.html and commentary from 2009 on eating

healthy fast food at http://www.mainstreet.com/article/lifestyle/food-drink/healthy-meal-

mcdonalds-can-it-be-done?page=1 and http://lifehacker.com/5283442/best-and-worst-fast-food-

mcdonalds-edition. What is McDonald’s core position about the role of its food in a healthy diet?

Do you agree or disagree with the company’s view?

Another sociocultural trend worldwide, touched on in Fast Food Nation, is focused on the

treatment of animals used for food. The Humane Society of the U.S. has challenged McDonald’s

to get its eggs from free-range chickens rather than cage-bound layers. In Britain, the company

already does this, but it has been slow to make the switch in the U.S. MCD uses upwards of 3

billion eggs a year. See the strategy here:

1. What source of competitive advantage does McDonald’s have, and is that position

supported by its value chain and other internal resources? What steps could

Easterbrook take to fix the problems McDonald’s faced?

Referencing Chapter 5: Formulating Business-Level Strategies

In order to achieve a sustainable competitive advantage, McDonald’s has to assess its ability to

contend with other fast-food restaurants. The question of how to compete in a given business to

attain competitive advantage requires an assessment of the types of competitive strategies,

including the three generic strategies that are used to overcome the five forces and achieve a

competitive advantage:

●Overall cost leadership

oLow-cost-position relative to a firm’s peers

●Differentiation

oCreate products and/or services that are unique and valued

●Focus strategy

oNarrow product lines, buyer segments, or targeted geographic markets

Ask the students which strategy they think McDonald’s should pursue, and why. Their answers

may include some of the following points:

Cost leadership has been the traditional strategy for the fast-food industry, but McDonald’s kept

costs under control in order to achieve parity with competitors. McDonald’s tried to develop a

Referencing Chapter 3: Analyzing the Internal Environment

To answer the question of whether McDonald’s differentiation strategy is adequately supported

by its value chain and other internal resources, McDonald’s must assess the relationships

between the elements in its value chain. Every activity should add value. Take a look at Chapter

3, Exhibit 3.1 to see the value chain activities. Here is what an assessment of this might look like

for McDonald’s:

Value chain activity How does McDonald’s create value for the “customer”?

What challenges does McDonald’s have in its value chain?

Primary:

Inbound logistics (food &

supply deliveries)

Assumed adequate.

Operations (efficient

Strived for consistency across the chain, with differing

Outbound logistics

(distribution to customers)

Assumed adequate.

Marketing and Sales

Many product innovations failed, $1 menu didn’t go well

promotion)

Service (ability to solicit

feedback & respond to

customer issues)

Assumed adequate.

Secondary (or support):

Procurement (relationships

with suppliers for

procurement of raw

materials and supplies)

Assumed adequate.

Technology development

& software)

Adoption of expensive cooking processes failed to generate

Human resource

recruitment, incentive &

retention mechanisms)

Lower standards for hiring, less time for training led to

General Administration

operating capital, effective

top mgmt communication,

relationships with diverse

stakeholders)

Top-down decision making, lack of involvement in changes

CEO Skinner realized that basic changes in McDonald’s’ value chain needed to be made to get

the company back on track. Menu changes and franchisee relationships were key factors that he

To further answer the question of how to support a competitive strategy, it’s important to

consider the concept of the resource-based view of the firm, and the three key types of resources:

tangible resources, intangible resources, and organizational capabilities. Determining whether the

internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help

a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6. McDonald’s profile might

look like this:

Tangible Resources:

Financial – McDonald’s appears to have managed its finances well, currently has adequate cash

Physical – has significant physical assets in the restaurants.

Intangible Resources:

Organizational – franchise model is a weakness unless strong quality controls are in place

Human – training of staff is critical, could be a problem.

Innovation – this is a current strength, but needs to be managed in the right direction – choice of

Reputation – McDonald’s brand is its most significant strength – this should be protected at all

Organizational Capabilities: Easterbrook’s leadership and willingness to extend Cantalupo’s and

Applying the VRIN analysis, McDonald’s doesn’t appear to have any resources that are clearly

valuable, rare, in-imitable, or non-substitutable. This indicates that McDonald’s may have a

Referencing Chapter 4: Assessing Intellectual Capital

Consider the concepts of intellectual capital and human capital, both of which are intangible

assets that a company such as McDonald’s needs to have in order to compete successfully.

Intellectual capital is a measure of the value of a firm’s intangible assets, its reputation, employee

loyalty and commitment, customer relationships, company values, brand names, and the

experience and skills of employees. Human capital involves the individual capabilities,

Regarding the steps Easterbrook could take to fix the problems McDonald’s faced, McDonald’s

should review the components of the strategic management process.

Remember our previous discussion. See Chapter 1, Exhibit 1.3 for a depiction of the strategic

management process. During strategic analysis, the leader does “advance work” to anticipate

unforeseen environmental developments, identify unanticipated resource constraints, assess

In strategy implementation, depending on the type of organization structure, the leader might

include key individuals in a discussion around selecting which strategies might be best to

implement at which level within the organization. The leader must ensure proper strategic

Once again, the basic question strategic management tries to answer is: How can we create a

sustainable competitive advantage in the marketplace that is not only unique and valuable but

also difficult for competitors to copy or substitute?

McDonald’s CEO Skinner continued the tough “up or out” grading system for franchisees that

identified underperforming units. He introduced new products such as McGriddles breakfast

sandwich; added healthier items; created a new promotion, “I’m loving it”; refurbished

McDonalds’s had already experienced a comeback the likes of which were pretty unprecedented,

but were things different now? The prevailing belief was that when restaurants started to slide, it

really took a lot to turn them around. Would McDonald’s be the exception? Will new CEO

Easterbrook guide McDonald’s to be able to successfully compete against all of its rivals? Who’s

willing to bet yes?

2. OPTIONAL QUESTION: What other strategies did McDonald’s formulate to achieve

a competitive advantage?

NOTE: There are no PowerPoint slides to accompany the following.

Referencing Chapter 6: Formulating Corporate-Level Strategies

Corporate strategy focuses discussion on the questions of what businesses a corporation should

compete in, and how the businesses should be managed so they can create “synergy” – creating

Diversification is the process of firms expanding their operations by entering new businesses. In

related diversification, a firm enters a different business in which it can benefit from leveraging

core competencies, sharing activities, or building market power. Some possibilities include:

●Mergers and acquisitions

●Strategic alliances

Whatever the choice, it should create value for all stakeholders – employees, suppliers,

distributors, and the organization’s owners themselves. The choice of diversification strategy

should create synergy so that all parties gain something they would not have had on their own.

When achieving synergy through diversification, a firm has two choices: related diversification

through horizontal relationships with related businesses, sharing tangible and intangible

resources, and leveraging core competencies; and unrelated diversification though hierarchical

relationships with unrelated business. In this case, value creation derives from the corporate

office by leveraging support activities.

McDonald’s has pursued related diversification through its relationships with franchisees.

Acquisition is the incorporation of one firm into another through purchase. It can be a means of

obtaining valuable resources that can help an organization expand its product offerings and

McDonald’s tried acquisition of Chipotle Mexican Grill and Boston Market. Cantalupo divested

these acquisitions – they did not add enough value to McDonald’s portfolio – were not related

Referencing Chapter 7: International Strategy: Creating Value in Global Markets

International expansion is a viable diversification strategy; however, before pursuing this, a firm

needs to determine why an industry in a given country is more (or less) successful than the same

industry in another country. When choosing a country to expand into, firms must assess the

McDonald’s has now had enough experience internationally to learn what works and what

doesn’t. Asia Pacific and Europe appeared to be growing. Growth was slower in the Americas.