978-1259913747 McDonalds Corporation Case

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Structure of the Case

The case is written from the perspective of McDonald’s CEO Steve Easterbrook. Dated approxi-

mately six months after Easterbrook assumed office in March 2015, it highlights the company’s recent

and dramatic decline in performance amidst increasing competition.

McDonald’s was started by the McDonald brothers in 1940 in San Bernardino, California. By limit-

ing the menu to burgers, fries, and drinks, Dick and Mac McDonald were able to emphasize quality

and streamline operations, leading to rapid growth. In partnership with Ray Kroc, they founded the

McDonald’s Corporation in 1955 with the vision of establishing McDonald’s franchises throughout

the United States. Kroc bought out the brothers’ shares in 1961 and oversaw a period of rapid expan-

sion throughout the 1960s and 1970s. The company had its first public offering in 1965, debuting at

$22.50 per share. It opened its first international location (Canada) in 1967. Around the same time, Kroc

varying success with further efforts to adapt its menu internationally and domestically. When Jack

Greenberg became CEO in 1998, he quickly took corrective action, announcing a geographic reorgani-

zation, a new food preparation system, and a series of job cuts, all while scrapping plans for numerous

store openings. Instead, he diversified the company’s portfolio by buying different restaurant chains

(e.g., Chipotle). These purchases were later divested when McDonald’s strategy shifted yet again in the

were redesigned to promote a more modern experience for the consumer. Don Thompson served as

COO under Skinner, leading the successful McCafé campaign and cementing his path as Skinner’s

eventual successor. Unfortunately, McDonald’s struggled with weakening sales under Thompson’s

reign despite his efforts to optimize the menu, improve the customer experience, and make McDonald’s

McDonald’s Corporation

TEACHING NOTE

Professors Frank T. Rothaermel and Marne L. Arthaud-Day prepared this case from public sources. The authors are indebted to Research Associate

MHE-FTR-038

1259420477

REV: SEPTEMBER 14, 2015

Teaching Note —McDonald’s Corporation

more accessible to a broader market base. Steve Easterbrook now faces the task of implementing the

strategic turnaround that Thompson proved unable to achieve.

The next section of the case provides an overview of the external environment McDonald’s faces.

The economy continues to recover from the 2008–2009 recession, such that spending on dining out

exceeded grocery sales for the first time ever in April 2015. However, while millennials are eating out

more than ever, they are seeking increased quality and value and do not seem to think they can find

it has surpassed McDonald’s in the number of total restaurants. Meanwhile, the boundaries between

quick service and other restaurant segments have become increasingly blurred. Due to their successful

combination of high quality and reasonable prices, restaurants in the fast-casual segment (e.g., Panera

Bread, Chipotle, etc.) are experiencing steady growth. Places like Five Guys, In-N-Out Burger, and

Smashburger provide higher-quality and higher-priced burgers, attracting the premium end of the

ally bring the children). However, increasing concerns over childhood obesity have started to erode

McDonald’s appeal. Young, single professionals who earn above-average incomes are considered

“heavy users” who frequent a given chain once or twice per week, yet McDonald’s is not among their

top ten preferred eating establishments. A lack of transparency and a series of food scandals (think

“pink slime”) have also negatively affected the company’s image.

desire to eat out). Compounding these issues is McDonald’s international notoriety, making it a prime

target for labor activists who want the company to increase wages even further and who have filed suit

to make headquarters liable for the labor practices of its franchises. In brief, the company is in the midst

of its most serious identity crisis to date, and desperately needs to define a clear vision of what it wants

to be and devise a plan for how to get there.

Teaching Note —McDonald’s Corporation

Suggested Answers

AnAlysis: Focus on ExtErnAl And/or intErnAl EnvironmEnts

1. Which trends in McDonald’s external environment are likely to have the greatest impact on the

company’s ability to sustain a competitive advantage?

This is a case where trends in the external environment are exerting a strong influence on industry

(and therefore firm) performance. Ask the students to perform a PESTEL analysis and then identify the

two or three segments of the most strategic importance. Next, ask them to identify the specific trends

and their likely impact on the industry. They should be able to support their analysis with data.

• Economic

The U.S. economy continues to bounce back from the 2008–2009 economic recession. The civilian

unemployment rate has been cut in half from its 2009 peak at 10.0 percent to just 5.1 percent in summer

Teaching Note —McDonald’s Corporation

of McGraw-Hill Education.

customers are working and have more money to eat out; on the other hand, customers with more dis-

posable income are likely to “trade up” to higher-quality and higher-priced food options. Recent data

on dining trends bear this out: for the first time ever, American spending on dining out exceeded gro-

cery sales in April 2015. A closer look, however, reveals key differences among market segments. Older

consumers (51- to 69-year olds) actually reported spending more on groceries and less on restaurant

dining compared to last year. The overall upward trend is due to the vast number of millennials who

view dining out as a social event and are more willing to pay for food outside of home.3

• Environmental

Beef prices began to skyrocket in late 2012 due to a severe drought in Texas (see Case Exhibit 8).

Without rain, farmers were forced to turn to more expensive forms of feed like hay and corn, ship

cattle to greener pastures in the north, or cull their herds through sales or sending heifers to the butcher

• Sociocultural

The United States is becoming increasingly health conscious. The CDC estimates that roughly 18

percent of children aged 6 to 19 years are considered obese, which places them at a higher risk for

cardiovascular disease, diabetes, bone and joint problems, sleep issues, and poor self-esteem. Obesity-

• Technological(medical)

Meanwhile, concerns over the increase in antibiotic-resistant bacteria have led to calls for the elimi-

nation of subtherapeutic antibiotic use in meat animals. Though banned in the EU and Canada, the

United States still permits farmers to administer small doses of antibiotics to livestock to increase

Teaching Note —McDonald’s Corporation

weight gain (a 3 percent increase). Exact usage data are not publicized, but doctors who study this

issue estimate that as many as 15 to 17 million pounds of antibiotics are administered to food animals

• Political/legal

Trends in this segment are consistent with and positively reinforce the sociocultural shift toward

greater health consciousness. Michelle Obama created her “Let’s Move” initiative to focus on the prob-

2. How is McDonald’s positioned vis-à-vis its major competitors?

A sample strategic group map is provided next, utilizing product quality (highly correlated with

price) and menu variety as the two plot dimensions. The case authors could not locate consolidated

information on market share across all of the represented segments of the restaurant industry, so the

circle size was based on 2014 total company revenues (as reported by Yahoo! Finance; BK revenues are

based on 2013 due to data availability).

A second observation is that the competitive space is very crowded (and this is not even a full list of

competitors). While it may appear that there is “open room” in the upper end of the quality dimension,

therealityisthatseveralcompaniesinthemid-tohigh-dollar/qualityrangehavebeenomittedfrom

Teaching Note —McDonald’s Corporation

of McGraw-Hill Education.

the graph for the sake of clarity (e.g., Chili’s, Old Chicago, Ruth’s Chris Steak House, etc.). Several of

these restaurants would also have higher menu variety and fall to the right of McDonald’s on the x-axis

(the other apparent “opening”).

Basically, McDonald’s is surrounded by competitors on all sides. Taco Bell challenges the lower end

of the price spectrum, while Burger King (burgers) and Dunkin Donuts (coffee) are roughly compa-

rable in price (just much smaller). Wendy’s aims for slightly higher quality and charges slightly higher

prices. As part of the fast-casual segment, Chipotle and Panera overlap with the higher-priced end of

McDonald’smenu,makingthemareasonablealternativefortheirquality/value.Starbucksisclearly

the premium coffee outlet.

One of the reasons the smaller competitors have been successful is that they have focused on a par–

ticularfood/drinkproduct.McDonald’sisoneofthemostdiversifiedcompaniesonthechart,with

burgers, chicken, salads, ice cream and other desserts, yogurt, and a full specialty beverage line. Of the

companies depicted, only Panera’s (full bakery, sandwiches, soups, salads, and specialty beverages)

menu exceeds McDonald’s in terms of offerings. McDonald’s complexity comes with definitive costs.

FormulAtion: Focus on BusinEss, corporAtE,

And/or GloBAl strAtEGiEs

3. Which business-level strategy does McDonald’s employ? Is it effective? How so?

Asking students to analyze McDonald’s business-level strategy can be an informative and enlight-

ening exercise, as they are not likely to agree, at least initially.

Some will argue that McDonald’s is primarily a differentiator, as evidenced by:

• Thefactthatthecompanyhasoneofthemostwidelyrecognizedbrandsandlogosintheworld.16

• Premiummenuitems(product features) such as the McCafé line, salads, and chicken sandwiches,

many of which have “premium” as part of their name.

Teaching Note —McDonald’s Corporation

Others will point out various low-cost elements of McDonald’s strategy, such as:

• Thelowpricepointoffastfoodrestaurantsingeneral(this can lead into a useful discussion of defin-

ing industry boundaries for analysis purposes).

• McDonald’sDollarMenu,because“anemptystomachshouldn’tmeanemptyingyourwallet,

too.”19

With well-developed arguments on both sides, others will propose that McDonald’s is best described

as an integrator,offeringrelativelydifferentiatedproducts/servicesatlowcost.Companiesthatpur–

sue an integration strategy have to find ways to reconcile the trade-offs between these two strategic

approaches. Some possible levers they can use include:

Ask students how well McDonald’s accomplishes an integration strategy by managing these levers

or whether it is more accurately described as “stuck-in-the-middle” of both strategies, executing nei-

ther effectively. This is precisely the question raised in a recent wall street Journal article, which features

the following quotes that can be used to stimulate class discussion:22

“McDonald’s is ‘focused on trying to be all things to all people, whether it’s catering to health-minded

people with oatmeal or to Millennials with snack wraps. They’ve gone so far afield from their core menu

that they’re not really resonating with anyone,’ says Howard Penney, managing director at Hedgeye Risk

Management, an independent investment research firm.”

Teaching Note —McDonald’s Corporation

4. Which international strategy does McDonald’s employ? Is it effective? How so?

The essence of this question is to what degree does McDonald’s standardize its vast global empire

versus adapting to local conditions. Ask students to develop a list of what is common versus what is

different across McDonald’s restaurants worldwide. Some examples follow:

Integration

• Globalbrandandlogo(goldenarches)

• Knownfor“funfoodexperience”

Local Responsiveness

• Promotional materials translated into local

languages

Many students will automatically assume that a company with such a well-known global brand

must use a global strategy to achieve that level of recognition. The truth is, however, that McDonald’s

also places significant emphasis on local adaptation of its culture, menu, and operations, which is

more consistent with a transnational approach to international strategy. See, for example, the company’s

statement of strategic direction (emphasis added):

This web page previously contains the following text, which illustrates the transnational approach

even more clearly:

Teaching Note —McDonald’s Corporation

Several additional resources are listed next to supplement the case and students’ own experiences in

traveling abroad (which they are usually eager to share in class).

reporting segments:

http://www.aboutmcdonalds.com/mcd/investors/company_profile.html

Through June 30, 2015, the company was organized into geographic reporting segments:

• Othercountries&corporate(OCC)includingCanada,LatinAmerica,andcorporate

The new corporate structure is as follows:

2014 Annual report: http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/

Investors/McDonald’s%202014%20Annual%20Report.PDF

international locations:http://www.aboutmcdonalds.com/mcd/country/map.html

implEmEntAtion: Focus on rEcommEndAtions

And How to implEmEnt tHEm

5. How should Easterbrook adapt the organizational structure of McDonald’s to achieve his

strategic plan?

As long as McDonald’s tries to pursue both differentiation and cost leadership as part of its business-

level strategy, it will have to find ways to reconcile the trade-offs inherent in these two approaches. This

suggests transforming McDonald’s into an ambidextrousorganizationto balance exploitation (applying

Teaching Note —McDonald’s Corporation

current knowledge to enhance firm performance in the short term) with exploration (searching for new

knowledge that may enhance a firm’s future performance). Structurally, this implies the need to:

Ambidextrous organizations frequently make use of the following techniques to resolve trade-offs

across internal value chain activities and time:

Ask students to analyze whether (and how) Easterbrook’s initiatives are likely to help McDonald’s

increase its ambidexterity as an organization, and thereby avoid (or escape) staying “stuck-in-the-middle.”

6. Among all the roles played by strategic leaders, which one(s) will be most important as

Easterbrook implements his strategic plan?

McDonald’s new CEO Steve Easterbrook explains his turnaround plan in a video statement released

inMay2015:https://mcdonalds.webcasts.com/viewer/event.jsp?ei=1063465(23:10).

CEOs play multiple roles over the course of their careers; this question is asking students to consider

what McDonald’s most needs from its CEO, Steve Easterbrook, at this point in its corporate develop-

ment. Are his initiatives sufficient to reverse the company’s lackluster performance over the past sev-

eralyears?

Teaching Note —McDonald’s Corporation

of McGraw-Hill Education.

McDonald’s has been the target of strikes by workers seeking a wage increase from $7.25 to $15.00 per

hour, forcing Easterbrook to step in as a disturbance handler (as yet he has refused to negotiate with the

strikers as most work stoppages have been relatively brief in duration). These activities emphasize the

decisional roles played by a CEO who is seeking to implement significant strategic changes.

At least one analyst was not impressed by Steve Easterbrook’s performance in the video, argu-

ing that it serves as a good lesson on how not to communicate:  http://www.forbes.com/sites/

nickmorgan/2015/05/12/what-steve-easterbrook-mcdonalds-ceo-did-wrong/.

Recent Updates

Wochit (2015), “McDonald’s says it will switch to cage-free eggs in the U.S. and Canada,”

Yahoo! Finance, September 11. http://finance.yahoo.com/video/mcdonald-says-switch-cage-

free-090118610.html;_ylt=AwrXgyLtKvNVKRcABnmTmYlQ;_ylu=X3oDMTByNDN1aDMxBGNvb

G8DZ3ExBHBvcwM1BHZ0aWQDBHNlYwNzYw–

Foraprintarticlesee:http://www.bloomberg.com/news/articles/2015-09-09/mcdonald-s-switch–

ing-to-cage-free-eggs-at-u-s-canada-locations. Cage-free eggs cost 5 percent to 10 percent more, but

McDonald’s hopes to mitigate the effect on consumer pricing over the next 10 years.

Additional Resources

1. Burger King invites mcdonald’s to make a mcwhopper in honor of world peace.

2. the Hamburglar gets a makeover.

1984McDonald’sCommercial(0.31):https://youtu.be/9cIf0P-Vb-U.

2015McDonald’s Commercial(0.30):See the video embedded attheend of this article: http://

3. dollar menu dilemma

3Dmcdonalds%26primaryType%3Dmixed%26sortBy%3Drelevance%26intl%3Dfalse%26x%3D0%

26y%3D0#/video/bestoftv/2013/10/24/ym-romans-fast-food-fights.cnn (2:05). October 24, 2013.

Teaching Note —McDonald’s Corporation

4. Burger King takes on the Big mac.

3D0%26y%3D0#/video/living/2013/11/06/lead-moss-burger-king-takes-on-big-mac.cnn (2:46).

the 1980s.

5. mcdonald’s Helpline: try Foodstamps.

9%26y%3D11#/video/bestoftv/2013/10/24/exp-costello-salgado-mcdonalds.cnn (4:24). October

24, 2013. A CNN video featuring the controversy created when an employee recorded a call to a

McDonald’s employee help line. When she asked for financial assistance, she was advised on how

Teaching Note —McDonald’s Corporation

ExHIbIt tN-1 Size/EconomyofScalesAdvantagesofMcDonald’s

Yum! Brands

13.28B

Parent of Taco Bell,

Pizza Hut, & KFC

McDonald’s

27.44B

1.15B

Menu Variety

Product Quantity

Starbucks

16.45B

2.06B

0.75B

Teaching Note —McDonald’s Corporation

Endnotes

1 https://research.stlouisfed.org/datatrends/net/page3.php.

2 https://research.stlouisfed.org/datatrends/net/page3.php.

3 http://www.bloomberg.com/news/articles/2015-04-14/

americans-spending-on-dining-out-just-overtook-grocery-sales-for-the-first-time-ever.

4 http://qz.com/442037/what-the-hell-has-happened-to-the-price-of-ground-beef/.

5 Mintel, market drivers.

6 “Rising corn prices and your grocery bill,” market watch, July 18, 2012.

7 http://www.wisoybean.org/news/soybean_facts.php.

8 http://ncsoy.org/media-resources/uses-of-soybeans/.

9 http://www.marketplace.org/topics/business/bird-flu-winding-down-bakers-still-feel-pinch.

10http://www.marketplace.org/topics/economy/why-egg-prices-have-been-climbing-while-chicken-prices-

are-falling.

11 http://blogs.wsj.com/economics/2014/11/19/obesity-epidemic-costing-world-2-trillion-a-year-study-says/.

12http://www.pbs.org/wgbh/pages/frontline/shows/meat/safe/overview.html.

13http://www.wsj.com/articles/mcdonalds-to-curb-purchases-of-chicken-raised-with-antibiotics-1425482366.

14http://www.letsmove.gov/about.

15 Mintel, trend applications,http://bit.ly/1bN2M0c.

16http://www.interbrand.com/en/best-global-brands/2013/top-100-list-view.aspx.

17http://www.huffingtonpost.com/the-daily-meal/how-to-make-fries-that-ta_b_3791465.html.

18http://www.mcdonalds.com/us/en/food.html.

19http://www.mcdonalds.com/us/en/food/meal_bundles/dollar_menu.html.

20http://www.mcdonalds.com/us/en/food/meal_bundles/extra_value_meals.html.

21http://online.wsj.com/news/article_email/SB10001424052702304384104579139871559464960-

lMyQjAxMTAzMDIwNDEyNDQyWj.

22http://online.wsj.com/news/article_email/SB10001424052702304384104579139871559464960-

lMyQjAxMTAzMDIwNDEyNDQyWj.

23 Ibid.