BUSINESS CASE STUDY 2017

Transcription

1 BUSINESS CASE STUDY 2017 A comprehensive case study of McDonald s Covering 99 Operations 99 Marketing 99 Finance 99 Human Resources FOR BUSINESS STUDIES/BUSINESS MANAGEMENT STUDENTS Christine Kassar Williams, A.J. Stanshall and G.H. Williams

2 CONTENTS Foreword McDonald s Case Study Introduction A Very Brief History 8 Worldwide Structure 8 Abbreviations 8 CHAPTER 1 OPERATIONS The Role of Operations: Why is operations important to McDonald s? 1.1 The Strategic Role of Operations 9 The Influences on Operations: What factors impact on the operations decisions McDonald s makes? 1.2 Globalisation Technology Quality Expectations Cost-Based Competition Government Policies Legal Regulation Environmental Sustainability Corporate Social Responsibility 15 The Processes of Operations: How does McDonald s actually do it? 1.10 Inputs Transformation Processes Outputs 24 Operations Strategies: How does McDonald s actually achieve its objectives? 1.13 Performance Objectives New Product or Service Design and Development Supply Chain Management Outsourcing Technology Inventory Quality Management Global Factors 30 3 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2016

3 CHAPTER 2 MARKETING The Role of Marketing: Why is marketing important to McDonald s? 2.1 The Strategic Role of Marketing Goods and Services Production, Selling, Marketing Approaches Types of Market 31 The Influences on Marketing: What factors impact on the marketing decisions McDonald s makes? 2.4 Factors Influencing Customer Choice Consumer Laws Ethical Considerations 34 The Processes of Marketing: How does McDonald s actually do it? 2.7 Situational Analysis SWOT, Product Life Cycle Market Research Establishing Market Objectives Identifying Target Markets Developing Marketing Strategies Implementation, Monitoring and Controlling 38 Marketing Strategies: How does McDonald s actually achieve its objectives? 2.13 Market Segmentation, Product/Service Differentiation and Positioning Products Goods and/or Services Price Including Pricing Methods Promotion Global Marketing 46 BLACKLINE MASTER valid until 1/11/2017 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams

4 CHAPTER 3 FINANCE The Role of Financial Management: Why is financial management important to McDonald s? 3.1 The Strategic Role of Financial Management The Objectives of Financial Management 48 The Influences on Financial Management: What factors impact on the financial decisions McDonald s makes? 3.3 Internal Sources of Finance External Sources of Finance Financial Institutions Government Institutions The Global Market 53 The Processes of Financial Management: How does McDonald s actually do it? 3.8 Planning and Implementing Financial Ratios The Limitations of Financial Reports Ethical Issues Related to Financial Reports 66 Financial Management Strategies: How does McDonald s actually achieve its objectives? 3.13 Cash Flow Management Working Capital Management (Current Assets) Working Capital Management (Current Liabilities) Working Capital Management (Strategies) Profitability Management (Cost Controls) Profitability Management (Revenue Controls) Global Financial Management 70 5 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2016

5 CHAPTER 4 HUMAN RESOURCES The Role of Human Resource Management: Why is human resource management important to McDonald s? 4.1 The Strategic Role of Human Resource Management Outsourcing 72 The Influences on Human Resource Management: What factors impact on the human resources decisions McDonald s makes? 4.3 Stakeholders Legal The Current Legal Framework Economic Technological Social Changing Work Patterns and Living Standards Ethics and Corporate Social Responsibility 78 The Processes of Human Resource Management: How does McDonald s actually do it? 4.9 Acquisition Development Maintenance Separation 81 Human Resource Management Strategies: How does McDonald s actually achieve its objectives? 4.13 Leadership Style Job Design Recruitment Training and Development Performance Management Rewards Monetary and Non-Monetary, Individual or Group, Performance Pay Global costs, skills, supply Workplace Disputes Resolution 85 The Effectiveness of Human Resource Management: How does McDonald s know what is working and what isn t? 4.21 Indicators 86 CHAPTER 5 INTERDEPENDENCE OF KEY BUSINESS FUNCTIONS BLACKLINE MASTER valid until 1/11/2017 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams

6 Introduction A Very Brief History Brothers Richard and Mac McDonald opened a restaurant called McDonald s Bar-B-Q in California in In 1948, they remodelled the store as a drive-in with a reduced amount of items for sale and changed the name simply to McDonald s. The New York Times quoted Richard McDonald as saying Our whole concept was based on speed, lower prices and volume. 1 In 1954, Ray Kroc acquired the rights to set up franchised McDonald s restaurants in most areas of the United States. By 1959, there were 102 McDonald s restaurants. In 1961, Ray Kroc finally purchased the remaining shares of the company, meaning that Richard and Mac McDonald were no longer involved. By 1963, the number of McDonald s restaurants had reached 500. The company was listed on the New York Stock Exchange in It was not until 1968 that McDonald s introduced the Big Mac. McDonald s is a revolutionary company in many ways, including marketing, management, operations and franchising. McDonald s phenomenal worldwide growth has also been viewed by some commentators as changing how and what millions of humans eat. Founder Ray Kroc once said I put the hamburger on the assembly line. 2 It now has more than 36,000 outlets in over 100 countries, around 80% of which are owned by franchisees, with the remainder owned by McDonald s. 3 Worldwide, McDonald s aims for this to change to 95% franchises and only 5% company stores within the next few years. 4 Many franchisees of McDonald s own multiple outlets. Worldwide Structure Like many global organisations, McDonald s has a complicated worldwide structure. McDonald s Corporation is the parent company for global operations. As of June 2016, the company had a market valuation in excess of US$107 billion. 5 To facilitate its operations around the globe, McDonald s has a web of corporations (and other structures) in many countries. In Australia, McDonald s Corporation uses the company McDonald s Australia Holdings Limited (i.e. the US parent company owns 100% of the shares in the Australian company). McDonald s Australian stores are then either run directly by McDonald s Australia (company stores) or are run under franchise agreements (to other small companies). Currently, approximately 80% of the 920 McDonald s stores in Australia are run by franchisees; the remaining 20% are company-owned stores. Abbreviations The first McDonald's Restaurant in Des Plaines. In this case study when we refer to McDonald s, we mean the worldwide group of companies. McDonald s Australia refers just to the company s operations in Australia. BLACKLINE MASTER valid until 1/11/2017 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams

7 Interiors of McDonald s restaurants. Facilities McDonald s kitchen staff use grills, fridges and fryers in order to complete their function in converting inputs into outputs. Similarly, the front counter staff need cash registers to complete transactions and communicate items required to kitchen staff. The capital (or physical resources) is vital in facilitating the transformation process. Some of the common facilities that are found in McDonald s restaurants include: Building Tables and seating Fryer Counters fitted with registers Menu board Drink dispenser Food warmer Ice cream machine Grill Fridge Coffee machine Cleaning equipment Sauce dispenser Food preparation area Customer dining area Play area Bathrooms Facilities can dramatically affect the efficiency, cost and capacity of a firm to deliver its good or service. McDonald s invests a lot of money in upgrading its facilities and systems. In the United States, the company invested over US$1 billion by 2015 in the biggest store-by-store makeover in the chains 56- year history. 59 The new contemporary interiors and premium menu items are deigned to give the chain a more sophisticated feel. 60 Upgrading facilities is important in order to sustain sales growth by remaining relevant to the business target market Transformation Processes The transformation processes are where the inputs undergo activities that change and create a new output. In converting a range of components such as meat, tomato, onions, sesame seeds, bread and cheese, McDonald s adds value by combining these to produce a hamburger. Managing this process effectively can reduce operational costs and waste, and can improve efficiency and customer satisfaction. Therefore it is imperative that operations management consider the following factors in the organisation of its transformation process: the influence of volume, variety in demand and visibility sequencing and scheduling technology, task design and process layout monitoring, control and improvement 19 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2016

8 The Influence of Volume, Variety, Variation in Demand and Visibility (Customer Contact) The influence of Volume McDonald s Volume refers to the quantity of an item produced. Central to its success is accurate inventory management that allows McDonald s transformation processes to respond to changes in consumer demand. In 2012, 1.7 million customers visited McDonald s each day in Australia. 61 This highlights the large volume of products moved by the business. McDonald s largely is able to satisfy customer demand by developing systems that track the volume of menu items sold in each store. There are times, however, when customer demand may fluctuate. Customer demand may be seasonal for products such as McFlurry, ice cream and frozen soft drinks. Managing volume is imperative for McDonald s to maintain short lead times as failure to do so may result in falling sales. Variety is the product or service mix and range that a business offers. Originally, McDonald s delivered a very simple menu including hamburgers, fries, thick shakes, Coke, root beer, coffee and milk. 62 As consumer tastes and demands have changed, McDonald s has responded by increasing the variety of menu items it now provides. In 2016, the menu for McDonald s Australia boasted breakfast items 8 beef burgers 6 chicken and fish burgers Nuggets and McBites 11 wraps and salads Variety 3 varieties of fries (original and loaded) 12 sauces and condiments 31 drinks 10 deserts 13 loose change items 8 value boxes 50 McCafé items These items can also be customised, or individuals can create their entire burger with the Create Your Taste menu. Menu expansion in the United States has led to about 145 menu items, which is an expansion of 70 percent since With increases to its menu, McDonald s transformation process is becoming increasingly complex. BLACKLINE MASTER valid until 1/11/2017 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams

9 Marketing Strategies How does McDonald s actually achieve its objectives? 2.13 Market Segmentation, Product/Service Differentiation and Positioning The Informal Eating Out (IEO) industry contains approximately 8 million outlets and had global sales reaching US$1.2 trillion in Despite only accounting for 0.5% of the total number of IEO outlets worldwide, McDonald s generated 7.2% of total industry sales. 75 This shows that McDonald s has been able to implement a range of strategies such as market segmentation, differentiation and positioning to attract and maintain a loyal customer base. Market Segmentation Market segmentation involves tailoring marketing initiatives for specific customer characteristics. Knowns as variables, target markets can differ based on demographics, geography, psychographics and behaviour. In doing this, a business is able to tailor its product, advertising and promotions to appeal to specific groups of customers. Demographic McDonald s also uses demographic variables to focus marketing initiatives to specific age groups. For example, Happy Meals contain a toy which appeals to young children, while the expansion of McCafé barista-made coffee, sweets and table service 102 appeal to older customers. Psychographic Psychographic segmentation requires a business to understand consumer behaviour. Pressure to improve diets and maintain a healthy lifestyle has influenced the development of McDonald s healthier options, which include grilled chicken, salads, water and fruit. Furthermore, in Australia, there has been a big focus on a healthy lifestyle and a diet free from processed food. McDonald s has responded to this lifestyle variable by making nutritional information and ingredient information 103 easily accessible to customers. Geographic As the marketing mix varies in different geographic locations, market segmentation by geography allows McDonald s to add or alter menu items to suit local tastes. Below is a list of some products that are specific to certain geographic locations. Corn Pie in Thailand. McDonald's in Thailand. 39 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2016

10 Country Food item Australia Aussie BBQ Angus 76 Chile Empanadas con Queso 77 India Maharaja Mac 78 Aloo wrap 79 McAloo Tikki 80 Masala Grill 81 McSpicy TM Paneer 82 Germany Spring Rolls Japan Teriyaki Mac Burger 83 Shrimp Fireo 84 Chocolate Fries 85 Malyasia Bubur Ayam 86 New Zealand Kiwiburger 87 Kiwi Angus Burger 88 Georgie Pie: Bacon N Egg 89 Georgie Pie: Steak Mince N Cheese 90 Peru Mexican Salad 91 Spain Gazpaco 92 Beer 93 CBO (Chicken, Bacon and Onion) 94 Thailand Fried Chicken Pieces 95 Corn Pie 96 Savoury Chicken or Pork Porridge 97 United States Bacon Clubhouse Burger 98 Artisan Grilled Chicken Sandwich 99 Premium Buttermilk Crispy Deluxe Sandwich 100 McRib 101 Product/Service Differentiation Globalisation has increased the quantity and variety of goods and services available to consumers. Consequently, in order to attract sales, businesses have had to change their product or service making them appear different to those provided by their competitors. The informal eating outlet market contains approximately 8 million restaurants, therefore the process of differentiation has been an important focus for McDonald s. BLACKLINE MASTER valid until 1/11/2017 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams

11 Profitability (Gross profit ratio) Gross profit Sales Note this information comes from the income statement. McDonald s (Company Stores) Yum! Brands Inc. (Company Stores) % 66% 66% 69% 68% 67% Gross profit is measured by taking sales and subtracting the cost of goods sold. The figures above have been taken from McDonald s and Yum! Brands Inc. company-owned stores. The cost of goods sold represents the actual food and packaging that a customer takes away with them after purchase. McDonald s company stores have shown a steady level (66%) of gross profit margin over the last three years and are marginally lower than Yum! Brand s Inc., who have been improving. McDonald s recognises that many of its food inputs (i.e. chicken, beef, etc.) are commodities subject to price fluctuations, while the selling price in restaurants usually remains stable (due to high levels of competition and consumer choice). This means that it is doing well to achieve consistent gross margins and management acknowledges that this will be a difficult task in the future. It must be noted, however, that the 2015 Annual Report expects the cost of food inputs to reduce slightly in the United States and remain stable worldwide, so the gross profit ratio should increase slightly. According to the ATO s published figures, comparable takeaway stores in Australia had a gross profit margin of 63% in the 2014 financial year (the most recent figures published). 25 McDonald s company stores (worldwide) are performing better than this. Note At a gross profit margin of 66%: Meal sale price = $9.00 (100%) Cost of ingredients = $3.06 (34%) Gross profit = $5.96 (66%) 70% GROSS PROFIT RATIO GROSS PROFIT MARGIN 68% 66% 64% 62% 60% 58% McDonald s (Company Stores) Yum! Brands Inc (Company Stores) Average Australian Takeaway BLACKLINE MASTER valid until 1/11/2017 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams

12 Profitability (Net profit ratio) Net profit Sales Note this information comes from the income statement. McDonald s (Company Stores) Yum! Brands Inc. (Company Stores) % 16% 17% 16% 15% 15% Net profit is measured by taking sales and subtracting the cost of goods sold and all other expenses. The figures above have been taken from McDonald s and Yum! Brands Inc. company-owned stores. McDonald s company stores net profit margin has decreased each year over the last three years. Yum! Brand s Inc. in comparison, is now achieving a higher net margin at its company stores than McDonald s. According to the ATO s published figures, comparable takeaway stores in Australia had a net profit margin of 9% in the 2014 financial year (the most recent figures published). 26 McDonald s company stores (worldwide) are performing significantly better than this. Note At a net profit margin of 15%: Meal sale price = $9.00 (100%) Cost of ingredients = $3.06 (34%) Other expenses = $4.59 (51%) Net profit = $1.37 (15%) (i.e. the company makes $1.37) NET PROFIT RATIO 18% NET PROFIT MARGIN 16% 14% 12% 10% McDonald s (Company Stores) Yum! Brands Inc (Company Stores) Average Australian Takeaway 8% Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2016

13 McDonald s Australia publishes information about workplace injuries. 32 The main measurement used is known as the Lost Time Injury Frequency Rate (LTIFR), which is calculated as the number of hours lost to injury per 1 million hours worked. The latest available statistics show McDonald s Australia improving in this area. In NSW, McDonald s Australia is also a self-insurer for worker s compensation, which means that it funds and processes all claims internally. In all other states, it uses traditional insurance agencies to provide workers compensation insurance. As a self-insurer in NSW, McDonald s Australia is regularly audited by NSW WorkCover. The Corporate Responsibility and Sustainability Report stated about one such audit: The audit closely examined the McDonald s Occupational Health and Safety Management System (OHSMS). The OHSMS audit reviewed two elements; Management Responsibility and Process Control. McDonald s was successful in both elements and scored at the comprehensive level result for testing and inspection. 33 McDonald s Australia also makes some of its Work Health and Safety Policy available publicly. 34 Anti-discrimination and Equal Employment Opportunity McDonald s Australia has a public commitment to both antidiscrimination and Equal Employment Opportunity (EEO). The Standards of Business Conduct The Promise of the Golden Arches states: McDonald s provides equal treatment and equal employment opportunity without regard to race, colour, religion, sex, age, national origin, citizenship status, disability, sexual orientation, military status, genetic information or any other basis protected by law. We apply this policy to our employees, applicants, independent contractors, franchisees, vendors and suppliers. We follow this policy in all aspects of McDonald s dealings with customers and to our employment decisions, including recruitment, hiring, placement, development, promotion, training, scheduling, benefits, compensation and termination. 35 In support of this, McDonald s employs a Chief Diversity Officer (currently Patricia Harris) who oversees worldwide efforts to make the business a diverse and fair workplace. 36 McDonald s reports that more than 70% of its United States workforce is either female or from a minority group. In Australia in McDonald s Diversity Officer Patricia Harris has even written a book on the subject! 2012 (latest figures available), 56% of the senior leadership team was female and 44% of executive management positions were held by women. 37 BLACKLINE MASTER valid until 1/11/2017 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams

14 McDonald s also employs many people with disabilities. As an example, it was reported in 2012 that a McDonald s store in Hobart employed fourteen people with a disability at one time. 38 On its website, McDonald s also states, McDonald s is a signatory to the Corporate Leaders for Indigenous Employment Strategy and are working to provide increased and more effective training and employment opportunities for Indigenous Australians. 39 McDonald s uses all of these avenues in its aim to have a diversified workforce free from discrimination. 4.5 Economic Human resource management at McDonald s is greatly impacted by economic conditions. The company has stated, Our results are substantially affected by economic conditions. Many major economies, both advanced and developing, continue to face weak economies, high unemployment rates and other ongoing economic issues 40 For this and other reasons, McDonald s financial results in recent years have not been as good as previously achieved. The numbers don t lie, said CEO Steve Easterbrook when he announced a major restructuring program at McDonald s US corporate headquarters. This included making redundant 135 employees from the United States and 90 employees based outside the US. This restructure was expanded at the November 2015 investor meeting. 41 The effect is a loss of jobs in the US, with these functions possibly to be outsourced. 4.6 Technological Technological advancements have impacted on both what staff do at McDonald s and how they do it. A typical McDonald s store looks very different today than it would have fifty years ago. For example, all McDonald s employees use Metime an online platform that is used for such things as rostering, pay and training. Each employee has a personal login to this system. This helps McDonald s to maintain effective communication with employees. Another example of the impact of technology is how tasks at the restaurant are carried out. McDonald s recently began rolling out self-service kiosks, which remove the need for the customer to interact directly with an employee to place an order. It has also introduced machinery such as self-filling drink machines, which take customer orders directly from the computer system and automatically pour drinks. The impact of this technology is to either free up staff to complete other duties, or reduce staff numbers overall. See the video of a self-filling drink machine in action. Click on the link given in the endnote 42 A self serve kiosk. 77 Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2016