Operations UNCORRECTED PROOF · to food safety requires all franchisees to be accountable for...

A.J. Stanshall

BUSINESS CASE STUDY 2021

A comprehensive case study of McDonald’s

Covering

9 Operations 9 Marketing 9 Finance 9 Human Resources

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3 © Copyright A.J. Stanshall 2020

BUSINESS CASE STUDY - McDonald's

www.resourcefactory.com.au

CONTENTS

Foreword – McDonald’s Case Study

IntroductionA Very Brief History 8Worldwide Structure 8Abbreviations 8

CHAPTER 1 – OPERATIONS

The Role of Operations: Why is operations important to McDonald’s?1.1 The Strategic Role of Operations 10

The Influences on Operations: What factors impact on the operations decisions McDonald’s makes?1.2 Globalisation 111.3 Technology 111.4 Quality Expectations 121.5 Cost-Based Competition 131.6 Government Policies 141.7 Legal Regulation 141.8 Environmental Sustainability 151.9 Corporate Social Responsibility 17

The Processes of Operations: How does McDonald’s do it?1.10 Inputs 201.11 Transformation Processes 221.12 Outputs 27

Operations Strategies: How does McDonald’s achieve its objectives?1.13 Performance Objectives 281.14 New Product or Service Design and Development 291.15 Supply Chain Management 301.16 Outsourcing 301.17 Technology 311.18 Inventory 311.19 Quality Management 321.20 Global Factors 32

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4© Copyright A.J. Stanshall 2020 www.resourcefactory.com.au

CHAPTER 2 – MARKETING

The Role of Marketing: Why is marketing important to McDonald’s?2.1 The Strategic Role of Marketing Goods and Services 332.2 Production, Selling and Marketing Approaches 332.3 Types of Market 33

The Influences on Marketing: What factors impact on the marketing decisions McDonald’s makes?2.4 Factors Influencing Customer Choice 342.5 Consumer Laws 352.6 Ethical Considerations 36

The Processes of Marketing: How does McDonald’s do it?2.7 Situational Analysis – SWOT, Product Life Cycle 372.8 Market Research 392.9 Establishing Market Objectives 392.10 Identifying Target Markets 402.11 Developing Marketing Strategies 402.12 Implementation, Monitoring and Controlling 40

Marketing Strategies: How does McDonald’s achieve its objectives?2.13 Market Segmentation, Product/Service Differentiation and Positioning 412.14 Products – Goods and/or Services 442.15 Price, Including Pricing Methods 452.16 Promotion 462.17 Place/Distribution 48 2.18 Global Marketing 48

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CHAPTER 3 – FINANCE

The Role of Financial Management: Why is financial management important to McDonald’s?3.1 The Strategic Role of Financial Management 503.2 The Objectives of Financial Management 51

The Influences on Financial Management: What factors impact on the financial decisions McDonald’s makes?3.3 Internal Sources of Finance 523.4 External Sources of Finance 523.5 Financial Institutions 533.6 Government Institutions 533.7 The Global Market 55

The Processes of Financial Management: How does McDonald’s do it?3.8 Planning and Implementing 563.9 Monitoring and Controlling 593.10 Financial Ratios 593.11 The Limitations of Financial Reports 663.12 Ethical Issues Related to Financial Reports 68

Financial Management Strategies: How does McDonald’s achieve its objectives?3.13 Cash Flow Management 693.14 Working Capital Management (Current Assets) 693.15 Working Capital Management (Current Liabilities) 703.16 Working Capital Management (Strategies) 703.17 Profitability Management (Cost Controls) 713.18 Profitability Management (Revenue Controls) 713.19 Global Financial Management 72

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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 734.2 Outsourcing 74

The Influences on Human Resource Management: What factors impact on the human resources decisions McDonald’s makes?4.3 Stakeholders 754.4 Legal – The Current Legal Framework 774.5 Economic 804.6 Technological 804.7 Social – Changing Work Patterns and Living Standards 814.8 Ethics and Corporate Social Responsibility 82

The Processes of Human Resource Management: How does McDonald’s do it?4.9 Acquisition 834.10 Development 834.11 Maintenance 844.12 Separation 84

Human Resource Management Strategies: How does McDonald’s achieve its objectives?4.13 Leadership Style 854.14 Job Design 864.15 Recruitment 864.16 Training and Development 864.17 Performance Management 874.18 Rewards – Monetary and Non-Monetary, Individual or Group, Performance Pay 874.19 Global – Costs, Skills, Supply 884.20 Workplace Disputes Resolution 88

The Effectiveness of Human Resource Management: How does McDonald’s know what is working and what isn’t?4.21 Indicators 89

CHAPTER 5 – INTERDEPENDENCE OF KEY BUSINESS FUNCTIONS

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Introduction

A Very Brief History

Brothers Richard and Mac McDonald opened a restaurant called McDonald’s Bar-B-Q in California in 1940. In 1948, they remodeled the store as a drive-in with a reduced number 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.” 1In 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 1965. 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 over 39,000 outlets in 119 countries, around 93% of which are owned by franchisees, with the remainder owned by McDonald’s. Worldwide, McDonald’s aims for this to change to 95% franchises and only 5% company stores within the next few years.Many franchisees of McDonald’s own multiple outlets. In 2020, like many businesses, McDonald’s was severely impacted by the COVID-19 pandemic. CEO Chris Kempczinski stated in March 2020: “We’re now operating in a completely different world and we expect these changes to persist long after the crisis is over.” 3

The first McDonald’s Restaurant in Des Plaines

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1.6 Government Policies

As a global business, McDonald’s is subject to a variety of governmental policies and rules. For example, in the United States, the government has introduced regulations that mandate fast-food restaurants to display calorie counts on its menus. Additionally, some cities in the US require restaurants to have regular health inspections and make the results publicly available. Food Standards Australia New Zealand is a bi-national government agency that develops and administers the Australia New Zealand Food Standards Code. The aim of this organisation is to provide food standards in areas such as food additives, safety and labelling. Working with government, industry bodies and other experts, McDonald’s adheres to the food standards and is also committed to continual improvement in its food handling processes. McDonald’s uses a safety plan which is based on the Hazard Analysis Critical Control Point (HACCP) approach. This is an important aspect of ensuring food safety as it establishes measures for both monitoring and controlling operational processes to ensure compliance with food standards. For example, a meat patty goes through 52 checks before it actually arrives in a McDonald’s restaurant. McDonald’s global science risk-based approach to food safety requires all franchisees to be accountable for compliance and encourages all employees to take action over food safety.

1.7 Legal Regulation

In Australia, each of the three levels of government create laws that regulate some aspect of business activity. The laws are established to ultimately protect consumers and ensure businesses are not engaged in unconscionable conduct that could compromise fair competition and public health.

LocalAt a local level, McDonald’s needs to ensure that potential business sites are located in commercially zoned areas. The zoning regulations set by local councils will impact the hours of operation and can affect restaurants’ outdoor facilities. For example, in Tecoma, Victoria, the local council voted against allowing a McDonald’s in its area (although the decision was eventually overturned by the State Government authority).

Government policy and legal regulation during COVID-19As the COVID-19 pandemic progressed in Australia, all three levels of government introduced laws and policies that impacted on the operations of McDonald’s outlets. For example, 8 cases were linked to a McDonald’s store in Fawkner, Victoria. Working closely with the Victorian Department of Health, the store was closed for a period of time and employees were asked to self isolate.At the start of the pandemic in March 2020, the Federal Government announced that restaurants were only able to open for takeaway. This severely impacted the operations of McDonald’s in Australia. On March 16, 2020, McDonald’s Australia CEO Andrew Gregory said: “We are continuing to work closely with all relevant authorities and are strictly following the guidance provided by the Australian Government Department of Health and relevant State Departments of Health.” 4

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Technology, Task Design and Process LayoutFactors such as technology, task design and process layout are important in supporting the operations processes.

• Technology McDonald’s has embraced technology to assist with operations. During COVID-19, McDonald’s CEO Chris Kempczinski said “Our global restaurant estate had been largely modernized. And we’ve made significant investments to build new capabilities in delivery and digital that have proven to be critical to our business during the pandemic.” 9 To improve efficiency in its Drive-Thru services, McDonald’s has employed the use of automated drink dispensers. It has also acquired a company called Apprente, which specialises in artificial-intelligence speech recognition. McDonald’s has been trialling this technology as part of the ordering process for some Drive-Thru’s. These measures have been beneficial as they allow for greater accuracy, less waste and faster delivery of food and beverages to customers.

• Task Design Task design is the way in which McDonald’s organises the transformation process into smaller tasks. Task design may overlap with the job descriptions created by the human resources division of a firm. The purpose of task design is to assist the employees to complete the job at hand and consists of breaking down the work into a number of jobs. Collectively, all tasks contribute to the final goal of delivering the companies goods or service. Task description includes a breakdown of tasks that key crew members need to follow. For example, the person receiving the order at the first contact point at the Drive-Thru should follow a process such as: 1. Greet the customer in a friendly manner – “Welcome to McDonald’s. Can I take your order?” 2. Take the order and ask the customer - “Would you like anything else?” 3. Once the customer completes their order, confirm the order by repeating it to them 4. State the total – “That will be $12.60, thank you,” – and direct them to the next window The food making process at McDonald’s is standardised and materials are organised in a manner that supports the time allotted for each task. Every stage of the process is allocated a target completion time. Therefore, thorough planning and design of the process layout is essential for McDonald’s to achieve the target times set for preparing burgers. McDonald’s is always looking to do better, as this quote, in the midst of COVID-19, from CEO Chris Kempczinski, reveals: “I was talking to a franchisee yesterday who’s down in Alabama and he was telling me one of the big revelations that he and his team have had coming through this is, they thought that they were running pretty close to capacity at Drive-thru. And they found actually they’ve got a whole another level of capacity that they can get to around just focusing on some of the operational elements of this. And so, he said it’s expanded our view of what’s possible through the Drive-thru.” 10 A busy McDonald’s kitchen

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The Influences on Marketing

What factors impact on the marketing decisions McDonald’s makes?

2.4 Factors Influencing Customer Choice

Marketing is focused on understanding changing consumer behaviour. Understanding why consumers buy particular products has been a vital factor in McDonald’s success. There are four major factors that influence consumer choice.

• Psychological This relates to the processes that affect an individual’s preferences and tastes. These can include motivation, perception, personality, learning, beliefs and attitudes. McDonald’s, as a company, has demonstrated over a long period it understands the key psychological drivers of consumers. For example, management were confident of a strong return of customers after COVID-19, noting “customers will be seeking known brands and familiar routines” and that “customers are craving comfort in our iconic core menu items.” 2

In designing the experience of the future stores, McDonald’s took into account the psychology of the purchase transaction, especially in regards to its digital displays. For example, strategies it uses include displaying signature (premium) items on a display as close to the entrance as possible - without a price, exploiting a concept know as “decision anchoring”, where all subsequent purchase decisions are made in reference to that first image seen by the consumer. This can also create a “price-anchor”, where the customer feels “better” about buying a cheaper, traditional meal - and in fact may even buy more as it is perceived as great value (in comparison). McDonald’s also make use of what researchers have described as a “health halo”. That is, it has been found that an “illusion” of healthiness can be created in the consumers mind when a relatively unhealthy option, such as a burger or fries, is pictured next to a more healthy option, like salad or water. Consumers then percieve the entire menu to be healthier and feel less guilty about the purchase. 3

• Sociocultural Socioeconomic status, social class, culture, family and peer groups all influence consumer behaviour. Being aware of these factors allows McDonald’s to differentiate its products in order to deliver goods and services that its customers will choose to buy. In the 2019 Annual Report, McDonald’s identified a range of ways to appeal to people from a variety of social and cultural backgrounds. These included the need to deliver customers value, quality and convenience. McDonald’s is therefore focused on offering “compelling value”.4

Signage focusing on premium menu items

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• Economic General economic conditions can influence the demand of goods or services. During the COVID-19 pandemic, economic conditions declined worldwide. Interestingly, for many years in its annual report (before COVID-19), McDonald’s stated: “Our results of operations are substantially affected by economic conditions... and by a variety of factors including hostilities, epidemics...” 5 The result of a worldwide economic decline, coupled with forced stores closures, dramatically reduced McDonald’s sales.

• Government Government regulations can influence business practices and consequently affect consumer decisions. During the COVID-19 pandemic, both State and Federal Governments enforced strict rules which severely restricted McDonald’s. For example, there was a period of time when stores could only open for Drive-Thru, takeaway and delivery. This became a significant factor influencing customer choice.

2.5 Consumer Laws

As McDonald’s operates in 119 countries, it faces a complex task of ensuring all of its marketing abides by the law in all of these juristictions. Two main areas that consumer law, in general, covers is labelling of food ingredients and advertising.

Labelling There are several laws that affect marketing at McDonald’s. McDonald’s Australia is bound by the labelling requirements stipulated in the Australia New Zealand Food Standards Code. McDonald’s Australia complies with this code and data regarding product ingredients, nutritional and allergen information is made available on the company website.In Australia, McDonald’s is also bound by state and territory laws such as the Food Act 2003 (NSW)and the Food Regulation Act 2015 (NSW). The NSW Food Authority aims to improve food labelling to encourage healthier food choices. For example, in NSW, it is mandatory for businesses to label the kilojoule intake for each food item. In 2015, Patrick Hatch reported for the Sydney Morning Herald6 that McDonald’s had breached NSW food labelling laws. The article stated that the animated menu boards made customers wait up to a minute to view the kilojoule information, which was then only screened for about seven seconds. McDonald’s worked with the NSW Food Authority to amend the digital menu to allow consumers to better compare the kilojoule intake of products.

AdvertisingIn Quebec, Canada, the Consumer Protection Act forbids advertising to children under 13. In 2013, a class action law suit was filed against McDonald’s, alleging that it had breached this law - by timing the release of new Happy Meal toys to coincide with popular film releases and directly targeting children by displaying its toys in store at “eye level” for children. The case was settled in 2020, with McDonald’s Canada agreeing to donate CAN$1,000,000 to four charities associated with hospitals and to make changes to its promotion of Happy Meals in Canada.

McDonald’s nutritional information under the spotlight.

COVID-19 severely impacted McDonald’s

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Product Life CycleIt is important that McDonald’s identifies where the overall company and/or individual products lie in terms of the product life cycle. This will help frame renewal marketing strategies. McDonald’s iconic french fries are an example of this.

• Introduction - French fries replaced packets of potato chips at McDonald’s in the 1940’s.• Growth - From the 1940’s to 1990, as McDonald’s rapidly expanded across the US, and then

internationally, french fries became a menu favourite and grew in popularity.• Maturity - In 1990, Phil Sokolof campaigned against McDonald’s, claiming that the oil used to

prepare french fries, which included beef tallow, was high in saturated fat and a danger to health. Under this pressure, McDonald’s changed the recipe for cooking the french fries, eliminating beef tallow. This change was met with resistance from customers who favoured the previous taste - and even McDonald’s shares fell in price on the New York Stock Exchange.

• Post Maturity / Renewal - McDonald’s again made slight changes to to the recipe over the years - in a bid to reduce saturated fat content and make the fries healthier. However, to stay relevant and ensure consistent sales, they also adopted a renewal strategy - innovation and extension. To do this, they have “extended” on the base product (fries) to create new variations worldwide - including “Loaded fries”, “Twisted fries” and “Cheesy fries”.

McDonald’s french fries Twisted fries

Loaded fries

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3.2 The Objectives of Financial Management

Financial objectives can be broad or specific. McDonald’s uses a combination of past-year results, overall future plans and general economic conditions to set objectives for future time periods. In 2017, McDonald’s announced some long-term financial targets (what the company sees as optimal performance). It also sets targets each year in the annual report. The company, however, issued a statement after the outbreak of the COVID-19 pandemic that withdrew any previously issued financial targets – both short and long-term.The following table looks at some of McDonald’s financial objectives pre COVID-19 and the impact of the pandemic:

Objectives Pre COVID-19 Impact of COVID-19

Profitability

McDonald’s aimed for consistent operating margins in the mid-40% range. (Overall net profit for the company before interest and tax.)

In the first 6 months of 2020, this metric was 19%.

McDonald’s annual net profit was around US$6 billion.

The dramatic reduction in sales in due to the COVID-19 pandemic, as well as increased costs associated with interest on debt saw a 44% drop in net profit for the first 6 months of 2020.

Growth

McDonald’s had the goal of increasing systemwide sales growth by 3% to 5% (that is, total sales for all stores in the world).

Systemwide sales were down 13% worldwide for the first 6 months of 2020.

Increase the number of restaurants worldwide by 1,000 in 2020.

Significant reduction in the amount of planned restaurant openings worldwide - down to around 350 in 2020.

Efficiency

Return on incremental invested capital in the mid-20% range. (That is, McDonald’s compare the increase in income to the capital it invests in that period of time. and expects a rise of 25%)

Significant reduction in both income and the amount of capital being invested.

Liquidity

Ensure enough cash is available to meet operating expenses and return equity to shareholders via dividends and share buybacks.

Suspension of the program that was returning equity to shareholders. Acquisition of US$6.5 billion in cash - funded by a new US$1 billion overdraft and US$5.5 billion in issued notes.

Solvency Stablisise the debt of the company.

The company has increased its level of debt due to COVID-19. Its current debt is higher than management would like – and it is aiming on reducing that debt as soon as practical.

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Human Resource Management Strategies

How does McDonald’s achieve its objectives?

4.13 Leadership Style

A successful franchise system relies on uniformity between outlets. As McDonald’s has over 39,000 stores worldwide and operates using strict business guidelines, it follows that the management of the corporation might be viewed as somewhat autocratic. Complaints have been made that corporate management decisions such as increasing store rent, running promotions and changing menu items sometimes occur without proper consultation with franchisees. McDonald’s maintains that it works closely with franchisees in decision making. In fact, the character Ronald McDonald was not an idea of the company, but of one its franchisees.The McDonald’s NZ Franchise Overview booklet states quite clearly to potential franchisees: “we’re looking for a certain type of business partner: one prepared to follow a proven system – the product of over 55 years of food service experience. If you’re not good at taking advice, then don’t become a McDonald’s Franchisee. We don’t expect you to reinvent the wheel, just to make it turn faster.” 18

The very nature of a franchise implies that all staff must precisely follow detailed operational instructions that limit the scope for participative, democratic decision making. McDonald’s has a very structured hierarchy, starting with a crew member all the way up to store manager and consultant. This sets a defined chain of command through the local store, consistent with autocratic leadership. This leadership strategy allows for consistency and uniformity.

The COVID-19 playbookTo help restaurants with reopening dining rooms during the pandemic, management published a 59-page “playbook”. This is another example of the company seeking uniformity across its system with a prescriptive, rules oriented approach. It was also reported that the playbook went as far as “scripting” employee responses to possible questions from customers. For example, if a customer asked why the dining room was reopened, the employee could say: “We are all in this together and this team has come together in so many amazing ways over the last few months.” 19

Ronald McDonald was a suggestion from a franchisee

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4.19 Global – costs, skills, supply

As a global business, McDonald’s is able to offer employees scope to work in different locations around the world. The Macca’s Prospectus for employment applicant’s states that employees can “access other exciting opportunities such as working internationally, participating in cross functional teams with colleagues in other countries and leading the organisation.” 23 The uniform nature of the McDonald’s system throughout the world also means that many employee skills are transferable between countries.As a global company, McDonald’s operates in many countries with differing employment laws, minimum wage rates and availability of labour. As such, a large disparity exists between the wages of workers in one country compared to another. The lowest paid McDonald’s workers (India) earn less than US$1.00 per hour, while the highest paid workers are in Denmark, earning around US$20 per hour.

4.20 Workplace Disputes Resolution

McDonald’s has clear employee grievance procedures set out in the Standards of Business Conduct – The Promise of the Golden Arches booklet. Employees can discuss issues with direct supervisors (or other managers) or the employee can directly contact the company and report an issue which may sometimes lead to mediation.McDonald’s also involves trade unions and other legal institutions when necessary to negotiate employee pay and conditions. Under the compliance partnership between McDonald’s and the Fair Work Ombudsman (FWO), a report is issued about the number of McDonald’s staff that request assistance from FWO. The total requests received compared to the total number of employees is around 0.03%. Given that a large majority of the McDonald’s workforce is comprised of young people, the FWO considers this to be an exceptionally positive outcome.(See “Hope to god you don’t get thirsty” on page 82).

McDonald’s in India

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CHAPTER 5 – INTERDEPENDENCE OF KEY BUSINESS FUNCTIONS This section involves all four chapters of this book – operations, marketing, finance and human resources – to highlight the interdependence of all four functions.

2020 COVID-19 pandemicIn 2020, the entire world was impacted by the COVID-19 pandemic. The effect on McDonald’s demonstrates the interdependence of key business functions.

OperationsMcDonald’s operations were severely impacted. At the height of the pandemic, 25% of McDonald’s stores worldwide we closed. The majority of stores that remained open did so with significant modifications, often involving the provision of only Drive-Thru, delivery of takeaway. McDonald’s reported that at least 50 operations processes were updated as a response to the pandemic and that stores who were reopening dining rooms in the United States needed to abide by a 59-page COVID-19 Playbook – a set of instructions developed by McDonald’s headquarters to instruct stores on operational changes required as a response to the pandemic. These included upgraded cleaning and sanitizing routines.

MarketingThe major impact on the “4 P’s” was undoubtedly “place”. The distribution of McDonald’s products was severely impaired by the closing of up to 25% of stores at the height of the pandemic. This highlights the close relationship between operations and marketing. McDonald’s also made changes to its product mix. This meant that many stores limited the size of the menu, whilst in Australia, items like milk, eggs and muffins were made available through Drive-Thru.

FinanceThe financial impact on the financial position and performance of McDonald’s cannot be understated. This included a dramatic fall in sales. April 2020 saw sales down 39% compared to April 2019. May sales were 21% reduced from the same month in 2019. Overall, systemwide sales in the 6 months to 30th June were down 13%.As a further response to the pandemic, McDonald’s obtained an additional US$6.5 billion in debt. Management have expressed that current debt levels are higher than they traditionally maintain and that a post pandemic priority will be paying down this debt as soon as practical.

Human ResourcesAs the frontline of operations, employees have felt the full impact of the pandemic. Included in this are the obvious reductions in the amount of jobs available and working hours for remaining employees. Other impacts have included increased fears for health and safety – as well as job security.It is obvious that the COVID-19 pandemic, whilst primarily affecting operations, has followed on to each of the other three key business functions.

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