Case Analysis

McDonalds New Structure

Growing from a single restaurant in 1955 to over 14,000 restaurants in the United States in 2014, McDonalds has experienced nearly continuous growth and success. With over $35 billion in sales in the U.S., McDonalds generates nearly three times the revenue of its closest competitor, Subway. But that doesnt mean that McDonalds is immune to struggles. In 2014, it faced a real challenge to remain relevant as an attractive option for customers and saw its U.S. sales drop by 4.1 percent compared to sales in 2013. This negative turn in the firms performance is likely related to the surprise retirement of McDonalds CEO, Don Thompson, in February 2015.

To consumers, McDonalds menu appears stale and unhealthy. As a result, customers are flocking to competing restaurants, such as Chipotle and Panera, that are seen as offering healthier food and having fresher ingredients and more interesting menu items. As McDonalds U.S.A. president, Mike Andres, stated, What has worked for McDonalds for the past decade is not sufficient to propel the business forward in the future.

McDonalds believes that one of the causes of its struggles is the structure of the firm. McDonalds has long aimed for consistency across its units. To maintain this consistency, McDonalds has used a central testing kitchen to develop new products that could be rolled out across the firm. The firm has also relied on a regional structure, with Eastern, Central, and Western divisions. When a new initiative or product was rolled out, the firm would introduce it in each region, moving from north to south. Thus, customers in Minnesota and Louisiana would have the same menu, but new products would first be introduced in Minnesota and later in Louisiana. But this structure is hampering the firm since it is unable to be very responsive to regional taste differences and is very slow in responding to changing customer tastes and preferences. As a result, within McDonalds, there are too many layers, redundancies in planning and communication, competing priorities, barriers to efficient decision making, and too much talking to ourselves instead of to and about our customers, according to Andres. Thus, the firm has been burdened by organizational boundaries that slow communication and the ability to talk to and respond to customers and other stakeholders.

To shake things up, McDonalds announced it would eliminate layers of management and create a new organizational structure in October 2014. The aim of the changes is to allow the firm to be more responsive to local tastes and to changes in customer demands. At the top level, the chain is moving to four regional divisions: Northeast, South, Central, and West. In McDonalds assessment, this new structure more effectively clusters together customers with similar tastes and preferences. At a lower level, McDonalds is giving leaders in 22 regional groups greater autonomy in making local menu and marketing decisions. In Andress words, We need to be more sophisticated in how we use local intelligence to address specific consumer needs . . . and to put decision making closer to our customers. As part of this effort, McDonalds is looking to the regions to learn about emerging customer preferences, and it created a learning lab on the west coast to better understand what consumers in that region want.

The open question is whether or not these structural changes will allow McDonalds to refresh its image and pull in more customers.

Questions

1. Is this structural change likely to be beneficial to McDonalds as it aims to stop sliding sales?

2. What are the potential costs and benefits of increasing regional autonomy?

3. New initiatives or menu changes in one region may be valuable in another region. What actions can McDonalds take to break through regional boundaries to facilitate learning?

4. What other actions does McDonalds need to take to turn around its sales?