Identify Problem and propose alternatives

case 40

On January 24, 2007, McDonalds CEO Jim Skinner stated that the total revenue for the fast food chain had risen by 11 percent during 2006 to $21.6 billion. Net profits had climbed by 36 percent to $3.6 billion. These results indicated that the firm had managed to make significant improvements to its performance since announcing its first quarterly loss ever in early 2003. The stock for McDonald's had risen to almost $45, representing a threefold increase in value since pulling out of a nosedive three years ago. "To state the obvious, McDonald's is on a bit of a roll," the firm's chief financial officer Matthew Paull told analysts' (see Exhibits 1 and 2 for income statements and balance sheets). Skinner was the second person to take over the company since James R. Cantalupo had died unexpectedly of a heart attack in 2004. Cantalupo had been replaced by Charlie Bell, who also resigned a few months later in order to fight his recently discovered cancer. In spite of these changes in leadership, the firm has continued to push on the turnaround strategy that had been initiated by Cantalupo in order to address McDonald's lackluster performance. The strategy, commonly refereed to as the "Plan to Win" tried to target various critical areas that needed to be addressed. In fact, Skinner attributed the firm's consistent growth in sales and profits to the successful development of Cantalupo's early turnaround efforts. As a result of these, McDonald's has managed to achieve 44 straight months of higher same-store sales. Much of the momentum has been generated in the United States, the firm's single largest market, where new menu items, refurbished outlets, late-night hours and cashless payments have boosted sales. The firm has also shown some improvement in its sales hi Europe, where it had failed to show much growth for several years. But Skinner was acutely aware that the problems at McDonald's went way beyond cleaning up restaurants and revamping the menu. The chain has been squeezed by long-term trends that are threatening to leave it marginalized. McDonald's is facing a rapidly fragmenting market, where changes in the tastes of consumers have made once-exotic foods like sushi and burritos everyday options. Many of its fast-food customers are also looking for food that is healthier and better tasting. Furthermore, competition has been coming from quick meals of all sorts that can be found in supermarkets, convenience stores, and even vending machines. Many analysts believe that McDonald's must continue to work on its turnaround strategy in order to meet these challenges. But they acknowledge that the firm has pushed hard to transform itself, and they are encouraged * This case was developed by Professor Jamal Shamsie. Michigan State University, with the assistance of Professor Alan B. Eisner. Pace University. Material has been drawn from published sources to be used for class discussion-Copyright 2007 Jamal Shamsie & Alan B. Eisner. by the results that it has achieved over the last three years. "They have experienced a comeback the likes of which has been pretty unprecedented," said Bob Golden, executive vice-president of Techonomic, a food service consultancy. "When restaurants start to slide, it really takes a lot to turn them around."2 Experiencing a Downward Spiral Since it was founded more than 50 years ago, McDonald's has been defining the fast food business. It provided millions of Americans their first jobs even as it changed their eating habits. It rose from a single outlet in a nondescript Chicago suburb to become one of the largest chains of outlets spread around the globe. But it had been stumbling over the past decade (see Exhibit 3). The decline in McDonald's once-vaunted service and quality can be traced to its expansion of the 1990s, when headquarters stopped grading franchises for cleanliness, speed, and service. By the end of the decade, the chain ran into more problems because of the tighter labor market. McDonald's began to cut back on training as it struggled hard to find new recruits, leading to a dramatic falloff in the skills of its employees. According to a 2002 survey by market researcher Global Growth Group, McDonald's came in third in average service time behind Wendy's and sandwich shop Chick-fil-A Inc. McDonald's also began to fail consistently with its new product introductions, such as the low-fat McLean Deluxe and Arch Deluxe burgers, both of which were meant to appeal to adults. It did no better with its attempts to diversify beyond burgers, often because of problems with the product development process. Consultant Michael Seid, who manages a franchise consulting firm in West Hartford, pointed out that McDonald's offered a pizza that didn't fit through the drive-through window and salad shakers that were packed so tightly that dressing couldn't flow through them. In 1998, after McDonald's posted its first-ever decline in annual earnings, CEO Michael R. Quinlan was forced out and replaced by Jack M. Greenberg, a 16-year veteran of the firm. Greenberg did try to cut back on McDonald's expansion as he tried to deal with some of the growing problems. But his efforts to deal with the decline of McDonald's were slowed down by his acquisition of other fast food chains such as Chipotle Mexican Grill and Boston Market. On December 5, 2002, after watching McDonald's stock slide 60 percent in three years, the board ousted Greenberg. He had lasted little more than two years. His short tenure had been marked by the introduction of 40 new menu items, none of which caught on big, and the purchase of a handful of nonburger chains, none of which helped the firm to sell more burgers. Indeed, his critics say that by trying so many different things and executing them poorly, Greenberg allowed the burger business to continue with its decline. According to Los Angeles franchisee Reggie Webb "We would have been better off trying fewer things and making them work. ...