QUESTION: What are the current forces in the external environment that might affect McDonalds strategy?

CASE 28 McDONALD'S IN 2019* On November 3, 2019, the MeDonald's board of directers experieaces for our customers." former CEO Steve dismissed Steve Easterbrook ovee violations of company Easterbecos said ia a statement." policy regarding a relationship with an employee and MeDonald's has been trying to attract more customers aamed Claris Kempcziniki the aew CEO. Kempezinski had to its restaurants by offeriag more customized products that experience at Kraft Foods and PepsiCo priot to joiaing are also healthier. It has removed high fructose corn syrup McDonald's in 2015, most recently as president of the USA from is bunk. chared from the use of lipuid margarine to business unit.' teal butter, decided to use chicken that has been raised In March 2019, McDonald's, the largest restaurant without antibiotics, and to make use of cage-free eges. Mike chain, announced it will acquire artificiabinteligence Andres, former president of McDonald's USA explained startup Dyramic Yield, a company focused on personalia-. Why the firm has decided to make these changes: "Why take tion and decision logic techaology. Aceesi to this technol a position to defead them if consumers ase saying they ogy will allow the firm to update instantaneously its don't want them?s drivethrough menus based on factors such as time of day. These changes ane expected to address some of chalweather, and trending menu items. McDoeald's plans to lenges that MeDonald's has been facing in many markets, roll out the updated drivethrough meeus across the Uaiked including in the Uniked States, where it has almost 15,000 States during the year. "With this acquisition, we're expand. of its 38,000 mostly franchised restaurants. It has lost a loe ing both our ability to increase the fole technology and data of ground with consumers, especially millentials, who are will play in our furture and the speed with which we'll able defecting to traditional competitors like Barger King and to implement our vision of ereating more personalized Wendy's as weil as to new designer burger outlets such as Five Guys and Shake Shack. Changiag tastes are also re- Cae peperat on leme slamie, Nialign Sye thirene wimte_ sponsible for the loss of customers that are liaing up at fast. Copreat o mo 9 leme slanse ind Man B Euer. eats (see Exhibits 1 to 4). EXHIBIT 1 Inceme Statement (s milions) Scurc: Armal Ropout at NkiDeralds Carpunatiec, 2018 EXHIBIT 2 Balence Sheet (s milions) ExAIEIT 3 Ereakdown of Revenues (\$ milions) Soabe Aneme Repart of MiDendat Corporicin. 20ia. EXCHIBIT 4 U.S. Customer Satistactien Index for Selected Chains Over the years, McDoaald's response to this groning Saa Bernardino, California to become one of the largest competition was to expand its mene with snacss, salads, elain of outlets spread apound the globe. But it gradually and new drinks. From 33 basic items that the chain offered began to run into various probiems that began to sbow down in 1990, the meau had growa by 2014 to 121 kean. The its sales gromth (see Exhibit 5). greatly expanded mene led to a stgnificant increase in coss This decine could be attributed in large part to a drop in and longer preparation times. Tais forced the ferm to in McDonald's cocevaunted service and oquality since its es crease the prices of many of its items and to take more dine pansion in the 1990s, ahen headquarters stopped grading to serve customers, moving it away from the attributes that franchises for eleanlinesk, speed. and service. By the end of it had built its teputation upon. "MeDonald's stands for the decade, the chain raa into more problems because of the value, consistency, and convenience," 5a id Darren Tristano, tigiter labor market. McDonald's began to cut back on a restaunast indestry coasultaet., traiairg as it struggled hard to find new recruits, leading to a The fast food chain has been through a similar crisis be. dranatic falboff in the 5 sills of its employees Accondirg to a fore. Back in 2002 and 2003. MeDoeald's had experieneed 2002 survey by narket researcher Global Growth Group. a decline in performance because of qualicy problems as McDocald's came in third in average service time behind result of rapid expansion. At that time, the firm had brought Wendy's and sandwich shop Chick-fihA lnc. James R. Cantalupo back out of retirement to turn things By the beginning of 2003 , consumer surveys were indiaround. He formulated a "Plan to Win," which has been the eating that MeDonald's was headed for serious trouble. basis of MeDonald's strategy over the last decade. The core Measures foe the service and quality of the chain were conof the plan was to increase sales at existing locations by tiauing to fall, dropping far behind those of its rivals. In improving the meau, refurbisking the outiets, and exteading order to deal with its deteriorating performance, the firm hours. This time, however, such incremental sleps might decided to briag back setired vice-chairman James R. not be enough. Cantalupo, 59, who had overseen McDonald's successul PullingoutofaDownwardSpiralCantalupo,internatocalexpansioninthe19805and1990s. Since it was founded more than 50 years ago, McDonald's only candidate with the aecessary qualifications, despite has been defining the fast food business. It prosided mit- sareholder sentiment for an outsider. The board had felt lions of Americans their first jobs even as it changed their that it aeded someone who knew the company well and eating habics. It rose from a single outlet in a nondescript could move quicsly to turn things around. EXHIBIT 5 McDanalds Milestenes 1948 Brethers Richard ane Mesrice McDonsic epea tie firstrestarart in Sar Bemacino, Cal7omia, that sells hamburges, fries, and milleshakes. 1965 Ray A. Kroc, 52, opens his first HicDonelf's in Des Plaines, Ilinos. Krox, a cistfbutar of milkshake muers, figures he can sell a bende of them If he fraxhises ithe McDonalf's assiness anc intal hit miacis in the rev stones. 1951 Sixyears latet, Kroc bups out the McDonald brothers for $2.7 rillion. 1963 Rionald McDonald makes his cebut as coparatespckexionatsing fuare NEC-TV weathemrar Willard Scot. During the year, the company also sels its 1 biliceth bargef. 1955 McDansids steck gees public af $22.50 a shax. It wil spit 12 times in the next 35 years. 1957 The first McDonsid's restauratt outside the U.S. apers r Richrerd, Birtish Colmbia. Today tere are 31,108 McDonak's in 118 coutries. 1968 The Big Mac, the first extension of McDonak 's bosic burer, makes its debut ard is an immedate hit. 1972 McDansidss swikhes to the frecan variety far it suceessidi Fiench frias. 1974 Fred L. Tumer nocceeds Krec as CED. I the midit of sracessice, the mi mum wage rises to $2 per hout, a big cost rereate for McDonsids, which is bait areund a modal af young. la-Aage warkers. 1975 The first ahe-theogh eneor is epened in 5ieta Viste, Afiaca. 1979 McDonalds respones is the needs of vordine pomen by introducinc Happy Meals. Aburget, some tries, a sada, and a boy give working rems a break. 1937 Michael R. Ouina beccetes chief exeative. 1901 Respenceg to the pubics desire far healther foecs, MzDerak's intioc ces the lan-lat Mctean Deliae buger. It fops and is withdrant from the market. Over the neat fex years, the thair wil stamble seyenal lires trying to sprece up its meru. 1992 The campany sels its 90 bilianta buycec anc stops coceting. 1996 In erder b attract more acut customers, the company laun ches its. uncl Delume, a "gran-ap" burget with an idiosyncratic taste. the the low-tat berget, it also lels flat. 1997 McDansid's lauxhes Campaien 55. which cuts the cast af a Big Mac to \$a.55. it is a nesponse to discounting by Eurger King and Tace Bel. The move, wtich prefegures simibr pice wars in 2002 , is wicely cor sidered a folure. 1998 Jack M. Greenberg beccemes MaClenalc's fouth chiel exacutee. A 16 -gear campany vele rar, he vans to spruce up the restsurarts and their mens. 1939 For the first time, saks trom ntematiossi epeatiens sulstr p cameste nevenues. In saarch af other cancepts, the company acquires Arams Cafe, Cripctie, Denatos, anc, hter, Bxbon Whaket. 2000 McDansids sales in the U.S. peak at an roe roge of $1.5 milior annually per restaust. It is hewewer, still mare than at any other factiood chain. 2001 Subwoy surpasses McDceale's as the fextacc chain wef the most U.S. atiets. th the and of the year it has 13.247 stores. 143 more than Hcloansic's. 2002 McDansie's pests its fritwer quitely lass, at $343.8 milisa. The siak ciaps to arsund $13.50, dsan 405 from fre years ago. 2003 James R. Cantalupe returns to M:Denelf's in Jaruary es CEO. He immeciately pulls back from the campary's 10-15\% forecast for per-share earnings gaonth. 2004 Charles H. Bel takes over the frn after the sasfen ceath of Cartalupo. He states he wil continue with the shategies that have been develeped by his prececessar. 2005 Jim Sounner takes ever as CEO efter Bell anncances retremert for heeld reasers. 2006 McDonalds la anches speciaty beverages, indudine coffee-besed dirks. 2008 McDonalds plams to acd McCalls to each of its outlets. 2012 Den Thempsen secceeds Skinner as CEO af the chaia. 2015 Thempsom resigrs because of dacining periomante ard is teplaced ty Steve Easterbrook the firm's chief beanding offices. 2017 Gbbal Ma0elirey Day is ce kbcated as Juty 26 to supperi the gobal lanch of McDellvary with UberEaTS. 2019 Steve Eastarbrock is repheed cue to poor juapement r a persenal re atianstip with an emplayee and Chris Kempcuirski, president of the USA baniness anit is nemed CFO. Sount: Tite Mo Donakrs stogs: Tineline, MeDenald's Leaderstip. MeDonedts Cepcration Cantalupo realized that McDonald's oftea tended to Eew ialad offeriags. McDonald's has carried out extensive miss the mark on delivering the critical aspects of consis experimencs and tess with these, deciding to use higher qual tent, fust, and friendly service and as allarouad eajoyable icy ingredieats. from a variety of lastuces and tasty cherry toexperience for the whole tamily. He uaderstood that its enatoes to sharper cheeses and better cuas of meat. It offered franchisees and employees alke needed to be iaspired as a cholce of Newmat' O men dressings, a wellinown higherwell as retrained on their role in putting the smile back into end brand. Salads have changed the way people thiak of cer McDonald's experience. When Castalupo and his team brand." said Wade Thoma, vice president for menu develop. laid out their turaaround plan ia 2003 , they stassed upon meat in the U.S. "It tells people that we ase very serious getting the basiss of service and quality right, in part by re- about offering things people feel comfortable eating to instituting a tough "up or out" grading syseen that would McDoaald's has also been trying to include more fruits kick out underperforming franchisees. "We have to rebulid and regetables in its we.lsnown and popular Happy Meals. the foundation. It's fruitess to add gromth if the foundation It aasounced in 201t that it would seduce the anount of is weak," said Cantalupo." Freach fries and phase out the caramel dipping sauce that In his effort to focus on its cone business, Cantalupo sold accompanied the apple slices in these meals. The addition off the non-burger chains that the firm had recently ac- of fruits aad vegetables has raised the firm's operating quired. He also cut bacs on the opening of new cuclets, fo- costs, becanse these are more expensive to ship and store cusing insead on generating more sales from ils exising because of their more perishable aature, "We ase doing outlets. Cantalupo pushed McDooald's to try to draw more what we can," said Danya Proud, a spokesperson for the customers through the introduction of acw products. The fism. "We lave to evolve with the times." chain had a positive response to its increased empiasis on The rolbut of new beverages, highilghted by new coffee healthier foods, led by a revariped line of fancier salads. The based driakk. represented the chain's biggest menu expanrevamped menu was promoted through a new wosld-aide ad sioe in almost three decades. Under a plan to add a MoCafe slogan "Tme loving it," which was delivered by pop idol Jestin section to all of its neary 14.000 U.S. outlets. McDonald's Timberlake through a set of MTV style commercials. bas been offering lattes, cappuccinos, ice-blended frappes, and fruitbased smoothies to its customers. "In many cases, Striving for a Healthier Image_ they'se aow comiag for the beverage, whereas before they When Jim Skinner toos orer from Cantakpo in 2004. he were coming for the meal," said Lee Renz, an executive continued to pash for MeDonald's to change its image. Skinner felr that one of his top priorities was to deal with the growing conceras about the unhealthy image of Refurbishing the Outlets McDonald's, ghen the rise of cbesity in the Liaited Stases. As part of its turnaround strategy, MeDonald's also been These concerns aere highlighted ia the popular documen ieling off the outlets that it owaed. More than 80 percent tary. Super Sise Me, made by Morgan Sputock. Spurlocs of its outlets are now in the hands of franchisees and other vividly displayed the bealth risks that were posed by a affilates. Skianer began workiag with the franchises to ad. steady diet of focd from the fast focd chain. With a rise in dress the look and feel of many of the chain's aging stores. awareness of the high fat content of most of the products. Without aay chanpes to their dtcor, the firm was likely to oflered by McDoaald's, the firm was also beginniag to fice be lett behind by other savier fast food and drink retailers. lawsuits from some of its loyal customers. The firm is in the midst of pushire harder to refurbish-or In respoase to the growing heaith coaceras, ofe of the re-image-all of its outlets around the world. "People eat first steps taken by McDonald's was to phase out supersiz- with their eyes first," said Thompson. "lf you have a festauing by the end of 2004. The supersiaiag cotioa alloaed cus rant that is appealing, contemporary, and relevant both tomers to get a larger order of Freach fries and a bigget sott from the screet and interior, the food tastes better. 1 driak by paying a little extra. McDoeald's atso anenounced The re-iangiag concept was first tried in France in 1996 that it intended to start providing nutrition inforeation on by Dennis Hennequin, an executive in charge of the chain's the packaging of irs products. The informarioe was easy to European operations, who felt that the effort was essential read and would tell customers about the calories, tat, pro- to revive the frm's sagging iales. "We were hip 15 years ago, tein, earbohydrates, and sodium that are in each product. but I think we lost that," he 5aid..10 McDonalds has been apFinally, MeDonald's also began to remove the artery" plyiag the se-maging coacept to its outkts around the world, clogging trans fatty acids from the oil that it used to mase with a budget of more than half of its total annusl capital its French fries and subsequently aenounced plans to re- expendituses. Ia the Laited States, the changes cost as much duce the sodium content in all of its products by 15 percent. as $650,000 per sestaurant, a cost that is shared with the But Skinner was abo trying to pash out mode offerings franchisees when the ourlet is not compamy owned. that are likely to be perceived by cuscomers to be healitier. One of the psototype interiors that was tested out by McDonald's has continued to build upon its chicken McDonald's has curved couaters with surfaces painted oflerings using white aneat with pooducts such as Chicken in bright colors. la one coraer, a touchactivated screcn Selects. It has also placed a great deal of emperask upon its allows customers to punch in orders without queuing- The interioes can feature armehairs and sofas, modern sandaich types. MeDonald's is hoping that such a push tolighting, large television screens, and even wireless lnternet ward more customization would bring more customers into access. The firm is also trying to develop new features for their outlets, beinging the U.S. countee/drivethrough its drivethrough customers, which account for 65 percent customer ratio closer to 50/50, up from the current 30/70. of all transactioes in the United States. They include music _McDonald's has also been workine to simplify its mene. aimed at queuing vehicles and a wall of windows on the reducing the number of "value meal" promoticns, groups of drivethrough side of the restaurant allowing customers to items that together cost kss than ordering items individually. see meals being prepared from their cars. It has tweaked its "dollar menu" replacing it with "dollar value The chain has even been developing McCafes inside its and more" raising the prices for many items as part of a bid to outhets next to the asual fast food counter. The MeCafe coo- get anch customer to spend more. But McDonald's had intsocept originated in Australia in 1993 and has been rolled out duced these bargain menus because its prices had risen over in many restaurants around the world. McDonald's has the years, driving away customers to cheaper outlets. Conse been introducing the concept to the United States as part of quently, as much as 15 percent of the chain's sales had been the refurbishment of its outlets. In fact. part of the refur. coening from its "dollar menu" where cverything cost a dollar. bishment has focused oe the installation of a specialty bev. Over the past year, McDonald's saw a slight jump in erage platform across all U.S. outkts. The cost of installing U.S. sales after launching an allday breakfast at most of its this equipment is runaing at about $100,000 per outlet, locations. The franchises had to be convinced to invest with McDonald's subsidiring part of this expense. _ about $5,000 to add food preparation space in order to of- The firm has planned for all MeCafts to offer espeesso fer breakfast along with the regular lunch or dinner itema. based coffee, gourmet coffee blends, fresh baked muffins, However, sales from the all-day breakfast have begun to flab and high-end desserts. Customers will be able to consume ten out, with a gradual decline in sales from customers who these while they relax in soft leather chairs listening to jazz. . were coming in throughout the day to order breakfast. bie band, of blues music. Commenting on this significant expansion of offerings, Marty Brochstein, executive editoe of The Licening Lemer sald: "McDonald's wants to be seen. More Gold in These Arches? as a lifestyle brand, sot just a place to go to have a burger." H In spite of all the changes that have been made by Eastes. brook, sales growth for McDonald's has continued to be Rethinking the Business Model_ slugesh. The firm does, however, believe that sales will re In response to the decline in performance. Me-Dound in the United States as well as in foreign markets. In ans Hong Kong. McDonald's ansounced a deal with Citic, a some locations that allows customers to skip the counter stateowned conglomerate and the Carlyle Group, a private and head to tabletlike kiosk where they can customize ev equity firm. "China and Hong Kong represent an enormous erything about their burger, from the type of bun to the va- growth opportunity for MeDonald's," Easterbrook said in a riety of cheese to the many. glossy toppings and sauces that recent news release. "The new parthership will combine can go on it. The firm has plans to gradually expand the one of the world's most powerful beands and our unparab. concept to more locations, but franchises are concerned leled quality standards with partners who have an un about the costs, which can rus up to $125,000 per restau matched understanding of the local markets."I rant to make the nequired changes. "Customization is not McDonald's has also been trying to grow by neaching McDonald's historic strength," said Mark Kalinowaki, an out to different customer segments with different peoducts analyst at Janney Montgomery Scott. I2 at different times of the day. It has tried to target young Dubbed the "Create Your Taste" platform, McDonald's adults for beeakfast with its gourmet coffee, ees sandwiches. was hoping to attract mote younger customers who may be and fat-free muffins. It attracts working adults for lunch, moving away froen frozen processed food that is loaded with particuladly those who are squeezed for time, with its burg: preservatives. But it realized that there were considerable ers and fries. And its introduction of wraps has drawn in risks involved with making such a change. The burgers tecnagers late in the evening after they have been partyingwould be priced higher at \$5.49, could take seven minutes to Restaurant analyst Bryan Elliott commented: "They've prepare, and could enly be ordered from inside the store and tried to be all things to all people who walk in their door." eventually beought to your table. Franchises complained that Above all. McDonaldrs is concerned about the findings this could not be offered to drive-through customers that of a recent survey that showed only 20 percent of millennib make up about 70 peroent of the chaie's business. _ als had even tried a Big Mac. It is also aware that despite Furthermore, such a change ran counter to the image for its efforts to diversify its menu, 30 percent of sales come inespensive and fast food that McDonald's has woeked hard from just five items: Big Macs, hamburgers, cheeseburgers, to build over the years. Eaterbrook has subsequendy shifted McNuggets, and fries. It has managed to increase traffic to a more efficient and less expensive format called "Signa during the late-night hours, but this may be hurt by their ture Crafted Recipes" that would allow both in-store and recent ansouncement that they would offer a more limited drivethrough customers to choose a bun and one of four sample of their full menu between midnight and 5 am. of burgers and fries does raise some fundamental questions. Anet in p. B3. Most significantly, it is aot clear just how far McDcakd's 4. The Eeonseint. 2015. Whe the chips are dewn Jaenary th. an 53. can stretch its brand while keeping all of its ourlets under 5. Pallavi G and M. Amdt 203. Hanturger hell. Desinesillook, the traditional nymbol of its goldee arches. In fact. iadescry Marth 3. in 105 . experts believe that the longterm success of the firm may 6. Winaer. M. 20e5. Yee wam any fruit with tha Big Maet Nre Jivk well depeed on its ability to compete with rival burger Thes, Febrary bi. p. 8. chains. "The barger category has great strength," added 2. Stem. S. 2ott. McDonaldb trims its Happy Meat. Nex fonk Tiuers. Darid C. Novak, chairman and CEO of' Yum! Brands, parNite 26, p 3 ?. ent of K.FC and Tace Bell, "That's America's food. People love hamburgers. =15 Swata, Octeber 27, p. B3. ENDNOTES Fidenary 2 a. 14 1. PRNewsire, 2019. MoDonaldr Corparann Ananc nes Lendenhip 11. Henowtz, B. AC03. SteDonald's wertires begond burges to dads tegs CSe fide. Nevember 14, p. 6 B Nerember 3. Gecthase M. 2019, Who s Cliris Kamperinsui 13. Tend, A ma W. Seit, w. 2047. McDormidy Chine operatises is te sold bo lokally had conserium. New Yot Tver. Janiery 9. p. B1. punendoknon. Nowenter 4. 14. Kowiti. B. 2014. Fallen Arten: Can MeDreald s prt its mojo back? 2. Lebe, K. 1019. McDanders muas $300 milliot deal is ell things Aestus, Dextmber I. D. 110 . 15. Jargen. I. 20t2. McDenald 's is fieling fried. Wat Sinet houmal. Nowmber 7, p. B