Polytechnic University of the Philippines

College of Accountancy and Finance

A.Y. 2020 – 2021

CASE STUDY

STRATEGY FORMULATION

McDonald’s Company

NICAVERA, JARELL CARVEN L.

BSA 2 – 4

June 20, 2021

 TABLE OF CONTENTS

Title Page

Table of Contents

Overview of the Company - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1

Historical Background - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2

Time Context - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3

Statement of the Problem - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3

Areas of Consideration (SWOT Analysis) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 4

Alternative Course of Action - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6

Conclusion - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8

Recommendation - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8

References - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9
OVERVIEW OF THE COMPANY

McDonald’s

McDonald's Corporation is an American fast-food corporation that was formed in 1940 as

a restaurant in San Bernardino, California, by Richard and Maurice McDonald. They renamed
their business a hamburger stand and then transformed it into a franchise, with the Golden Arches
emblem first appearing in 1953 at a Phoenix, Arizona site.

Currently, McDonald's is one of the largest food service companies in the world.
Systemwide, it earns more than $40 billion in revenue. It has over 30,000 eateries across six
continents in over 100 countries. We have the advantages of size and a strong financial position.
We possess one of the most well-known and respected brands in the world. In restaurant
operations, real estate, commerce, marketing, and franchising, it has an unrivaled worldwide
infrastructure and competences. According to IBISWorld, in 2014, McDonald’s had the largest
share in the fast-food restaurant industry of 17% in the U.S. The closest competitor, Yum! Brands
(or YUM) had a market share of 11% (Jhaveri, 2014).

McDonald's is most known for their hamburgers, cheeseburgers, and fries, but they also
provide chicken, breakfast, soft drinks, milkshakes, wraps, and desserts. The company has
introduced salads, fish, smoothies, and fruit to its menu in response to shifting consumer tastes
and a negative criticism over the unhealthiness of their meals.

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HISTORICAL BACKGROUND

In 1948, brothers Maurice ("Mac") and Richard McDonald opened the first McDonald's
restaurant in San Bernardino, California. Ray Kroc, who was interested by their need for eight
malt and shake mixers, sold them appliances for their little hamburger eatery. Kroc identified a
basic, efficient format that allowed the brothers to create large amounts of food at affordable rates
when he visited them in 1954 to examine how a little business could sell so many milk shakes. A
standard hamburger cost 15 cents, which was about half of what other eateries charged.
Customers received their food promptly since hamburgers were made ahead of time, wrapped,
and warmed under heat lamps at the self-service station, which eliminated the need for servers
and waitresses.

Kroc offered to start a franchise scheme for the McDonald brothers because he saw
significant potential in their restaurant concept. He opened the first McDonald's franchise in Des
Plaines, Illinois, on April 15, 1955, and the McDonald's Corporation the following year, finally
buying out the McDonald brothers in 1961. Before the end of the decade, McDonald's would have
over 1,000 locations. The company's stock went public in 1965, buoyed by consistent expansion.

The public face of McDonald's was introduced in 1963 with the introduction of Ronald
McDonald, while the double-arch "m" symbol became the company's most enduring emblem in
1962, lasting considerably longer than the tall yellow arches that originally dominated the
restaurant rooftops.

The business continued to grow both domestically and globally, expanding to Canada in
1967, reaching 10,000 restaurants by 1988, and operating more than 35,000 locations in more
than 100 countries by the early twenty-first century. In the 1990s, growth was so rapid that it was
reported that a new McDonald's opened every five hours somewhere on the planet. It quickly
became the most popular family restaurant, focusing on low-cost meals, entertainment, and
flavors that appealed to both children and adults.

McDonald's' success drew more criticism, much of which focused on the company's
alleged role in the global obesity epidemic. McDonald's responded by expanding its menu to
include healthier options, and in 2017 it introduced McVegan, a plant-based hamburger that was
only offered in certain areas. It began testing another vegan hamburger, the P.L.T., two years
later. During this time, McDonald's also phased out supersized portions and discontinued using
trans-fat oil in a number of dishes in its U.S. and Canadian restaurants. However, such actions
did little to alleviate health concerns. Furthermore, as one of the world's largest private employers,
McDonald's was pressured to raise wages.

McDonald's expanded their business beyond hamburgers in the late twentieth century,
purchasing Chipotle Mexican Grill (1998), Donatos Pizza (1999), and Boston Market (2000) in the
United States, and Aroma Cafe (1999) and a stake in Pret A Manger (2001) in the United Kingdom.
McDonald's, on the other hand, no longer owned or had an interest in any of those enterprises by
late 2008, focusing exclusively on its own brand.

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TIME CONTEXT

McDonald’s, as a food service company inevitably encounters different issues and

concerns even though it is one of the largest in its field. There are several setbacks the company
must address.

McDonald’s latest 4th quarter report shows a persistent decline on customer traffic. This
downward trend in customer transactions is concerning. McDonald's, according to the corporation,
will not be able to exist if its client base continues to decline. This was said by the CFO during the
third quarter 2019 results call. The C-suite appears to understand that a thriving business cannot
be built on a decreasing customer base. However, the pattern remains (Light, 2020).

One of the major challenges facing McDonald's on which we will focus is the health risks
associated with eating McDonald's. Nowadays, the term "quick food" has nearly a negative
connotation. McDonald's meals are high in sodium, unhealthy fat, sugar, and empty
carbohydrates. Indeed, the processed fat in McDonald's fried chicken causes endothelial
dysfunction, which has been related to erectile dysfunction in the long run. McDonald's cuisine
has been linked to major health concerns such as heart attack, diabetes, and high blood pressure
in multiple studies (Pathmanathan et. al, 2019).

Another one is its product pricing. The problem with McDonald's new menu was that it
provided customers with an excessive number of options for adding to their orders. They
discovered that the new menu had an unexpected effect on customers: the more products they
added to their orders, the less traffic the businesses received. McDonald's new pricing approach,
in effect, increased profitability by adding more menu items and options to the menu, but it did so
at the expense of sales volume. They anticipated that the more goods people ordered or
purchased, the more money McDonald's would make, but this was not the case, which was a
concern because McDonald's thrives on multiple transactions to increase market share and
dominance. They perplexed their clients and discouraged them from purchasing by adding
intricacy to their existing menu. McDonald's would call this a negative "price cliff" because unit
sales increased as prices increased. As a result of raising prices over a larger menu, Mcdonald's
effectively lost substantial market share and income, putting its huge and established business
model and network (with high operational expenses) at danger (Wells, 2020).

STATEMENT OF THE PROBLEM

McDonald's has a few serious strategic issues to deal with. One of the company's main
challenges is how to keep its prices low. Customers now want higher-quality (and healthier) food
than they did previously, as detailed in the article. McDonald's profits have been squeezed as the
cost of the ingredients they buy from suppliers has risen. McDonald's is well aware of this and is
working to improve its production process in order to maintain its prices competitive.

Second, the fast-food industry is considerably more competitive now than it was when
McDonald's first opened, pushing the firm to develop and diversify (to the extent possible) in order
to serve a larger number of consumers.

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 This paper aims to focus on identifying the possible improvements to be taken in its
strategic formulation that could help the company address the problems stated above in order to
achieve better results and boost its consumer traffic in the long run.

AREAS OF CONSIDERATION (SWOT ANALYSIS)

In this part, the Gupta’s (2019) SWOT analysis of McDonald’s in 2019 is presented. This includes
the strengths, weaknesses, opportunities, and threats of one of the leading food service
companies globally. The following factors are McDonald’s most potent aspects which have
ensured the company’s profitability, development, and universal brand image.

Strengths:

o Tenth Most Valuable Brand. McDonald's is the world's tenth most valuable brand.
Despite the severe competition, the firm controls the restaurant sector with an outstanding
brand value worth.

o Technology Initiatives. McDonald's is pursuing ground-breaking technological

innovations in order to realize its vision of the "Experience of the Future." McDonald's is
enhancing its image as the "restaurant of the future" by adopting self-service kiosks,
mobile order and payment systems, and other initiatives.

o Improved Quality Control and Products. You might argue about the flavor and overall
customer experience, but McDonald's has long prided itself on its high-quality standards.
Before purchasing products from third-party intermediaries, the Company follows strict
food safety and quality standards. Many public health and consumer groups applaud the
legislation because it represents a significant effort to prevent deadly superbugs.

o Leading Quick-Service Restaurant. McDonald's is the leading quick-service restaurant

(QSR) chain in the United States by system-wide sales, according to Statista. McDonald's
accounting for transactions topped the list with $38.52 billion in 2018.

Weaknesses:

o The Franchise Business Model. The finest example of worldwide franchising models is
McDonald's. However, the brand is exposed to certain dangers as a result of the complex
network of franchised and company-operated restaurants. Financial degradation,
mismanagement, consumer discontent, and low revenue creation are all possible
outcomes. The firm is largely reliant on franchisees, which operate autonomously and so
have little influence over their day-to-day success, but it has a direct impact on the brand.

o Supply Chain Interruption. McDonald's, being one of the busiest food companies, is
frequently affected by supply chain disruptions. It also reduces the availability of items that
are vital to the business's operations. As a result, when a franchise suffers from such
disruptions, the operating expenditure rises, resulting in reduced revenue and profitability.

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 o Lack of Employee Satisfaction. Many companies have experienced severe
dissatisfaction from employees as a result of recent employee rights revolutions
throughout the world and rising salary restrictions. McDonald's has recently received a lot
of flak from their employees. The workers staged multiple rallies and strikes to demand
that their minimum wage be raised to $15 per hour, leading the firm to lose face.

Opportunities:

o Innovative Products. McDonald's must make an effort to offer fresh, inventive products
to their menu in order for people to pick them over new fast-food restaurants. McDonald's
can keep their allure for a longer amount of time by introducing more creative goods that
are tailored to local conditions and culture.

o Global Expansion. McDonald's has a monopoly in the United States, but it frequently
suffers in other markets. However, the firm has a lot of opportunity to keep expanding
globally by focusing on foreign markets rather than individual states in the United States.

o Rebuilding the Brand Image. While fast-food businesses battle the stigma of being "junk-
food factories," McDonald's may play it smart by pursuing its aggressive push toward
healthier and more personalized products. Positive comparative sales have led to an
increase in profitability as a result of these changes. The re-franchising effort has
undoubtedly slowed sales, but in the long run, McDonald's positive reputation can continue
to make a greater effect.

Threats:

o Risky Investments on Technology Initiatives. Although McDonald's' creative

improvements have a favorable outlook, investing in technology is nevertheless
hazardous. The public's rapid adoption of new technology may reduce the return on
investment, and the benefits of improving customer experience may not provide the
desired outcomes.

o Cultural Threat while Operating In Various Countries. McDonald's, as a worldwide

fast-food business, has been subjected to a variety of cultural challenges in various areas
of the world, tarnishing the brand's reputation. It's also difficult to adjust and function
differently depending on the franchise's region. McDonald's, for example, was embroiled
in a major issue a few years ago for utilizing products that were not considered ‘halaal’ in
Muslim nations. Such controversies make it harder for McDonald's to satisfy consumer
expectations in the foreign operating environment due to inherited risks, resulting in a
deterioration of the brand's image.

o New Age Fast-food Trends. McDonald's is generally seen as an old school by millennials
because to its conventional menu and flavor. Food franchises like Shake Shack and
Wendy's take full advantage of this circumstance by including diversity into their menus
and recipes.

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 o Constant Environmental Concerns. McDonald's, like every other food conglomerate, is
under intense pressure to improve its waste management methods in order to reduce
pollution. Growing environmental concerns need McDonald's to take action and set an
example for other fast-food restaurants, but it is not that straightforward. Due to an
increase in plastic pollution, environmental groups suggested to McDonald's' board of
directors in March 2018 that the company's over 37,000 locations globally stop using
plastic straws.

ALTERNATIVE COURSE OF ACTION

McDonald’s is now one of the largest and leading food service company in the world.
However, there have been several issues strategically that threaten the brand and image of the
company. If not addressed and solved, in the long run, can hurt the credibility, image, and status
of McDonald’s which can lead to low profit and poor performance. In this part, the researcher
presents the alternative course of action McDonald’s can do to improve its strategic formulation
for a better performance and image.

Alternative Course of Action No. 1

Improve and Create Healthy Options in the Menu

McDonald's may create menu items like as burgers packed with a variety of veggies or
burgers accompanied with fresh salads that are lower in fat, salt, and sugar than its more
conventional burger and fries offerings. McDonald's may also advertise juice, low-fat milk, and
water as beverage options in children's Happy Meals (Pathmanathan et.al, 2019). As for the
desserts, they can add healthy options in the menu such as yogurts and fresh-cut fruits as sides.

Advantages:

a. Positive feedbacks from health experts.

b. Health-conscious customers and children will likely increase.
c. Health image of the McDonald’s will boost and will be phenomenal.

Disadvantages:

a. Slight increase in expenses.

b. Abrupt change in the menu can cause confusion to customers.

Alternative Course of Action No. 2

Market Penetration Pricing Strategy

McDonald's' major intense approach for expansion is market penetration. McDonald's

expands by reaching more consumers in markets where it currently operates by using this
aggressive approach. Global expansion through additional sites is a strategic goal linked to this

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intense growth plan. McDonald's generic approach supports this aggressive expansion plan since
cheap costs and prices enable the company to quickly reach new markets (Gregory, 2017).

Advantages:

a. It can lead to direct sales and adoption of your product or service in the market if it’s priced
correctly.
b. Leads to direct brand awareness and can create customer referrals
c. It can discourage other competitors from coming into the same market because of
increased competition.
d. Causes the rest of the market to innovate and improve their products in order to maintain
their customer base.
e. Improves competition in the marketplace and provides lower pricing for consumers.

Disadvantages:

a. It can be quite expensive for businesses depending on the type of strategy they decide to
use.
b. Lowers industry margins and revenues due to increased competition.
c. Creates saturation in the market and creates cheaper alternatives for consumers.
d. It can push out smaller companies who can’t compete with lower prices.

Alternative Course of Action No. 3

Improve Market Development

McDonald's employed market development as its major intense approach for expansion
in its early years. Market development, on the other hand, is currently a secondary intense growth
strategy because McDonald's has restaurants in almost every country on the planet, with the
exception of Mongolia, some sections of the Middle East and west Asia, and the bulk of African
nations. Establishing new sites in new areas, such as new McDonald's restaurants in African or
Middle Eastern nations where the firm presently has no presence, is a strategic goal of this intense
expansion approach. McDonald's supports this aggressive expansion plan by employing low
pricing to compete in new areas, based on its generic cost leadership approach (Gregory, 2017).

Advantages:

a. In a world where game-changing technologies are introduced more quickly than most
consumers can keep up with them, a product line that stays the same over time may come
to seem tired and stale.
b. As consumer tastes and interests evolve, a product development strategy can help your
business leverage opportunities to market to these new preferences.
c. Your business will have an easier time attracting and keeping talent if you build a
reputation as an operation where creative individuals have the space to innovate.

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Disadvantages:

a. New products come with a world of uncertainty, from ironing out unfamiliar production
processes to introducing customers to offerings that they may or may not want.
b. At the same time your business is scrambling to come up with the next exciting product
that your customers will embrace, your competition is also working hard to solve the
same problems.

CONCLUSION

McDonald's generic cost leadership approach allows the firm to maintain its market
dominance. The company's broad differentiation strategy also contributes to its success. However,
establishing new outlets in developing economies and nations where McDonald's does not have
a market presence might be a viable strategic path for the company's continuing expansion.

Though McDonald’s pricing strategy is successful at implementing cost leadership

marketing strategy, its overall objective is still to increase market share. Arriving at a pricing
decision is the result of analysing demand, costs, competitor pricing, a product’s life-cycle and
then balancing quality with value.

RECOMMENDATION

McDonald's has to focus on its present position throughout the world, since the food
business is changing and the number of restaurants and food items is increasing every day. Their
menu should be enhanced in terms of quality, flavor, and quantity of goods or items. There are
better things to eat than McDonald's from a consumer standpoint; nevertheless, improvements in
the menu and prices should be made, and McDonald's should introduce better food items than
its rivals, such as a range of fries, burgers, and sandwiches. Customers in the contemporary day
are fully informed of everything linked to food, therefore methods should be devised to persuade
them, and people should be provided with high-quality, hygienic food.

In order to establish the restaurant as a superior service restaurant in the minds of the
target consumers, McDonald's must focus on service differentiation approach. McDonald's'
service differentiation strategy states that the company would provide outstanding service at all
consumer contact points, from order placement through delivery of items.

McDonald's can use an integrated marketing mix for brand promotion that includes a
combination of conventional and new digital media. McDonald's has to understand the value of
digital media in the promotional mix for businesses, and develop digital marketing strategies to
interact with their online customers.

In order to give convenience to consumers, McDonald's can provide extra product and
service options such as meals on demand and home delivery. Fresh ingredients can improve
product quality even further. To attract and engage with target customers in a variety of regional
regions, McDonald's should continue to invest in menu personalization and standardization
methods.

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REFERENCES:

Britannica. (n.d.). McDonald’s. Retrieved (June 20, 2021) from

https://www.britannica.com/topic/McDonalds

Gregory, L. (2017). McDonald’s Generic Strategy & Intensive Growth Strategies. Retrieved from
(June 20, 2021) from http://panmore.com/mcdonalds-generic-strategy-intensive-growth-
strategies

Gupta, S. (n.d.). McDonald’s swot analysis. Retrieved (June 20, 2021) from
https://bstrategyhub.com/mcdonalds-swot-analysis/

Jhaveri, A. (2014). Must-know: a company overview of McDonald’s. Retrieved (June 20, 2021)
from https://finance.yahoo.com/news/must-know-company-overview-mcdonalds-
185841237.html

Light, L. (2020). McDonald’s declining customer traffic is a death march to the future. Retrieved
(June 20, 2021) from https://www.forbes.com/sites/larrylight/2020/02/10/mcdonalds-declining-
customer-traffic-is-a-death-march-to-the-future/?sh=2dcff4511c09

Pathmanathan et. al. (2019). Health threats by McDonald’s. Journal of the Community
Development in Asia, (2)3, Pg 45-51. https://doi.org/10.32535/jcda.v2i3.580

Reference For Business. (n.d.). McDonald's corporation - company profile, information,

business description, history, background information on McDonald's corporation. Retrieved
(June 20, 2021) from https://www.referenceforbusiness.com/history2/56/McDonald-s-
Corporation.html

Wells, T. (2019). McDonald’s new pricing strategy. Retrieved (June 20, 2021) from
https://taylorwells.com.au/mcdonalds-new-pricing-strategy/