McDonald’s – 2007

Forest David: Francis Marion University

A. Case Abstract

McDonald’s Corporation (www.mcdonalds.com) is a comprehensive business policy

and strategic management case that includes the company’s fiscal year-end
December 2006 financial statements, competitor information and more. The case
time setting is the year 2007. Sufficient internal and external data are provided to
enable students to evaluate current strategies and recommend a three-year
strategic plan for the company. Headquartered in Oak Brook in the U.S. state of
Illinois, McDonald’s common stock is traded on the New York Stock Exchange
under the ticker symbol MCD.

McDonald’s sells various fast food items and soft drinks including, burgers, chicken,
salads, fries, and ice cream. McDonald’s is led by CEO Jim Skinner whose basic pay
was over US$10 million in 2006. The firm’s major competitors are Wendy’s, Burger
King, and Hardee’s.

B. Vision Statement (proposed)

Our vision is to maintain our stand as the number one fast food restaurant in the
world.

C. Mission Statement (proposed)

It is our mission to be the world’s best quick service restaurant (). Being the best
means providing outstanding quality, service, cleanliness and value, so that we
make every customer () in every restaurant smile (). To achieve our mission we
must be the best employer () for our people in each community () around the
world (), deliver excellence to our customers in each of our restaurants and
achieve profitable growth by expanding the brand McDonald’s through innovation
and technology ().

1. Customer
2. Products or services
3. Markets
4. Technology
5. Concern for survival, profitability, growth
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees
D. External Audit

Opportunities and threats

1. Rising population in China

2. Yum Brands variety of food and wide range of prices for selections
3. Wendy’s Frescata product line increased sales by 3.2 percent
4. Chinese consider drive-thrus a novelty where car ownership is growing
rapidly
5. Burger King’s market share among quick service sandwich chains
dropped 10.95 percent in 2006
6. Developing a “Healthy Lifestyle” program to attract health conscious
consumers
7. Increased expansion of traditional rivals
8. Yum Brands are the leading quick service chains in China
9. According to National Restaurant Association (NRA) average menu price
increased by 3.2 percent
10. Hispanic population has recently increased 14 percent in the U.S.
11. Krispy Kreme Doughnuts’ possibility of going bankrupt
12. 6 percent increase in social shopping areas (i.e. malls, plazas)
13. McDonald’s Europe sales dropped 1.9 percent
14. Burger King’s sales growth is an estimated 18.2 percent compared to
McDonald’s 11.2 percent
15. Growing public awareness of fast food being unhealthy

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted

Score
Opportunities
1.
2.
3.
4.
5. .
6.
7.
Threats
1.
2.
3.
4.
5.
6.
7.
8.
TOTAL 1.00

E. Internal Audit

Strengths and weaknesses

1. Globally recognized brand name

2. Largest U.S. restaurant chain in international markets with approximately
17,000 stores in 120 countries
3. Lack of menu development
4. Low personnel productivity
5. Yum Brands return-on-assets of 13.56 compared to McDonald’s 9.74
6. Public’s perception of quality, service, and cleanliness at McDonald’s units
suffered over the past years
7. Consumption of food away from home accounted for 48.5 percent of total
expenditures on food
8. Total assets of US$29 billion in 2006
9. McDonald’s serves nearly 54 million customers daily
10. McDonald’s beat Starbucks, Burger King and Dunkin’ Doughnuts in a coffee
taste test according to the Consumer Report
11. In 2006 McDonald’s return nearly US$5 billion to shareholders through
shares acquired and dividends paid
12. McDonald’s ranked last out of 25 fast-food chains in a recent study of drive-
thru order accuracy
13. McDonald’s 5-year average sales are 8.14 compared to 8.89 for the industry
14. McDonald’s sells fast food in Disney’s theme parks around the world as well
as Ocean Park in Hong Kong
15. In 2006, revenue and operating income reached a record high of US$21.6
billion and US$4.4 billion respectively
16. McDonald’s increased the company’s dividends by 50 percent, raising the
annual US$0.67 per share to US$1.00 per share totaling about US$1.2
billion
17. Operations loss in Islands of Jamaica, Barbados, Bermuda
18. Long-term debt remains over US$8 billion
19. Website not user friendly

Financial Ratio Analysis (December 2007)

Growth Rates % McDonald’s Industry SP-500

Sales (Qtr vs year ago qtr) 5.70 7.50 8.30
Net Income (YTD vs YTD) -32.10 -9.10 16.00
Net Income (Qtr vs year ago 69.40 42.50 6.60
 qtr)
Sales (5-Year Annual Avg.) 8.14 8.89 13.34
Net Income (5-Year Annual
18.67 13.16 20.14
Avg.)
Dividends (5-Year Annual Avg.) 44.27 26.63 10.00
Price Ratios McDonald’s Industry SP-500
Current P/E Ratio 28.6 24.8 21.9
P/E Ratio 5-Year High NA 30.4 25.9
P/E Ratio 5-Year Low NA 13.0 7.4
Price/Sales Ratio 2.89 2.10 2.38
Price/Book Value NA 3.02 3.39
Price/Cash Flow Ratio NA 5.40 10.60
Profit Margins McDonald’s Industry SP-500
Gross Margin 34.7 31.0 33.8
Pre-Tax Margin 15.7 12.1 17.5
Net Profit Margin 10.3 8.1 12.4
5Yr Gross Margin (5-Year Avg.) 32.4 30.5 33.5
5Yr PreTax Margin (5-Year
17.1 12.3 16.8
Avg.)
5Yr Net Profit Margin (5-Year
11.7 8.5 11.7
Avg.)
Financial Condition McDonald’s Industry SP-500
Debt/Equity Ratio NA 0.69 1.19
Current Ratio NA 0.4 0.9
Quick Ratio NA 0.4 0.7
Interest Coverage 7.6 13.9 43.3
Leverage Ratio NA 1.7 4.0
Book Value/Share NA 3.58 16.25
Adapted from www.moneycentral.msn.com

Date Avg. P/E Price/Sales Price/Book Net Profit Margin

(%)
12/07 26.50 3.13 NA 10.2
12/06 16.10 2.66 3.45 13.7
12/05 15.70 2.17 2.81 13.0
12/04 15.60 2.20 2.87 12.2
12/03 17.10 1.85 2.62 8.8

Date Book Value/ Debt/Equity ROE ROA Interest

Share (%) (%) Coverage
12/07 NA 0.00 NA NA 9.5
12/06 $12.84 0.55 18.5 9.9 11.0
12/05 $11.99 0.67 17.1 8.6 11.1
12/04 $11.18 0.65 16.0 8.2 9.7
12/03 $9.50 0.81 12.6 5.8 7.2
Adapted from www.moneycentral.msn.com

Net Worth Analysis (December 2006 in millions)

1. Stockholders’ Equity + Goodwill = 15,458 + 2,200 $17,658

2. Net income x 5 = $3,544 x 5= $ 17,720
3. Share price = $57/EPS 2.00 =$28.5 x Net Income $3,544= $
101,004
4. Number of Shares Outstanding x Share Price = 1,180 x $57 = $ 67,260
Method Average $50,910

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted

Score
Strengths

Weaknesses

TOTAL 1.00
F. SWOT Strategies

Strengths Weaknesses
1. 1.
Opportunities S-O Strategies W-O Strategies

Threats S-T Strategies W-T Strategies

G. SPACE Matrix

FS
Conservative 7
Aggressive

CS IS
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7

-1

-2

-3

-4

-5

-6

-7 Competitive
Defensive

ES
Financial Strength (FS) Environmental Stability (ES)
Return on Assets (ROA) 4 Rate of Inflation -2
Leverage 3 Technological Changes -1
Net Income 6 Price Elasticity of Demand -2
Income/Employee 6 Competitive Pressure -6
Inventory Turnover 5 Barriers to Entry into Market -3

Financial Strength (FS) Average 4.8 Environmental Stability (ES) Average -2.8
Competitive Advantage (CA) Industry Strength (IS)
Market Share -1 Growth Potential 6
Product Quality -3 Financial Stability 6
Customer Loyalty -2 Ease of Entry into Market 3
Technological know-how -2 Resource Utilization 5
Control over Suppliers and Distributors -1 Profit Potential 5

Competitive Advantage (CA) Average -1.8 Industry Strength (IS) Average 5.0

x-axis: -1.8 + 5.0 = 3.2

y-axis: 4.8 + -2.8 = 2.0
H. Grand Strategy Matrix

Rapid Market Growth

Quadrant I
Quadrant II

Strong
Weak Competitive Position
Competitive
Position

Quadrant IV
Quadrant III Slow Market Growth
I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99

Medium IV V VI
The EFE 2.0 to 2.99
Total
Weighted
Score

Low VII VIII IX

1.0 to 1.99

Grow and Build

Division % Revenue
Europe 36
US 35
Asia Pacific/Middle East 14
Latin America 7
Canada 5
Corporate & Other 3

J. QSPM

Key Internal Factors

Strengths Weight AS TAS AS TAS
4 0.32 2 0.16

4 0.60 2 0.30

1 0.06 3 0.18
3 0.30 4 0.40

--- --- --- ---

2 0.08 4 0.16

--- --- --- ---

--- --- --- ---

4 0.48 3 0.36

--- --- --- ---

Weaknesses
1. Lack of menu development 0.03 1 0.03 4 0.12
2. Public’s perception of quality,
service, and cleanliness at
McDonald’s units suffered over the --- --- --- ---
past years 0.08
3. McDonald’s ranked last out of 25
fast-food chains in a recent study of --- --- --- ---
drive-thru order accuracy 0.08
4. McDonald’s 5-year average sales
are 8.14 compared to 8.89 for the --- --- --- ---
industry 0.02
5. Operations loss in Islands of
Jamaica, Barbados, Bermuda 0.01 --- --- --- ---
6. Long-term debt remains over US$8 --- --- --- ---
billion 0.02
7. Low personnel productivity 0.01 --- --- --- ---
8. Yum Brands return-on-assets of
13.56 compared to McDonald’s 9.74 0.05 --- ---
9. Website not user friendly 0.02 --- --- ---
SUBTOTAL 1.00 1.84 1.68

Key External Factors

Opportunities Weight AS TAS AS TAS
1. Rise in population in China 0.05 4 0.20 1 0.05
2.
0.05 4 0.20 1 0.05
3.
0.08 --- --- --- ---

0.15 --- --- --- ---

4. in the U.S.
0.05 --- --- --- ---
5.
0.02 1 0.02 4 0.08
plazas)
0.05 --- --- --- ---
Threats
1. 0.15 4 0.60 2 0.30
2. in China
0.05 4 0.20 1 0.05
3. 0.02 --- --- --- ---
4. 11.2 percent
0.05 3 0.15 2 0.10
5. of prices for selections
0.04 --- --- --- ---
6. sales by 3.2 percent
0.04 --- --- --- ---
7. 3.2 percent
0.05 --- --- --- ---
8. Growing public awareness of fast
food being extremely unhealthy 0.15 --- --- --- ---
1.00 1.37 0.63
SUM TOTAL ATTRACTIVENESS 3.21 2.31
SCORE
K. Recommendations