CASE – 1 INTERNATIONAL CASE: MCDONALDS’S – SERVING FAST FOOD AROUND THE WORLD
Ray Kroc opened the first McDonald’s restaurant in1955. He offered a limited menu of high-quality, moderately-priced food served in spotless surroundings. McDonald’s QSC&V (quality, service, cleanliness, and value) was a hit. The chain expanded into every state in the nation. By 1983 it had more than 6,000 restaurants in the United States and by 1995 it had more than 18,000 restaurants in 89 countries, located in six continents. In 1995 alone, the company built 2,400 restaurants, and by 2001 it had more than 29,000 restaurants in 121 countries.
In 1967, McDonald’s opened its first restaurant outside United States, in Canada. Since then, international growth has been accelerate. In 1995, the “Big Six” countries that provide about 80 per cent of the international operating income are: Canada, Japan, Germany, Australia, France, and England. Yet fast food has barely touched many cultures. The opportunities for expanding the market are great, as 99 per cent of the world population are not yet McDonald’s customers. For example, in China, with a population of 1.2 billion people, there were only 62 McDonald’s restaurants in 1995. McDonald’s vision is to be the major player in food services around the world.
In Europe, McDonald’s maintains a small percentage of restaurant sales but commands a large share of the fast-food market. It took the company 14 years of planning before it opened a restaurant in Moscow in 1990. But the planning paid off. After the opening, people were standing in line up to 2 hours for a hamburger. It has been said that McDonald’s restaurant in Moscow attracts more visitors—on an average 27,000 daily—than Lenin’s mausoleum (about 9,000 people) which used to be the place to see. The Beijing opening in 1992 attracted some 40,000 people to the largest (28,000 square-foot). McDonald’ restaurant in China at a location where some 800,000 pedestrians pass by every day. Food is prepared in accordance with local laws. For example, the menus in Arab countries comply with Islamic food preparation laws. In 1995, McDonald’s opened its first kosher restaurant in Jerusalem where it does not serve dairy products. The taste for fast food, American style, is growing more rapidly abroad than at home. McDonald’s international sales have been increasing by a large percentage every year. Every day, more than 33 million people eat at McDonald’s around the world with 18 million of them in United States.
The prices vary considerably around the world ranging from $4.90 Switzerland to 1.23 in the Philippines for the Big Mac that costs in the United States $2.90. The Economist magazine even devised a Big Mac index to estimate whether a currency is over or under-valued. For example, the $1.26 Chinese Mac translates into an Implied Purchasing Power Parity of $3.59. The inference is that Chinese currency is undervalued. Here are other price comparisons for the $2.90 U.S. Big Mac: Chile $2.18, Euro area $3.28 (Weighted average of member countries), Hong Kong $1.54, Japan $2.33, Mexico $2.33, Peru $2.57, Singapore $1.92, and Thailand $1.45.
Its traditional menu has been surprisingly successful. People with diverse dining habits have adopted burgers and fries wholeheartedly. Before McDonald’s introduced the Japanese to french fries, potatoes were used in Japan only to make starch. The Germans thought hamburgers were people from the city of Hamburg. Now, McDonald’s also serves chicken, sausage, and salads. One of the items, a very different product, is pizza. In Norway, McDonald’s serves grilled salmon sandwich, in the Philippines pasta in a sauce in a sauce with furter bits, and in Uruguay the hamburger is served with a poached egg. Any new venture is risky and can be either a very profitable addition or a costly experiment.
Despite the global operation, McDonald’ stays in close contact with its customers who want good taste, fast and friendly service, clean surroundings, and quality. To attain quality, so called Quality Assurance Centers are located in the US, Europe, and Asia. In addition, training plays an important part in serving the customers. Besides day-to-day coaching, Hamburger Universities in the US, Germany, England, Japan, and Australia, teach the skills in 22 languages with the aim of providing 100 per cent customer satisfaction. It is interesting that McDonald’s was one of the first restaurants in Europe to welcome families with children. Not only are children welcomed, but in many restaurants they are also entertained with crayons and paper, a playland, and the clown Ronald McDonald, who can speak twenty languages.
With the generally aging population, McDonald’s takes aim at the adult market. with heavy advertising (it has been said that McDonald’s will spend $200 million to promote the new burger) the company introduced Arch Deluxe on a potato-flower bun with lettuce, onions, ketchup, tomato slices, American cheese, grainy mustard and mayo sauce. Although McDonald’s considers the over-50 adult burger a great success, a survey conducted five weeks after its introduction, showed mixed results.
McDonald’s golden arches promise the same basic menu and QSC&V in every restaurant. Its products, handling and cooking procedures and kitchen layouts are standardized and strictly controlled. McDonald’s revoked the first French franchise because the franchise failed to meet its standards for fast service and cleanliness, even though their restaurants were highly profitable. This may have delayed its expansion in France.
The restaurants are run by local managers and crews. Owners and managers attend the Hamburger University near Chicago, or in other places around the world, to learn how to operate a McDonald’s restaurant and maintain QSC&V. The main campus library and modern electronic classrooms (which include simultaneous translation systems) are the envy of many universities. When McDonald’s opened in Moscow, a one-page advertisement resulted in 30,000 inquiries about the jobs; 4000 people were interviewed, and some 300 were hired. The pay is about 50 percent higher than the average Soviet salary.
McDonald’s ensures consistent products by controlling every stage of the distribution. Regional distribution centres purchase products and distribute them to individual restaurants. The centres will buy from local suppliers if the suppliers can meet detailed specifications. McDonald’s has had to make some concessions to the available products. For example, it is difficult to introduce the Idaho potato in Europe because of the special soil requirement.
McDonald’s uses essentially the same competitive strategy in every country: Be first in a market, and establish your brand as rapidly as possible by advertising very heavily. New restaurants are opened with a bang. So many people attended the opening of one Tokyo restaurant that the police closed the street to vehicles. The strategy has helped McDonald’s develop a strong market share in the fast food market, even though its US competitors and new local competitors quickly enter the market.
The advertising campaigns are based on local themes and reflect the different environments. In Japan, where burgers are a snack, McDonald’s competes against confectioneries and new “fast sushi” restaurants. Many of the charitable causes McDonald’s supports aboard have been recommended by the local restaurants.
The business structures take a variety of forms. Sixty-six per cent of the restaurants are frankfranchises. The development licenses are similar to franchising, but they do not require McDonald’s investments. Joint ventures are used when understanding of the local environment is critically important. The McDonald’s Corporation operates about 21 per cent of the restaurants. McDonald’s has been willing to relinquish the most control to its Far Eastern operations, where many restaurants are joint ventures with local entrepreneurs, who own 50 per cent or more of the restaurant.
European and South American restaurants are generally company-operated or franchized (although there are many affiliates—joint ventures—in France). Like the US franchises, restaurants aboard are allowed to experiment with their menus. In Japan, hamburgers are smaller because they are considered a snack. The Quarter Pounder didn’t make much sense to people on a metric system, so it is called a Double Burger. Some German restaurants serve beer; some French restaurants serve wine. Some Far Eastern McDonald’s restaurants offer oriental noodles. In Canada, the menu includes cheese, vegetables, pepperoni, and deluxe pizza; but these new items must not disrupt existing operations.
Despite its success, McDonald’s faces tough competitors such as Burger King, Wendy’s, Kentucky Fried Chicken, and now also Pizza Hut with its pizza. Moreover, fast food in reheatble containers is now also sold in supermarkets, delicatessens and convenience stores, and even gas stations. McDonald’s has done very well, with a great percentage of profits coming now from international operations. For example, McDonald’s dominates the Japanese market with 1,860 outlets (half the Japanese market) in 1996 compared to only 43 Burger King restaurants. However the British food conglomerate Grand Metropolitan PLC, which owns Burger King, has an aggressive strategy for Asia. Although McDonald’s has been in a very favourable competitive position, by 2001 the customer satisfaction level has been below that of its competitors Wendy’s and Burger King. In China, KFC is more popular than McDonald’s. Some observers suggest that McDonald’s expanded too fast and that Burger King and Wendy’s have tastier meals. It is Mr. Jack Greenberg’s (the McDonald’s top manager) task to change things around.
1. What opportunities and threats did McDonald’s face? How did it handle them? What alternatives could it have chosen?
2. Before McDonald’s entered the European market, few people believed that fast food could be successful in Europe. Why do you think McDonald’s succeeded? What strategies did it follow? How did these differ from its strategies in Asia?
3. What is McDonald’s basic philosophy? How does it enforce this philosophy and adapt to different environments?
4. Why is McDonald’s successful in many countries around the world?
CASE – 2 INTERNATIONAL CASE: THE ROAD AHEAD FOR SHANGHAI VOLKSWAGEN
Shanghai Volkswagen is a joint venture between the German Volkswagen AG and a consortium of Chinese partners. The 25-year agreement signed by the partners in the middle of 1980s provided for 50 per cent VW AG equity. By 2001, this venture was the most successful automobile venture in China. Other attempts made by the US AMC Jeep Corporation and other carmakers failed. Other companies were attracted by the large population of 1.2 billion people (certainly only a very small percentage would be the customers), VW built successful venture over the years. By 2001, it had a market share of over 50 per cent due to introducing “hot” models and assuring reliable service. But a great deal of effort was necessary to build up this market.
The early years were not without difficulties. For example, VW had to develop suppliers for quality components, train the work force, work under constraints imposed by the government, and had to share its latest technology. The Santana model, that proved successful in Brazil, was the primary vehicle that suited the Chinese market. By 1995, the improved Santana 2000 was introduced. The ultimate aim of the Chinese, however, is to design, and eventually develop their cars by themselves. The factory, not far away from Shanghai, has one of the most modern engine plants. Chinese engineers and managers were sent to the factory in Wolfsburg, Germany for training. Moreover, Chinese managers and technicians attended German universities to gain engineering expertise. One of the major difficulties was the lack of quality components. Therefore, VW also introduced an incentive system that paid their suppliers handsomely for quality car products. At the same time, the company worked hard to build relationships not only with the suppliers, but also with the community.
The Chinese government, on the other hand, provided tax incentives and protected care market for VW during the early years. For example, from 1993 to 1996 the government did not permit other carmakers to set up joint ventures for passenger car assemblies. The combination of hot models and reliable service resulted in an 8 per cent sales increase in 2000 and expected sales of more than 14 percent in 2001. Besides the popular Santana model, VW produces Jettas, Passats, and Polos that should result in more than 4,00,000 cars in 2001. But the competition is not sleeping with Ford introducing a budget car and Toyota a compact car. With 90 percent of the parts produced in China, VW was able to keep the price lower that its competitors. Still the Passat at $29,000 is expensive for a person having monthly earnings of $1,200. In comparison, the midsize Buick by General Motors costs $44,000, partly due to the fact that only 60 percent of the parts are locally made. With China’s entrance to the World Trade Organization (WTO) in 2001, competition is likely to increase, putting pressure in prices. VW could counteract by bringing the low-priced, Czech Skoda (which is wholly owned by VW) to China. Although the successful in the past, VW cannot rest on its past success, but must prepare for the future global competition.
1. Why was VW so successful in China while other companies failed?
2. What would you recommend to Shanghai VW to remain successful in the future?
3. Was it wise of VW AG in Germany to share its latest engine technology with the Chinese?
CASE – 3 INTERNATIONAL CASE: RESTRUCTURING KOREA’S DAEWOO
Daewoo was founded in 1967 by its hardworking relentlessly driven chairman Kim (surname) Woo-Choong. After its initial success in exporting textiles, the company expanded into trade, autos, machinery, consumer electronics, construction, heavy shipping, computers, telephones, and financial services, becoming Korea’s fourth largest business group. The company became, for example, a textile supplier for Sears, Christian Dior, Calvin Klein, and London Fog. Daewoo also engaged in a joint venture with General Motors to build the Le Mans car. However, labor and other problems limited the car shipments.
Chairman Kim’s philosophy of hard work and the value placed in people were important factors in the firm’s success. However, in the late 1980s and early 1990s, the company faced several problems. For one, Kim was concerned that with the increasing prosperity of Koreans, the workforce might lose the spirit of hard work. Moreover, there was a growing discontent among the younger workers and a lessening of motivation.
Through Kim’s hands-off approach to managing, some of the companies in the Daewoo group went out of control. For example, in the profitable heavy shipping industry, he noticed many unnecessary expenses. The elimination of company sponsored barbershops saved the company $8 million a year. In general, Daewoo’s workforce is young and well educated. In contrast to similar positions in many other Korean companies, top positions at Daewoo are occupied by managers with no family ties.
Although Daewoo is a major company with 91,000 employees, it is not dominant in any one industry. The strategy of being a supplier for major foreign companies, such as Cater-pillar, General Motors, and Boeing, may have led to bypassing opportunities for becoming a major marketer of its own brands. Now in the 1990s, Kim is also looking at opportunities in Europe; for example, he formed a joint venture with a distribution company in France.
The massive restructuring has already had some positive effects. Kim sold some steel, financial, and real estate units. The hands-off managerial style has been replaced by hands-on style, resulting in recentralization. Managers were “retired” or otherwise let go. Thousands of positions were also eliminated.
Things were looking better in 1991. The company lost money in 1988 and 1989 but made some profit in 1990 partly because of the sale of some major assets. The joint venture with GM registered a healthy growth. The company was also optimistic about the future of the new compact car Espero. Still, Daewoo had to cope with its labor costs and Japanese competition.
What looked good in the early 1990s, dramatically changed in the latter part during that decade and especially in the years 2000 to 2002. In 2000, Ford planned to buy Daewoo Motors for some $7 billion. However, he deal fell apart later in that year. Moreover, the company went bankrupt in November 2000. Chairman Kim mysteriously disappeared. He liked to think big, and also left the company with big debts behind. Several billion dollars were also unaccounted for. With Ford out of the picture, General Motors (GM) entered seriously in negotiations with Daewoo, which was once Korea’s second biggest car maker. On April 30, 2002, GM agreed to buy the bankrupt company that was named GM-Daewoo. What is in it for GM? The acquisition is a key component of its global strategy. On the other hand, restructuring Daewoo is going to be a formidable task. The brand image has to be restored and the Korean market share of 10 per cent (which was 37 per cent in 1998) has to be improved. The product line also has to be reviewed and complemented with new models. Moreover, GM-Daewoo can expect difficulties with Korea’s aggressive unions.
1. What are the advantages and disadvantages of a hands-off, decentralized management approach?
2. How can Daewoo stay competitive with the Japanese?
3. What are some of the controllable and uncontrollable factors in this case? How should Mr. Kim respond to those factors?
4. What do you think of Daewoo’s expansion into central Europe? What are the advantages and risks for the company?
5. Why do you think GM acquired the company, while Ford did not?
CASE 4: Jack Welch Leading organizational Change at GE
When Jack Welch, the chairman and CEO at GE (General Electric) retired in 2001, he could look back at a very successful career. He became CEO in 1981 at the age of 45. At that time, GE had a very complex organization structure with considerable bureaucratic rules.
One of his first changes was to initiate a strategy formulation process guideline that each of the businesses should be No.1 or No.2 in their respective areas. If this was not the case, managers had the options of fixing the problem, selling their particular business, or closing it. In an effort to streamline the organization, Welch deleted the sector level and eliminated thousands of salaried and hourly employee positions. Because of these drastic measures, Welch earned the nickname “Neutron Jack.” The re- organization increased the span of management (also called span of control) for many managers so that they would have 10 or even 15 subordinates.
The restructuring was followed by changing the organizational culture and the managerial styles of GE’s managers. One such program was the “Work-Out program.” Groups of managers were assembled to share their views in three-day sessions. At the beginning of the meetings, the superior presented the challenges for his or her organizational unit. Then the boss had to leave, requesting the groups to find solutions to the problems. Facilitators helped these discussions. On the last day, the superior was presented with problem solutions. The manager then had three choices: to accept the proposal, not to accept it, or collect more information. This process put great pressure on the superior to make decisions.
Another program to improve the effectiveness and efficiency was the “Best Practices program.” The aim was to learn from other companies how they obtained customer satisfaction, how they related to their suppliers, and in what ways they developed new products. This helped the GE people to focus on the processes in their operations that would improve the company’s performance.
Jack Welch was personally involved in developing managers at GE’s training center in Crotonville. Leaders, Welch suggested, are not only those who achieve results, but also those who share the values of the company—those managers received highest ranking. Managers who shared the company values but did not achieve the results got another opportunity to improve their performance. On the other hand, managers who achieved results but did not share the values received coaching that had the aim of changing their value orientation. There was little hope for those types of managers who did not achieve the results, nor shared the company’s values.
The stretch initiative emphasized “dream targets” with little consideration of how to achieve them. This approach is similar to setting creative objectives used in some MBO programs by other companies. These dream targets did not replace the traditional objective-setting approach, but supplemented it.
To improve the quality, the Six Sigma approach, which was used by Motorola Inc., was introduced at GE. The Six Sigma program suggested that the quality should not exceed 3-4 defects for a million operations. Managers were required to participate in the program and their bonuses were related to the achievement of the quality level. With the strong conviction of relating performance to rewards, an appraisal systems was also introduced that ranked employees into five categories ranging from the top per cent to the bottom 10 per cent. The top 25 per cent got stock option as their reward.
While some managers were in favor of the organizational transformation because they felt greater freedom, rewards for good performance and value sharing, other saw flaws in the system.
1. Do you think it is ethical to engage in restructuring and delayering resulting in massive reduction of positions?
2. How would you feel if you were the boss in the “workout” sessions being asked to leave the meeting while your subordinates discuss problems and suggest solutions to which you have to say “yes,” “no,” or “require further study”?
3. Why would other companies agree to study their “best practices”?
4. What do you think of evaluating the performance of managers not only on the achievement of results, but also on the degree to which they share the organizational values?
5. How would you feel of setting unrealistic (stretch) objectives?
6. Should managers be ranked in their organizational unit? What would you suggest if one such unit is far superior to another unit with most of them being generally good managers, yet you still have to identify the bottom 10 per cent?Overall, how would you evaluate GE’s approach to organizational change? What are the advantages and possible problems?
CASE – 5 Could The Challenger Accident Have Been Avoided?
The Challenger Space Shuttle accident on January 28, 1986, gripped the nation more than any other event in the last dozen years or so. It was a tragic accident in which seven people died. There is now some evidence that the astronauts may have survived the initial explosion and may have died on impact when the space shuttle hit the water. The purpose of recounting the Challenger accident is to briefly explain what happened, why it may have happened, how it may have been prevented, and what one can learn from it.
The Challenger mission consisted of two complex systems: the technical system and the managerial system. The technical problem was the troublesome O-rings, which under pressure and low temperatures became ineffective and did not provide the required seal. Engineers and managers were aware of the problem. So why was the go-ahead given for launching the spacecraft? Can it be explained by the way the managerial system worked?
The engineers at Morton Thiokol, the contractor for the booster rocket, argued against the launch, citing previous problems at low temperatures. Management, on other hand, may have felt pressure from NASA to go ahead with the launch. Roger Boisjoly, one of the engineers who argued strongly against the launch, stated that he received looks from management that seemed to say “Go away an don’t bother us with the facts.” He said that he felt helpless. Another engineer was told to take of his engineering hat and put on his management hat.
Eventually, the go-ahead was given by the managers. Engineers were excluded from the final decision. What, then, were some possible reasons for the disaster? Some argued that there was a lack of communication between engineers and managers. They have different goals: safety versus on-time launching. Others suggested that people with responsibilities did not want to hear the bad news. Thus, no listening. Still others suggested that there was insufficient provision for upward communication outside the chain of command. There was also a suggestion that status differences between engineers and managers and between upper- and lower-level managers may have played a role in inhibiting upward communication. Perhaps there was also false confidence in the mission because of past luck. Managers and engineers knew of the problem, but nobody was killed before. Moreover, no one in the organizational unit wanted to be the “bad guy” to halt the launch. Morton Thiokol may also have been concerned about a pending contract.
The result of the series of events was to the death of seven Americans: Jarvis, McAuliffe, McNair, Onizuka, Resnik, Scobee, and Smith. The question on our minds is: Could this accident have been prevented?
1. What can you learn from this disaster that may be relevant to your organization or an organization you know?
2. What do you think was the cause, or were the causes, of the Challenger disaster?