McDonald’s: Serving Fast Food Around the World
Ray Kroc opened the first McDonald’s restaurant in 1955. He offered a limited menu of high-quality, moderately-priced food served fast 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 6000 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.
In 1967 McDonald’s opened its first restaurant outside the United States, in Canada. Since then, the international growth accelerated. In 1995, the “Big Six” countries that provide about 80 percent of the international operating income are: Canada, Japan, Germany, Australia, France, and England. In the same year, more that 7000 restaurants in 89 countries generated sales of $14 billion. Yet fast food has barely touched many cultures. The opportunities for expanding the market are great when one realizes that 99 percent of the world population is not yet McDonald’s customers. For example, in China, with a population of 1.2 billion people, there are only 62 McDonald’s restaurants (1995). McDonald’s vision is to be the major player in food services around the world.
In Europe, McDonald 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 1982 attracted some 40,000 people to the largest (28,000 square-foot) restaurant at a location where some 8, 00,000 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 995, 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 the United States.
The prices vary considerably around the world ranging from $5.20 in Switzerland to $1.05 in China for the Big Mac that costs in the United States $2.32. The Economist magazine even devised a “Big Mac Index” to estimate whether a currency is over or undervalued. Thus, the $1.05 Chinese Mac translates into an implied Purchasing Power Parity of $3.88. The inference is that the Chinese currency is undervalued while the Swiss Franc is overvalued. Here are other prices for the $2.32 U.S. Big Mac. Britain, $2.80, Denmark $4,92, France $3.23, Japan $4.65, and Russia $1.62.
Its traditional menu has been surprisingly successful. People with diverse dining habits have adopted burgers and fries whole heartedly. 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 with frankfurter 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’s stays in close contact with its customers who want good taste, fast and friendly service, clean surroundings, and quality. To attain quality, the so called Quality Assurance Centers (QACs) , are located in the U.S., Europe, and Asia. In addition, training plays an important part in serving the customers. Besides day-to-day coaching, Hamburger Universities in the U.S., Germany, England, Japan, and Australia, teach the skills in 22 languages with the aim of providing 100 percent 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 also in many restaurants they are also entertained with crayons and paper , a playland, and the clown Ronald McDonald’s , who can speak twenty languages.
With the 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 franchises 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 manager 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 OSC&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 precuts by controlling every stage of the distribution. Regional distribution centers purchase precuts and distribute them to individual restaurants. The centers will buy from local suppliers if the suppliers can meet detailed specifications. McDonald’s has had to make some concessions to available products. For example, it is difficult to introduce the Idaho potato in Europe.
McDonald’s uses essentially the same competitive strategy in every country: Be first in a market, and establish its 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 restaurants 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 U.S. 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 abroad have been recommended by the local restaurants.
The business structures take a variety of forms. Sixty-six percent of the restaurants are franchises. The development licenses are similar to franchising, but they do not require McDonald’s investments. Joint ventures are used when the understanding of local environment is critically important. The McDonald’s Corporation operates about 21 percent of the restaurants. McDonald’s has been willing to relinquish he most control to its Far Eastern operations, where many restaurants are joint ventures with local entrepreneurs, who own 50 percent or more of the restaurant.
European and South American restaurants are generally company-operated or franchised (although there are many affiliates – joint ventures – in France). Like the U.S. franchises, restaurants abroad 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 reheatable containers is now also sold in supermarkets, delicatessens (a store selling foods already prepared or requiring little preparation for serving) 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 (halt the Japanese market) in 1996 compared to only 43 Burger King restaurants. However, the British food conglomerate Grand Metropolitan PLC that owns Burger King has an aggressive strategy for Asia. Although McDonald’s is in a very favourable competitive position at this time, can this success continue ?
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 has 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. Should McDonald’s expand its menu? If you say no, then why not? If you say yes, what kinds of precuts should it add?
5. Why is McDonald’s successful in many countries around the world?
Case No. :2
Developing Verifiable Goals
The division manager had recently heard a lecture on management by objectives. His enthusiasm, kindled at that time, tended to grow the more the thought about it. He finally decided to introduce the concept and see what headway he could make at his next staff meeting.
He recounted the theoretical developments in this technique, cited the advantages to the division of its application, and asked his subordinates to think about adopting it.
It was not as easy as everyone had thought. At the next meeting, several questions were raised. “Do you have division goals assigned by the president to you for next year ?” the finance manager wanted to know.
“No, I do not,” the division manager replied. “I have been waiting for the president’s office to tell me what is expected, but they act as if they will do nothing about the matter.”
“What is the division to do, then?” the manager of production asked, rather hoping that no action would be indicted.
“I intend to list my expectations for the division,” the division manager said. “There is not much mystery about them. I expect $30 million in sales; a profit on sales before taxes of 8 percent; a return on investment of 15 percent; an ongoing program in effect by June 30, with specific characteristics I will list later, to develop our own future managers; the completion of development work on our XZ model by the end of the year; and stabilization of employee turnover at 5 percent.’’
The staff was stunned that their superior had thought through to these verifiable objectives and stated them with such clarity and assurance. They were also surprised about his sincerity in wanting to achieve them.
During the next month I want each of you to translate these objectives into verifiable goals for your own functions. Naturally they will be different for finance, marketing, production, engineering, and administration. However you state them, I will expect them to add up to the realization of the division goals.’’
1. Can a division manager develop verifiable goals, or objectives, when the president has not assigned them to him or her? How? What king of information or help do you believe is important for the division manager to have from headquarters?
2. Was the division manager setting goals in the best way? What would you have done?
Case No. :3
The Daimler-Chrysler Merger: A New World Order?
In May 1998, Daimler-Benz, the biggest industrial firm in Europe and Chrysler, the third largest carmaker in the US merged. The carefully planned merger seemed to be a “strategic fit.’’ Chrysler with its lower-priced cars, light trucks, pickups, and its successful minivans appeared to complement Daimler’s luxury cars, commercial vehicles, and sport utilities. There was little product-line overlap with the exception of the Chrysler’s Jeep and Daimler’s Mercedes M-Class sport utility vehicles.
The merger followed a trend of other consolidations. General Motors owns 50 percent of Swedish Saab AB and has subsidiaries Opel in Germany and Vaxuhall in England. Ford acquired British Jaguar and Aston Martin. The German carmaker BMW acquired British Rover, and Rolls Royce successfully sold its interests to Volkswagen and BMW. On the other hand, the attempted merger of Volvo and Renault failed and Ford later acquired Volvo.
The Daimler-Chrysler cross-cultural merger has the advantage of both CEO’s having international experience and knowledge of both German and American cultures. Chrysler’s Robert Eaton had experience in restyling Opel cars in GM’s European operation. Mr. Lutz, the co-chair at Chrysler, speaks fluent German, English, French, and Italian, and has past work experience with BMW, GM, and Ford. Daimler’s CEO Juergen Schrempp worked in the US with Euclid Inc. and has experience in South Africa giving him a global perspective.
Lee lacocca, the colorful Chrysler Chairman left Ford for Chrysler because of a clash with Henry Ford II in 1978. He is credited with saving Chrysler from bankruptcy in 1979/1980, when he negotiated a loan guaranty from the US government. Iacocca also led Chrysler’s CEO who negotiated the 1998 merger with Daimler, replaced Iacocca in 1992.
At the time of the merger, Daimler was selling fewer vehicles than Chrysler, but had higher revenues. Daimler’s 300,000 employees worldwide produced 715,000 cars and 417,000 trucks and commercial vehicles in 1997. The company
was also in the business of airplanes, trains, and helicopters, and two thirds of its revenue came from outside Germany.
So, why would Daimler in Stuttgart go to Chrysler in Detroit? The companies had complementary product lines and Chrysler saw the merger as an opportunity to over come some of the European trade barriers; but the primary reasons for mergers in the auto industry are technology (high fixed costs) and overcapacity. Only those companies with economies of scale can survive. Mr. Park, the President of Hyundai Motor Company stated that the production lines in Korea operate at about 50 percent of capacity in 1998. The auto industry could produce about 1/3 more cars. It has been predicted that only six or seven major carmakers will be able to survive in the next century. This makes merger more of a competitive necessity than a competitive or strategic advantage.
Daimler + Chrysler = New Car Company
In the late 1980s and the early 1990s, the Japanese made great strides in the auto industry through efficient production and high quality. Now the German carmaker changes the car industry with the Daimler-Chrysler merger in which the former having 53 percent ownership and the latter the rest. The new car company is now the fifth largest in the world and could become the volume producer in the whole product line range.
The respective strengths are that Daimler is known for its luxury cars and its innovation in small cars (A-Class, Smart Car). Chrysler, on the other hand, has an average profit per vehicle that is the highest among the Big 3 (GM, Ford, and Chrysler) in Detroit, thanks to the high margins on minivans and Jeeps. Chrysler is also known for its highly skilled management and efficient production. Low cost and simplicity (e.g. Neon model) are other hallmarks of Chrysler.
Juergen Schrempp – A Shake-Up Artist?
Besides arranging for the Daimler-Chrysler merger, Juergen Schrempp initiated many changes in the German operation. When he took office, he felt that the company was without purpose and direction. Consequently, he divested AEF and reduced the number of businesses from 35 to 23. His emphasis on shareholder value is counter to traditional German business culture. Schrempp models his
managerial style after General Electric CEO Jack Welch. Welch believes the GE should be No. 1 or No. 2 (or have a plan aimed at getting there) in a given market or business, or the company should get out of this market.
Yet, Schrempp faces many challenges. In the next century, Mercedes will face tough competition from the Japanese Lexus, infinity, and Acura as well as BMW and Ford’s Jagur. Germany’s labor cost is the highest in the world and it requires 60 to 80 hours to build a Mercedes while to takes only 20 labor hours to build a Lexus. Schrempp needs to cut costs and improve productivity in order to survive. To remain competitive in a global market with fewer, but larger automakers, Daimler-Chrysler has to grow and introduce new models. At the Frankfurt Auto Show in 1999, the company announced that it would invest $48 billion to introduce 64 new models in the next five years.
Strategy Implementation: The Achilles’
Heed of the Merger?
The formulation of the merger strategy was carefully planned. The global perspectives of Schrempp and Eaton as well as the product line indicate a fit. Yet, implementing a well conceived strategy provides its own challenges. Some Chrysler designers and mangers saw the merger more as a takeover by Daimler, and consequently left the firm to join GM and Ford. Mr. Eaton, who is the American moral booster, will soon retire. While there is a mutual understanding of the country and corporate culture on the highest organizational level, incorporating the different cultures and managerial styles on lower levels may be more difficult.
German top managers may rely on the 50 page report for discussion and decision making. Americans prefer one-to-one communication. Below the board level, subordinates typically research an issue and present it to their German boss, who usually accepts the recommendation. American managers frequently accept the report and file it away, frustrating German subordinates. Also, Chrysler designers are frustrated with not being involved in the design of Mercedes cars. Although there are at this time two headquarters (Detroit and Stuttgart), a top manager predicted that in the near future there would be only one – in Germany.
Both the Americans and Germans can learn from each other. Germans need to write shorter reports, be more flexible, reduce bureaucracy, and speed up managerial decision making. American mangers, on the other hand, hope to learn from the Germans. As one Chrysler employee said: “One of the real benefits to us is instilling some discipline that we know we needed but weren’t able to inflict on ourselves.’’
1. Evaluate the formulation of the merger between Daimler and Chrysler. Discuss the strategic fit and the different product lines.
2. Assess the international perspectives of Eaton and Schrempp.
3. What are the difficulties in merging the organizational cultures of the two companies?
4. What is the probability of success of failure of the merger? What other mergers do you foresee in the car industry?
Case : 4
Re-engineering the Business Process at Procter & Gamble
Procter & Gamble (P&G), a multinational corporation, known for its products that include diapers, shampoo, soap, and tooth-paste, was committed to improve value to the customer. Its products were sold through various chanels such as grocery retailers, wholesalers, mass merchandisers, and club stores. The flow of goods in the retail grocery channel was from the factory’s warehouse to the distributor’s warehouses, to the stores where the grocery stores where customers selected the merchandise from the shelves.
The improvement-driven company was not satisfied with its performance and developed a variety of programs to improve the service and efficiency of its operation. One such program was the electronic data inter-change (EDI) that provided daily information about shipments from the retail stores to P & G. the installation of the system resulted in better service, reduced inventory levels, and labor cost savings. Another approach, the continuous replenishment program (CRP), provided additional benefits for P & G as well as its customer retailers. Eventually, the total ordering system was redesigned with the result in dramatic performance improvements.
The re-engineering efforts also required restructuring the organization. P & G has been known for its brand management for more than 50 years. But in the late 1980s and early 1990s, the brand management approach pioneered by the company in the 1930s required a rethinking and restructuring. In a drive to improve efficiency and coordination, several brands were combined with authority and responsibility given to category managers. Such as manager would determine overall pricing and product policies. Moreover, the category managers were given the authority to delete weak brands and thus avoid conflicts between similar brands. The category managers were also held responsible for profits of a product categories for all stores. The switch to category management required not only new skills, but also a new attitude.
1. The re-engineering efforts focused on the business process system. Do you think other processes, such as the human system, or other managerial policies need to be considered in a process redesign?
2. What do you think was the reaction of the brand managers, who may have worked under the old system for many years, when the category management structure was installed?
3. As a consultant, would you have recommended a top-down or bottom-up approach, or both, to process redesign and organizational change? What are the advantages and disadvantages of each approach?
Case No. : 5
Managing the Hewlett Packard Way
William R. Hewlett and David Packard are two organizational leaders who demonstrated a unique managerial style. They began their operation in a one-car garage in 1939 with $538 and eventually built a very successful company that now produces more than 10,000 products, such as computers, peripheral equipment, test and measuring instruments, and handheld calculators. Perhaps even better known than its products is the distinct managerial style preached and practiced at Hewlett-Packard (HP). It is known as the HP Way.
“What is the HP Way?
I feel that in general terms it is the policies and actions that flow from the belief that men and women want to do a good job, a creative job, and that if they are provided the proper environment they will do so.’’ Bill Hewlett, HP CoFounder
The values of the founders – who withdrew from active management in 1978 – still permeate the organization. The HP Way emphasizes honesty, a strong belief in the value of people, and customer satisfaction. The managerial style also emphasizes an open-door policy, which promotes team effort. Informality in personal relationships is illustrated by the use of first names. Management by objectives is supplemented by what is known as managing by wandering around. By strolling through the organization, top managers keep in touch with what is really going on in the company.
This informal organizational climate does not mean that the organization structure has not changed. Indeed, the organizational changes in the 1980s in response to environmental changes were quite painful. However, these changes resulted in extraordinary company growth during the 1980s.
1. Is the Hewlett – Packard way of managing creating a climate in which employees are motivated to contribute to the aims of the organization? What is unique about the HP Way?
2. Would the HP managerial style work in any organization? Why, or why not? What are the conditions for such a style to work?
Case No.: 6
Quality as the Key Success Factor In Winning the Global Car War
Massachusetts institute of Technology (MIT) conducted an extensive study of the global car industry that compared operations at General Motors, Toyota, and the joint venture between GM and Toyota, the New United Motor Manufacturing Inc. (NUMMI) plaint in Fremont, California. The result of the study should raise some very disturbing questions about the quality and productivity of American operations, namely:
- Why did GM’s Framingham plant require 31 hours to assemble a car when the Toyota plant only required 16 hours- or roughly half the time?
- Why did the GM plant average 135 defects per car when Toyota had only 45 defects – or about one-third the number?
- Why did GM require almost twice as much assembly space as the Toyota facility?
- Why did GM require to a two-week parts inventory when Toyota only needed a two-hour supply of parts for its assembly line? As one might suspect, the cost of maintaining a large parts inventory inflates product costs.
Obviously GM did not fare well in the direct comparison to Toyota, but there are also signs of encouragement in the MIT study. Although American auto makers had fallen behind their foreign rivals, they have taken active steps to improve product quality and respond to customer wants. These companies have not been defeated; rather they have been revitalized by the competition.
GM joined forces with Toyota to create the NUMMI plant in order to improve the quality and efficiency of its manufacturing operations. The old GM plant in Fremont, California, was one of the car maker’s worst performing facilities before the NUMMI operation was initiated. As a result of the joint venture, assembly time has been greatly reduced and quality, measured in terms of total number of defects per car, has equaled the performance of Toyota in Japan.
Although assembly space is still relatively high by Japanese standards, NUMMI’s inventories have been reduced from two weeks to just two days. In short, the solution to many of GM’s production problems could be traced to a need of eliminating waste, focusing on value-added process, and enforcing more stringent quality controls.
In some ways, the European car industry is even in a less competitive position than U.S. companies. The quality, measured by assembly defects for 100 vehicles, is worse in Europe. European car manufacturers had 97 defects per 100 cars, compared to 82.3 by American firms operating in the United States. Japanese companies operating in North America had only 65 such defects and Japanese firms in Japan had only 60.
In productivity, European car firms also did poorly, requiring 36.3 hours to assemble a car compared with 25.1 hours of U.S. companies in North America, 21.2 hours of Japanese car makers in North America and only 16.8 hours of Japanese firms operating in Japan. Clearly, U.S. and especially European firms need much improvement in productivity and quality to be competitive in the global market.
1. In the NUMMI joint venture, what did Toyota gain? What were the benefits for General Motors?
2. As a consultant, what strategies would you recommend for European carmakers to improve their competitive position in the global car industry?