A R I A S , H U M B E RT O

GONZALEZ, REYNEL
M O L I N A R E S , A LVA R O
S E R E B R E N I K , N AT H A N E L

Mc DONALDS (in 2013) How to win again?

A. Can They win again?

McDonalds must improve its strategic process considering its declining situation if it
wishes to win again. The guidelines that former CEO Jim Skinner left with his Plan to
Win are a generic marketing strategy that can be found on the first page of any
textbook and does not provide a certain path to anywhere. It is too broad the way he
focuses on what a company should do but cannot do efficiently.

The current strategic plan is based on 5Ps: People, Product, Price, Place and Promotion
which is a variant of the 4 Marketing Ps that Philip Kotler promoted. This is neither
original nor innovative. With a correct analysis of their chain value, McDonalds will
know which knobs to turn and which to leave alone for the moment since what the
company needs now is to stop the decline and change the trend. To do so, they must
analyze their business strategy starting with the external and then focusing on the
internal. From this analysis, specific strategies can be designed and later classified in
order of importance and feasibility.

If they do this, they will be able to turn the company around. The continuous growth
trends of the last decades now seem difficult to continue and that many external
factors now threaten the business, so the strategy of global expansion seems to have
run out of steam. A new strategy is needed that adapts the existing company to a new
environment with new ideas that will permit it to take a new growth path that can be
sustainable for many years.

The food services industry is very attractive and will continue to grow, but McDonalds
role inside that business needs to be rethought and this includes taking difficult
decisions regarding: products, pricing, locations and business units. The company has
great assets on what to build a new strategy and this is a very strong place to begin
from. Now more than ever it is important for the company to diversify strategically now
that its core business which is fast-food menus is losing steam comparing other fast-
food service options that are healthier, more hip and cost basically the same. If the
company rethinks this it can be sure that it has the muscle to reclaim market share
from new competitors, but it cannot expect to do this by remaining with the same
strategy and just inventing a new value product.
McDonalds has the potential for being a place to get healthy sandwiches, a salad bar,
a coffee house and of course, either a value meal or a premium hamburger.

B. What are the factors that explain performance of the firm?

It is interesting how a quick-food chain as McDonalds has been able to underperform

its stock value ever since overall behavior of industry has a positive trend to growth
more than 22%. To determine the reasons behind McDonalds poor performance we
can support on a Porter Analysis to identify the variables that has caused this
regrettable situation.

From a global perspective, exchange rates have been affecting overseas revenues. A
relatively weak dollar is an asset for the company to generate almost 70 percent of its
revenues. US dollars current strength made McDonalds trademark products even
more expensive for its international consumers

Externally, our primordial focus should be driven by the slow recovery pace after the
recent economic recession in 2008 that globally all industries suffered. Seasoned with a
high unemployment rate (between 8% and 15%) which has affected buyer power since
people willingness to eat outside has declined dramatically over time. Hence, budget
control is tight making people more sensitive to price and more attached to single
value menus.

Population composition is increasingly having more and more millennials in its market
target composition. McDonalds seem to ignore such fact that conditions its overall

** Colombian franchisees Chef Burger is an example of high-end value offer that rivals McDonalds having
succeed among millenials which offer burger with ingredients unseen in regular fast-food chains
strategy. Consider that millennials is a population that is always connected and
concerned about health value of food. Has been remarkable how important has
becoming the interaction between these two questions: what to eat? And where to eat?

First question has had important consequence on what McDonalds must communicate
to their commensals. For example, recent concerns about lack of transparency on how
McDonalds produce their food is gaining ground. Beef composition, vegetables
provenance, GMO usage, farmers policies, sustainability among other factor has
becoming a major concern for consumers. Not in vain, movements like Gluten-free has
raised an unneglectable trend in nowadays society. Ingredient quality is a must flag to
attract a growing sector of the population whose shift toward more healthy food is
becoming undeniable. Basically, consumers have seemed to understand that there is a
high correlation between calories and health. Calories awareness has been exacerbated
by PPACA (Patient & Protection Affordable Care Act) which has put food calories
composition in the spotlight. This have moved people preferences to shift towards
white meats such as poultry or turkey based products.

Second question: Where to eat? is also a main driver nowadays. Convenience, location
and service-oriented policies are a must-have. Fast-casual friendliness restaurant is a
concept which has been elusive to McDonalds. This has affected available table ratio
during peak hours which is a main driver to assure proper financial behavior.

OPEX pressure is also an important factor to outperform in this industry. OPEX affect
both precedent questions. In first instance, McDonalds food composition in mainly the
result of its main product: hamburger. Consequently, beef is the most important item
on its value chain. Beef prices are expected to rise and the consequent pressure on its
financial statements is beginning to affect its overall performance. Moreover, other
ingredients also have been suffering and increase due to corn crop disaster which has
been exacerbated by fuel price. As we know, fuel prices have a powerful effect by
increasing all costs in any conventional chain value. In a society more sensitive to price
this might result into a deadly meal for McDonalds shareholders. Where to eat? is also
having negatively effects on OPEX since McDonalds must be aware that the concepts
of their restaurant must change. The old-fashion concept to be a restaurant for kids 3 is
any more sustainable in a world that is changing in such a rapid pace. New restaurants
should include more Wi-Fi, charging docks and different illumination patterns which will
lead to a whole different OPEX structure. As shown in image below taken from IBIS,
current OPEX structure composition is heavily drive by: purchases to wholesales raw
ingredients suppliers and wages.

3 () a 9-years old girl () publicly took CEO Thompson to task a recent shareholders meeting, accusing
[McDonalds] of tricking kids into eating junk food by using toys and cartoons characters. (italics were added
to highlight). Taken from the business case McDonalds (in 2013): How to win again?
Regarding industry overall rivalry, it is important to remark that even if McDonalds
outperform its major competitor, competence has been increasing dramatically from
both low-end and high-end. Competition is high and the trend is increasing due to low
entry barrier that industry has. Even if the overall industry is in a mature state
accordingly to www.ibisworld.com there is still room for improvement through
innovation that will allow to exploit unexplored gaps. In this discussion, we believe that
3 mainly gaps empower rivalry: differentiation, bundled-services offers and
convenience. Long-last standing competitors such as Burger King and Wendys strive to
differentiate by offering [inadequate] higher-quality food. Even if target audiences feel
that competitors offer are fresher we must criticize that it is only consequence of
tailored marketing strategy that has produced tangible results. True value
differentiators have surfaced by offering high-end fancy hamburgers which now include
ingredients such as: mushrooms, caramelized onions, sesame oil, hydroponic organic
lettuce or integral bread. Thus, premium hamburger sellers have been redefining
burger quality. At the other end, we might find street hamburger vendors which take
advantage of an important variable: price-sensitiveness. Regardless, other aspects that
might drive other segment customers, street vendors have been able to capture low-
end customers which now prefers a basic-featured hamburger rather than a BigMac

Healthier options have beginning to eat an important piece of the pie. Driven by
consumer awareness to eat healthier, fast-casual restaurant as Panera has been
multiplying across United States. Globally, that trend is just the same. Medellins fast-
casual restaurants Mundo Verde (which means green world) has gained ground among
Colombian commensals and many examples could be cited around the world.
Therefore, customers looking to obtain the highest value and convenience from their
budget are leaning toward this kind of options reducing McDonalds sales.

Additionally, by having explored horizontal integration through offering coffee,

McDonalds now face competition from other actors such as: Dunkin Donuts and
Starbucks. This might be considered as a source to distort McDonalds focus but could
be also a new revenue stream looking to increase customers length of stay. This would
close the loop of adults who were looking for an affordable dessert accompanied by a
coffee or just optimize idle capacity since McDonalds restaurants were only busy at
peak hours. McCaf will lead then to increase traffic to their restaurants in valley-
hours creating specific ambiences for that end.

Internally, McDonalds must strives many unattended aspects. Primarily, we strongly

believe that C-level managers are unaware of McDonalds inner capabilities and by
attempting to mimic rivalry strategies are losing momentum relaying them to follow-
the-trend.

As we observe out VRIO analysis, one might be able to observe that McDonalds owns
capabilities that are not VRIO anymore. Convenience has become less and less VRIO
since major competitors have been able to rollout restaurant in many strategic zones.
Malls, high-affluence places among others is not a barrier nowadays. In fact, one can be
able to find Wendys restaurant near by McDonalds ones. Consequently, our analysis is
consistent when states that McDonalds lacks of Convenience as a VRIO capability.

McDonalds menu it is no more a VRIO capability. In fact, right now other restaurant in
the same segment have been able to imitate or compete against McDonalds legacy
McHits, among which we can mention: BigMac, Quarter Pounder with Cheese and
McNuggets. It is not rare either valuable but it is inimitable since recipes are being
kept jealously. In fact, when McDonalds recently unveiled one of its famous hamburger
sauces, video became instantly viral on YouTube which highlight remarkable strategy
execution of recipes protection. Nevertheless, it is not a VRIO capability.

Our last non-VRIO capability is McDonalds offer. Old days combo word which seems to
be popularized by McDonalds is not an added-value characteristic. Other restaurant in
the very same segment offers bundle product allowing customers to access affordably
to a meal typically comprised by: hamburger, side dish (commonly french-fries), a soda
and even a dessert. It is important to highlight that, even of this non-VRIO capabilities
cannot boost McDonalds sales, all of them are organized to exploit and this will add
some ground for our proposed strategies.

There is an important capability that might allow McDonalds to build sustainable

competitive advantage: its Chain Value. It fulfills all VRIO conditions since its integrated
supply chain management system is efficient and technologically advanced. This will
improve cost-saving and reduce time to deploy. All of them are prepared to cost-cutting
by improving operational efficiency.

Lastly, we have an intangible asset that will help McDonalds to build a remarkable
advantage: its brand. Accordingly to Forbes Worlds Most Valuable Brands, we will find
McDonalds above their competitors. In fact, many of new entrants are not even listed.
Even if McDonalds might experience some difficulties to revitalize their brand due to
industry overall context, the true is that they are better positioned to face fast-food
challenges.

1-Yr Value Company

Ran Brand Brand Change Brand Advertisement
k Value Revenue
9 McDonalds $39.1 B -1% $82.7 B $719 M

45 Starbucks $11.9 B +14% $15.9 B $228 M

87 Subway $7.1 B +4% $19.2 B -

Inner McDonalds challenges to boost their brand are for sure innumerable.
Notwithstanding, there is one aspect that might lead to a quick-win and is their own
people. McDonalds employees have been struggling due to many work conditions such
as: time-to-deliver, lack of customer-centric approach and low wages. Summarizing,
employees lacked adequate training to perform comprehensive services and the
waiting times services were increasing. Annually, this lead to high rate high of
employees turnover.

C. What are the BIG strategic problems, issues, or challenges facing the top
management at the time the case ends?

The principal strategic problems that McDonalds is facing begin with the change in the
external conditions as economy and competition environment, but also include some
internal issues as positioning and health concern. To follow we describe the forth
principal issues where we consider that the top management should base the actions:

The first challenge that the top management is facing is the necessity to reinvent the
brand in an economy that was decreasing. In the beginning they live in a good
economy, where people just were looking for a food solution for their dinner. However
the economy change, their target evolves and the competition appears in the
environment of the brand.

In this new reality people is no longer having the same consumption rate that they
have before; they eat more times at home, and also are looking for other option of
food. Having more competition and trying to reach more share of the market McDonald
has also to keep in mind that the cost of the food will be a problem, because for each
supplier they need to maintain the concept in terms of price and the speed that deliver
the food to their client. Based in this guidelines they need to make that the business
grow and identify the new opportunities in the market. In this point they need to
develop new options, maintain costs and protect their fast food offer.

Based in the first challenge we can identify the second challenge that is that the target
change and they are no longer only looking for a fast food solution. They also are
looking for food that not affect their health, with a high quality and that they feel that
the brand in align with their beliefs. In this line McDonalds need to make a big advance
and show to the public that they are making changes in the fields of the health
products. Also they need to be sure that they are willing to align the values with new
targets, where they have no presence in order to increase their share in the market. Is
important to keep in mind that McDonalds is the first option for moms, children and
young adults, however they are not in the head of the other targets where the brand
has options to capitalize sales if they align the concerns of the new targets.

The third challenge that the brand have is the competition. Is this point we are not
referring only to the competition in terms of big player, but we are referring to the
competitions in terms of global and local environment. For example when McDonalds
came to Colombia the biggest issue where not burger king or dunking donuts, but was
the local brand with high recognition that offer local food preference as Corral
Hamburgers. In this line understanding that McDonalds is adapting their offer (products
and facilities), sometimes they take too much time to make big changes in the menus
and they are affecting the final price of the client (for the dollar exchange rate) that
makes that the price for that kind of food will be very high, for the current offer of the
market.

Finally the fourth challenge that they are facing is the positioning of the brand as a
specific offer, because in this moment they are trying to enter to different markets and
try to have more option for the people that is going to their restaurant, however the
problem in this case is that they are trying to enter in new markets without any order.
This kind of thing can confuse the clients in order to not understand that for example
the place where they can find the better hamburgers will be also the same place to
take the best coffee. This kind of message can confuse the target affecting the
positioning of the brand in the head of the targets. In this line the top management
needs to develop a well structure plan were they have a clear understanding of which
will be the different steps or phases that they will follow in order to stablish the right
services in the right target.

We consider that this are the main challenges that the top management need to figure
out in order to reinvent the brand, and have a deployment in the new markets in order
to make that the band increase in term of sales and equity.

D. If you were a top executive in the firm, what would you do and why?

We have learnt that even if we might feel tempted to deploy a dual-strategy to

outperform and create value for shareholders by reducing costs or innovating, we must
concentrate only on one. In this case, we strongly believe that McDonalds future
strategy must rely on differentiation. Even if it a risky strategy and McDonalds
numbers might force us to bend toward cost-control strategy, we still believe that our
choice will lead to McDonalds to [colloquially] increase the value of the pie.

In the shoes of a McDonalds top executive, this strategy wont be easy to sell to our
shareholders but at the end: they will realize that is the most suitable strategy
considering currents firm situation. Our proposal is based in 3 pillars:

1. Present
2. Future
3. Health

Our Present strategy must lead McDonalds to develop a new customer-centric

approach looking to create a better experience in our restaurants. To that end, we must
modify our restaurants to meet our customers needs. We must embrace that we are
anymore a kids restaurant. Kids are part of a valuable segment but not our main
target. Factors such as: proper illumination, allure atmosphere and techy capabilities
are feature that our restaurant will have. Regarding our infrastructure, having high-
profile locations for stores, with easy access, parking and drive-through services
increases convenience for customers. Secondly, McDonalds must have access to multi-
skilled and flexible workforce. Industry operators need access to a good supply of
skilled workers, casual workers to meet peak service demand periods. Human
Resources is going to be crucial to: attract, promote and maintain.

Within our Present strategy, chain value is an important capability to be kept and
continuously optimized by using state-of-art technology. McDonalds chain value will
play a key role by allowing them to timely deliver without sacrificing quality new menus
and meals. Since, as we stated before, chain value complies with all VRIO
requirements; sustainable competitive advantage would be easily to build from.

Our Future strategy will lead McDonalds to embrace oncoming times. Initially, we must
invest heavily on R&D to produce new healthy recipes. We undeniable agree that a
McHit is absolutely needed. To do so, we must promote innovation cluster globally to
obtain ideas having as a common framework: healthy food (italics will later introduce
us to our third pillard). Our specific proposal here is to align McDonalds new proposals
with de-composition4 trend. This strategy will lead us to create new dishes from our
classic hamburgers without attempting to dilute our brand. Becoming leaders in the
segment having as ground our new recipes will seed our path for increase McDonalds
profits.

A second branch of our Future strategy is to invest in Big Data. McDonalds

countrywide locations and global presence is fair enough to deliver insanely amount of
data to unveil hidden consumption patterns among our commensals. Big Data output
will lead McDonalds to design marketing strategies that fit costumers need with an
unprecedented level of granularity. We acknowledge that there is gap between
McDonalds offer and new customers and Big Data will provide them the tools to bridge
those gaps.

Finally, our third pillar is Health. Even if McDonalds early efforts to reduce calories
consumption are valuable, are yet insufficient. 40% reduction of our calories must be
our target. Calories reduction should be properly communicated and use of new
healthy ingredients should be gently added. Ingredients such as: beef from non-GMO
farmers, quinoa, blackcurrant, olive oil among other certified must be added. It is
important to raise awareness of our situation by looking at Coca-Colas situation whose
consumers have deflected to non-sugar drinks.

44 Decompose, is a culinary nouvelle process based on employ ingredients from well-known recipes to create
new different meals. For example, recent initiatives have shown Burger soup or Hamburguer salads. By
using healthy ingredients those have shown that eating a hamburguer can still be a very healthy option