Business / Mcdonald’S Vs. Burger King

Mcdonald’S Vs. Burger King

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Autor:  anton  04 January 2011
Tags:  Mcdonalds,  Burger
Words: 3699   |   Pages: 15
Views: 769

Situation Audit

Since 1954, McDonald’s has seemed to be invincible. They have demonstrated consistent quality throughout thousands of restaurants. McDonald’s has enforced operational standards effectively that controlled service, cleanliness, and other operating processes. They have consistently hired friendly employees that contributed to customer satisfaction. And they successfully focused upon a specific target market for over forty-two years, the family. McDonald’s has maintained an unremitting marketing strategy specifically designed to attract families that include products, pricing, site locations, and advertising and media efforts. All of these strategic initiatives have contributed to the historical success of the organization. However, despite increasing sales and organizational operating income throughout the 1990’s, domestic income has remained relatively consistent. Over the last ten years, several company and industry critical issues have challenged McDonald’s traditional strategy and its market position.

McDonald’s has demonstrated tremendous growth. Just after six years of operating, the founder Ray Kroc, had sold 200 franchises. Within seventeen years, he had become a billionaire and was responsible for the success of one thousand millionaires! Sales and income have steadily increased every year and until 1998, McDonald’s has had a positive percent gain. In 1998, McDonald’s was opening 2,400 new restaurants around the world. A confident marketing attitude prevailed that believed only one percent of the world’s population eats at McDonald’s daily, therefore, the remaining ninety-nine percent represents an untapped market. McDonald’s sustained an aggressive global growth strategy to gain market share and profitability worldwide. Standardizing materials and equipment contributed to expansion efficiency and decreased new building and construction costs. McDonald’s also grew through the purchase of 184 outlets owned by a weak competitor, Roy Rogers.

McDonald’s increased its convenience to the customer by building satellite restaurants in nontraditional places like hospitals, museums, gas stations, and retail stores such as Wal-Mart and Home Depot. In addition to physical growth associated with building, McDonald’s invested in immense advertising initiatives that included marketing deals with Disney. In 1995, advertising expenses accounted for 6 percent of sales, or $1.8 billion. Even in the early years, advertising efforts proved to be worthwhile. A survey of school age children conducted in the 1970’s found 96 percent of the children surveyed were able to identify Ronald McDonald. He was only second to Santa Claus!

With 7,012 outlets and 24,800 traditional restaurants in 89 countries throughout the world, McDonald’s aggressive growth strategy was presumably very successful. However, aggressive growth does not come without potential consequences.

McDonald’s has used aggressive growth to capture more market share, but the industry has not been without competition. Burger King enjoyed 28-29 percent of McDonald’s total sales from 1993-1998. Pizza Hut and Taco Bell are also gaining popularity and market share.

Rapid expansion is blamed, by some, for a 2.5 percent drop in same-store sales from 1994-1995, a possible sign of maturation. Also, many believed that McDonald’s restaurants no longer competed with other fast food restaurants but other McDonalds’; thus, experiencing cannibalism.

The traditional McDonald’s target market was families; however, baby boomers and the aging population are less interested in fast food restaurants offering cheap and fatty foods. McDonald’s has made efforts to attract business from this new market segment. It has attempted several new menu items designed to offer “grownup tastes” that contributed little to an increase in market share or segmentation.

McDonald’s desire for expansion led to 24,800 restaurants in 1998, an increase of 7,991 stores since 1995. This changed represents a 32 percent increase in restaurants; however, sales only increased 17 percent. In 1995, international stores represented 38.5 percent of the number of stores worldwide. And in 1996, international stores provided 47 percent of sales and 54 percent of profits. Some might think the zest for market share came at a significant cost to profit and performance in the domestic market.

Strict operational standards that controlled service, cleanliness and other operational aspects have contributed to the success of McDonald’s. Customer’s enjoyed the quality of food and the cleanliness of the restaurant. Sales associates were expected to be friendly. All of these standards contributed to high customer satisfaction

Other controls contributing to McDonald’s success include a standardized menu and building standards. The standardize menu contributed to brand recognition. Customer’s knew what to expect when they entered any McDonald’s restaurant. Building standards not only help decrease building costs but also supported brand recognition. The development of playplaces enhanced the family image and targeted the traditional market segment.

Customer perceptions of quality, value, service, and cleanliness declined significantly as confirmed in a national restaurant survey conducted in 1995. McDonald’s responded with a new quality control program. Franchising 2000 was designed to establish a new set of business practices directed at improving quality and customer satisfaction. The standards established strict standards such as product prices, service grading guidelines, secret shopper experiences, and strict consequences, including store closure, for poor performers. Unfortunately, the program had such strict guidelines that franchise relations were stressed.

The efforts associated with the market share plan (cannibalism, competition, stricter controls, etc) all contributed to declining relationships between McDonald’s and franchise owners. Franchise owners did not have a sense of empowerment. They were unable to participate in decisions affecting their restaurants. They were unable to change the menus and prices. They were also not allowed to offer any local specials. Many franchise owners desired a kinder, gentler organization. One resembling the days when Ray Kroc was in power. Now, owners feel corporate management does not respond to their concerns. Poor franchise relations could provide havoc for McDonald’s since 60-70 percent of all McDonald’s operations between 1985 and 1998 were owned by franchisers.

McDonald’s responded to many of these issues by attempting diversification. To appeal to the adult customer, McDonald’s developed menu options targeting adult customers. Healthy choice menu options were created but failed. In fact, they even offered a soy burger that might have been more nutritious but tasted so bad employees switched the patties for real ones. McDonald’s was concerned the product life cycle of the hamburger was finished or significantly impacted by the new healthier lifestyle choices made by the customer.

Store styles changed. Restaurants were built with décor to appeal to the adult customer. In addition to store changes, McDonald’s also purchased stores from weaker competitors. These efforts were made to diversify enough to gain market share among the aging adult segment.

Problem Statement

How can McDonald’s remain the industry leader?

Identification of Alternatives

Alternative A: Diversify

Should McDonald’s pursue a diversification strategy?

Alternative B: Traditionalize

Should McDonald’s return to its traditional strategy?

Critical Issues

The critical issues that McDonald’s faces in determining how to remain the industry leader include the following:

Operational Standards

Market Share

Franchise Relations

Diversification

Analysis

Alternative A: Diversify - Alternative A – Should McDonald’s pursue a diversification strategy?

Due to possible domestic market saturation, fierce competition and life cycle maturity of the hamburger market, McDonald’s may need to pursue a diversification strategy in order to maintain its industry leader position.

Operational Standards. Throughout McDonald’s history one ingredient of their success was consistent quality, service and cleanliness across stores nationwide. Domestic building standardization also allowed McDonald’s a competitive advantage by reducing construction costs by 26%. Continuing these operational standards and consistency may allow McDonald’s to meet customers’ expectations, increase satisfaction levels, increase return visits and thus increase sales. Also through operational standards McDonald’s may be able to maintain standardized building designs and take advantage of economies of scale on building materials and equipment. However, maintaining strict operational standards requires constant monitoring and may increase costs associated with such monitoring. If operational standards are too strict they may hurt franchise relations and create unnecessary competition and lack of cooperation between McDonald’s and franchise owners. Strict operational standards might also make diversification difficult as these standards will not allow for differences between stores and may over look regional opportunities that could be pursued to increase profits.

Market Share. While McDonald’s dominates the fast-food industry in total sales and total revenues competition is increasing. Burger King is a distant second in regards to total sales with $11.1 billion compared to McDonald’s $41.5 billion. In 2003, Yum Brands surpassed McDonald’s in total number of stores, with 33,000 stores compared to 31,129 stores. However, Yum Brands sales were $32.6 billion less than McDonald’s. During the mid-1990’s McDonald’s executives pursued aggressive market share expansion by following “Greenberg’s Law”. This law hypothesized that more McDonald’s stores meant more sales per capita without regard to market saturation. Pursuing market share growth may result in convenience for many consumers and an increase in overall sales. Heavy advertising targeted toward families and strategic store locations may also increase overall sales. Rapid and aggressive market share expansion also has its disadvantages. At some point the fast food market may become saturated and opening more stores may cause self cannibalization and decrease individual store sales and profit and may hurt franchise relations. As more stores are opened competition may not only increase between McDonald’s stores but also between competitors causing a price war, further reducing profits.

Franchise Relations. Franchise relations were hurt due to the aggressive expansion and franchise owners questioned the effects of market share expansion on their individual store sales. Relations were further hurt with the implementation of business practices such as Franchise 2000 which eliminated franchise autonomy. In order to pursue diversification, McDonald’s may consider lessening franchise restrictions and allow franchise owners to recommend regional products to meet market needs, react to specific circumstances and pursue opportunities. This independence may lead to higher franchise owner satisfaction and may also increase sales and profits through the segmentation of markets. However, this autonomy may lead to a lack of consistency and differing levels of quality, service and cleanliness between stores. This lack of consistency could lower customer satisfaction levels, decrease return customers and reduce sales and profits. Furthermore, branch design may become less standardized and McDonald’s will loose economies of scale on building materials and equipment.

Diversity. Yum Brands has achieved a level of success through product diversification. They currently own Pizza Hut, Kentucky Fried Chicken Taco Bell and Long John Silvers each of which appeals to a specific and different customer base resulting in little or no self cannibalization. Similar diversification may help McDonald’s maintain its industry position. Through menu and product diversification McDonald’s may be able introduce new products to stimulate sales and counteract the maturing life cycle of their core product; the hamburger. There is also opportunity for diversity through growth in the international market and through smaller satellite stores. Both international market expansion and satellite store expansion should increase sales and thus profits. Finally, McDonald’s might consider horizontal integration by purchasing competitors to gain market share, to increase sales and profits, and to further diversify their product offerings. In spite of these advantages, diversification may cause a drain on profits and decrease operational standards. Finally, horizontal integration could add additional strain on net income by increasing overhead expenses and increasing long term debt.

Alternative B: Traditionalize - Should McDonald’s return to its traditional strategy?

Operational Standards. In order to remain in the lead position in the fast food industry, McDonald’s might need to go back to the basics to return to its traditional strategy upon which its success was established. One area that was vital in this foundational platform was stringent operational standards. An advantage of re-establishing tight operational controls might be the return of McDonald’s stores to their original reputation of cleanliness, friendliness, and family atmosphere. This might attract more customers and increase frequency of visits for a possible higher sales volume. A resulting increase in customer satisfaction could be likely, with an overall positive effect on customer expectations: customers might come to expect a pleasant dining experience, and therefore the customer base might grow considerably.

A possible disadvantage of strict standards might be an overall decrease in customer satisfaction caused by management and employee dissatisfaction with corporate intervention. If corporate representatives attempt to push the standards in a negative or demanding manner, and/or the controls become extreme, limiting the franchise’s perceived autonomy, the staff might become angry and this could possibly become apparent in their dealings with patrons. Further, if standardization of controls is taken too far, not allowing price specials to be implemented by the franchise leaders, the lack of promotionals could adversely affect sales volume.

Market Share. Under a traditional business strategy, McDonald’s might focus on conservative domestic and global expansion that avoids cannibalization and targets the family market segment and convenience market in its advertising as well as in its offerings, to include play lands for children to play during the dining experience. A possible advantage of this market share attempt to further develop the family market segment might be an increased customer base for families, as well as grandparents, school-sponsored events, and day-care organizations. All of these entities might be enticed by the “family-centered” atmosphere that may result from attempts to appeal to families. A possible advantage of placing satellite restaurants in Wal-Marts and gas stations might also be increased market share and revenues, for convenience shoppers as well as travelers.

A possible disadvantage to this moderate approach to the global market in order to avoid over saturation and cannibalization might be lost potential revenues. A possible disadvantage of this market share appeal to families is that it might alienate the business crowd, who is more interested in peace and quiet, as well as Internet connection hot spots. If this were to happen, McDonald’s market share could decrease if business locals and travelers opted to choose other dining establishments.

Franchise Relations. A traditional business strategy might seek to develop and nurture the corporate to franchise management relationship. In this effort, corporate might hire on production management, accounting, and human resources experts, referred to as mentors, coaches or facilitators rather than managers or inspectors. The role of these coaches would be to mentor franchise owners and staff, in a positive, encouraging manner. Without a dictatorial approach, an advantage of this effort might be that the morale and efficiency of the franchises might increase tremendously. The possible increase in franchise management and employee satisfaction might be increased customer satisfaction, quite possibly positively affecting the profitability bottom line to a significant degree.

A possible disadvantage to reverting to a traditional strategy in the area of franchise relations might be that the “soft” approach may lead to a lackadaisical attitude on the part of franchise management or employees. If encouragement was to be construed as weakness, the franchise leadership might possibly let their controls be weakened, believing that there would be no “threat” of corporate retribution.

Diversification. A traditional business strategy in the area of diversification might lead to a moderate variation in menu and price promotionals, and the establishment of satellite McDonald’s as opposed to venturing into business mergers with other fast food organizations. A possible advantage of utilizing moderation in menu variation and pricing promotionals might be reinforcement of the corporate-franchise relationship providing some leniency in management without sacrificing customer expectations or posing significant threat to meeting financial goals. A possible advantage of establishing satellite McDonald’s restaurants might be gained market share and sales volume. A possible advantage of avoiding acquisitions and mergers with related businesses might be better financial management of the corporation, because diluting the business focus by expanding into other business areas can be very risky and can threaten common stock strength if sufficient cash flows do not exist to address the added debt burden.

A possible disadvantage of choosing moderation in diversification under the traditional strategy might be lost revenues if in fact radical change to the menu or expansive price promotionals would have generated significant increases in sales volume or market share expansion. Further, a possible disadvantage to avoiding acquisition of related business might be lost potential income if in fact these mergers turned out to be lucrative for McDonald’s.

Recommendations

Recommended Alternative

Alternative B: Traditionalize - McDonald’s should return to its traditional strategy to remain the industry leader in the fast food burger industry.

Implementation

McDonald’s must revert to its traditional business strategy that proved so successful for the initial decades of the corporation’s existence under Ray Croc’s guidance. Firm operational controls, moderate market share philosophy, transformational corporate-franchise relations, and moderate diversification strategies are all essential elements of a successful plan to position McDonald’s back on top of the fast food industry.

Tight operational controls to manage profitability factors and customer expectations are critical. In its inception, McDonald’s foundational platform centered on stringent operating standards that the corporation effectively ensured (in a positive manner). Re-establishing tight operational standards will re-set customer expectations and increase patronage and sales volume as customers will once again learn they can count of cleanliness, friendliness, and a family atmosphere. To ensure standards are consistent, McDonald’s will have to increase the production management liaison force, whose job is to travel to area restaurants and teach, coach, and mentor franchise management and staff to facilitate and ensure success.

Market share expansion must be moderate both at home and abroad to avoid cannibalization while still developing the family, child, convenience, and travel market segments. This conservative and focused expansion will require advertising to ensure success. Adding play lands, particularly indoor play lands for year-round enjoyment, to new and existing restaurants will increase the customer base for families, as well as grandparents, school-sponsored events, and day-care organizations. Placing satellite restaurants in Wal-Marts and gas stations will also increase market share and revenues for convenience shoppers and travelers.

Franchise relations must be firm and effective, not overbearing and constricting. Corporate must also provide experts to teach and coach, who are encouraging and constructive rather than retaliatory and faultfinding. These relations will lead to satisfied and effective franchise managers and employees, whose positive attitude will in turn serve to increase market share and recurrent patronage. Corporate must invest in production management, accounting, and human resources experts, whose role is to mentor, coach, and facilitate rather than inspect. Under this type of leadership and support, the morale and efficiency of the franchises will increase tremendously, which will in turn, increase customer satisfaction and profitability.

Finally, McDonald’s must diversify moderately, limiting expansion to unsaturated areas to prevent cannibalization, and to satellite restaurants rather than acquiring related businesses. These diversification initiatives, to include moderate menu variation and pricing and promotionals will reinforce the positive corporate-franchise relationship providing some leniency in management without sacrificing customer expectations or posing significant threat to meeting financial goals. Establishing satellite McDonald’s restaurants will produce greater market share and sales volume. Avoiding acquisitions and mergers with related businesses will ensure a healthy debt-asset ratio is maintained and enable better financial management of the corporation as the corporation maintains the necessary liquidity and cash flow to manage short term debt, accounts payable, and interest payments.

Tentative Budget

To revert to consistent, tight operational controls, McDonald’s will have to build an operating efficiency liaison workforce, whose job will be to travel to area restaurants to teach, coach, and mentor franchise management and staff on developing, implementing, and maintaining operational controls to facilitate and ensure success. This will require a significant recruiting and training effort, to find mature, people-oriented and trainable employees who will be loyal to the development and sustainment of restaurant standards. McDonald’s should be prepared to expend 1M for recruiting and training efforts, and another 10M annually to sustain the expanded liaison work force.

The moderate market share expansion domestically and globally will require an advertising budget of approximately 2M. This focused campaign will developing the family, child, convenience, and travel market segments. To further capitalize on these market segments, McDonald’s must expend 20M to add indoor play lands to corporate stores, and to lend to franchise leaders for same. Facilitating the placement of satellite restaurants in Wal-Marts and gas stations will require an additional 30M in corporate solicitation efforts and lending to interested franchise developers.

As in the case of liaisons for establishing effective operating standards, the McDonald’s corporation must be prepared to invest another 1M in recruiting and training efforts, and approximately 2M annually in support of transformational mentors. These coaches will be experts in the fields of production management, accounting, and human resources.

Finally, for the moderate diversity strategy under the return to traditional practices, McDonald’s must fund moderate expansion efforts into unsaturated areas and to satellite restaurants rather than acquiring related businesses. The corporation must provide approximately 20M to research and produce agreements with perspective country hosts in support of global expansion. McDonald’s must also fund a moderate research and marketing effort to determine the most likely profitable menu variations and pricing and promotionals, which is expected to amount to 50K. This research and marketing will enable the firm to make solid recommendations to their franchise leadership in the area of menus and pricing.

McDonald’s has several areas in which it can revert to its traditional business strategy. These strategies were proven for decades. If the McDonald’s corporation is willing to invest in its future, these measures will likely stop the firm from losing ground, and will place it back on top as the industry leader with steady growth and increased profitability.

References

Hartley, R (2006). Marketing mistakes and successes. New Jersey: John Wiley & Sons Inc.

Kolter, P & Keller, K (2006). Marketing Management. New Jersey: Pearson Education, Inc.



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