Mcdonalds

McDonald's: Polishing the Golden Arches

Generic & Functional Strategies

Overall, McDonald's tries to operate on a cost leadership basis by offering low-priced goods with higher profit margins. Most of the functional strategies adopted by McDonald's correlate with this strategy of low cost.

McDonald's management strategy involves a primarily decentralized delegation of authority. The CEO is responsible for making all the large company decisions and designing the processes involved in the business. But since the company allows entrepreneurs to open their own franchise locations, it also allows these franchisees to manage their own stores as they see fit, so long as they follow the stated values and procedures. This management strategy fits in with McDonald's generic strategy of cost leadership because the simple standardized policies are monitored at each location which cuts down costs of executives traveling to check on each store.

McDonald's recognizes the value of their employees and thus their personnel strategies work to attract, develop, and retain a highly competitive workforce. Employees are offered a plethora of benefits and opportunities for both financial rewards and recognition. See Appendix A for a complete listing of benefits and awards offered to McDonald's employees. Promotion usually occurs from inside the organization where employees increase their training and responsibilities as they move up the corporate ladder to store manager and beyond. To help educate new managers and franchise owners, the Hamburger University training program has been established. While some of these personnel programs are pricey and appear to disregard the low-cost strategy, they actually work to attract and retain a competitive workforce which is much more cost-effective than having to retrain new employees due to high turnover.

Displaying their highly automated processes, McDonald's utilizes an assembly line production system to prepare their food for customers. As the original innovator in the fast-food industry, McDonald's has tried to maintain this edge by allowing their employees to contribute and test out new ideas. Both of these strategies follow the generic strategy of cost leadership by minimizing the labor and equipment costs of the company.

McDonald's has maintained their position as the industry leader through their functional strategy of mass marketing. They work to develop their market through both stimulation of existing customers and penetration into new markets. As a company focusing on cost leadership, McDonald's should work to minimize the costs incurred to reach their potential customers so these marketing strategies are not in-line with their generic strategy.

Though they did have a highly successful IPO in 1966, McDonald's has followed a financial strategy involving primarily external funding from long-term debt. The company is able to maintain its growth through both external funding from loans and internal funding from the reinvestment of their large profits. This financial strategy involving a large amount of debt and thus large interest payments is not conducive to the low-cost edge the company is trying to achieve.

Financial & Cost Analysis

In conducting a financial analysis of McDonald's in comparison to the fast food industry, it has become clear that McDonald's needs to pay off some of its loans. See Appendix A for Financial Report Card Feedback and input regarding McDonald's Corporation for the five years from 2000 to 2004.

McDonald's liquidity, activity, and profitability ratios all seem to match the industry averages in 2004. Plus, they all indicate an increasing trend, which could be a sign of strong financial stability for McDonald's in the future. The liquidity ratios suggest that McDonald's is perfectly ready to meet its short-term debt obligations as they become due. Activity ratios show average efficiency in operations. The corporation could free up millions of dollars by shortening its operating cycle of 18 days. The fastest way to do this would be to stop paying their vendors in advance or at least reduce how far in advance the payments are made. Because McDonald's focuses on cost leadership, we would expect the company to be more profitable than the rest of the industry. While their return on assets and return on equity are slightly below the industry average, McDonald's does have a much larger profit margin than the rest of the industry, which is one of the primary goals of companies that focus on cost leadership. See Figure 1 for the trends in profit margin over the past five years between McDonald's and the rest of the industry.

Figure 1. Profit margin decreased under the direction of Jack Greenburg because he took on too many new initiatives at once. Since Greenburg's resignation at the end of 2003, Jim Cantalupo has worked to bring profit margins back up to the success they once were.

While both leverage ratios seem to be improving, they still indicate that McDonald's Corporation may be having trouble repaying its long-term debt. In studying the amount of debt to total equity, McDonald's is more leveraged than the rest of the industry, which means they carry more debt in proportion to their equity. This larger amount of debt places the company in a position of higher credit risk to their lenders. Directly related to the amount of debt a company carries is the amount of interest that company pays throughout the year. Again, McDonald's falls below the competition in terms of the number of times in a year their revenues will cover their interest payments. This puts McDonald's in a bad position to receive financing. As a direct result of their higher credit risk, they will suffer higher interest rates and payments over the life of their debt. By paying off some of their long-term debt early, McDonald's would incur less total interest expenses as well as lower their credit risk and obtain more favorable lending rates in the future. See Figure 2 for an illustrative comparison of the debt-to-equity ratios for McDonald's and the industry.

Figure 2. The large drop in debt-to-equity ratio for McDonald's from 2003 to 2004 is