1. What characteristics of McDonald’s production system have been most important in building its record of success and growth in the industry? McDonald’s unique production system has been central to their corporate strategy. Ray Kroc immediately saw value in the McDonald brothers’ production methodology. The McDonald brothers controlled the preparation of each menu item, regulating exactly how much of each topping would go on each burger, in order to maintain consistency and uniformity. Going forward, the company would base their business model on three key tenets: limited menu, low prices, and fast service. Kroc obsessed over perfecting the operating system with these three tenets in mind. He believed that consistency and uniformity, with respect to products, should be the overarching goals of this operation strategy. It began with the “Speedee Service System” in 1948 and continued to evolve from that point. McDonald’s operating system focused on four key areas: improving the product, improving equipment, developing excellent supplier relations, and developing and monitoring franchisees.
McDonald’s had created a unique relationship with its franchisees and suppliers. McDonald’s believed that franchise growth was where they should make their profits, not primarily from the franchise fees, which had been the industry standard. This relationship fostered growth and innovation as franchisees made recommendations and provided feedback on what was working and what wasn’t. McDonald’s broke another industry standard by developed very close relationships with supplier. McDonald’s worked closely with suppliers to ensure consistently high quality food products made to McDonald’s’ exact specifications. By working with the suppliers to control the quality of their products, McDonald’s’ was helping to ensure that a burger served at any one of their locations would look the same, taste the same, and reinforce McDonald’s’ reputation for quality and consistency. The suppliers knew that if they met the very specific standards set forth by McDonald’s, they would be rewarded with the loyalty of a very lucrative customer. This relationship was mutually beneficial as the consistent demand from McDonald’s helped suppliers grow alongside the chain, turning small farming operations into major institutional vendors.
2. What are the primary new challenges McDonald’s faces in the 1990s? In the early ‘90s, McDonald’s legendary growth rate began to slow. Consumer preferences were changing and McDonald’s worried that the limited menu that had served them so well over the previous decades might not be enough to carry them into the future. Going into the 1990s McDonald’s faced many challenges, including increased competition in the domestic quick-service market, consumer pressure to provide healthier options, and increased environmental criticism. The major challenges outlined in the case include the following: Casual dining restaurants, such as Chili’s and Olive Garden, were becoming increasingly popular. These restaurants offered a wide selection of menu items, with prices that could compete with McDonald’s. Drive-thru only chains, such as Sonic and Rally’s, were out-performing McDonald’s on speed of service. These chains were now seeing big growth, where McDonald’s’ expansion was slowing down.
Taco Bell had become another big competitor. Taco Bell focused on providing an extensive offering of inexpensive Mexican food. Taco Bell had 26 menu items under one dollar. They were able to keep their prices low by shifting food preparation to offsite suppliers, requiring less kitchen space on-site. Nutrition was a growing concern among many American consumers, and McDonald’s had become synonymous with high-fat, high-calorie “fast food”. There was extreme pressure for McDonald’s to augment their menu with healthier options, lower in fat and sodium than the traditional burgers and fries. Including a wider variety of items on their menu was likely necessary to meet the changing needs and preferences of their consumers, however McDonald’s core competencies were built around an operating system that was designed for speedy delivery of a limited number of menu items. McDonald’s had become the target of environmental activists who criticized the agricultural practices of McDonald’s’ suppliers and the company’s extensive use of disposable packaging.
3. What are the key types of flexibility which McDonald’s operations strategy needs to support? Which does it support and how? Which does it not support well and why? Product/service flexibility is the ability of the organization to develop new products and services which customers may find attractive. McDonald’s achieved great success with the introduction of its breakfast menu in the 1970’s, proving that product flexibility is an important mechanism for growth in their industry. That said, the long term success of McDonald’s operating model is largely due to their commitment to maintaining a limited menu. While McDonald’s should continue to develop and test new products, they need to be cautious about expanding their menu too much. Volume and delivery flexibility allows the operation to adjust its output levels and its delivery procedures in order to cope with unexpected changes in how many products and services customers want, when they want them, and/or where they want them.
McDonald’s equipment and work flows were designed for maximum efficiency. Speedy service was critical to increase volume of sales per unit time. With respect to delivery models, McDonald’s had also developed a number of different building designs, such as drive-thru only facilities and cafés suitable for small towns. They also placed McDonald’s in new venues, such as schools, hospitals and airports. Mix flexibility allows an organization to produce a wide variety of products and services for its customers to choose from. The operating system at McDonald’s had been constructed to ensure uniformity, quality and speed in all of their restaurants. If they introduce a wide variety of foods it would disrupt an operation strategy built around a limited menu. McDonald’s may have wanted to offer a wide variety of products but it would be a real challenge to maintain their standards with respect to quality, speed, and pricing.
4. How would you adapt the system to accommodate these changes in the US? McDonald’s could adapt their system in several ways to accommodate the changing trends in the US market. They could develop more drive-thru only locations. Off-premise consumption had risen from just 23% in 1982 to 62% in 1990 and overhead costs would be lower under this model. In keeping with this theme, McDonald’s should continue to develop smaller outlets in venues like schools, airports, and sporting arenas. They should continue to work on product development, but should focus on potential offerings that could be produced quickly and easily with their existing equipment.
Products that will likely require additional time and aren’t aligned with the restaurant’s traditional offerings (e.g. lasagna) should be avoided. They should consider healthier options that still fit with the traditional concept of what McDonald’s offers, such as veggie burgers, or low fat chicken sandwiches. They should take steps to improve their environmental image, by encouraging suppliers to adopt environmentally responsible practices, and by looking for opportunities to reduce unnecessary packaging. This will provide dual benefits by improving their image and reducing costs at the same time. 5. How can McDonald’s lay the basis for future growth?
The Ansoff product-market matrix outlines four possible strategic directions a firm can take, in order to grow.
Existing Products New Products MARKET PENETRATION
•Focus on promotion of existing product lineup
•Focus on increasing number of restaurants in US
•Focus on increasing sales in existing restaurantsPRODUCT DEVELOPMENT
•Focus on developing new menu items to add to current lineup
•Explore ways to modify operating system to allow speedy delivery of new items
•Build relationships with new suppliers to source inputs for new menu items at low cost
•Focus on delivering core menu items in international locations •Focus on increasing number of restaurants in countries where the chain has had most success •Focus on increasing sales in existing overseas restaurants
•Try out new menu items in international locations
•Focus on developing new menu items that appeal to customers in specific geographies (e.g. curries in India) •Build relationships with new suppliers in host countries
McDonald’s should adopt a growth strategy that focuses on Market Development, with limited Product Development. McDonald’s needs to recognize and accept that a firm cannot grow indefinitely in a restricted territory. They cannot expect their historical 25% annual domestic growth to continue forever. Their slowing growth rates in the US suggest they are likely approaching market saturation in the United States. They should stick to the operating model that has been so successful for them, and look outside US borders for growth opportunities. McDonald’s should not try to be all things to all people. McDonald’s needs to recognize who their customers are, and what they expect when they go to McDonald’s. The company should not deviate too far away from their original business model (limited menu, low prices, fast service).
McDonald’s should focus on delivering their core products to an ever expanding geographic territory, instead of complicating their operating model, increasing service time, and decreasing margins, by offering an ever-expanding array of menu items. New menu items should be easy to deliver with existing equipment and established workflows (e.g. veggie burgers, lamb burgers, lean patties, chicken burgers). With respect to US sales, the case cited that only 20% of McDonald’s sales came from dinner. This may be a possible frontier for growth, but an entirely new menu should not be required to bring people in for dinner. This seems to be more of a marketing issue. McDonald’s needs to position themselves as “top of mind” when people are driving home from work, with nothing prepared for supper. Perhaps repackaging their existing products into a family package, similar to those offered by KFC, would help in this regard.
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