1. Which characteristics of McDonald’s production system have been most important in building its record of success and growth? McDonald’s operating system is built on the characteristics of guaranteeing uniform quality and service and maintaining it remarkably consistent across all units. It mainly focused on factors such as providing customers with pleasant experience, fast service and tasty and inexpensive food. McDonald’s took several measures to ascertain consistency across units. In their ‘Speedee Service System’, they standardized their preparations methods by employing a combination of product specifications and customized equipment.
While the competitors entered McDonald’s market and tried to emulate its product preparation and franchise recruiting process, McDonald’s sought out to build special set of relationships with its suppliers and its franchises. McDonald’s operating system primarily concentrated on four areas: 1. Improving the product 2. Developing outstanding supplier relationships 3. Improving equipment 4. Training and monitoring franchises They paid a great attention to detail in the pursuit of improving the product. Product improvement was a revolutionary innovation on McDonald’s operation strategy.
McDonald’s highly monitored the way farmers grew potatoes and ranchers raised beef, introduced alterations in both potato and meat processing and invented efficient cooking equipment to meet its tailored needs. Restricting itself to relatively small number of menu items helped McDonald’s spend time and effort in improving the processes, monitor their supplies and maintain consistency. McDonald’s production system heavily adhered to the standards mentioned in its operation manual, be it the way the hamburgers were made or the French fries were made.
To ensure quality, products were held in transfer bins no more than ten minutes. McDonald’s was more concerned about quality. They never bargained with the supplier for the price, rather they believed in supplier making fair profits and letting the suppliers grow alongside of McDonald’s. McDonald’s meticulous attention to detail was driven by its practice of seeking to study every component of its operation to learn what worked and what failed. These studies and their results were used continuously to revise and improve and do things in better ways. . What are the primary new challenges McDonald’s faces in the 1990s? Despite the fact that McDonald’s provided quick and consistent service to its customers, during the 1990s its sales per unit had slowed down. They were facing some vexing challenges such as growing need for flexibility and product variety. Although McDonald’s expanded in the international market, its US quick-service market went down drastically. It had 2500 franchises and 8814 restaurants and accounted for 60% of the company’s revenues and yet it needed to be supported.
The primary challenges that McDonald’s faced during the 1990’s include: 1. Health and nutrition awareness amongst consumers 2. Recession attributing to reduced consumer purchasing power 3. Competitors in fast food and dine-in services 4. Competitors’ variety of menu and products 5. Competitors low pricing strategy 6. McDonald’s brand image One of the reasons for this decline in the US quick-service market was because of demographic trends. Consumers were becoming more health conscious and aware of nutritional and dietary options while not compromising on taste.
The eating habits amongst the youth and the older generations have undergone significant changes. Consumers tend to be picky in determining their daily consumptions. They have also expressed their dissatisfaction on the quality of food which was being served by McDonald’s. It is an obvious fact that burgers comprise of fat and oil and is bound to affect one’s health but their conscience as well. Besides health reasons, many Americans’ eating habits have changed towards the concept of eating out.
Recession during that era has taken a heavy toll on many consumers causing them to be thrifty and have returned to home cooked meal instead. While this was not universal, it contributed to the decline in per unit sale. One other major reason for the decline in McDonald’s per unit sales was the entry of specialist competitors. These competitors were in both drive-through and dine-in services. Sonic and Rally’s were one example of competitors in hamburger chain that offered drive-through service only and were specialized in delivering burgers in much faster fashion.
While on the other hand, competitors like Chili’s and Olive Garden were family-style restaurants and they focused primarily on targeting middle aged consumers (aged 40 to 60) amongst whom casual dining was becoming more popular. The competitors also catered to consumers who were in pursuit of variety of food. Chili’s and Olive Garden offered a wide variety of menu items while McDonald’s focused on having a limited menu choices while controlling the quality and consistency. Furthermore, the competitors provided a variety of menu items and yet prices remained competitive when compared to McDonald’s.
Competitors like Taco Bell shifted it kitchen operations to external suppliers, reduced kitchen space in outlets and thus used cost based strategy (low prices) to compete with McDonalds. One other reason for decline in sales was McDonald’s brand image itself. While responding to the prevailing market conditions and consumer needs, McDonald’s has introduced new menu items including pizzas. However, McDonald’s being practically synonymous with burgers, consumers never thought of McDonald’s when they wanted to eat pizza.
McDonald’s not only had to extend its own brand image that it has built over a p of several years, it also had to challenge established competitors and their reputation. 3. How would you adapt the system to accommodate these changes in the U. S.? Adapting the system to accommodate the changes in US can be explained using Porter’s five forces. Threat of Competitors (traditional rivalry) In the current US fast food industry, there are a number of players in the market, McDonald’s being the largest. The competitors are majorly large corporations running across various locations and they compete with McDonald’s by huge marketing strategies.
While the threat from competitors is high in terms of variety of food and location, McDonald’s can combat the competitors rivalry by focusing on its outlet and franchise locations and by diversifying their menu to meet the consumer preferences Threat of New Entrants Entry barriers are very few into the fast food industry and there are new entrants of differing magnitudes emerging all the time. Only the economies of scale and distribution access seem to be the major barriers and hence there is a likelihood of more entrants into the market. This in turn is increasing the threat from competitors.
McDonald’s being the largest in the fast food industry in the US, it should use its brand power and influences to stop new entrants grow big in this industry. Doing this would give McDonald’s a competitive advantage over the new entrants and thus help survive in the industry Threat from Substitutes Substitutes for fast food industry players are the dine-in services, caterers and ready-to-eat/heat-and-eat food products available in super markets. The threat from substitutes is high when: 1. Consumer switching costs are low 2. Substitute products are cheaper 3.
Substitute product has equal or superior quality when compared to the industry product Since the fast food industry currently has a variety of substitutes, the threat from substitutes is high. McDonald’s can gain competitive advantage over its substitutes by combating the aforementioned three issues and also focusing on marketing its product as healthy and nutritious and increasing the awareness amongst its consumers. Power of Supplier Given the massive size of McDonald’s, it has the advantage of driving the lower prices of raw materials from suppliers due to economies of scale.
The power is less with the supplier since no supplier wants to lose McDonald’s from their customers list. If McDonald’s plans to diversify its menu, it should ensure that the suppliers are capable of supplying a large scale material in order to cater its consumer need in US market. Power of Buyer In order to meet its consumer needs in the US market and maintain a high consumer satisfaction rate, McDonald’s has to do things that will safeguard its consumer loyalty. To achieve this, McDonald’s has to come up with variety in its products and low prices consistently while not compromising on quality.
Product differentiation is very important in the fast food industry to suppress competition and withstand the industry pressure. Buyer bargaining power also depends on the quality of products the industry provides and hence McDonald’s has to ensure that the quality is not compromised. Apart from the aforementioned factors, McDonald’s is also facing a high employee turnover rate. They have very low paid, non-union, part time jobs with low rights and conditions. This is causing the employees leave the organization.
This high attrition rate is causing huge costs to McDonald’s since the company spends a huge amount of money in training the employees and the franchises. To combat this issue of high employee attrition, McDonald’s should restructure the pay and incentive system and be more flexible towards the employees. 4. How can McDonalds lay the basis for future growth? McDonald’s has always been focusing on the quality of service, be it consistent or fast, ever since its inception. This has been a remarkably distinguishing factor for McDonald’s to reach apex in the fast-food industry.
McDonald’s has already introduced menu diversification options. Instead of making this diversification across all geographies, it should first implement and test the strategy in various small locations. Based on the success rate of this change, it should spread the diversified menu to all of its outlets and franchises. Also, while introducing new menu items, it should do a careful planning of targeting a new market segment (children) and their preferences based on the demography in which the change is introduced.
Since there in a tremendous increase in consumer awareness about the nutritional and dietary options, McDonald’s should now expand its menu to contain more nutritional items. Introducing a whole new line of healthy items will help retain consumer satisfaction and loyalty while allowing competing with the market. When new menu items are introduced, consumer feedback should be taken to evaluate if the menu expansion was good or bad. Consumers should be encouraged to give feedback by awarding surprise rewards.
This gives motivation to the consumer and would also help the company in making the right decisions. However, while introducing new menu items, McDonald’s has to ensure to be first in the market to introduce a new variety of menu items and be the trend-setter. It has to formulate strategies to be able to be first in the marketplace rather than being a follower. Furthermore, McDonald’s can take the advantage of organic food industry popularity to build its entire new set of menu items. Another issue that McDonald’s should focus on is changing the consumers’ perception about McDonald’s.
New marketing campaigns have to be launched to highlight the improved quality, service, and cleanliness and to address the complaints about bad service. Additionally, McDonald’s should set up an internal health inspection team to do investigate quality of their products and address issues related to consumer perception. For example, it is generally known that burgers in McDonald’s are “junk” food and that stigma affects reputation of McDonald’s. By engaging these inspection teams, McDonald’s should erode this consumer perception to survive the competition in fast food industry.
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