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Independent Assessment of McDonald’s Competitiveness and Business Situation

Executive Summary

At the beginning of 2013, it is evident that McDonald’s experiences some potentially serious problems both in domestic and international markets due to the decrease of popularity and subsequent stock drop. Therefore, top management of McDonald’s has ordered an independent assessment that would address the issues relating to the company’s competitiveness and overall performance. Don Thompson, who is the current CEO of the company, and his colleagues responsible for decision-making want to better understand the past before making decisions about the future. Thus, the main objective of the present memo is to provide an assessment analysis and overview of some major issues relating to McDonald’s competitiveness and performance as well as providing some general recommendations on how the existing problematic issues can be addressed in the most effective and efficient way. The memo comprises several parts, including Introduction, the Current Situation, the Prospective Situation, Conclusions, References, and Appendix, while some of these parts are further subdivided into several subsections to ensure easier navigation and emphasize some core issues.

Memo

Introduction

A. Memo Purpose

Over the decades of its existence, McDonald’s has enjoyed stable growth and constant increase in sales and international outreach owing to effective and efficient strategies implemented by its top management. The previous CEO of the company Jim Skinner ruled McDonald’s for more than 40 years and managed to successfully implement his ‘Plan to Win’ aimed at ensuring continued growth and development of the company both in the domestic and international markets. The company also managed to cope with the recent economic crisis and subsequent recession more effectively than the overwhelming majority of its competitors. However, its 2012 performance may be considered quite alarming in terms of its future prospects and growth. The reason is in a significant drop in the stock performance and a marked decrease in the popularity of the goods it offers with the US population as compared to the increase under this aspect shown by its core competitors. Since Jim Skinner retired in 2012, his successor and current CEO Don Thompson and his team of senior executives have to handle these issues. Thus, preferably in the nearest future, they have to avert a further decrease in the company’s market share in the USA and in the world in general.

Key financial indicators of the company have remained rather stable in terms of their annual growth, the stock performance as of years 2011 and 2012 is the cause for alarm. Hence, in 2011, McDonald’s stock was among the best performing in the Dow 30 and had the total shareholder return at the level of 34.7% (Arthaud-Day, Rothaermel, & Collins, n.d.). In 2012, the total shareholder return was at the level of 10.75%, which shows a significant year-over-year decrease, while the company was placed as number 30 in the Dow 30 (Arthaud-Day et al., n.d.). On the other hand, this worsening of the stock performance does not correlate with any statistically significant or worrying decreases in key financial indicators that have either slightly increased or remained stable in 2012 as compared to 2011, with some exceptions. Moreover, 2012 stock performance may be partially explained by the change in the management and market reaction to it as well as competitors’ strategic moves that benefitted their positions in the market. On the other hand, the trend is an alarming sign as the company’s popularity is decreasing while Americans slowly abandon the fast food segment toward healthier foods and experience financial problems that do not allow them to visit restaurants as often as before. Furthermore, the stock performance shows a significant decline, which also warrants attention.

Therefore, the company’s management is interested in obtaining an independent assessment of the situation and competitiveness of McDonald’s. Thus, the primary objective of the memo is to provide an assessment with a view to suggesting some major issues to be addressed and recommended activities that the company can take to return to its winning tendency in 2013 and afterward.

B. Specific Issues Addressed

Analysis of the current state of affairs at McDonald’s shows that the company needs a new plan that would enable it to win again as the previous one developed and implemented by Skinner has exhausted its capabilities. It is evident not only from the worsening stock performance but also from a decrease in profit. Hence, there are some specific issues to be addressed in the present memo that should be taken into consideration by the top management of McDonald’s when developing a new strategy of the company’s functioning and development. These specific issues include increased competition in the market, the lack of menu offerings that would satisfy customers’ expectations relating to healthy food, and inadequate performance in terms of stock prices and profits (Arthaud-Day et al., n.d.). Moreover, there is a need to retain existing and attract new customers, some service and staffing issues, as well as a new winning strategy, is needed, for instance, through the introduction of some new product that would instantly become a hit (Arthaud-Day et al., n.d.). Hence, the memo aims to assess the current situation by providing an overview of the competitive environment and competitive advantages of McDonald’s as well as the prospective situation by focusing on possible changes in the company’s performance and specific activities required to implement those changes.

C. Project Approach

The above issues are to be addressed by doing firstly assessment of the current situation and then of the prospective situation, ending with overall conclusions. The current situation is going to be assessed by focusing on the competitive environment, in which the company under consideration operates, and competitive advantages of McDonald’s as evident from the analysis of its past performance. In turn, the prospective situation will be addressed by assessing the viability of McDonald’s objectives and current market position, suggesting changes in the company’s product and market strategies and proposing activities with a view to effecting the aforementioned changes. Some relevant diagrams and tables are given in the Appendix to the memo.

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The Current Situation

A. Competitive Environmental Assessment

Some of the key competitors include Burger King, Wendy’s, Taco Bell, Subway, Five Guys and other fast-casual restaurant chains, Starbucks, and Dunkin’ Donuts. It is evident that all companies compete for the market share as the fast food segment is forecast to grow in sales and revenues. In the past, only the first three companies posed a serious threat to McDonald’s as they all operated in the fast food segment and competed for customers. However, recently, customers’ preferences and demands have become more diversified, which has made all fast food companies expand their product offerings and enter new segments of operation, for instance, coffee segment, thereby making them compete with a number of other companies. McDonald’s performance is still usually benchmarked against these three companies and has been not as strong in the recent past. Despite the recent decline, the company is still twice as large as its next global competitor Wendy’s, irrespective of having a smaller number of stores (Arthaud-Day et al., n.d.). Wendy’s competitive advantage lies in offering a higher quality of food that is always fresh. Moreover, it plans to redesign its stores, launch new advertising campaigns, and expand its menu, which can attract new customers, yet it might require significant capital expenditures to be covered in the long term (Arthaud-Day et al., n.d.). With regard to Burger King, it seems to be experiencing some problems with attracting new customers and expanding internationally, which is evident from the loss of the number 2 position in the market to Wendy’s. However, the recent changes in ownership and ownership forms start to have a positive impact on the performance as evident from the improved stock performance. Furthermore, the company is aimed at modernizing stores, expanding the menu, and trying to win some market share from McDonald’s. Talking about Taco Bell, it is the company’s competitor in the domestic market and poses a threat in the long term due to the launch of healthy food menus and expansion across the USA, which can lure away McDonald’s customers.

It is worth mentioning that McDonald’s now faces competition from quick-service restaurants like Subway that offer the food of a higher quality at slightly higher prices. The major threat is associated with the increasing popularity of Subway and other quick-service and fast-casual restaurants like Panera Bread and Five Guys that are part of a premium segment of burger restaurants. These stores have been steadily becoming popular with Americans of the working age who still value convenience and speed but are ready to pay slightly more and eat healthier food (Arthaud-Day et al., n.d.). Moreover, the McCafe line of McDonald’s faces competition from Starbucks and Dunkin’ Donuts that currently dominate the US coffee market. Cooperation of Starbucks with Subway and Burger King can lure away a significant share of customers from McCafe. In turn, Dunkin’ Donuts has been working on expanding its food menu in addition to traditional coffee drinks, which makes its competition with other similar companies more intense. Overall, the competitive environment of McDonald’s may be assessed as being marked by intense competition and threats originating from both large existing companies and new entrants within the quick-service restaurant segment.

B. McDonald’s Competitive Advantages and Core Competencies Assessment

Some of the McDonald’s competitive advantages include its reputation, economies of scale, long-established relations with suppliers, availability of a variety of foods and offerings on the menu, and willingness and readiness to respond to market changes and customers’ demands. Hence, McDonald’s is among the best known fast-food restaurants in the world that are valued by customers for its relatively cheap but tasty food. The majority of customers of all ages are primarily interested in getting the best value for their money, which is traditionally a major strength of McDonald’s. Nonetheless, core competitive assessment shows that this reputation is not enough to ensure the long-term success of the company as customers start preferring healthier options not available in McDonald’s. Furthermore, global expansion means that relationships with suppliers have to be deepened, which may place a strain on the supply of the goods of the same quality to all stores in the world.

In terms of core competencies, McDonald’s has developed an efficient and effective system of supply and management of stores, which guarantees the same quality of goods overall stores. Apparently, this competence relating to supply management ensures that the company can enjoy benefits offered by the economies of scale. Another competence relates to the speed of servicing clients like McDonald’s positions itself as fast-service fast food joints. However, some recently revealed staffing and service issues undermine this competence, which should be urgently addressed by the top management in order not to harm the reputation. The most significant competence of McDonald’s is its ability to provide the best value at a relatively low price, even though in some countries of the world this competence is lacking due to high prices as compared to the income of the population. Overall, the core competencies analysis shows that McDonald’s has several competencies that it can exploit to win again in domestic and international markets.

The Prospective Situation

A. Assessment of the Viability of McDonald’s Objectives and Current Market Position

McDonald’s objectives of returning to its winning trend, retaining customers, attracting new customers, and expanding internationally seem to be viable taking into account the assessment of the competitive environment and analysis of key financial indicators. McDonald’s enjoys a solid capital base and has a wide range of fixed assets that it can exploit to offset its recent slight decline in profits. Moreover, its plan of modernization of all stores is almost over, which is likely to attract new customers. In addition to that, products offered by the company are still popular all over the world, even though Americans seem to have become more conscious about the impact of foods on their health. Therefore, the company can win internationally and offset any potential declines in the domestic market. Due to tough competition in the domestic market, it does not seem reasonable to open new joints in the USA, while the company instead should focus on expansion into rapidly developing markets like China. Despite the recent stock performance decline, the company remains strong. However, the current market position can worsen to some extent unless the company reacts to changes in customers’ preferences and actions of its key competitors. Some of the possible prospective changes aimed at retaining the currently strong market position of McDonald’s and implementing its objectives are provided below.

B. Prospective Changes in McDonald’s Product/Market Strategies

Undeniably, previously launched modernizations and a decision to have more cafes open either longer or 24/7 should not be abandoned as they offer some short- and long-term benefits to separate stores and the company in general. Nonetheless, these two measures are hardly sufficient to improve the situation with the profitability of the company. Therefore, the management should also address some other specific issues. Firstly, the market environment has been changing with the company’s competitors improving their services and goods, thereby attracting more customers and winning a larger market share. Secondly, customers’ preferences have been changing, which should be reflected in menu offers and a choice of healthier ingredients for offered products. Thirdly, the company needs to revise its current menu offerings with a view to refusing the least popular and launching some new goods that would become a hit with customers in the US and international markets. Fourthly, revealed staffing and service issues have to be properly addressed so that customers’ satisfaction is increased and their loyalty is earned. Fifthly, McDonald’s has to consider further global expansion into new and rapidly developing markets with locally oriented menu offerings. Finally, the top management has to address such essential issue as retention of loyal customers and the attraction of the new ones.

C. Proposed Implementation Activities

In order to respond to the changing environment, the company has to introduce more healthy food options into its menu. What is more, it has to develop new hits like the recent McWrap with a chicken meet. In terms of its international markets, it has to offer unique options adjusted to local traditions, which it basically does nowadays, but these measures are not enough. It seems beneficial to develop unique local menus grounded on the inclusion of some core McDonald’s goods like fries. Although this activity may be time-consuming and costly in the short run, it will manage to attract new customers and win their loyalty in foreign markets in the long run. Moreover, McDonald’s has to invest time and resources into proving that its foods are not as harmful as it is traditionally considered due to claims that they contribute to obesity (Arthaud-Day et al., n.d.). Hence, initial investments have to be directed into R&D activities so that current offerings are made healthier and the new ones correspond with customers’ expectations. Revealed staffing and service issues can be addressed by offering additional training of employees and trying to reduce the turnover, which is currently at the annual level of 60% (Arthaud-Day et al., n.d.). Employees have to be motivated to stay and render high-quality services through various incentives, for instance, increases in salaries grounded on regular performance appraisals. Global expansion is another issue to be considered by top management. The Chinese market remains underdeveloped, and its capabilities should be exploited by McDonald’s as the Chinese population comprises quite a big proportion of the customer base and seems to be interested in food offered by the company. Moreover, the African market should be studied for expansion opportunities, even though prices may appear to be too high for the local population due to low incomes in most African countries and would possibly require some adjustment. Finally, the retention of customers can be insured by offering the best value for their money and taking into consideration their preferences and wishes. The information about the latter can be gathered via surveys that can be conducted both online and in stores. Overall, the management has to invest in studying the expectations and preferences of customers and appropriately respond to them. Furthermore, some loyalty bonus program can be developed to reward customers for loyalty.

Conclusions

McDonald’s remains today an internationally strong fast-food company with millions in annual revenues and ability to remain profitable in the future. Nonetheless, it operates in a highly competitive and rapidly developing environment, thereby being threatened by a number of large companies competing for leadership in the market. The present memo has provided an assessment of the competitive environment of McDonald’s as well as suggested some changes to be implemented to ensure the competitiveness of the company in the short and long terms. The top management is advised to reconsider its current strategic plan taking into account identified issues and take some urgent measures to prevent further stock performance decline in 2013 and return the status of the winning leader to McDonald’s. The main focus should, however, remain on customers and their satisfaction, which requires a significant revision of the menu offerings. Furthermore, the international market should be paid special attention due to the huge prospects for winning a large market share.

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