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Christine Kassar Williams, A.J. Stanshall and G.H. WilliamsFOR BUSINESS STUDIES/BUSINESS MANAGEMENT STUDENTS

BUSINESS CASE STUDY 2020

A comprehensive case study of McDonald’s

Covering

9 Operations 9 Marketing 9 Finance 9 Human Resources

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1 © Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2019www.resourcefactory.com.au

valid until 1/11/2020

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BUSINESS

A comprehensive case study of McDonald's

CASE STUDY 2020

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3 © Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2019

BUSINESS CASE STUDY - McDonald's

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CONTENTS

Foreword – McDonald’s Case Study

IntroductionA Very Brief History 8Worldwide Structure 8Abbreviations 8

CHAPTER 1 – OPERATIONS

The Role of Operations: Why is operations important to McDonald’s?1.1 The Strategic Role of Operations 9

The Influences on Operations: What factors impact on the operations decisions McDonald’s makes?1.2 Globalisation 101.3 Technology 101.4 Quality Expectations 111.5 Cost-Based Competition 121.6 Government Policies 131.7 Legal Regulation 131.8 Environmental Sustainability 141.9 Corporate Social Responsibility 16

The Processes of Operations: How does McDonald’s actually do it?1.10 Inputs 171.11 Transformation Processes 191.12 Outputs 24

Operations Strategies: How does McDonald’s actually achieve its objectives?1.13 Performance Objectives 251.14 New Product or Service Design and Development 261.15 Supply Chain Management 271.16 Outsourcing 281.17 Technology 281.18 Inventory 291.19 Quality Management 291.20 Global Factors 30

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4© Copyright C.K. Williams, A.J. Stanshall and G.H. Williams 2019 www.resourcefactory.com.au

CHAPTER 2 – MARKETING

The Role of Marketing: Why is marketing important to McDonald’s?2.1 The Strategic Role of Marketing Goods and Services 312.2 Production, Selling, Marketing Approaches 312.3 Types of Market 31

The Influences on Marketing: What factors impact on the marketing decisions McDonald’s makes?2.4 Factors Influencing Customer Choice 322.5 Consumer Laws 332.6 Ethical Considerations 34

The Processes of Marketing: How does McDonald’s actually do it?2.7 Situational Analysis – SWOT, Product Life Cycle 352.8 Market Research 362.9 Establishing Market Objectives 372.10 Identifying Target Markets 372.11 Developing Marketing Strategies 382.12 Implementation, Monitoring and Controlling 38

Marketing Strategies: How does McDonald’s actually achieve its objectives?2.13 Market Segmentation, Product/Service Differentiation and Positioning 392.14 Products – Goods and/or Services 412.15 Price Including Pricing Methods 422.16 Promotion 432.17 Place/Distribution 45 2.18 Global Marketing 46SAMPLE





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CHAPTER 3 – FINANCE

The Role of Financial Management: Why is financial management important to McDonald’s?3.1 The Strategic Role of Financial Management 473.2 The Objectives of Financial Management 48

The Influences on Financial Management: What factors impact on the financial decisions McDonald’s makes?3.3 Internal Sources of Finance 493.4 External Sources of Finance 493.5 Financial Institutions 513.6 Government Institutions 513.7 The Global Market 53

The Processes of Financial Management: How does McDonald’s actually do it?3.8 Planning and Implementing 543.9 Monitoring and Controlling 573.10 Financial Ratios 573.11 The Limitations of Financial Reports 643.12 Ethical Issues Related to Financial Reports 66

Financial Management Strategies: How does McDonald’s actually achieve its objectives?3.13 Cash Flow Management 673.14 Working Capital Management (Current Assets) 673.15 Working Capital Management (Current Liabilities) 683.16 Working Capital Management (Strategies) 683.17 Profitability Management (Cost Controls) 693.18 Profitability Management (Revenue Controls) 703.19 Global Financial Management 70

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CHAPTER 4 – HUMAN RESOURCES

The Role of Human Resource Management: Why is human resource management important to McDonald’s?4.1 The Strategic Role of Human Resource Management 714.2 Outsourcing 72

The Influences on Human Resource Management: What factors impact on the human resources decisions McDonald’s makes?4.3 Stakeholders 734.4 Legal – The Current Legal Framework 754.5 Economic 774.6 Technological 774.7 Social – Changing Work Patterns and Living Standards 784.8 Ethics and Corporate Social Responsibility 78

The Processes of Human Resource Management: How does McDonald’s actually do it?4.9 Acquisition 804.10 Development 804.11 Maintenance 814.12 Separation 81

Human Resource Management Strategies: How does McDonald’s actually achieve its objectives?4.13 Leadership Style 824.14 Job Design 824.15 Recruitment 834.16 Training and Development 834.17 Performance Management 834.18 Rewards – Monetary and Non-Monetary, Individual or Group, Performance Pay 844.19 Global – Costs, Skills, Supply 844.20 Workplace Disputes Resolution 85

The Effectiveness of Human Resource Management: How does McDonald’s know what is working and what isn’t?4.21 Indicators 86

CHAPTER 5 – INTERDEPENDENCE OF KEY BUSINESS FUNCTIONS

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Introduction

A Very Brief History

Brothers Richard and Mac McDonald opened a restaurant called McDonald’s Bar-B-Q in California in 1940. In 1948, they remodelled the store as a drive-in with a reduced amount of items for sale and changed the name simply to McDonald’s. The New York Times quoted Richard McDonald as saying “Our whole concept was based on speed, lower prices and volume.” 1

In 1954, Ray Kroc acquired the rights to set up franchised McDonald’s restaurants in most areas of the United States. By 1959, there were 102 McDonald’s restaurants. In 1961, Ray Kroc finally purchased the remaining shares of the company, meaning that Richard and Mac McDonald were no longer involved. By 1963, the number of McDonald’s restaurants had reached 500. The company was listed on the New York Stock Exchange in 1965. It was not until 1968 that McDonald’s introduced the Big Mac.

McDonald’s is a revolutionary company in many ways, including marketing, management, operations and franchising. McDonald’s phenomenal worldwide growth has also been viewed by some commentators as changing how and what millions of humans eat. Founder Ray Kroc once said, “I put the hamburger on the assembly line.”2 It now has nearly 38,000 outlets in 120 countries, around 93% of which are owned by franchisees, with the remainder owned by McDonald’s. Worldwide, McDonald’s aims for this to change to 95% franchises and only 5% company stores within the next few years.3 Many franchisees of McDonald’s own multiple outlets.

Worldwide Structure

Like many global organisations, McDonald’s has a complicated worldwide corporate structure.

McDonald’s Corporation is the parent company for global operations. As of August 2019, the company had a market valuation in excess of US$165 billion.4

To facilitate its operations around the globe, McDonald’s has a web of corporations (and other legal structures) in many countries. In Australia, McDonald’s Corporation uses the company McDonald’s Australia Holdings Limited (i.e. the US parent company owns 100% of the shares in the Australian company).

McDonald’s Australian stores are then either run directly by McDonald’s Australia (company stores) or are run under franchise agreements (by other small companies). McDonald's has 981 stores in Australia.5 More than 80% are run by franchisees - the remainder are run by the company.

Abbreviations

In this case study when we refer to McDonald’s, we mean the worldwide group of companies.

McDonald’s Australia refers just to the company’s operations in Australia.

The first McDonald's Restaurant in Des Plaines.

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1.13 Performance Objectives

Performance objectives are established to provide parameters for measuring performance. These goals are necessary for a business to gauge the efficacy of parts of the transformation process and can promote efficiency, productivity and ultimately contribute to company profitability.

QualityQuality is the consistency and dependability of output. In ensuring quality, wastage and remedial costs can be reduced. McDonald’s emphasises the need to source quality raw materials such as fresh vegetables and meat. Inputs are regularly checked for freshness and levels of bacteria. McDonald’s also demand strict procedure while processing food to ensure hygiene and compliance with the company’s Hazard Analysis and Critical Control Point (HACCP) program.86

SpeedMcDonald’s uses speed as a strategy to maintain flow in the kitchen. The company allots recommended times for tasks; for example, kitchen crew have:

• 11 seconds to toast a bun• 20 seconds to assemble the burger• 14 seconds to wrap the burger

To assist employees in meeting such performance objectives, the plant and process layout are designed to ensure the logical placement of ingredients and equipment. Speed has traditionally been a focus for fast-food outlets. The test kitchen plays a significant role in ensuring new menu items can be made at the speed expected from McDonald’s.87 In McDonald’s Drive-Thru, which accounts for 70% of sales made in the US88, crew are required to act swiftly greeting and serving customers. In a 2010 CNBC report, the then CEO of the McDonald’s Corporation, James Skinner, said: “If you’re driving down the road and you see seven or eight cars in the drive-thru - even though the service time might be 30 seconds per car - you’ll drive by it… I do.” 89 The increasing complexity and variety of menu items has resulted in longer wait times at the Drive-Thru. In 2016, the average wait time was 208.16 seconds which is 25% slower than the average wait time 10 years earlier.90 In an attempt to reverse this trend, McDonald’s made alterations to the Drive-Thru footprint which helped shave an average of six seconds off each transaction. In doing this, McDonald’s increased its capacity to serve 15 more cars per hour.91 Furthermore, in May 2017, the company announced that it would be launching mobile order-and-pay technology and curbside delivery across its 14,000 US stores. This allows customers to order and pay for food from their smartphones - avoiding the Drive-Thru.92 To encourage the use of the app, from July 2018 until the end of the year, McDonald’s stores across the USA offered free french fries every Friday for every order over $1 made using a registered account on the McDonald’s app.93

Mobile ordering technology.

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The following is a list of some products that are specific to certain geographic locations.

Country Food itemAustralia Aussie BBQ Angus76

Chile Empanadas con Queso77

India Maharaja MacAloo wrapMcAloo TikkiMasala Grill McSpicyTM Paneer78

Germany Spring RollsJapan Teriyaki Mac Burger79

Shrimp Fireo80

Chocolate Fries81

Malaysia Bubur Ayam82

New Zealand KiwiburgerKiwi Angus BurgerGeorgie Pie: Bacon ‘N’ EggGeorgie Pie: Steak Mince ‘N’ Cheese83

Peru Mexican Salad84

Spain GazpacoBeer85

CBO (Chicken, Bacon and Onion)86

Thailand Fried Chicken PiecesCorn Pie87

Savoury Chicken or Pork Porridge88

United States Bacon Clubhouse BurgerArtisan Grilled Chicken SandwichPremium Buttermilk Crispy Deluxe SandwichMcRib89

Product/Service Differentiation Globalisation has increased the quantity and variety of goods and services available to consumers. Consequently, in order to attract sales, businesses have had to make their product or service appear different to those provided by their competitors. The informal eating outlet market contains approximately 9 million restaurants, therefore the process of differentiation has been an important focus for McDonald’s.

McDonald's is popular throughout the globe.

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3.2 The Objectives of Financial Management

Financial objectives can be broad or specific. McDonald’s uses a combination of past-year results, overall future plans and general economic conditions to set objectives for future time periods.

In 2017, McDonald's announced some long-term financial targets (what the company sees as optimal performance).2 They also set targets each year in the annual report. Some of these objectives include:

Profitability (objective – increase profit)• Achieve operating margins in the mid-40% range (overall gross profit for the company). • Achieve an increase in net profit - by reducing spending on general and administrative expenses.

Growth (objective – increase sales and store numbers)• Increase system-wide sales growth by 3% to 5% (that is total sales for all stores in the world). • Increase the number of restaurants worldwide by 750 in 2019.

Efficiency (objective – increase efficiency)• Reduce general and administration expenses by 4% in

2019.

Liquidity (objective – ensure adequate cash on hand to meet current needs)• Ensure enough cash is available to meet operating

expenses and return equity to shareholders.

Solvency (objective – increase debt/return equity to shareholders)• Continue to increase the debt of the company - and reduce the equity.

McDonald’s Objectives at a Glance

Profitability Growth Efficiency Liquidity SolvencyContinue operating margin in mid-40%. and increase net profit.

Overall sales increase of 3-5% and store numbers by 750.

4% general and admin expense reduction.

Retain sufficient cash to pay outgoings.

Continue returning cash to shareholders.

Ratios Ratio Ratios Ratio Ratio

Gross profit Net profit Return on equity

N/A Expense Net profit Current Gearing (debt to

equity)

Delivery vehicles in Asia.

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A second union, the Retail and Fast Food Workers Union (RAFFWU), also have McDonald's employees as members. It clearly believes that it will do more for employees than the SDA. Its website states "SDA and McDonald’s have teamed up to make dodgy back room deals which smash worker rights." 16

Government• Australian Taxation Office (ATO) – The ATO is interested in the Goods and Services Tax (GST)

collected by McDonald’s Australia, the income tax paid by the company (and franchises) and also the tax on the wages of employees.17

• Fair Work Ombudsman (FWO) + Fair Work Commission (FWC) – These statutory bodies seek to ensure employees in Australia are treated according to the law. In the case of McDonald’s Australia, FWC is the body that checks and approves the enterprise agreement between the company and its employees.18 McDonald’s and FWO have also entered into a Proactive Compliance Deed where McDonald’s “self-audits” and reports on workplace relations.19 FWO states “A Compliance Partnership is a collaborative relationship between us and businesses that want to publicly demonstrate their commitment to creating compliant and productive workplaces.” 20

• Australian Skills Quality Authority (ASQA) – As McDonald’s Australia is a Registered Training Organisation (RTO), it is subject to the rules administered by ASQA – the government authority that regulates the training industry.21 This includes granting approval for courses that it runs and regular auditing to ensure that it meets the standards demanded of a RTO. As of 2018, this RTO had awarded almost 41,000 qualifications.22

• State Governments – Around Australia, state governments collect payroll tax and administer Workplace Health and Safety (WHS) legislation through such agencies as SafeWork NSW.23 SafeWork NSW influences human resource management by mandating that all tasks McDonald’s employees carry out are performed it a safe manner. The NSW Government also partly funds McDonald's training. This funding amounted to $1.8 million in the 2016 financial year. 24

• Federal Government – As well as running the ATO, ASIC, ASQA, FWC and FWO, the federal government implements policies that impact on human resource management.

SocietyThe way in which McDonald’s manages human resources is impacted by societal expectations. As an example, society place a great value on high school education. As a result, McDonald’s has a Responsible Student Employment Policy which restricts the hours school students are allowed to work.

"Learn and churn"

In 2018, McDonald's came under pressure for its apparent "learn and churn" policy, implying that stores either train staff as managers (learn) or reduce their hours (churn) as they got older.

The ABC reported "In Australia, paying junior rates is legal. Under most awards this allows employers to pay children who are 14 just 50 per cent of the hourly wage. These rates increase progressively by 10 per cent on each birthday until an employee reaches 21. The 2013 McDonald's enterprise agreement sets out that, as of July 2016, McDonald's employees in NSW aged 14 could be paid as little as $8.43 an hour." 25

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Work Health and Safety and Workers Compensation The Standards of Business Conduct – The Promise of the Golden Arches outlines that McDonald's is committed to providing a safe working environment. It mandates that accidents and unsafe practices must be reported promptly.36

McDonald's Australia's main measurement of workplace injuries is known as the Lost Time Injury Frequency Rate (LTIFR), which is calculated as the number of hours lost to injury per 1 million hours worked. Its goal is to have less than 8.5 hours lost per million hours worked.37

In NSW, McDonald’s Australia is also a self-insurer for worker’s compensation, which means that it funds and processes all claims internally. In all other states, it uses traditional insurance agencies to provide workers compensation insurance.

As a self-insurer in NSW, McDonald’s Australia is regularly audited by NSW WorkCover. The company has received favourable results in these audits.38 McDonald’s Australia also makes some of its Work Health and Safety Policy available publicly.39

Anti-discrimination and Equal Employment Opportunity McDonald’s Australia has a public commitment to both anti-discrimination and Equal Employment Opportunity (EEO). The Standards of Business Conduct – The Promise of the Golden Arches states:

“McDonald’s provides equal treatment and equal employment opportunity without regard to race, colour, religion, sex, age, national origin, citizenship status, disability, sexual orientation, military status, genetic information or any other basis protected by law. We apply this policy to our employees, applicants, independent contractors, franchisees, vendors and suppliers. We follow this policy in all aspects of McDonald’s dealings with customers and to our employment decisions, including recruitment, hiring, placement, development, promotion, training, scheduling, benefits, compensation and termination.” 41

In support of this, McDonald’s employs a Chief Diversity Officer who oversees worldwide efforts to make the business a diverse and fair workplace.42

More than 70% of US employees are either women or from an ethnic minority.43

In Australia, McDonald’s has a partnership with Job Centre Australia who run a program called Golden Opportunities. This program aims to place job seekers with a disability into employment with McDonald’s. By early 2019, over 750 such jobs had been filled.44

McDonald’s uses all of these avenues in its aim to maintain a diversified workforce free from discrimination.

At work or not at work?

In January 2019, McDonald's employee Mandep Sarkaria was granted workers compensation in the Industrial Court of Queensland for an accident at a McDonald's. Ms Sarkaria fell from a ladder whilst trying to get onto the roof of the outlet to have a cigarette before her shift. Despite the fact that the roof was not a designated smoking area, and that she didnt have permission to do this, the court decided that she was "on duty" as there was a policy in place that employees come 10 minutes before their shift start time.40

McDonald's aims for a diverse workforce.

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4.20 Workplace Disputes Resolution

McDonald’s has clear employee grievance procedures set out in the Standards of Business Conduct – The Promise of the Golden Arches booklet. Employees can discuss issues with direct supervisors (or other managers) or the employee can directly contact the Global Compliance Office and report an issue which may sometimes lead to mediation.88

In Australia, McDonald’s has a Workplace Relations Team which takes calls directly from employees who have unresolved issues. “Currently, McDonald’s has an Employee Relations Hotline that is supported by three employee relations advisors between 8am and 6pm, as well as an email facility, to deal with all employee enquiries and complaints.” 89

McDonald’s also involves trade unions and other legal institutions when necessary to negotiate employee pay and conditions. As an example, the current award for McDonald’s Australia employees was negotiated between McDonald’s and the SDA and was checked and approved by FWC.

Under the compliance partnership between McDonald's and the Fair Work Ombudsman (FWO), a report is issued about the number of McDonald's staff that request assistance from FWO. The total requests received compared to the total number of employees is around 0.03%. Given that a large majority of the McDonald’s workforce is comprised of young people, the FWO considers this to be an exceptionally positive outcome.90(See "Hope to god you don't get thirsty" on page 79).

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