Appendix 2 Comprehensive Cases for Analysis

huge, high-tech vending machines—described as really tiny convenience stores—

outside some McDonald's in Washington D.C. didn't work. They were shut down
because they attracted lots of attention, but didn't generate much business. The
biggest question mark, though, was the company's fast-casual dining brands, which
still, for the most part, were losing money.
After deliberating several months about what to do with the company's outside
partner brands, the company's executives decided in the fourth quarter of 2003 to
sell a couple of divisions: the Boston Market chicken restaurants outside the United
States and the Donatos Pizzeria chain, which they sold back to its founder. The com-
pany also chose to exit its domestic joint venture with Fazoli's Italian Restaurants.
They chose, however, to keep the Chipotle Mexican Grill chain and the U.S. Boston
Market chicken restaurants and to retain its minority investment in Pret a Manger in
all locations except Japan. Cantalupo said the moves were "consistent with the
company's new priority to do fewer things better" in order to boost long-term growth
in sales and profits. To accommodate the divestments, the company took mostly non-
cash charges of 23 to 28 cents a share.
Despite its stated desire to narrow its focus, McDonald's announced plans in
November 2003 to globally relaunch its marginally successful McKids line, which it
did in spring 2004. But this time, instead of just kids' clothing and toys, the line
expanded to include interactive videos and books. The McKids line isn't sold at
McDonald's stores, but at W ql-Mart, Toys R Us, and Target. The company also
signed licensing agreements for the McKids brand name with Mattel, Hasbro, and
Creative Designs.

Taking Care of its Pet)*

McDonald's commitment to its employees has been a focus since Ray Kroc founded
the company in 1955. Its belief is that "only satisfied people can satisfy our cus-
tomers." This philosophy has continued throughout its history.
Take good core of those who work for you, and you will float to greatness on their
achievements.—Ray Kroc, Founder and Chairman of the Board, 1955-1977.
We are not going to give in to a hollow concept of bigness, because people make
a company—not a balance sheet or a listing on the New York Stock Exchange.—Fred
Turner, Chairman of the Board, 1977-1990.
We have to recognize that we have to empower our management teams and our
crews to do what's necessary to take the best care of our customers.—Michael
Quinlan, Chairman of the Board, 1990-1999.

For McDonald's to achieve its goal of being the world's best quick-service
restaurant, it realized the importance of providing the best experience for all
McDonald's employees. These beliefs have been formalized into its People Vision
and its People Promise.
McDonald's People Vision:
We Aspire to Be the Best Employer in Each Community Around the World.
McDonald's People Promise:
To the 1.5 million people who work at McDonald's in 119 countries around the world,
and to all future employees, we want you to know that: We Value You, Your Growth,
and Your Contributions. This is our People Promise.

The company has won several awards worldwide for its employment practices.
It was named Brazil's Best Employer in the Retail Industry for the third year in a
row by a leading business magazine. The company's focus on training, employee
Appendix 2 Comprehensive Cases for Analysis

development, and opportunities for advancement were key factors in receiving this
award. McDonald's Sweden was named Best Competence Company by a leading
Swedish university, again because of its commitment to employee training and
career development. And in 1999, the Australian National Training Association
named McDonald's Australia as the Employer of the Year, the third consecutive year
for the honor.

McDonald's commitment to social responsibility is an important part of its heritage.

Jim Cantalupo says, "More than ever, we are focused on and committed to doing
the right thing for the local communities in which we operate and for the customers
we serve. This philosophy of doing good and giving back has always been at the
heart and soul of the McDonald's business!' This commitment can be seen in four
areas: community, environment, marketplace, and people.
Its community commitment means that it supports local schools, youth sports,
and other community programs. For example, one of its most widely known pro-
grams, the Ronald McDonald House charity, provides health care and help to chil-
dren and families around the world. Its environmental commitment is reflected in its
long-standing support of environmental protection. McDonald's has developed inno-
vative programs for recycling, resource conservation, and waste reduction. The
company's marketplace commitment involve working with suppliers and expert
advisers to improve animal handling practices, helping to preserve the effectiveness
of antibiotics, ensuring the safety and quality of products and restaurant environ-
ments, and promoting the protection of workers' healthy, safety, and human rights.
Finally, its people commitment is expressed in its People Vision and People Promise
and extends further to integrating diversity in business operations and planning.

INDUSTRY CHARACTERISTICS
The restaurant industry is an interesting one. The industry has a lot of growth potential
because an increasing portion of consumers' food dollars is being spent on eating
out According to the U.S. Department of Agriculture, consumption of food away
from home accounted for 46.1 percent of total food expenditures in 2002 (the
latest data available). With the increase in dual-income families, single-parent families,
and numerous moderately priced restaurant choices, dining out is often the most
convenient option. But it's the casual dining sector that's profiting most from this trend.
It continues to gain market share from fast-food chains, probably because an aging
population prefers full-service restaurants. In addition, fast-food chains have to deal
with consumers' demands for healthier food alternatives. Not only will this help
attract customers, it's important for deflecting potential obesity-related lawsuits.
Another trend impacting the fast-food industry is the rapidly fragmenting market
of different ethnicities that have made once-exotic foods such as sushi and burritos
everyday meal options. In addition, quick meals of all kinds can be found in many
locations, including supermarkets, convenience stores, and even vending machines.
In late 2003, burger companies were startled by the first case of mad-cow dis-
ease found in the United States. McDonald's profits previously had been hurt by this
food-safety issue in its global restaurants, but this was the first time it was faced with
the potential fall-out from this threat domestically.
Appendix 2 Comprehensive Cases for Analysis

WHAT NOW?
Grappling with a tired brand, a glut of restaurants, and increasing societal concerns
about obesity, Cantalupo had his work cut out for him. However, he was able to
spark a turnaround. He said, "It's clear to me that we have turned the corner and
are embarking on 2004 with a stronger plcrybook. Our Plan to Win is driving results
and we are gaining momentum." This Plan to Win has played a primary role in the
company's new strategic direction. What is it?

McDonald's strategies for achieving sustainable, profitable growth are

customer driven, goal oriented, and are designed to increase restaurant visits
and grow brand loyalty among new and existing customers, and further build
our financial strength. {excerpted from the Plan to Win).

The Plan to Win is built upon three components of success.

The first is operational excellence. The company pursued this by implementing a
consistent restaurant-specific review and measurement process that included mys-
tery diners. It also made changes to increase the speed of service, including better
organizing the kitchen, front-counter, and drive-through areas and simplifying the
restaurant environment by eliminating certain sizes and slow-selling items. In addi-
tion, it made a commitment to reemphasize hospitality, accuracy, and cleanliness
through new employee training and incentive programs.
The second component for success is leadership marketing, which it is doing by
reconnecting with customers using a hip and contemporary global marketing direc-
tion. It chose to use a global brand message in advertising, packaging, and restau-
rant experiences. The "I'm lovin' it" campaign was designed to be more than
a global marketing effort. It reflected an attitude that employees were to embrace
and display as they served customers.
The final component for success is innovation. The company is refocusing its
efforts on being an innovator. Its goal is to feature a variety of value, premium, and
wholesome product options and to deliver the right products at the right price to
customers.
In addition to its Plan to Win, the company has been working hard to improve
individual restaurant profitability by leveraging economies of scale and by being
more efficient. To this end, it has expanded the use of labor-saving equipment and
streamlined processes. Corporate financial highlights can be found on its Web site
(www.mcdonalds.com).
Where does McDonald's go from here? The company seems to have reversed
its downward slide, but faces continuing challenges. Its goals for 2005 and beyond
include annual systemwide sales and revenue growth of 3 percent to 5 percent,
annual operating income growth of 6 percent to 7 percent, and annual return on
incremental invested capital in the high teens. Achieving these returns will be a chal-
lenge for Cantalupo and the entire McDonald's organization.

Epilogue
On April 19, 2004, Jim Cantalupo died unexpectedly of an apparent heart attack in
Orlando, Florida, where almost 12,000 McDonald's franchisees had gathered for a
worldwide convention. The company's board met and quickly named Charlie Bell, the
company president as CEO. Bell was Cantalupo's right-hand man and one of the most
forceful proponents of change at McDonald's. He faces the difficult task of keeping the
 Strategic Management in Action

momentum going in the company's remarkable turnaround. As if dealing with these

issues wasn't enough, just 16 days after being named Cantalupo's replacement, Bell
underwent successful colorectal cancer surgery in early May.

{Sources: McDonald's, www.mcdonalds.com, April 8, 2004; Hoover's Online, www.hoovers.com, April 8,

2004; Standard & Poor's NetAdvantage, www.netadvantage.standardandpoors.com, April 8, 2004; B.
Horovitz and T. Ankner, "McDonald's Absorbs Another Blow," USA Today May 1 2004, p. 3B; J. Zich, "McDonald's
,

CEO Contolupa Restored Luster of Its Arches," USA Today, April 20, 2004, pp. 1A+; D. Kruger, "You Want Data With
That?" Forbes, March 29, 2004, pp. 58-60; The Associated Press, "McDonald's Happy Meals Get New Items, Make-
Over," USA Today, March 19, 2004; S. Leung, "McDonald's Makeover," Wall Street Journal, January 28, 2004, p. B1;
B. Horovitz, "McDonald's CEO Could Be One to Copy or One lo Console," USA Today, December 23, 2003, p. 81;
The Associated Press, "McDonald's Sells Donatos, Narrows Focus," USA Today, December 16, 2003; T. Howard,
"Survey: Not All Viewers Lovin' It," USA Today, November 24, 2003; B. Horovitz, "McDonald's Ventures Beyond
Burgers to Duds, Toys," USA Today November 14, 2003, p. 68; The Associated Press, "Drive-Thru Survey Bags
McDonald's," USA Today, September 30, 2003; The Associated Press, "McDonald's Testing Healthier, Adult 'Go
Active' Meal," USA Today, September 18, 2003; P. Gogoi, "Saving Mickey D's Bacon," Business Week, August
25, 2003, p. 46; "The Top 100 Brands," Business Week, August 4, 2003, p. 72; N. Pachetti, "Back in the Kitchen,"
Money July 2003, pp. 44-45; T. Howard, 'McDonald's Salads Lure Women," USA Today, June 16, 2003; B.
Horovitz, "CEO May Reveal Plans to Restore Luster to Golden Arches," USA Today, May 5, 2003; P. Gogoi and M.
Arndt, "Hamburger Hell," Business Week, March 3, 2003, pp. 104-108; B. Horovitz, "McDonald's Plans Big Overhaul
for Image," USA Today, February 7, 2003; B. Horovitz, "Ten Things McDonald's Must Do to Get Its House in Order,"
USA Today, December 12, 2002; B. Horovitz, "Burger Wars Heat Up as Consumers Devour Value," USA Today,
November 11, 2002, p. 4B; J. Forster, "You Deserve A Better Break Today," Business Week, September 30, 2002, p.
42; J. Forster, "Thinking Outside the Burger Box," Business Week, September 16, 2002, pp. 66-67; and D. Stires,
"Fallen Arches," Fortune, April 29, 2002, pp. 74-76.1
306 Strategic Management in Action

pinpoint problems and take action. "People know what's being measured, and it
certainly helps to focus their minds," says one corporate executive.
Cantolupo also sent 900 operations experts out into the field restaurants, with
each person visiting stores multiple times to help them fine-tune operations.
McDonald's Corp. also conducted day-long seminars where store managers shared
tips with each other and where corporate kitchen experts educated the managers
about topics such as how to position crew members to shave precious seconds off
average service times.
After surveys revealed that changes to popular products, such as the sauce on
the Big Mac, had not gone over well with customers, Cantalupo ordered a compre-
hensive product review. He appointed a team of chefs and selected franchisee oper-
ators to review the products, and they made several changes. They restored the
more expensive ingredients in the Big Mac sauce and changed the salt-and-pepper
seasoning in the beef patties. They also changed the bun recipes to enhance the
sweet, caramelized flavor and lengthened the toasting time to enhance the look and
feel of the product. Cantalupo said, "Everyone wants to say that our turnaround was
about the salads. But it isn't. It was hundreds of things—with formulations, times and
temperatures, the Big Mac sauce. Our food tastes better today. It's one of the rea-
sons we're doing so well."
Other changes included improving customer wait time by making the outdoor
menu boards more "idiot proof" with more pictures and fewer words. An LED dis-
play also confirms what customers say so there's no confusion about the order. Also,
premium sandwiches have been repackaged in boxes, rather than wrappers. And
the boxes are color coded by sandwich to improve speed and accuracy.

Marketing
The company's marketing was another area that needed to be fixed. Surveys
showed that its ads were hitting the mark with little kids, but alienating teenagers
and young adults. The "I'm lovin' it" ads left consumers uncomfortable with the
unfamiliar message. However, McDonald's executives have decided to stick with
the ads and use them globally as a single brand message, a first for the company.
Its advertising expenditures in 2003 were nearly $710 million, up 9.6 percent
from 2002.
Other marketing changes being proposed include a redesign of the company's
packaging, especially its cups, french-fry holders, and the to-go bags. Happy Meals
are getting a makeover as well. In the United States, the company is adding 1 per-
cent milk and Apple Dippers; in Italy, fruit cups are being added; and in Spain,
Dannon low-fat yogurt is being added. The company will also be pursuing opportu-
nities to align the brand more with popular music, sports, fashion, and entertain-
ment outlets.
Although the company had made changes in its marketing, problems still existed.
In addition to the surveys described earlier, the company got some disturbing news
from a mid-2003 marketing survey of repeat customers. Many ate at McDonald's sim-
ply because they had no better alternative. And, for the first time in 15 years, more
people disliked the brand than liked it. So there's still work to be done.

Beyond Burgers
Some of McDonald's past attempts to expand outside of fast food hadn't been as suc-
cessful as hoped. In 1991, Sears closed all 47 free-standing McKids stores (which
sold kids' clothing and toys) because of poor performance. And test marketing of