Case analysis questions based on 2001 annual report and textbook

McDonald's has the vision of being the world's best quick-service restaurant experience (2001 Annual Report). The annual report does not note a mission statement, but the About McDonald's website lists the mission statement as

"McDonald's brand mission is to "be our customers' favorite place and way to eat." Our worldwide operations have been aligned around a global strategy called the Plan to Win centering on the five basics of an exceptional customer experience -- People, Products, Place, Price and Promotion. We are committed to improving our operations and enhancing our customers' experience." (AboutMcDonalds.com, 2011).

The product portfolio diagram, as constructed using the BCG Matrix (Tutor2U.net, 2011).

STARS

Hamburgers

Fries

International Operations

QUESTION MARKS

-Coffee?

- Most new menu items

Other brands (Chipotle, Pret a Manger, etc.)

CASH COWS

Lunch

Dinner

Beverages

DOGS

Breakfasts

Stars are defined as those businesses with high market share and high growth. Question marks have low market share but high growth. Cash cows have high market share and low growth. Dogs have low market share and low growth.

4. The economy of scope refers to the lowering of the firm's average costs based on having two or more different products. The 2001 Annual Report mentions that consumers want variety in their quick service food offerings. McDonalds can capture a greater portion of the quick service market share by having more offerings. This leads the company to introduce new products frequently in order to find those that resonate with the consumers. In addition, the company offers meals at breakfast. While lunch and dinner are the cash cows of the company in general, McDonald's restaurants carry fixed costs associated with management, overhead, real estate and other such costs. Thus, if they have a breakfast offering, they can spread these overhead costs around, so that they are a smaller portion of each menu item sold.

5. McDonald's have diversified in two ways. The first is that the company has focused on economies of scope. The company has diversified its menu offerings, adding at various points in its history pizzas, salads and breakfast items in order to capture a greater share of the quick service business. The company has long been geographically diversified. While the U.S. remains the core market, McDonald's has a strong presence in dozens of international markets. In addition, the company has recently embarked on a diversification program by adding new brands such as Chipotle and Pret a Manger to the company. By owning more quick service properties, McDonalds believes that it can, as a corporation, capture some of the quick service market that it cannot capture within the framework of the core McDonalds brand.

6. McDonalds typically competes as a cost leader with its core restaurant offering. It is diversified somewhat with its brand but the basic offerings -- hamburgers, fries, etc. -- are shared by a significant portion of its quick service competitors. The McCafe offering is expected to also be a cost leader, but at a higher quality level than the company's main competitor in the cost leader category, Tim Horton's.

This can be shown in a product positioning diagram that uses Porter's generic strategies as its axes.

7. McDonalds should handle threats to its competitive positioning in Burlington by besting the competition. This is congruent with the company's mission statement vision of being the best quick service experience. In this situation, the major competitive threat is in the coffee/breakfast sphere. Most of the other McDonalds offerings are either 'stars' or 'cash cows', but breakfast is a relatively low market share proposition. Yet, having a strong breakfast business is essential to achieving economies of scope. For McDonald's to win in breakfast, it needs to tackle Tim Horton's head on. This means using the company's economies of scale to deliver a superior breakfast/coffee offering at a comparable price. If McDonalds can essentially undercut Tim Horton's with higher quality, it will be able to win back some of the market share that it has lost.

8. The strategy, using the five parts of the strategy diamond, should look something like this. The arena is Burlington, and McDonalds may wish to have more locations in order to match the sort of saturation that Tim Horton's generally has in southern Ontario. The vehicle for the competition will be the McCafe concept, along with higher-end coffee equipment that will allow for a superior product offering. The differentiator will be the casual nature of the coffee bar, combined with the superior product/price combination relative to Tim Horton's. The staging is simple -- the McCafe will be an adjunct to the regular store, and will be rolled out simultaneously at all Burlington McDonald's. The pacing will therefore be rapid and aggressive.

9. McCafe in Burlington will have the following value chain:

Inbound Logistics

Operations

Outbound Logistics

Marketing

Service

Source better coffee, equipment;

Staff training;

Design of McCafe interior; improved breakfast offerings

Rapid production;

Foster casual atmosphere;

McCafe drive-thru option; rapid delivery of product; build more locations to better saturate the market

Local ad campaigns; promotions; leverage the captive lunch and dinner audiences with strong in-house promotion

Allow customers to linger at the McCafe; Coffeehouse service level, better than usual quick service