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Organizational Decision-Making: McDonald's Reevaluation of its Market Position

McDonald's is one of the most famous brand names in the world. Children can recognize Ronald McDonald as easily as Santa Claus, at least according to the 2004 anti-McDonald's documentary "Supersize Me." Regardless of whether a consumer approves of its product, its health claims, or influence on the buying (or nagging) power of children, the name of Ronald McDonald is instant recognizable in virtually every country where the restaurant is located, thanks to corporate advertising and promotional power. The name of McDonald's is synonymous with standardization, and if a customer walks into one of its more than 30,000 restaurants in over 119 countries, serving around 50 million people every day, it is assumed that the quality of that burger speaks for the quality of all McDonald's burgers, for better or worse ("McDonald's," Business Case Studies, the Times 100). Thus quality control of all of its restaurants is particularly important for the fast food chain.

So why were people quoting Mel Brooks, saying: "It's good to be the king, during the 1990s 'Burger Wars'? Because it seemed like it was good to be Burger King, not McDonald's. The once-secondary fast food company's star seemed to be ascending rapidly in the highly competitive and fickle restaurant industry. Long before the current criticism inflicted upon McDonald's, the bad publicity the company generated because lawsuits about childhood obesity, and the popularity of the documentary "Supersize Me," McDonald's found itself in a state of financial distress, facing a public relations debacle -- Burger King's hamburgers were beating McDonald's in blind taste tests. In some ways, this controversy was even worse than the concerns about fast food harming consumer's health. Taste, after all, and convenience, is why people patronize fast food restaurants, health worries aside. And in 1996, the New York Times reported the McDonald Company's chief operating officer, Thomas W. Glasgow Jr., had great concern about its franchisees' belief that the food and food preparation techniques were sorely lacking. Franchisers complained that the policies they had to use food preparation were inefficient and damaged the quality of the product ("Changes at McDonald's after taste test," 1996).

In the 1990s, the company's share of the hamburger business in the United States had fallen by one-tenth of a percentage point, to 42.2%, while rival Burger King's portion had surged to 19.4% from 18.2%. Wendy's share of the market had increased 11.3% from 10.7% (Canedy 1998). While McDonald's was still the brand name to beat, and the Big Mac was the burger of choice of most consumers, the company's promise of absolute quality control meant that the poor performance of even some stores could impact sales nation, perhaps world-wide. Furthermore, the fickleness of the industry, the youthful and easily swayed fast food demographic, and the high overhead costs of running a restaurant also meant Burger King's sales figures could not be ignored, as a new generation of Whopper-loving consumers might be created, and the high turnover necessary to make a profit at a restaurant could be permanently damaged for the chain that boasted of serving billions and billons of consumers beneath its golden arches.

Decision Making

McDonald's tried to stay ahead by looking at what made the competitions so successful, particularly in the way that Burger King delivered its hamburgers to its customers, by 'making it' the customer's way. At Burger Kings, demand drove hamburger production, as each hamburger was assembled to the customer's order as it came in. At McDonald's, demand during peak periods was anticipated, and then the burgers were 'held' under heat lamps until there was an order. If the burgers were held too long, they were then discarded. The advantage to the McDonald's system was quickness and ease -- hamburgers could be produced when there were few customers, and fewer employees were needed to assemble the burgers, as they were not done to order. The downside, however, was food waste and the decline in the quality of the food items over time (Canedy 1998). And because of poor quality control, even this was lacking: "the quality and speed of service is," one independent 'secret shopper' firm found, to be unacceptable in many restaurants: "with only three customers at the counter, an order for a single Extra Value Meal took more than seven minutes to fill," at one McDonald's because the waiting burgers were deemed to be inedible (Barett, 2001). This was clearly unacceptable for the restaurant built on the "15-second burger" concept of good service, honed at Hamburger Universities all over the nation (Barett, 2001).

The eventual decision at the top level of McDonald's management was to change the burger-making process. The first innovation it pursued to compete with Burger King was generating the "Made for You" approach. The key element of the "Made for You" approach was keeping the bread, lettuce, onions, and all other sandwich add-ons separate from the meat until the very last minute of the customer's orders. In the previous procedure, the sandwich meat and toppings were assembled at the same time on a bun and kept warm beneath a heat lamp. All of the components were microwaved just before serving. But with the "Made for You" approach the cooked meat was kept warm by itself, and once an order came in, it was placed with fresh ingredients on toasted bread and put on a tray -- bypassing the need to microwave the entire sandwich (Canedy 1998).

Not only did the sandwiches taste fresher under the new "Made for You" method but because personalized requests were now built into the ordering system, the customers could ask the servers to 'hold the pickles' or ketchup without having to wait longer than their fellow diners ordering them the usual way. But instituting this shift was costly. Because these changes were in response to franchiser's concerns, and because it would ultimately be beneficial to franchisers because of increased sales and lower food waste costs, McDonald's agreed to assume only half of the cost of the change $190 million, and required franchisees to assume the other half, beginning with a test case of 600 kitchens and moving onto other kitchens year after year (Canedy 1998).

Franchisers may have disliked assuming the cost, but McDonald's was willing to place rigorous demands upon McDonald's owners, because owning a restaurant in the chain was still highly desirable. The initiative was specifically designed to bolster the company's position in the American market, which was already supersaturated (no pun intended) with stores, and facing competition from new chains.

The company actually wanted to discourage opening new stores, and focused instead on the "Made for You" approach. The approach had" to be the centerpiece of the growth in the U.S. business because I don't think it's practical to get growth solely out of new stores," said McDonald's CEO, "I think sales momentum, the changes we made, the trust and confidence of the operators, all that combined over the last several months has given people a better feeling about the U.S. business" (Canedy 1998). McDonald's tremendous growth based upon franchise expansion alone "could only continue for so long. Its average annual return on equity was 25.2% between 1965 and 1991. But the company found its sales per unit slowing between 1990 and 1991. In addition, McDonald's share of the quick service market fell from 18.7% in 1985 to 16.6% in 1991" ("McDonald's Case Study," 2008).

Growth in the quick service market was projected to only keep pace with inflation in the 1990, but the company estimated that the "Made for You" system would increase same-store sales by at least 1.2% and save as much as $100 million a year in input costs because only the prepared meat would need to be discarded, not whole, assembled sandwiches (Canedy 1998). An initial decline in profits was anticipated as servers were retrained in the new system, and managers and franchise owners were trained on how to manage the new approach to maximize value. Also, to support the "Made for You" system, the company had to introduce costly technological changes as well to every franchise. It developed a fast-acting browning toaster that could brown hamburger buns in 11 seconds instead of 30, and the buns were changed so that they could withstand the higher temperatures. Cabinets with controlled temperatures and humidity levels were added to minimize the need to use microwaves. Employee assembly was also streamlined: "someone even figured out that workers could save two seconds if condiment containers were repositioned to apply mustard to sandwiches with one motion instead of two" (Canedy 1998). It was hoped the increased efficiency and spike in demand would make up the added cost to the company and the franchise owners.

In addition to introducing these new standard operating procedures for burger creation, the company also introduced new menu items. McDonald's, once again looking to its rival's success, tested "a burger it calls the Big Extra that looks and tastes surprisingly like a Whopper...after Burger King introduced the Big King a burger that consumers would be hard pressed to distinguish from a Big Mac" (Canedy 1998). After all, the company rationalized that new menu items had always been a part of McDonald's innovative image, and keeping on the cutting edge of restaurant trends, as had been the case with the introduction of its innovative breakfast sandwich items like the Egg McMuffin in 1976 and Chicken McNuggets in 1980 ("McDonald's Case Study,"2008).

Effectiveness of the Decision-Making Process

One problem with initiating changes like the "Made for You" campaign in the fast food industry is that customers are not always cognizant that the changes have occurred, as they are not usually connoisseurs of the food, only apprehending vaguely a decline or improvement in quality. "It seems a little bit better," observed one consumer when prompted by a reporter, noting "the bacon looks like it's just been cooked." Another frequent McDonald's patron was more complementary: "it seems like the Quarter Pounder is juicier," declared Rosemary Frigo, a nurse from Downers Grove, Ill., as she devoured an Extra Value Meal at the McDonald's in nearby Darien. 'The Quarter Pounder used to be thrown in the microwave sometimes and they would overcook the meat,' she added" (Canedy 1998). Still, there was the embarrassment of the similarity to Burger King's famous slogan that customers could 'have it their way,' a problem not apparently anticipated in McDonald's harmonious decision-making process (most of the top level management had agreed to undertake the change without much debate). Upon the "Made for You" campaign launch, Burger King crowed "that in letting customers choose their trimmings," McDonald's has essentially adopted the approach that it has long touted under its slogan, "Have it your way" and Burger King spokespersons openly forecasted that the new campaign would generate unintended publicity for Burger King, not cause customers to return to McDonald's (Canedy 1998).

Yet McDonald's brand proved more durable than Burger King would like to have believed. Food cost savings came even swifter than expected -- at one Manhattan McDonald's, food wastage costs "declined by about $100 a month" while sales increased 7% in the year that the outlet has been using the new system. Less successful in the new campaign were the new menu items based upon the competition. The lesson learned was this: customers did not notice or care that the new delivery and assembly model was inspired by Burger King. However, they did care if the new menu items seemed like imitations of Burger King originals like the Whopper and did not 'bite' at the new offerings, wisely thinking that they would go to the original source, rather than sample McDonald's knock-off. Unlike the truly innovative Egg McMuffin, which brought hot breakfasts to a once breakfast-phobic, cereal eating nation, the Whopper imitation fell flat. There was nothing new about the Big Extra's taste or presentation, fundamentally, unlike the earlier introduction of Chicken McNuggets. Interestingly, when Burger King created a burger with mayonnaise to challenge the Big Mac's ascendency on the front of 'special sauce' or mayo-laded burgers, it was also ignored by Burger King and McDonald's loyalists alike (Canady 1998).

Reflect on your own decision-making process

The lessons of McDonald's may seem to be contradictory -- McDonald's gained a huge payoff and competitive advantage, instituted substantial savings, and experienced less difficulties than anticipated with a 'pull' generated system of hamburger assembling, driven by demand, rather than its usual push system which anticipated demand and held the burgers for too long. Yet its other imitated decision, inspired by Burger King, to introduce new menu offerings similar to that of its rival did little to rehabilitate the company's fortunes. Why? McDonald's had to remain true to itself, to its expected offerings and to its image of offering good-tasting, fast food Learning from Burger King's supply chain did not impinge upon McDonald's brand integrity, shamelessly copying the Whopper did.