McDonald's Value Chain and Cost Structure Analysis

Introduction to the Value Chain Concept

The concept of the value chain is helpful in understanding how business organizations create or lose value across their various activities and operations. This is primarily because the value chain is based on the economic principle of competitive advantage over rivals. Business organizations are considered successful when they operate in segments where they have a relatively productive advantage compared to others within the same industry. The significance of the value chain in an organization's competitive and productive advantage lies in the fact that it incorporates a series of activities relating to developing, manufacturing, marketing, and distributing products. An example of a company that has achieved tremendous competitive advantage over its rivals through effective value chain practices is McDonald's Corporation.

Components of McDonald's Cost Structure

The growth and development of McDonald's Corporation has been characterized by a widespread reputation for its value proposition. This value proposition is based on the consistent provision of quality food served quickly across all its restaurants worldwide. The value proposition is largely supported by the corporation's cost structure, which is composed of restaurant costs, marketing costs, and costs associated with raw materials procurement. In addition to generating revenues through its fully-owned restaurants, the company also obtains revenues from fast-food chains owned by franchise holders.

Generally, McDonald's cost structure is relatively similar to the industry average, as evident in the sector's cost breakdown (Nair, 2013). The largest component of McDonald's cost structure is raw materials or purchases, followed by labor. The other components in this cost structure are rent and utilities, depreciation, marketing, and miscellaneous costs, respectively. As noted, the company's cost structure relative to its supply or value chain is similar to that of the fast-food industry as a whole. However, the corporation's pricing strategy follows a geographic structure, which is the basis of its business model. This is influenced by the organization's efforts to offer its products and services at value-driven prices to customers in a competitive manner. Based on this analysis, the major components of McDonald's cost structure in order are raw materials or purchases, labor, rent and utilities, depreciation, and marketing.

McDonald's Value Chain in Relation to Cost Structure

McDonald's Corporation is renowned as the leading fast-food retailer worldwide, having achieved tremendous success and profitability across all its operations. The company's success is reflected in its huge customer base and reputation for excellent customer service and suitable food offerings. The rapid growth and development of the corporation has contributed to its status as an epitome of globalization, especially in relation to its various success factors.

At the heart of McDonald's success is a suitable value chain process dependent on primary and support activities. These primary and support activities form part of the corporation's distinctive strategy that helps generate competitive advantage over its rivals. According to Thompson, Peteraf, Gamble, and Strickland III (2015), a creative, unique competitive strategy is one where a business organization distinguishes itself from competitors and generates competitive advantage reflected in strong profits (p. 6). McDonald's Corporation, through its primary and support activities in the value chain, has demonstrated a creative and distinctive competitive advantage. There are two major categories of value chain activities in the fast-food industry and in McDonald's Corporation: primary activities and supportive activities.

Primary Value Chain Activities

The primary activities in McDonald's value chain include inbound logistics, operations, outbound logistics, marketing and sales, and service. With regard to inbound logistics, the corporation purchases raw materials from pre-determined suppliers only. Although the company has practiced backward vertical integration in relation to its supply chain, an increase in its capital and labor results in a corresponding increase in production. The use of this strategy in the supply chain is geared toward reducing costs and ensuring the production of high-quality food products (Sharma, 2014).

In relation to operations, the business organization has continually refined its design for quickly manufactured, high-quality products. Despite these improvements in design, the corporation's food quality has at times declined and service has become slow in certain locations, which demonstrates a lack of consistency across the firm's restaurants (Cantalupo, n.d.).

McDonald's outbound logistics is devoted to offering the highest quality food accompanied by excellent customer service in a customer-friendly environment. Consequently, the organization ensures collaboration among workers, franchisees, and suppliers to provide high-quality food options and to help customers make effective decisions.

The corporation's marketing and sales activities are characterized by the use and maintenance of a comprehensive advertising campaign that has contributed to a huge customer base. The firm utilizes not only conventional media but also new media as part of its advertising strategy.

The final primary activity in McDonald's value chain that relates to its cost structure is service, through which the organization provides additional offerings to customers. Key examples of additional services provided by McDonald's include free Wi-Fi and a Gift Card program.

Conclusion

The success and increased profitability of McDonald's Corporation since its inception is attributable to sound business practices and effective value chain activities. Based on its primary and supportive activities in the value chain, the company's major cost structure components include raw materials, labor, rent and utilities, depreciation, and marketing — a profile that is relatively similar to the fast-food industry's overall cost structure.

References

Cantalupo, J. R. (n.d.). McDonald's teaching note. McGraw-Hill Education.

Etienne, E. C. (2012). Dimensions of global operations strategy in service business: A value-chain-based analysis. International Journal of Applied Operations Management, 1(1), 1–18.

Nair, S. (2013). Wage wars: McDonald's stubborn cost structure. Yahoo Finance.

Sharma, D. B. (2014). Value chain analysis. SlideShare.

Thompson, A., Peteraf, M., Gamble, J., & Strickland III, A. J. (2015). Crafting & executing strategy: The quest for competitive advantage: Concepts and cases (20th ed.). McGraw-Hill Education.