An External and Internal Analysis of McDonald’s Corporation

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Executive Summary

The present paper conducts an external and internal analysis of McDonald’s corporation to identify strategic issues that can influence the financial performance of the company in the future. The analysis demonstrates that the company will experience uncertainty in the nearest future due to rising awareness of the environmental problems and growing concern about healthy eating. The company needs to reimagine its supply chain management structure and marketing campaign to address the problems in the nearest future to avoid escalation of the problem.

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Introduction

McDonald’s corporation owns the largest fast-food restaurant chain in the world. It has almost 39,000 restaurants around the globe that generate more than $21 billion in revenues every year (Yahoo Finance, 2020). After experiencing the first quarterly loss in history in 2002, the company changed its attitude towards operations, marketing, and innovation to achieve financial success. However, despite internal perfection, the company is experiencing significant external threats that should be addressed to improve the company’s performance. The present case analysis claims that the company’s management needs to address these problems at the earliest convenience to avoid escalation.

External Analysis

Porter’s Five Forces

Current Rivalry: Opportunities

The fast-food industry is expected to grow between 2020 and 2027 due for various reasons. According to BusinessWire (2020), the global value of the fast-food industry is expected to grow from $647.7 billion in 2019 to $931.7 billion in 2027 with a CAGR of 4.6% despite the COVID-19 pandemic. The central drivers for success are increased demand for international meals, a rise in the number of working women, and tech-savvy ordering options (BusinessWire, 2020). Thus, Mcdonald’s can exploit this industry growth to increase its revenues worldwide.

Current Rivalry: Threats

The competition in the sector is hectic, as more fast-food giants establish their operations in emerging markets to compete with McDonald’s. According to BusinessWire (2020), Burger King, Wendy’s, Subway, Dunkin’ Donuts, and Domino’s have been establishing their brands around the world to offset McDonald’s. Additionally, local restaurants also compete for the market share in the industry.

Potential Entrants: Opportunities

McDonald’s can offer lower prices in comparison with local fast food and family restaurants due to its operations tailored to perfection. McDonald’s can offer very lower prices for meals, cleaner restaurants, fast service, and entertainment, such as R Gyms and playgrounds. Thus, new entrants will find it difficult to compete in terms of price and value.

Potential Entrants: Threats

Even though potential entrants can compete with McDonald’s in terms of prices, there is still a high chance of the emergence of new entrants. Thousands of local competitors appear around the globe every year. These new entrants can offer new formats of dining, which can attract customers. Additionally, fast food industry giants are starting to enter emerging markets, which can also decrease the company’s market share.

Bargaining Power of Customers: Opportunities

The company offers free leisure options, such as playgrounds and R Gyms, so that families often prefer McDonald’s to its competitors. Additionally, McDonald’s started to offer healthier food options to display its care for the customers. These facts can be the basis for establishing loyalty to the brand.

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Bargaining Power of Customers: Threats

The switching cost is low, while the availability of providers is high. This implies that in the cases of small failures, the company may suffer significant outflow of clients (Greenspan, 2018). A strong customer relationship strategy is needed to offset these threats.

Bargaining Power of Suppliers: Opportunities

McDonald’s is a strategic customer for the majority of the suppliers due to its prestige and volume of orders. Moreover, there is high availability of suppliers, while their vertical integration is low (Greenspan, 2018). Hence, suppliers have the low bargaining power to influence McDonald’s operations.

Bargaining Power of Suppliers: Threats

No identified threats are associated with the bargaining power of suppliers.

Substitute Products: Opportunities

The company is planning to start selling plant-based burgers, which are expected to help the restaurant chain attract vegans and vegetarians (Golluci, 2020). This product can help the company to substitute vegetarian restaurants.

Substitute Products: Threats

The services offered by McDonald’s can be substituted by a wide variety of products. According to Greenspan (2018), the threat of substitution is the strongest force affecting the company, as customers may decide to turn to other fast food options, such as sushi, pizza, Mexican food, Chinese food, or non-fast food restaurants.

PESTLE Analysis

Political Politicians often target the fast food industry and McDonald’s in particular for the initiative in reducing cardiovascular diseases and obesity (Heng, 2018). This can affect the profit margin of the company in countries with heavy regulations against unhealthy food.
Economic The COVID-19 pandemic and associated economic crisis have not affected McDonald’s financial performance, as many people turned from expensive dining options to cheap fast-food restaurants (BusinessWire, 2020). A similar situation happened during the economic crisis of 2008 when the fast-food industry flourished despite the economically unfavorable environment (Heng, 2018).
Social McDonald’s is one of the most appreciated brands in the world due to its relationships with wider society. However, global society is becoming increasingly health-conscious, viewing fast food as a cause of obesity and cardiovascular diseases. Additionally, society views McDonald’s as a reason for environmental problems, as aggressive cattle farming leads to inadequate soil use (Golluci, 2020).
Technological The company has adopted the technology of digital marketing and Big Data analysis to ensure the best profitability. The company tracks customer data carefully, which helps to alter prices faster to optimize sales.
Legal The recent increase in minimal wages in the US is a considerable threat to McDonald’s, as it can affect the most profitable market of the company. According to Heng (2018), the minimum wage in California will grow to $15 per hour, and other states will soon follow.
Environmental The majority of beef used by McDonald’s is produced in the deforested areas of Amazonia (Heng, 2018). This often leads to problems with society, as it becomes more environmentally conscious. Thus, the company needs to change to sustainable sources of supplies.

Internal Analysis

Strategic Management

Strategic management is one of the company’s strengths, as it has been implementing its Plan to Win initiative successfully since 2003. The company’s strategy is based on three major components, which are crucial for financial success. First, McDonald’s focuses on operational management with a back-to-basics approach, which ensures the best efficiency and effectiveness of the supply chain and provision of services. Second, the company aims at taking the leadership position in marketing, which can ensure the best brand performance and customer awareness. It promotes a unified brand image around the world, which is crucial in the environment of globalization. Finally, McDonald’s places an increased focus on innovation in all spheres, which can improve the performance of the company in all spheres.

Corporate Structure

McDonald’s has a unique corporate structure, which helps to ensure its steady growth in all the target markets. According to Thomson (2019), there are three distinct features of the company’s corporate structure based on global hierarchy, performance-based divisions, and functional-based groups. The latest innovation was the emergence of performance-based divisions in 2015, which change the geographic-based divisions. Thus, the company divides its markets into the US, International Lead Markets, High Growth Markets, and Foundational Markets and Corporate (Thomson, 2019). Such divisions help to acknowledge the characteristics of markets instead of their geographical location, which improves the corporate strategy choices.

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Corporate Culture

Of McDonald’s central benefits in its corporate culture is taking care of its people. The central belief of the company is that only satisfied employees can bring satisfaction to the customers. Thus, McDonald’s makes significant investments in the development of its staff. In the 2000s, McDonald’s was criticized for having dead-end jobs, which is no longer the case. McDonald’s is making sure that all the employees have a comprehensive career ladder to encourage improvement. Even CEO Skinner joined the company as a manager trainee. Thus, the company’s corporate culture supports the development of the staff, which is a significant strength.

Operations

The company’s operations work at its maximum efficiency due to placing an increased focus on operations on all levels. CEO Skinner continues Jim Cantalupo’s focus on the basics, such as clean restaurants, fast service, and hot food. The company is extremely customer-centric, which encourages it to build around the customers’ wants and desires, which is a significant strength in the competitive industries. McDonald’s continuously collects information using Big Data technologies, which allows it to react quickly to fluctuations in sales or quality of service. Finally, the company is dedicated to energy efficiency and a reliable supply chain, which allows it to provide high-quality food at predictable prices. The analysis of the case scenario and literature revealed no significant weaknesses in operations.

Marketing

McDonald’s marketing strategy is also tailored to perfection, as it is one of the central focuses of the corporate strategy. The company’s slogan “I’m lovin’ it” is known in almost every country without translation. At the beginning of the 2010s, the company was among the top-valued brands due to its unified approach to marketing. The central feature of the marketing campaign is to use real stories and real people in advertising. Apart from traditional marketing tools and internet marketing, McDonald’s is famous for varying the menu according to the local tastes, which allows it to connect with people. Thus, McDonald’s marketing campaign has a global commitment but a local approach. The central problem with marketing is that McDonald’s products are frequently attacked as the symbol of unhealthy eating. Thus, the company needs to address its weakness to improve its marketing campaign success.

R&D

Innovation is one of the central values of McDonald’s corporation. Thus, the company makes significant investments in R&D to address the needs of its customers. In particular, the company spends money on Big Data technologies to improve operational control. Additionally, McDonald’s investments in the development of new menus, such as vegan burgers, Ebi Filet-O, and McArabia (Golluci, 2020). There are no identified weaknesses in the company’s R&D strategy.

Human Resources

The major advantage of McDonald’s HR strategy is the commitment to developing the employees. All the workers on all levels know their opportunities from the moment of their recruitment. The company is known to have provided hundreds of thousands of jobs in the US and abroad, helping young people to earn their first salary. However, the company suffers from increased turnover, as almost 100% of frontline employees quit their job in one year.

Information System

The company uses its IT potential at its maximum through Big Data analysis and internet marketing. McDonald’s promotes self-service using mobile applications, and self-service stands to improve the efficiency of operations. Such innovations are a signal about the effectiveness of the company’s IT. No significant weaknesses were identified during the analysis.

Financial Analysis

The financial analysis of the company is provided in Table 1 below. According to the analysis, there are several weaknesses that can be identified in McDonald’s financial position. First, the company has been experiencing a significant decline in the efficiency of operations, as the asset turnover ratio has been declining for the past three years. This implies that the company should improve its management of assets in the nearest future.

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Second, the company has a debt-to-assets (D/A) ratio of above 1, which demonstrates that the stockholders’ equity is negative. It is a crucial problem, as it affects long-term performance, as the company may find it difficult to operate during the recession periods. Finally, the company’s liquidity has been dropping consistently during the past three years, which may lead to the company’s inability to cover its current debt payments. However, it should be noticed that even though McDonald’s revenues were relatively stable during the past three years, it managed to improve its profitability, which can be seen in a steady growth of the net profit margin.

Table 1. McDonald’s selected financial data (in thousands) and ratios.

Selected Financial Data
2019 2018 2017
Total Revenue $21,076,500 $21,025,200 $22,820,400
Net Income $6,025,400 $5,924,300 $5,192,300
Total Assets $47,510,800 $32,811,200 $33,803,700
Total Labilities $55,721,100 $39,069,600 $37,071,700
Current Assets $3,557,900 $4,053,200 $4,053,200
Current Liabilities $3,621,000 $2,973,500 $2,890,600
Ratios
Net Profit Margin 0.29 0.28 0.23
Asset Turnover Ratio 0.52 0.63 0.70
Debt-to-Assets Ratio 1.17 1.19 1.10
Current Ratio 0.98 1.36 1.40

While the financial analysis provided above is based on reliable data taken from a reputable website, there are some limits to the analysis that should be acknowledged. First, the information is based on the standards of accounting, which do not take into consideration of the current market situation when assessing the value of assets (Elliot & Elliot, 2019). Second, the assessment of intangible assets may be heavily biased, as it is based upon individual judgment and numerous assumptions (Elliot & Elliot, 2019). Finally, the financial performance needs to be compared with its competitors to acquire a full understanding of the current situation.

Strategic Issues

Strategic Issue I: Increasing Health Concern

Identifying the Issue

McDonald’s corporation is forced to deal with attacks from all entities, as its food is considered unhealthy. In particular, the company is experiencing political pressure from governments with high regulation standards, such as in Europe or Arabic countries. Additionally, society views McDonald’s products as a source of fat, sodium, and processed products, which can harm people’s health.

Justification

McDonald’s image of an unhealthy food choice harms the company’s profitability. The profitability of the company in the US is higher than in European countries, as it is forced to comply with healthy food policies (Heng, 2018). Moreover, the company may lose its customers, as many people decide to turn to healthier dining options, such as local family restaurants (Heng, 2018). This tendency can be especially harmful after the economic crisis associated with the COVID-19 pandemic is over, as people will be able to choose more expensive restaurants. Therefore, the company needs to address the problem of unhealthy food image in the nearest future.

Strategic Issue II: Growing Environmental Awareness

Identifying the Issue

Currently, governments, non-governmental organizations, and communities express significant concerns about global environmental problems, including climate change, pollution, plastic contamination, deforestation, and loss of natural habitat. The push towards sustainable development affects the company, as the majority of beef is received from the deforested areas of Amazonia. Moreover, the company utilizes single-use plastic for packaging purposes, which contributes to the global waste management problem.

Justification

Growing environmental concern contributes to the overall uncertainty of the outside environment, which was described in the external analysis. As seen from the financial analysis, McDonald’s has a low tolerance to economic downturns due to a high level of financial leverage. The company may be affected by policies and negative perception of the public, as it uses a non-sustainable supply chain. This can decrease the company’s revenues and increase expenses to comply with government regulations. The problem is growing every year, as society is becoming increasingly aware of global environmental problems.

Strategic Alternatives

Strategic Alternatives to Issue I

Alternative 1

  • What: McDonald’s can invest in lobbying for laws that decrease regulation in the food industry. This can increase the profitability of high-regulation regions.
  • How: The company needs to hire an outside company that will research all the relevant laws and issues and influence the right people in the governments.
  • Who: The process will be conducted by lobbyists from an outside company.
  • When: This alternative needs to be implemented at the earliest convenience, as the governments are currently busy fighting against the COVID-19 pandemic, which requires additional funding from private investors.
  • Where: The alternative should be implemented in regions of high regulations, including Europe and Arabic countries.

Alternative 2

  • What: McDonald’s needs to start a rebranding process to acquire an image of a healthy food provider.
  • How: The rebranding process needs to start from basics, such as the slogan “I’m lovin’ it.” Currently, the slogan appeals to the desire for pleasure, which is associated with the culture of consumerism. The new marketing campaign should feature health as the primary concern.
  • Who: The marketing team will be responsible for the planning and implementation of the alternative.
  • When: The alternative needs to be implemented after the annual report for FY2020 is out to exclude problems with financial performance. However, the planning process can start immediately.
  • Where: The alternative should be implemented in all regions simultaneously to comply with the company’s strategic marketing principles.

Strategic Alternatives to Issue II

Alternative 1

  • What: The company can continue to improve the efficiency of operations to mitigate the possible issues with profitability from addressing environmental concerns.
  • How: This can be achieved by additional investments in process control and Big Data analysis.
  • Who: Top managers will lead the process of operational perfection.
  • When: This alternative needs to be implemented immediately.
  • Where: All regions should be involved in the modernization.

Alternative 2

  • What: McDonald’s should turn to a sustainable supply chain and initiate a marketing campaign that features the changes.
  • How: The process should start from basics, such as single-use packaging, and build up to the highest level of organization.
  • Who: Top management and the marketing team will be responsible for the change. The alternative will touch every employee of the company.
  • When: The alternative needs to be implemented after the annual report for FY2020 is out to exclude problems with financial performance. However, the planning process can start immediately.
  • Where: The alternative should be implemented in all regions simultaneously to comply with the corporate principles.

Recommendations

McDonald’s should seek to implement the second alternatives for both of the identified strategic issues. For Strategic Issue I, investment in lobbying may be associated with significant risks associated with legal problems and corporate image. Additionally, investment in the option does not address the problem of social concern about healthy food. For Strategic Issue II, the first alternative does not guarantee success, as the company is already working at almost maximum efficiency. Moreover, the coming changes in minimum wages will influence the profitability of the company, which implies that it cannot afford a decrease in revenues.

It should be acknowledged that changes in the marketing campaign and the supply chain can cause significant fluctuations in the company’s performance, which can be challenging to predict. Additionally, both initiatives are associated with significant financial investments, which will need to be financed using debt. Since McDonald’s is highly leveraged, additional debt can destabilize the company. However, the company can address both problems simultaneously by moderating the marketing strategy to create an image of the company that is both environment-friendly and healthy.

Implementation

Changes in the Supply Chain

McDonald’s will need to use all the products from the local suppliers to decrease the impact on the environment. Additionally, it will need to find suppliers of recyclable materials for disposable tableware and packaging. The restaurants should also start separate waste collection and start to recycle all the waste by partnering with local plants. When implementing the change, the company should realize that the bargaining power of suppliers will increase; however, the increase will not be dramatic. This fact should be used during the negotiations.

Changes in the Marketing Campaign

McDonald’s should rework the marketing campaign to feature the new sustainable and healthy image of the country. Regretfully, the current slogan will need to change, as it is associated with unhealthy eating and the destruction of forests. The company may also consider adding green as an additional corporate color. In general, the marketing team will need to rework the marketing strategy from scratch following the process first established by Jim Cantalupo in 2003.

Funding

The company will need to finance the changes using debt, as issuing additional shares may cause significant problems with investment performance. Currently, the company’s stock is extremely overvalued, which is a source of uncertainty. Thus, even though the company’s financial leverage is high and liquidity is low, McDonald’s will need to risk increasing its long-term liabilities, diminishing its equity.

Conclusion

Even though McDonald’s is an extremely efficient company with low internal risks, the company is exposed to significant pressure from the outside. In particular, the company needs to manage many political, social, legal, and environmental uncertainties. The two central issues it will need to address are growing environmental awareness and rising health concerns. McDonald’s needs to rework its marketing campaign and reimagine the supply chain management to address these two problems together. The implementation of the strategic changes to start at the earliest convenience to decrease the chances of escalation of the problems.

References

BusinessWire. (2020). Fast food industry analysis and forecast 2020-2027. Web.

Elliott, B., & Elliott, J. (2019). Financial accounting and reporting (19th ed.). London, UK: Pearson.

Golluci, N. (2020). McDonald’s announces a new plant-based burger and they named it the McPlant. Mashable. Web.

Greenspan, R. (2018). McDonald’s PESTEL/PESTLE analysis & recommendations. Panmore Institute. Web.

Heng, L. (2018). McDonald’s Inc. business strategies. Web.

Thomson, A. (2019). McDonald’s organizational structure & its characteristics – An analysis. Panmore Institute. Web.

Yahoo Finance. (2020). McDonald’s Corporation. Web.

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