McDonald’s:All Day Breakfast, A Hero's

Journey

By: Elliot Mar, Erica Lindstrom, Nam Bui, Phillip Lam, and Will Fung

Strategic Analysis - MGMT 3519Winter 2016Page for WSJ Article

Table of ContentsExecutive Summary.......................................................................................................................4

Background (Introduction).............................................................................................................1

Scope of Analysis..........................................................................................................................4

External Analysis...........................................................................................................................5

Macroeconomic Trends:............................................................................................................6

U.S Economy..........................................................................................................................6

Government Policies..............................................................................................................7

Consumer Trends...................................................................................................................8

Technological Change............................................................................................................9

Industry Definition: Fast Food....................................................................................................9

Industry Lifecycle.....................................................................................................................10

Porter’s Six Forces Analysis of the Fast Food Industry...........................................................13

Threat of Rivalry...................................................................................................................13

Power of Buyers...................................................................................................................14

Threat of Substitutes............................................................................................................14

Threat of Entry......................................................................................................................15

Power of Suppliers...............................................................................................................15

Influence of Complements....................................................................................................16

Key Competitors.......................................................................................................................17

External Analysis of Primary Competitors:...........................................................................18

External Analysis of Secondary Competitors:......................................................................22

Internal Analysis..........................................................................................................................24

McDonald’s value chain...........................................................................................................24

Primary Activities..................................................................................................................24

Support Activities..................................................................................................................26

McDonald’s Strategy Diamond................................................................................................28

Arenas..................................................................................................................................28

Vehicles................................................................................................................................28

Differentiation.......................................................................................................................29

Staging.................................................................................................................................29

Economic Logic....................................................................................................................29

McDonald’s Resources and Capabilities.................................................................................31

Financial Position.....................................................................................................................31

Insights and Critical Challenges (AKA SWOT)............................................................................33

Insights:....................................................................................................................................33

Porter’s Three Tests................................................................................................................35

Test 1: The Attractiveness Test............................................................................................35

Test 2: The Cost-of-entry Test.............................................................................................39

Test 3: The Better-off Test...................................................................................................39

Recommendations.......................................................................................................................40

Short-Term Recommendations................................................................................................40

Medium to Long-Term Recommendations...............................................................................41

Create a New Brand “grind.”................................................................................................42

Merger & Acquisition:...........................................................................................................48

Exhibits........................................................................................................................................53

Works Cited.................................................................................................................................71

Table of Illustrations (Figures)

Figure 1: McDonald's Financial Performance (U.S. Market).........................................................4

Figure 2: McDonald's Position in the Industry Lifecycle..............................................................11

Figure 3: Attractiveness of the Fast Food Industry (Porter's 6 Forces).......................................13

Figure 4: Classification of Competitors........................................................................................18

Figure 5: Attractiveness of the Fast Casual Industry (Porter's 6 Forces)....................................36

Figure 6: List of Potential Cities to Launch "grind.".....................................................................44

Figure 7: Depreciation Schedule.................................................................................................46

Figure 8: Store Opening Schedule for "grind."............................................................................47

Figure 9: Forecasted Number of Stores......................................................................................47

Figure 10: DCF Schedule - Base Case.......................................................................................47

Figure 11: DCF Schedule - Optimistic Case................................................................................48

Figure 12: Strategy Diamond For Target Acquisition..................................................................49

Executive Summary

This report analyzes the rippling effects of the downfall McDonald’s began to experience

in 2014 and the attempts made to overcome it. McDonald’s is a household name that has been a

staple in American culture since its creation in 1940. They have experienced trials and

tribulations alongside their success since creation. Recently, McDonald’s made the move to

begin serving breakfast all day in response to overwhelming demand and a need to create change

to overcome their financial downturn. We are taking on the position of consultants hired on by

McDonald’s to analyze the success of their move into the market of all day breakfast and the

necessary next steps to remain relevant and successful.

McDonald's is currently categorized as a fast food restaurant. They have been attempting

to move into fast casual dining, at the behest of changing consumer tastes and health trends.

They focus on cheap, fast, and healthy food served all day. McDonald’s also has a strong

community presence and operates globally. After experiencing a 6.8% decline in sales, McD's

has implemented a substantial change by limiting menu customization and offering breakfast

items all day. These small but drastic changes have had a rippling effect on operations,

performance, and sustainability that we will delve into within this study.

After significant research it has been concluded that the move to all day breakfast was a

success, but not without its challenges. That being said, there is much to expand on to continue

growing within the company and industry. Because of all day breakfast, overall sales in in Q4 of

2015 went up 6%. Fast food as a market segment is dying, though it will not ever disappear

completely as long as people are traveling or have low income needs. Building on the success of

the all-day breakfast rollout, we have recommendations we believe will allow McDonald’s to

exploit successful trends in the future market.

In a short term view we have recommended that McDonald’s continue to strive to be the

health leader in the fast food industry, sourcing ingredients that the public perceives to be more

wholesome and healthier overall. We also suggest they look for more opportunities via

technological trends and social media to appease the public demand, just as they did for all day

breakfast. McDonald’s has already begun, and we recommend they continue, to close down low

performing stores. They will also continue to roll out new seasonal menu items, but we suggest

they leverage social media to allow the public to feed ideas to them so they can come up with

new products at a higher rate.

We have also developed and analyzed a long term goal and recommendation that centers

around making or buying a fast casual entity. Looking at the command and market share

restaurants like Chipotle, Panera, and The Counter, have seized, it is easy to see the next

dominant trend the food industry will experience. We will be analyzing the pros and cons of

starting our own fast casual chain, similar to the one Australia has begun with The Corner, or to

purchase a chain like Shake Shack.

Based on an extensive study of the industry and an internal analysis of both the strengths

and weaknesses of the company, we feel that we have made recommendations that will vastly

improve McDonald’s as a whole.

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Background (Introduction)

McDonald’s is a fast food chain that operates globally as a universally recognized and

standardized restaurant. McDonald’s was founded in 1940 as a car hop barbecue drive-in located

in San Bernardino, California. In 1948, the original barbecue was shut down for renovations and

reopened as McDonald's, a self-service drive in restaurant serving nine standardized items. In

1949, the famous McDonalds french fries were added to the menu to replace chips. In 1954, Ray

Kroc journeyed to McDonald’s originally hoping to sell capital equipment, but walked away

determined to be the new franchising agent. That became a reality in 1955 as Kroc opened the

first franchise in Illinois.

By 1965, there would be over 700 McDonald's locations in the United States. Hamburger

University was opened in 1961 and the standardization of McDonald’s operations processes and

employee training began. In 1962 the first McDonalds with indoor seating was opened in

Denver, Colorado, changing the cultural feel of McDonald’s. In 1965, McDonald's celebrated

their 10th anniversary with an Initial Public Offering (IPO) and began offering stock at $22.50

per share. The first commercial aired in 1966 introducing Ronald McDonald as the face of the

restaurant and a character that all of America would come to know. In 1967, McDonald's opened

its first international location which has since expanded to 119 countries worldwide. The

globally recognized Golden Arches were created in 1969 when McDonald’s went through a

global rebranding. Shortly after the 1969 rebrand, the McDonald’s friends joined McDonaldland

in 1971. A crucial change for the McDonald's brand was when McDonald’s introduced the first

Ronald McDonald House in 1974 as a charity organization to help children.

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Finally, in 1975, the introduction we were all waiting for was made: McDonald's began

serving breakfast. After the introduction of Ronald McDonald there was a call to action to make

the restaurant more children friendly. To cater to a child audience, McDonald’s introduced the

happy meal in 1979. Today McDonald's battles a stigma of being unhealthy. To combat this

stigma, McDonald’s added fresh salads to the menu in 1987. America is known for its obesity

and vast food options. In 1988, McDonald’s was named one of the top 100 American-made

products by Fortune Magazine. McDonalds.com was launched in 1996, creating a media

platform for consumers to view and get involved in worldwide. In 1998, McDonald’s made a

huge directional change by rolling out their Made for You Operating Platform. This allowed

consumers to begin customizing their orders. In 2002, McDonald’s began McHappy day,

designated as world children's day, to help raise money for children everywhere. Since this start

they have raised over $170 million dollars from McHappy day events. In 2003, McDonald’s Plan

to Win was launched as a marketing driven plan that incorporated the 4 P’s: Price, Place,

Product, and Promotion. A global packaging plan was rolled out in 2008 that created a

standardized look for all McDonald’s take out packaging. Today, McDonald’s boasts a brand

value for the year 2015 of $39.8 billion, good for the 9th most valuable in the world.

McDonald’s strives to go beyond what they sell. According to their website, “We’re

using our reach to be a positive force. For our customers. Our people. Our communities. Our

world.” They have operated as more than a fast food restaurant for years now in an attempt to

build better communities and increase their impact on the world. From serving good food,

growing their employees into good people, to being a good neighbor, McDonald’s strives to

empower their communities as they expand their franchise and their brand. “We’re proud of

everything we do. And we’re dedicated to doing more. Evolving alongside our customers.

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Building memories that last a lifetime. And goodwill that lasts forever.” They have created a

successful charity to improve the lives of children and participate in community activities such as

neighborhood clean-up days.

McDonald’s is a fast food restaurant that is optimized to use the repetitive unskilled

actions of its workers to generate consistent, low-cost products that keeps consumers coming

back for more. Due to the maturity of their industry, they are fully aligned with the mission they

have, but now must combat a market that is dying in favor of fast casual dining.

In September of 2015, McDonald’s announced a national rollout to begin in October of

that year to serve breakfast all-day, which is a drastic change as it previously only served

breakfast items from opening until 10:30AM. This followed an announcement in which

McDonald’s is slimming down the menu. After the record low numbers McDonald’s

experienced in 2014, they had a wakeup call that sprung them into action to make changes that

would hopefully improve their financial status and overall image. The decision to move to all-

day breakfast was due to a high demand from the public specifically via social media. There was

a huge outcry via Instagram, Facebook, and most specifically Twitter demanding all-day

breakfast. There have been pointed slights and references that McDonald’s would eventually

serve breakfast all-day ever since 1999, when the movie Big Daddy was released.

Here we are, 6 months later, and there is still social media celebration over the

announcement and availability of the Egg McMuffin. When the movie SuperSize Me came out in

2004, McDonald's reputation took a huge hit and they have been combatting that ever since.

With the recent emergence of fast casual dining options, such as Chipotle and Panera Bread, and

the influx of healthier menus across all fast food locations, McDonald’s has been struggling to

maintain their fast food royalty status. This analysis will delve deep into the struggles

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McDonald's has experienced, the effects this move to all day breakfast has brought about, and a

few potential next steps to give McDonald’s a fighting chance.

Scope of Analysis

With the launch of McDonald’s all-day breakfast currently limited to the U.S. market

(McComb), the scope of the analysis will be focused on the U.S market. Further, the U.S. market

is one of the important markets for McDonald’s, as it holds the largest percentage of global

restaurants at 40%, provides the largest portion of global revenue at 32%, and makes up for a

large share of consolidated operating income at greater than 40% (“Company Profile”). Taking a

closer look at its performance in the U.S. market over the last several years (Figure 1),

McDonald’s financial performance has been in a decline as its rate of growth in sales, revenue,

and operating income have slowed down, evening reaching negative rates. Recently,

McDonald’s has seen some success with U.S. same-store sales rising 5.7% in the fourth quarter

of 2015 (Strom), some of which is attributed to the offering of all-day breakfast.

2010 2011 2012 2013 2014 2015-8

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-4

-2

0

2

4

6

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Financial Performance Trend

% Change in Sales

% Change in Revenue

% Change in Operating Income

Year

Perc

ent (

%)

Figure 1: McDonald's Financial Performance (U.S. Market)

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External Analysis

In our external analysis of McDonald’s and the Limited-Service Restaurant Industry,

there are a few distinctions/assumptions that we will be making. First, there is a vague distinction

between “quick-service” (aka “fast food”) and “fast casual”. As Roberto A. Ferdman captures

the ambiguity of this new category in his article in The Washington Post The Chipotle Effect:

Why America is obsessed with fast casual food, “…the category is only loosely defined at best.

What makes fast casual food fast casual—and not simply fast food? And at what point do we

draw the line between fast casual places and the likes of Applebee's and Chili's, which have table

service, but also takeout? The answer might simply depend on whom you ask.” According to

Technomic, a food industry research and consulting firm, there are 10 markers that differentiate

the fast-casual category: the quality of the food, the use of better ingredients, food that is

wholesome, a perception of freshness, first-rate decor, fair pricing, fast service, friendly

employees, flexible offerings, and a full view of how the food is prepared (Ferdman). We will be

using this criterion when assessing other competitors in the limited-service restaurant space.

Second, the industry classifies the limited-service food chains in segments. Nation’s

Restaurant News, a restaurant industry data and analysis firm, segments the industry into the

following categories; Sandwich, Beverage-Snack, Pizza, Casual Dining, Chicken, and Bakery

Café. Included under the Sandwich segment is Taco Bell, under Yum! Brands Inc. Though some

might not consider their product offering as sandwiches, Taco Bell will be considered a direct

rival during our analysis.

Third, our analysis focuses on the United States and all financial figures pertain to the

U.S., unless otherwise noted. Lastly, our revenue comparison of McDonald’s as a corporation

against its rivals includes revenues generated from its subsidiaries and/or franchisee licensing.

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For example, revenues from Yum! Brand as a corporation will include earnings not only from

Taco Bell, but also KFC and Pizza Hut. We begin our External Analysis by considering the

major macroeconomic trends that have an impact on the fast food industry.

Macroeconomic Trends:

U.S Economy

Following the Great Recession in 2008, the U.S. economy has recovered well. Since

2010, the national Gross Domestic Product (GDP) rate of growth has been positive (“Federal

Reserve…”). U.S capital markets have ridden the bull wave, as the nominal value of the S&P

500 has well exceeded its peak value prior to the 2008 market crash (“Federal Reserve…”). The

U.S. economy has added back millions of jobs since the recession’s lowest point (Diamond), and

the national unemployment rate has drastically reduced to 4.9% from the peak value of 10% in

2009 (“Federal Reserve…”). Recently, economists are starting to reduce their outlook on the

economy, with economists on average predicting a 17% chance of a recession within the next 12

months (Zumbrun). With the Chinese stock market crashing and crude oil prices reaching as low

as $30 per barrel, from which it was previously around $100 per barrel, the outlook on the

economy is not as rosy.

When it comes to the fast food industry, the overall U.S. economy plays a significant

role. With such a large presence in the U.S., fast food restaurants play a large role in the

economy. Specifically, McDonald’s hires about 1 million employees each year and McDonald’s

customers consume around 1 billion pounds of beef each year (Lubin and Badkar). Meats and

vegetables such as beef, chicken, and potatoes, make up the majority of McDonald’s cost of

goods sold. As the cost of these ingredients rise and prices at remain constant, the profit margins

of fast food restaurants are reduced. Not only do fast food restaurants contribute to the economy,

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but also the state of the economy tends to have an impact on the revenues of fast food

restaurants. During recessions, consumers tend to reduce their spending, and cheaper meals

offered by fast food restaurants become more appealing in those economic times.

Government Policies

Government policies also have an effect on the fast food industry, including the entire the

restaurant and overall food industry. The U.S. Food and Drug Administration (FDA) is

empowered to impose regulations to protect and advance the public health. An example of this

was in 2014 when the FDA announced new rules that “require chain restaurants with 20 or more

locations to begin posting calorie information on their menus” (Aubrey) that will be put into

effect on December 1, 2016 (“Overview of FDA Labeling..”). The motivation behind the new

guidelines is to make consumers aware of the calorie information and hope that they will steer

towards healthier items or eat less. Restaurants not only suffer from having to spend money to

purchase new menus and menu boards that label calorie information, but also deter customers

from purchasing certain items or abstain from entering the restaurant all together causing losses

in sales. There have been studies that found menu labeling is not effective or simply goes

ignored (Carroll). Although in this particular instance, government policy may not necessarily

have had much of an effect on the revenues of fast food restaurants, government policies can also

cause an impact on the costs for restaurants.

In the fall of 2015, the state of New York became the first U.S. state to impose a

minimum wage of $15 per hour on fast food chains that operate in more than 30 locations

nationwide (Sahadi). At the time, the state minimum wage was $8.75 per hour, and the new rate

of $15 per hour represents an increase of over 70%. Other states are feeling the pressure to

follow suit as protests and strikes are taking place in order to similarly increase wages. Wages

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represent the second highest costs that fast food operators face, with the purchasing of

ingredients being the highest (Alvarez). The fast food industry will most likely not absorb the

additional costs and watch their profit margins decrease. Possible actions by the industry include

passing along the higher costs to the consumer with higher menu prices, reducing the number of

employees, or replace workers altogether with technology such as automated systems or kiosk

style ordering windows. Many of these solutions come at odds with the core value propositions

of fast food restaurants that include offering low cost value items and quick service.

Consumer Trends

In recent years, consumers have developed a preference for healthy, fresh, nutritious,

unprocessed, locally sourced foods (Li). Combining the health preference of consumers and the

perception that fast food restaurants are unhealthy, consumers are moving away from greasy fast

food, and opting for restaurants that offer customizable, gourmet meals in a quick and convenient

manner (“Serving Up Diversity…”). Examples of restaurants that meet these needs are Chipotle

and Panera Bread, which are known as fast-casual restaurants. The demand by consumers for

wanting healthier menus is also causing the fast food industry, and the overall food industry, to

change the ingredients used or remove ingredients deemed as unhealthy such as artificial food

coloring. One such movement that has made a large impact was consumers demanding a ban of

trans-fats. In 2007, New York City banned the use of trans-fats in restaurants (MacMillan). This

movement eventually led to the decision by the FDA to ban all food producers from using trans

fats by 2018, as trans fats were deemed not "generally recognized as safe" for use in human food

(Christensen). The fast food industry foresaw the ban, and in order to appease consumer health

advocates, fast food chains took initiatives to phase out the use of trans fats and resources to

develop a healthier alternative. In 2008, McDonald’s completely stopped using cooking oil

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containing trans fats, with KFC and Taco Bell following suit in 2007 (“McDonald's Cooking

Oil…”). Altering the oil used to fry its food was a risky move by McDonald’s due to the

potential to alter the taste that its customers love, especially pertaining to its world famous

French fries (Hellmich).

Technological Change

With the ubiquity of smartphones and multiple social media platforms, technology plays

a key role for the fast food industry. Through these channels, firms can launch advertisement

campaigns, and analyze various consumer insights. A prime example of this was when

McDonald’s launched a social media campaign called “Our Food. Your Questions,” that allowed

customers to pose questions online and the company providing honest answers in real time

(Starkman). Technological changes can also have different implications for the fast food

industry. Firms that provide on-demand services are becoming more prevalent in the U.S. and in

the world, and they can both aid or hurt the fast food industry. For example, the company

Postmates partners with local McDonald’s to deliver meals to hungry customers that simply do

not or cannot go the restaurant’s location. On the other hand, Uber, the company mostly known

for providing on-demand transportation, launched the service UberFresh that tends to partner

with fast casual or full service restaurants (Harris). Another potentially game changing

technology for the fast food industry is the use of robots to automate the preparing and cooking

steps in the kitchen; thereby replacing the workers that typically earn minimum wage (O'Toole).

Industry Definition: Fast Food

From food trucks to fine dining, the restaurant industry can be divided into multiple

different categories; however, from a macro perspective there are 2 main segments: Full-Service

Restaurants (NAICS: 722511) and Limited-Service Restaurants (NAICS: 722513). Typical

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business operations of Full-Service Restaurants involve customers ordering while seated by a

waiter or waitress, being served at their seat, consuming their meal at the restaurant, and paying

for their meal after eating (naics.com, 2016). On the other hand, business operations of Limited-

Service Restaurants mainly involve customers ordering and paying before receiving their meal.

In addition, a customer’s order can be consumed on-site, taken out, or delivered to the

customer’s location (naics.com, 2016).

The Limited-service restaurants can be further broken down into four classifications; Fast

food, Cafe, Fast Casual, and (Jones). The business operations of McDonald’s Corporation

(McDonald’s) fit within the model of a Limited-Service Restaurant, but primarily focuses as a

fast food restaurant, also known as quick-service, as McDonald’s emphasizes on value and speed

of service by preparing food before orders are taken and offering drive-through services. Fast

food restaurants are different than fast casual restaurants, which typically offer higher quality

food at a higher price point and a well decorated atmosphere that promotes dining in the

restaurant (Parpal, 2015).

Arguably, with the launch of McDonald’s McCafe, one can consider that McDonald’s

could also be considered under the cafe class. In 2015, 5 years after the release of McCafe,

McDonald’s hasn’t grown much in sales, most of which can be attributed to food sales (Lim).

Within the scope of this paper, we will not be considering McDonald’s as a café, because most

of their sales and value is generated through hamburgers and sandwiches.

Industry Lifecycle

This analysis will concentrate on the industry life cycle of Fast Food in the United States.

McDonald’s international expansion and efforts will not be considered in this analysis.

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The Fast food industry in the U.S. is currently in the mature state of the life cycle (Figure

2). The industry revenue growth is forecasted to be flat, seeing an average annual rate of 2%

over the next 5 years to 2020. This industry’s value added to the United States’ Gross Domestic

Product (GDP) is at an average rate of 1.9% over the years to 2020. In comparison to the

estimated U.S. GDP growth of 2.2% over the exact time span, we can further confirm that

industry has reached maturity, given its gradual growth over the span of 5 years and slower

growth rate than the GDP.

Figure 2: McDonald's Position in the Industry Lifecycle

Some macro factors that affect this industry performance are consumer preference in

healthy food, popular trend of fast casual restaurants which offer healthier menu items, and better

ROI on fast food chains outside of the saturated U.S. market. The rate of new stores have also

slowed down, a tell-tale sign that the industry has reached its maturity. Reaching the maturity

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stage of the life cycle, the products within the industry become highly commoditized. Consumers

are very sensitive to pricing, and this creates a heavy price-based competition between rivals.

Since the release of the whistle-blowing documentary Supersize Me, perspectives of the

general public have shifted. They have become more health conscious and this in turn, shifted

the entire fast food industry. Since then, we have seen companies like McDonald’s and Burger

King offer healthier substitutes to existing products; grilled chicken compared to its deep fried

counterpart. In this digital age, consumers are becoming more aware and arguably more educated

about their food. Consumers care about not only the calories that they are ingesting, but also the

source of the products and how it was cultivated or raised. With consumer demands and public

pressure, McDonald’s announced they will be serving menu items using cage-free eggs in the

near future.

Restaurants that supply this demand of healthier and higher quality menu offerings with

the same convenience of service of “order at the counter and seat yourself” are fast casual

restaurants. New competitors in the fast casual space are Chipotle, Five Guys Burgers, and

Noodle Dude, all of whom allow users to fully-customize their orders. These types of

establishments have been claiming their own piece of the market share.

With China’s Fast food industry revenue forecasted to grow by 8.5% annually to 2020, it

is much more attractive than the U.S.’s 2%. This opportunity cost will be a consideration for

restaurant franchisees that are looking to expand.

Consumers are now connected more than ever, and a large trend we are beginning to see

in the fast food industry is tech-savvy ordering (Taylor). Food chains are launching mobile apps

and web apps to assist consumers in ordering food and to provide users with a richer dining

experience. Apps like Starbucks’, gamify their loyalty program by allowing users to unlock

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badges, which in turn reward the user with perks like free refills, upgrades, or a discounts on

premium items. We have also seen application-based services like door-dash or eat24, which

enable users to get food from their favorite restaurant delivered to their doorstep.

Porter’s Six Forces Analysis of the Fast Food Industry

To assess the structure of relationships among all the players in the industry and to assess

the attractiveness of the fast food industry, we performed a Porter’s Six Forces analysis. Using

the framework, we found the industry score to be 4.0 (Figure 3 and Exhibit 1), making the fast

food industry a moderately unattractive industry from a competitive standpoint.

ForceLevel II Score

Level III Weight

Level III Weighted score

Threat of Rivalry 4.5 0.3 1.35Power of Buyers 4.3 0.3 1.29Threat of Substitutes 4 0.29 1.16Threat of Entry 2.05 0.05 0.1025Power of Suppliers 1.6 0.05 0.08Influence of Complements 3 0.01 0.03

Level III Overall Score: 4.0125

Figure 3: Attractiveness of the Fast Food Industry (Porter's 6 Forces)

Threat of Rivalry

Out of all the forces, the Threat of Rivalry is the most intense, with a Level II score of 4.5

(Exhibit 2). In a very mature market in which the overall market is no longer growing, the firms

in the fast food industry utilize price wars to gain market share. The value proposition of the fast

food industry is to quickly provide value meals at very low prices. Recently, McDonald’s

launched a promotion called the McPick 2 menu that allows customers to pick 2 menu items for

$2 (the promotion now offers 2 menu items for $5), while Wendy’s and Burger King countered

by offering similar bundling promotions with 4 items for $4 and 5 items for $4, respectively (La

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Monica). Further, Burger King and Wendy’s are only a couple of the vast number of rivals in

fast food. There are national competitors, such as Taco Bell and KFC, as well as regional

competitors such as Whataburger in Texas. The high number of rivals contributes to the Threat

of Rivals having a high score. The last main contributing factor that leads to a high score for the

Threat of Rivals is the low switching cost. With fast food restaurants almost located every few

miles, customers can easily drive to a competitor’s restaurant and enjoy a meal.

Power of Buyers

The second force that is the most intense on the fast food industry is the Power of Buyers,

with a Level II score of 4.2 (Exhibit 3). Similar to the above, the cost for customers to switch

between the products’ of rivals is very low; thus, this increases the power of buyers. Further, the

products that competitors offer are not entirely unique, though each rival tries to differentiate

their products from others. The total addressable market and total serviceable market for the fast

food industry is very large, so if a firm loses one customer it is not critical to their success. On

the other hand, customers can be group into various personas that have certain preferences as a

group, so something that might disinterest one customer from going to a particular fast food

chain may actually disinterest the entire persona group that that one customer belongs to.

Threat of Substitutes

The third and last force that applies the most pressure on the industry is the Threat of

Substitutes that has a Level II score of 4.0 (Exhibit 4). When it comes to fast food, there are

many substitute products such as food from fast casual restaurants, full-service restaurants, or

cooking at home. The threat of substitutes is very high, as consumers can easily move from one

category to another. Cooking at home can be quite affordable and relatively healthy meals can be

prepared; however, the time it takes to cook a full meal at home can deter people to eat out more.

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Full-service restaurants tend to be more expensive, and fast casual being on the more affordable

end. Consumers select a category by trading between parameters such as cost, health, and time;

therefore substitute between categories based on their prioritization of parameters, which can

change day-to-day.

Threat of Entry

The Threat of Entry is one of the more benign forces, and has a Level II score of 2.05

(Exhibit 5). The Threat of Entry is low because new entrants somewhat require a large amount of

capital. Franchising an existing fast food chain is not considered as a new entrant, as the chain

already exists in the industry, and is simply expanding its footprint. A new entrant is considered

as a completely new entity with no existing tangible or intangible assets in the market. Opening a

new single restaurant is more affordable than opening enough restaurants to gain a small

percentage of the overall fast food market.

Power of Suppliers

Another mild force is the Power of Suppliers, which has a Level II score of 1.60 (Exhibit

6). The main reason why suppliers have such low power is because the products being supplied

are not unique and highly standardized. The meat that comes from livestock farms is not very

differentiated and suppliers typically win business from firms by supplying at the lowest cost.

The same is also true for suppliers of produce, packaging materials, and other items that are not

related to machinery or equipment. Further, there is a large pool of potential suppliers which

places pressure on current suppliers to abide by the demands of the firms. Also, firms such as

McDonald’s purchase a very large volume from their suppliers. As a result, these suppliers most

likely dedicate all their resources and farmed ingredients to supplying McDonald’s. Again, this

puts pressure on the supplier to do what it can to keep its business by serving its only and largest

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buyer, weakening the supplier’s power. The only factor that suppliers have an advantage on the

industry is the lack of substitute products. Though beef can be substituted for other red meats

like lamb, the general population prefers beef when it comes to their hamburgers from fast food

restaurants. Although this metric favor the suppliers, the lack of substitutes is pales in

comparison to other factors affecting supplier power.

Influence of Complements

The last force in Porter’s 6 Forces is the Influence of Complements, with a Level II score

of 3.0 (Exhibit 7). The fast food industry does not have many complements, which contributes to

complements having a very low weight in Porter’s Level III score. Complements include the

transportation because consumers need a way to get to the restaurants, and dietitians or gyms

because of the belief that eating a lot of fast food can lead to obesity. Condiments can also be

considered as complements, but for the purpose of this analysis, condiments are assumed to be

supplied by the fast food restaurant and consumers are not purchasing condiments outside of the

restaurant in order to make their meals more enjoyable. Due to the vast differences between the

fast food industry and complements, it is highly unlikely that complements can or will enter the

focal industry; thus complements are not threatening which results in low acting force. On the

other hand, dietitians and gyms memberships offer the complete opposite to consumers in which

these services are meant to get people in better shape and more healthy. These services can

influence and reduce the demand of fast food, which is seen as making people obese and

unhealthy.

In the overall industry, the strongest acting forces acting upon it are: Threat of Rivalry,

Power of Buyers, and Threat of Substitutes. The weakest forces are: Threat of Entry, Power of

Suppliers, and Influence of Complements. Based on all these forces acting on the fast food

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industry, it is moderately unattractive with an analysis score of 4.0 (Exhibit 1). The 4.0 score is

supported by the low industry’s 5-year average on Return on Invested Capital (ROIC) of 5.04%;

however, that of McDonald’s is 12.95% ("The Top Management Teams…”). Based on these

ROICs, it can be inferred that McDonald’s is able to operate in a manner that allows it

outperform the rest of the industry. The Internal Analysis section will investigate how they are

able to do so.

Key Competitors

The limited-service restaurant industry is vast and segmented across various products and

services. When looking at the competitive landscape of the industry, we have classified

McDonald’s rivals into 3 classifications: Primary Competitors, Secondary Competitors, &

Tertiary Competitors (Figure 4). Primary Competitors are rivals who are in direct competition

with McDonald’s from a standpoint of both products and price. In this group, we include major

quick-service or “fast food” chains such as Wendy’s, Taco Bell, and Burger King. Secondary

Competitors operate in the same space, but offer goods and services at either a higher or lower

price. Since McDonald’s is the low-cost leader, competitors in the fast-casual, casual-dining,

and full-service restaurants fall in this segment. Notable competitors in this space include

Chipotle, Five Guys Burgers and Fries, and Roy’s Restaurant. Tertiary Competitors operate in

the food industry, but do not necessarily compete directly with McDonald’s. Services like Blue

Apron that bring fresh ingredients with corresponding cooking instructions to the consumer’s

address would be considered tertiary. The percentage of market ownership that each of the

leading competitors in the limited-service restaurant industry is presented in Exhibit 8.

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Figure 4: Classification of Competitors

External Analysis of Primary Competitors:

Before we begin to compare and contrast McDonald’s and their Primary Competitors,

there are industry factors to consider that affect all businesses in this space. Fast food chains like

McDonald’s and Taco Bell have a high product turnaround, as burgers and sandwiches are

assembled within seconds and eaten within minutes. Restaurants in this industry however have

historically low profit margins. As Dianna Ransom captured in The Wall Street Journal Article:

Can They Really make Money Off the Dollar Menu?, McDonald’s only earns $.06/dollar per

hamburger they sell off their Dollar Menu. One can also consider products offered from these

establishments, especially products at the $1 price point, a commodity. For around the $1 price

point, consumers can opt to eat a McDouble at McDonald’s, a Jr. Bacon Cheeseburger at

Wendy’s, a Beefy Fritos Burrito at Taco Bell, or a Whopper Jr. at Burger King. This then in turn

forces these chains to be very lean in their operations. We also analyzed the strategic position of

Wendy’s, one of McDonald’s primary competitors (Exhibit 9).

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Arenas (Primary Competitors):

By the definition of quick-service restaurants, McDonald’s, Taco Bell, and Wendy’s offer

cheap products and fast and convenient services. All storefronts are equipped and designed to

handle the surge of consumers during lunch rush. A notable number of these high traffic

locations offer drive-thrus, which average service time is 180.83 seconds ("The Drive-Thru

Performance…”). Menu items offered at these chains are also very similar and they include

burgers, sandwiches, fries, wraps/burritos, salads, specialty beverages, and desserts. In recent

years, McDonald’s has launched their McCafe menu that offers consumers a variety of specialty

hot and cold drinks. Both Taco Bell and Wendy’s focus their products and services to cater to the

U.S. market, whereas McDonald’s has become an international superstar, with a presence in over

119 countries and counting.

Vehicles (Primary Competitors):

The successes of these chains often rely on the hard work and diligence of the employees

at every store location. As McDonald’s, Taco Bell and Wendy’s are franchisors of their brand,

it’s imperative that all franchise locations are operating and adhering to corporate standards. To

educate their employees on operation procedures, services, quality and cleanliness, McDonald’s

created Hamburger University. This is the most distinguished training program offered by any

QSR (Quick-Service Restaurant), as Hamburger University is one of the few programs that is

approved by ACE (American Council on Education) to receive college credit recommendations.

Taco Bell supports professional development through education, and their online Learning Zone

courses also qualify employees for college credit. In addition to the online and onsite job

training, Taco Bell offers GED Certification, scholarships, and a 45% subsidy for an accredited

online college for Associate, Bachelor’s, or Master’s Degree. Compared to these two chains,

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Wendy’s seems to be lacking in personal development for their employees out of the job

description context. Not much information was available pertaining to neither unique training

programs nor support for educational growth. As mentioned, all three companies rely heavily on

the franchise-licensing model, wherein the franchisees pay royalties to use the chain’s brand.

Nearly 82% of McDonald’s storefronts are franchise owned and operated, Wendy’s and Taco

Bell are 85% and 80% respectively.

Differentiators (Primary Competitors):

Though these three Fast Food restaurant chains are competing in a commoditized market,

there are some distinctions in the products and services they provide. McDonald’s is the most

well-known brand in all of fast food, as it placed 10th in the Top 100 Brand LoveList based of off

consumer surveys in social media (“Top 100 Brand”). Taco Bell comes in a close second at 13th,

while Wendy’s trails behind at 55th. The golden arches are known for their classic burger and

fries classics, as well as their breakfast menu items. By being the market share leader, a

McDonald’s burger is regarded as industry standard. This standard is quite low because they are

also the cost leader. In contrast, Wendy’s markets themselves as “A Cut Above”, offering higher

than industry standard quality at a small premium. Taco Bell regards themselves as the

innovators in this space, releasing novel food inventions like the double decker taco or quesalupa

(a quesadilla chalupa hybrid) or teaming up with popular nacho chip manufacturer Doritos to

offer Doritos taco shells. Initially, customization of products was relatively low for the golden

arches and Wendy’s. Menu items were preconfigured allowing some modifications like no

ketchup or extra pickles. Taco Bell offered more customization as customers could order a

burrito with a choice of beef, chicken, steak, or vegetarian.

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A more contemporary redesign of the Quick-Service Restaurant industry was observed in

the recent years. It’s almost as if the restaurant chains have matured along with their consumers.

This is in response to the fast-casual restaurants more edgy, earthy, industrial design language of

both their interior and exterior. This design language increases the perceived value of the brand.

Staging (Primary Competitors):

As stated in our Industry Analysis, the Limited-Service restaurant industry has reached

maturity, and is on the verge of decline. U.S. regions are saturated, and we are witnessing the

closing of poor performing storefronts across all QSR chains. As these chains try to maintain a

hold of their market share in the U.S., they are also planning to expand internationally into

markets where QSRs are in their emergent state of the lifecycle. Ahead of the pack is

McDonald’s, with their current presence in over 100 countries. Taco Bell is serving burritos in

20 countries outside of the United States and Wendy’s has a foothold in 29. Taco Bell is in last

place when compared to the other two chains, but a Bloomberg publication reveals that the

corporation is targeting to go from 280 to 1,000 international stores by 2020 (Patton). Unlike the

golden arches or ringing bell, Wendy’s is reserved about international expansion. Only 1% of

their revenues are generated outside of North America. Without extensive experience or

knowledge in global expansion, expansion looks to be a great challenge for Wendy’s. This is

further confirmed in the Market Realist article: Emerging Markets: Wendy’s International

Expansion Plans, “Finding the right strategic partners in an international franchisee and

managing them will be a challenge for Wendy’s” (Newman).

Economic Logic (Primary Competitors):

Using their position as the market share and cost-leader, McDonald’s and their well-

trained employees will leverage their super star brand image and highly standardized product

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line to maintain their share leader position in the QSR segment of the U.S. and continue their

international expansion. Their solid grasp of their supply chain and distribution channels is a key

factor in controlling costs and providing infrastructure for rapid expansion in international

territories. Taco Bell’s industry average priced innovative menu items, accompanied by their

educated workforce, will fight to keep their market share while they focus on international

opportunities. Under the leadership of Yum! Brands Inc., who also owns KFC, Pizza Hut, &

Little Sheep Mongolian Hot Pot, Taco Bell looks to achieve their target of 1000 international

locations by 2020. Yum! Brands has a solid international track record, occupying over 120

countries with nearly 40,000 stores. Wendy’s higher price, higher quality burgers value

proposition, paired with their standard employee-training hopes to maintain their market share.

This positioning is shaky, and Wendy’s runs the risk of competing with fast-casual restaurants,

which are serving higher quality premium burgers. They are definitely the late adopters in QSR

global expansion and will find it increasingly more difficult to enter once the market is saturated

with competition.

External Analysis of Secondary Competitors:

Arenas (Secondary Competitors):

Chipotle is in the Fast-Casual segment of the Limited-Service Restaurant industry, which

is generally regarded as higher quality than traditional fast-food restaurants. Unlike McDonald’s,

Chipotle serves food made with healthy, carefully-sourced ingredients that is made to order

(Exhibit 10). QSR chains, such as McDonald’s, pre-make popular menu items to help supply

lunch rush demands. Items at times will sit under a heat lamp for long periods of time before

being bagged and served. Their main market is the United States, but is slowly expanding into

the European countries of Germany, France, and the United Kingdom.

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Vehicles (Secondary Competitors):

Chipotle offers a clear and organized career path for their employees. Although they have

a thorough training program, employees are not eligible to earn college credits upon completing

the program. Unlike McDonald’s, Taco Bell and Wendy’s, Chipotle does not operate with, nor

do they believe in the franchise model. Further reinforcing this claim, Chipotle’s

communications director stated in an Entrepreneur article, “We believe that companies franchise

for two reasons. Either they need money to grow or they need operators to run restaurants”

(Taylor). Chipotle does not need either. By refusing the franchising model, the company is able

keep a higher degree of control over their products and services.

Differentiators (Secondary Competitors):

What makes Chipotle stand out of the rest of the competition is their healthy, high quality

raw ingredients, and sustainable branding image. Though they only offer a few menu items such

the burrito, bowl, and tacos, the customer is able to highly customize their meal with a variety of

meat choices, toppings, and condiments. “A Few Things, Thousands of Ways” is Chipotle’s

motto. Driving the fast-casual segment’s health initiative, Chipotle prides themselves on their

hand prepared ingredients, such as their hand-marinated and grilled Carne Asada and their fresh

hand-made guacamole. Their ingredients are non-GMO, and they do their best to serve free-

range meats. With a solid product and open kitchen design resembling that of high-end

restaurants, Chipotle is able to demand a higher price than QSRs because of the customers’

increased WTP.

Staging (Secondary Competitors):

Chipotle is in a trending fast casual phenomenon within the limited-service food industry

and is expanding aggressively. Since they are opting to forego a franchise model, their expansion

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will not be as fast as that of McDonald’s, but they are forecasted to grow from 2240 storefronts

to 3440 by 2021 (Tice).

Economic Logic (Secondary Competitors):

With their distinguished dining atmosphere, high quality, highly-customizable products

and services, the premium priced Chipotle focuses on expanding both domestically and

internationally, claiming market share from maturing QSR chains like McDonald’s and Taco

Bell. Growth will be challenging for Chipotle as they will rely heavily on suppliers for free-range

livestock, fresh herbs and vegetables that define the Chipotle image.

Internal Analysis

To assess McDonald’s internal strategic position, we will evaluate where it participates in

the Value Chain, the relationships among its initiatives from the Strategy Diamond, and

offensive and defensive positions using the VRIO criteria.

McDonald’s value chain

Primary Activities

Inbound logistics:

In terms of inbound logistics, McDonald’s buys raw materials from predefined suppliers

that meet their strict quality standards. McDonald’s quality standards include animal well-being

and corporate relationships with their partners. Using this methodology, they have replaced most

of their old suppliers to increase quality, while maintaining low costs. This supplier turnover

creates revenue-enhancing synergies from higher quality produce provided by the suppliers and

cost-saving synergies by keeping the threat of replacement in the suppliers’ minds. A limited list

of their suppliers is listed as follows: Bread: Fresh Start Bakeries; Apples: Leo Dietrich & Sons;

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Fish: Kenny Longaker, Global Seas Fishing; Lettuce: Dirk Giannini, Christensen & Giannini

LLC; Beef: Steve Foglesong, Black Gold Ranch and Feedlot; Potatoes: Frank Martinez,

Washington State Potato Commissioner; Potatoes: Jenn Bunger, Hoelzer Farm in Pasco,

Washington (“Meet Our Suppliers”).

Operations:

In the realm of operations, McDonald’s opts to go away from highly skilled cooks in

favor of cooking everything from start to finish. Instead, McDonald’s breaks up the process and

employs more workers who are less skilled to complete fewer steps of the food preparation

process. Using the Speedee Service System, a system that is based from Henry Ford’s

automobile assembly line, McDonald’s optimized their cooking and preparation process

(Wilson). Each kitchen has a large grill to cook many burgers in tandem, a dressing station to

add condiments to burgers, a fryer for a single worker to make fries, a soda fountain/milkshake

machine for drinks, and counters for customers to place their order.

Warehousing is used to supply each store with ingredients and raw materials needed for

its daily operations. Warehousing and distribution is centralized rather than being controlled by

each restaurant. Using Weblog, a web based communication software, an inventory manager can

view and change order proposals (“Logistics and Supply…”). This ensures that each location

will have the necessary supplies to operate. Most testing for new types of food is done in kitchen

labs, like the one in their Illinois headquarters, while operational testing is done at the innovation

center warehouse in Romeoville, IL.

Outbound Logistics:

McDonald’s is all about providing high quality food and superior customer service at a

great value in a clean environment. Over the last few years, McDonald’s has optimized their

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menu again and again to cater to specific consumer tastes, and provided nutritional information

after laws were passed requiring fast food restaurants to do so. For each restaurant, McDonald’s

is focused on conserving energy, using sustainable materials for packaging, and waste

management. McDonald’s seeks to remain a profitable business, but also seeks to be more

sustainable and environmentally friendly (“You’re In!”).

Sales/Marketing:

Perhaps the heaviest of its expenses, McDonald’s invests heavily in sales and marketing,

with their SG&A expenses totaling 584M in Q3 of 2015, up from 575.8M in Q3 of 2014.

McDonald’s operates in 119 countries and employs over 1.7 million people. For decades,

McDonald’s supremacy has been fueled by their robust advertising campaigns, spanning

multiple media outlets (TV, Radio, Newspapers, Billboards, Sporting Events, and other

Sponsorships and Partnerships, and social media). Although TV has historically played a central

role in their advertisements, social media has become a very significant marketing avenue in

recent years.

(Customer) Services:

More recently, McDonald’s has coupled amenities with its store remodels, with over

11,000 restaurants in the US offering free Wi-Fi to customers with their purchases. McDonald’s

has also recently been remodeling their stores to have a different look, with over half the stores

adopting this remodeling initiative so far.

Support Activities

Infrastructure:

McDonald’s infrastructure is very mature and stable, with the company operating 6,554

of its 36,405 restaurants worldwide, franchising the other 29,851 to franchisees. Their current

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model franchises 81% of stores, which they hope to bring up to 90% by 2018 (Alvarez). This

move to franchising is spearheaded by their CEO Steve Easterbrook, who has said he is a big fan

of the franchise model. Most changes are made from the top down, with franchisees being

notified and given time to adjust to any changes. Don Thompson was president and CEO from

2012 to 2015, stepping down in January 2015. He was succeeded by Steve Easterbrook in March

2015.

Tech/product/business development:

McDonald’s uses an IT system to track deliveries, inventories, social media activities,

and sales. McDonald’s has made tech support deals in the past to maintain that system.

McDonald’s has also released a mobile app to bring their menu, nutritional facts, and promotions

to the public. In terms of product development, McDonald’s has an innovation center located in

Romeoville, Illinois that fine tunes and optimizes McDonald’s operations and allows stores to

roll out new initiatives prompted by decisions made at headquarters. Products in the innovation

center include new capital equipment to make current food faster, as well as new products

themselves. McDonald’s has created a large initiative for business development in order to reach

their goal of franchising 90% of their restaurants by 2018. McDonald’s looks to operate less and

less of its restaurant and make most of its money from franchising.

HR management:

In terms of HR management, there is a 4 step process in which prospective employees

must fill out an online application, a personality questionnaire, on-job evaluation, and interviews.

In 1961, McDonald’s created Hamburger University located in Oak Brook, IL as a place for

workers to acquire classroom training, hands-on training, and eLearning for jobs at every level in

the company.

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Procurement:

McDonald’s works with specialized farmers that grow a single crop to ensure quality,

freshness, and a daily supply of the best ingredients. Orders and distribution are tracked with an

innovative E-procurement system from Emac Digital. Emac Digital was launched in 2000 and is

jointly owned by McDonald’s and Accel-KKR Internet Co. Currently, McDonald’s gets roughly

80% margins on stores they franchise, versus 20% for the stores it operates. The risk of

franchising includes not maintaining quality standards by losing control of franchisees, and

adversely affecting the brand. The upside to franchising is increased margins and more dividends

for shareholders.

McDonald’s Strategy Diamond

We used the Strategy Diamond framework to assess whether there are any misalignments

in McDonald’s strategy (Exhibit 11).

Arenas

McDonald’s is very active in serving fast, cheap, and convenient food. They span

multiple product categories, including burgers, sandwiches, salads, wraps, and even specialty

drinks. They focus heavily on the cost and time conscious consumers in the US, while focusing

on a luxury experience in Asia.

Vehicles

In order to maintain its dominance in the industry, McDonald’s employs an extensive

training program through Hamburger University, where employees from fry cooks to executives

can attain the information and skills they need in order to succeed at their job. Their joint

ventures and partnerships include commercials featuring star athletes (like Michael Jordan), and

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large sporting events (like the Olympic Games, the high school All-American game). In terms of

licensing and franchising, McDonald’s plans to increase the proportion of its franchised

restaurants to 90% by 2018. As of 2016, they currently stand at 82%. McDonald’s plans to

continue making money by expanding into emerging markets like Asia, Africa, and the Middle

East, where they believe there is room to grow as those regions develop. In order to maintain

their revenue and market in the US, they began offering All Day Breakfast by listening to

customer preferences on social media platforms.

Differentiation

From a differentiation standpoint, McDonald’s plans to win by taking multiple

approaches. They will do this by leveraging their brand image, decreasing customization for

menu options, pricing items by menu segment, and marketing to consumer emotions. They have

also done a pretty good job in styling by revamping the store layout and testing other restaurant

concepts. Their latest foray into testing another type of restaurant was a fast casual concept in

Australia called “The Corner.”

Staging

McDonald’s plans to continuously thrive in a mature market by increasing their revenue

with initiatives like All Day Breakfast. While continuously dominating the US Market, they plan

to rapidly expand into untapped areas, including Asia, Africa, and the Middle East. There they

want to grow their revenues as those regions develop.

Economic Logic

McDonald’s takes a simple approach in terms of economic logic. They exploit their

advantages in economies of scale and achieve the lowest cost in the industry. They also have a

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proven model, and garner returns through franchise fees from their franchisees, as well as yearly

payments of rent and royalties.

There are several resources that will increase the value of the company and henceforth

increase the customer's Willingness To Pay (WTP). These attributes include the brand value and

brand reach that McDonald’s has created through years of outreach, the vast organizational

structure they have created allows for a set process, great retention, and synchronized policies

across locations. There are financial resources that McDonald’s has obtained through years of

development and franchising. The distribution channel leverage that McDonald’s has is also a

resource that will increase the value as well as the supplier squeeze they have established.

There are still several things that will decrease the costs and therefore increase profit margin.

McDonald’s prides themselves on their operational expertise such as their Speedee kitchen. They

have spent a lot of time driving operations to cut time, cost, and labor. McDonald’s has also

established many partnerships with suppliers and distributors that have led to long term success.

Recently they have begun limiting customization and cutting out products to also add to the cost

reductions.

McDonald's is able to capture and maintain value through their renowned marketing,

teaching programs, and community outreach. They focus on their employees, pricing, and their

promotions. This in turn increases the customer loyalty and retention. With a heavily criticized

company like McDonald’s, there will be many things that hinder the ability to capture and

maintain value. The maintenance of facilities as well as the perceived quality of food is crucial to

the success of McDonald’s. The biggest issue that they have combatted in the past and must

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continue to address is Public Relations scandals. If they cannot overcome PR attacks they will

not be able to maintain their value perceived.

McDonald’s Resources and Capabilities

McDonald’s takes a strong offensive based on their brand and marketing strategies. The

issue is they are not overwhelmingly defensive as they are public and many of their strategies

could be easily replicated. Even with the backlash from documentaries like Supersize Me,

McDonald's has built themselves a reputable brand that can withstand such attacks. They also

were praised by several sources for their resilience. Even with the health implications that were

widely publicized, McDonald’s was able to adapt and leverage their brand to combat the

negative media coverage (Exhibits 12 and 13).

Financial Position

McDonald’s is the market leader, with a Market Capitalization of $107.3 billion. The

company also has the highest Net Margin at 17.24% and boasts considerable top tier Gross

Margin at 38.05%. However, their P/E ratio sits at the lower tier of the market (25.3 compares to

Wendy’s 42.9 or Chipotle 34.8). The low P/E ratio demonstrates that their stocks or any

investment in the company is not favored by the investors. The market valuation of McDonald’s

conflicts with the financial performance of the company. Therefore, the most acceptable

explanation for this situation is the investor outlook on the direction of the industry.

If we consider any P/E less than 30 to be subpar and anything higher than 30 to be

optimal, all the companies which possess a healthy image such as Wendy, Chipotle, or Panera

belong to the higher end. The obvious differentiation between fast-food and “healthy fast casual

food” presents a decline in fast food and high growth in health-conscious consumers.

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In addition, McDonald’s ROA – Return on Assets – is average amongst its peers

(12.82%). The average ROA ratio implies that McDonald’s does not utilize their investment

resources effectively. The leader in ROA category is Chipotle at 18.04%. Furthermore,

McDonald’s Return on Invested Capital is 17.7% which is also lower than competitors, for

instance, Chipotle stands at 22.97% and Yum Brands at 26.44%. These ratios clearly display that

the resource McDonald’s possesses does not yield financial returns as high as their competitors

(Exhibit 14).

McDonald’s Gross Margin sits at 40%, which is highest amongst their peers. Their

relatively high gross margin shows that McDonald has a cost advantage over the competitors.

This results from utilizing their operating resources and infrastructure effectively. If we take a

closer look at McDonald’s operation structure, the company has a low cost of good sold due to

their ability to exploit economies of scale. Their volume of sales - meals as a unit - is five times

larger than a direct competitor like Burger King. The purchasing power over their suppliers is

tremendous, and McDonald’s leverages their purchasing power to lock in the most favorable

price for their ingredients against the market for a considerable amount of time. Moreover, with

the large market share advantage, McDonald’s has the ability to bring ingredient manufacturing

in house, which can further reduce the cost by cutting the markup margin from a third party

supplier.

In addition to a low COGS, McDonald’s invests heavily in an inventory management

system, which allows forecasting sales of particular items. These innovations help the company

reduce the waste of ingredients and lower the inventory level, which leads to an increased gross

margin and more cash flow generated. On the other hand, we observe a downtrend of

McDonald’s revenue in recent years. The downtrend of sales can be viewed as a signal of

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dropping in WTP level. We believe that the gap between WTP and Price is very small due to fast

food being a mature market, with fierce competition.

Nevertheless, according to an outlook from MorningStar, McDonald’s looks to have the

highest 5-year CAGR (3.8% vs. 2.9% from Yum, 1.6% from Burger King and -3.3%from

Wendy’s) when compared to its competitors. This piece of evidence shows that the difference

from a customer’s WTP to actual Price of McDonald’s items is higher than others. Therefore,

there is still room for the company to increase their price even though that range is very limited.

Insights and Critical Challenges (AKA SWOT)

Insights:

The core strengths of McDonald’s lie in their brand value and reach, speed of operations,

menu variety, their franchise model, their community outreach, and their choice of sponsorships

and partnerships. They have done a great job in leveraging the strength of the brand to form

optimal partnerships with premier companies, individuals and organizations to reach a global

audience. Despite these overwhelming strengths they are in a mature market that has only left

them so much room for growth. The fast food market will never completely die due to a high

number of people who are consistently on the road, or low income families. Although the fast

food industry will not entirely disappear, it is no longer a sought after food market. The

introduction of the fast casual market segment has been slowly pushing out those in the fast food

industry.

A SWOT analysis of the factors has outlined the strengths, weaknesses, opportunities and

threats that have really stood out for McDonald’s (Exhibit 15). The strengths, as aforementioned,

are really in the maturity they have gained from being in the industry for 70 plus years. They

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have mastered the speed of their operations, they have established a well-known brand, they are

a globally recognized franchise with a stabilized franchisee model, and they have a plethora of

partners and sponsors that add to their value. In addition, they have corporate strategies that have

been perfected with age involving their training and retention, along with their human resources

division as a whole.

As far as the weaknesses McDonald’s has, these are natural regressions for any long

standing entity. After Supersize Me they had to fight, and continue to fight, a huge reputation

battle to maintain relevance despite negative views towards their brand. They are also situated in

a declining market and therefore must fight to remain stable as evidenced by the financial decline

in the last few years. In an industry built around speed and convenience they must also combat a

lack of differentiation between their products and those of their competitors.

Even in a receding market and with the weaknesses they are experiencing, McDonald’s

has many opportunities to potentially capitalize on. They have moved into several international

locations already, but increased expansion and globalization will be huge as the US market

dwindles. Expanding the menu with gourmet options and standardizing a more global menu has

a lot of potential to help McDonald’s as well. The biggest potential opportunity seen is to create

or buy a fast casual spinoff that could lead to entry into the fast casual market.

Finally the ever lingering threats for McDonald’s include the dying market, the new

competition, and the range of their target market. As McDonald’s has grown, their market has

changed and grown substantially, leaving it ultimately undefined. In a world where fast casual is

trending and pushing fast food out, this itself is an overwhelming threat to the market. In

addition, as has been noted, health campaigns and negative PR will continue to be a battle

McDonald’s must combat and could potentially lose.

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Based on the opportunities and threats identified through the analysis it is clear that there

are aspects McDonald's can capitalize on and improve upon. In addition they have many

strengths and weaknesses that they can grow and challenge. Through these areas we have

developed a short term and long term recommendation plan.

In the short term, we will be implementing a plan that will capitalize on the new

technological trends in the market. McDonald’s will use what they learned from the all-day

breakfast rollout and the social media outcries to continue to use social media to determine the

best next move. They will also continue to strive to be a health leader to dominate the small

niche that the fast food market is becoming.

Long term, we will look into the options involving making or buying an entry into the

fast casual market. After an analysis to determine the best course of action, one of these

recommendations can be implemented to gain market share using the established resources into

the new, dominant sector of fast casual.

In order to determine success and feasibility, we must test whether or not the industry

move to fast casual is rooted in sound logic. We will use Porter’s Three Tests to confirm or

contest whether the market change decisions will validate the industry move.

Porter’s Three Tests

Test 1: The Attractiveness Test

Porter’s first test is The Attractiveness Test, which is used to determine whether the new

industry is attractive enough for to enter and build a long-term competitive advantage. To assess

whether the fast casual industry is an attractive industry to participate in, the Porter’s Six Forces

framework was used. Using the framework, we found the industry score to be 3.76 (Figure 5 and

Exhibit 16), making the fast food industry moderately unattractive industry. Similar to the

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Porter’s Six Forces analysis performed on the Fast Food Industry, the most intense forces acting

on the Fast Casual Industry are the Power of Buyers, Threat of Rivalry, and Threat of

Substitutes, while the weaker forces are Threat of Entry, Power of Suppliers, and Influence of

Complements.

ForceLevel II Score

Level III Weight

Level III Weighted score

Power of Buyers 4.35 0.30 1.305Threat of Rivalry 3.75 0.30 1.125Threat of Substitutes 3.56 0.29 1.0324Threat of Entry 2.35 0.05 0.1175Power of Suppliers 3.10 0.05 0.155Influence of Complements 3 0.01 0.03

Level III Overall Score: 3.76

Figure 5: Attractiveness of the Fast Casual Industry (Porter's 6 Forces)

Power of Buyers

In contrast to the Fast Food Industry’s strongest acting force is the Threat of Rivalry, the

Fast Casual’s strongest acting force is the Power of Buyers, with a Level II score of 4.35 (Exhibit

17). Overall, the Power of Buyers in both the Fast Food Industry and in the Fast Causal Industry

is very similar. It is quite easy for customers to switch from one firm’s product to another, and

product offers are not highly unique. These factors strengthen the Power of Buyers in both

industries; however, in the Fast Casual Industry, products tend to be more expensive than those

in the Fast Food Industry. The higher expense to consumers adds further pressure on to the Fast

Casual Industry, yielding a higher amount of force from buyers.

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Threat of Rivalry

In the Fast Casual Industry, the Threat of Rivalry is the second strongest acting force with

a Level II score of 3.75 (Exhibit 18). In comparison to fast food, the Fast Casual Industry has a

smaller number of competitors, but still faces a sizeable number of competitors that continues to

grow. With the Fast Casual market growing as well, firms are able to increase revenues by either

growing along with the market or by expanding. This alleviates the force of rivals as competitors

do not need to compete for customers as much. One factor in the Fast Casual Industry that scores

much higher than the Fast Food Industry is ingredients. The ingredients used in the Fast Casual

Industry tend to be fresh and not frozen. This pressures firms to sell their products as soon as

possible, otherwise ingredients can spoil and reduce inventories without increasing revenues.

Fortunately firms can overcome this issue by properly forecasting demand for their products and

planning accordingly.

Threat of Substitutes

The Threat of Substitutes is the third highest forcing factor on the industry with a Level II

score of 3.56 (Exhibit 19). Similar to customers in the Fast Food Industry, those in the Fast

Casual Industry can easily switch to other substitute products such as meals at full-service

restaurants or cooking at home; however, the meals offered by the Fast Casual Industry tend to

be healthier; therefore, consumers tend to favor the products slightly more than those in the Fast

Food Industry.

Threat of Entry

The Threat of Entry is one of the weaker forces acting on industry, with a Level II score

of 2.35 (Exhibit 20). With a relatively competitive market already, it will be difficult for a new

firm with limited resources to enter the industry and be competitive. Further, new firms need to

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have high knowledge of operations management to maximize utilization of resources, and to

efficiently and quickly serve customers. With the Fast Casual Industry growing, new firms will

be motivated to enter the market; however, customers in this market tend to be more loyal to

firms that have participated in the market for some time such as Chipotle and Panera Bread.

Power of Suppliers

With a Level II score of 3.10, the Power of Suppliers in the Fast Casual Industry is higher

than that in the Fast Food Industry (Exhibit 21). Once again comparing to the Fast Food Industry,

the Fast Casual Industry has a much smaller number of potential suppliers. This is because the

ingredients that are used in the Fast Casual Industry that are viewed as healthier because they do

not use antibiotics, are non-Genetically Modified Organisms (GMO), are not mass produced and

are generally limited to smaller farms or regions. This smaller number of potential suppliers

increases the force of suppliers in the industry.

Influence of Complements

Finally, the Influence of Complements in the Fast Casual Industry has the same score as

it does in the Fast Food Industry, with Level II score of 3.0 (Exhibit 22). As previously

mentioned, complements include transportation products and services, and services to help

maintain a healthier lifestyle such as dietitians or gym memberships. It is very difficult and

unlikely for complements to enter info the fast casual industry, which weakens the force of

complements on the overall industry. However, these complements do strongly influence

demand by recommending that consumers eat healthier meals. This in turn strengthens the force

of complements. Because the fast casual industry is growing, the power of complements is

reduced. In our analysis however, it was determined that such a factor held little to no weight in

changing the Influence of Complements.

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Conclusion of Test 1: The Attractiveness Test

In the overall fast casual industry, the strongest acting forces acting upon it are: Power of

Buyers, Threat of Rivalry, and Threat of Substitutes. The weakest forces are: Threat of Entry,

Power of Suppliers, and Influence of Complements. Based on all these forces acting on the fast

casual industry, it is moderately attractive with an analysis score of 3.76 (Exhibit 16). The Level

III score of 3.75 is lower than the Fast Food Industry’s of 4.0 (Exhibit 1). This makes the Fast

Casual Industry slightly more attractive than the Fast Food Industry. This is supported by the

ROIC of Fast Food restaurants such as Chipotle and Panera Bread that have 3-year Returns on

Invested Capital of about 23% ("Chipotle Mexican Grill Inc Class A.”) and 17% ("Panera Bread

Co Class A."), respectively. Based on this analysis, the fast casual industry appears to be an

attractive industry for McDonald’s to enter. The next step is to assess how much it would take

for McDonald’s to enter the new industry.

Test 2: The Cost-of-entry Test

According to a report from Market Realist, a typical fast casual dining restaurant would

be approximately 3000 square feet and support up to 140 seats. The average cost to construct,

decorate, and furnish a store this size is about $750,000 to $1M. In order to make a significant

impact on the market, we need achieve at least 100 locations (versus In n Out 300 stores, Smash

Burger 300 stores, or The Habit 140 locations). The average Revenue for this type of restaurant

is $280/sqft/year, which translates to $840,000 revenue/store. In addition, the working capital

stays at 13% of sale, which is $110,000/store/year. In conclusion, with 100 stores opening, the

required capital investment is about $120 million, which is the approximately the cost to enter

the market and make a significant impact.

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Test 3: The Better-off Test

McDonald’s is the market leader in the fast food industry, especially in the burger

segment. They have a lot to offer but in the fast food industry, but there is only so far they can

continue to go. With the resources that they have to offer such as strong outreach, organizational

excellence, solid HR, and set training they could easily move into a new market with success.

According to Forbes the fast casual industry “is a fresh and rapidly growing concept”.

McDonald’s has enough maturity and resources to be able to move into the new market with a

smooth transition. In competition with restaurants like Chipotle, Panera, and the Counter, they

would be given an edge via their established reputation and procedures. The fast casual

restaurants are relatively new and therefore the 70 plus years that McDonald’s has had in the

industry will give them leverage upon entering the market. Though many of their operational

processes will need to change, they will have a great foundation to work from and the resources

to utilize, including their suppliers, value chain, and operational functions.

Recommendations

McDonald’s has a lot of potential for success based on the reach their brand has obtained.

Based on that determination we have several potential options to consider, and a few solidified

recommendations to pursue in the short-term and in the medium to long-term.

Short-Term Recommendations

McDonald’s looks to be the health leader in fast food. They are actively searching for

higher quality ingredients and strive to be ahead of the competition in terms of quality,

convenience, and price. One example of this is the announcement that McDonald’s plans to have

cage free eggs by 2025. We would recommend that McDonald’s continue this health trend by

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referencing the consumer health index. Some attributes we would advise them on employing are

low-carb menu options, diversified seafood items, and a focus on white meat poultry items like

turkey and chicken.

We would also advise McDonald’s to continue using technology as a tool to listen to

consumers. Potential applications include using Twitter surveys to ask consumers about their

preferences for international menu items, and app integrations that allow third party vendors to

deliver McDonald’s to consumers ordering from home. Creating social media interaction with

customers would allow McDonald’s to expend as little money as possible and expand their reach

to US customers, and possibly global customers as well. These recommendations look to slow

McDonald’s US decline and keep them in parity or in a short term competitive advantage until

our longer term recommendations can realize returns.

Medium to Long-Term Recommendations

With the slow decline of the fast food industry, our recommendations to acquire a

restaurant and create a fast casual entity of McDonald’s will allow for a sustainable competitive

advantage. Our short term goals to enhance and sustain the fast food empire that already exists

will be more of a competitive parity. In reality, the fast food industry will not disappear entirely

with two prominent market segments driving business: those who travel, and those who are low

income. This has led to the creation of our short term goals which will immediately go into effect

to salvage and maintain McDonald's (Exhibit 23).

In any new venture there will be naysayers that are opposed to change and growth. An

argument can be made not pursue any of our recommendations, but the fear of change is behind

that. A huge concern for McDonald’s moving into the fast casual market will be that even with a

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new brand they will not be able to overcome their current reputation for gross, unhealthy, and

fattening foods.

A potential resistance to an international menu that is presented across the McDonald’s

board will be the elimination of the novelty. When people travel they are frequently looking for

the novelty of a new McDonald’s item. By making the menu universal McDonald’s will be

eliminating the unfamiliarity that one would experience when they travel. Another issue they

may encounter and will be consistently scaling to meet needs. This will be similar to the issue

they were able to overcome with all day breakfast.

Create a New Brand “grind.”

Key Characteristics:

The main purpose of “grind.” is to provide a completely different dining experience from

traditional McDonald’s stores. With a different brand image, “grind.” can serve the higher end

market and compete with the fast growing casual-dining restaurants without dramatically shifting

McDonald’s core value proposition. The “grind.” should resemble the brand perception of

Panera Bread, Chipotle or The Counter. The key characteristics of those brands are a cook to

order philosophy, upscale ingredients that are not often served in fast food restaurants, and a fun

dining experience.

The first characteristic is a “Cook to order” or “create your own dish” philosophy, which

is the main selling point of fast casual dining restaurants we are examining in this paper.

Chipotle offers “create your own burritos” or The Counter lets customers “create your own

burger.” The process of “cook to order” allows customers to observe their meals being prepared

in front of them, from raw ingredients to a freshly prepared meal. The advantage of “cook to

order” is to ensure customers that the ingredients are fresh and the cooking procedure is handled

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appropriately. This helps to improve the value of the products, which will increase customers’

WTP.

The second characteristic that differentiates “grind.” from conventional McDonald’s

stores is using upscale ingredients. If McDonald’s is using meat patties, “grind.” will serve

whole high quality pieces of steak. There will be other fresh ingredients that are usually found in

high end restaurants such as avocado, fresh berries, and a full vegetable bar. All of the

ingredients will be supplied by local suppliers and delivered on daily basis. The cost of providing

these organic ingredients will be high, but quality and freshness will justify the higher price

customers are paying.

Last but not least, we want to build a fun place to eat for our customers. A study from

Market Realist shows that the restaurant environment is one of main contributors to the meal

price. The “grind.” not only provides healthy, high quality food, but also offers a dynamic

ambience to dine in. Although the turnover per seat will be lower than a typical fast food

restaurant, the revenue/seat will be higher.

Implementation Plan:

In order to have an effective branding introduction, we decided that the best strategy

would be to open stores next to established brands that have similar target markets. Some

identified brands are Target, Whole Foods, Boston Market or even competitive brands such as

The Counter, Chipotle and Taco Bell’s Cantina. These brands serve the mid to upper end of the

market segment in term of spending. Moreover, the identified brands also offer a higher quality

of food, and some items that customers are not able to find in other discounted stores. By

opening next to or in the same complex with these brands, we are able to create a certain degree

of brand association. Therefore, customers visiting “grind.” can have a preliminary expectation

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about the restaurants. This brand associating strategy can reduce marketing costs, while

eliminating any confusion with other “healthy fast food chains.”

The rollout plan is to open flagship stores in 9 of the biggest urban cities which are trendy

in healthy consumer tastes: New York City, Los Angeles, Chicago, San Francisco, Boston,

Houston, Seattle, San Diego and Miami. These cities are not only early adopters but also famous

for tourism. With the amount of media coverage coupled with the clout of independent food

bloggers, these identified markets are amongst the top ten in America in terms of traffic.

Therefore, we can leverage word-of-mouth marketing, create a strong buzz, and reduce the risk

of failure.

We believe that each can optimally serve an area with a population of 200,000. In this light, we

plan to only open in cities with 1.6 million people or more to make sure there are available local

suppliers that can provide the ingredients that match our guidelines stated in the characteristics.

Figure 6 lists the cities and potential stores that can be open. We are planning to reach our peak

number of potential stores in the next 10 years.

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Figure 6: List of Potential Cities to Launch "grind."

For the marketing plan, we suggest covering three channels of communication:

Traditional media, social network, and high-profile customers. The first priority of advertising

campaign should be to leverage published ads over Facebook or Twitter. Social networking is

our main priority because McDonald’s already has a considerable amount of followers and fans

on their Facebook (62 million likes) and Twitter (3.6 million followers). Announcing releases

and events on McDonald’s social network fan base will tremendously reduce the cost per

customer reach. Moreover, the geographic of audience of McDonald’s social network is

appropriate for the market segment that ‘grind.” Is trying to penetrate.

Our second priority is to cater to influential customers like celebrity chefs and local food

bloggers. These high-profile figures also have their own fan bases, and their opinions can make a

dramatic impact on the expectation of the customers. We conclude that having celebrity chefs

and local food bloggers to announce the introduction of “grind.” can spread the word more

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effectively than advertising over conventional media like billboards and television. There will be

costs associated with inviting high-profile eaters. However, the cost per customer reach will

certainly be lower than running advertising on traditional media.

Last but not least, we suggest the company runs ads on the conventional channels as well

to be certain to reach the entire market. We prefer the local newspaper and TV channels over the

national ones simply because we only plan to roll out a store in 9 urban cities in the first year.

We would like to avoid the perception that “grind.” is another nation-wide fast food chain and

instead make sure that the core characteristics of the “grind.” brand resonate as a high quality

boutique restaurant to the local market.

Financial Analysis:

According to a report from Market Realist, a typical high-end fast casual dining

restaurant is approximately 3000 square feet and supports up to 140 seats. The average cost to

construct, decorate, and furnish a store this size is about $750,000 to $1M. The rent expense in

urban areas like San Francisco, Los Angeles, or Chicago is about $4.25/sqft. We assume the

average revenue/sqft/year of the industry is $280 will be our base case; and the revenue/sqft/year

of the top performers is $480 will be our optimistic case.

To assess the payback period, we used the DCF model with a WACC of 12.5% and set

the revenue growth of our base case as 10%/year (industry average) and our optimistic case as

15%/year(top performers. In addition, we set the perpetuity rate after 10 years to 3% and the net

margin to 11%. We will employ straight line depreciation over 10 years and every fixed asset

will be classified equally (Figure 7). According to a report conducted by NYU, the average

working capital/sale for Restaurant/Dining is 1.87%. We assume that “grind.” will follow the

industry average of the Working Capital vs. Revenue ratio closely. The store opening schedule is

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displayed in Figure 8, and the number of stores forecasted to open in the future is displayed in

Figure 9.

Figure 7: Depreciation Schedule

Figure 8: Store Opening Schedule for "grind."

Figure 9: Forecasted Number of Stores

According to the DCF Schedule base case (Figure 10), we are expecting to generate

positive cash flow at year 9, and the payback period for this project is expected to be 11 years.

Assuming no new stores open after the number of stores reaches potential, the existing 850 stores

are projected to generate $2.9 billion in revenue and grow at 3% annually. This translates to 12%

of the corporation’s total sales.

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Figure 10: DCF Schedule - Base Case

Meanwhile, the DCF Schedule for our optimistic case boasts a payback period of

approximately 6 years, with positive cash flow generated in year 5 (Figure 11). The revenue

generated by “grind.” will be an estimated $5 billion and accounted for 20% of the corporation’s

total sales. We concluded that the incremental revenue from “grind.” in both cases is a

significant contribution to the total growth of McDonald’s.

Figure 11: DCF Schedule - Optimistic Case

The payback period of 11 years in the base case is longer than the foreseeable future

regarding the trend of the industry. Therefore, if we decide to build “grind.” from the ground up,

we will have to deal with a tremendous amount of external risk, especially market uncertainty.

However, we are expecting that the probability of the optimistic case is high at approximately

70%, because the fast casual is a high growth industry and the consumer spending is expected to

rise 20% year over year for 10 years (Alvarez).

Merger & Acquisition:

Another route of creating a new entity to counter industry trends is to acquire an existing

brand on the market. There are two key things to consider when we want to buy another firm: the

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strategy needs to be synced with McDonald’s core values and the financial performance need to

enhance McDonald’s financial position. In this part of the paper, we introduce some key criteria

for the company to use as a guideline for choosing targets.

The first guideline we believe is crucial for future growth is the strategic position of the

target (Figure 12). It must fulfill both purposes of the M&A: to participate with the trendy fast

casual segment, and to create value through synergy.

Figure 12: Strategy Diamond For Target Acquisition

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We are looking for a company who is participating in the fast casual food market.

McDonald’s is operationally optimized to the burger-making process. Therefore, the products of

their acquisition target should be high quality, premium burgers. McDonald’s can utilize their

operational know-how to help their acquisition target improve the process; make it more cost

effective and increase the margin without compromising the quality.

The second strategy criteria is creating a healthy brand image, especially in high-density

urban areas. We identified that McDonald’s is losing the higher income market segment in which

customers are willing to pay more for a healthier product. Even McDonald’s has been trying to

regain this customer segment by introducing healthier products like salads, and premium burger

products like the Angus Beef & Mushroom. Even with these new product iterations, the

company could not retain their customer base. Therefore, the most formidable way to enter the

fast casual space is to acquire an existing brand in this segment and use McDonald’s resources to

expand aggressively, gain market share, and stay ahead of the curve.

Another important factor for the M&A is a high growth rate. A fast growing company

demonstrates that their products are beloved by customers, and the brand recognition is slated to

increase tremendously. We expect to see that the fast casual industry will become dramatically

competitive in the next two years, and it is imperative that McDonald’s acquire a company with

strong momentum so they can leapfrog their potential fast casual competitors and gain a

considerable amount of market share. We believe that McDonald’s “grind.” brand needs to keep

and maintain over 25% of the fast casual market share to sustain a competitive advantage.

Last but not least, we want a socially responsible brand. McDonald’s for years has been

viewed as an unhealthy, inhumane fast food chain. The company has a considerable amount of

regular eaters, but garners considerable criticism regarding the way the company has been

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conducting business. Therefore, it is important for us to acquire a brand with strong social

empathy. We want to shift the perception of consumers from processed food and automated

machinery to the notion of fresh ingredients and the development of skills in the workforce. We

believe that this will substantially improve and sustain the acquired brand in the long term.

For financial criteria, McDonalds’ should look at company that helps to improve the

financial performance of the corporation. The company is declining in sales, and McDonald’s

has over 30,000 stores with over $27billion in sales. Knowing this, it is difficult to find a target

that can offset the decrease in sale for the company as a whole. However, we put more weight on

targets that can improve our financial ratios, and the synergy must support the long term growth

rather than the short term compensation for market decline.

The first financial ratio we are looking at is their internal return rate. Our current return

on invested capital is 17.8%, therefore, we must choose a target with the internal return rate of

17.8% or more. McDonald’s is already behind the competitors in term of investment

effectiveness, so acquiring a company with an IRR of less than what McDonald’s already has

would be an ineffective acquisition. With 17.8% or more on internal return, the synergy would

help McDonalds’ improve their ROI, and increase market appeal for McDonald’s shares

The second criteria is that Y-o-Y growth has to be at least 15%. The market leader in fast

casual dining is Chipotle and their growth rate is 15.6%. Therefore, to compete with Chipotle

and jump ahead of the curve, we need a target with a faster Y-o-Y growth rate. Together with the

tremendous amount of resources McDonald’s has, the acquisition target will be able to achieve

the highest growth in the industry. In an optimistic scenario, the acquired entity would have 20%

Y-o-Y growth after the M&A.

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Finally, with the uncertainty of economic conditions and a highly competitive industry,

we would suggest that McDonald’s pay no higher than a 60% premium of their target’s

valuation, and target a P/E ratio of 35 or lower. We believe that a 60% premium on the target

valuation is appealing enough for the owner to sell their businesses, and costly enough to balance

the risk rewarding regarding the current trend of the market. The 35 P/E ratio is higher than the

industry average of 32 for this type of business model. The differences between 35 and 32

(industry average) is to reward their target for being a fast grower in the industry.

A few targets that we conducted a preliminary assessment on and fit at least 3 of our

criteria are ShakeShack, Five Guys, Habit, and Smashburger.

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Exhibits

Exhibit 1: Overall Fast Food Industry Attractiveness (Porter’s 6 Forces)

ForceLevel II Score

Level III Weight

Level III Weighted score

Threat of Rivalry 4.5 0.3 1.35Power of Buyers 4.3 0.3 1.29Threat of Substitutes 4 0.29 1.16Threat of Entry 2.05 0.05 0.1025Power of Suppliers 1.6 0.05 0.08Influence of Complements 3 0.01 0.03

Level III Overall Score: 4.0125

Exhibit 2: Threat of Rivalry (Porter’s 6 Forces) – Fast Food Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

ScoreIs there a small number of competitors? Often the greater the number of players, the more intense the rivalry. However, rivalry can occasionally be intense when one or more firms are vying for market leader positions.

5 0.2 1.00

Is there a clear leader in your market? Rivalry intensifies if companies have similar shares of the market, leading to a struggle for market leadership.

4 0.05 0.20

Is the market growing? In a growing market, firms are able to grow revenues simply because of the expanding market. In a stagnant or declining market, companies often fight intensely for a smaller and smaller market, exacerbating rivalry.

5 0.15 0.75

Are there low fixed costs? With high fixed costs, companies add production capacity in large increments frequently resulting in overcapacity, increasing the threat of rivalry.

3.5 0.05 0.18

Can firms store the product to sell at the best times? High storage costs or perishable products pressure firms to sell product as soon as possible, increasing rivalry among firms.

2.5 0.05 0.13

Are competitors pursuing a low growth strategy? If competitors are following a strategy of milking profits in a mature market, there will be less intense rivalry.

2 0.05 0.10

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Is the product unique or differentiated? Firms that produce products that are very similar will compete mostly on price, so rivalry is expected to be high.

5 0.1 0.50

Is it easy for competitors to abandon their product? If exit costs are high, companies may remain in business even unprofitable, increasing rivalry.

3 0.05 0.15

Is it difficult for customers to switch between competitors? If customers can easily switch, the market will be more competitive and rivalry is expected to be high as firms vie for each customer’s business.

5 0.3 1.50

Level II Factor Score: 4.50

Exhibit 3: Power of Buyers (Porter’s 6 Forces) – Fast Food Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

Score

Do firms have enough customers such that losing one isn’t critical to their success? The smaller the number of customers, the more dependent firms are on each one of them, making buyers stronger.

3 0.1 0.30

Does the product represent a small expense for firms’ customers? Are buyers making an economic profit? If the product is a relatively large expense or they are not making a profit, buyers will negotiate heavily to lower the price or they will seek replacements.

2 0.15 0.30

Is the product unique? If the product is standard or the same as other producers’, buyers have more bargaining power.

4 0.15 0.60

Would it be difficult for buyers to integrate backward in the supply chain, and compete directly with the industry’s firms? The less likely a customer will enter the industry, the more bargaining power firms have.

1 0 0.00

Is it difficult for customers to switch from the product to a rival’s product? If it is relatively easy for the buyers to switch, firms will have less negotiating power with their buyers, increasing buyers’ power.

5 0.6 3.00

Level II Factor Score: 4.20

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Exhibit 4: Threat of Substitutes (Porter’s 6 Forces) – Fast Food Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

ScoreDoes the product compare favorably to possible substitutes? If another product offers more features or benefits to customers, or if their price is lower, customers may decide that the other product is a better value.

4.5 0.4 1.80

Is it costly for customers to switch to another product? When customers experience a loss of productivity if they switch to another product, the threat of substitutes is weaker

4 0.4 1.60

Are customers loyal to existing products? Even if switching costs are low, customers may have allegiance to a particular brand. If customers have high brand loyalty to existing product the industry has a weak threat of substitutes.

3 0.2 0.60

Level II Factor Score: 4.00

Exhibit 5: Threat of Entry (Porter’s 6 Forces) – Fast Food Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

Score

Do firms have a unique process that has been protected? For example, technology-based companies with patent protection for their research investments, enjoy little threat of entry.

4 0.05 0.20

Are customers loyal to incumbent firms’ brands? If customers are loyal to current brands, a new firm would face a formidable battle to win over loyal customers, weakening the threat of entry.

1.5 0.2 0.30

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Are there high start-up costs? The greater the capital requirements, the lower the threat of new competition. 3 0.2 0.60

Is there a process or procedure critical to the industry that takes time to learn or develop? The more difficult it is to learn the business, the greater the entry barrier.

4 0.05 0.20

Will a new competitor have difficulty acquiring/obtaining needed inputs or raw materials? Current distribution channels may make it difficult for a new business to acquire/obtain inputs as readily as existing firms.

3 0.05 0.15

Will a new competitor have any difficulty acquiring/obtaining customers? Distribution channels that make it difficult for a new business to acquire/obtain new customers lower the threat of entry.

2 0.15 0.30

Would it be difficult for a new entrant to have enough resources to compete efficiently? For every product, there is a cost-efficient level of production. If challengers can’t hope to achieve that level of production, they won’t enter the industry.

1 0.3 0.30

Level II Factor Score: 2.05

Exhibit 6: Power of Suppliers (Porter’s 6 Forces) – Fast Food Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

Score

Are there a large number of potential suppliers? The greater number of suppliers of the industry’s needed inputs, the weaker supplier power is.

1 0.2 0.20

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Are the products that the industry needs to purchase for their business standard? Suppliers are weaker when the products needed are not unique.

1 0.4 0.40

Do purchases from suppliers represent a large portion of their business? If the industry’s purchases are a relatively large portion of the supplier’s business, the suppliers will have less power to increase their prices or diminish product features.

2 0.2 0.40

Would it be difficult for the suppliers to enter the industry, sell directly to the customer, and become a direct competitor? The harder it is for suppliers to start a new, competing business, the weaker their power.

1 0.1 0.10

Can firms in the industry easily switch to substitute products from other suppliers? If it is relatively easy to switch to substitute products, there is more negotiating room with suppliers, weakening their power.

5 0.1 0.50

Level II Factor Score: 1.60

Exhibit 7: Influence of Complements (Porter’s 6 Forces) – Fast Food Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

Score

How concentrated are the firms in the complementary industries? Complement concentration is more favorable for the focal industry than fragmented complementary industries.

4 0 0.00

Is it costly/difficult for customers to switch products within the focal industry or to switch between complementary products? If it is easier for customers to switch between rival products than between complements – complements will have strong, unfavorable power.

5 0 0.00

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How easy is it to unbundle products and their complements? The more difficult it is to unbundle products from their complements, the less favorable it is for the focal industry.

5 0 0.00

How much influence do complements have on demand? Complements that have significant sway over demand could threaten the profit making potential of the focal industry.

5 0.5 2.50

Could complements easily enter into the focal firm’s industry? Complements that can easily enter the focal industry have more power and thus are more threatening.

1 0.5 0.50

Does the focal industry suffer from a low rate of profit growth? An industry in that situation had fewer alterative for growth, increasing the influence of complements.

4 0 0.00

Level II Factor Score: 3.00

Exhibit 8: Major Players in the Limited Service Restaurant Industry

59

Exhibit 9: Strategy Diamond Analysis of Primary Competitor, Wendy’s

60

Exhibit 10: Strategy Diamond Analysis of Secondary Competitor, Chipotle

61

Exhibit 11: Strategy Diamond Analysis for McDonald’s

Exhibit 12: McDonald’s VRIO

62

Exhibit 13: McDonald’s VRIO Analysis of Resources and CapabilitiesResource/Capability Valuable

(1-5)Rare (1-5)

Inimitable (1-5)

Org. exploited (1-5)

Offensive(V+O)

Defensive(R+I)

1: Brand Value 5 3 3 5 10 6

2: Community Outreach 5 5 2 5 10 7

3: Ronald McDonald House 5 4 2 4 9 6

4: Athlete Partnerships 5 2 1 5 10 3

5: Optimized Kitchen 3 1 1 2 5 2

6: Event Partnerships 5 2 1 5 10 3

7: Hamburger University 5 1 1 2 7 2

8: Social Media 5 2 2 3 8 4

9: Real Estate 3 1 1 3 6 2

10: Franchises 3 4 4 2 5 8

11: Management 4 1 1 4 8 2

12: Advertisements 5 3 3 5 7 10

63

Exhibit 14: Financial Positions of McDonald’s and Key Competitors

64

Exhibit 15: SWOT Analysis for McDonald’s

65

Exhibit 16: Overall Fast Casual Industry Attractiveness (Porter’s 6 Forces)

ForceLevel II Score

Level III Weight

Level III Weighted score

Power of Buyers 4.35 0.30 1.305Threat of Rivalry 3.75 0.30 1.125Threat of Substitutes 3.56 0.29 1.0324Threat of Entry 2.35 0.05 0.1175Power of Suppliers 3.10 0.05 0.155Influence of Complements 3 0.01 0.03

Level III Overall Score: 3.76

Exhibit 17: Power of Buyers (Porter’s 6 Forces) – Fast Casual Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

ScoreDo firms have enough customers such that losing one isn’t critical to their success? The smaller the number of customers, the more dependent firms are on each one of them, making buyers stronger.

3 0.1 0.30

Does the product represent a small expense for firms’ customers? Are buyers making an economic profit? If the product is a relatively large expense or they are not making a profit, buyers will negotiate heavily to lower the price or they will seek replacements.

3 0.15 0.45

Is the product unique? If the product is standard or the same as other producers’, buyers have more bargaining power.

4 0.15 0.60

Would it be difficult for buyers to integrate backward in the supply chain, and compete directly with the industry’s firms? The less likely a customer will enter the industry, the more bargaining power firms have.

1 0 0.00

Is it difficult for customers to switch from the product to a rival’s product? If it is relatively easy for the buyers to switch, firms will have less negotiating power with their buyers, increasing buyers’ power.

5 0.6 3.00

Level II Factor Score: 4.35

66

Exhibit 18: Threat of Rivalry (Porter’s 6 Forces) – Fast Casual Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

ScoreIs there a small number of competitors? Often the greater the number of players, the more intense the rivalry. However, rivalry can occasionally be intense when one or more firms are vying for market leader positions.

4.5 0.20 0.90

Is there a clear leader in your market? Rivalry intensifies if companies have similar shares of the market, leading to a struggle for market leadership.

4 0.05 0.20

Is the market growing? In a growing market, firms are able to grow revenues simply because of the expanding market. In a stagnant or declining market, companies often fight intensely for a smaller and smaller market, exacerbating rivalry.

2 0.15 0.30

Are there low fixed costs? With high fixed costs, companies add production capacity in large increments frequently resulting in overcapacity, increasing the threat of rivalry.

3 0.05 0.15

Can firms store the product to sell at the best times? High storage costs or perishable products pressure firms to sell product as soon as possible, increasing rivalry among firms.

4 0.05 0.20

Are competitors pursuing a low growth strategy? If competitors are following a strategy of milking profits in a mature market, there will be less intense rivalry.

4 0.05 0.20

Is the product unique or differentiated? Firms that produce products that are very similar will compete mostly on price, so rivalry is expected to be high.

3 0.10 0.30

Is it easy for competitors to abandon their product? If 3 0.05 0.15

67

exit costs are high, companies may remain in business even unprofitable, increasing rivalry.

Is it difficult for customers to switch between competitors? If customers can easily switch, the market will be more competitive and rivalry is expected to be high as firms vie for each customer’s business.

4.5 0.30 1.35

Level II Factor Score: 3.75

Exhibit 19: Threat of Substitutes (Porter’s 6 Forces) – Fast Casual Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

ScoreDoes the product compare favorably to possible substitutes? If another product offers more features or benefits to customers, or if their price is lower, customers may decide that the other product is a better value.

3.4 0.4 1.36

Is it costly for customers to switch to another product? When customers experience a loss of productivity if they switch to another product, the threat of substitutes is weaker

4 0.4 1.60

Are customers loyal to existing products? Even if switching costs are low, customers may have allegiance to a particular brand. If customers have high brand loyalty to existing product the industry has a weak threat of substitutes.

3 0.2 0.60

Level II Factor Score: 3.56

Exhibit 20: Threat of Entry (Porter’s 6 Forces) – Fast Casual Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

Score

Do firms have a unique process that has been protected? For example, technology-based companies with patent protection for their research investments, enjoy little threat of entry.

4 0.05 0.20

68

Are customers loyal to incumbent firms’ brands? If customers are loyal to current brands, a new firm would face a formidable battle to win over loyal customers, weakening the threat of entry.

3 0.2 0.60

Are there high start-up costs? The greater the capital requirements, the lower the threat of new competition. 3 0.2 0.60

Is there a process or procedure critical to the industry that takes time to learn or develop? The more difficult it is to learn the business, the greater the entry barrier.

4 0.05 0.20

Will a new competitor have difficulty acquiring/obtaining needed inputs or raw materials? Current distribution channels may make it difficult for a new business to acquire/obtain inputs as readily as existing firms.

3 0.05 0.15

Will a new competitor have any difficulty acquiring/obtaining customers? Distribution channels that make it difficult for a new business to acquire/obtain new customers lower the threat of entry.

2 0.15 0.30

Would it be difficult for a new entrant to have enough resources to compete efficiently? For every product, there is a cost-efficient level of production. If challengers can’t hope to achieve that level of production, they won’t enter the industry.

1 0.3 0.30

Level II Factor Score: 2.35

Exhibit 21: Power of Suppliers (Porter’s 6 Forces) – Fast Casual Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

Score

Are there a large number of potential suppliers? The greater number of suppliers of the industry’s needed inputs, the weaker supplier power is.

4 0.3 1.20

69

Are the products that the industry needs to purchase for their business standard? Suppliers are weaker when the products needed are not unique.

3 0.15 0.45

Do purchases from suppliers represent a large portion of their business? If the industry’s purchases are a relatively large portion of the supplier’s business, the suppliers will have less power to increase their prices or diminish product features.

1 0.15 0.15

Would it be difficult for the suppliers to enter the industry, sell directly to the customer, and become a direct competitor? The harder it is for suppliers to start a new, competing business, the weaker their power.

1 0.1 0.10

Can firms in the industry easily switch to substitute products from other suppliers? If it is relatively easy to switch to substitute products, there is more negotiating room with suppliers, weakening their power.

4 0.3 1.20

Level II Factor Score: 3.10

Exhibit 22: Influence of Complements (Porter’s 6 Forces) – Fast Casual Industry

Factor Level I Score

Level 1 Weight

Level 1 Weighted

Score

How concentrated are the firms in the complementary industries? Complement concentration is more favorable for the focal industry than fragmented complementary industries.

4 0 0.00

Is it costly/difficult for customers to switch products within the focal industry or to switch between complementary products? If it is easier for customers to switch between rival products than between complements – complements will have strong, unfavorable power.

5 0 0.00

How easy is it to unbundle products and their complements? The more difficult it is to unbundle products from their complements, the less favorable it is for the focal industry.

5 0 0.00

70

How much influence do complements have on demand? Complements that have significant sway over demand could threaten the profit making potential of the focal industry.

5 0.5 2.50

Could complements easily enter into the focal firm’s industry? Complements that can easily enter the focal industry have more power and thus are more threatening.

1 0.5 0.50

Does the focal industry suffer from a low rate of profit growth? An industry in that situation had fewer alterative for growth, increasing the influence of complements.

2 0 0.00

Level II Factor Score: 3.00

Exhibit 23: Cage Framework

71

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