The worldwide presence of McDonald’s symbolized both globalization and the extensive influence of the American way of life. Founded in 1940 as a hamburger stand in San Bernardino, California by siblings Richard and Maurice McDonald, the fast-food company has now become the largest restaurant chain in terms of revenues and one of the largest employers in the world. Appreciating the success of this company requires an understanding of the core principles of its business strategy.
Key Elements in the Business Strategy of McDonald’s
1. The Fast Food Concept
Fast food is a concept employed in restaurant operation that involves the mass production and preparation of ready-to-eat food products to accommodate a large number of customers and thus, increase sales volume, improve operational effectiveness and efficiency, and promote convenience by reducing waiting time.
Both Richard and Maurice introduced the “Speedee Service System” in 1948 that utilized and expanded further the fast food concept earlier practiced by the American hamburger chain White Castle. The system not only applies the concept of fast food but also the principles of production line manufacturing to prepare a range of food items quickly.
Today, the speedee service system and the general fast food concept remain central to the daily operations of every McDonald’s branch. The company has applied these practices not only in its core restaurant business but also in other restaurant models such as the McDrive drive-in branches, McExpress food stalls, and the McCafè coffee shops.
2. Franchising Business Model
Central to the business strategy of McDonald’s and one of the primary reasons it has successfully expanded across the United States and in different parts of the world is a business model based on franchising. The company began franchising in 1953. It further attracted franchisees after its acquisition by Ray Krock in 1961.
The fast food concept and the overall operational efficiency observed in different branches have attracted the attention of investors and the restaurant industry. Since the 1960s, individuals and groups have always been eager to secure a franchise license to operate their own McDonald’s branch because of the high return on their investments. Note that Krock was initially a franchisee who opened his first branch in 1954 before taking over the company seven years after.
Based on the business model, McDonald’s generates some its revenues from the rent, royalties, and fees paid by the franchisees although it also earns from the restaurants it directly owns and operates. Franchising has allowed the company to expand its market reach not only across the U.S. but also in developed and developing countries.
3. Joint Ventures With Other Organizations
Franchising is not the only business model of McDonald’s. Another way it enters in and expands to specific geographic markets is through joint ventures with local business organizations and in some cases, governments or state-owned companies.
In 2017, the company has entered a joint venture with three Chinese companies: CITIC Ltd., CITIC Capital, and Carlyle Capital. This move was aimed at increasing the presence of restaurants across mainland China, increasing its global sales by digging deeper into the Chinese market and of course, increasing the number of its branches.
A joint venture enables an organization to enter a foreign market through access to local resources and the use of suitable management competencies, as well as localization of a global brand and the acculturation of the entire business. In the case of McDonald’s, the joint venture with the Chinese companies will enable it to secure better locations for its branches and gain local market knowledge.
4. Real Estate Development and Ownership
It is interesting to note that more than just a fast food restaurant, McDonald’s is also a developer and owner of real estate properties. The estimated collective value of these properties is around USD 18 billion to USD 30 billion.
Aside from collecting royalty and licensing fees from franchisees, the company also collects rents from these individual businesses. It essentially buys and develops real estate properties and have them leased to franchisees at a large markup value. McDonald’s has developed and operated lands not only in the U.S. but also in other countries.
The strategy stems from Krock. To be more specific, he hired Harry Sonneborn in 1956 who advised him that the real income would not be generated through franchising alone but also to the development and leasing of real estate. McDonald’s currently charge franchisees either stipulated markups of about 40 percent of lease costs or 5 percent of the sales—whichever is higher.
5. Supply Chain Management
Supply chain management is another critical element of the business strategy of McDonald’s. Remember that the company not only sells food products but also uses other resources for its daily operations to include kitchen equipment, dining provisions, and materials for its physical stores.
The company has been utilizing long-term contracts with suppliers to ensure a steady supply of the resources it needs. For example, the company has secured contracts with farm owners, as well as food and beverage producers in different parts of the world to supply them with products needed for the preparation of its specific fast food productions.
McDonald’s has also subjected its suppliers under strict standards through performance management to promote quality across different branches in different parts of the world. Performance management ensures that branches are able to serve products that are consistent with the standards set forth by the company. It also drives suppliers to innovate to improve operational efficiency and promote further quality.
6. Marketing and Advertising
There are several key activities that form part of the overall marketing strategy of McDonald’s. Note that it has obliged franchisees to observe its branding standards based on its trademarks to ensure consistency in branding and marketing messages. These standards are an essential part of the contracts with franchisees.
It has also invested heavily in advertising through traditional and digital media. Similar to The Coca-Cola Company, the company has seasonal advertising campaigns and regional ones that are tailor fitted to a particular occasion or event and culture of the geographic market.
Product strategy through localization is also an essential marketing consideration. The company has also developed food products based on the culture of the locality to address the preferences of consumers in specific geographic markets. This is the reason why menus in different McDonald’s branches in different countries are varied. For example, in Japan, branches there offer food products demonstrating the fusion between American and Japanese cuisines.