Author:Nuque-Joo, Annalee


Arcadia, California-After seeing great success with their drive-in hotdog stand in the late 1930s, brothers Mac and Dick McDonald opened their very first burger-and-fries stand-alone restaurant in San Bernardino in 1948. The restaurant became popular for its consistent and high-quality burgers. This success was made possible by the brothers' Speedy Service System, a standardized process where one employee was taught to perform only one step in a meal's preparation for their entire shift. A few years after opening the stand-alone restaurant, the brothers met Ray Kroc, a sales agent who they had bought six new electronic multi-mixers from to use for the shakes they sold in the store. Realizing he was witnessing the growth of a potential business hit, Kroc offered to expand McDonald's and become the brothers' franchising agent. The McDonald brothers hesitated in fear an expansion meant risking the high-quality products associated with the McDonald's brand. However, in 1954, Kroc finally convinced them and officially became the brothers' business partner. Eventually, Kroc bought the restaurant from the brothers for 2.7 million dollars, with a hand-shake promise of 1.9% royalty to the brothers. In 1955, Kroc founded the McDonald's Corporation and opened his very first Corporation-owned franchise in Illinois. In 1960, he then bought exclusive rights to the McDonald's name and it's Speedy Service System. The Speedy Service System was strictly enforced in all McDonald's franchises to maintain the consistent and quality burgers that McDonald's was known for. The Speedy Service System was eventually renamed into The System and has become the core of McDonald's franchises in the US and all over the world.


The System: Suppliers, Employees and Franchises

Previously called the "Three-legged stooF, McDonald's "system" is comprised of a network of suppliers, employees and franchises. As of year-end 2018, McDonald's employed over 210,000 employees and operated a systematized franchise network of over 37,855 stores all over the world (McDonald's Corporation, 2018). To manage and ensure effective application of their System, McDonald's partners with local logistics companies that cover their major market segments' logistics and operations. For instance, McDonald's Europe market has partnered with HAVI Logistics for logistics services in Europe since 1981 (HAVI Marketing Analytics, 2015). Through their logistics providers, McDonald's is able to leverage their huge network and produce standardized products at cheaper prices for their customers.

Suppliers-McDonald's suppliers are composed of farmers and food manufacturers who provide ingredients for its food business and equipment suppliers for its kitchen and restaurant equipment needs. Farmers produce raw materials (meat, vegetable) and send them to food manufacturers who turn these materials into ingredients used for McDonald's meals (frozen fries, patties). Distribution centers receive and store these ingredients, and only deliver to franchises on a per-request basis to minimize storage time and expenses. Coordination of all supplier activities are managed by McDonald's Corporation's ("company") Restaurant Supply Planning departments, through an online McCommunications Network dedicated to the management of their global supply network (Birkinshaw, 2012). To maintain quality standards, McDonald's sends third-party auditors to conduct on-site interviews, quality checkups and reviews of suppliers' operations based on strict internal company standards.

Employees-McDonald's employees are called crew members and are all recruited by individual franchise owners (franchisees). Due to varying sizes of its stores, there is no specific number of how many crew members are employed for each store. McDonald's crew members are divided into three categories: salaried management, hourly paid management and hourly paid servers. Managers are responsible for tasks in sales and resource management, recruitment and training of crew members. The training provided to crew members is loosely based off of the original Speedy Service System (Royle, 2004). Although most training happens inside individual stores for crew members, McDonald's Corporation operates a training center in Illinois called Hamburger University dedicated for its higher-level employees.

Franchises-The System allows McDonald's Corporation to define franchising arrangements based on mixed ownership, shared revenues and standardized operating procedures. A typical franchise term is 20 years, and the three types of franchise contracts are conventional franchise, developmental license and foreign affiliate franchise. Under conventional franchise, the company owns the land and building, and a franchisee invests for the store equipment, seating, decor and additional business reinvestments over time. Under developmental license, the company does not invest in any capital. Licensees must provide capital for the entire business (finding land, building stores, recruitment and supply chain set-up), while the company receives upfront fees and royalty from sales. Lastly, the company has equity investments in foreign affiliated markets where they are able to receive a royalty fee based on a percentage of sales in invested stores. All three franchise types (Table 1) are operated by either one of two entities: McDonald's Corporation or individual franchise owners (franchisees).

As expected of global brands such as McDonald's, the company requires interested franchisees to satisfy specific requirements before being awarded a store. For example, McDonald's stores in the USA must be "located in a corner or corner wrap with a signage on two major streets and/or signalized intersection" (Corporate McDonald's, 2016). Other requirements include: Background checks and interviews of interested investors, proof of ability and resources, cash from non-borrowed resources, and proof of experience as a McDonald's crew member (Corporate McDonald's, 2016). Franchisees are allowed to own multiple stores as long as they meet those requirements.

Day-to-Day Operations

Historically, McDonald's growth in the 1960s was often attributed to the urbanization of the US market through developments in automobile and highway systems (Nicolaides & Wiese, 2017). Equipped with better modes of transportation, more customers were able to eat out and access drive-through services while on highways. This meant good business for McDonald's whose stores were often located in areas such as these. To cater to a growing customer base, it was important for McDonald's stores to prepare menu items as quickly as possible while maintaining prices at affordable levels. Through the system, they were able to do so while also providing identical burgers, fries and beverage menu items to various types of customers all over the world. Consistently, store layout and designs also followed a "First In, First Out" theme related to quick customer turnover. Store furniture was made of plastic and is small in size to maximize restaurant space and foot traffic. However, changing consumer trends have pushed McDonald's to start investing in more comfortable furniture for slower-eating customers. Especially in Europe where customers are seen as slow eaters than Americans, plastic chairs have been replaced with leather covered seats to make eating more comfortable (Patenaude, 2016). Other types of entertainment like free Wi-Fi and flat screen TVs were also introduced in stores (Appendix Figures A1-A4).

On top of their standard food operations, McDonald's has been successful in positioning itself as an affordable coffee provider through its McCafe brand. McCafe was first conceptualized by a local Australian licensee in 1993. The licensee added additional coffee equipment into regular kitchen areas to sell hot coffee to breakfast customers. The initiative was later picked up by the company's local Regional Corporate Team who aggressively expanded the coffee operations in Australia. By 2003, McCafe was the largest coffee shop brand in Australia and New Zealand (Balmer, 2014). Outside of Australia, the first McCafe store was opened in the US and some parts of Europe around the early 2000s (McDonald's, 2001). Over the years, McCafe as a brand has since become one of the biggest in the world (Table 2). This growth may be attributed to the company's initiatives to introduce McCafe as stand-alone stores and even having some regular franchises bake pastries in-house (Patten, 2016). McDonald's Corporation has also started requiring franchisees to purchase new equipment for espresso machines (worth US $12,000) to keep up with new items on their McCafe menus (Close, 2016).



Through the company's system, McDonald's is able to operate a vast global network of individual franchisees while still maintaining a strong brand image. As of 2018, McDonald's operates in over 100 countries where 93% of stores are owned by individual franchisees (McDonald's, 2018). Before 2015, their global franchisee network was segmented based on geographical proximity. In 2015, the company pursued a change in strategy which included organization restructuring and changes in market segmentation. Market segments of McDonald's stores are shown in Table 3.

History and Global Expansion

Almost a decade after its establishment, McDonald's first expanded into foreign markets through developmental franchise agreements in the Caribbean and Canada in the 1960s (Ahlers et al., 2017). This was the same period where Ray Kroc bought out the business from the McDonald brothers, who were skeptical of expansion outside the already successful US market. Now with full control of the business, Ray Kroc pursued aggressive global expansion initiatives. Under his leadership, the company pursued further expansion in Europe through joint venture agreements. The first European McDonald's...

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