McDonalds Corporation

Executive Summary
McDonalds Corporation is a Centralized, International company, which competes in the fast
food industry supplying hamburgers, french fries and other consumable items using
standardization, heavy expansion and branding as the driving force. McDonalds operates in
over 121 countries and has over 30,000 restaurants worldwide.
McDonalds utilized an intense, rapid expansion into foreign countries through three primary
methods, franchising, company owned restaurants, and joint ventures. With the majority of
international restaurants stemming from franchising agreements, McDonalds management relied
on this method to aid in the acceptance of a new style of eating into unfamiliar markets. With
minimal risk and maximum gains, franchising continues to contribute heavily to McDonalds
international success.
With a centralized, international structure, McDonalds keeps a tight grasp on operations, cost
and quality. With an ethnocentric management strategy, McDonalds relies on domestic based
logic and attitudes and transfers them to their international outlets and restaurants.
In order to control its overseas operation, McDonalds uses a combination of two approaches.
The majority of control would fall under the rules approach, meaning that control lies with
headquarters creating procedures and policies for the subsidiaries to follow. However, there is
also a little of the cultural approach that has surfaced and is being utilized judging by the
adaptation that has occurred in some of the overseas restaurants. This has occurred even with
the tight internalized norms that are constantly presented and enforced by headquarters.

McDonalds Background

With operations in over 121 countries and over 30,000 restaurants around the globe, McDonalds
Corporation is the largest fast food service and supplier in the world. To serve all of the their
customers and demonstrate the incredible size of the company, McDonalds has more than one
and a half million employees and serves more than ninety-six percent of the worlds population at
least once a year. McDonalds operates in the fast food industry and its core product lines
include hamburgers and french fries, but the chain also sells chicken, salads, and fish products
among others.
Since the first restaurant operations in the early nineteen fifties, McDonalds has grown at an
incredible pace through an internal philosophy of expand at all costs. What this philosophy
means is open as many stores as possible as fast as possible. At the peak of the companys
growth, this rapid pace had a new McDonalds outlet opening every four hours everyday of the
year. Management instilled the idea that as more restaurant locations are opened the more
customers will be served, and this leads to higher profits that would be realized across the
board. Since the beginning, this intense expansion plan has been successful, both in the
domestic and foreign markets abroad. However, recently there have been issues developing with
saturation across the globe that have had an impact on sales, which will be discussed later in the
paper.
The company has always utilized four major principles throughout its history to expand rapidly,
increase sales and remain the market leader. By leveraging their enormous cash flow, brand
power, real estate and customer spending habits, McDonalds has not only emerged as the
world-wide leader, it has also changed the way the world eats. As the means to rapid expansion
are not the focus of this paper, altering the eating habits around the world represent a very
significant topic and will also be addressed later in the paper.

International Operations Significance

McDonalds first international expansion occurred in 1967 when the company opened in Canada.
The companys international division was formed shortly after in 1969 and has continuously
grown since.

Over the years, the international section of the McDonalds Corporation has

become increasingly more important to the companys overall success. As of this past year, nonUS based restaurants account for over half of the companys $40 billion in revenues (Appendix
A). Even more critical than the amount of sales to the company is the amount of profits of the
overseas operations. Foreign restaurants now account for about 60% of McDonalds total
profits4. The difference between revenues and profits of international operations is credited to
McDonalds immense market share in off shore outlets. Currently, McDonalds is the market
leader in 96% of the markets they do business in around the world and it is very common for

McDonalds to hold over 50% of the fast food market in foreign markets. Unlike the U.S.,
competitors in the past have not cut into McDonalds market share as easily in foreign markets,
although that is beginning to change.
There are a few major reasons why McDonalds not only chose to invest overseas originally, but
also continuously since. In the last ten years, almost 90% of McDonalds expansion occurred in
countries other than the United States. During that time, the 1990s saw an increase in
international units from 3,600 in 1991 to more than 11,000 by 1998, largely in Japan, Canada,
Germany, Great Britain, Australia, and France. Additionally, the number of international countries
nearly doubled from 59 in 1991 to 114 in 1998 (Appendix B). The rationale behind these
important decisions stemmed foremost from the increasing amount of saturation that had evolved
in the United States. This saturation was in the past, and is currently, forcing McDonalds to slash
prices and as a result profits in its domestic market. To counter this trend, international
restaurants were franchised and invested in. As was mentioned earlier, foreign markets are
extremely more profitable for McDonalds than U.S. operations. McDonalds detected this trend
early as an opportunity through marketing research and the idea of utilizing the heavily populated
areas of focus to cut costs and increase profits. Second, expansion in the U.S. has been taking
place for the last 45 years, where it has only been occurring heavily overseas for about 20 years,
so there is more business opportunity. McDonalds serves over 43 million people a day, but that
is still less than one percent of the worlds population, so you can see how McDonalds
management could be so optimistic.
To reiterate the importance of McDonalds international restaurants to the overall core business
plan of McDonalds, a closer look at a few facts is required. First, the busiest McDonalds in the
world is located in Pushkin Square in Moscow. The restaurant serves over 43,000 customers a
day and is only one example of the volume that some of the larger foreign restaurants are
capable of. In fact, eight of the ten largest McDonalds outlets in the world are located outside of
the United States.

International Expansion through Franchising

Now that the international operations have been conveyed as an increasingly important part of
McDonalds overall sales, it is vital to analyze how McDonalds entered into the foreign markets.
McDonalds entered into the international markets utilizing three methods; franchising, joint
ventures and company owned outlets. Where McDonalds had a choice, franchising was not only
favored, it dominated how the company expanded. Currently, 73% of all McDonalds restaurants
across the globe are franchised 16. When entering into some of the countries, McDonalds had to
abandon its philosophy of franchising and use the other methods.

For instance, when

McDonalds first entered into Mexico, the government did not allow franchising from foreign
countries. To work around this, McDonalds utilized company owned restaurants to enter the
market until the laws changed. In 1990, when the legislation went through legalizing franchising,
McDonalds Corporation sold the company owned outlets to franchisees. Similarly, joint ventures
were used as an early entry method where franchising was not feasible. Although this option was
not McDonalds first priority, it was not a far second behind franchising, and the companys most
prosperous international success to date stems from an initial joint venture in Japan.
To grasp a better understanding of how important franchising was to McDonalds rapid
international growth, the very concept of franchising must be analyzed. McDonalds restaurants
have crossed international borders fairly easily compared to other retail sectors and it is attributed
directly to franchising. However, the idea of franchising was not a new one to McDonalds. In
fact, McDonalds expansion in the United States began very early in the companys first years
utilizing a method that was relatively new to the industry, franchising 5.
It was the fast food industry, and McDonalds specifically, that turned franchising into a business
model that would transform the retail economy of the world. At the heart of a franchise
arrangement is the desire by two parties to make money while avoiding risk. The franchiser
wants to expand an existing business without spending its own funds. The franchisee wants to
run a business without going at it alone and risking everything on a new idea. One provides a
brand name, a business plan, expertise, and access to equipment and supplies. The other puts
up the money and does the work 10. In the case of McDonalds, they wanted an international
presence without the incredible risk associated with entering foreign countries and altering eating
habits. McDonalds knew that entering into foreign markets would be very difficult for an
American fast food company and needed the aid of local partners to ease the transition. That is
exactly what franchising allowed McDonalds to accomplish. By franchising, McDonalds could be
marketed as a local country business instead of an American company strong-arming their way
in. What they had to offer was the fastest growing fast food business in the world. Not to
mention an extensive supplier line, industry leading technology and a very prosperous business
history for anyone willing to accept the terms and pay the franchising fees.

Administrative Heritage
When comparing and contrasting the past and present organizational history of McDonalds, the
reflection in a mirror becomes top of mind. McDonalds is one of the worlds most insular large
companies, with a management team more typical of a private company than a global
powerhouse. The average top executive started working at the company when Richard Nixon
was President and there are no future plans to shuffle top management. The 15-member board

of directors has avoided the corporate-governance revolution that has attacked a large majority of
the Fortune 500 companies. By adding directors who do not have a direct stake in the company,
share holders, consumers, and employees can be reassured that actions made are for the good
of the company. However, McDonalds has elected not to take part in this trend. Currently, more
than two thirds of the board of directors is filled with current and former executives, vendors, and
service providers4.
McDonalds has basically been the same for fifty years, and change does not seem to be a top
priority. The company focus has always been publicly stated as being directed to McDonalds
customers and employees, although both have been debated extensively over the years. One
topic that has remained constant throughout the companys history is the emphasis on
management training. Management centers are now located in Munich, Tokyo, Sydney and
London where professors instruct management students in 22 languages. These centers are
replicas of the Hamburger University that has become famous in the United States, not only for
the information taught, but also for the large number of managers that have been trained at the
facilities.

McDonalds Structure and Strategy

McDonalds is a centralized, International Division company composed of franchisees and joint
venture partners. McDonalds utilizes a broad approach and initially grew overseas by relying on
transferring new products, processes, and strategies from the United States to less developed
markets1. The idea has always been to transfer the American tradition of fast food to other
counties using the same real estate principles, cost advantages, and new technologies that were
so successful in the U.S. McDonalds has always exploited the corporate company knowledge
and transported and diffused it to foreign markets. Starting with the concrete supplier chain, all
the way down to the store design and implementation, differentiation is not encouraged nor is it
allowed.
With an Ethnocentric mentality, McDonalds has constantly based the companies international
operations on home-grown ideas and concepts. Corporate first places the focus the domestic
market, and then filters the functions to the overseas operations. Information flows from
corporate to the franchisees based on what is working in the United States markets, with the
expectation that it will be implemented in the foreign markets. When analyzing McDonalds
corporate structure (Appendix C), it is evident that the top down approach is not only used it is
enforced. All information starts with corporate and is disbursed to the foreign markets.

Company Control and Coordination

In order to control the thousands of franchises in the system, McDonalds corporate utilizes a
combination of methods. Both the Rules Approach and the Cultural Approach are applied by
management in order to ensure that the international outlets maximize their potential without
disrupting the overall corporate plan. The reason for the combination of control approaches
stems from the nature of how the McDonalds system was built. By relying and building around
franchising, a fine line has to be drawn between keeping the franchises motivated and
accomplishing the company objectives.
The elements of the Rules approach are very evident when magnifying the requirements of the
franchisees. Management requires continuous lines of reports and paperwork to follow every
move of the franchises. The extent of the requirements can be seen in the following example.
The McDonalds operation-and-training manual is a roughly seven hundred and fifty-page
document that weighs about four pounds. It is known throughout the company as the Bible and
contains precise instructions on how various appliances should be used, how each item on the
menu should look, and how employees should greet the customers. An example of the extent of
detail that is contained in the manual are hamburgers are always to be placed on the grill in six
neat rows; french fries have to be exactly 0.28 inches thick. The regimentation and
standardization of McDonalds restaurants determines exactly how every task is done and
imposes rules about pace, quality and technique. The McDonalds Corporation insists that its
operators follow directives on food preparation, purchasing, store design and countless other
minute details. Operators who disobey these rules can lose their franchises and this has
occurred in the past.
The control from corporate can be extensive at times and franchises are constantly threatened.
We have found outthat we cannot trust some people, who are nonconformists, declared Ray
Kroc, one of the founders of McDonalds, angered by some of his franchisees. We will make
conformists out of them in a hurryThe organization cannot trust the individual; the individual
must trust the organization4,10 From the beginning of time, McDonalds management has
created and pushed an operating system of unusual thoroughness and attention to detail. In
order to enforce this style of management, McDonalds has strategically placed local and regional
offices throughout the world (Appendix D).
As mentioned before, the nature of franchising has led to this pattern of control and further
discussion on the topic is warranted to clarify it. The franchising relationship has its built-in
tensions. The franchiser gives up some control by not wholly owning each operation and the

franchisee sacrifices a great deal of independence by obeying the company rules. Everyone is
happy when the company is succeeding and profits are rolling in, but when revenues fall, the
arrangement often degenerates into a mismatched battle for power. The franchiser almost
always wins. In the global world of McDonalds, that exact scenario is currently taking place. The
last three years, McDonalds has seen lagging sales in the domestic market and booming sales in
the international markets. As a result, corporate is trying to tighten the reigns on foreign
operations even tighter than they have in the past 10. The key to a successful franchise, according
to many texts on the subject, can be expressed in a single word: uniformity. Franchises must
reliably offer the same product or service at numerous locations. This is the case with
McDonalds. They must continue to provide a high quality core product line at the lowest possible
cost available. Customers are drawn to familiar brands by an instinct to avoid the unknown. A
brand offers a feeling of reassurance when its products are always and everywhere the same. At
the same time, a little control must be sacrificed to keep motivation and creativity among the
franchises blossoming. This concept is why McDonalds management also utilizes some of the
Cultural Approach to control the international markets.
Through the years, McDonalds management has realized that in the fast food industry, more
freedom is needed in order to prosper in foreign countries. There are two major business
functions that are dictated by the countrys local influence and symbolize the Cultural Approach
freedom; product development and marketing. These functions are not only locally developed
they are operational away from headquarters and are represented in McDonalds structure chart
accordingly (Appendix C). By allowing the foreign markets the autonomy to develop and market
geographical specific menu items, management is not compromising or deviating from
internalized company norms or standards. Instead, they are allowing for local adaptation that will
not only benefit the franchise, but the corporation as well. Both product development and
marketing will be discussed in detail below.

Product Development and Marketing

As mentioned previously, product development and marketing can and do occur at a local level in
McDonalds international countries. These are the only two major business functions that
McDonalds Corporate allows some flexibility by deviating from the tight grasp that they hold over
international restaurants. Now, that is not to say that the countries and local markets have
complete freedom to add to the menu and promote their products how they wish. McDonalds
prides itself in the consistency of its products and taste around the world and would not allow
complete autonomy. Instead, it means that some of the lengthy, tedious, and idea crushing
control that corporate normally holds over its franchises is lifted slightly and can occur at the

country level as opposed to corporate level (Appendix C). To look at the impact this has on the
international outlets, a closer look at product development and marketing will each be analyzed.
Each local country has the autonomy and authority to develop its own products to address unique
tastes that their consumers have. It is the sole responsibility of the individual country to complete
the marketing research and develop new menu items. Once that has occurred, the information is
then studied and approved or rejected by the corporate offices depending on the extent of
favorable data available. Where there is limited involvement from corporate in the development
process, there is still heavy involvement in the acceptance process. This involvement from
corporate is only increasing, as the international markets become more important to McDonalds
overall business. However, according to Den Fujita, President of McDonalds Japan, when
McDonalds first entered Japan, corporate was relatively accommodating to the new menu items
that were presented to them, and as a result, acceptance in Japan was expedited 5.
There are many examples of item adjustments that have been made around the world over the
years to address local tastes and preferences (Appendix E). The menu changes resulted from
many different reasons such as cultural, religious, taste preferences and translation reasons.
Some specific examples are in India, there are no beef items served throughout the country, so
McDonalds added the Maharaja Mac, a lamb version of the standard Big Mac. Other
examples include Germany, where McDonalds serves beer with meals and in Cyprus, the
McNistisima menu was adopted for the lent period between Easter and Christmas and consisted
of veggie burgers, country potatoes, and shrimp and spicy rolls 14,16. Occasionally, new local
menu items might not seem like a logical choice for a country and are protested accordingly like
when McDonalds was going to recently add meat bowls over rice. Heavy protesting occurred
until the launch of the items. However, on the first day the bowls were available, they sold out
entirely proving that local marketing research and flexibility can benefit the company 13.
The marketing of international restaurants is handled with the same process as product
development. Locally, the countries develop and test market ideas that differ from the corporate
worldwide message. Any differences in the core message are then presented to the corporate
office for approval. Marketing overseas, like product development, is mostly handled away from
the corporate office. There are many reasons why the core marketing message would change,
including; translation reasons, cultural differences, customer target differences and the fact that
the product itself being marketed might not even exist in the companys core message. A specific
example of a country differing the marketing message from corporate took place in different
countries that use the metric system. Instead of calling their burger the Quarter Pounder, the
European countries market their burger as either the Royal Hamburger or the Burger Royal.

Future Issues for McDonalds

In order for the international division of McDonalds to continue the impressive success that it has
achieved in the past, two major areas of concern must be addressed. The increasing level of
saturation in most of the major markets around the world and the struggle over autonomy
between corporate and the franchises must be addressed with extreme urgency and by allocating
the resources necessary.
As mentioned earlier, competition in the fast food industry is becoming incredibly saturated.
When McDonalds first began expanding into international markets, their main focus was altering
eating habits. This was primarily because there was an absence of major competitors overseas.
However, over the last decade, the international market is beginning to mirror that of the heavily
saturated United States market. Profits are shrinking, same store sales are down, and the overall
market growth has slowed tremendously. This has prompted McDonalds to continue to cut costs
by announcing the closing of 175 under performing outlets in 10 countries. As the international
markets become more competitive and saturated, McDonalds must continue to analyze and
make adjustments accordingly.
Although saturation is a growing issue overseas, it was noted earlier that foreign operations are
now more than ever, a major element of the McDonalds Corporation business. As a result there
is a constant battle over autonomy. The franchises, especially the experienced outlets with over
a decade of success, want more autonomy to adapt to local tastes and preferences. The
franchises feel that as the market becomes more competitive, it will be vital for alterations and
adaptations to occur faster and easier than they ever have in the past. However, McDonalds
corporate is on the opposite side of the issue and is not budging. Corporate feels that control
must be at an all time high because of the importance of the international division and the fact
that if it fails, the whole company could suffer as a result. Corporate has tightened the reigns
consistently the last few years and will continue to do so to stay afloat by turning the losses into
gains.