How Did McDonald’s Build Its Sustainable Competitive Advantage? -The Key Success Factors and Business Strategy
A guy named Ray Kroc, aged 52, diabetic, with medical problems in knee and hip, who went to sell multi-mixer machines to McDonald brothers ended up purchasing the franchise rights for McDonald’s stores. Though he began with an aim to sell more multi-mixers through McDonald’s’ franchises, his thoughts transformed over a period of time and finally, McDonald’s became his passion. In the next 63 years, McDonald’s network grew to nearly 35,000 stores in 119 countries.
How did McDonald’s become a leader? What right things Ray Kroc and his team did? What could we learn from them?
The first step for any business is to ponder how to occupy space inside a consumer’s mind, which is called ‘Positioning’. It can also be termed as a consumer’s perception of a brand with respect to competing brands. A customer would notice a brand only when there is a markable difference from other brands.
Michael Porter writes, “A company can outperform rivals only if it can establish a difference that it can preserve. It must offer greater value to customers or create comparable value at a lower cost, or do both”
What values did McDonald’s offer in those initial years?
In the 1930s, the ‘fast food’ concept was spreading among the masses. A lot of drive-in restaurants sprouted in many places. The fast-food menu was revolving around Barbecue Beef, Pork and Chicken. Into this scenario, in the year 1937, two brothers Maurice and Richard McDonald started their own fast-food restaurant at San Bernardino. The business soon attracted a lot of teenagers and continued to grow rapidly.
The Hiccup -After world war II, the brothers felt that they were not making enough profits even though their parking lots were full all the time. They realised that one of the reasons was that they were selling too many items like every other competitor. Their resources were stretched to the limits, affecting the quality and the timely service.
The Reflection -McDonald brothers realised that their offerings were becoming like ‘me-too’ products. A product for everybody is like a product for nobody. Most ‘me-too’ products would fail to achieve reasonable sales after some time because their positioning is based on ‘better than the competitor’ rather than the ‘Value to the customer’. McDonald brothers did not want to fall into the trap of becoming another ‘me-too’ product. They wanted to focus on providing something different, something valuable to the customer.
‘Hamburger’ was a common favourite food in America at that time. What value differentiation, McDonald brothers could provide?
Fast and Efficient -How about Quicker service to consumers? Quicker Service -Would it be possible to reduce the time taken to deliver? Mcdonald brothers realised that cutting down the number of items on the menu would free the resources to help in quicker delivery.
“It is better to do one product well than two products in a mediocre way,” -Reed Hastings.
McDonald brothers decided to focus only on Hamburgers and its complimentary items. The menu became a shorter one.
Lean Process -To further reduce the time to deliver, the brothers copied lean-manufacturing process used in automobile companies and the war machines assembly units during the world war II.
Earlier, McDonald’s used to prepare sandwiches in batches and keep them warm in ovens. This would reduce the serving time, but the wastage increased on the days when the demand was less. To deal with this, they then started to keep patties, salad and other ingredients ready, and combine them into finished sandwiches, only when an order is placed. The time taken during this process was only a few minutes, enabling a quick response to any change in demand. Inventory was also brought down. Thus the risk of wastage was eliminated.
They also began to develop assembly line machines to prepare hamburgers, french fries and beverages. The machines drastically reduced the time further. The tests showed that consumers were happy and pleasantly surprised when they received orders quickly.
Price -The assembly line machines brought down the labour cost too. As the machines delivered quickly, the volume of sales increased and further helped McDonald’s to sell quality hamburger cheaper than other competitors.
Quality in Product -As the machines handled most of the tasks, McDonald brothers were free to work on the quality of the product at every step. That further enhanced the quality of Hamburgers, fries and beverages. They saw that competitors were mixing small quantities of other ingredients in the beef patties to save cost which was affecting the quality of their product. The brothers took responsibility to ensure that McDonald’s would sell only one hundred per cent beef patties. No compromise on quality. Similarly, they took extra efforts to ensure that each patty would contain exactly nineteen percentage of fat content. Their french fries were better than any other competitor in the town.
Quality Experience -It is impossible to become a leading sustainable brand if the company’s quality is associated with only the products. McDonald brothers not only focused on the quality of products, services and processes but also on the quality of infrastructure for enabling awesome experiences. They designed the store to enhance the quality of everything the customers see, touch, hear, smell and taste. The huge arches, the octagonal structure, glass partitions between kitchen & delivery areas and so on. They gave particular attention to ‘Aroma’ as it plays a vital role in the store experience. The premises were kept clean. The employees were trained to interact friendly with their customers. McDonald’s was also about building experience environments.
Cleanliness -The chances of a customer turning loyal to a brand is high if he leaves the premises with a positive service experience about the brand. One of the factors that have the potential to hinder the positive service experience is Customer’s hidden anxieties. It was important to address the elements and design every customer touch point in a way that would not trigger those anxieties in the customer.
McDonald brothers observed that one of the common worries of most of their customers was food hygiene and safety. They felt that it was important that none of the customer touch points should trigger this emotion -They took efforts to keep high standards of hygiene & cleanliness, in and around the restaurant. They made sure that employee’s attire also would reflect hygiene and cleanliness. They motivated employees to adhere to the hygienic standards all the time. The customers were allowed to view the kitchen and the supporting areas where the food is prepared & processed.
So, McDonald’s Value Propositions were Quicker Service, Lower Price, Quality Food, Quality Experience and Cleanliness. As per Porter’s definition of Strategy, McDonald was offering both value and low price to customers.
SERVICE AS MANUFACTURING
When Ray Kroc took control of the McDonald’s in the year 1955, he liked the McDonald’s idea of comparing service and production to the concept of car assembly line and manufacturing process. He too began to view everything from the assembly line perspective. He felt that the process flow and the production assembly line could further be improved. Ray Kroc’s past experiences(Worked in paper cup industry and also developed & sold multi-mixer machines) had also provided him with sufficient knowledge about process flow and equipment design.
Independent of Operators-To ensure repeat business, Ray Kroc believed that McDonald’s has to provide a consistent experience across all outlets by standardizing the quality of food, speed of service, methods of preparation, environment and cleanliness. Like an assembly line in a product manufacturing company, Ray Kroc was trying to take the operator out of the equation and rely on the system’s operations. Improving a service that depends on the performance of an operator would be inconsistent as people differ in attitudes, skills, interests, tastes, behaviours, experience and in environments where they grew up.
Operational Strategy -A business may have to perform hundreds of activities to create, produce, sell and deliver their products or services. Michael Porter says, “To establish a sustainable competitive advantage, a company has to perform some activities that are different from rivals and perform similar activities(Where it could not be avoided) in different ways.
Ray Kroc meticulously looked into each and every activity of McDonald’s. He kept exploring the possibility of new ways of performing some of the activities and, better yet, pondered the possibility of actually changing the activity itself.
As we have seen earlier, the way forward to provide consistent quality across all stores is not to depend on an operator’s individual skills, ability and strengths. One of the solutions is to standardise the preparation of many ingredients as possible, particularly the core ingredients. Ray’s team developed their own methods and equipment in preparing the ingredients without manual intervention. One of the examples is below
- The raw hamburger patties are prepared and semi-cooked in a centralised place, without any manual intervention in determining the texture, thickness, density, consistency and colour.
- The patties are carefully prepacked and premeasured, which completely eliminates the possibility of any errors from a human operator. It was then delivered to the stores. This semi-processed food brought down the cooking time and enabled operators to deliver the end products in quick time.
- The semi-cooked food dramatically lowered the wastage and helped to keep the store clean & hygienic with minimum effort. The cost of cooking the food and maintaining inventory also came down.
- McDonald’s designed and developed testing equipment to test and validate the quality of patties.
McDonald’s have given this kind of attention to all major ingredients like french fries, buns etc..
Standardization of ingredients allowed to optimize storage, preparation space and related facilities for a predetermined mix of products, thereby saving time, minimizing wastage, and reducing the cost. It was difficult for an operator to introduce any new process or ingredient or product into this system. The operator was forced to sell whatever McDonald’s corporation decides due to his facility limitations.
Standardisation helped in high volume production and sales, and managers were able to forecast demand with high precision. It was easier to manage peak demands as the inventory management was made simple.
Standardization brought down the employees training cost. The repeatability of actions helped the employees to work faster on the production line without compromising the quality of the product.
To deliver a good quality product in a quick time with a minimum price, Ray saw that layout design would play a major role. The key to good facility layout and design is the integration of customer’s needs and employee’s needs resulting in a smooth flow of materials, work and information. Ray’s team worked on the layout to impart following benefits
- It would be easy to interact with customers to take an order and deliver in quick time
- The store employees would have everything in its reach to serve the customer quickly
- Machines, product ingredients were arranged in such a way to create a single, well-functioning system
- The layout was designed in such a way that it could be expanded by adding resources to meet the increased customer demands
- As the customers could see inside the store, Ray wanted to use it a promotional value for McDonald’s. The store facility layout with machines, storage boxes had to be laid out in an attractive way that would further increase the value of the brand.
- To optimize the space and provide more ventilation.
- To control the climatic conditions inside the store during summer and winter.
- The Equipments were placed in such a way that the number of steps involved in performing the task would be reduced.
Ray Kroc and his team were constantly looking for ways to reduce the number of steps involved in performing the task, skill level needed and the time consumed. Having worked in a multi-mixer industry, he felt that machines would solve those major problems and also bring down the product’s cost thereby establishing a massive competitive advantage. At the same time, he firmly believed that equipment had to be energy efficient, easy to clean, easy to use, and importantly, provide consistent taste. Food made with the help of machine was also considered more hygienic at that time.
Jim Schindler, one of Ray Kroc’s associates, was called a steel magician. He had spent years in designing and developing food processing machines. In the earlier years of McDonald, Jim had worked overtime to ensure that the right equipment was made and also, the machines were easy to use.
- Earlier McDonald’s was making milkshakes with a hand dipping ice-cream method, which was a time-consuming process and the quality was operator-dependent. Jim Schindler modified it using a pre-measured ice-cream drawn from the overhead tank, improving the productivity and consistency.
- Ray’s team also developed high-efficiency fryers which would drastically reduce the time to fry the chips. The frier machine also simplified filtering and cleaning, thereby improving the taste and also provided enhanced environmental benefits. The machine consumed 40% less oil than the normal manual process. McDonald’s implemented a conveyor system, a radical step in a fast food industry at that time.
Jim’s team kept working on a lot of other machines to improve productivity, quality, thereby enhancing the service experience and earning more revenue. Ray Kroc invested in machines well ahead of his competitors.
Buns are such an important part of McDonald’s business that prompted Ray’s team to devote special attention. They not only worked on the texture, form, size of the bun but also looked at them from the assembly line perspective. Initially, the buns were delivered to stores in clusters of four to six with partially being sliced. One of Ray’s team associate Fred Turner saw that it would be easier and faster for a griddle man if McDonald’s received individual buns rather than clusters. The buns supplier was asked to slice the buns all the way through to the bottom. This drastically reduced the preparation time and speeded up the service. The preparation area was also left a lot less messy.
Ray’s associate Fred Turner kept working on the packaging of semi-processed foods and other ingredients, as they had to be transported from the assembly location to individual stores. Earlier, the buns being made as a cluster had been using a lot of papers and the kitchen ended up messier with papers thrown around. A lot of time was also lost in opening up packages. Fred designed a sturdy, reusable cardboard box for holding individual buns. It was easy to handle, transport and reduced shipping costs. Fred kept refining the cardboard box. He modified the box by extending the top lid all the way to the bottom so that it can hold moisture for a long time. Through experiments, he figured out that an extra heavy coating of wax inside the box would increase the number of reuses from the box.
Fred also worked on the packaging of patties, an essential component of McDonald’s business. He did a lot of experiments before arriving at the right kind of paper for packaging, with the right kind of wax which would enable the patty to pop out without sticking when the griddle man slaps it into the griddle. He optimized the size of the box based on the science of stacking patties without messing up the bottom-most patty.
Fred looked at every activity that would help griddle man’s job easier and worked on it. He extended the principle to every other ingredient and designed a suitable packaging.
McDonald continues to monitor various other activities with an emphasis on reducing its cost and time without compromising the quality.
BRANDING -TAKEAWAY PACKAGING
Ray Kroc gave particular importance to customer’s takeaway packaging as it was visible to both customers & non-customers and also had the potential to represent quality, integrity and safety of the brand. He chose good quality paper material for takeaways. In 1961, he modified the graphics in the packaging and for the first time, he gave prominence to McDonald’s famous arches(The customers were already familiar with arches and Ray Kroc thought that it would be better to exploit this familiarity) to aid in brand recognition & recall.
Rather than the words, symbols would communicate effectively at a glance, even from a far away distance. Nowadays, we could see the arches that are positioned to be clearly visible to passing motorists in the highways. It’s a sign that signifies an assured, known quality food. The symbol quickly conveys a story. They do not need words or a tagline.
The foremost task in promoting a brand is to make it clear where it would be available. McDonalds’ arch is so effective in this case.
One of the key elements in McDonald’s success was ‘french-fry operation’. Many of the Kroc’s close suppliers had commented to him that McDonald’s was not in hamburger business at all but in the french-fry business.
Marketing Tool -McDonald brothers realised in their earlier days that they had the best of french-fries in the town and it brought customers back to the store. They began to give special attention to the french-fries when every other competitor thought that french-fried potato is a necessary evil and an uninspiring one whose function was just to kill the time. But for McDonald brothers, it was the main marketing tool -they gave special attention to it. The preparation process was a ritual for them.
Immerse Yourself -Ray Kroc, when he took over the McDonald’s, loved the french-frying ritual. He himself took part in peeling, washing, blanching and cooking of french-fries. He purchased good quality fresh potatoes directly from the farmers -He carefully stored them in double layered mesh bins in order to let the fresh air in but keep the rats & critters away.
Obtaining Consistent Quality -In the late 1950s, Ray Kroc observed that potato peelings were giving plenty of problems in some of the stores. Peeling and blanching was a time-consuming process and also made the place messier. Some of the operators were finding it difficult to replicate the blanching process. Disposal of wastewater from the process posed another challenge in some places as the soil conditions were not conducive enough to absorb the water. There was a terrible stinking smell emanating from the wastewater accumulation.
To standardise the taste and quality of french-fries in all the stores, Ray Kroc began to standardise and automate many of the processes. He devised machines to peel the potato, carefully leaving a tiny portion of thin skin on, before cutting them into long pieces, while taking the operator’s skills out of the system. McDonald brothers used a natural curing process in their open bins as they were staying in a desert area and got a good breeze. Ray realised that relying on natural environment would be a disaster for the brand at some places. His team then devised an artificial curing system in the 1950s, using a big electric fan. They automated the time to allow for sugars change to starch.
In the year 1962, two of Ray Kroc’s associates developed an idea of using frozen potatoes that drastically changed McDonald’s business. Now the corporation could supply its outlets with precut, semi-cooked frozen potatoes that could be quickly cooked in a store using a deep-dry facility.
No more stinking smells, no more wastewater disposal problems, no more messy stores.
Fryer Equipment -Theodore Levit, in his HBR article, writes that the McDonald’s fryer at the store is neither so large that it produces too many french fries at one time (thus allowing them to become soggy) nor so small that it requires frequent and costly frying. The frier was designed to consume 40% less oil.
Tray and The Scoop Handle -The fryer is emptied onto a wide, flat tray adjacent to the service counter. This tray is designed and located in such a way to avoid spillage while filling the french-fries to the brim of the bag in order to give an impression of abundance and generosity. Ray Kroc’s team designed the scoop handle that would fill french-fries in exact portions in the delivery bag without soiling the employee’s hands or dress or the environment.
Ray’s team optimised each and every activity of french-frying process when the competitors were not giving enough attention to the product itself.
McDonald’s owes their initial success to a unique strategic position involving clear trade-offs. Choosing a unique activity or a differentiation is not enough to guarantee a sustainable competitive advantage as competing brands could easily copy or imitate those value propositions and unique activities. But they would find it difficult to copy one thing — The Trade-offs.
Trade-offs are the activities a brand chooses not to do, the activities that would be incompatible with the brand’s vision and core values.
Without trade-offs, there would be no choice and thus no need for strategy — Michael Porter.
The desire to grow puts enormous pressure on the business owners and they make some compromises. They add a series of incremental changes which lead them to lose their way.
-In the year 1948, McDonald brothers began to focus only on Hamburgers, french fries and the related items. They decided to focus and expand their energy only on their core strengths.
-Everywhere Hamburger patty is a piece of meat but in McDonald’s, it was a piece of meat with a soul. From the beginning, they were hell-bent on maintaining one hundred percentage beef in the patties. They never allowed mixing anything in the grounded beef mixture while the competitors were mixing things in beef patties to save cost. The competitors had also put holes in the patties like a doughnut and plugged the hole with pickles or other ingredients. But McDonald’s never compromised on their quality. They developed tests to strictly maintain the prescribed nineteen percentage fat content.
-McDonald’s refrained from selling Pizzas as they thought that it would affect their core strengths and core values.
-In the year 1960s and 1970s, many of the stores were earning an extra income through pay telephones, jukeboxes and other types of vending machines. Being tempted by those extra profits, many operators approached Ray Kroc to allow those machines. But Ray Kroc stayed firm and never allowed. He felt that it would create unproductive traffic in the store and create inconvenience to core-customers, affecting the brand’s core values. It would downgrade the family image, which McDonald’s was trying to portray.
The Benefits-By delivering one kind of value, McDonald’s projected an image of consistency whereas his competitors were confusing their customers. McDonald’s reputation grew. This trade-off showed its employees how the McDonald’s management is seriously committed to the brand’s core values. It made the organizational priorities clear to all its employees. It helped the brand to build a strong internal brand culture.
McDonald’s, by choosing not to do some of the activities, projected a consistent image of credibility and built a sustainable competitive advantage.
HIRE RIGHT PEOPLE
A founder alone cannot build a sustainable brand. He or she would build a great company if he or she could find a colleague who had ‘shared common interests’ and who could bring different strengths to the company.
“If you have the right people, then the problem of how to motivate and how to manage people properly goes away”-Jim Collins
Ray Kroc, while recruiting employees, made sure that he chose people who shared his passion, commitment and goals. He believed that like-minded souls would create a far greater impact.
- One of Ray Kroc’s earliest hires, Mrs.June Martino was from a poor family and was struggling to meet ends, before she joined McDonald’s. Ray saw that she exhibited a compassionate personality and had a natural persistence to deal with the problems. Ray hired her despite she having no book-keeping experience. In the next twenty years, she grew to the position of secretary and treasurer of McDonald’s corporation. She was voted as one of the top women executives in America.
- Ray’s one of the successful hires, Ed McLuckie was a friend’s son-in-law. But he hired him because he was passionate about the food service business. He became one of his successful store operators.
- Art Bender was McDonald brother’s successful hires. Art Bender was a musician and was also doing part-time work in making sodas, ice-creams and milk-shakes. He loved both the professions. After some time, he started the fast food business but lost everything and become broke. He then joined a restaurant as an employee and worked day & night in supplying sandwiches and ice-cream. Mac McDonald, who visited the restaurant often, liked Art Bender’s work ethics, cleanliness and the way he performed the tasks sincerely. After he heard that Art Blender had already gone broke, he immediately hired him for McDonald’s. Art Blender served the first hamburger of McDonald’s in 1948. Art Blender helped Ray to open more stores, train employees and help the operators in sourcing materials etc…
- Another of Ray’s earlier hires, Fred Turner was from a wealthy family. He approached Ray to buy a franchise. Ray liked Fred’s problem-solving ability, attention to details and his passion for the work. Fred began his McDonald’s career by working as an employee in one of the stores, cooking, cleaning and serving the customers. Fred solved a lot of operational problems in McDonald’s franchises. He became the operations-in-charge and later he became CEO.
- Harry Sonneborn, another Ray’s earlier played a major role in McDonald’s expansion. Before joining McDonald’s, he was working as V.P of Tastee-Freeze, an ice-cream chain. Harry was inspired by Ray’s vision, his hands-on working and wanted to join McDonald’s to take part in its growth. When Ray met Harry, he felt that both of them spoke the same language of business and passion. Though Ray made it clear that he had no money to pay him, Harry was resolute and persistent, the qualities which Kroc liked very much. It was not the money which motivated people to join McDonald’s.
The desire for growth forced every other competitor of McDonald’s to expand quickly through the franchising route as it was the logical, quick and easy way to raise capital. The problem was that most of them could not control the quality at any of their franchises and eventually ran themselves out of the business. Even McDonald brothers were happy to sell franchise license but not interested in following up through and maintaining checks. But Ray Kroc was not interested in compromising the quality of their franchises. Superior techniques, standardisation, employee & operator training programmes and frequent monitoring helped franchises to deliver uniform quality.
Harry Sonneborn was in-charge of developing franchises who himself had learnt the pitfalls of franchising from his earlier job at Tastee-Freeze ice-cream chain. Those lessons helped McDonald’s to maintain high standards in every franchise.
A franchise is not your customer -Every other competitor saw their franchises as a money-making machine. They sold machines, ingredients to their franchises and also took a share in their revenues along with a license fee. From the beginning, Ray was clear that the corporation was not going to be a supplier for its operators. He felt that there was a basic conflict in seeing a franchise as part of the organisation and at the same time, seeing them as a customer, trying to sell something and make a profit out of them. He was very clear that the corporation should try its best to help an operator to succeed in his business and should not be concerned about how much the company would be going to sell to him or her.
The company encourages every store operator to find their own supply sources within that area and also would help the potential vendors to build automated systems to produce and supply the ingredients at a low cost. The experience of McDonald’s executives simplifies a lot of work for an operator. The McDonald’s executives would work with the vendors to get the required quality, texture and consistency of buns, meat and other condiments. They also train the vendors and impart them the ways each ingredient need to be packed and supplied to individual stores.
Selection of an Operator -Whenever somebody approached Ray Kroc to buy a franchise, he would check whether he or she would be totally committed to run the franchise and whether he or she would be willing to work hard and concentrate exclusively on the challenges of operating the store. He had asked every potential candidate to work for hundreds of hours in one of the McDonald’s stores without conflicting their personal work at that stage. Once the candidate gained sufficient knowledge and skills, he would be given proper orientation training -he would be taught about the operations, the art of influencing people, management and leadership skills.
Locations -Ray and Harry would hunt the store locations on their own, lease them and rent it to franchises for a period of twenty years. Franchise owner rarely had an opportunity to choose their own location. This way, McDonald’s controlled everything as the place was owned by them and not by the operator.
The McDonald’s model was the first successful one in developing large-scale franchise network with consistent experiences across all locations.
REAL ESTATE STRATEGY
Harry Sonneborn, Former McDonald’s CFO said, “ “We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is that they are the greatest producer of revenue, from which our tenants can pay us our rent.”
Observational Research -As Ray’s team had the knowledge and experience in running McDonald’s stores, they chose the franchise locations. They spotted good locations by flying over the community and looked for schools and church steeples from above. Once they zoned in on a promising location, Ray and Harry would move around the location by walk and by car. They would visit nearby shops, supermarket stores, salons, spend time there and observe the movement of people and their behaviours. Both of them would check out traffic flows, which way cities and towns would be growing, would evaluate the best ways to transport goods to & from the store, and assess the location of possible competition. They did thorough research before finalising the location.
Right Time with Right Skill -Initially, Ray & Harry built franchises mainly in suburbs. Most of the earlier locations were nothing but a bare ground, where the owner would be happy to rent it out. Both Harry and Ray were being a good salesman, it was easy for them to convince property owners to lend out space. In the late 1950s and the early 1960s, a lot of vacant lands were available as the franchise business was yet to proliferate on a large scale. Ray Kroc was lucky to be expanding the business in a period of less fierce competition.
Being In Control Of Business -It was Sonneborn’s idea to have the McDonald’s company lease a plot of land and the building for each restaurant. The company would then sublease to the franchisee who would run the restaurant. Harry took classes on the fundamentals of leasing and also hired a professional attorney to help him in the lease agreements.
Investments -For the proposed idea to work, Sonneborn needed a large amount of money. He had good contacts with many of the insurance companies and roped in some of them to pay for the mortgages of those plots and the building. Without those investments, McDonald’s would not have grown faster.
The other competitors never owned the land and whatever the investments they acquired were only through the franchise fee which was not sufficient enough to let them invest in a large-scale assembly line production plant and new technologies.
Another major reason why McDonald’s could provide consistent quality food, maintain a clean environment and make customers leave with a smile was their employees. Employees are responsible for the wonderful customer experiences and McDonald’s training programmes under Hamburger University played a major role.
Ray Kroc, started Hamburger University in the year 1961 -the world’s first restaurant company to open a ‘Global Training Center’. It was surprising to know that Ray and his executive team thought well ahead in those times and implemented the ‘University’ idea. The concept of ‘Corporate Universities’ sprouted mostly in the last thirty years. Ray Kroc got a massive headstart.
The university was started with the sole aim to provide a decent future for McDonald’s employees. The employees were not only trained extensively in the McDonald’s operations but also in social skills, restaurant leadership and business leadership. The university also taught them ethics, accountability and responsibility. It was a platform to help employees to climb the career ladder inside the McDonald’s. It helped the franchise owners and managers dramatically in successfully running the franchise business.
RESEARCH AND DEVELOPMENT LABORATORY
In the year 1961, Ray Kroc established McDonald’s Research and Development laboratory with the help of Louis Martino. Louis, an engineer had worked as an operator and felt that the McDonald’s operations needed more sophisticated automated equipment to standardise the products and speed up the whole process. This lab kept working on new innovations, new types of equipment and new technology.
-While making french-fries, potatoes had to be pulled out of oil when they got a certain colour uniformly. But it was a subjective one as each person would have his own interpretation and this affected the quality of french-fries. Louis’s team developed a computer program to pull out potatoes automatically when it got the colour. They also automated the timing of the blanching process. They automated many processes through computer programming. They automated the frying time to suit the balance of water to solids in a given batch of potatoes. They devised automated dispenser systems to dole out the right amount of Catsup and Mustard into hamburger patties. They designed testing equipment like Fatiliyzer to validate the nineteen percentage fat content in the hamburger.
McDonald’s was investing in computers, technology and research while the competitors were unwilling to bet on them.
New Product Development -McDonald’s R&D also observe the behavioural change in the customers, the signs of fatigue in the taste monotony, and the changing food trends. They conduct ethnographic research, including shadowing customers and gather insights into how McDonald’s could help consumers in their everyday lives. Based on the research data, they continue to innovate new products, test them and launch it in the market. McMuffin, Big Mac, Breakfast Sandwiches, Apple Pie were all the results of McDonald’s R&D lab’s efforts. The lab also understands the nation-specific customer behaviour, cultural requirements, taste preferences and help McDonald’s to customize their product offerings. In India, they have McAloo Tikki Burger, Spicy Paneer Wrap and so on. -Customized food, catering to the needs of Indian taste buds.
Investing in R&D right from the beginning became a vital factor for McDonald’s sustained leadership in the market.
OPERATORS NATIONAL ADVERTISING FUND(OPNAD)
Until the early 1970s, McDonald’s was expanding exclusively in the suburbs. A few of the stores were struggling to attract customers. When Ray gave advertisements in the national media, he saw that those stores began to increase customer foot-print rapidly.
In the late 1950s and early 1960s, many fast food stores saw the money paid for advertisement programs or publicity campaigns were expenditures. But Ray Kroc saw it as an investment and he believed that the benefits came in many forms like building brand recognition, brand recall etc… In 1957, he hired an expensive public relations firm for $500 a month while he was struggling to pay salaries for himself and his employees. His investments in advertisements from the beginning helped McDonald’s rapid expansion in the minds of customers.
Ray Kroc set up a fund called Operators National Advertising Fund, where every store would contribute a small Percentage of gross to advertising campaigns. This led to volume purchasing of advertisement slots. Centralised advertising programmes further led to cost savings per consumer gained. It was a wonderful bargain for individual stores. It would be expensive for a store to hire external agencies to make those quality advertisements on their own.
Ray Kroc also helped operators to form a local association within their state and contribute One Percent to advertise in their local market. He encouraged them to hire their own local agencies, run their own campaigns in those markets by following guidelines established by the McDonald’s corporation.
The advertisements benefitted every store and helped the brand to grow quicker than other competitors.
EMBRACE AND DRIVE CHANGE
It is a well-known fact that every business must learn to adapt to their changing environment to remain successful. As long as the company remains close to their customers, they would find solutions to the questions ‘What to be changed? and ‘When to change?’.
The way to adapt to a changing environment is to anticipate and act in advance than reacting to the change. One of the solutions is to Innovate. Innovation is possible through an integrated process of experimentation. Through literally thousands of small experiments, McDonald’s refined it’s new products, then tested them, made sure that it meets the quality standards and then, they had launched it.
“The most important and visible outcropping of the action bias in the excellent companies is their willingness to try things out, to experiment.” — From the book ‘In Search Of Excellence’.
Fillet-O-Fish Sandwich -Once, operator of one of the store franchises, Lou observed that people in his area had developed a taste preference for fish based products and some of the local sellers had begun to sell products to meet those demands. Backed by research data, Lou’s team convinced Ray Kroc to try a fish sandwich. They experimented every detail -Type of fish, type of breeding, how long to cook, how thick it should be, how soft it has to be, kind of sauce that would be best for the product, and they continued experimenting with many other ingredients. While experimenting, they discovered that by adding cheese, the fish sandwich became delicious. Finally, Fillet-O-Fish was born. McDonald’s launched it and saw that sales rocketed through the roof.
Hot Apple Pie -After observing customers for some time, McDonald’s research team found that many customers were desperately looking for a dessert item after the meals. They experimented with the type of dessert that would fit readily into the existing assembly line system and also gain wide acceptance among the common customers. They experimented with Strawberry shake, Pound cake, Kolackies, brownies but nothing caught up with the consumers. Then, one fine day, McDonald’s experimented with an Apple Pie recipe received from one of the operator’s mother. The team changed the frying methods, ingredients, type of apples used, the hardness of the external crust, the viscosity of the hot sweet fillings inside, sugar levels and so on. They market-tested the product and later, they launched it. It was a resounding success and going strong even after fifty years.
Egg McMuffin -In the late 1960s, some of the operators were looking for ways to bring more business during the morning hours. The McDonald’s team experimented with simple breakfast items. One of the operators, Herb Peterson took a commonly available Eggs Benedict Sandwich and began experimenting. He changed various ingredients, added cheese, tried other combinations and tested various consistencies. While experimenting, he complimented the egg and muffin with grilled bacon and that transformed customer’s experience. McDonald’s breakfast business took off and soon was growing in double digits.
The company continued to invent & introduce more breakfast items in the early 1970s while the brand’s competitors began to introduce commercial breakfast items only in the mid-1980s. McDonald’s got a massive headstart.
McDonald’s continued to experiment and innovate and launched many products like Big Mac, Shamrock Shake, larger size fries, Happy Meals for kids, Cherry Pie and so on which went on to help McDonald’s build strong brand loyalty.
SUPPLY CHAIN MANAGEMENT
McDonald’s supply chain owes its success to Ray Kroc’s long-term vision. A vision that would profit everyone in the supply chain-Customers, Operators, Employees, Vendors and the Corporation.
Vendors as Partners -Ray saw vendors as business partners. He preferred to build a long-term relationship with every vendor and he chose vendors who were passionate and shared his vision. Many of McDonald’s supply chain vendors have been around from the beginning.
- McDonald’s executives spend time with their vendors to find better, faster and cheaper ways to deliver McDonald’s core values.
- They also help vendors with solutions if they encounter any production-related problems.
- McDonald’s plans the supply chain strategy along with their vendors.
- The suppliers are encouraged to innovate and would be aptly rewarded.
One of the vendors, Martin-Brower Company LLC began supplying paper napkins in the year 1956 and it is now a multi-billion dollar company delivering products to more than McDonald’s 15,000 locations in North America. The company kept innovating and added value to McDonald’s customers. It has exclusive distribution centres, warehouses, logistics network for McDonald’s.
Communication -One of the strong points of McDonald’s Vendor relationship programme is the transparent and real-time communication of data. Communication is the key to collaboration. The company constantly tracked every sale, inventory, future customer demands and shared all data with partners, franchise owners. It also invested in systems to track the movement of ingredients in the logistics network.
Sourcing -McDonald’s is the largest purchaser of beef globally and they directly buy from farmers ensuring the quality of meat. They also buy potatoes directly from the farmers. They never outsourced procurement process. They train in-house people to handle it. McDonald’s contribute a lot to the welfare of farmers through education, technical knowledge and financial support. This helped them to build trust and forge a long-term relationship with farmers. McDonald ’s made long-term contracts at fixed prices which helped them to gain protection against unknown events and price fluctuations. This was mutually beneficial.
Economics of Scale -As McDonald’s restaurant buy more buns, more mustard, more catsup, the vendor who gets an opportunity to supply them consider it as a break of a lifetime. Moreover, the McDonald’s executives would spend the time to help the vendor to lower the costs in every step. In the year 1955, Ray Kroc, for his first McDonald’s store, chose Louis Kuchuris’ Mary Ann Bakery as the supplier of buns. In the next fifteen years, Kuchuris built an automatic bun bakery, exclusively for McDonald’s and served more than 40 stores in an area. They had a quarter mile long belt conveyor for cooling buns. The firm used one million pounds of flour per month. They also had an exclusive trucking company that serviced McDonald’s stores. Due to the volume of sales, the vendors are ready to experiment McDonald’s new requirements. When Fred Turner approached the supplier to change the supply of cluster of buns to individual ones, the vendors could afford to do that. Similarly, with the box packaging suppliers, the volume allowed McDonald’s executives to experiment the packaging design and the vendors could implement those changes. The company is always engaged in an extensive utilization of economies of scale to achieve the cost advantage and better quality.
Cold Chain System -The perishable nature of products has forced McDonald’s to adopt cold chain processing, storage and distribution across all levels of the supply chain system. The first fast-food chain to implement such a system. The cold chain maintained shelf-life, freshness and nutritional value of the product. It also brought down the cost considerably as the company could buy raw materials in bulk and process them in volumes. The distribution centres are equipped to handle multiple temperature requirements of different items.
Technology -McDonald’s kept investing in computers and software. It’s integrated IT system helps stores in real-time monitoring, ordering, procurement and tracking of deliveries. It also helps in seamless communication within the supply chain system between warehouses or distribution centres or trucks and store managers. The constant communication also helps to manage the inventory more accurately.
Inventory -As the value of materials declines rapidly, inventory was the worst thing to own in business. McDonald’s runs a lean-process based assembly line to deliver products to the customer. The company designed the assembly process to meet instant demand, thereby reducing storage costs while minimizing wastage. Good vendor relationships also helped McDonald’s to maintain lower inventory levels.
McDonald’s restaurants have developed a reasonably accurate program for forecasting demand which further helps in inventory control. So, the McDonald’s system has evolved over a period of time to keep less inventory all the time.
A competitor can replicate some of the McDonald’s activities or match certain employee’s skills but they cannot have another Ray Kroc. Ray Kroc was a massive difference between McDonald’s and other brands.
- His mother taught him the importance of cleanliness from his childhood. She was an extremist in cleanliness. No wonder why McDonald’s is so clean.
- He was a wonderful sales person and that helped him so well in building the business. The reasons -he did a lot of part-time selling jobs from his childhood. In his younger days, he ran a lemonade business -worked part-time in a grocery store selling things -Worked in a music store -worked in a drugstore -He sold ice-creams -He started a music store business with friends and lost it -He sold coffee beans -He sold many novelty items door to door -Those jobs had taught him how to vary the marketing pitch to each customer. He worked hard most of the time. He was happy to sell things.
- He learnt the art of influencing people — He smiled often, Enquired others, Thought everything from the other’s perspective. He was enthusiastic and energetic.
- Ray always thought everything from his customer’s perspective, thanks to his salesman job. He would ask a customer to buy his product only when he thinks it would be beneficial to him or her. He disliked forcing a customer to buy.
It’s About Customers, Not About Us -While selling Lily brand paper cups, he always explored how his product would help in improving the sales of his customer. He observed customers of his customers. He observed his customer’s process. This led him to make small modifications in the paper cups which led to increased revenues for his customers. He learnt that experimentations and innovations are the life-blood of business which had to be backed up by consumer’s likes and desires. He kept providing ideas/suggestions to his clients on how to tap non-customers.
It’s not about our profits, It’s about how we could solve a customer’s problem, elevate their life, help them to achieve their ambitions, and fulfil their aspirations.
Observe, Be Curious -Ray Kroc was a keen observer. Whenever he visits a client, he would keenly observe whatever possible. Anything interesting developments would not escape his eyes. He had been selling his products to food companies and stores for a long time. So, he had developed a sound knowledge of food trends, consumer tastes, and preferences. He had been to kitchens of thousands of his clients. He had learnt different techniques, the importance of cleanliness, and assembly line production from them. He could recognize which business activity would appeal to a consumer. He could recognise which company would fail and which would succeed.
Running a Company -Ray Kroc, after leaving Lily Brand Paper Cups company, started his own company and sold multi-mixer machines. This multi-mixer business had taught him a lot of lessons -He learnt to manage money, manage debt. He faced many difficulties but learnt to persist and work hard. He learnt not to worry more than one thing at a time.
All those prior experiences of Ray Kroc’s forty years helped McDonald’s to grow into a brand of what it is now. What would have happened without that knowledge and learned grittiness?
Note: The above content is part of the following book.
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We could cover only limited activities in this article. Almost all of the activities are inter-related. Ray Kroc thought every activity from the customer’s perspective and made them distinctive and strengthened the fit among activities. McDonald’s competitors copied some of its products, some of the processes yet struggled to match the quicker delivery, quality and the price. A competitor copying only a few activities would fail to compete and it would be tough for anyone to copy all the activities and their inter-relationship.
References: Content predominantly from ‘Grinding It Out’, ‘Fast Food Factory’ article in bbc.co.uk/worldservice, Article on Facility Layout and Design in Inc.com, Article in phoenixmag.com by Keridwen Cornelius, UKessays.com, Article in Mashed.com by Maria Christina, Article in Time.com on McMuffin, McDonalds.com, What Is Strategy-HBR article by Michael Porter, The Five Forces Of Competitive Strategy-HBR article by Michael Porter, articles from entrepreneur.com, retailwire.com, What Great Brands Do by Denise Lee, Good To Great by Jim Collins, Sam Walton’s Made in America, Positioning by Al Ries, HBR article by Theodore Levitt.