McDoanld's Case

I. Executive Summary

In 2006, Greenpeace accused the fast food giant McDonald's of allowing its supplier Cargill to use soya from deforested areas of the Brazilian Amazon rainforest for its chicken feed. McDonald's responded immediately, moving the industry and its suppliers to enact a moratorium on buying soya from this environmentally sensitive land. Although McDonald's received considerable praise for its rapid actions, it is still far from reaching its sustainability goals (Goldberg and Yagan 2007, p. 7-11). In fact, other sources point to the fact that McDonald's is much further from these goals than the soya initiative's apparent success would indicate. Suppliers in McDonald's supply chain are still employing practices that are contrary to the sustainability goals. For example, on the issue of animal welfare, the chickens raised for McDonald's white meat products live in terrible conditions (Kenner 2008). The main problem is that McDonald's does not use strict enough auditing measures on its suppliers regarding sustainable practices and corporate social responsibility. As a result of this lax auditing of its suppliers, McDonald's was forced to retroactively create a large-scale soya initiative, enacted after Greenpeace's outcry. There is a noticeable increase of about $2.12 billion in McDonald's fixed costs from 2006 to 2007. In fact, the EBITDA margin declined from 26.27% in 2006 to 21.99% in 2007. Part of those costs, perhaps $200 million, is assumed to be due to the initiative. To avoid the costs of this kind of large-scale initiative in the future, McDonald's needs to enact a solution involving stricter auditing of its suppliers, sustainability education throughout its supply chain, and the purchasing of chickens, for example, in line with sustainability goals. These long-term and consistent solutions are estimated to cost about $14 million per year for the first five years and $4 million per year in the following years. Assuming potential new and ongoing initiatives could be required in each subsequent year, the net gain of the solution of $186 would equate to a return on investment of about 13 times the original investment (($200 million - $14) / $14 million = 13.29). McDonald's would recover up to 0.82% of the lost 0.88% profit margin, improving its financial position.

II. Situational Analysis

1. Corporate Strategy

McDonald's has employed the expansionary strategy of concentration. As of 2007, the company had more than 30,700 restaurants in 118 countries. It is the largest foodservice retailer in the world (Goldberg and Yagan 2007, p. 2). In a concentration strategy, a firm "[grows] through market penetration in [its] core business. This market penetration can be achieved through increasing sales in existing markets, or through growth in previously untapped markets" (Ellram and Birou 1995, p. 43-45). Throughout its history, McDonald's has expanded throughout the world, opening restaurants and franchises in a large number of markets. McDonald's has also used the expansionary strategy of backward vertical integration for some products, including chicken, to decrease the complexity of its supply chain (Goldberg and Yagan 2007, p. 4).

2. Business Mission

McDonald's mission "is to be [its] customers' favorite place and way to eat and drink. [Its] worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experience - People, Products, Place, Price and Promotion. [McDonald's is] committed to continuously improving [its] operations and enhancing [its] customers' experience" ("McDonald's Mission and Corporate Values," AboutMcDonalds.com). McDonald's sustainability vision is to have a supply chain "that profitably yields high-quality, safe products without supply interruption while creating a net benefit for employees, their communities, biodiversity, and the environment (Goldberg and Yagan 2007, p. 1).

3. Business Strategy

According to the Porter model, McDonald's main business strategy is differentiation. The company's mission emphasizes creating "an exceptional customer experience," being its "customers' favorite place and way to eat and drink" ("McDonald's Mission and Corporate Values," AboutMcDonalds.com). The differentiation strategy "[creates] a 'perceived' difference in the customer's mind" about the company (Ellram and Birou 1995, p. 48). People all over the world recognize the McDonald's logo and brand, knowing what they will get when they eat at the restaurant. McDonald's also uses a cost-leadership strategy, which is clear in its pursuit of competitive prices (Goldberg and Yagan 2007, p. 3). Overall, differentiation and cost-leadership have contributed to McDonald's place as a leader in its industry.

4. Business Goal/Objectives

McDonald's overall goal is to provide consumers with "an exceptional customer experience" ("McDonald's Mission and Corporate Values," AboutMcDonalds.com). Its sustainability goal as of 2006 "was to move beyond the sustainable soya initiative and other specific efforts to a more comprehensive sustainable supply chain strategy" (Goldberg and Yagan 2007, p. 16). In order to improve the sustainability of its supply chain, McDonald's will want to address issues besides the soya initiative, including the humane treatment of all animals in its supply chain. For example, chickens and cattle should be raised in safe, clean, and spacious conditions. McDonald's wants to improve its profitability as well. Part of the large rise in fixed costs from 2006 to 2007 was probably due to the costs of the soya initiative. McDonald's will want to avoid having activists and the public accuse the company of unsustainable actions in the future. If each large-scale initiative to address a different sustainability problem costs McDonald's $200 million, then the company can save the $200 million that it would have spent on an initiative by addressing sustainability issues more consistently. Therefore, the profitability margin would increase by about 0.88%, not including solution costs. McDonald's can maintain an EBITDA margin at or above its average of 26.17%. McDonald's will also want a more reliable supply chain that is aligned with its sustainability goals. Each link in the chain must have a reliability of at least 95% to 99% and must have a sustainability score of at least 4.0 out of 5.0, which is discussed