PROBLEM-SOLVING APPLICATION CASE

What About McDonald’s Other Customers?

BACKGROUND AND SCALE

Sixty-nine million. That is thePage 416 number of customers McDonald’s serves per day around the world! The company does a staggering volume of business. But it might surprise you that despite the brand’s global reach and incredible staying power, it is in the midst of a serious conflict with its other important customers—its franchisees. McDonald’s has 5,000 franchisees around the world who run 82 percent of the chain’s 36,000 restaurants, accounting for just under $30 billion or a third of the company’s total revenue and employing 90 percent of its employees. This means the average franchisee operates six to seven restaurants, and the company lives or dies by their performance.¹⁰¹

TROUBLE UNDER THE GOLDEN ARCHES

The relationship between the company and its franchisees is very complicated and increasingly strained. While franchisees own their respective businesses, McDonald’s owns the land and buildings they use. That means the company is the landlord and has ultimate say over whether particular restaurants open or close. The company also largely dictates menu items, required equipment, and most other details, including pricing in many instances. (One franchisee said he controls the price of fewer than 20 of 100 menu items.)¹⁰²

Franchisees must follow directions from the company and pay an assortment of expenses and fees, such as rent of 15 percent of revenues, a royalty of 5 percent of revenues, and 5 percent of revenues for advertising.¹⁰³On top of this, various additions to the menu require new equipment. The McCafe coffee and espresso equipment can cost up to $20,000 per machine, expanding grill space to accommodate all-day breakfast takes another $5,000, and installing a second drive-thru window can cost $100,000.¹⁰⁴ A milkshake machine costs $20,000, and a new grill $15,000.¹⁰⁵ While the corporation focuses on the restaurants’ top line, operators worry about what’s left after paying rent, payroll, royalties, and other expenses.¹⁰⁶

Last but not least, if the movement to boost minimum wages to $15 across the country succeeds, the burden will fall on the franchisees. McDonald’s decided to raise wages in all its corporate-owned restaurants to $1 above the minimum wage. The move was presumably intended to help keep up with similar wage hikes by Walmart and Target,¹⁰⁷ with whom the company often competes for employees. The problem? Corporate stores compete with franchisees too and don’t bear the costs outlined above. A wage hike will likely have a much smaller impact on the corporate-owned stores versus the franchisees.

IMPACT AND POTENTIAL CAUSES

The franchise model has worked very well for McDonald’s and the majority of its franchisees. Revenues have exceeded expenses and many franchisees have become quite wealthy, which explains why many own multiple restaurants. However, franchisee satisfaction and performance have steadily declined. In 2015, for the first time McDonald’s closed more stores than it opened, and the level of same-store sales (a key performance measure) also declined. Franchisees and Wall Street analysts attribute much of the lackluster performance and conflict to poor corporate leadership and policies. Corporate leaders dictate menu items, pricing, and strategy to franchisees. The addition of McWraps, salads, yogurt parfait, and specialty coffees, for instance, were meant to compete with the likes of Chipotle, Burger King, Shake Shack, and Wendy’s, as well as to keep up with evolving customer tastes.¹⁰⁸

Boosted sales is certainly a good outcome for the corporate arm of the company, given it takes a cut of all revenues, but franchisees argue that enough money isn’t left over for them. Some initiatives, like the dollar menu, are actually money losers for some franchisees, yet it is difficult not to offer them because of national advertising that promotes them, not to mention pressure from regional and corporate representatives. Another franchisee provided an example. “One time our coffee price was a nickel over what the advertising price wasPage 417and the head of the McDonald’s region came in and he said: ‘You are over. You can’t do this.’ That was the first time he told us to sell our business.”¹⁰⁹

Beyond the financial implications, many franchisees also feel various initiatives have eroded the McDonald’s brand, which makes “the promise of serving good-tasting food fast.” The company requires that any order be filled in 90 seconds or less, which many franchisees say is unrealistic for many (new) menu items. These standards will be put to the test yet again with the “Create Your Taste” initiative, which allows customers to personalize their burgers. One longtime but now former franchisee, Al Jarvis, said in an interview that he “loves the taste, but the complexities of making it came to epitomize his disillusionment with McD’s. ‘The service times went up because of the expansion of the menu . . . I think they went a little overboard. When I would . . . see cars backed up at the drive-thru my stomach would just knot up. The people were different, the company was different. It became very frustrating . . . I wanted to get the hell out.’” And he did.¹¹⁰

There is evidence to support Jarvis’s concerns. The American Customer Care Satisfaction Index Restaurant Report for 2015 ranked McDonald’s dead last among all fast-food restaurants. This index measures staff courtesy, speed of checkout or delivery, food quality, and order accuracy.¹¹¹ The frustration Jarvis expressed is increasingly common and has generated an “us vs. them” dynamic between franchisees and McDonald’s corporate staff.

Franchisees also perceive that McDonald’s is using them as a shield, for instance, in deflecting the question of wages by saying it is up to franchisees to do as they see fit. Doing one thing at corporate-owned stores, which account for only 10 percent of employees, and doing something else at franchise stores has the potential of creating more intense conflicts. Steve Easterbrook, relatively new as CEO, is aware of the performance challenges and determined to make significant changes. It will be up to McDonald’s employees and franchisees at all locations to effectively implement them.¹¹²

If you were CEO, what would you do to help overcome the challenges raised by franchisees while meeting McDonald’s goals?

APPLY THE 3-STEP PROBLEM-SOLVING APPROACH TO OB

Use the Organizing Framework in Figure 10.6 and the 3-Step Problem-Solving Approach to help identify inputs, processes, and outcomes relative to this case.

Step 1: Define the problem.

• Look first at the Outcomes box of the Organizing Framework to help identify the important problem(s) in this case. Remember that a problem is a gap between a desired and current state. State your problem as a gap, and be sure to consider problems at all three levels. If more than one desired outcome is not being accomplished, decide which one is most important and focus on it for steps 2 and 3.
• Cases have protagonists (key players), and problems are generally viewed from a particular protagonist’s perspective. In this case you’re asked to assume the role of CEO.
• Use details in the case to determine the key problem. Don’t assume, infer, or create problems that are not included in the case.
• To refine your choice, ask yourself, Why is this a problem? Focus on topics in the current chapter, because we generally select cases that illustrate concepts in the current chapter.

Step 2: Identify causes of the problem by using material from this chapter, which has been summarized in the Organizing Framework for Chapter 10 and is shown in Figure 10.6. Causes will tend to show up in either the Inputs box or the Processes box.

• Start by looking at the Organizing Framework (Figure 10.6) and decide which person factors, if any, are most likely causes of the defined problem. For each cause, explain why this is a cause of the problem. Asking why multiple times is more likely to lead you to root causes of the problem. For example, do employee characteristics help explain the problem you defined in Step 1?
• Follow the same process for the situation factors. For each ask yourself, Why is this a cause? By asking why multiple times, you are likely to arrive at a more complete and accurate list of causes. Again, look to the Organizing Framework for this chapter for guidance.
• Now consider the Processes box in the Organizing Framework. Are any processes at the individual, group/team, or organizational level potential causes of your defined problem? For any process you consider,Page 418ask yourself, Why is this a cause? Again, do this for several iterations to arrive at the root causes.
• To check the accuracy or appropriateness of the causes, map them onto the defined problem.

Step 3: Make your recommendations for solving the problem. Consider whether you want to resolve it, solve it, or dissolve it (see Section 1.5). Which recommendation is desirable and feasible?

• Given the causes you identified in Step 2, what are your best recommendations? Use the material in the current chapter that best suits the cause. Consider the OB in Action and Applying OB boxes, because these contain insights into what others have done that might be especially useful for this case.
• Be sure to consider the Organizing Framework—both person and situation factors—as well as processes at different levels.
• Create an action plan for implementing your recommendations.