McDonald’s Value Chain Analysis
Value chain analysis is an analytical framework that assists in identifying business activities that can create value and competitive advantage to the business. The figure below illustrates the essence of McDonald’s value chain analysis.
McDonald’s value chain analysis
McDonald’s Primary Activities
McDonald’s inbound logistics involves receiving and storing raw materials and using them to produce its burgers and other items in the menu. Raw materials for the fast food chain include meat, raw vegetables, ketchup, mayonnaise, napkins etc. Economies of scale are the main source of value creation in McDonald’s inbound logistics.
The fast food giant has been pursuing backwards vertical integration strategy. This strategy involves companies to expand their roles and capabilities to complete tasks formally fulfilled by other companies in their supply chain. Specifically, McDonald’s “grow their own beef through contracted producers, process their own meat, create their own spices and mixes in factories that they contract, grow their own potatoes and other vegetable through contracted producers, transport their goods on their own.”[1] Backward vertical integration strategy allows the fast food chain to control the quality of their ingredients and reduce the costs of supply.
McDonald’s operates more than 40,000 company-owned and franchised restaurants. As of December 2021 in total 37,295 stores, or 93%, were franchised[2]. McDonald’s franchise restaurants have one of the following formats: conventional franchise, developmental license or affiliate.[3]
Conventional franchising involves franchisees paying rent and royalties on the percentage of sales along with the payment of initial fees when opening a new restaurant. In this type of franchising, McDonald’s Corporation owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and décor.[4]
Developmental license involves licensees providing capital for the entire business, including the real estate interest.[5] In developmental license agreement no capital invested by McDonald’s Corporation. Royalty is paid by licensee on the percentage of sales in addition to initial fees upon the opening of a new restaurant or grant of a new license.
Affiliates as another form of franchising refers to a limited number of foreign affiliated markets. McDonald’s receives royalties from affiliates on the percent of sales.
McDonald’s operations are divided into the following segments:
1. United States. It is the largest segment. The segment is 95% franchised as of December 31, 2021.
2. International Operated Markets – comprised of markets, or countries in which the company operates and franchises restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K. The segment is 84% franchised as of December 31, 2021.
3. International Developmental Licensed Markets & Corporate – comprised primarily of developmental licensee and affiliate markets in the McDonald’s system. Corporate activities are also reported in this segment. The segment is 98% franchised as of December 31, 2021.
Macdonald’s outbound logistics comprises the following ways of delivering food to customers: sit-down restaurants, drive-thru, counter-service outlets in food courts, ski-thru, on the go and home delivery. The process of obtaining meals in sit-down restaurant format is conventional process of dining out in a restaurant and it involves a waiter or waitress taking order and delivering the food.
McDonald’s counter-service outlets, on the contrary, involve self-service. McDonald’s is credited with the invention of drive-thru and sky-thru formats of food delivery. The latter format is available only in a few locations such as “a popular Swedish ski resort of Lindvallen, 280 miles north of Stockholm”[6]. The variety of ways customers can obtain their food is the main source of value creation in McDonald’s outbound logistics.
McDonald’s Marketing and Sales
McDonald’s adheres to the principle of ‘Think Globally, Act Locally’ in pursuing its marketing strategy. Accordingly, while communicating the marketing message of delicious fast food for affordable prices, the fast food chain adjusts items in its menu for the local tastes and preferences. The delivery of the marketing message takes into account cross-cultural differences too.
McDonald’s uses print and media advertising extensively in order to communicate its marketing message to the representatives of the target customer segment. Specifically, McDonald’s advertising costs totalled USD 82.9 million, USD 329.2 million and USD 81.5 million for 2021, 2020 and 2019 respectively.[7] Along with print and media advertising, this amount was spent on sales promotions, events and experiences and public relations.
High speed of the provision of customer service is one of the main competitive advantages of McDonald’s. However, attempts by the company to provide excellent customer service contradict its practice of paying minimum or slightly above minimum wages to its employees. The fast food chain has free Wi-Fi, as well as, play areas for children known as Playplace in many restaurants. These additional conveniences positively contribute to customer service perception.
McDonald’s Corporation Report contains a full version of McDonald’s value chain analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Porter’s Five Forces, Ansoff Matrix and McKinsey 7S Model on McDonald’s. Moreover, the report contains analyses of McDonald’s leadership, business strategy, organizational structure and organizational culture. The report also comprises discussions of McDonald’s marketing strategy, ecosystem and addresses issues of corporate social responsibility.
[1] McDonald’s Supply Chain Management is The Secret to Their Success! (n.d.) Box Around the World, Available at: https://boxaroundtheworld.com/mcdonalds-supply-chain-management/
[2] Annual Report (2021) McDonald’s Corporation
[3] Annual Report (2021) McDonald’s Corporation
[4] Annual Report (2021) McDonald’s Corporation
[5]Annual Report (2021) McDonald’s Corporation
[6] McDonald’s Have A Ski-Thru Restaurant On A Mountain. Yes, Really (2015) MPORA, Available at: http://mpora.com/articles/mcdonalds-have-a-ski-thru-restaurant-on-a-mountain-yes-really#QJrLdK3U24ADtlsv.97
[7] Annual Report (2021) McDonald’s Corporation