Case study operation excellence

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104 PART ONE DIRECTING THE OPERATION

● Implementation – the way that strategy is operationalized or executed. Three issues are often mentioned by strategy practitioners as being important in achieving successful implementation: the clarity of the strategy, the nature of the leadership provided by top management, and effective project management.

● Monitoring – involves tracking ongoing performance and diagnosing data to make sure that the changes are proceeding as planned and providing early indications of any devi- ation from the plan.

● Control – involves the evaluation of the results from monitoring the implementation so that activities, plans and performance can be assessed with the intention of correcting future action if that is required.

CASE STUDY McDonald’s: half a century of growth 13

It is loved and it is hated. It is a shining example of how good-value food can be brought to a mass market. It is a symbol of everything that is wrong with ‘industrialized’, cap- italist, bland, high-calorie and environmentally unfriendly commercialism. It is the best-known and most loved fast food brand in the world with more than 36,000 restau- rants in 117 countries, providing jobs for 1.7 million staff and feeding 69 million customers per day (yes, per day!). It is part of the homogenization of individual national cul- tures, filling the world with bland, identical, ‘cookie cutter’, Americanized and soulless operations that dehumanize its staff by forcing them to follow ridged and over-defined procedures. But whether you see it as friend, foe, or a bit of both, McDonald’s has revolutionized the food industry, affecting the lives of both the people who produce food and the people who eat it. It has also had its ups (mainly) and downs (occasionally) as markets, customers and economic circumstances change. Yet, even in the toughest times it has always displayed remarkable resilience. What follows is a brief (for such a large corporation) summary of its history.

Starting small Central to the development of McDonald’s is Ray Kroc, who by 1954 and at the age of 52 had been variously a piano player, a paper cup salesman and a multi-mixer salesman. He was surprised by a big order for eight multi-mixers from a restaurant in San Bernardino, California. When he visited the customer he found a small but successful restaurant run by two brothers Dick and Mac McDonald. They had opened their ‘Bar-B-Que’ restaurant 14 years earlier, and by the time Ray Kroc visited the brothers’ oper- ation it had a self-service drive-in format with a limited

menu of nine items. He was amazed by the effectiveness of their operation. Focusing on a limited menu including burgers, fries and beverages had allowed them to analyse every step of the process of producing and serving their food. Ray Kroc was so impressed that he persuaded the brothers to adopt his vision of creating McDonald’s res- taurants all over the USA, the first of which opened in Des Plaines, Illinois, in June 1955. However, later, Kroc and the McDonald brothers quarrelled, and Kroc bought them out. Now with exclusive rights to the McDonald’s name, the restaurants spread, and in five years there were 200 restaurants through the USA. Yet through this, and later, expansions, Ray Kroc insisted on maintaining the same principles that he had seen in the original operation: ‘ If I had a brick for every time I’ve repeated the phrase Quality, Service, Cleanliness and Value, I think I’d probably be able to bridge the Atlantic Ocean with them .’

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CHAPTER 3 OPERATIONS STRATEGY 105

Priority to the process Ray Kroc had been attracted by the cleanliness, simplic- ity, efficiency and profitability of the McDonald brothers’ operation. They had stripped fast food delivery down to its essence and eliminated needless effort to make a swift assembly line for a meal at reasonable prices. Kroc wanted to build a process that would become famous for food of consistently high quality using uniform meth- ods of preparation. His burgers, buns, fries and bever- ages should taste just the same in Alaska as they did in Alabama. The answer was the ‘Speedee Service System’, a standardised process that prescribed exact preparation methods, specially designed equipment and strict prod- uct specifications. The emphasis on process standardiza- tion meant that customers could be assured of identical levels of food and service quality every time they visited any store, anywhere. Operating procedures were specified in minute detail. The first operations manual prescribed rigorous cooking instructions such as temperatures, cook- ing times and portions. Similarly, operating procedures were defined to ensure the required customer experience, for example no food items were to be held more than 10 minutes in the transfer bin between being cooked and being served. Technology was also automated. Specially designed equipment helped to guarantee consistency using ‘fool-proof ’ devices. For example, the ketchup was dispensed through a metered pump. Specially designed ‘clam shell’ grills cooked both sides of each meat patty simultaneously for a pre-set time. And when it became clear that the metal tongs used by staff to fill French-fry containers were awkward to use efficiently, McDonald’s engineers devised a simple aluminium scoop that made the job faster and easier.

For Kroc, the operating process was both his passion and the company ’s central philosophy. It was also the foundation of learning and improvement. The company’s almost compulsive focus on process detail was not an end in itself. Rather it was to learn what contributed to con- sistent high-quality service in practice and what did not. McDonald’s always saw learning as important. It founded ‘Hamburger University ’, initially in the basement of a res- taurant in Elk Grove Village, Illinois. It had a research and development laboratory to develop new cooking, freez- ing, storing and serving methods. Also franchisees and operators were trained in the analytical techniques nec- essary to run a successful McDonald’s. It awarded degrees in ‘Hamburgerology ’. But learning was not just for head- quarters. The company also formed a ‘field service’ unit to appraise and help its restaurants by sending field service consultants to review their performance on a number of ‘dimensions’ including cleanliness, queuing, food quality and customer service. As Ray Kroc said, ‘We take the ham- burger business more seriously than anyone else. What sets McDonald’s apart is the passion that we and our suppliers share around producing and delivering the highest-qual- ity beef patties. Rigorous food safety and quality standards

and practices are in place and executed at the highest levels every day.’

No story illustrates the company’s philosophy of learn- ing and improvement better than its adoption of frozen fries. French-fried potatoes had always been important for McDonald’s. Initially, the company tried observing the tem- perature levels and cooking methods that produced the best fries. The problem was that the temperature during the cooking process was very much influenced by the temper- ature of the potatoes when they were placed in the cook- ing vat. So, unless the temperature of the potatoes before they were cooked was also controlled (not very practical) it was difficult to specify the exact time and temperature that would produce perfect fries. But McDonald’s researchers discovered that, irrespective of the temperature of the raw potatoes, fries were always at their best when the oil tem- perature in the cooking vat increased by 3 degrees above the low-temperature point after they were put in the vat. So by monitoring the temperature of the vat, perfect fries could be produced every time. But that was not the end of the story. The ideal potato for fries was the Idaho Russet, which was seasonal and not available in the summer months. At other times an alternative (inferior) potato was used. One grower, who, at the time, supplied a fifth of McDonald’s potatoes, suggested that he could put Idaho Russets into cold storage for supplying during the summer period. Unfortunately, all the stored potatoes rotted. Not to be beaten, he offered another suggestion. Why doesn’t McDonald’s consider switching to frozen potatoes? But the company was initially cautious about meddling with such an important menu item. However, there were other advantages in using frozen potatoes. Supplying fresh potatoes in perfect condition to McDonald’s rapidly expanding chain was increasingly dif- ficult. Frozen potatoes could actually increase the quality of the company’s fries if a method of satisfactorily cooking them could be found. Once again McDonald’s developers came to the rescue. They developed a method of air- drying the raw fries, quick frying, and then freezing them. The sup- plier, who was a relatively small and local suppler when he first suggested storing Idaho Russets, grew his business to supply around half of McDonald’s US business.

Throughout its rapid expansion McDonald’s focused on four areas: improving the product; establishing strong supplier relationships; creating (largely customized) equip- ment; and developing franchise holders. But also it was its strict control of the menu that provided a platform of stabil- ity. Although its competitors offered a relatively wide vari- ety of menu items, McDonald’s limited its to 10 items. As one of McDonald’s senior managers at the time stressed, ‘It wasn’t because we were smarter. The fact that we were selling just ten items [and] had a facility that was small, and used a limited number of suppliers created an ideal environment.’ Capacity growth (through additional stores) was also man- aged carefully. Well-utilized stores were important to fran- chise holders, so franchise opportunities were located only where they would not seriously undercut existing stores.

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106 PART ONE DIRECTING THE OPERATION

of tartar sauce, a fish fillet, and cheese on the bottom bun. But Kroc wanted to push his own meatless sandwich, called the hula burge – a cold bun with a piece of pineap- ple and cheese. Groen and Kroc competed on a Lenten Friday to see whose sandwich would sell more. Kroc’s hula burger failed, selling only six sandwiches all day while Groen sold 350 Filet-o-Fish. Similarly, the Egg McMuffin was introduced by franchisee Herb Peterson, who wanted to attract customers into his McDonald’s stores all through the day, not just at lunch and dinner. He came up with the idea for the signature McDonald’s breakfast item because he was reputedly ‘very partial to eggs Benedict and wanted to create something similar’.

Other innovations came from the company itself. When poultry became popular, Fred Turner, then the Chairman of McDonald’s, had an idea for a new meal: a chicken finger-food without bones, about the size of a thumb. After six months of research, the food technicians and scientists managed to reconstitute shreds of white chicken meat into small portions that could be breaded, fried, frozen and then reheated. Test marketing of the new product was pos- itive, and in 1983 they were launched under the name of Chicken McNuggets. These were so successful that within a month McDonald’s became the second largest purchaser of chicken in the USA. Some innovations came as a reac- tion to market conditions. Criticized by nutritionists who worried about calorie-rich burgers and shareholders who were alarmed by flattening sales, McDonald’s launched its biggest menu revolution in 30 years in 2003 when it entered the prepared salad market. McDonald’s offered a choice of dressings for its grilled chicken salad with Caesar dressing (and croutons) or the lighter option of a drizzle of balsamic dressing. Likewise, moves towards coffee sales were prompted by the ever-growing trend set by big coffee shops like Starbucks.

Problematic periods Food, like almost everything else, is subject to swings in fashion. Its is not surprising then that there have been periods when McDonald’s has had to adapt. The period from the early 1990s to the mid-2000s was difficult for parts of the McDonald’s Empire. Growth in some parts of the world stalled. Partly this was due to changes in food fashion, nutritional concerns and demographic changes. Partly it was because competitors were learning either to emulate McDonald’s operating system, or to focus on one aspect of the traditional ‘quick service’ offering, such as speed of service, range of menu items, (perceived) quality of food, or price. Burger King promoted itself on its ‘flame- grilled’ quality. Wendy’s offered a fuller service level. Taco Bell undercut McDonald’s prices with its ‘value-pricing ’ promotions. Drive-through specialists speeded up service times. Also, ‘fast food’ was developing a poor reputation in some quarters, and as its iconic brand, McDonald’s was taking much of the heat. Similarly the company became a lightning rod for other questionable aspects of modern

Securing supply McDonald’s says that it has been the strength of the align- ment between the company, its franchisees and its suppli- ers (collectively referred to as the System) that has been the explanation for its success. But during the company’s early years suppliers proved problematic. McDonald’s approached the major food suppliers, such as Kraft and Heinz, but without much success. Large and established suppliers were reluctant to conform to McDonald’s requirements, preferring to focus on retail sales. It was the relatively small companies who were willing to risk supplying what seemed then to be a risky venture. And as McDonald’s grew, so did its suppliers, who also valued the company’s less adversarial relationship. One supplier is quoted as saying, ‘Other chains would walk away from you for half a cent. McDonald’s was more concerned with getting quality. McDonald’s always treated me with respect even when they became much bigger and didn’t have to.’ Furthermore, suppliers were always seen as a source if innovation. For example, one of McDonald’s meat sup- pliers, Keystone Foods, developed a novel quick- freezing process that captured the fresh taste and texture of beef patties. This meant that every patty could retain its con- sistent quality until it hit the grill. Keystone shared its technology with other McDonald’s meat suppliers for McDonald’s, and today the process is an industry standard. Yet, supplier relationships were also rigorously controlled. McDonald’s routinely analysed its suppliers’ products.

Fostering franchisees McDonald’s revenues consisted of sales by company- operated restaurants and fees from restaurants operated by franchisees. McDonald’s views itself primarily as a fran- chisor and believe franchising is ‘important to delivering great, locally-relevant customer experiences and driving profitability’. However, it also believes that directly operat- ing restaurants is essential to providing the company with real operations experience. Of the 36,000 restaurants in 117 countries, approximately 80 per cent were operated by franchisees. But where some restaurant chains concen- trated on recruiting franchisees that were then left to them- selves, McDonald’s expected its franchisees to contribute their experiences for the benefit of all. Ray Kroc’s original concept was that franchisees would make money before the company did, so he made sure that the revenues that went to McDonald’s came from the success of the restau- rants themselves rather from initial franchise fees.

Initiating innovation Ideas for new menu items have often come from fran- chisees. For example, Lou Groen, a Cincinnati franchise holder, had noticed that in Lent (a 40-day period when some Christians give up eating red meat on Fridays and instead eat only fish or no meat at all) some customers avoided the traditional hamburger. He went to Ray Kroc with his idea for a ‘Filet-o-Fish’, a steamed bun with a shot

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1 Explain how the four perspectives of operations strategy would apply to SSTL (see the ‘Operations in action’ case at the start of this chapter).

2 Compare the operations strategies of a low-cost airline, such as Ryanair, and a full-service airline such as British Airways or KLM.

3 What do you think are the qualifying and order-winning factors for (a) a top of the range Ferrari, and (b) a Renault Clio?

4 What do you think are the qualifying or order-winning factors for Pret A Manger described in Chapter 1 ?

5 Search the Internet site of Intel, the best-known microchip manufacturer, and identify what appear to be its main structural and infrastructural decisions in its operations strategy.

6 (Advanced) A gliding club has a current membership of over 100 pilots, many of whom have their own gliders. In addition the club has a fleet of six gliders available to its members. The club also offers trial flights to members of the public – ‘casual flyers’ who can book flights in advance or just turn up and fly on a first-come, first-served basis. The club sells trial flight gift vouchers that are popular as birthday and Christmas presents. If the conditions are right the customer may get a longer flight, although at busy times the instructors feel under pressure to return to the ground to give another lesson. If the weather is poor the instructors still do their best to get people airborne, but they are restricted to a short two-minute flight. Club members are expected to stay all day to help each other and any casual flyers get airborne

PROBLEMS AND APPLICATIONS

McDonald’s Chief Executive Officer, Steve Easterbrook, when he was head of the company’s UK operation, where he redesigned the outlets to make them more modern, introduced coffee and cappuccinos, worked with farmers to raise standards and increased transparency about its supply chain. At the same time he participated fully and forcefully with the company ’s critics in the debate over fast food health concerns. But some analysts believe that the ‘burger and fries’ market is in terminal decline, and the McDonalds’s brand is so closely associated with that mar- ket that further growth will be difficult.

QUESTIONS 1 How has competition to McDonald’s changed over its

existence?

2 What are the main operations performance objectives for McDonald’s?

3 What are the most important structural and infrastructural decisions in McDonald’s operations strategy, and how do they influence its main performance objectives?

life that it was held to promote, from cultural imperialism, low-skilled jobs (called ‘McJobs’ by some critics), abuse of animals and the use of hormone-enhanced beef, to an attack on traditional (French) values (in France). A French farmer called Jose Bové (who was briefly imprisoned) got other farmers to drive their tractors through, and wreck, a half-built McDonald’s.

Similarly, in 2015 McDonald’s closed more stores in its US home market than it opened – for the first time in its 60-year history. Partly this was a result of the increase in so-called ‘fast casual’ dining, a trend that combined the convenience of traditional McDonald’s-style service with food that was seen as more healthy, even if it was more expensive. Smaller rivals, such as Chipotle and Shake Shack, had started to take domestic market share.

Surviving strategies Over recent years the company ’s strategy has been to become ‘ better, not just bigger ’, focusing on ‘ restaurant execution ’, with the goal of ‘ improving the overall experi- ence for our customers ’. In particular it has, according to some analysts, ‘gone back to basics’, a strategy used by

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