Nevil Speer Ph.D.

Business principles dictate that competitive advantages erode over time. Therefore, strategic management must be implemented for continuous transformation of tactics and execution in order to remain successful. However, seeking new opportunities should never be at the exclusion of maintaining foundational strengths. Collins and Porras, in their landmark book Built to Last, explain it this way: “Preserve the core, stimulate progress.” Evidence of the wisdom of that premise is found in the beef industry’s single largest customer—McDonald’s.

Several years ago, McDonald’s was in deep trouble. Most indicative of those woes was the company’s performance in University of Michigan’s Customer Satisfaction Index; the chain’s score fell to 59 in 2001—nearly the poorest rating of any private-sector company since the survey began in 1994 (Northwest Airlines received a score of 53 in 1999). Common complaints among McDonald’s customers included poor service, sloppy burgers and non-representative advertising. The company responded with various endeavors to address those concerns and improve the shareholder return. For example, McDonald’s initiated a new cooking program, “Made For You,” to improve food quality. The program possessed a significant downside—it required additional waiting time—especially detrimental because convenience has traditionally been a core emphasis. The company also implemented a new grading system for its restaurants. The “Mystery Shopper” program was designed to place anonymous visitors in stores for evaluation purposes to improve customer service. And McDonald’s made substantial investment into a series of new ventures designed to increase revenue, including eatery concepts such as McDiner, McCafe, McSnack Spot and McTreat, while experimenting with new offerings such as pizza in several test markets. Those efforts never proved successful in generating profit.

Amidst declining earnings and growing disfavor on Wall Street, Jim Cantalupo, a 28-year company veteran, was brought back from retirement on January 1, 2003, to serve as chairman and CEO (Cantalupo passed away suddenly in April, 2004; Charlie Bell was named as his successor). Cantalupo’s task was to competitively reposition the company. His leadership immediately brought about renewed focus, coupled with a dramatic shift in strategy. The company implemented a new “Revitalization Plan” with the following assertion:

“McDonald’s [has] embarked on a new strategic course, reflecting a fundamental change in our approach to growing the business. Previously, we emphasized adding new restaurants. … We’ve aligned our global System around a common mission with a common set of customer-focused, goal-oriented actions. We call it McDonald’s Plan to Win. It’s based on the five drivers of exceptional customer experiences—people, products, place, price and promotion. By consistently delivering on all five drivers, we will achieve our key objectives. We will attract new customers, encourage existing customers to visit us more often, build brand loyalty and, ultimately, create enduring profitable growth for the Company, the System and our shareholders.”

And indeed, that plan has led the way in a dramatic turnaround for the company.

September marked McDonald’s 17th straight month of gains—same-store sales were up 10.6 percent versus year-earlier results. Moreover, the company’s third-quarter profits (ending September 30) rose by 42 percent and established a new McDonald’s quarterly benchmark. The company partially attributes those results to the growing number of restaurants that accept debit or credit cards, thus reducing transaction time from fifteen seconds associated with cash exchange to four seconds (customers demand convenience from McDonald’s!). The company’s net profit margin is projected to be 12 percent in 2004 (up from 10.7 percent in 2003). In comparison, publicly traded competitors Wendy’s and CKE (operator of Hardee’s and Carl’s Jr.) are projected to post net profit margins of 7.6 percent and 3 percent, respectively. Consistent performance has allowed the company to see a marked recovery in terms of its earnings and stock price (MCD) over the course of the past year.

The restaurant industry has been busy leveraging popularity of low-carb dieting trends. However, McDonald’s promotional campaign has diverged somewhat from its competitors’; its enticements have primarily focused upon non-food promotions in order to increase sales. The strategy reveals management’s comfort level with Cantalupo’s revitalization strategy. That confidence also portrays positive signals for the beef industry. It signifies assurance in the company’s foundation of beef products. Most important, from a beef industry perspective, beef’s single largest customer appears to be right on track: “stimulating progress” while “preserving the core.” That equation for renewed success certainly bodes well for the beef industry. And it serves as an indicator of how far we’ve come in recent years; beef increasingly finds itself in a favorable position.