Question

Read the case about the conflict between McDonald's and its franchisees. Then, using the 3-step problem-solving approach, answer the questions that follow. Background and Scale Sixty-nine million. That is the 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.1 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.)2 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.3 On 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 $100,000.4 A milkshake machine costs $20,000, and a new grill $15,000.5 While the corporation focuses on the restaurants’ top line, operators worry about what’s left after paying rent, payroll, royalties, and other expenses.6 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,7 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.8 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 was and 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.”9 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.10 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.11 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.12 Utilizing the example outlined, post your response to Connect Case: What About McDonald’s Other Customers. Your posting will look like: Stop 1: (Define the problem in the case.) Stop 2: (Identify the OB concepts or theories to use to solve the problem.) Stop 3: (Explain what you would do to correct the situation.)

Answer 1

Answer-

Step 1: the underlying issue or problem defined in this case is the lack of understanding on the McDonalds management’s part about the issues faced by their franchisees. The decision making power in McDonalds is very centralized, where the decisions about the menu items, pricing, revenue distribution, equipment, service timings, recopies, etc. hence, the franchisee owners feel constrained and dissatisfied as with the new menu items adding up and minimum wages set to increase, their revenues are shrinking, and above that they are facing corporate pressure for the service delivery timings and standards they are expected to follow.

Step 2: Herzberg’s Two Factor theory f motivation highlights two types of factors that influence the level of motivation employees have in the company. Hygiene factors are the ones which if not present can cause dissatisfaction or de-motivation like respectable salary and pay, job security, suitable working conditions, proper supervision, supportive company policies, and fulfilling interpersonal relationships. Motivating factors are the ones that actually motivate the employees to perform and experience more job satisfaction, like achievement, recognition, personal development, responsibility, etc.

The franchisee owners in this case are dissatisfied because the hygiene factors are missing from their association with McDonalds. They don’t have fair share of revenues, they lack security for their business investments, the company policies are not supportive, and they feel that franchisees are a way for the company to hide behind to justify their labour policies.

Step 3: to correct the situation, McDonalds will first need to effectively communicate with its franchisees, in form of get together, formal meetings, or conferences. The corporate management will have to pay heed on the issues raised by their franchisee owners, and try to resolve them by tweaking their policies. Above all, McDonalds need to treat franchisees not just as revenue sources but as legit part of their business, to ensure that the policies their make are not tailored to the 10% of their owned business but also in accordance with the needs of the rest 90% of their franchisee business. To do this they will need to rethink their revenue distribution strategy, to accommodate the increasing prices of equipment and minimum wage. Also, when adding items to the menu, they should make sure to analyse thoroughly can the current equipment and strength they demand from the franchisee suffice the item needs or will the franchisee need additional investment to produce the item. The ROI of the additional equipment should be considered through proper financial analysis to ensure franchisees are not going in losses.