More Companies Should Be Like McDonalds
Sean is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
McDonald's (NYSE: MCD) turned its sales growth around through a lean management strategy that few companies are able to implement.
Last month McDonalds suffered its first monthly revenue decline in ten years, and investors punished the stock. Between mid-October and mid-November the stock price declined by about $10 from around $94 to $84 per share. It has been climbing back up since and should do well for at least the next several months.
McDonald's should be ok because it is clearly being well managed. The company recently posted their monthly revenue growth numbers for November and surprised analysts by far exceeding expectations.
You see, McDonald's did something that most large companies have difficulty doing. It implemented what in lean management programs would be called a Rapid Improvement Event, or RIE for short. An RIE is a quick brainstorming session to identify a problem, come up with a way to fix it, and rapidly implement the solution.
Let’s take a look at how this must have played out inside McDonald's. Last month, according to the Wall Street Journal, “McDonald's blamed the decline [of in store sales] on a weak economy and heightened competition from rivals offering coupons.”
Up to this point, McDonald's had been growing sales and boosting traffic through “its expanding global operations and increasingly diverse menu.” But in October those efforts let McDonald's down. As mentioned above, it became apparent to McDonald's that consumers were most interested in saving money.
So what did McDonald's do? It identified the problem, a weak economy and consumers who want to save money. It identified a solution, cost saving options on its own menu, namely the Dollar Menu. It identified a way to implement the solution, refocused marketing.
As the Wall Street Journal reports, “In light of U.S. customers becoming increasingly worried about the economy, McDonald's said in October it would shift its advertising focus back to the famed ‘Dollar Menu’, from a previous push for the ‘Extra Value Menu’, which is priced a bit higher.”
Within a matter of weeks, McDonalds identified the cause of the problem, identified a solution, and implemented the solution. The results were spectacular. Analysts were expecting sales to rise .2% in Novembers; instead they rose 2.4%. In the US, analysts expected sales to decline .59%, but instead they rose 2.5%.
The value of a rapidly implemented solution is so obvious here and something that other large companies should take note of. Companies like General Motors (NYSE: GM) and Ford (NYSE: F) have struggled with this concept for decades.
As recently as 2009, GM was operating multiple competing car companies, with Saturn, Pontiac, and Chevy often going after the same customer base. GM had run these companies as competitors to each other for years as it struggled to be profitable and efficient. It took the financial collapse of 2008 and subsequent bankruptcy for GM to realize that it needed to shed these redundant brands that did nothing but sap the company's overall productivity. An RIE could have addressed this issue long before bankruptcy.
As a further example, consider Ford a couple years ago when they came out with the MyFord Touch navigation/entertainment system. There were so many glitches with it that Ford went from 5th on the J.D. Power's Initial Quality Survey in 2010 to 23rd in 2011, mostly because of MyFord Touch. As this is a major component of the vehicles in Ford's lineup, Ford should be striving to implement an RIE solution.
Yet, this has definitely not occurred. After more than a year, Ford still hasn’t been able to resolve the issues with MyFord Touch. J.D. Power’s 2012 Initial Quality Study ranks Ford 28th, with 118 problems per 100 cars sold. Granted, the solution to Ford’s MyFord Touch problem is more complex than what McDonald's was faced with, but no issue so extensive should be allowed to continue for roughly two years.
What a difference it would make if companies could all rapidly identify problems and implement solutions just like McDonald's did. This is a reflection on the strength of McDonald's management and should give investors confidence that this is a company interested in quickly addressing issues and moving the company forward.
SeanMSullivan has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and McDonald's. Motley Fool newsletter services recommend Ford, General Motors Company, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!