ENTREPRENEURSHIP MANAGEMENT

SUCCESS STORY OF STARBUCKS CORPORATION

FAILURE STORY OF KOZMO.COM TURNAROUND OF MCDONALDS

CONTENTS
Success story: Starbucks corporation o Introduction o History & growth o Starbucks-the brand
o

Non-coffee ventures

o Business model o Key reasons for success o Reasons for sustaining Failure story: Kozmo.com o Introduction o Company profile o History o Partnerships o Competitors o Financial decline o Causes of failure o Suggestions to have succeeded

Turnaround story : McDonalds o Introduction

o

Company profile(summary)

o Competiotion

o Industry analysis o Swot o Key success failures o Strategies o Turnaround o Appendices Conclusion Bibliography

SUCCESS STORY
STARBUCKS CORPORATION

ABOUT THE COMPANY

1. INTRODUCTION
Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 17,133 stores in 49 countries, including 11,068 in the United States, nearly 1,000 in Canada and more than 800 in Japan. Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sandwiches and Panini, pastry, snacks, and items such as mugs and tumblers. From Starbucks' founding in later forms in Seattle as a local coffee bean roaster and retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a new store every workday, a pace that continued into the 2000s. The first store outside the United States or Canada opened in the mid-'90s, and overseas stores now constitute almost one third of Starbucks' stores.

2. HISTORY AND GROWTH

FOUNDING The first Starbucks was opened in Seattle, Washington, on March 30, 1971 by three partners: English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon Bowker. The three were inspired by entrepreneur Alfred Peet (whom they knew personally) to sell high-quality coffee beans and equipment. During their first year of operation, they purchased green coffee beans from Peet's, then began buying directly from growers.

HOWARD SCHULTZ Entrepreneur Howard Schultz joined the company in 1982 as Director of Retail Operations and Marketing, and after a trip to Milan, Italy advised that the company should sell coffee and espresso drinks as well as beans. The owners rejected this idea, believing that getting into the beverage business would distract the company from its primary focus. To them, coffee was something to be prepared in the home, but they did give away free samples of pre-made drinks. Certain that there was money to be made selling pre-made drinks, Schultz started the Il Giornale coffee bar chain in April 1986.

SALES AND EXPANSION In 1984, the original owners of Starbucks, led by Baldwin, took the opportunity to purchase Peet's. In 1987, they sold the Starbucks chain to Schultz's Il Giornale, which rebranded the Il Giornale outlets as Starbucks and quickly began to expand. Starbucks opened its first locations outside Seattle at Waterfront Station in Vancouver, British Columbia, and Chicago, Illinois, that same year. At the time of its initial public offering on the stock market in 1992, Starbucks had grown to 165 outlets.

INTERNATIONAL EXPANSION Currently Starbucks is present in more than 55 countries. The first Starbucks location outside North America opened in Tokyo, Japan, in 1996. Starbucks entered the U.K. market in 1998 with the $83 million acquisition of the then 60-outlet, UK-based Seattle Coffee Company, re-branding all the stores as Starbucks. In April 2003, Starbucks completed the purchase of Seattle's Best Coffee and Torrefazione Italia from AFC Enterprises, bringing the total number of Starbucksoperated locations worldwide to more than 6,400. On September 14, 2006, rival Diedrich Coffee announced that it would sell most of its company-owned retail stores to Starbucks. This sale includes the company-owned locations of the Oregon-based Coffee People chain. Starbucks converted the Diedrich Coffee and Coffee People locations to Starbucks. Many bookstores have Starbucks outlets within them, including Barnes & Noble in the United States, Chapters-Indigo in Canada, Livraria Saraiva and Fnac in Brazil and B2S in Thailand.

The Starbucks location in the former imperial palace in Beijing closed in July 2007. The coffee shop had been a source of ongoing controversy since its opening in 2000 with protesters objecting that the presence of the American chain in this location "was trampling on Chinese culture." Also in 2007, Starbucks cancelled plans to expand into India, but opened its first store in Russia, ten years after first registering a trademark there. In 2008, Starbucks continued its expansion, settling in Argentina, Bulgaria, the Czech Republic and Portugal. In Buenos Aires, the biggest Starbucks store in Latin America was opened. In April 2009, Starbucks entered Poland. Starbucks has also opened its doors on 5 August 2009, in Utrecht, Netherlands. On October 21, 2009 it was announced that Starbucks will finally establish in Sweden, starting with a location at Arlanda airport outside Stockholm. On June 16, 2010 Starbucks opened its first store in Budapest, Hungary. In May 2010, Southern Sun Hotels South Africa announced that they had signed an agreement with Starbucks that would enable them to brew Starbucks coffees in select Southern Sun and Tsonga Sun hotels in South Africa. The agreement was partially reached in order for Starbucks coffees to be served in the country in time for the commencement of the 2010 FIFA World Cup hosted by South Africa. Starbucks is planning to open its third African location, after Egypt and South Africa, in Algeria. A partnership with Algerian food company Cevital will see Starbucks open its first Algerian store in Algiers. STORE CLOSURES In 2003 Starbucks closed all six of its locations in Israel, citing "on-going operational challenges" and a "difficult business environment." On July 1, 2008, the company announced it was closing 600 underperforming companyowned stores and cutting U.S. expansion plans amid growing economic uncertainty. On July 29, 2008, Starbucks also cut almost 1,000 non-retail jobs as part of its bid to reenergize the brand and boost its profit. These closings and layoffs effectively ended the companys period of growth and expansion that began in the mid-1990s. Starbucks also announced in July 2008 that it would close 61 of its 84 stores in Australia by August 3, 2008. On January 28, 2009, Starbucks announced the closure of an additional 300 underperforming stores and the elimination of 7,000 positions. CEO Howard Schultz also

announced that he had received board approval to reduce his salary. Altogether, from February 2008 to January 2009, Starbucks terminated an estimated 18,400 U.S. jobs and began closing 977 stores worldwide.

3. STARBUCKS THE BRAND

NAME The company is named in part after Starbuck, Captain Ahab's first mate in the novel Moby-Dick, as well as a turn-of-the-century mining camp (Starbo or Storbo) on Mount Rainier. LOGO The Starbucks logo features a twin-tailed Siren which is a highly evolved and streamlined version of the original controversial logo. The mermaid is supposed to represent that the coffee is as seductive as a sirens call, thus luring customers to Starbucks.

4. NON-COFFEE VENTURES
HEAR MUSIC Hear Music is the brand name of Starbucks' retail music concept. Hear Music began as a catalog company in 1990, adding a few retail locations in the San Francisco Bay Area. Hear Music was purchased by Starbucks in 1999. Nearly three years later, in 2002, they produced a Starbucks opera album, featuring artists such as Luciano Pavarotti, followed in March 2007 by the hit CD "Memory Almost Full" by Paul McCartney, making McCartney the first artist signed to New Hear Music Label sold in Starbucks outlets. Its inaugural release was a big non-coffee event for Starbucks the first quarter of 2007.

STARBUCKS ENTERTAINMENT In 2006, the company created Starbucks Entertainment, one of the producers of the 2006 film Akeelah and the Bee. Retail stores heavily advertised the film before its release and sold the DVD.

PARTNERSHIP WITH APPLE Starbucks has agreed to a partnership with Apple to collaborate on selling music as part of the "coffeehouse experience". In October 2006, Apple added a Starbucks Entertainment area to the iTunes Store, selling music similar to that played in Starbucks stores. In September 2007 Apple announced that customers would be able to browse the iTunes Store at Starbucks via Wi-Fi in the US (with no requirement to login to the Wi-Fi network), targeted at iPhone, iPod touch, and MacBook users. The iTunes Store will automatically detect recent songs playing in a Starbucks and offer users the opportunity to download the tracks. Some stores feature LCD screens with the artist name, song, and album information of the current song playing. This feature has been rolled out in Seattle, New York City, and the San Francisco Bay Area, and was offered in limited markets during 20072008. A Starbucks "app" is available in the iPhone "App Store."

5. BUSINESS MODEL
INITIAL PUBLIC OFFERING Starbucks' initial public offering (IPO) of common stock in June 1992 turned into one of the most successful IPOs of the year. With the capital afforded it by being a public company, Starbucks accelerated the expansion of its store network

STORE EXPANSION STRATEGY In 1992 and 1993 Starbucks developed a three-year geographic expansion strategy that targeted areas which not only had favorable demographic profiles but which also could be serviced and supported by the company's operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a "hub"; teams of professionals were located in hub cities to support the goal of opening 20 or more stores in the hub in the first two years. Once stores blanketed the hub, then additional stores were opened in smaller, surrounding "spoke" areas in the region. To oversee the expansion process, Starbucks created zone vice presidents to direct the development of each region and to implant the Starbucks culture in the newly opened stores.

PRODUCT LINE Starbucks stores offered a choice of regular or decaffeinated coffee beverages, a special "coffee of the day," and a broad selection of Italian-style espresso drinks. In addition, customers could choose from a wide selection of fresh-roasted whole-bean coffees (which could be ground on the premises and carried home in distinctive packages), a selection of fresh pastries and other food items, sodas, juices, teas, and coffee-related hardware and equipment. In 1997, the company introduced its Starbucks Barista home espresso machine featuring a new portafilter system that accommodated both ground coffee and Starbucks' new ready-to-use espresso pods. Power Frappuccino, a version of the company's popular Frappuccino blended beverage, packed with protein, carbohydrates, and vitamins was tested in several markets during 1997; another promising new product being tested for possible rollout in 1998 was Chai Tea Latt, a combination of black tea, exotic spices, honey, and milk.

REAL ESTATE AND STORE CONSTRUCTION Schultz formed a headquarters group to create a store development process based on a six-month opening schedule. Starting in 1991, the company began to create its own inhouse team of architects and designers to ensure that each store would convey the right image and character. Stores had to be custom-designed because each space was leased in an existing structure and thus each store differed in size and shape. Most stores ranged in size from 1,000 to 1,500 square feet and were located in office buildings, downtown and suburban retail centers, airport terminals, university campus areas, or busy neighborhood shopping areas convenient to pedestrian foot traffic. Only a select few were in suburban malls. While similar materials and furnishings were used to keep the look consistent and expenses reasonable, no two stores ended up being exactly alike.

STORE AMBIENCE Starbucks management looked upon each store as a billboard for the company and as a contributor to building the company's brand and image. Each detail was scrutinized to enhance the mood and ambience of the store, to make sure everything signaled "best of class" and that it reflected the personality of the community and the neighborhood. The thesis was "Everything matters." The company went to great lengths to make sure the store fixtures, the merchandise displays, the colors, the artwork, the banners, the music,

and the aromas all blended to create a consistent, inviting, stimulating environment that evoked the romance of coffee, that signaled the company's passion for coffee, and that rewarded customers with ceremony, stories, and surprise.

EMPLOYEE TRAINING Accommodating fast growth also meant putting in systems to recruit, hire, and train baristas and store managers. Starbucks' vice president for human resources used some simple guidelines in screening candidates for new positions: "We want passionate people who love coffee . . . We're looking for a diverse workforce, which reflects our community. We want people who enjoy what they're doing and for whom work is an extension of themselves." Every partner/barista hired for a retail job in a Starbucks store received at least 24 hours training in the first two to four weeks. The training included classes on coffee history, drink preparation, coffee knowledge (four hours), customer service (four hours), and retail skills, plus a four-hour workshop called "Brewing the Perfect Cup." Baristas were trained in using the cash register, weighing beans, opening the bag properly, capturing the beans without spilling them on the floor, holding the bag in a way that keeps air from being trapped inside, and affixing labels on the package exactly one-half inch over the Starbucks logo. Beverage preparation occupied even more training time, involving such activities as grinding the beans, steaming milk, learning to pull perfect (18- to 23-second) shots of espresso, memorizing the recipes of all the different drinks, practicing making the different drinks, and learning how to make drinks to customer specifications. There were sessions on how to clean the milk wand on the espresso machine, explain the Italian drink names to customers, sell an $875 home espresso machine, make eye contact with customers, and take personal responsibility for the cleanliness of the coffee bins. Everyone was drilled in the Star Skills, three guidelines for on-the-job interpersonal relations. Management trainees attended classes for 8 to 12 weeks. Their training went much deeper, covering not only the information imparted to baristas but also the details of store operations, practices and procedures as set forth in the company's operating manual, information systems, and the basics of managing people. Eight to 10 weeks before opening, the company placed ads to hire baristas and begin their training. It sent a Star team of experienced managers and baristas from existing stores to the area to lead the store-opening effort and to conduct one-on-one training following the company's formal classes and basic orientation sessions at the Starbucks Coffee School in San Francisco.

JOINT VENTURES In 1994, after months of meetings and experimentation, PepsiCo and Starbucks entered into a joint venture arrangement to create new coffee-related products for mass distribution through Pepsi channels, including cold coffee drinks in a bottle or can. Despite the clash of cultures and the different motivations of the two partners, the partnership held together because of the good working relationship that evolved between Howard Schultz and Pepsi's senior executives. After months of experimentation, the joint venture product research team came up with a shelf-stable version of Frappuccino that tasted quite good. In September 1996, the partnership invested in three bottling facilities to make Frappuccino, with plans to begin wider distribution. In October 1995 Starbucks partnered with Dreyer's Grand Ice Cream to supply coffee extract for a new line of coffee ice cream made and distributed by Dreyer's under the Starbucks brand. The new line, featuring such flavors as Dark Roast Espresso Swirl, JavaChip, Vanilla MochaChip, Biscotti Bliss, and Caffe Almond Fudge, hit supermarket shelves in April 1996; by July, Starbucks coffee-flavored ice cream was the top-selling superpremium brand in the coffee segment. In 1997, two new low-fat flavors were added to complement the original six flavors, along with two flavors of ice cream bars; all were well received in the marketplace. Additional new ice cream products were planned for 1998. Also in 1995, Starbucks worked with Seattle's Redhook Ale Brewery to create Double Black Stout, a stout beer with a shot of Starbucks coffee extract in it.

LICENSED STORES AND SPECIALITY SALES In recent years Starbucks had begun entering into a limited number of licensing agreements for store locations in areas where it did not have ability to locate its own outlets. The company had an agreement with Marriott Host International that allowed Host to operate Starbucks retail stores in airport locations, and it had an agreement with Aramark Food and Services to put Starbucks stores on university campuses and other locations operated by Aramark. Starbucks also had a specialty sales group that provided its coffee products to restaurants, airlines, hotels, universities, hospitals, business offices, country clubs, and select retailers. One of the early users of Starbucks coffee was Horizon Airlines, a regional carrier based in Seattle. In addition, Starbucks made arrangements to supply an exclusive coffee blend

to Nordstrom's for sale only in Nordstrom stores, to operate coffee bars in Barnes & Noble bookstores, and to offer coffee service at some Wells Fargo Bank locations in California.

KEY REASONS FOR SUCCESS

1. GOOD BUSINESS CONCEPT Starbucks is a tremendous success because it capitalized on a concept that hadnt existed before the coffeehouse as a gathering place. It is not just a place to get a cup of gourmet coffee, but it has become a center for socializing and intellectual discussion, particularly among students and young urban professionals.

2. SLOW BUT SURE BUSINESS GROWTH Starbucks was certainly not an overnight success. But through perseverance, patience, management and financial smartness, the company became a formidable global presence. Careful but steady expansion into worldwide markets has made Starbucks a force to reckon with.

3. COMPANY-OPERATED RETAIL STORES One of the best decisions taken by Starbucks thus far is its strategy of foregoing franchisees and making sure that its stores are company-owned. This strategy has allowed the company to maintain a tight grip on its image and provide a consistent quality of excellent service

4. SMART PARTNERING Starbucks was able to achieve its objectives, break new markets, and increase its bottomline by entering into strategic alliances with the right companies. It has partnered successfully with several companies like Barnes and Noble, Pepsi-Cola Company, Dreyer's Grand Ice Cream, Hyatt Hotels Corp.

5. UNIQUE EXPERIENCE From the very beginning, the Starbucks marketing strategy has focused on creating the third place for everyone to go to between home and work. Creating this unique and relaxing experience for people has been very important for the company as this is one of the strongest concepts attached to the company, the Starbucks atmosphere, to which customers have been strongly attracted.

6. KEEPING CUSTOMERS HAPPY The success of Starbucks is largely due to its steadfast commitment to the customers. Starbucks strives to make sure that no one has a bad experience in their stores. Hence, many of their strategies from opening of clusters of stores to drive-through in some areas are all designed to speed up customer line and avoid the spectacle of impatient customers.

7. CREATING A STARBUCKS COMMUNITY The Starbucks marketing strategy has even expanded to create a community around their brand. On their website, individuals are encouraged to express their experiences with Starbucks history, and the company strives to personally join in the discussions. Starbucks has thus succeeded in creating a sort of emotional tie in the minds of customers.

8. DIVERSIFIED REVENUE SOURCES Starbucks understands that good business does not mean putting all eggs in one basket. Hence, it strives to reduce its reliance of certain product lines in order to keep a healthy financial position and grow its revenues. Starbucks retail sales mix by product type in the year 2008 comprised of approximately 78% beverages, 12% food items, 5% whole beans coffees and 5% coffee making equipment and accessory. It is currently looking at additional opportunities in distribution channels for Starbucks products, whether in foodservice, grocery, licensed stores or business alliances.

9. FOCUS ON QUALITY Starbucks history has shown that they place a huge emphasis on product quality and the "perfect cup of coffee". Their coffee, even if priced slightly more expensive than expected, is notorious for satisfying customers with its rich, delicious taste and aroma.

10. CONTINUOUS INNOVATION Through the years, the Starbucks Coffee Company has been known to think up creative and innovative ideas to add to their products or services. Theyve added different flavors to their coffee, more food on their menu, and even became one of the firsts to offer internet capability in their stores. In the past years, Starbucks have moved to expand supermarket sales of their whole beans. Theyve introduced prepaid Starbucks cards and also the unique ordering program, wherein customers can pre-order and prepay for beverages and pastries via phone or on the Starbucks Express website.

11. NUDGING CUSTOMERS TO SPEND MORE Apart from coffee, they offer sandwiches, pastries and other eats which go well with coffee, and are sure to tempt customers. The music initiatives are also unique and nudge the customer to buy something, which they generally wouldnt buy from Starbucks. The wireless Internet access that Starbucks introduced in many of its stores is a clever but indirect way to get customers to spend more and increase the stores revenues.

12. JUDICIOUS MARKETING The Starbucks marketing strategy has always focused on word-of-mouth advertising and letting the high quality of their products and services speak for themselves rather than spend huge amounts of money on media ads. Instead, marketing expenses are poured on product launches and introduction of new coffee flavors which bring greater revenue to the company

SUGGESTIONS FOR SUSTAINING

1. Prevent alienation of young, domestic demographic by expansion in retail operations

2. Capture emerging international markets as effectively as possible

3. Continue incorporating technological advances

4. Find new distribution channels like delivery

5. Come up with new products, with special focus on items for the health-conscious

6. Subtle marketing and promotional efforts might help boost sales by reminding the target customers of its existence.

FAILURE STORY
KOZMO.COM

ABOUT THE COMPANY

1. INTRODUCTION
Kozmo.com was a venture-capital-driven online company that promised free one-hour delivery of "videos, games, DVDs, music, magazines, books, food, basics & more" and Starbucks coffee in several major cities the United States. It was founded by young investment bankers Joseph Park and Yong Kang in March 1998 in New York City. The company is often referred to as an example of the dot-com boom.

2. COMPANY PROFILE
Name Web site Proposed symbol CEO Estimated amount of offering Underwriters Revenue Net loss Average order size Employees (salaried) Cities of operation Kozmo.com www.kozmo.com KZMO Joseph Park $150 million Credit Suisse First Boston, Salomon Smith Barney, U.S. Bancorp Piper Jaffray $3.5 million (1999) $26.3 million (1999) $15 445 New York City, Seattle, San Francisco, Boston, Washington, D.C. and Los Angeles

3. HISTORY
In March of 1998, two investment bankers, Joseph Park and Yong Kang came up with the idea to launch a new internet based home delivery service, known as Kozmo.com which was driven by venture capital. The service promised door front delivery within one hour with no delivery charges. They delivered a wide range of items, such as DVD players, videos, magazines, ice cream, snacks, Krispy Creams, Starbucks coffee, along with many other impulse on-line items. Kozmo began as a timesaving service for harried consumers. They offered four major product categories: entertainment, food, basics, and specialty.

Kozmo expanded its market by placing outlets in 11 major cities: Atlanta, Boston, Chicago, Houston, New York, Los Angeles, Portland (OR.), San Francisco, Seattle, San Diego, and Washington, D.C. At one point, they had over 400,000 customers and 2600 employees also known as the kozmonauts, which delivered goods on bikes, scooters, cars, vans, and public transportation. According to documents filed with the Securities and Exchange Commission, in 1999 the company had revenue of $3.5 million, with a resulting net loss of $26.3 million. The company raised about $250 million, including $28 million from a group of investors in 1999 which included Flatiron, Oak and Chase and $60 million from Amazon.com in 2000. It entered a five-year co-marketing agreement with Starbucks in February 2000, in which it agreed to pay Starbucks $150 million to promote its services inside the company's coffee shops.

4. BUSINESS MODEL
Kozmo.com focused on selling frequently purchased high margin items with well-known brand names. Additionally, it had initiated a business-to-business service to enable select retailers to provide their customers with an expedited delivery option on a fee-for-service basis through Kozmos distribution networks. Kozmo served each of its markets from one or more distribution centers (DC). DCs were approximately 10,000 square feet in size and were located primarily in low-rent areas with access to key thoroughfares. The size of DCs provided capacity to expand product offerings in existing markets. Kozmo.com solution combined the convenience, time savings, large selection of high quality product information, personalization of catalog, Internet shopping with the immediate gratification of in-store shopping, quality customer service, efficient logistics process and low cost distribution model. Kozmo.coms growth strategy had two main objectives: To be the leading online provider of entertainment, food and convenience products with free delivery in under one hour, and to further enhance the usage of distribution infrastructure by providing select retailers an expedited delivery option. To accomplish these objectives, it intended to: Expand into new geographic markets; Exploit rapid delivery infrastructure for business to business transactions; Build the Kozmo brand; Build a loyal customer base; and Establish strategic relationships with key vendors, retailers and other service providers.

Within the first year, they rose over $280 million in venture capital from investors including Flatiron Partners, Starbucks, Amazon.com, and Softbank of Japan.

4. PARTNERSHIPS
In order to increase distribution, build its brand, and expand into the B2B market, Kozmo.com has aggressively pursued two types of partnerships marketing/co-branding and financial. Some of its financial partnerships include: Amazon.com (March 2000) DreamWorks International Distribution L.L.C. Twentieth Century Fox Home Entertainment Universal Studios Home Video (September 2000) While, it had marketing partnerships with some big players like: Starbucks Ticketmaster Online-CitySearch Balducci Pasta (August 2000) Zagat Survey (October 2000)

5. COMPETITORS
Although no company did exactly what Kozmo did, there are several current and potential competitors in the race to own the so-called last mile - the final distribution leg linking e-commerce to the customers doorstep.

Urbanfetch: It began within-the-hour delivery of books, CDs, videos, electronics, and food last October, but only in New York City. It had no delivery charge, no order minimum, and a no-tipping policy. Webvan: This was a full-service online grocer that delivered free of charge within a 30-minute window specified by the customer.

Sameday.com (formerly Shipper.com): This company offered same-day delivery of consumer goods (including electronics, books, CDs, videos, and toys) in the greater Los Angeles area. It also provided same-day fulfillment and delivery services to e-commerce companies. PDQuick.com (formerly Pink Dot.com): This firm delivered groceries, baked goods, sandwiches, liquor, and household goods in about 30 minutes for a delivery fee of $2.99 and had no minimum order requirement. Homedelivery.com: This New York-based firm teamed up with local merchants to deliver groceries, pet supplies, toiletries, flowers, and dry cleaning to the consumers home or office.

6. FINANCIAL DECLINE
Like other Web retailers, Kozmo believed that time-pressed consumers cared about convenience, not cost. Eventually, consumers would appreciate the value of saving time and become die-hard Kozmo customers. Kozmo spent $30 million dollars to develop its delivery on-line software, but experienced difficulties attracting their target market. While attempting to attract the more affluent, computer savvy, urban customer -- the younger college, mid night craver gravitated towards their services, which usually spent $12 on average. Consequently, they lost money on each sale. Delivery charges, which they incurred completely, coupled with maintaining their on-line delivery systems and operational cost far exceeded their profits. The investors promised a total of $30 million in private funding. But at a very crucial moment the company learned that an investor had backed out of a $6 million commitment. Kozmo executives had been working on a merger deal with Los Angeles-based PDQuick, another online grocer. The deal collapsed when funding that was promised to PDQuick did not materialize. Kozmo still had money but decided to close down and liquidate to ensure that employees could receive a severance package. Not only that, Kozmo was not able to compete against other traditional brick and mortar restaurants and major retailers, nor were they able to compete against other internet delivery service providers, such as webvan, Peapod, and Urbanfetch, which all were in danger of going out of business due to the inability to meet operating expenses.

MAIN CAUSES OF FAILURE

1. CHANGE OF TARGET CUSTOMERS Kosmos greatest error with their customers occurred when they stopped catering to their main client base of middle class college-students. This was done so that they could target more upscale clients who would order expensive products. Indeed, Kozmo was frantically trying to ditch its college-student customers, who a year ago made up 76% of its business, in pursuit of those who will pay a premium to have thousands of items, from DVD players to cotton swabs. 2. COSTLY Kozmo delivered small items on free basis. Although this policy attracted a lot of consumers and made it a hot favorite, it was costly for Kozmo as the transportation fee was not covered. After co-founder and former Chief Executive Joseph Park stepped down, Burdo slashed Kozmo's overhead, instituted a delivery fee of a $10 minimum charge and oversaw several rounds of layoffs. The company also closed operations in San Diego and Houston. But even this change of policy could not stop it from shutting down its company. 3. RESTAURANT-DELIVERY SERVICE Kozmo had to compete over many restaurants that provided delivery service which offered more choice (food) in New York City. 4. EXCESSIVE EXPENDITURE ON ADVERTISING The management team had too much money to spend on too often meaningless advertising that is far too clever to include a message that has meaning to the serious customer. 5. OVERSATURATED INDUSTRIES Because it was so easy to enter many e-industries some software and a good website is all that was needed there were too many firms going after the same customers. The

oversaturation has been partially caused by venture capitalists who were willing to invest in almost any business plan if it ended with the dot-com suffix.

6. POOR BUSINESS MODEL The whole thing about same-day delivery is that they run ultra-efficient operations on paper-thin margins. Even if you could corner the entire market, you could never get enough to be able to get a return on an investment of $280 million. The products that large numbers of consumers purchase on the Web include books, music, software, and DVDs. These are products that are not always easily available and consumers are willing to wait a few days for them. For those who want the product immediately, software and music (even, in some cases, books and films) can be downloaded directly into the customers computer. The basic rules of marketing apply to products sold on the Internet. You have to offer some advantage to the consumer: either convenience, better quality, wider selection, or lower prices to succeed. To the consumer, the Internet is just another channel of distribution. Since most consumers tend to avoid uncertainty, one would not switch to another vendor unless the benefit is visible and meaningful.

7. FEASIBILITY OF LOCATION Some analysts say Kozmo's business model only made sense in the context of a densely packed city such as New York. Vern Keenan, a financial analyst with Keenan Vision, said the service had a chance to work in only a few other cities around the world, such as London, Stockholm or Paris. This seemed like a dumb idea from the beginning," Keenan said. "This grew out of a New York City frame of mind and it simply didn't translate.

8. RUNNING OUT OF MONEY A large number of dot-coms failed because they simply ran out of money. At one point, Kozmo was expanding into many markets and was spending more than $30 million a month. When the firm could not raise money by selling stock because of the weak market, the firm was forced to restructure. Employees were laid off, delivery fees were added, and the company started selling merchandise with higher profit margins than videotapes and soft drinks. The company went from 3,300 employees down to 1,100 employees and was spending $2 million per month. At this point, the company did begin

to make some profits in some of their markets, but it was too little and too late. Had the firm been more prudent with its spending in the early years the firm was founded in 1998 there might have been sufficient financing for them to survive.

9. GROWING TOO BIG TOO SOON Many of the dot-coms invested more time and resources in pumping up the value of their stock than in developing a healthy business. This is why many of the standard rules for running a business were ignored. The dot-com failures were trapped by their obsession to gain market share. Their philosophy was "go big or go home." The more people that are connected to a network, the more valuable that network is. The first company that reaches a critical mass tends to sweep the market. While it is true that market share is important, being obsessed with it and totally ignoring profits does not make business sense, especially for firms that do not possess deep pockets. In fact, the strategy of many of the dot-coms was to gain market share and worry about profits later. Unfortunately for them, there was no later: they ran out of money before ever making a profit.

10. INADEQUATE PERFORMANCE MONITORING A large number of e-commerce companies were very successful at attracting visitors to their sites, but were not effective at getting visitors to buy (conversion). Even those customers that did buy, rarely came back to buy again (customer retention). In a number of cases, the more visitors a site attracted, the more money it lost. They note that the "foundation of long-term profitability is lifetime customer value: the revenue customers generate over their lives, less the cost of acquiring, converting, and retaining them." to be successful in e-commerce a firm must focus on the costs of attracting, converting and retaining customers. Firms should not go spending crazy in the hope of attracting visitors to a website. Loyal customers tend to spend more when shopping, bring in new customers, provide information to the firm, and provide assistance to other customers with regard to installation, use, repair and maintenance of the

11. POOR WEBSITE The key to successful e-commerce is customer retention and this requires a reliable, trustworthy, and helpful site. Successful sites encourage retention and conversion by

personalization. Intelligent agents such as collaborative filtering are employed to promote additional products that customers might be interested in based on past purchases, or purchases of customers with similar preferences. Key problems with the Kozmo website were as following: Poorly organized search results including erroneous results or too many results. Shoddy information architecture such as poor grouping of information and inconsistent elements within a group. Slow performance Cluttered home pages Confusing labels and terminology Invasive registration procedure including asking for too much information. Inconsistent navigation

SUGGESTIONS TO HAVE SUCCEEDED

Kozmo should have targeted college students and limited the products offered to ensure profitability.
1. 2. They could have marketed their service for what it was rather than marketing it for

the free shipping.

3. They could offer the service in more rural areas to consumers who wouldn't have

had as easy of access to late night or nearby grocery or convenience stores.

4. They could offer free shipping only for orders over a certain amount. 5. Kozmo should have found a way to retain the cost of delivery

6. Spend money carefully

7. Test its business model as it expanded slowly and carefully; they should not have

expanded to numerous markets simultaneously with an untested business model.

8. Focused on the costs of attracting, converting, and retaining customers. The main

measure to be considered is lifetime customer value.

9. Been more customer-oriented. Should have had a website that downloaded

efficiently and was frequently updated.

10. Customer complaints should have been taken seriously and dealt with sincerely

and honestly. Making it easy for customers to return products with which they were not satisfied.

TURNAROUND STORY McDonalds

Executive Summary

The business began with two brothers. In 1937, Dick and Maurice McDonalds opened a small drive-in restaurant east of Pasadena, California. They served hotdogs and shakes. This led to the creation of a bigger drive-in which operated successfully and by 1948, the brothers had a made a fortune they never expected. The brothers realized that hamburgers comprised of 80 percent of their sales and closed their doors to re-evaluate their business model. The same year, in 1948 the model was about affordable dining for family who wanted to eat out. The Speedy Service System was also implemented that included an assembly line of sorts, a nine-item menu, and an all male staff. The operations were proven successful in 1952 and the first franchise was sold to Neil Fox who opened a restaurant in Phoenix, Arizona and created the well-known golden arches of McDonalds. Fox had huge success with the store and the brothers were reluctant at first to begin a national franchise system, but soon realized that too many copycats were creeping up and they needed an advantage and a head start. Ray Croc joined the team as the exclusive franchise agent in the United States. Some of the problems and challenges facing the company is the increase in competition, poor management, bad marketing, and lack of response to the changes in the needs of franchises and customers. This resulted in the strategic issues that needed to be implemented to continue growing success for the company. Going global is critical in the expansion of McDonalds. Over the past couple of decades, the major chains have also begun to expand into the global marketplace and have opened franchises up around the world. McDonalds currently operates in over 120 countries around the world with over 30,000 stores. In analyzing this company, the strengths, weaknesses, opportunities, and threats were inevitably explored to better understand the current situation. This SWOT analysis shows us that although there are numerous threats against the fast-food industry, McDonalds occupies a relatively strong position in the global marketplace. According to the five forces model, the strongest competitive force is between rival sellers in the industry. This SWOT analysis shows the many strengths that Mc Donalds employs to keep itself at the top of the fast-food industry. Although there are various weaknesses, these can all be turned around following the McDonalds Plan to Win, which was implemented with the hiring of Jim Cantalupo. Keeping in mind, the core competencies of this company is what makes it so successful today. For the past ten years, one of McDonalds key success factors has been its franchises, taking in approximately 60 percent of total sales. Another success factor is the Plan to Win strategy. It is a plan that focuses on five key drivers of success; people, product, place, price, and promotion. The first factor is McDonalds people or

employees. McDonalds is striving to do a better job of staffing during busy periods as not to overwhelm and to reward outstanding employees for exception work. Based on these facts and analysis, we have come up with alternate strategies and have recommended the one that best fits McDonalds current situation. The recommended strategy includes diversification and maintaining customer service through quality training and people development.

Vision/Mission/Objectives

1. Strategic Issues, Problems and Challenges In recent time McDonalds had underperformed in comparison to previous years achievement. Its revenue growth has been in the decline and prior to April 2003 store sales fall for 12 straight months. It is no surprise that as a consequence McDonalds reported a loss of 343.8 million dollars in first quarter of 2003. It is believed that this situation is a result of several aspects that include an increase in competition, poor management, bad marketing and lack of response to the changes in the needs of franchises and customers.

2. Rising Issues-Customer Service As years have progress many issues have arisen for McDonalds but the greatest is probably its poor customer service. A customer service index done in 2003 found that McDonalds has the lowest the customer service ranking in the fast food industry and is ranked even lower on customer service than the IRS. One reason for this is a high employee turnover rate. McDonalds has the highest employee turnover rate among its competitors. Another contributing aspect to the poor customer service is slow service at the drive-through window. McDonalds currently ranks fifth in speed at the drive-through window and 19th in accuracy. If you compare its speed and accuracy to its competitors and keep in mind that McDonalds generates 60 percent of its revenue from its drive-through and assume it is losing one percent of revenue for every six seconds that its behind, than McDonalds is losing approximately 97,000 dollars annually.

3. Opposing Viewpoints While McDonalds feels positive about its newly implemented changes the critics are rather skeptical. It was stated that long-term they believe that it will be tough to sustain growth and margin expansion. Specific concerns include McDonalds ability to maintain its current level of product innovation and competitors ability to copy those ideas. The critics even went as far to question if McDonalds recent improvement was more of a reflection of the market and the dollar rather than its newly implemented strategy. In response, McDonalds officials stated that they will need to deliver on their stated goal of sustaining increases in sales and operating income. Following with the most significant question of weather or not the new changes will sufficiently provide McDonalds with core competencies necessary to build a sustainable competitive advantage in the global fast-food industry.

4. Health Factor All fast-food hamburger chains, McDonalds included, are forced to respond to the shift in customer preferences from high-calorie burger and fries to healthier items such a deli sandwiches and baked potatoes. All the chains are expected to be struggling for several years to come to meet new consumer health expectations without compromising the original menu items.

Competition

One of the major issues for McDonalds is it competitors. Burger King is the second largest hamburger fast-food chain in the world and is the number one competitor for McDonalds. Burger King has 11,400 locations in 58 countries and derives 55 percent of its revenue from the drive-through window. Burger King reported 1.72 billion in 2002 in revenue which is a 17 percent increase compared to a 4 percent increase reported by McDonalds over the same period. Burger Kings distinct assets include the unique Whopper with its one of kind charbroiled taste and the company policy of preparing the hamburger any way that the customer wants it. Burger King has distinguished itself over the years in many ways including being the first in the fast-food industry to enclose its patio seating in 1957 thereby offering customer indoor dining experience. Burger King also differentiated itself when it installed the drive-through window in its restaurants in 1975. In addition to the Whopper Burger King also offers a few set items on its break-fast menu that differs it from it competitors including the Croissanwiches

and french toast sticks. The rest of the menu also offered the unique veggie burger and chicken Caesar salad.

Wendys is the third largest fast-food chain with 9,000 stores in 33 countries world wide. In 2002 they reported 2.73 billion in revenue which is up 14.2 percent from the previous year. Wendys offers several unique items including the Frostys and Spicy Chicken Sandwiches as well as healthier items such as salads, baked potatoes and chili. Wendys has also distinguished itself through the creation of the special value menu with all items on it under a one dollar. Wendys also owns several small companies including Tim Hortons and Baja Fresh Mexican Grill. It plans on increasingly using acquisitions of smaller brands to further growth. In next decade Wendys plans to add between 2 and 4 thousand new stores worldwide. One important weakness of Wendys is the lack of easily recognizable product compared to McDonalds Big Mac of the Burger King Whopper.

Hardees is the fourth largest fast-food chain in the nation. It holds 2,400 locations in 32 states and 11 countries. In 2002 it reported 1.8 billion in sales. Hardees greatest strength is in its breakfast menu which brings in 35 percent of its revenue. Hardees is currently remodeling all of its restaurants inside and out into Star Hardees and the menu is being expanded to include several premium offerings such as the Angus beef Thickburger which has been well received by hamburger eaters and the innovative Six Dollar Burger. Along with these Hardees offers a one-third, half pound and three quarter-pound hamburger. These new items were implemented to demonstrate that it is quite clear that at Hardees it is thought that customers are willing to pay more for quality and taste rather than cheap and poorly made burgers.

Jack in the Box, another major competitor in fast-food industry, has of 1,850 restaurants in 17 states. In the fiscal year 2002 Jack in the Box reported revenue of 2.2 billion dollars, which is up 4.7 percent from the previous year. While McDonalds and some of the other competitors focus on a family concept, Jack in the Box gears its menu items toward adult consumers only. Part of Jack in the Boxs menu includes its innovative items such as teriyaki chicken bowl and a chicken fajita pita. Along with most of its competitors Jack in the Box offers a value menu, but the company does not to engage in the price wars stating its

intended reduction of emphasis on dollar menus and instead has turned its efforts toward improving the quality of it product as well as to initiate efforts to attract women and reduce its dependency on young males which is a crowded market. Like its competitors Jack in the Box believes that success in the future relies on broadening its product offerings in order to maintain the same level with the other fast-food chains and grocery stores.

Sonic yet another major competitor owns 2,700 locations and reported in 2003, 2.4 billion in revenue which is 6.2 percent increase. They also reported an increase of net income by 20 percent. Its unique drive-in restaurant business is the largest in America and it broad menu and atmosphere along with oldies music attempt to emulate an era long past. Sonic has specialty soft drinks and frozen shakes and malts. Over the years Sonic has tried to focus on it items that are fun and novel. Since its founding the company has experienced non-stopped growth. In 2004 Sonic expects earning per share to rise 16 to 17 percent due to the addition of franchises. It also expects to open 200 new locations in 2004 and its revenue is expected to grow between 1-3 percent.

Industry Analysis

Market Size Sales for the U.S. consumer food-service market totaled approximately $408 billion in 2003. The 10 largest chains in America accounted for about 14 percent of these total sales according to U.S. System wide Foodservice Sales. The consumer food-service market is typically broken down into eight categories according to the type of food and the restaurant operations. The categories are as follows: sandwich, pizza, chicken, family, grill-buffet, dinner house, contract, and hotel. McDonalds competes with other businesses from these other categories as substitute product competitors but primarily competes in the quick-service sandwich market. Experts projected that the sandwich segment was expected to grow by two percent annually for the years ahead.

5 Competitive Forces The quick-service sandwich industry faces competitive pressures from a number of forces. The major competitive threats originate from competing sellers in the industry as well as firms in other industries that offer substitute products. McDonalds main competitors within the quick-service sandwich industry are continually deriving new strategies through offensive and defensive tactics in order to gain customers and market share. In 1989, Wendys implemented the 99 cent value menu as an offensive strategy to gain customers looking for a quality product at a value price. In response, McDonalds and Burger King took a defensive approach and also instituted a value menu in their respective stores so that they wouldnt lose market share and customers to Wendys. Firms in the quick-service sandwich industry are constantly jockeying for better market position through offensive strategies and in response to these strategies, other firms will take a defensive approach to guard against that offensive move made by the rival firm.

Substitute Products In addition to competition from rival sellers in the industry, sandwich firms also face intense competitive pressure from firms in other industries selling substitute products. The substitute products for the fast-food industry are probably some of the most diverse in the world. These substitute products may include products purchased from the local grocery store, food from sit-down restaurants, or delivery foods such as pizza. The primary issue with these substitute products is that they are readily available to the customer and the customer tends to view them as being comparable or better in terms of the quality of fast-food products. Another issue that faces the fast-food industry is the availability of products that cater to the health-conscious lifestyle. The majority of the public tends to view fast-food restaurants as primarily serving foods that are high in fat content and unhealthy and as a result they are likely to look elsewhere for a healthy alternative. In response to the product offerings, buyers also exercise a great deal of bargaining ability through their purchasing power. While fast-food products may not always be associated with health and quality, fast-food restaurants to possess a major advantage over firms selling substitute products through the price of their products and the quick, convenient service.

New Entrants The threat of potential new entrants and the bargaining power of suppliers is not a significant competitive force in the fast-food industry. Occasionally, new entrants

will come along and compete with firms in the fast-food industry and offer substitute products. However, in order to compete on a large scale, it will require a great deal of capital to invest in real estate and build physical restaurant locations. In addition, the market is already so saturated that the new competitor might find it difficult to establish a customer base and become profitable. Suppliers in the fast-food industry do not have substantial bargaining power due to the fact that firms in the fast-food business tend to purchase their materials from various outlets. One company might purchase their meat supplies from a couple different meat manufacturers, then purchase their dairy needs from a number of different dairy companies, and also purchase their bakery products from a variety of sources. Since the fast-food firms divide their purchases among a diverse array of suppliers, the suppliers tend to have little or no bargaining power or leverage since there are multiple suppliers for the same products.

Driving Forces

There are a number of driving forces which have molded the current state of the fast-food industry. In the beginning, fast-food companies typically focused on being the low-cost provider and sought to expand into as many markets as possible. As these national brands have grown, the markets they are competing in have become overly saturated with restaurant options. As a result, the fast-food industry has begun to focus on the needs of the customer. The buyer has a great deal of leveraging power due to the fact that if they are dissatisfied with one brand they can easily switch or purchase from an alternate brand with little or no monetary repercussions. The fast-food firms have implemented strategies to improve the quality of customer service and the cleanliness of the restaurant locations in order to please their customers in hopes that they will become a repeat customer.

New Menu Items

Fast-food restaurants have, for the most part, always been related to an unhealthy lifestyle. As a result, customers who are health-conscious have tended to take their business elsewhere to restaurants that offer nutritious alternatives. In response to the health-conscious lifestyle that people have adopted, the majority of the national chains have created new menu items to cater to this demographic. Customers are the main driving force behind the daily operations of fast-food

firms. They are the reason that companies have attempted to upgrade the quality of their customer service and their needs have lead to the creation of new products to satisfy their demands.

Strategic Moves A number of competitors in the fast-food industry have expanded beyond their traditional offering of generating revenues from their fast-food restaurants. Major chains such as McDonalds have acquired smaller chains Boston Market, Chipotle Mexican Grill, and Donatos Pizza. Wendys has also grown by acquiring smaller companies such as Tim Hortons and Baja Fresh Mexican Grill. These acquisitions were executed in hopes of generating revenue from multiple sources and also to help support the companys growth over the long term. Over the past couple of decades, the major chains have also begun to expand into the global marketplace and have opened franchises up around the world. McDonalds currently operates in over 120 countries around the world with over 30,000 stores. Burger King has 11,400 stores in 58 countries and Wendys operates 9,000 restaurants in 33 countries worldwide. These fast-food firms have seen countries outside the U.S. as markets that have an enormous growth potential. In order to cater to the different cultures, companies such as McDonalds and Burger King have offered menu items with a distinctively local flavor.

Strategic Groups The fast-food industry is primarily composed of national chain brands. As a result, there are just a couple of strategic groups associated with the fast-food market. The major national chain brands such as McDonalds, Burger King, Wendys, Hardees, and Jack in the Box compete in markets throughout the United States and around the world. Their strategies are focused on providing a product that is based on low-price convenience. Their strategic group is associated with many geographic locations and low price and quality. In competition with these large multinational firms are local fast-food restaurants. Local fast-food restaurants focus on providing their customers with a quick, cheap alternative to the national brands. These businesses offer a low price and low quality product in few localities.

Fast-Service Over the past couple of years there has been a growing trend in the restaurant industry to provide customers with a higher quality product in a short amount of

time. These restaurants are typically referred to as fast casual or quality quickservice. They aim to provide freshly prepared, made-to-order meals. Their operations combine the speed and convenience of traditional fast food with the food quality and appealing dcor of casual-dining restaurants. There are a number of national chains that fall into this strategic group of providing a high quality product in many geographic locations and there are also some businesses that function in a couple locations and provide a similar high quality product.

SWOT Analysis This SWOT analysis shows us that although there are numerous threats against the fast-food industry, McDonalds occupies a relatively strong position in the global marketplace. According to the five forces model, the strongest competitive force is between rival sellers in the industry. This SWOT analysis shows the many strengths that Mc Donalds employs to keep itself at the top of the fast-food industry. Although there are various weaknesses, these can all be turned around following the McDonalds Plan to Win, which was implemented with the hiring of Jim Cantalupo. Obviously all fast-food chains are going to have to combat the new consumer health expectations, but we feel that under Cantalupos leadership, McDonalds has a strong enough consumer base to grow in the upcoming years. The financial analysis shows certain flaws in McDonalds finances, but these are largely due to the expansionary policy in place in the company.

Financial Analysis McDonalds has gone through a large turnaround period in the previous two years. This becomes very apparent when looking at McDonalds net income between the years 1998 and 2003. Net income rose steadily between 1998 and 2000, then there was a drop-off in 2001 of over a$300 million. Then in 2002, net income plummeted over $700 million. This was due mainly to slower growth in total revenues, and large increases in operating costs and expenditures. McDonalds showed a marked improvement in 2003, amassing $1.328 billion in net income, up over $400 million from the previous year. Although this was a large gain, McDonalds is still not over its financial and operating troubles, and needs strong performance in the upcoming years to stay at the top in the fast food industry. McDonalds bottom-line in the first quarter of 2003 was $324.7 million. The dollar profit improved substantially over the next two quarters, netting $470.9 in the second quarter and $547.4 in the third quarter. As of the end of the 2003 fiscal year, McDonalds has enjoyed 11 months of sustained sales gains, which

bode well for the future. One mention of note is that McDonalds did take a big bath in 2002 and the first quarter on 2003, amassing a 135 million dollar loss as a result of accounting changes done to the books.

DuPont Analysis A DuPont Analysis of McDonalds financial statements shows that McDonalds is climbing out of their financial troubles of 2001-2002, yet need a continued effort to reach their goals. The profit margin is low throughout McDonalds income statements. In 2003, is .11. This means that for every dollar they sell, they are only reaping 11 cents profit. This is an increase of nearly 6 cents on the dollar over 2002 though, so this shows that the company is doing a better job of keeping expenditures down. One reason McDonalds profit margin is so low is that they are continually expanding, both domestically and internationally. They continue pouring money made from sales into new facilities and franchises. This severely depletes net income, and generally lowers the profit margin.

Asset Turnover Ratio The asset turnover ratio shows that McDonalds is doing a poor job producing sales from its assets. This would be a cause for concern, but generally McDonalds has always had a lower asset turnover ratio, even when they were operating at the pinnacle of the industry. The return on assets, or return on investment shows again that McDonalds net income is low when compared to its level of assets. As stated earlier, this is due in large part to the expansionary policy in place at McDonalds and in turn, the growing number of assets. One interesting point is the large amount of cash that McDonalds has begun to keep. Between 1998 and 2001, the cash on hand was around $415 million, yet in the third quarter of 2003, the company had $647.4 million on hand. This is one reason why the asset turnover ratio is slightly smaller in 2003 than other years.

Return on Equity The return on equity at McDonalds is again, low. This represents the profitability of funds invested by the stockholders in the business. Again, much of the reason for McDonalds low return on equity is due to the expansionary plans in the future and the fact that they are continually looking for ways to expand into foreign markets. As stated, nearly 100 percent of profits from company owned stores are re-invested into new enterprises.

The debt to equity ratio shows that McDonalds has a large amount of liabilities and debt, when compared to shareholders equity. In 2003, debt was 1.16 higher than equity. This is not generally a good sign, especially if McDonalds plans to pay dividends and give back to shareholders in the near future.

Current Debt Ratio

The current debt ratio at McDonalds shows that current liabilities are higher than current assets. This is again, a bad sign, as the company is not able to cover all of its immediate debts and loans. If creditors were to call in all debts, the company would find it very difficult to pay. As such, McDonalds has little liquidity.

The general impression we receive from McDonalds financial situation is that the company is slowly climbing out of a low period and making a turnaround. This can be seen in the financial ratios between 2002 and 2003. All show a marked improvement, and attest to the changes taking place at McDonalds. The DuPont analysis shows major weaknesses arising from McDonalds level of debt and relatively low net income. In order to stay a stable company, we feel McDonalds will have to lower its debt levels, and strive to keep costs to a minimum. We do realize that McDonalds is continually expanding, and using all manner of capital to increase its market share, yet if McDonalds were to fall into another hole, as it did in 2001 and 2002, it would make it that much harder to make it out unscathed. (See Appendix C)

Value Chain Analysis The value chain at McDonalds is very competitive in the global fast-food industry. The following table shows the costs and markups associated with McDonalds signature hamburger, the Big Mac, bought at a McDonalds. The Big Macs average price of $2.80 compares favorably to the various signature items at other fast food retailers, such as Burger King and Wendys. The royalties are paid by franchisees back to the McDonalds. (See Appendix B)

Key Success Factors

1) McDonalds short term financial objectives include cutting its capital expenditures by 40 percent, which will save approximately 1.2 billion dollars. McDonalds will use the extra money pay off debt and return some cash the shareholders by repurchasing shares and paying out more dividends. Its long term financial objectives include annual sales growth of 3-5 percent with one to three percent of this growth coming from existing stores and two percent coming from new stores. They also include an increase in operation income capital investments. 2) For the past ten years one McDonalds key success factors has been its franchises, taking in approximately 60 percent of total sales. McDonalds own restaurants bring in less than 30 percent of its sales but at the same time that money comprises a fairly significant portion of total income because the company keeps and applies 100 percent of those profits rather than just a portion of the franchises profits. 3) McDonalds receives funds from its franchises in two ways. There is monthly service fee that varies but most recently in 2002 was 4 percent of total monthly sales. Another manner in which McDonalds receives funds from its franchises is in rent money. McDonalds owns all property in which a McDonalds outlet was built regardless if the location is a franchise or company owned. It is estimated that McDonalds generates more money from its rent than from its franchise fees. 4) McDonalds also markets excess land, property and buildings on the web.

5) Between rent and profits from land sales, McDonalds real estate represents a significant portion of its overall company value along with ventures in earning income will allow McDonalds to continue to be successful and profitable in the future. 6) McDonalds also has several restaurant affiliates that in the past years have been doing quite well for themselves. The list includes Boston Market, Chipotle Mexican Grill and Donatos Pizza. 7) McDonalds is currently testing new ways of raising revenue such as offering retail merchandise for sale in some stores.

One of McDonalds key success factors has been its implantation of its Plan to Win. The plan focuses on five key drivers of success; people, product, place, price, and promotion. The first factor is McDonalds people or employees. McDonalds is striving to do a better job of staffing during busy periods as not to overwhelm and to reward outstanding employees for exception work. It is also putting more emphasis on its hospitality training to ensure a friendlier and customer focused support staff.

8) The second factor is the customer experience. In response to a changing taste preference and growing interest in healthy foods, McDonalds introduced the McChicken and McGriddles as well as offering white meat for the chicken McNuggets. In addition McDonalds added several premium salads. 9) The third factor was restaurant appears, putting much focus on cleanliness and modern environment. As a part of this McDonalds has installed wireless technology and added coffeehouses in some of restaurants. These few carried premium coffee, muffins, and pastries at low price to enhance adult appeal. In addition to this McDonalds has gone as far to renovate, rebuild and even relocate some of its buildings in order to create a fresh and friendly family atmosphere. 10) The fourth factor was on price, putting much focus on productivity and value. McDonalds has concentrated much effort on products that appeal to price sensitive customers, thus it implantation of the dollar menu. 11) The final factor was promotion and a continuing focus on building trust and brand loyalty. In its recent campaigns McDonalds has advertised using the slogan Im lovin it which it there attempt to make McDonalds an easy choice for families. They have also started using popular or main stream music to attract an ever growing youth population. 12) McDonalds has chosen to enhance it focus on its core business and sell certain aspects such as Donatos Pizzeria. Along with this McDonalds has entered into a letter of intent to exit its domestic ventures activities with Fazolis and discontinue development of non- McDonalds brands outside the U.S.

Alternate Strategies

Strategic Possibilities

Stay-on-the-offensive strategy The main goal of the stay-on-theoffensive strategy is to be a proactive market leader. The principle of this strategy is to continually stay one step ahead of your competitors and force them to play catch up. McDonalds is already the industry leader in the fast-food industry with a market share of 33 percent compared with the number two chain in the industry, Burger King at 13 percent market share. They can stay out front by implementing technological improvements in their restaurants to enhance the production methods or to improve the ordering process of the customer. In addition, they can also introduce new or better product offerings to satisfy the needs of their
1.

customers. The best approach that McDonalds can take through this strategy is to improve their customer service. McDonalds customer service ranking was the lowest in the fast-food industry and was even lower than the Internal Revenue Service. To improve upon this substandard attribute, McDonalds should revamp their training process for newly hired employees and introduce new educational modules for currently employed personnel. Fortify-and-defend strategy The purpose of this strategy is to make it harder for challengers to gain ground and for new firms to enter. A fortify-anddefend strategy works well with firms that have already achieved industry dominance. Since McDonalds is already the industry leader in the fast-food market, they can opt for a number of tactics using this strategy to maintain their industry position. They can continue their expansion tactics by continuing to open more stores around the world. This expansion would help defend against and help to discourage smaller companies from increasing their market share. In addition, they can also elect to invest capital in R&D to aid in developing new technologies for their operations. These new technologies will help them remain costcompetitive and technologically progressive.
2.

Global strategy. McDonalds already holds a strong position in the global economy. Our recommendation is that they decrease expansion in the almost saturated domestic markets, and continue their expansion in foreign countries, such as Asia, and the Pacific. Companies generally expand into foreign markets in an attempt to gain new customers and capitalize on core competencies. McDonalds core competency is that they are able to produce and sell quick and cheap food to a large number of customers. With this concept, they have been able to expand into other countries, and they currently are the largest global fastfood chain in the world. Since they already hold this lucrative position, they should continue expansion in an effort to drive out competition. One strong recommendation would be for McDonalds to expand into emerging markets. Since they focus on low-priced food, it is likely that many could afford their products, and therefore, McDonalds could expand into a stronger company.
3.

Diversification. One strategy that McDonalds as well as many of the other fast-food chains have embraced is that of diversification. We feel that McDonalds should continue this trend. With the large health-craze hitting the United States, many restaurants have to change to healthier, higher quality menu items. The fast-food industry is no exception. Healthier burgers, low-fat salads are all popping up on menus across the country. We feel McDonalds should continue its diversification and incorporate more healthy foods, including low-carb burgers and fries. If McDonalds is able to stay ahead of the competition in this
4.

aspect, they will have a strong competitive advantage over such companies as Wendys and Burger King.

Recommended Strategy

Stay-on-the-offensive strategy The main goal of the stay-on-the-offensive strategy is to be a proactive market leader. The principle of this strategy is to continually stay one step ahead of your competitors and force them to play catch up. McDonalds is already the industry leader in the fast-food industry with a market share of 33 percent compared with the number two chain in the industry, Burger King at 13 percent market share. They can stay out front by implementing technological improvements in their restaurants to enhance the production methods or to improve the ordering process of the customer. In addition, they can also introduce new or better product offerings to satisfy the needs of their customers. The best approach that McDonalds can take through this strategy is to improve their customer service. McDonalds customer service ranking was the lowest in the fast-food industry and was even lower than the Internal Revenue Service. To improve upon this substandard attribute, McDonalds should revamp their training process for newly hired employees and introduce new educational modules for currently employed personnel.

Executing the strategy and control McDonalds has needless to say already made a presence in the market and had made itself a household name. It is already the largest hamburger chain in the world. Therefore, it needs to continue onward with its successes while being a head every time with new product innovation, marketing schemes, technology development, customer service, employee training. By improving the standards and raising the bar a little higher for employee expectations will result in success stories from stores world wide. The Plan to Win strategy is important in the offensive strategy because it is about being innovative and challenging to the competitors. It proves that McDonalds is not just about profit only, they have made great leaps to show appreciation for their employees. Happy employees will result in better performance and give the reputation a whole new look on top of its current one. One of McDonalds key success factors has been its implantation of its Plan to Win. The plan focuses on five key drivers of success; people, product,

place, price, and promotion. The first factor is McDonalds people or employees. McDonalds is striving to do a better job of staffing during busy periods as not to overwhelm and to reward outstanding employees for exception work. It is also putting more emphasis on its hospitality training to ensure a friendlier and customer focused support staff. Conclusion McDonalds has seen many changes, good and bad during its creation and duration of the business. As long as the core competencies are recognized and never forgotten, then this business will continue to thrive. With every issue and challenge the corporation faces, it has the opportunity to improve itself and prove itself to the public, shareholders, and stakeholders. With every battle conquered, another one rises and with a secure mission and vision in mind, the corporation should never stray too far from the roots and success of the company. The recommended strategy will strengthen this plan because it is doing what McDonalds does best and more so. Despite the downturn the company has seen, the general impression we receive from McDonalds financial situation is that the company is slowly climbing out of a low period and making a turnaround. We must never forget the key success factors of the business which really makes the business for what it is today, including franchises that offer quick, efficient service in a clean friendly environment.

Turnaround The case gives a comprehensive account of the decline of McDonald's in the 1990s, and the events that led to the company's eventual turnaround in the early 2000s. McDonald's is the leading fast food chain in the world. Set up as a small drive-in joint in 1937, the company developed a highly successful system of franchising in the 1950s to expand across the US and later, around the world. The USP of McDonald's was cheap fast food, and the company's signature product, the Big Mac hamburger was considered an American icon. However, in the late 1980s and 1990s, the company's growth began to taper off. Analysts attributed this to a growing interest in a healthier lifestyle among people, which made them shun fatladen fast food, and also increasing competition. By the late 1990s and the first two years of the early 2000s, the company's profits had decreased drastically. In January 2003, McDonald's posted its first quarterly loss since it went public in 1965. In 2003, under the leadership of Jim Cantalupo, the company announced a turnaround plan aimed to restore the company's tarnished image and crumbling operations. By mid-2004, it was generally acknowledged that McDonald's had turned around.

Appendix A

SWOT Analysis Strengths Weaknesses

Owns one of the worlds best Customer service ranking is the known brand names lowest among fast-food chains Real estate operations bring in Many stores beginning to look large revenues and allow dated McDonalds to open more stores Quality becoming inconsistent Countless new innovations Order accuracy is low compared breakfast, playpens, etc. to other chains Specialized training for managers- Hamburger University Reinstitute the restaurant review operation (QSC) Large market share Strongest international presence among fast-food chains Strong leader in Jim Cantalupo McDonalds does not need to act as finance corporation to franchises McDonalds Plan to Win- focuses on people, products, place, price and promotion Opportunities Threats Diversification and acquisition of other quick-service restaurants Low-cost menu to attract different customers Initial public offerings in other countries could raise revenues Retail merchandise potentially used to raise revenues Increased competition among rival sellers, including price wars, product innovation, and growth Health conscious consumers demanding better quality, healthier menu items All fast-food chains expected to struggle to meet new consumer health expectations Overall weaker economy

Appendix B Value Chain Analysis McDonald's Production Costs McDonald's Overhead Costs Royalties 4% Service Fee Total Costs Retail Markup Average price to Consumer $ 0.13 $ 1.48 $ 1.32 $ 2.80 $ 0.65 $ 0.70

Appendix C

Financial Analysis

1998 Current Assets Current Debt Ratio= Current Liabilities 0.524368

2002

2003

0.70817

0.727829

Net Working Capital Net Working Capital Ratio= Total Assets -0.06003 -0.02949 -0.02873

Net Income Return on Equity= Average Stockholders' Equity 0.162282 0.084634 0.123051

Net Income Profit Margin= Sales 0.124793 0.057964 0.109852

Net Income Earnings Per Share= Shares Outstanding 1.135355 0.701437 1.087298

Sales Assets Turnover Ratio= Average Total Assets 0.609376 0.636869 0.507014

Total Liabilities Debt to Equity Ratio= Total Stockholder's Equity 1.090336 1.331557 1.166277

Net Income

Return on Assets=

Average Total Assets

0.076046

0.036916

0.055697

CONCLUSION
Most home business entrepreneurs start-up with very little money and a strong belief that success will come to them if they work hard enough and offer a quality product or service. While this positive attitude is essential, it is not enough to guarantee financial success. Before one can begin to develop his/her business idea, he/she needs to determine its strength and viability. The key factors that play a very crucial role in determining the success of any venture are: Team Personalities: what are your personality types (values, style, etc.)? Interests: what are you interested in? Experience: what experience do you have? Resources IP and goods: what does the business own? Cash: how much cash do you have? Network: what connections support the organization? Strategy Plan: what is your plan for establishing and growing the business? Competition: how will you address the competitive challenges? According to the analysts & research methodologists, in order to have a maximum probability of ensuring the success of our venture, the following 10 key areas should be looked upon: 1. Check your idea: Before plunging head-on to entrepreneurial venture, the first step should be to ascertain the viability of business idea. After developing the product, check

potential competitors in the market, both direct and indirect. It's one thing to have a good idea, and another to create a demand for the idea. 2. Check the market for your product/service: Market defines the distribution mechanism, pricing structure, and other business variables.

3. Know the legal structure: Legal structure will depend on the liability an entrepreneur is willing to take, the number of investors, the tax structure, etc.

4. Availability of financing: Even with a great idea & a ready market, you are bound to fail if you do not have adequate capital. If you are planning to invite partners to the venture, clarify the roles and responsibilities of each and make sure that all agreements are made in writing.

5. Plan out your operations: How well the product or service is presented will determine the initial consumer acceptance or rejection.

6. Develop your marketing program: You need to think how you will market & promote your product. Your product must be designed and marketed to clearly demonstrate how it will satisfy an unsatisfied need.

7. Write a business plan: This is essential as it helps you think through your business and what you really need to do.

8. Know the zoning regulations:

Zoning considerations usually include the amount of traffic, disturbance levels, and safety considerations.

9. Initiate the business registration process: After you have filed your business registration and fictitious name, open a separate bank account for your business.

10. Get insurance: The rule of thumb is to carry insurance only on what the business cannot afford to cover in the event of misfortune.

BIBLIOGRAPHY
Pour your heart into it by Howard Schultz

www.powerbiz.com www.answers.google.com www.drapkintechnology.com www.studentwebstuff.com www.scribd.com www.freeonlineresearchpapers.com