The Globalization of McDonalds

Knowledge management is a technique used by many organizations to expand their businesses globally and provide a competitive product in their specific market. It focuses on organization objectives such as improved performance, competitive advantage, innovation, the sharing of lessons learned, integration and continuous improvement of the organization (Wikipedia 2011). Although knowledge management has only become mainstream in the early 1990's, many organizations have used similar techniques well before. One such company is McDonald's.

McDonald's started as a small store front in San Bernardino, California. Brothers, Richard (Dick) and Maurice (Mac) McDonald owned the restaurant that originally sold hotdogs, chips, sodas, and pies. By the mid 1940's, McDonald's was the number one teen hangout. It had a menu that consisted of 25 items, which now included hamburgers, pork sandwiches, and ribs. The brothers, realizing the flaws in the restaurant atmosphere and how the consumer wanted their food in a timely manner, closed down their restaurant for three months to implement upgrades decided on while brainstorming to establish what was then called the drive in restaurant and make it more efficient. Their business was successful due to the concentration of the limited menu which enabled them to serve a quality product. This was a practice that would stay the same in the new and improved restaurant they would open. These brothers used the various strategies of knowledge management to overcome a market that consisted of carhop restaurants. In strategizing to remain competitive, the McDonald brothers added fries and milkshakes to their menu. They also let all their car hops go. As the changes were implemented the brothers realized a new type of customer. "With the carhops gone, McDonalds lost a good bit of its teenage appeal. But it also lost its image as a hangout, which gave it newfound appeal to a much bigger segment: families" (Love, 1986, p15-16). With its new design, which featured an open kitchen that fascinated kids, the McDonald brothers found that appealing to the children made their restaurant more appealing to the family as a whole (Love, 1986). "By the mid-1950's, their little hamburger factory enjoyed revenues of $350,000- almost double the volume of their previous drive-in business at the same location." (McDonald's) The drive in restaurant was the idea that would go on to set the standard for restaurants of the future. The restaurant, in its new state, generated profits that were consistent with bigger franchises. The concept and standing operating procedures was duplicated by several drive in restaurant entrepreneurs.

Although the McDonald brothers would go on to open a few franchises, it wasn't until 1955 that the Corporation was formed, and it was due to the vision of a salesman by the name of Ray Kroc. "Kroc could see the trends in a market because he had developed a salesman's most important asset-a knack for putting himself in the position of his customers and for addressing their needs and interests, not his own" (Love, 1986 p. 32). Ray was a business man who sold various products across the United States. The McDonald brothers, while expanding their business, called on him to sell them some multi-mixers. Once Ray saw how the operation worked, he figured he could work that operation "anyplace" (McDonalds, 2011, p 2). He used his vision to pitch the idea to the McDonald brothers, and was brought in as their franchising agent. His first prototype McDonald's restaurant opened in Des Plaines, Illinois on April 15, 1955 (McDonalds, 2011, p2).

Mr. Kroc had no way of knowing the road he embarked on would lead to some of the strategies used in today's knowledge management. In setting up franchises in other markets, he utilized networking techniques. This would serve as a great benefit for the corporation, which found success in getting the franchisees and suppliers to buy into the vision of having McDonald's in every state. The one thing that would make this vision seem strange was that Kroc's system would include food that was prepared the same whether in "Alaska, or in Alabama" (McDonald's). Using this format proved successful for the McDonald brothers so there was no need to change it. Instead the area Kroc focused on was franchising. "Kroc's agreement with the McDonald brothers was to limit the franchise fee to $950 per restaurant and charge a service fee of only 1.9 percent of restaurant sales- with 0.5 percent of that going back to the McDonald Brothers"(McDonalds, 2011, p2). As McDonalds continued to grow, so did its knowledge management practices. In 1956 the price to purchase a franchise was raised to $1500, and has since gone up to $10,000 (Love, 1986). "At the end of 1956 McDonald's 14 restaurants reported sales of $1.2 billion and had served some 50 million hamburgers. In just four years there were 228 restaurants reporting over $37.6 million in sales and the company had sold its 400 millionth hamburger mid-way through 1960" (McDonalds, 2011, p3). Today McDonald's require 40% of the total cost to open a new restaurant, or 25% of the total cost to take over an existing one. And require a minimum of $500,000 of non-borrowed personal resources to consider a person or group for a franchise. During the term of the franchise, McDonald's collects a monthly service fee base upon the sales of the restaurant, and rent, be it a base price or a percentage of monthly sales.

Although franchising was bringing in good revenue for Kroc and his McDonald's company, it would be another aspect of business that would bring wealth to the company. "McDonald's made its money on real estate and on a little known formula developed by Harry J Sonneborn. Sonneborn was the former Tastee Freeze executive Kroc hired in 1956, and he worked for McDonald's for just ten years" (Love, 1986, p152). Based off a proposal from Sonneborn, McDonald's formed a real estate company, and located and leased sites from landowners who were willing to build McDonald's units. The units would be leased to the McDonald's Company who would then lease the land and building to its franchisees for and nominal mark up fee. According to the book McDonalds: Behind the Arches, "In his negotiations with property owners, Sonneborn refused to cave n to their demands for rent based on a fixed percentage of store sales and insisted on McDonald's paying flat monthly rents, typically in the area of $500 to $600. In subleasing the store to the franchisee, he marked up the price initially by 20 percent and then by 40 percent" (Love, 1986, p154) Also included in the sublease was a clause that required the franchisee to pay all