The Chicago Tribune ran a great overview of the situation facing McDonald’s leadership today. In a nutshell, an upstart hedge fund manager (William Ackman of Pershing Square Capital LP) is pushing McDonald’s to restructure itself by spinning off restaurant operations, selling real estate and otherwise changing the company. He is supported by a large REIT (Vornado Realty Trust) which would like to participate in the real estate restructuring. McDonald’s management is fighting off these efforts.
The really interesting question is, how did McDonald’s get itself into this mess? Quite simply, Lock-in to the past has kept McDonald’s from seeing its real Challenge. McDonald’s business today is remarkably like it was in the 1960s. The company still franchises and operates a hamburger chain. While there has been an amazing amount of change in the last 40 years, little of it has affected McDonald’s as they have continued Defending and Extending their early success. Now McDonald’s is mired in the Swamp, unable to control its own destiny due to the attacks from outsiders.
McDonald’s has had lots of opportunities. It has bought other restaurant concepts (such as Chipotles), yet it never really supported their growth as it kept focused on hamburgers. It built expertise in franchising as well as food and restaurant supplies distribution strengths. But it never moved into those businesses beyond supporting its core business. And as nutritional habits have changed among its baby boomer customer generation has aged, while an entirely new generations of customers has come along, McDonald’s steadfastly ignored the Challenges and kept trying to grow its old Success Formula.
You can’t blame the hedge fund operators and REITs for taking aim at McDonald’s. Any time a company becomes a slave to its Lock-in it becomes an easy target. Management is too easy to predict, and their unwillingness to address Challenges with their resources makes those resources a juicy desire for outsiders. Sometimes competitors take advantage, and sometimes its unexpected outsiders – like in this case.
We all have a natural tendency to support the incumbent. They’ve worked hard to get their positions, and we want them to succeed. But when the incumbents can’t address Challenges and overcome Lock-in the interests of shareholders, suppliers, employees and customers are best served by those who would force a change in behavior.