McDonalds Corporation - Separation between Management and Ownership - Case Study Example

Name Professor’s Name Course Name/Code Date McDonald’s Corporation Introduction Over the last decade, McDonalds has dominated the fast food industry serving in excess of sixty-eight million customers every day. McDonalds has more 35,000 outlets which are distributed to over one hundred and nineteen countries across the globe (McDonald). The success of this company is for all intents and purposes accredited to its ability to separate between management and ownership. Due to its geographically dispatched branches, the corporation has been able to take apart management from ownership effectively. The restaurant operates as an affiliate, an actual cooperation or as a franchise. For this reason, the company has been able to generate its revenues from various ways including sales from hotel operations, fees from franchisee, and royalties among others. The core aim of this paper is to describe the operation of McDonalds Corporation putting into consideration various financial activities including risks, capital, as well as valuation of the overall company performance. Separation between management and ownership Separation between management and ownership involves running the company under the responsibility of a professional rather than the real owners. Management of a corporation through professional management brings about growth to the company as the owner may not have adequate experience and skills required for the managerial position. McDonald s has efficiently managed to separate the management with Ownership. The company was founded by Richard, Ray Kroc and Maurice Mc Donald in the California. Ever since, the company has operated under a structured management having various key management people including a Chairman, a President, and CEO. Therefore, the company has benefited in making hierarchical decision -making. Due to various branches worldwide, the company has its headquarters located in Illinois where all its strategic decisions are made (McDonald's). Potential conflicts of interest that Nonetheless, there is an impending conflict of interest in McDonald Corporation. A conflict of interest is a situation whereby an organization has been involved in more than one interest in which one could potentially corrupt the motivation of the organization. A conflict of interest may be a recommendation, action as well as a decision that may detriment or benefit an organization. For years, the company has been firm to have a significant redesign to their restaurants to catch up with the latest technology. The restructuring is planned to include executive wooden table, muted colors, faux-leather chairs, Sage and Olive green among other features. In addition, the company is setting up to improve their flat screen TVs as well as WI-FI to meet the standards of the hotel. Other redesigns include; designing flat roofs for their restaurants, double drive- thrus among others (McDonald's). Virtually, a conflict arises on whether this expenditure is recoverable. Redesigning of all the McDonalds outlets globally requires a considerable amount of capital and, as a result, effective decision has to be made. On the other hand, redesigning seems to be mandatory due to the competition being posed by other restaurant including Starbucks, Jollibee among others. The design of the restaurants is considered to be relative below par considering it was one of the earliest restaurants to have been established. Therefore, the management of Mc Donald Company has to act accordingly to ensure that the company will not lose its competitive advantage due to obsolete designs. Additionally, the management needs to ensure that the capital expenditure on redesigning will not negatively influence the company’s financial position. Interaction with financial markets Mc Donald’s has actively interacted with financial markets for years. In today’s competitive and modern business environment, interaction with the financial markets is the heart of every company despite the kind or service or product the company is operating. McDonalds operates an integrated accounting as well as a finance function. In addition, the company supports a centralized financial department as well as a centralized accounting system. Therefore, the company has effectively managed to produce updated financials in the market financials through their distributed network becoming an excellent target for potential investors (McDonald's). Social obligations to the society One of McDonald’s social obligations is provision of employment opportunities. By the year 2013; McDonalds had over 440,000 employees worldwide. In addition, the company is distinguished for support of the society as well as the local community. For instance, it has a cleanup day in Australia, McDonalds Forest among other charitable activities. These charitable activities have significantly improved the image of McDonalds Corporation. Risk Analysis Every company has to evaluate its willingness to take risks and threats which the organization is exposed. Among the potential risks facing by Mc Donald’s is competition. Jollibee, Starbucks, Yum! Brands Inc among others has been a great threat to every developments strategy of McDonalds. Competition is resulting from the market environment. Due to increased technological development in food production, competitors of McDonalds have extensively capitalized on new food production processes which are considered to be a threat to Mc Donald’s food production. Financing Most of the Mc Donald Operations are financed through equity finance. Over years, the company has registered tremendous profit to run it operations. In 2013, the company recorded a total equity of US$ 16.0097 billion (McDonald's). Consequently, the company was able to finance its strategic plans such as expansion programs, technological advancement among others In essence, McDonald’s capital falls in the continuum of equity. Due to a wide range of revenue generated from its rental income, franchising, royalties as well as sales from restaurant trading, the company can finance its activities adequately. Nevertheless, in some cases, the company may find it necessary acquire funds from the financial institution to finance high capital projects. Qualitative Advantages of Debt Capital Although most finance in Mc Donald’s Corporation is from equity finance, there are various qualitative benefits that result from the use of debt capital. The company has been able to redesign their organization to ensure that they do not lose their market share to their competitors due to obsoleteness of their structures. The management cannot tolerate losing their market share due to poor food production methods. The company would rather risk some trade-offs with acquiring debt capital (McDonald's). Qualitative Disadvantages of Debt Capital Nevertheless, debt capital lowers the credibility of a company; if a corporation is highly geared, the company may lose revenue as potential investors may be reluctant to invest in their company. For instance, one of the primary sources of income in Mc Donald’s Corporation is through franchising and royalties. Therefore, the company may risk earning this revenue source by having a large debt capital as few investors will be keen to invest in their organization. Qualitative Trade-offs of Having too much Debt Capital From a qualitative trade off, the debt capital that is being used by McDonald’s is too little for the company. It is prudent for the company to expand its operation to various parts of the world. One of the greatest risks that are associated with high debt capital is losing potential investors. In some scenarios, well managed debt capital can also motivate investors to share the risks of investment. Therefore, losing some franchising revenues can be recovered from more sales generated from diversifying markets if the additional capital was aimed for expansion capital. Growth Pattern McDonald Corporation can be referred be a stable company. Stability may be determined by various ways including dividend payment to its stockholders, ability to plough back its profit among others. The company generates significant earnings and as a result it has profitable reinvestment opportunities for its retained earnings. In addition, McDonalds’ Corporation has a very favorable dividend payout ratio and, as a consequence, it has attracted a considerable number of investors “Key Variable.” in Growth The key variable in McDonald’s growth is separation of management with ownership. In addition, the management of the organization has efficient skills and expertise to handle immerging needs of the organization. Accordingly, the firm, has been able to enjoy economies of scale through large-scale production, easier performance appraisals and more importantly, efficient check and balances, among others. Conclusion To sum it up, Mc Donald’s has dominated the fast food restaurant will remain to be the biggest restaurant chain in America as well as in the world. The company has managed to seize a large market share by its ability to fill in its food production as well as its operations. The paper has critically analyzed McDonalds Company in terms of it financials ability including its source of capital as well as its overall management. In essence, more emphasis has been laid on why the company has enjoyed tremendous success over years. Work Cited McDonald's. About McDonalds. 2015. Web. 29 March 2015. Read More