Understanding Organisations:

Theory & Practice

(21512)

Assignment 1

Course Coordinator & Lecturer:

Dr. Walter Jarvis

Tutor: Mr. Tayyab Waqas Amjed

Student Name: XYZ

Student ID: 123

Tutorial Time: 0.00 pm

Submission Date: April 1, 2014

1

1. Description of Organization

McDonalds is a transnational organisation working within the fast-food industry.

McDonalds is considered to be a transnational organisation, as there are more than 35,000

restaurants around the world in over 100 countries (McDonalds, 2013). As a leading global

food retailer, McDonalds has a staggering 1.8 million employees (McDonalds, 2013). While

being the biggest and most successful fast-food chain in the world, McDonalds has

strategically positioned itself as a family friendly, low cost fast-food restaurant (McDonalds

Franchise Strategy, 2009).

McDonalds first opened its doors in 1940 as a Bar-B-Q restaurant, founded by the

McDonald brothers, Mac and Dick. In 1967, the company went international, with restaurants

opening in Canada and Puerto Rico (McDonalds Franchise Strategy, 2009). The

organisations mission and values centre on an exceptional customer experience

(McDonalds, 2013).

As a whole, McDonalds is a publicly owned corporation, although individual restaurants are

either operated by the company or by franchisees; under a conventional franchise agreement

(New York Stock Exchange, 2012). In fact, more than 80% of McDonald's restaurants

worldwide are owned and operated by independent local business men and women

(McDonalds, 2013). While providing widespread employment opportunities across the

world, McDonalds also hold an extensive portion of market share within the global fast-food

industry, as they serve tens of millions of people every day (Watson, 2006).

Amid ever-increasing complexities within the globalised business world, especially as seen in

the tumultuous years surrounding the Global Financial Crisis, McDonalds still continues to

maintain strong international sales and a high level of success; hence my interest in using

McDonalds as my organisation of focus. The organisations perfectly implemented

international strategies have certainly made it an insightful and interesting organisation to

analyse.

2

2. Selected Theories for Analysis of McDonalds

Contingency theory developed as a part of organisational theory throughout the 1960s. Van

de Ven & Drazin point out that, Contingency theories dominate scholarly studies of

organization behaviour, design, performance, planning, and management strategy (1984, pp.

333). According to contingency theory, characteristics of the external environment have the

ability to heavily impact an organisation, requiring management to adapt the organisations

structure (Donaldson, 2006). Through application, the contingency theory helps to generate

an understanding of why McDonalds organisational practices are the way they are.

As a huge company, with many different departments, the McDonalds corporation utilises a

hierarchical management structure. This is evidently the most effective way to manage an

organisation of such a large size. For the individual McDonalds restaurants, however, a

flatter management structure is utilised a single manager exercises authority over front-line

employees (Parcel & Sickmeier, 1988). While McDonalds have adopted slightly different

management styles to compliment different parts of the organisation, overall the organisation

utilises a mechanistic structure as a means to effectively control the organisations activities

(Parcel & Sickmeier, 1988). The mechanistic structure is evident in its assembly-line style

operations. Job roles are clearly defined in a highly formalized and orderly environment and

communication lines are straight-forward; allowing McDonalds to produce reliable products

of a consistent standard on a global scale (McDonalds, 2013). A mechanistic structure

allows McDonalds to establish the solid foundations needed to successfully compete in an

increasingly complex and competitive global market (Carpenter et al., 2010).

Dynamic capability theory considers how resources and core competencies within an

organisation can be developed into value-creating strategies in order ensure competitive

survival (Eisenhardt & Martin, 2000). Teece et. al. further explain dynamic capabilities to be

the firms ability to integrate, build, and reconfigure internal and external competencies to

address rapidly changing environments (1997, pp. 516). In order for an organisation to

successfully develop dynamic capabilities, management must be able to recognise potential

opportunities, have the capacity to seize them and finally, be able to apply the skills

necessary to enhance them (Eisenhardt & Martin, 2000). Analysing McDonalds through the

dynamic capabilities lens provides critical insight towards understanding how McDonalds

has managed to retain its position as the industry leader.

3

According to Teece, McDonalds is an excellent example of a firm that has grown globally

based on an ability to replicate and manage assets in multiple jurisdictions (2014, pp. 32).

While McDonalds generates economies of scale through standardised mass production, the

organisation also implements effective localisation strategies to accommodate local

preferences (Watson, 2006). Combining competitive pricing with their dedication to customer

satisfaction, McDonalds have created a unique strategy that absolutely works in their favour.

Such dynamic capabilities are a direct result of McDonalds commitment to providing quality

management training. Despite being a long-term commitment, McDonalds believe that

highly qualified managers have the ability to foster innovation and productivity; resulting in

the establishment of competitive strategies (McDonalds, 2013)

3. Seminal Papers and Analysis of McDonalds

Zeithaml & Zeithaml (1988)

Zeithaml & Zeithaml provide a comprehensive theory-based understanding of contingency

theory; ultimately supporting the central idea that there is no single best way for an

organisation to manage its operations. Zeithaml & Zeithaml claim that contingency theory is

a mid-range theory situated between the two extreme views which state either that

universal principles of organisation and management exist or that each organisation is unique

and each situation must be analysed separately (1988, pp. 37). Once establishing the

theoretical foundations of contingency theory, Zeithaml & Zeithaml attempt to demonstrate

its value for marketing. For any organisation, the successful development of specialised

marketing strategies requires a conscious understanding of external contexts. McDonalds

have successfully created a loyal customer base on a global scale. This accomplishment is

seen to be directly related to their success in identifying their customers needs and

effectively adapting their marketing mix to draw in customers.

Donaldson (2006)

Donaldson first and foremost explains that the most effective organisational structural design

is where the structure fits the contingencies (2006, pp. 19). While theoretical and empirical

evidence show that significant challenges within contingency theory exist, these challenges

provide organisations with the opportunity to develop innovative strategies. It has been

4

alleged that new developments in technology are rendering contingency theory obsolete,

however Donaldson discredits such claims. Ultimately, Donaldson reiterates the idea that

contingency theory is valuable in helping management to adapt internal structures so that

they align with external contingencies; helping to boost organisational performance. This

approach has clearly worked for McDonalds. While famous for their consistent quality

standards, cleanliness and service worldwide, McDonalds also understand that they need to

implement local strategies to suit local tastes and preferences across the globe. McDonalds

offer a wide range of menu variations, such as the Kiwiburger in New Zealand, a McFalafel

in Egypt and certified halal meals in Pakistan (McDonalds, 2013)

Eisenhardt & Martin (2000)

Eisenhardt & Martins paper conceptualises dynamic capabilities as a set of specific and

identifiable processes such as product development, strategic decision making, and

alliancing (2000, pp. 1105). Eisenhardt & Martin put forward the idea that market dynamism

has a considerable impact on the dynamic capabilities within an organisation. In a moderately

dynamic market, change is said to be constant, but predictable. Players within a moderately

dynamic market are well-known, operate within stable industry structures and rely heavily on

existing knowledge. McDonalds is a perfect example of an organisation operating within a

moderately dynamic market. Contextualising McDonalds in this way helps to understand

what kind of dynamic capabilities should be used to strengthen the RBV.

Prieto & Easterby-Smith (2006)

Prieto & Easterby-Smith analyse the interaction between dynamic capabilities and knowledge

management within an organisational context. Prieto & Easterby-Smith suggest that the

relationship between the two is significantly important, hence the need to develop a deeper

understanding. It is revealed that dynamic capabilities can be facilitated by knowledge

management (2006, pp. 500). This is a plausible explanation for McDonalds widespread

and immense success. McDonalds have effectively utilised extensive industry knowledge

gained over the last 50 years to develop current competitive operational strategies. Prieto &

Easterby-Smith explain that recent developments in information technology are radically

changing the way knowledge is transferred and shared within organisations. With increased

opportunities for knowledge transfer, comes increased flexibility in terms of dynamic

5

capability development; helping organisations such as McDonalds to sustain a fierce

competitive edge.

4. Organizational Issues with the Lens of Selected Theories

Contingency theory, while often used by managers to aid the development of appropriate

organisational strategies, is also helpful in highlighting managerial and organisational

problems. Contingency theory can be used to expose problematic areas within an

organisation that have not successfully adapted to external contingencies (Donaldson, 2006).

While McDonalds is famous for its ability to customise its products to suit the needs of local

markets, further analysis reveals that its mechanistic organisational structure is essentially

hindering certain areas of the organisation.

There have been growing pressures for large organisations, such as McDonalds, to conduct

business operations that are moral, ethical and sustainable. These ideas are encompassed

within the Corporate Social Responsibility (CSR) movement which has significantly grown

in depth and numbers over the last decade (Brazelton, 1999). McDonalds has recognised

such external pressures, and due to public scrutiny from stakeholders, McDonalds has

incorporated CSR practices (such as sustainability reports) into its operations (Fieseler et. al.

2010, pp. 559). Nevertheless, critics are quick to point out the exploitative nature of many

areas within McDonalds operations. Most commonly, McDonalds are criticised for the

treatment of their employees and the adverse affects its business operations have on the

environment. Brazelton et. al. expose McDonalds poor working conditions, describing them

as being low status, low wage, non-union jobs with no fringe benefits and little chance of

advancement (Brazelton et. al. 1999, pp. 5). Environmental groups have also exposed the

destructive nature of McDonalds operations in terms of pollution, waste and the degradation

of tropical forests.

Some organisations (such as the body shop) have set high CSR standards, reassuring

consumers that big organisations are able to operate responsibility (Brazelton et. al., 1999).

Managers need to be aware of developing CSR benchmarks and be able to adapt

organisational structures and operations so that they fulfil changing consumer expectations. If

McDonalds are not able to develop sustainable strategies to meet current expectations, they

may lose customers to superior, innovative competitors.

6

Dynamic capabilities theory can be utilised by management to assess whether or not the

organisation is developing, integrating and improving all of its resources in response to the

external environment to the best of its ability (Teece et. al., 1997). An analysis of McDonalds

reveals that the hierarchical structure within the organisation has created problems; most of

which relate to power distance and employee dissatisfaction (Royle, 2000). These internal

issues within McDonalds are essentially hampering the development of its dynamic

capabilities.

The strict hierarchical structure within McDonalds has created a high power-distance culture

(Hofstede et. al. 1997). Khatri points out that this kind of organisational culture results in

behavioural implications for employee participation, organisational communication and

decision-making, discipline and control, management development, and organisational

structuring and adaptation (2009, pp. 2). Reduced job satisfaction is becoming increasingly

common for lower lever employees within McDonalds, as downward vertical

communication channels reinforce superiority; and ultimately the underlying autocratic

nature of the organisation (Royle, 2000). Lower level employees often feel a lack of moral

support from their superiors which can cause tension and hinder the flow of innovation and

knowledge transfer. Employee grievances, if left unaddressed, can be detrimental to an

organisations success.

It is clear that McDonalds management need to address the organisations work culture, and

consider adapting it to better suit the needs of its employees; they are after all one of the most

valuable resources of the organisation. Reconfiguring the organisations internal lines of

communication to create a supportive environment that encourages innovation and

productivity is vital to allow the development of dynamic capabilities within McDonalds.

5. Limitation of Theories for Analysis of McDonalds

Critics of contingency theory claim that its weakness stems from a lack of clarity. Northouse

(2010) believes that contingency theory does not explicitly explain how managers can use the

results of the theory to effectively execute any structural adjustments or changes that are

required. Northouse further explains that, changing the situations can result in positive

7

outcomes, but this does present significant workability problems for organisations (2010, pp.

118). For example, contingency theory helps to highlight how a weak economy will

negatively impact upon McDonalds, but is unable to provide effective solutions on how to

lessen its impact (Mitchell et. al., 1970).

Similar to contingency theory, dynamic capabilities theory has also been criticised for its

lack of theoretical foundation, and is often described as being logically inconsistent. Arend &

Bromiley go so far as stating that if the DCV does not quickly develop a theoretical

foundation, the field should move away from the DCV (2009, pp. 87). Other critics suggest

that the theory has an insufficient concern for competition (Williamson, 1999). While the

dynamic capabilities theory is useful in explaining how McDonalds has been able to

successfully seize opportunities, growing competition has the potential to diminish this;

which is a factor that McDonalds cannot simply overlook.

6. Different Stakeholders Perspectives

While customers may have high expectations for large organisations such as McDonalds,

they do not technically have to fulfil any obligations other than what is required of them by

law. Although many customers have started to put pressure on McDonalds to conduct its

operations in an ethical and sustainable manner, the organisation only needs to legally

comply with the regulatory authorities. McDonalds are required to fulfil responsibilities that

are set out in legislation, such as meeting food safety standards, fulfilling OH&S obligations

and complying with local labour laws (McDonalds, 2013) (Brazelton, 1999). McDonalds

often claim to go above and beyond what is required of them by law; however, criticism

surrounding the validity of these claims is common.

McDonalds organisational structure may not be ideal for lower level employees; however,

the CEO of McDonalds has a very different perspective. The hierarchical structure and high

power-distance present within McDonalds has created a work culture that is often viewed as

unfavourable for lower level employees (Khatri, 2009). While feelings of inferiority within

lower level employees is not something McDonalds can entirely overlook, the hierarchical

structure is evidently the most effective organisational structure for McDonalds (Carpenter,

8

2010). Due to its large-scale global operations, McDonalds requires tight control and

efficient operations, hence the need for a hierarchical structure (McDonalds, 2013).

7. Understanding of Different Stakeholders Perspectives

Profit maximisation is the number one priority for many organisations. However, a change in

consumer demands and an increase in consumer expectations have made profit maximisation

an increasingly complex goal to achieve (Matsusaka, 2001). While McDonalds ultimately

strive to generate profits in order to maximise shareholder wealth, consumers are becoming

increasingly interested in and invested upon various organisational operations; essentially

condemning unethical practices. In order to operate sustainably, McDonalds need to find a

happy medium between profit maximisation and upholding CSR practices. McDonalds

management need to be open minded and consider how participation in sch CSR practices as

triple bottom line and fair-trade may in fact prove to be a profitable investment.

While being efficient and ultimately necessary, the strict hierarchical structure of

McDonalds management has indeed often neglected the needs of lower-level employees.

Considering there are no viable alternative management structures for such a large

organisation, it is important for McDonalds to instead create a functioning hierarchy that is

supportive of its employees at every level. In order to effectively generate positive changes

within McDonalds autocratic management, a set of policies that the organisation must abide

by could be developed and enforced. Such policies could outline the need for respect at every

level, open communication channels throughout the organisation and finally, rules that are

focused on clarity, rather than control.

9

8. Reference List

Arend, R. J. and P. Bromiley (2009). "Assessing the dynamic capabilities view: spare change,

everyone?" Strategic Organization 7(1): 75-90.

Brazelton, F., et al. (1999). Study of Corporate Social Responsibility Poverty & Prejudice:

Breaking the Chains of Inner City Poverty.

Carpenter, M. A., et al. (2010). Principles of Management, Flat World Knowledge, L.L.C.

Donaldson, L. (2006). The Contingency Theory of Organizational Design: Challenges and

Opportunities. Organization Design. R. Burton, D. Hkonsson, B. Eriksen and C. Snow,

Springer US. 6: 19-40.

Eisenhardt, K. M. and J. A. Martin (2000). "Dynamic capabilities: what are they?" Strategic

Management Journal 21(10-11): 1105-1121.

Fieseler, C., et al. (2010). "Corporate Social Responsibility in the Blogosphere." Journal of

Business Ethics 91(4): 599-614.

Hofstede, G., et al. (1997). Cultures and organizations, McGraw-Hill New York.

Khatri, N. (2009). "Consequences of Power Distance Orientation in Organisations." Vision:

The Journal of Business Perspective 13(1): 1-9.

Matsusaka, J. G. (2001). "Corporate Diversification, Value Maximization, and Organizational

Capabilities*." The Journal of Business 74(3): 409-431.

McDonalds (2013). Getting to Know Us, 29 March 2014,

.

McDonalds Franchise Strategy (2009). History of McDonalds, 29 March 2014,

10

Mitchell, T. R., et al. (1970). "The contingency model: Criticism and suggestions." Academy

of Management Journal: 253-267.

New York Stock Exchange (2012). McDonalds Corporation, viewed 29 March 2014,

.

Northouse, P. G. (2010). Leadership: Theory and Practice, SAGE Publications.

Parcel, T. L. and M. B. Sickmeier (1988). "One Firm, Two Labour Markets: The Case of

McDonalds in the Fast Food Industry." Sociological Quarterly 29(1): 29-46.

Prieto, I. M. and M. Easterby-Smith (2006). "Dynamic capabilities and the role of

organizational knowledge: an exploration." European Journal of Information Systems 15(5):

500-510.

Royle, T. (2000). "Worker Representation under Threat-The McDonald's Corporation and the

Effectiveness of Statutory Works Councils in Seven European Union Countries." Comp. Lab.

L. & Pol'y J. 22: 395.

Teece, D. J. (2014). "A dynamic capabilities-based entrepreneurial theory of the

multinational enterprise." Journal of International Business Studies 45(1): 8-37.

Teece, D. J., et al. (1997). "Dynamic capabilities and strategic management." Strategic

Management Journal 18(7): 509-533.

Van de Ven, A. H. and R. Drazin (1984). The Concept of Fit in Contingency Theory, DTIC

Document.

Watson, J. L. (2006). Golden Arches East: McDonald's in East Asia, Stanford University

Press.

Williamson, O. E. (1999). "Strategy research: governance and competence perspectives."

11

Zeithaml, V. A. and C. P. Zeithaml (1988). "The contingency approach: its foundations and

relevance to theory building and research in marketing." European Journal of Marketing

22(7): 37-64.