Introduction
Regardless of the type of business, whether it is an industrial enterprise or a small advertising firm, control over the expenditure of financial resources is one of the essential activities that directly affect market stability and capital growth. In this regard, the concepts of planning and decision-making form an important background for analytical work since a competent assessment of development prospects helps companies avoid unnecessary expenses and unplanned costs. Applying such models in practice requires a careful assessment of various factors and one of the techniques that may contribute to an adequate evaluation of budget costs is cost estimation. This concept will be considered in the context of McDonald’s, one of the largest fast-food chains, which does business in dozens of countries. The global activities of this network with thousands of restaurants explain the relevance of a convenient and accurate algorithm for estimating costs. Given the current restrictions imposed on social contacts due to the COVID-19 pandemic, cost estimation in the chain organizational model of McDonald’s is crucial to carry out responsibly due to the enormous losses that the corporation suffers, as well as the lack of stable profits.
Company Description
McDonald’s is one of the most famous fast-food restaurant chains. Founded in 1955 by Ray Kroc, then a salesman, it quickly grew from a single hamburger restaurant to a large chain (“Our history,” n.d.). Today, McDonald’s products, including the brand logo, are known all over the world. The philosophy of the business is to provide people with affordable and tasty meals that are cooked fast and, at the same time, high in calories to make one feel full (“Our history,” n.d.). McDonald’s has an extensive supply chain network, but a particular challenge lies in controlling productivity and allocating finances. The franchise has thousands of restaurants; in addition, due to the constant need for a workforce, the corporation has a training program for employees of various categories, and career growth is possible (“Our history,” n.d.). In such conditions, this is extremely important to ensure comprehensive control over costs since, in case of failure to assess the range of expenses, it can lead to problems that will be solvable for the company as a whole but may become critical for an individual restaurant and be the reason for closing.
McDonald’s Need for Cost Estimation
McDonald’s budget includes extensive expenses for the purchase of raw materials, advertising, and other activities. In this regard, despite the profit from numerous restaurants, an objective assessment of costs is critical. As Blocher et al. (2019) note, identifying the relationship between items of expenditure and their drivers makes it possible to reliably predict future costs. According to Kee et al. (2021), who analyze the activities of fast-food restaurants in Malaysia, the COVID-19 pandemic has caused severe threats to the chain’s business sustainability. The need to maintain social distancing, install protective equipment, meet sanitary requirements, and other mandatory measures incur losses that are not included in the standard operating activities of the corporation. As a result, due to the limited number of visitors and the aforementioned costs, McDonald’s cannot not only provide the usual profit, and inevitable expenses put a serious strain on the chain’s budget.
Another reason why cost estimation should be an integral part of McDonald’s business is due to its corporate culture. Singireddy (2020) draws attention to the chain’s approach to meeting modern trends, including adapting menus in the context of local demands and communicating features. In addition, the requirements for compliance with the rules of cooking, consistent with the norms of healthy eating, dictate special approaches to the recipe for McDonald’s because close attention to the health of the population is an urgent task of modern healthcare agencies (Singireddy, 2020). Keller and Alsdorf (2012) mention people’s moral concerns, which, coupled with cultural characteristics, determine the social responsibility for actions that violate generally accepted norms of behavior. The activities of McDonald’s can be expressed in the condemnation of the use of low-quality products or the avoidance of responsibility for violating corporate ethics when interacting with customers or staff. Thus, given these numerous nuances and constraints that have become particularly relevant in recent times, the restaurant chain needs an effective cost estimation strategy to avoid severe problems for the budget.
Introducing Relevant Control Mechanisms
To allocate financial resources efficiently and plan expenses competently, McDonald’s needs to identify the areas in which cost optimization is most relevant. Dai et al. (2017) suggest looking at supply chain management as one of the cost items where the corporation can try to reduce unwanted expenses. As a potentially actionable initiative, joint supply planning with partners is an objective solution that can help eliminate unwanted delays in product delivery and accelerate the pace of transportation. By selecting reliable suppliers with conveniently located warehouses, McDonald’s can count on fewer risks of delays and, therefore, prevent losses caused by temporary shortages of raw materials.
Despite the local business background, McDonald’s can optimize the allocation of financial resources by planning costs following the policy of standardization of marketing initiatives. According to Hamza and Karabulut (2021), although the corporation pursues customer acquisition programs by segmenting the target market, product unification may be a step to control costs more effectively. For instance, planning for the introduction of a new product on the menu can be done in the context of many regions in which restaurants operate and not just within one location. As Blocher et al. (2019) remark, this planning strategy makes it possible to facilitate pricing and adapt decision-making through a single algorithm of work rather than disparate interventions. By adhering to the tactics of a single marketing plan, the corporation can reduce costs and estimate future costs more efficiently, thereby minimizing financial risks.
Based on the aforementioned principle of unification, one can conclude that companies that are formed as network enterprises may experience difficulties in assessing financial risks due to the distinctive development strategies of individual enterprises. Hollenbeck (2017), in this case, argues that “cost estimation shows that after accounting for unobserved heterogeneity, chain-affiliated firms receive no cost advantage relative to independent firms” (p. 1103). This means that ventures that can create a work environment with a unified approach to controlling business activities are more likely to successfully control expenses. Olson and Pagano (2017) emphasize the importance of a financial strategy in which a company uses available assets over the cost of acquiring those assets. In other words, by distributing profits responsibly, McDonald’s management should make sure that the corporation generates sufficient profits to implement various marketing initiatives and other financial interventions that require capital investment. If this procedure is performed competently, the risks to assets are minimal, and cost estimation is performed more accurately.
Finally, another approach to allocating funds efficiently in the context of a cost estimation strategy is the use of reliable equipment. Rajawat et al. (2020) analyze the activities of McDonald’s and pay attention to the features of routine operating procedures, for instance, cooking or washing dishes, which, if rationally optimized, can help reduce budgetary risks. The authors highlight the significance of product consumption control, energy-saving techniques, the automation of individual processes, and other factors that can help reduce losses (Rajawat et al., 2020). While taking into account the global business of the brand, appropriate initiatives may improve performance and allow cost estimates to be more accurate. Keller and Alsdorf (2012) state that controlling different variables affecting life circumstances contributes to security. Therefore, given this remark, McDonald’s management should optimize the resource base to conduct a more efficient cost estimation strategy and allocate financial assets rationally and safely.
Conclusion
The lack of stable profits and unexpected expenses that McDonald’s has to bear in the era of the COVID-19 pandemic explains the relevance of the competent implementation of the cost estimation strategy in the corporation. While developing over decades, the brand has transformed from a few restaurants into a global chain. Despite the franchise system that McDonald’s adheres to, local marketing and cultural trends explain the distinctive approaches to doing business in different regions. The desire for unifying business tactics, improving logistics, increasing control over assets, and optimizing routine operations in individual restaurants may contribute to the efficient allocation of financial resources in the corporation.
References
Blocher, E. J., Stout, D. E., Juras, P. E., & Smith, S. (2019). Cost management: A strategic emphasis (8th ed.). McGraw-Hill Education.
Dai, J., Peng, S., & Li, S. (2017). Mitigation of bullwhip effect in supply chain inventory management model. Procedia Engineering, 174, 1229-1234.
Hamza, S., & Karabulut, A. T. (2021). Global or local strategies? McDonald’s Turkey example. International Journal of Commerce and Finance, 7(2), 101-121.
Hollenbeck, B. (2017). The economic advantages of chain organization. The RAND Journal of Economics, 48(4), 1103-1135.
Kee, D. M. H., Toh, A. L., Chong, J. H., Teng, Y. M., Ooi, S. J. C., & Chong, R. X. J. (2021). The impact of COVID-19 on McDonald’s business: A case study of Malaysia. International Journal of Accounting & Finance in Asia Pasific (IJAFAP), 4(2), 46-57.
Keller, T., & Alsdorf, K. L. (2012). Every good endeavor: Connecting your work to God’s work. Penguin.
Olson, G. T., & Pagano, M. S. (2017). The empirical average cost of capital: A new approach to estimating the cost of corporate funds. Journal of Applied Corporate Finance, 29(3), 101-110.
Our history. (n.d.). McDondald’s. Web.
Rajawat, A., Kee, D. M. H., Malik, M. Z. B. A., Yassin, M. A. Q. B. M., Shaffie, M. S. I. B. A., Fuaat, M. H. B., AlDosari, N., & Santoso, M. E. J. (2020). Factors: Responsible for McDonald’s performance. Journal of the Community Development in Asia (JCDA), 3(2), 11-17.
Singireddy, M. (2020). McDonald’s: Global marketing. International Journal of Health and Economic Development, 6(2), 16-27.