Journal of Business and Behavioral Sciences Volume 23, Number 1 issn 1946-8113 Spring 2011 inthis issue

McDonald‘s Systems is characterized by a large number of structural and managerial ingredients for success that take advantage of the opportunities. It is a progenitor of the modern franchising system, it established core operating designs early in the company‘s development and expanded internationally long before saturating its domestic market. Most of the key ingredients have been covered elsewhere. This paper focuses on the company‘s alignment with theoretical foundations as hypothesized and described in the academic literature on market orientation, brand orientation and organizational learning paradigms.

A market-orientation culture assists a business to monitor effectively the marketplace in order to achieve superior performance and profitability (Grinstein, 2008). A culture of brand-orientation involves an organization in a brand identity association with customers in order to achieve a competitive advantage (Urde, 1999). Decisions regarding branding are extremely important because they may greatly influence the success of a business. Branding and product positioning are the means to connect the company with its intended customers by correlating the

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McDonald‘s is well known within its home base in the U.S.A., McDonald‘s restaurants crisscross the landscape from north to south and east to west with over 13,000 establishments. McDonald‘s Systems is a company of complex design with 32,000 establishments in 119 countries around the world (McDonald‘s, 2009). Even twenty years ago, the company had a successful international presence with around 3,000 establishments in other countries. This was a ratio of U.S. domestic to international of 2.6 to 1 (Prewitt, 1990). In 1999, the company formed a global brand strategy task force (Howard, 1999). By 2007, McDonald‘s Systems had grown to over 25,000 restaurant locations, and the domestic/international ratio had reversed with twice as many international locations as domestic. In 2009, there were a total of 31,000 restaurants, and the international expansion continued to increase to 2.4 international locations to domestic outlets. It is the largest single purchaser of potatoes, buying 1.5 million tons each year, and its influence on the commodity is overwhelming. Currently, McDonald‘s Systems is in the process of creating an environmentally more friendly potato by bioengineering a potato to replace the common variety (Watson, 2009).

The initial expansion outside of the U.S.A. was logically determined by the ability to replicate previous domestic experience in the most similar cultural locations. For example, the first international location was Canada in 1967 (McDonald‘s, 2009). Interesting is the fact that the famous Big Mac was not developed until 1968 by a Pittsburg franchisee and then added to the company menu. The company logo was changed in 1969 to the now ubiquitous Golden Arches design, and all the restaurants were remodeled to establish a single brand identity. In 1981, the company expanded into Western European countries, opening in Spain and Denmark, followed by penetration into Asia with the Philippians opening and by 1983, it was operating in 32 countries. It was one of the very first companies to move into territories of the former Soviet Union after the collapse of the empire, opening the Moscow Russia restaurant in 1990 and Warsaw Poland in 1992. The company periodically updated its packaging designs and eventually initiated full-scale truly global re-packaging designs in 2007.

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The company‘s retail products are extremely standardized but not exclusively available to all outlets. In other words, a Big Mac or a Wrap is the same anywhere, except where it is not available because of local cultural preferences, in which case the company produces an equally attractive consumer product specifically befitting the local market. For example, the outlets in India are differentiated according to dominant culture, either offering a lamb burger instead of beef or a veggie-burger for the vegetarian locales. In China, there are variants of certain Chinese food, which have been carefully redesigned for these markets. However, the core capabilities and brand penetration are the same everywhere.

One of the authors of this article cites his discussions with the founder and then Chairman of McDonald‘ Systems, Ray Kroc. In 1976, professor Mitry asked the founder about the secret of the company‘s success. Kroc replied, ―It is not what everyone thinks. They believe that it is all about hamburgers and fries, but it is not. McDonald‘s gives the customer the opportunity to buy the same quality everyday and everywhere. It is about a system to design, package and efficiently deliver on a strictly consistent basis a satisfying little meal or a snack in a clean environment in order to encourage the sale of soda pop and collect rent. The profit margin on soda pop is huge.‖ Obviously, inherent in Kroc‘s brief statement is commitment to standardization, but that does not mean offering beef to vegetarians. It is the efficiency of assembly line production, organizational best practices, constantly learning about customer preferences as these evolve, and expanding operations everywhere as they are aligned and blended within the local culture. It is about global branding, offering a system for global products alongside of a few designed for locally encultured preferences, and all delivered in a consistently efficient and clean environment.

The history of operations and the future plans as identified in the company goals are evidence of commitment and dedication to the three organizational processes identified in this article: market-orientation, brand-orientation and an overriding and generative organizational learning paradigm.

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McDonald‘s organizational design exhibits dedication to the three organizational processes identified in this article. In addition, although management of many companies have studied and made significant advances in globalization, McDonald‘s Systems is a premier example proactively blending the demands of customers with product and service innovation aimed squarely at the future, it is about standards and envisioning an evolutionary process. The company accomplishes this while satisfying stakeholders worldwide, its business partners, employees, retail customers, local governments, and corporate shareholders. Nothing escapes the managements view or action, at least nothing escapes for long. It is possibly the most proactive organization in the industry. The company preserves and leverages its core while it is long-planning, highly adaptive, quickly responsive and therefore extremely successful. Businesses everywhere would do well to study it, and where appropriate emulate the organizational practices of this truly global company.

Barrett, F. J. (1995). Creating appreciative learning cultures. Organizational Dynamics, 24 (2), pp. 36-49.

Bartlett, C.A., & Ghoshal, S. (2002). Managing across borders. Boston, Harvard Business School Press.

Berger, J. and Heath, C. (2007). Where consumers diverge from others: Identity signaling and product domains. Journal of Consumer Research, 34 (2), pp. 121–134.

Boddewin, J. J., Soehl, R., & Picard, J. (1986). Standardization in international marketing: Is Ted Levitt in fact right? Business Horizons, 6, (69), pp. 69-75

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Grinstein, A. (2008). The relationship between market orientation and alternative strategic orientations: A Meta Analysis. European Journal of Marketing, 42, 115-134.

Howard, T. (1999). The over-arching strategy – McDonald‘s global brand strategy task force. Brandweek, November 8^th. Available from: <http://findarticles.com/p/articles/mi_m0BDW/is_42_40/ai_58251889/ > [Accessed on 5 February 2010].

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competitive market. Journal of Marketing Communication, 13 (4), pp.

214-231. Johansson, J. K. (2009). Global Marketing, 5^th ed. New York, McGraw-Hill. Kjeldgaard, D., & Askegaard, S. (2006). The globalization of youth culture: The

global youth segment as structures of common difference. Journal of

and the self: a social identity perspective. Journal of Consumer

changes in consumer perceptions. In: Kustin, R. A. ed. the global

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(2004). Neural correlates of behavioral preference for culturally familiar

drinks. Neuron, 44, pp. 379–387.
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<http://www.aboutmcdonalds.com/mcd/csr.html> [Accessed on 29

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Halliburton, C. and. Hunerberg R. eds. European marketing.

Wokingham, England, Addison –Wesley, pp. 45-62. Mitry, D.J., & Smith, D.E. (2009). Convergence in global markets, and consumer

behavior. International Journal of Consumer Studies, 33, pp. 316-321. Porter, M.E. (1990). The Competitive Advantage of Nations. New York, Free

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24 September 2009]. Weitz, B.A., & Wensley, R. (2002). Handbook of marketing, Thousand Oaks,

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Journal of Business and Behavioral Sciences Vol 23, No 1; Spring 2011

Bellarmine University

The University of Louisiana at Lafayette

In an extension of Darrat‘s 1998 study of this issue in Turkey, this research constructs a model to determine the relative importance of tax cuts and tax increases with respect to the budget deficit of the United States. Cointegration procedures and Granger causality tests are employed to investigate the relationship between government spending and tax revenues. This article provides the interested reader with a better understanding of the potential implications of the interrelationships between tax policy and spending.

With the budget surpluses of 1999 and 2000 only a wistful memory and mounting deficits seemingly in store for the foreseeable future, the question once again arises in the United States of cause and effect between government revenues and expenditures. That is, does the need to finance deficits cause increases in taxes, or do increases in taxes lead to increased government spending? This is clearly not a new question, but rather is one which has been debated for years. In an extension of Darrat‘s 1998 study of this issue in Turkey, this paper investigates once again the causal relationship between government spending and tax revenues for the United States.

Deck, Bundy, Ward and Ward

BACKGROUND

The tax versus spending debate has numerous implications in the economic policy arena of government revenue and spending. However, in a 1992 article, Hoover and Sheffrin cut to the heart of the matter when they questioned, ―…if it is possible to intervene to control one of the variables (spending or taxation) directly, would that yield control over the other variable?‖ The answer to this question is, of course, the fundamental reason the debate continues to rage.

Several researchers have examined the debate from various viewpoints. Wolff and Zacharias examined the effects on household economic well-being in the United States based on household-level data. Their results indicated that government expenditures for the household sector are significantly more powerful than the level of taxation. In an attempt to understand the future path of the United States 2006 budget deficit, Ewing, et. al. examined the empirical relationship between government revenues and expenditures. The study‘s findings concluded that neither revenues are Granger-caused by expenditures nor are expenditures Granger-caused by revenues. The study also found that revenues and expenditures both respond to long-run requirements of the budgetary balance only when that balance is worsening.

Zapf and Payne provided support for the theory that spending leads taxation via an examination of the modeling of revenues and expenditures at the state and local government levels. They found that state and local government expenditures have a significant impact on receipts in the short-run but respond to budgetary disequilibrium in the long-run. In an inquiry into several theories involving the tax-spend and the spend-tax models, Baghestani and McNown studied the adjustments of expenditures and revenues to budgetary disequilibra. The study increased the time period, compared to most other studies, covering quarterly data from the first quarter of 1955 through the last quarter of 1989 – excluding episodes of policy changes in taxation and spending related to the Korean War. The study concluded that there was no evidence of cause-effect relationships between spending and taxation.

Additional studies attempting to show causation in the USA have reported conflicting results. Chang et. al. (2002) tested for Granger causality using annual data from 1951 to 1996, and found unidirectional causation from tax revenues to expenditures. Furstenberg et. al. (1986) also tested for causality using quarterly data from 1954-1982, finding weak support for the hypothesis that taxes follow expenditures, rejecting the hypothesis that expenditures follow taxes. Likewise, Anderson et. al. (1986) reported no evidence of causation from taxes to expenditures, and strong evidence that government spending leads to increased taxes. Finally, Manage and Marlow (1986), using annual data from 1929 through 1982 (the period from 1941 to 1946 was removed to minimize the

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In an extension of Darrat‘s study, this research was undertaken to further address the fundamental question of whether the need to finance deficits causes increases in taxes, or whether increases in taxes lead to increased government spending. The examination constructs a model to determine the relative importance of tax cuts and tax increases with respect to the budget deficit of the United States.

Regression analysis is useful in highlighting relationships between dependent and independent variables, or correlations. These correlations, though, are just that, and are not necessarily indicative of causation. The Granger causality test, however, is widely used in econometric modeling, to show actual causation in time series data.

There are four possible outcomes when testing the relationship between government spending and tax revenues: (1) they are independent of each other, (2) increased taxes lead to increased expenditures, (3) higher spending causes increases in the tax rates, or (4) they are mutually causative. The current study follows the procedures utilized by Darrat in his examination of Turkey (1998), in which he tested for Granger causality utilizing annual data from 1967-1994 and found support for the ―tax and spend‖ hypothesis.

This study uses quarterly data from 1949 through 2002 on seasonally adjusted government expenditures, tax receipts, and gross national product, as well as three-month Treasury bill rates. All data is from the FRED economic database available from the Federal Reserve Bank of St. Louis. The monthly t-bill rates available from FRED were averaged to obtain the quarterly rates. The gross national product was used rather than gross domestic product in keeping with Darrat‘s procedures. Data was not collected for the years after 2002 because of the bombing of the World Trade Center and the resulting Middle-East conflict. Spending on Homeland Security and on the Military Operations in Iraq and Afghanistan was swift and was not related to the tax structure during this time. Although there have been other wars or conflicts during the period covered by the data (e.g., World War II, Korea, and Viet Nam), each has been resolved and any catch-up effects on spending and taxation have had time be worked out. Since the current Middle-East conflict is still on-going, the spending/taxation relationship has not had time to even out.

Regressing with the variables in their level form resulted in a Durbin-Watson statistic of .0959, indicating autocorrelation was present. This was

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Economic time trend data frequently show changes in mean and variance. Accordingly, our data were non-stationary and required transformation. The Augmented Dickey-Fuller (ADF) specified that first differences were necessary for all variables in order to induce stationarity; therefore, the Engle-Granger test was required to determine whether spending and tax revenues are cointegrated (that is, the residuals are stationary). Of the possible cointegrating equations, the highest R² was achieved by having expenditures as the dependent variable. We tested the residuals from this equation for stationarity using both the ADF test and Cointegration Regression Durbin-Watson test, in each case failing to reject the null hypothesis that no cointegration exists.

Having established that expenditures and tax receipts are not cointegrated, we then investigated the core issue of Granger causality. The following equation was estimated to test whether taxes lead to increased government spending:

n1=5 n2=1 n3=1 n4=1

Expend = % + jV_{1 i}Taxest,_i + jV_2iGNP_t__i + $XTbillt_i + j^_{4 i}Expendt__i + ju_i

i=1 i=1 i=1 i=1

Testing the joint significance of Ψ ₁ yields an F-statistic of 6.11 and an associated p-value of .0000; therefore, the null hypothesis that tax revenues do not cause expenditures is rejected.

Similarly, testing for causality from spending to taxes is accomplished by estimating:

n1=1 n2=1 n3=1 n4=5

Taxes = O₀ + ^^Expend _t__i + %Q>_2iGNP_t__i + J>₃iT bill_t__i + £& _{4 i}Taxes _t__i +e_i

i=1 i=1 i=1 i=1

In this case, the joint significance test for Φ ₁ produces an F-statistic of 7.16 (p-value = .0001), and the null hypothesis that spending does not cause taxes is also rejected.

Finally, a Chow test was performed to check the temporal stability of the function. It generated an F-statistic of 9.07 (p-value = .0000), indicating some structural instability in the model. In light of this, the model may not be

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Journal of Business and Behavioral Sciences