When Travis Heriaud decided to spend $40,000 on the grand opening of a new McDonalds heresponsoring a book giveaway for local children and hosting a parade of zoo animalshis father, Lee balked. Lee Heriaud, a 59-year-old owner of 12 McDonalds restaurants, warned that the even risked erasing cash flow for a full year. Youve gone overboard here, he told his son. Travis, 30, pressed ahead anyway, and busted the budget for the grand opening by adding even more new-store promotions; however, first-year revenue at the restaurant is now on track to beat McDonalds projections by 50%. Other McDonalds in the area are now adopting his tactics. The results surprised the elder Mr. Heriaud: It was difficult to get my head around the price tag, he says. I just didnt think it would pay off. McDonalds may seem like just another giant corporation, but its secret sauce has always been its small-business franchisees, and not that network is undergoing one of its biggest generational transformations in decades as the children of owners start taking over from their parents.

As with any entrepreneurial venture, the transition is fraught with challenges. McDonalds prides itself on carefully selecting its franchisees, so it is loath to encourage raw nepotism. The sons and daughters of McDonalds franchisees arent automatically entitled to become franchisees and they cant inherit their parents restaurants; instead, they have to undergo a one- to five-year process of proving themselves capable of running strong restaurants before the can be approved franchisees. The next gens dont have a birthright to be an owner operator; they earn it, says John Kujawa, Vice-President of Franchising for McDonalds USA.

So far, the results are mixed, say McDonalds executives and franchisees. Have grown up in an era of Fast Food Nation and Super Size Me, the next generation is moving quickly to address the criticism of the fast-food industry. The younger franchisees are proposing everything from healthier foods, including gluten-free hamburger buns and organic produce, to more corporate responsibility on issues such as recycling and providing community services for low-income kids. The group also promotes use of more technology, installing Wi-Fi in restaurants and building McDonalds Facebook pages.

The changes are always welcome to the older franchisees, some of whom have resisted new ideas as benign as credit cards. The Oak Brook, Illinois corporate headquarters has passed on some ideas, preferring to wait and see if they have broad appeal before they are adopted. Still, this group of young owners is likely to have a growing impact on the nations largest fast-food chain by revenue. Next-generation McDonalds franchise owners, whose parents or grandparents owned restaurants, currently make up the largest percentage of franchisees ever, 30% of the U.S. base, up from 18% in 2001. The company expects the figure to reach 37% in the next five years.

In Oak Brook, McDonalds management credits next-generation franchisees with proposing some of the companys most popular products and services. The changes include: a line of upscale burgers with thicker patties called Angus burgers that have contributed to sales growth; free Wi-Fi, which has helped keep McDonalds competitive with Starbucks Corp.; a picture-based ordering system that shaves precious second from customer wait times; and, payment by credit card, which boosted the value of transactions because people tend to order more when they can charge it. The credit-card option worried Houston franchisee Nelly Quijano, 66, who says she had made some computer accounting mistakes over the years. She feared she would make similar mistakes with the credit-card machines and lose track of sales. I wasnt against it; I was scared, she said. Her daughter, 30-year-old Mariselle Quijano, who now owns six McDonalds, urged her mother to switch to cashless payment. Today, hardly anyone carries cash, she told her mother. After installing the machines, sales immediately improved at their restaurants.

Another seemingly simple idea was to keep McDonalds open later into the evening, which has helped the company wring more sales out of existing restaurants. Today, nearly 40% of its U.S. outlets are open around the clock, up from about 30% seven years ago. Our young people helped us understand that theres a lot more going on when the rest of us are sleeping that we would have known, says McDonalds USA Chief Operating Officer Jim Johannesen.

The company, however, isnt gung ho about every idea. Brittaney Kerby of Austin, Texas recently stopped working at her fathers McDonalds restaurants and took out a loan to open her own so she could make her own decisions. Ms. Kerby, who is 32, has been pushing McDonalds executives during regional meetings to start a recycling program for employees soda cans and restaurant products like cardboard boxes. Partly as a result of her efforts, McDonalds agreed to test the program on a regional basis beginning in April 2012.

Ms. Kerby has been less successful in convincing corporate management to adopt some of her other ideas such as composting and installing rooftop gardens in restaurants. She asked the companys menu management to discuss broadening offerings to include organic produce and items for people with food allergies, like gluten-free hamburger buns, to no avail thus far. Its always an open dialogue, she says. You dont hear a straight-up No. McDonalds spokesperson Dayna Proud says new ideas need to be appropriate for all 14,000 restaurants in the U.S. Not to say it could happen or that were not looking at things like gluten-free buns and organic produce, Ms. Proud said. But with a system the size of ours, it has to be something that has an appeal to the masses.

It is not the first time McDonalds headquarters has resisted new ideas. A long-time franchisee in the South recalls the companys reticence to adopt a fish sandwich back in the early 1960s. Proposed by a Cincinnati franchisee because his mostly Catholic patrons didnt eat meet on Fridays, the idea was considered radical at the time, he said. It took five years of testing and development for the Filet-O-Fish to be included on McDonalds national menu. Its very difficult to get any changes through at McDonalds whether youre a younger or older franchisee, he said. Ms. Proud, who confirmed the fish story, said that when the company makes a change it needs to be right four our customers, our restaurants, our franchisees, and our suppliers, so that process and the discussion that occur take time. Still, corporate managers emphasize that they are relying on the young franchisees for fresh ideas to sustain their multi-year growth spurt.

McDonalds shares have nearly quadrupled since the end of 2003, when it adopted a plan to slow new-store openings in the U.S. and improve restaurant operations; however, some investors are wondering how much more room there is to grow. After the company posted another strong quarter in January of 2012, its shares dropped as investors questioned how much upside is left. Some younger franchisees are taking a different approach to criticism than their parents generation. For example, Brandon ORourke, a 39-year-old franchisee, decided to proactively approach what he calls the haters, or people who dislike McDonalds. Until recently, Mr. ORourke owned only two McDonalds in Denver, but he is now opening five in Phoenix, has visited McDonalds citrus growers in Florida, chicken farmers in Arkansas, potato fields in Idaho, and beef processing plants in Oklahoma. He says what he has seen has given him confidence in the quality of McDonalds food and ammunition to fend off critics. More than a year ago, he invited some mothers who were blogging about whether to let their kids eat fast food for a tour of a kitchen at one of his restaurants. Some of them had thought the eggs in the Egg McMuffin were cut from a giant log of processed egg and were surprised to see that McDonalds actually cracks eggs in the restaurant, he says. The moms later blogged about what they saw. Recently, he fielded questions from 7th and 8th graders at his daughters school after a teacher showed the documentary Super Size Me. One kid, he recalls, thought McDonalds killed chickens by putting them in a blender. I could answer all of their questions because I had seen it for myself, Mr. ORourke says.

Some smaller changes are helping individual franchisees at a time when restaurants are fighting for market share and even tiny details can influence which restaurant a person chooses. Adrian Smith, a 39-year-old franchisee in North Carolina, persuaded his dad to add more electrical outlets to his restaurants to make it easier for people to plug in their laptops. I think weve got to stay relevant and fresh for our customers. We need to be a destination, he says.

Travis Heriaud, the Arizona franchisee, says that with years of experience under his belt, his dad sometimes has a better feel for customer psychology than he does. Recently, when McDonalds offered a free small coffee giveaway in some parts of the country for two weeks, the younger Mr. Heriaud wanted to discount medium and large coffees, too. His father said they would be leaving money on the table and argued for leaving medium and large prices unchanged. To see who was right, they agreed to test both strategies in a few of their stores. It turned out that the elder Mr. Heriaud was right. While people were happy to get a free small coffee, those who wanted a bigger size were willing to pay full price and didnt expect a discount. When it came to his community-outreach program, though, the younger Mr. Heriauds instincts proved correct. Tolleson, west of Phoenix, was once a strong agricultural community; the smell of dairy farms can still be power in the right wind. In studying the market, the younger Mr. Heriaud learned that manufacturing and food-service distribution had overtaken agriculture, and that local schools were short of funds and the local library was struggling to get kids to participate in its summer reading program. He argued to his father that, since they were already spending $1.7 million to build a restaurant, it made sense to invest another $40,000 to demonstrate that their restaurant aimed to be part of the community. He decided to hold community event all year long rather than stop after the grand opening in March 2011. To encourage participation in the library summer reading program, Mr. Heriaud handed out free books and had Ronald McDonald do readings.

In the fall of 2011, he held a back-to-school fair and handed out free backpacks; more than 100 families waited in line for an hour for freebies. As Christmas drew near, he held a topy drive, brought in the local high-school choir to sing carols, and invited kids to pose for photos with Santa. The entire plan ended up costing $50,000; however, sales in 2012 are expected to total more than $3 million, which is far higher than the $2 million the company projected the store to ring up, and higher than the $2.5 million McDonalds restaurants around the country average annually. The Heriauds say they will more than recoup the $50,000 investment. When Travis Heriaud shared his results with other Phoenix franchisees, all 220 restaurants in the areas began to adopt parts of his strategy. In March of 2012, the restaurants began to offer free breakfast to kids before taking standardized tests. In September of that year, they handed out backpacks to kids and provided information on how to get after-school tutoring.

Ana Cruz, a 27-year-old mother of two, was eating lunch at the Tolleson McDonalds recently while her three-year-old son clambered around on some playground equipment. She said the restaurants efforts, including donations to her daughters school, eased her mind about eating there. At first, I wasnt thrilled that a McDonalds was donating to my daughters school, she says, because its not too healthy. She says that, over time, she has come to appreciate the various efforts. They dont come off like theyre only about getting people to come in, she says.

1.To what extent do McDonalds franchisees and managers at headquarters make non-programmed decisions, and how do they approach such decisions? Provide examples from the case description. 2.To what extent do you think both franchisees and managers engage in satisficing when they make decisions? Provide an illustrative example from the case description. 3.Discuss how the garbage can model of decision making would apply to the decision-making process employed by McDonalds and its franchisees.