Why HR is at the Heart of McDonald’s New Golden Age
For David Fairhurst, the entrepreneurial spirit took hold at an early age.
“I had my own sweets shop when I was 10 years old, selling to local kids,” the northwest England native says.
The lure of commerce wasn’t the only thing on young Fairhurst’s mind, however. He also seriously considered becoming a pastor and took public-speaking lessons at his local church, in addition to engaging in lots of community volunteer work.
Upon graduating college, however, he’d lost his ambition for a career in the church—yet he hadn’t lost sight of his idealism, nor his fascination with business. He ended up combining the two into a career in HR.
“When people science and commerciality come together, it feels like HR,” says Fairhurst, who continued his community involvement by serving as a visiting professor at the U.K.’s Manchester University and working with nonprofits to teach workers new skills.
Fairhurst today is corporate executive vice president, chief people officer at McDonald’s Corp., which is itself a global symbol of commerciality and entrepreneurialism. Beginning with a single hamburger stand in San Bernardino, Calif., in 1948, founders Richard and Maurice McDonald pioneered a system in which burgers, fries and milkshakes were produced with assembly-line efficiency. They later partnered with Ray Kroc, a milkshake-machine salesman who greatly expanded their franchise operations. In 1961, the McDonald brothers sold the business to Kroc for $2.7 million. Under his leadership, McDonald’s expanded rapidly throughout the U.S. and then the world, providing the opportunity for numerous franchisees around the world to become millionaires.
These days, McDonald’s, like its fast-food competitors, is facing a turning point. The industry’s global growth has slowed, even as consumers’ expectations for innovation and convenience continue to grow. Customers want home delivery, healthier eating options and the ability to pay via their phones; yet, they also want more than the convenience that McDonald’s has built its reputation on—they want a hospitable environment where they feel welcome, says Fairhurst. Meanwhile, a tight labor market and competing opportunities from the emerging gig economy mean that finding and retaining restaurant employees to help maintain that environment is harder than it’s ever been.
Despite these pressures, McDonald’s financial performance has been on the rise. The company’s stock price is at an all-time high, while profits have risen by 4.5% since CEO Steve Easterbrook took over in 2015. According to data from Technomic, total sales rose 2.4% last year to $38.5 billion.
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Easterbrook, who’s led a turnaround at the company that’s resulted in cost savings of $500 million, moved Fairhurst into the top HR job shortly after becoming CEO. Easterbrook had previously served as president of McDonald’s Europe, where Fairhurst was chief people officer.
“I have the privilege of working with a CEO who’s really a catalyst of change and knows how to harness all the ‘capitals’: financial, cultural and human,” he says.
Dave Ulrich, Rensis Likert Professor at the University of Michigan’s Ross School of Business and a partner at the RBL Group, served as a consultant to the company on its cultural transformation and has high praise for Fairhurst.
“David is just one of the best HR people I’ve run into,” he says. “He has great insight into the business and great instincts on what HR can do to help.”
The Power of Organization Design
At the time Fairhurst stepped into his current role in 2015, things were trending downward at McDonald’s. A year before, a Consumer Reports survey declared McDonald’s hamburgers the “worst-tasting” of all fast-food chains. The company felt compelled to run commercials denying that its hamburger meat contained “pink slime.” Same-store sales had been declining for six consecutive quarters, and its stock price was barely budging upward. And, unfairly or not, McDonald’s bore the brunt of criticism over the fast-food industry’s role in the nation’s obesity epidemic.
Meanwhile, consumers were showing an increased preference for fresh, healthy alternatives to traditional fast-food items, or for newer chains such as Chipotle and Five Guys Burgers.
“Our heritage was about understanding our customer, but the challenge was that our customers’ needs had moved on, and we hadn’t kept up as well as we should have,” says Fairhurst. “We needed to reconnect with our entrepreneurial heritage but in a contemporary way, and this required an evolution of our culture.”
From 2012 to 2015, the business hit a tough spot of negative sales growth across the entire system. “The reality is that we lost touch with our customers as we were trying new innovations that were not generating customer growth,” he says.
Easterbrook swiftly launched a turnaround plan. He closed less-profitable locations, invested in upgrading food quality and restaurant technology, and restructured the company.
Fairhurst has played a vital role in the restructuring effort that reduced costs by $500 million. This included moving from a decentralized reporting relationship to a centralized one, with all 18 of the company’s wholly owned markets reporting directly to corporate headquarters.
“Getting all of the behaviors aligned was a top priority,” says Fairhurst. “It’s not about becoming a different McDonald’s, but a better McDonald’s.”
He cites the importance of organization design in helping the company reshape itself for the future.
“One of the things I’ve recognized over the years is the power of OD,” he says. “OD is about ensuring the right people focus on the right things.”
Too often, however, OD gets “switched on and off”—brought in to help solve a particular issue, and then abandoned once the issue is resolved, says Fairhurst. Instead, OD should be “always on”—driving scenario planning and conceptualizing the shape the organization will need to take in order to deliver against those plans. “Always-on OD” can also help ensure the organization can adapt quickly to changing business needs, he says.
As part of the organization redesign, McDonald’s various markets—which traditionally had been organized according to geography—were reoriented toward being grouped in “segments,” depending on which stages of evolution they were in, he says.
“Working closely with Steve, we got to the point where we realized that, although defining our structure by geography had served us well for 40 years, it was not the best way to support our business strategy,” says Fairhurst. “When you put markets together which have similar needs, challenges and opportunities, innovation happens more readily.”
Core functions such as HR and finance departments were also globalized, with the intent of allowing the business side to focus its attention on operations, he says.
Changing the Talent Model
The changes at McDonald’s extended to the executive suite at McDonald’s corporate headquarters in Oak Brook, Ill. (The company has since relocated to a new building in Chicago’s trendy West Loop neighborhood.)
Working with Ulrich, Fairhurst oversaw an “objective assessment” of the business to gain a solid understanding of what “world-class leadership” means and how it would apply to McDonald’s.
“We wanted to see how we stacked up against others not only within our industry sector but to leading businesses outside our sector as well,” he says.
Fairhurst and his team eventually came up with an acronym called “BEST,” for Building Blocks, Execution Proficiency, Strategic Proficiency and Talent Proficiency.
“This highlighted the historic strength we needed to build on while helping us focus on the new muscle we needed to develop,” he says.
Building Blocks, for example, refers to the behaviors and traits most critical in an agile, growth environment, while Execution Proficiency refers to the ability to prioritize and get things done. Strategic Efficiency centers on making customer-led decisions to drive competitive advantage, and Talent Proficiency relates to building the capabilities of others.
All senior leaders at McDonald’s were assessed against the BEST model. For the first time in the company’s history, each one was assigned an executive coach. Through a combination of developmental opportunities and replacement of some members of the team with new talent from within or outside the organization, McDonald’s executive team evolved to reflect a blend of internal and external experience, says Fairhurst.
By 2017, nearly every senior leader on Easterbrook’s executive team was new to his or her role.
“Steve and David have done a marvelous job of redefining leadership for the next generation,” says Ulrich. “Traditionally, McDonald’s DNA was all about cleanliness and convenience. They’ve upgraded that to ‘customer obsession’—as in, rather than employees just smiling at the customer, the customers smile back because they’re delighted with the service.”
The goal for Easterbrook and Fairhurst is to have an organization stocked with “ambidextrous” managers—those who are comfortable dealing with ambiguity and paradox, says Fairhurst.
Reinventing Performance Management
Fairhurst’s zest for shaking things up and questioning established ways of doing things extends to processes such as performance management.
“What I hear is that performance management in most organizations has little correlation to the performance of the business,” he says. “It involves lots of appraisals, processes and time but a big question mark as to how it relates to driving business performance.”
Fairhurst aspired to something different at McDonald’s.
“We completely redesigned performance management,” he says. “You can’t manage performance, but you can motivate it.”
The new PM model at McDonald’s is built around clear and effective goal setting, performance feedback and career-development conversations with managers, says Fairhurst. More than one person now delivers feedback, and managers are required to have at least one goal-setting conversation with direct reports at least annually.
“We’ve gotten great results so far,” he says. Eighty-seven percent of employees report having had goal-setting conversations with their managers, while 75% have received performance feedback and 82% have had career-development conversations.
Fairhurst has also emphasized the importance of teams within the organization.
“Organizations are typically siloed into different functional areas, but the reality is that more of our work cuts across those functions,” he says.
The company’s partnerships with the Uber Eats and DoorDash online food-delivery services are prime examples. McDonald’s was able to extend the services to its customers by quickly pulling together the right people from around the world, irrespective of geography or function. In 2018, McDonald’s partnership with Uber Eats generated $3 billion in revenue.
“The future is about fluidity, agility and speed,” says Fairhurst.
An Evolving Culture
These days, it’s not enough for McDonald’s to be focused on customer service—that needs to be redefined to customer obsession, says Fairhurst.
“That’s a strong thing to aspire to,” he says.
When Easterbrook arrived, he began pushing franchisees to try new things, such as all-day breakfast. “This was something consumers said they wanted,” says Derek Berube, the company’s director of HR analytics.
By working closely with franchisees and mandating that they upgrade and remodel their stores, the company has ensured that the customer experience at McDonald’s reflects the speed and efficiency they’ve come to expect while they also enjoy new perks, such as digital menus and tableside delivery.
These changes have been helped along by a reshaping of McDonald’s corporate culture, says Berube.
“Historically, you were considered a very good performer here if you were able to influence others, kept your budget down and supported the market, but there wasn’t really an emphasis on driving anything,” he says.
In order for the company to continue innovating, the culture had to change, he says.
Working with Ulrich, Fairhurst created the slogan “Better Together” to emphasize collaboration over competition among the company’s various global markets. Rather than compete with one another, they were encouraged to share ideas, says Berube.