THE BLOG

Why Innovation is Key to McDonald's Future

04/29/2015 10:06 am ET | Updated Jun 29, 2015

As CEO Steve Easterbrook prepares to release McDonald's plan to deliver enduring profitable growth, the firm would do well to ignore the naysayers who are calling for cuts and cost restraint and focus instead on creating a company that can manage the increasingly complex demands of consumers, together with growing stakeholder expectations to manage environment and social issues responsibly.

With 34,000 restaurants worldwide, the challenge that McDonald's has is that the formula that led to its previous success needs to change if the company is to thrive in the future. One of my colleagues pointed out to me that 2015 is the 20th anniversary of my first book: Get Innovative or Get Dead! The sentiment -- and indeed the imperative -- captured by that title applies with a vengeance to the iconic McDonald's franchise.

Fortunately, there is actually some evidence that McDonald's understands that the world it is living in is different to the past.

One area where McDonald's is taking action is in relation to the environment. Significant changes that it has made in the past year include:

  • Committing to source white fish from sustainable fisheries
  • Only sourcing chicken raised without use of antibiotics
  • Committing to a target for purchase of verified sustainable beef

But in other areas, McDonald's is being led by others to take action. In particular McDonald's is still struggling to manage labour relations and has much, much more to do on nutrition.

McDonald's future lies in responding with agility and innovation to provide today's -- and tomorrow's -- consumers with reasons to come back to their stores on a regular basis. With more choices and more knowledge at their disposal than at any time before, consumers will only return to McDonald's if the offering stacks up in terms of their personal wants.

There are a number of specific things that McDonald's can do:

"People are our greatest asset": This month, McDonald's finally responded to an ongoing national campaign by the SEIU and announced its intention that starting wages at company-owned restaurants would be one dollar above locally mandated minimum wages. By 2016, McDonald's average hourly wage will be in excess of $10, still well short of the SEIU's claim for a $15 minimum wage. However, McDonald's commitment only applies to its company- owned stores, leaving most McDonald's workers subject to conditions set by local franchises.

McDonald's franchise arrangements enabled the firm to achieve its rapid growth over preceding decades, but are now a millstone around its neck. Just as McDonald's is responsible for the quality of its food in all its stores around the world, it needs to recognize that, in the eyes of consumers at least, the employment conditions of all of its employees are also its business.

For starters, McDonald's needs to bury the hatchet with trade unions and sit down and start talking. The announcement that it has made for its company employees, which includes investment in education and the ability to accrue paid time off, is positive, and establishes a foundation for discussion. Talking to trade unions doesn't mean that parties will agree on everything, but it will start to build a relationship that over time can actually be productive for the business.

McDonald's also needs to find ways to better harness the talent of its employees. It would seem that for a business model that is all about the endless repetition of actions there would be little scope for personal empowerment, but that is actually not the case. In fact there is much that McDonalds can do to provide employees with opportunities to demonstrate their skills, including giving local employees the reigns to develop community relationships.

Get serious on nutrition: The documentary Super-Size Me was a never- ending PR disaster for McDonald's. One positive move is that the firm has recently committed to the Clinton Global Initiative to make nutritious choice and nutrition a bigger part of its focus. But education is not sufficient when McDonald's hasn't addressed the fundamental aspects of its menu. One thing that McDonald's can do, for instance, is to stop serving the largest cup size for soft drinks. The move would be in tune with food producers such as Nestle that have reduced portion sizes of sugar-based products.

Reinvest in its aging stores: One disadvantage of its franchise relationships is that aging McDonald's stores give the restaurants an old fashioned image. McDonald's should negotiate franchise fee reductions or freezes in return for the refurbishment of stores. McDonald's is already a huge local employer, but can leverage its impact on local economies that are in the need of jobs even further by stimulating construction, whilst at the same time giving its brand a fresh coat of paint that it desperately needs.

Having built a global empire, the question now is whether McDonald's can maintain its current market position and even continue to grow. To achieve the enduring growth that Steve Easterbrook seeks, McDonald's needs to get better at horizon scanning and trend anticipation. It needs to find ways to promote innovation. This means that innovation should not just be a product of head office, but becomes something for which each store -- and indeed, each employee -- has responsibility.

McDonald's recent partnership with the World Wildlife Fund to tackle deforestation demonstrates that it does indeed have the capacity to innovate by creating partnerships that can drive change, whilst also building reputational capital for the business. The business needs to apply the same approach that it is commendably taking around environmental issues to address other issues, notably labour relations and nutrition.

Because McDonald's is such a large global corporation, with a significant environmental and social footprint, turning the ship will take time. Long term investors need to focus, not on arguing for cost cutting, but for a permanent change of culture that embraces innovation. The impact that McDonald's can have by embracing innovation and agility will not only ensure the future success of the business, it will deliver real social and environmental impacts, something we call Impact Investment 2.0 at Inflection Point. For McDonald's the core message is: Get Innovative or Get Dead!