Human resource development case study

McDonald’s Case Study

For most of its fifty-four years of existence, McDonald’s has been quite successful growing its business while utilizing a decentralized approach to managing its global workforce. As the size, complexity, and global character of the business have continued to grow (to more than thirty-thousand restaurants in 118 countries serving fifty-five million customers per day), however, it became increasingly apparent that sustained success requires the development of more consistent and disciplined approaches to talent management and development. In response to this recognized need, McDonald’s has taken a number of steps, starting in 2001, that have enhanced its capabilities for developing local leadership talent and ensuring management continuity throughout its global system. This chapter will provide an overview of how McDonald’s system for developing its management talent throughout the world has evolved over the past eight years and will focus on describing the design, roll-out, initial impacts, and continued refinement of five major initiatives that have been introduced to enhance this system since 2001.

A number of factors led the organization to the conclusion that enhancements in its talent management and development system were needed. First, after many years of outstanding business results and growth, business performance began to falter. For the fourth quarter of 2002, in fact, the company declared the first loss in its history. In contrast to the significant problems surfacing in the company’s business results, however, the ratings of managers in McDonald’s performance management system were incredibly high and suggested that everyone was doing an outstanding job. More specifically, more than 90 percent of the managers were rated either “outstanding” or “excellent,” and over 75 percent were assessed as having the potential to advance to take on greater responsibilities. Senior management recognized that “something was wrong with this picture.” It was clear that the bias toward inflated ratings of both performance and potential did not align with the overall performance of the business. Furthermore, senior management noted that, despite the very high ratings of employees’ potential throughout the system, when key leadership positions actually needed to be filled, the company was frequently having difficulty finding individuals everyone could agree were truly ready for these roles.

These factors led senior management of the company to begin to take significant actions to upgrade the company’s talent management systems and processes on a global basis. (Note: While the initiatives to enhance talent development that are described in this paper were well under way at the time, the urgency for them was painfully validated when in April of 2004, McDonald’s CEO Jim Cantalupo died suddenly and unexpectedly. Fortunately, due to the heightened attention that was being given to talent management at this time, his successor, Charlie Bell, was quickly and smoothly named to step into the CEO role. Tragically, not long after Charlie Bell was named as CEO he was diagnosed with colon cancer and died within a year. Once again McDonald’s was challenged to address the succession issue at the very top of the organization and did so by naming Jim Skinner as CEO in January of 2005.)

Before launching into an in-depth description of McDonald’s talent management system, it is important to make clear how this system fits into McDonald’s overall business strategy and aligns with its key values. McDonald’s strategy to develop its global workforce is designed to be aligned with and support the execution of its over-arching strategic business goal, which is “to become everyone’s favorite place and way to eat.” McDonald’s has an overall “plan to win” that provides the global business with a common framework for developing tactics to reach this goal. The framework includes five key elements: (1) people, (2) place, (3) product, (4) promotion, and (5) price (see Table 9.1 ).

The five initiatives that have strengthened the company’s talent management system, and that will be described in this chapter, are key elements of the “people” component of the “plan to win.” They have been designed and implemented to enhance the organization’s global capability to develop and have “at the ready” the quantity and quality of leadership talent needed for effectively executing its “Plan to Win” and ensuring the company’s continued growth and success. Further, in order for these talent management initiatives to be successful, it was clear that they also needed to reflect the value that McDonald’s places on striking the right global/local balance and customer/employee focus.

Striking the Right Global/Local Balance

In order for McDonald’s to successfully execute its business strategy, the company has determined it needs to excel at developing and successfully implementing a balanced global/local approach in managing and developing its global workforce. While global frameworks and parameters can be used to set the stage for success and align the entire business with regard to strategy, essential tactics, and a shared company culture—at the end of the day, the actual execution of the company’s “plan to win” depends on the capability of local talent to develop and customize the elective tactics to fit their local culture and circumstances. As a business, McDonald’s success relies not only on the leverage that comes from its coherent business strategy and focus on standardizing core operations/processes but also on its ability to adapt its tactics to fit the needs and preferences of specific customers in particular regions or countries and to develop a deep connection between McDonald’s and the local communities in which it operates. This connection is reflected in McDonald’s commitment to local charities; to Ronald McDonald Houses; and, most importantly, to the very people who own, operate, and manage McDonald’s stores in any locale, country, or region. Given this, it is deemed highly important that the individuals operating the business come from, understand, and represent the communities and cultures in which the business is located.

All areas of world have freedom to execute in their locales as long as they stick within the basic parameters of the “plan to win” framework by (1) developing an aligned strategy, (2) meeting customer needs within the marketplace, (3) supporting the global brand campaign—“I’m Loving It,” and (4) ensuring that their people develop and demonstrate key competencies that reflect the core elements of the company’s common culture and support its “plan to win.” In addition to having the technical skills and expertise to do their specific jobs, staff throughout McDonald’s are expected to be attentive not just to getting results but to doing so in a way that is aligned with the company’s shared global company culture and values.

Customer and Employee Focus

Whatever is done within McDonald’s is routinely assessed and measured against its impact on customers. Customer service and experience levels are key metrics that are embedded within the performance expectations for employees throughout the system. The company’s focus on and commitment to quality, service, cleanliness, and value (QSC&V) is strong. These variables have been shown to be strongly linked to customer expectations and loyalty. Any and all efforts to enhance the company’s global workforce management system incorporate a focus on key behaviors (customer focus and service orientation) and results-metrics (speed and quality of service, food, and environment) that deliver to customers what they value.

McDonald’s has also paid significant attention to its employees and their development throughout its history. The company is well known for the opportunities it has given many of its people to grow with the company and to rise (over time) from working as a member of a store crew to its highest executive ranks. In addition, the company has placed strong emphasis on its managers’ ability to create a work climate within which their employees are motivated to excel, give their best, and help to make McDonald’s “everyone’s favorite place and way to eat.” Since 1997, McDonald’s has used its commitment survey to assess the extent to which the desired work climate is being created throughout the company. This survey gathers employee feedback on a wide variety of specific management behaviors and practices that have been shown to be linked to employees’ personal satisfaction and commitment and to the company’s business success. More specifically, the survey assesses employee satisfaction with such factors as the support and recognition they receive, the extent to which their skills are utilized and developed, their workload, the degree of their empowerment, resource availability to get the job done, the quality of supervision/leadership, and their compensation /benefits. A manager’s scores on the commitment survey are one of many important factors considered in rating his or her effectiveness and potential for advancement. In addition, turnover and tenure measures are used to evaluate the effectiveness of managers—especially in retaining top talent. The global workforce initiatives described later in this chapter were developed so that they reflect both the customer and employee focus described above.

EVOLUTION OF THE TALENT MANAGEMENT SYSTEM: KEY INITIATIVES AND ENHANCEMENTS
As mentioned earlier, five separate initiatives were developed and have been implemented since 2001 to enhance McDonald’s talent management and development processes and support the organization’s goal of meeting the global leadership needs of the business. These include: (1) the redesign of the performance development system (PDS) for all staff positions throughout McDonald’s; (2) introduction of the talent review process for all officer-level positions; (3) the development and roll-out of a series of accelerated development programs beginning with the Leaders at McDonald’s Program (LAMP) launched in 2003 to enhance the development of high-potential individuals for officer level positions; followed by (4) the introduction of the McDonald’s Leadership Institute; and (5) the design and launch of the Global Leadership Development Program.

Initiative 1: Performance Development System Redesign
Prior to 2001, McDonald’s performance development system was comprised of (1) an “MBO-based” annual performance plan that measured performance against established annual objectives but included no assessment of how these results were achieved (that is, leadership behaviors); (2) a 5-point rating scale of overall performance ranging from “outstanding” to “unsatisfactory”; (3) a personal developmental planning element based on a McDonald’s-wide competency framework that included nine core competencies and four leadership competencies as well as a menu of “elective” competencies that could be chosen/applied as relevant in specific functional areas (see Table 9.2); (4) a three-level assessment of career potential that combined performance and demonstrated leadership competencies; and (5) an annual compensation system element tied to the results of the annual performance rating.

Competency Category

Specific Competencies

Core Competencies

Change Orientation

Communicates Effectively

Continuous Learning

Customer Focus

Drives to Excel

Holds Self and Others Accountable

Problem Solving and Innovation

Teamwork and Collaboration

Values and Respects Others

Leadership Competencies

Coaches and Develops

Maximizes Team Effectiveness

Maximizes Business Performance

Strategic Perspective

Functional Competency Menu (elective)

Job Knowledge

Leverages Resources

Decisiveness

Gathers and Uses Information

Impact and Influence

Negotiation and Conflict Resolution

Uses Technology Appropriately

Vendor Management

While the process for rating performance and potential was not unusual in structure and design, the outputs of the system reflected the culture of McDonald’s at that time. Specifically, there was significant rating inflation for both annual performance (98 percent of managers were rated either “outstanding” or “excellent”) and potential (78 percent of managers were rated as having the potential to advance in the business at least one level). Because there was significant inflation in such ratings, there was little meaningful performance and compensation differentiation. Further, since almost everyone was rated not only as being an excellent/outstanding performer but also as having advancement potential, it made differentiation for purposes of realistic succession planning very difficult.

Senior management realized that because the business had been so successful for so long, a culture of entitlement may have set in. This was exemplified by many employees believing that their past success and associated rewards would guarantee their future success/rewards rather than their having to earn success each day with every customer. Senior management believed it was important to change the culture in order to help the organization become better able to face the challenging realities of a more competitive global marketplace. As one approach to signaling the need for this change to the organization, the top management team at McDonald’s asked human resources to redesign the performance development system in order to (1) place a stronger focus on accountability for results, (2) increase performance differentiation, and (3) enhance openness to change and innovation.

The redesign and enhancement of the system (designed for all staff throughout the company—not just officers) rolled out in 2001 included the following changes:

1. The addition of six key expected leadership behaviors termed “performance drivers” (see Table 9.3 ) as an element of how annual performance will be assessed so that managers would be measured not just on the “what” of their accomplishments but also on “how” they accomplished them. The performance drivers were very much like “competencies” but were written to measure the actual application of those competencies on the job versus measuring one’s level of capability. Further, these “performance drivers” were used as an additional key lever by top management to signal the importance of needed culture change along certain dimensions identified as critical to enable the organization to compete more effectively in the marketplace (greater accountability and performance differentiation, more innovation, etc.).

2. The introduction of a 4-point rating scale (“exceptional performance,” “significant performance,” “needs improvement,” and “unsatisfactory” to replace the 5-point scale) with a rating distribution guideline of 20-70-10 percent for each category, respectively (the last category of 10 percent includes both “needs improvement” and “unsatisfactory”). The new 4-point rating scale and distribution guidelines were put in place to help address the rating inflation problem.

3. A new incentive compensation plan that tied to the improved performance differentiation and ensured that those rated in the “top 20 percent” were receiving significantly higher compensation than those who did not.

4. A revised assessment of potential that utilized a combination of performance, performance drivers, position-specific competencies as criteria supported by a facilitated calibration roundtable process. This revised assessment of potential was also accompanied with a guideline that stated that no more than 20 to 25 percent (this guideline was set based on internal discussions regarding what was realistic as well as some external benchmarking done with outside companies) of managers in any given year were expected to be assessed as “ready” immediately for a promotion to the next-higher level and “ready within two years” for such a promotion.

Performance Drivers

Sample Behaviors

Setting Clear Objectives with Results Accountability

Involves establishing high standards for performance, well- defined objectives and targets, and clear priorities for what must be accomplished and taking full personal responsibility for doing what it takes to deliver promised results. For people managers, it includes ensuring that direct reports understand what is expected of them and receive regular feedback on their performance as well as clearly differentiating between top and lower contributors when evaluating performance.

Coaching and Valuing People

Involves treating people with dignity and respect at all times, demonstrating honesty and integrity in all dealings with others; ensuring that the highest quality people are being selected for the organization and are actively provided with opportunities to use their capabilities to contribute to the business as well as grow and develop their potential to do more in the future.

Strategic Focus and Business Planning

Involves being able to develop an effective organizational business vision and strategy that are based on sound facts and that are well thought through, communicating them so that others understand and commit to them, and translating the vision and strategy into a clear overall work plan as well as into the individual goals and priorities that will guide and align the efforts of people at all levels of the organization.

Acting in the Best Interest of the System

Involves demonstrating consistent commitment to work together as a team to achieve the vision and what is in the best interest of the system. Shares information and resources with others to contribute to their success. Acts to break down silos or boundaries in order to help the business maximize the leverage from its combined resources.

Open Communications

Involves demonstrating strong “listening for understanding skills” and valuing diverse opinions. Conveys information and ideas in an open, articulate, and timely manner that enables others to get their jobs done. Communicates in a highenergy, positive way that motivates people to achieve.

Embraces Change/ Innovation

Involves being open to new ideas and innovation and having not only the flexibility to adapt to change but also the energy and drive to initiate and lead it.

New System Roll-Out—Global vs. Local Emphasis How this new system was rolled out globally reflected the balance between the global and local approaches to workforce management. When it was introduced at a global HR meeting in June 2003, it was clear that certain elements of the new system redesign were not suited for the foreign cultures and legal structures that existed in certain countries. As a result, all 119 countries were given latitude (labeled “freedom within the framework”) to make certain changes (for example, the labels given to the three rating categories), while they were not permitted to customize other aspects of the process (such as rating distribution guidelines or the use of performance drivers in the ratings). Providing this flexibility made a key difference in how well the new process was accepted by each country and, while many countries would have preferred to continue to use their own performance plans and processes, most willingly began the implementation of the new system and accepted the value of following the framework.

Results of Implementation As with any major change that impacts employees’ individual performance ratings and compensation, the introduction of the new performance development system (PDS) was difficult and met some expected resistance. While this resistance was directed, in part, to specific concerns regarding particular changes made in the system (the number and labels for rating categories, changes in format, etc.), people’s reactions also reflected the reality that the revisions in the performance management process were designed to help drive what were believed to be some needed changes in the company’s management culture (enhanced accountability, greater differentiation in evaluating performance, increased emphasis on openness to change/innovation, etc.). At the same time, leaders of McDonald’s wanted to ensure that the focus on people and people development was not diminished.

The introduction of the new PDS system impacted significantly on the distribution of ratings for both performance and advancement potential. For example, in 2000 the vast majority of U.S.-based officers and managing directors received ratings (“outstanding” or “excellent”) that were above the mid-point (“good”) on the 5-point rating scale. In 2001, however, only 25 percent were given an “exceptional contributor” rating (this rating is for individuals who are judged to have “achieved results that far exceed expectations and requirements of the job in the face of challenging demands during the performance cycle and who have done so while modeling the values and behaviors expected of McDonald’s leaders”). Most individuals received a “significant contributor” rating (for “consistently meeting and perhaps exceeding some expectations and planned objectives while demonstrating the McDonald’s values and behaviors”) that was perceived to be average because it was the mid-point on a 3-point rating scale. For the first time in their careers, many managers (at the corporate officer and managing director levels) had received ratings that were not labeled “exceptional” or “outstanding,” and this was a shock and source of discomfort to them. In addition, a relatively small proportion of individuals were actually rated below the mid-point on the scale (“lower contributor/needs improvement” or “unacceptable performer”), which was highly unusual in McDonald’s culture. It should be noted, however, that the very year the new PDS was introduced, McDonald’s business performance was well below expectations and the stock price hit new lows. This softened the blow a bit, as managers could see that change was necessary and that McDonald’s was operating in a different world with new challenges that needed to be met in order to get the business turned around and once again moving in a positive direction.

As the new system has continued to be used, the proportion of individuals in each of the categories described above has stayed in a similar range. We have discovered along the way that it is a challenge to keep the distributions of individuals across performance rating categories consistent across levels of the organization. In other words, ratings creep seems to be a natural tendency as you move, for example, from the VP to the SVP level. What we have done to address this is to emphasize the importance of individuals being compared relative to those in the peer group at their specific level of the organization.

Ratings of Potential Consistent with this more critical differentiation of performance, changes in distributions were also seen in the company’s ratings of individual potential for continued advancement. In 2001, approximately three-quarters of U.S.-based officers and managing directors had been rated as having the potential to be promoted at least one more level. With a much more critical and challenging succession planning review process instituted, 2002 ratings of this group’s future potential were far more realistic (the proportion evaluated as having clear potential for further advancement from their current officer-level positions was closer to 15 to 20 percent). This proportion has remained in this same relative range since that time.

Lessons Learned While the process was difficult to do, our results would suggest that it’s sometimes easier to “bite the bullet” and make a significant change all at once rather than trying to make incremental changes. The PDS change enacted in 2001 effectively lowered the ratings of more than 50 percent of McDonald’s managers on a year-over-year basis. This was all done in a single year, but by year two, the organization had adapted to the new process. Other key lessons learned in implementing this initiative included the importance of: soliciting input from around the globe prior to program design finalization (the finalized system has been well accepted and has worked smoothly across widely varying geographic/cultural locations) and keeping the centralized, structured processes as simple as possible. Finally, we have purposefully given the organization time to become familiar with the new system and have resisted any significant “tweaking” of it. Some changes to further streamline the system continue to be made, but they have not been major.

Initiative 2: Global Succession Planning and Development Process

Design of the Global Talent Review Process Prior to the launch of the current global talent review process, succession planning had been conducted at McDonald’s for many years. Prior to 2003, this process was less formal, less structured, and less consistent across various areas of the world, yet it probably met the needs of the business, which had an outstanding record of growth of profitability. As business growth slowed and competition increased, however, there was a recognized need to enhance the focus on leadership talent to align better with the new global business challenges.

Beginning in 2003 it was decided that the talent management process at the leadership level needed to be more rigorous and also more transparent. To achieve this rigor and transparency, the presidents of each area of the world (U.S., Europe, Asia/Pacific/ Middle East/Africa, and Latin America), along with each corporate staff head (EVP-HR, EVP-Finance/CFO), were given a talent management template that consisted of a series of questions about their leadership talent requirements and the depth and diversity of their talent (see Exhibit 9.1 ). They were asked to prepare answers to these questions for their respective organizations. It was made clear that these questions would form the basis of the in-depth talent reviews that each of them would have with his or her immediate superior, who at that time was either the vice chair or the chief operating officer.

EXHIBIT 9.1. Talent Review Template Questions

The talent reviews were held as planned in 2003 and resulted in a much more realistic and rigorous assessment of the “health” of the talent pools in each area of the world and each functional area than had been achieved previously within McDonald’s. The increased ownership that leaders were taking for the results of these reviews was reflected in the specific actions that they proactively initiated (such as accelerating the development of high-potential managers, special recruiting initiatives, etc.) to respond to the current and anticipated replacement gaps that had surfaced. The HR support team was able to analyze the overall results of these reviews and look for any organization-wide interventions that would contribute to better addressing talent needs and gaps.

Talent Review Process Impact Results of the one-year follow-up survey with executive management and HR leaders in each of the company’s four major regions yielded the following observations regarding improvements in the talent review process: (1) managers and the organization overall became much more aware of the strengths and talent gaps in each area; (2) more candid and more challenging discussions took place on talent and not only focused more crisply on strengths and development needs but also more effectively addressed when it was time to remove individuals from positions in which they are not performing and not developing; (3) more specific actions were being planned and taken to close replacement gaps and development talent in a more focused way; and (4) senior executives were placing greater overall priority on and taking personal ownership for talent management.