McDonald's $15 Wage Debate Isn't About Profits, It's About Their Business Model

Last week, we witnessed a new wave of one-day strikes of fast food workers fighting to achieve an ambitious goal: increasing the minimum wage to $15 an hour. These strikes brought back to public attention the debate over minimum wage and its economic and social impacts, as well as the unavoidable question: How much would a Big Mac actually cost if workers at McDonald’s were being paid $15 per hour?

While the answer to this question provides some sort of indication as to the level of change required of McDonald’s and other fast food chains to provide their employees with a decent paycheck, it probably doesn’t help us much in understanding the issue we’re facing.

Why? Because the issue here is not about pricing or even human rights, but about innovation and design thinking. The question we should ask is not if McDonald’s can adjust its pricing model to a new wage level or not, but in what way McDonald’s will choose to redesign its business model.

First, let’s get the Big Mac question off the table. The Daily Beast created a McPoverty calculator that lets you see how your extra cents could translate into real-life wages based on the work of economists Jeannette Wicks-Lim and Robert Pollin. Using this calculator, the price of Big Mac would need to increase by 22 cents to enable workers at McDonald’s to make $15.23 per hour, or $31,671.83 per year.

Another estimate comes from a group of 100 American economists who signed a petition last month in support of raising the federal minimum wage to $10.50 per hour. In the petition, the economists write: “On average, even fast-food restaurants…are likely to see their overall business costs increase by only about 2.7 percent from a rise today to a $10.50 federal minimum wage. That means, for example, that McDonalds could cover fully half of the cost increase by raising the price of a Big Mac, on average, from $4.00 to $4.05.”

So we can learn from these estimates that if McDonald’s (as well as other fast food chains) would like to raise the wage of its workers it can do so with a relatively small hike in prices – anywhere from one to five percent depending on what degree the wages would go up.

Yet, all of these calculations are nothing but a theoretical exercise with very little practical value because this is not the equation that McDonald’s has in mind. If anything, the changes its executives probably think about to compensate for a potential increase in wages is replacing employees with systems that allow customers to place orders through automatic ordering screens. As Economist Adam Ozimek writes: “It’s not hard to imagine McDonald’s switching to a system like this for credit card orders.”

The reason? It goes back to the way McDonald’s has been designed. It all started with Ray Kroc, the man who bought a chain of few restaurants from the McDonald brothers and transformed them into the most successful fast food operation in the world.

Kroc, explains Roger Martin in his book, The Design of Business: Why Design Thinking is the Next Competitive Advantage, refined the idea the McDonald brothers had of quick-serving restaurants with strictly limited menu options into a precise algorithm. He “simplified the McDonald’s system down to an exact science; with a rigid set of rules that spelled out exactly how long to cook a hamburger, exactly how to hire people, exactly how to choose locations, exactly how to manage stores, and exactly how to franchise them,” Martin writes in the book.

Kroc basically created a formula that could be replicated fast, providing McDonald’s with a powerful efficiency advantage that helped it take over the world in only 20 years. This success was also built on hiring unskilled labor that could be paid low wages as all they were asked to do was basically to follow the manuals Kroc and his successors developed.

Now, what happened is that employees at McDonald’s became part of Kroc’s formula – they were just another input in an assembly line that has aimed to perfect its efficiency and maximize its performance. This approach that codified workers into a factor in an equation is reflected in the absurd budget McDonald’s provided its employees showing them how they can survive on their McDonald’s income.

McDonald’s has now three options: the first is to look at the strikes as a bug in its code and search for ways to fix it by adding more automatic service systems that will replace some of its employees and increase efficiency. This option, to paraphrase Martin, emphasizes further exploitation of the algorithm.

The second option is exploration. The company could give innovation a chance and look for ways to reinvent the business. For example, McDonald’s could adopt a similar vision to Chipotle’s "Food with Integrity," creating what BBMG called “an ethos that the way we cultivate and consume our food should be healthier and more ethical.” Hell, it might even decide to compensate its employees like Chipotle does.

The third option is the middle-of-the-road choice, balancing between exploitation and exploration. This integrative approach, explains Martin, creates a design-thinking organization that can both exploit existing knowledge and create new, gaining a cost advantage over its competitors along the way. McDonald’s could automate systems while revising its formula in order to ensure it takes into consideration the well-being of its stakeholders, including the employees.

What’s the best option for McDonald’s? What option is it going to choose from these three? Feel free to comment and share your thoughts.

[Image credit: Matt McGee, Flickr Creative Commons]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.