Online Extra: Skinner's Winning McDonald's Recipe

The fast-food giant's CEO talks about the turnaround he helped cook upand how the chain keeps sizzling

James A. Skinner's dream of becoming chief executive of McDonald's (MCD ) seemed over in late 2002. The company's board had just pushed Chairman and CEO Jack M. Greenberg into resigning after years of deteriorating numbers.

But instead of promoting Skinner, then the fast-food chain's No. 2 officer, directors rehired a recent retiree as the next chief, James R. Cantalupo. Setting Skinner back further, Cantalupo brought in his own second-in-command and heir apparent, Charles H. Bell. Skinner was 58. Bell had just turned 42.

Yet here it is, four years later, and Skinner is about to enter his third year as McDonald's CEO. In April, 2004, Cantalupo died of a heart attack while hosting his first biannual convention of McDonald's managers, franchisees, and suppliers.

Bell was immediately elevated to CEO. But he was diagnosed with colon cancer a month later. He died in January, 2005, two months after Skinner—the last of the three who crafted and then implemented McDonald's successful comeback, dubbed the Plan to Win—was moved up to replace him.

Skinner pretty much has stayed the course. He added "balanced, active lifestyles" to the company's marketing message, to make McDonald's appear more health-conscious and refute critics who have accused Big Mac of fattening up the nation with high-calorie junk food. Otherwise, he has stuck with the plan's five back-to-basics principles—people, products, place, price, and promotion—that have refocused the company and yielded an impressive 41 months in a row of same-store sales increases worldwide.

Today, McDonald's boasts that its 1.6 million employees serve 50 million people every day at 31,900 locations in 118 countries. No other restaurant chain comes close.

Skinner, 62, is a McDonald's lifer. An Iowa native, he worked briefly as a crew member in a McDonald's in Davenport, Iowa, in 1962. After almost 10 years in the U.S. Navy, he became a manager trainee at an outlet in Carpentersville, Ill., in 1971. He rose to president and chief operating officer of the company's then-nearly 30,000 outlets in early 2002 and to vice-chairman less than a year later.

Skinner was interviewed recently by BusinessWeek Senior Correspondent Michael Arndt in his sun-filled office on McDonald's headquarters campus in Oak Brook, Ill. Skinner was wearing a dark gray striped suit, a pale yellow shirt, and a patterned tie of yellow and black rectangles. The shelves of his office were filled with McDonald's memorabilia. As he does every morning, Skinner was drinking coffee from a McDonald's foam cup topped with his own special lid. An edited transcript of the interview follows:

Maybe it would be best for you to go back to late 2002 and early 2003 and walk through the thinking as you were coming up with the plan to revitalize the company. Those early meetings were really an assessment of where we were. We knew we had to deliver a better experience for our customers. And to focus on our customers. We had lost our focus. We had taken our eyes off our fries, if you will.

Out of that came the headline about revitalization: Better, Not Bigger. We wanted more customers in our existing restaurants, rather than more restaurants for our customers. Everything after that just fell into place. The fact that we had operating executives—Charlie and myself were line guys—was important. It was just line guys who understood the business.

So were you and Jim and Charlie huddled day-in, day-out going over this? No. We basically mapped out what we thought the revitalization plan should look like in the first month. We set new targets: 3% to 5% on annual revenue growth, 6% to 7% on operating income growth, and high-teen incremental returns on invested capital. Our mission was operating excellence, to be our customers' favorite way and place to eat. Now we've added drink to that, because one of our strategies now is beverages.

You've been logging same-store sales increases globally since June, 2003. We'd love to hear you say there was a magic bullet. Was there? It's a combination of things; it's a holistic plan. The five P's in the Plan to Win are not profound. I urge people to read them and they say: "This is it?" But what is profound is the infinite opportunities to strategize about the restaurants within those five P's.

It's all about choices, something for everybody. We've got to be able to deliver relevant food for our customers, that tastes good and that they enjoy eating, so they can feel good about their experience with McDonald's, with all the expectations that they have today around health and wellness.

Are you doing better at introducing new products than you were five or 10 years ago? Yes. To focus on our customers, we have to have a robust consumer-insight process. We shored that up in '03 and '04. The other thing we do is a very, very good job in a test-sell environment. We now have food studios in all of our geographic segments, in Oak Brook, Hong Kong, and Paris.

With a product like our new Snack Wraps, we tested that in 800 to 1,200 restaurants. We have a consumer-insight test. We have an operations test. We have a sales test. Before we move forward, we pretty much know where we are.

You didn't do that before? We were more willy-nilly before. The attitude was we'll make it and they'll buy it. We didn't spend enough time listening to our customers. We weren't bad in the past, just not as good as we should be.

Do you think your focus on balanced, active lifestyles has changed the debate on McDonald's and healthful food? I think it's changed it substantially. We still have to do a better job of telling our story, because people just don't understand what we are. I don't think anybody has done more than McDonald's to try to be part of the solution.

In the end, it is about personal responsibility; we all know that. But we have an obligation because of our size to make a difference. We are committed to doing things right and doing the right things.

In general, the debate does seem to have changed. But there are still people who think you are an evil company that does bad things. How do you deal with them? If people are communicating negative things, or untruthful information—myths if you will—then I think it's important for us to set the record straight. We enjoy a healthy debate. We're not going to do the best for our customers without a healthy debate. What we don't like is when people say things that are not true, or use sound bites to put us in a bad light.

It's our customers whom we listen to most. We're concerned about the 50 million people who come to our restaurants every day, making sure we deliver what they want so they'll come back tomorrow. We will always have critics. Everybody who's the size of McDonald's will not be loved by everybody.

Let's turn to a different subject. You have a hedge-fund shareholder, William Ackman of Pershing Square Capital Management, who's been agitating for change. He's been pushing the idea that McDonald's is really a real estate company and not a restaurant company and that therefore you should sell all the company-owned sites and let franchisees run them. What do you make of his argument? I think we've been pretty clear that we don't agree with him. You have to understand why we buy real estate. It is not about securing a revenue stream relative to real estate. It is not an annuity that somebody else should capture at the expense of the hamburger business.

We secure real estate around the world to secure the long-term viability of the McDonald's hamburger and chicken business. And I think our performance speaks for itself.

A personal question: What do you eat when you go to McDonald's? My favorite is a plain Quarter Pounder, no condiments, just a beef patty. I'm from Iowa. We eat beef. But I also like the Asian chicken salad, and I like the fruit and walnut salad.

I test the fries everyday. It's an icon. I want to make sure we're doing it the right way. I get a coffee every day, too. See that lid? I don't like our new lid. Our customers like it. I don't like it. So when I go through the drive-through, I change this lid out every day.

You've mentioned a few times that you're an operations guy, and that Charlie Bell was an operations guy. How important is it that the CEOs of McDonald's have that background? I think it's important to understand what our crews and crew managers are trying to do on a daily basis, as you lead the organization. And no one can do that better than someone who actually worked in a restaurant, particularly without any favor.

I came up through the ranks, and no one was going, "You just work in the stores for a while and everything will be fine and you'll be the CEO." I wasn't in a fail-safe environment. I could have been fired at any moment.

You just turned 62. McDonald's doesn't have a formal retirement age, but many CEOs leave before 65. How long are you going to stay in this job? We've got a great team in place. I think as long as I'm having fun and delivering great results and the organization is making great progress, I'll be around for a while.

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