Simplify. Richard Koch
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McDonalds’ fries in California. Hugely frustrated, he called the brothers, but they couldn’t work out what he was doing wrong. The breakthrough came when a researcher at the Potato and Onion Association asked Kroc to describe in detail the procedure for making fries in San Bernardino. The secret turned out to be that the potatoes were stored in open chicken-wire shaded bins, which allowed plenty of time for the wind to dry out the potatoes and change the sugars to starch. With advice from the potato experts, Kroc created his own natural curing process with a big electric fan. And bingo! The fries now tasted just like those in the original restaurant, and the same process could be replicated in all new stores.9
Kroc also describes how he developed a proprietary system that would deliver consistency for both customers and franchisees:
Consistent menu — no variants allowed — and the same methods to attain the same food quality.10
Sparkling clean toilets, restaurants, and parking lots. Cleanliness was one of the four principles that Kroc stressed, along with quality, service, and value.11
No pay telephones, jukeboxes, or vending machines of any kind.
Founding the “Hamburger University” for franchisee and staff training.
Offering franchisees a simple product by providing them with a suitable ready site and financing.
Keeping the economics favorable, with a narrow product line, and helping the best suppliers to serve a large number of McDonald’s outlets and lower their costs, for example through bulk packaging and allowing them to deliver more items per stop.12
Any business person writing their memoirs will — like Ford and Kroc — make the most of the opportunity to advertise the quality of their product. Yet it is clear that Kroc, Ford, and Kamprad all realized that the main purpose of their systems was to deliver a good product at an exceptionally low price. The bigger the scale of the operation, while allowing no variation in product and procedure, the lower the price. And the lower the price, the greater the customer satisfaction, sales, profits, and value of the company. Kroc kept the price of McDonald’s hamburgers at fifteen cents for nineteen years — until 1967, when inflation brought about by President Johnson’s Great Society and the Vietnam War forced an increase. He authorized the increase to eighteen cents reluctantly: “If you look at it from the customer’s point of view — which is how I do it, because this guy is our real boss — you see the importance of every penny.”13 This is the credo of every price-simplifier.
Who created the greater value — the McDonald brothers or Ray Kroc? It depends on your perspective. Financially, Kroc added far more. Yet, we could argue that the brothers created the product, the proposition, the brand, the pricing, and indeed the system. The changes to their template since 1961 have been relatively minor. However, imitation is usually more vital than creation. Certainly, in this case, imitation created an extraordinarily valuable business with a global footprint. Ray Kroc added a simple, uniform, high-quality franchise system that cloned the McDonald’s formula to a degree that was truly mind-boggling.
McDonald’s was the first restaurant to create an assembly-line operation that recreated the coffee shop with a limited but complete meal solution. The firm also first made the fast-food restaurant a universal phenomenon. It created a new branch of the restaurant business, a template for fast-food specialists in chicken, pizzas, and innumerable other food genres, which in aggregate have dwarfed even McDonald’s.
By the end of 1976, McDonald’s had 4,177 restaurants. Seven years later, this had nearly doubled to just short of 8,000. Ray Kroc died in 1984, still in harness. Today, the firm serves 68 million customers every day in 35,000 restaurants and 119 countries, from Panama to Russia to New Zealand.
In 1976 the revenues of the McDonald’s Corporation (excluding the sales of franchisees and affiliates, including only their payments to McDonald’s) exceeded $1 billion and net earnings after taxes were over $100 million. In 2014 revenues were $28.1 billion, and net income was $8.8 billion. The firm is worth $93.5 billion today — 39,000 times what the McDonald brothers received when they sold out to Ray Kroc in 1961. This compares with a meager twenty-fivefold increase in the Standard & Poor’s index over the same time period. Kroc (and his successors) therefore added some $90 billion of value to McDonald’s by spreading the formula that Dick and Mac McDonald had invented but could not — or would not — propagate.
1 McDonald’s is another example of price-simplifying — where subtraction and an assembly-line operation have slashed complexity and enabled costs to be halved. Could you automate an industry or service that has not yet experienced anything comparable?
2 If you work in a service business, take heart that price-simplifying works as well in a service or retail setting as it does in manufacturing.
3 With prices cut in half and the appropriate economic exploitation, world demand for fast-food hamburger meals has expanded to a degree that was unimaginable in 1948. Can you think of a pedestrian market today that could conceivably explode in a similar fashion if prices were at least halved through automation and co-opting customers and/or franchisees?
4 Once again, the simplifying firm created a new, proprietary business system, with economics quite different from those of more complex restaurants. If you are considering price-simplifying, how might you create a dramatically better economic system than whatever exists today in your market?
5 The firm combined an exceptionally low price with greater usefulness (consistently high-quality food; play areas for children), art (especially the Golden Arches and instantly recognizable branding) and ease of use (speed). What might be the equivalent extra benefits in your industry?
6 The McDonald’s formula was invented in miniature by its two founders. It was made into an economic powerhouse by one person who took the system, standardized it, and cloned it on a scale that its creators could never imagine. So look for a simplifying system that already exists on a tiny scale but could be made into a universal product and rolled out around the globe.
He made devices simpler by eliminating
buttons, software simpler by eliminating
features, and interfaces simpler by
eliminating options. He attributed his love
of simplicity to his Zen training.
Walter Isaacson
This is the story of a man and a machine that transformed the way we work and play. He distorted and compressed reality, and achieved the impossible by insisting on simplicity and its benefits for customers.
There had been nothing like it before. In the middle of Super Bowl XVIII, immediately after a touchdown, came images conjured up by Ridley Scott, the director of Blade Runner. Masses of skinheads in an urban wasteland are paying full attention to Big Brother on a huge screen. But then a female athlete wearing a white top labelled “Macintosh” leaps clear of pursuing police to hurl a sledgehammer that smashes the screen and destroys Big Brother. “On January 24th,” announces the voice-over, “Apple Computer will introduce the Macintosh. And you’ll see why 1984 won’t be like 1984.”
The sixty-second commercial cost $750,000 to make and $800,000 to air.