Category: Entrepreneurship

Determination, Not Education, Is Key to Success at McDonald’s

(p. 189) McDonald’s is a real melting pot.

The key element in these individual success stories and of McDonald’s itself, is not knack or education, it’s determination. This is expressed very well in my favorite homily:

“Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education alone will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.”

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.

Many of McDonald’s Best New Products, Started With Franchise Operators

(p. 163) Some of my detractors, and I’ve acquired a few over the years, say that my penchant for experimenting with new menu items is a foolish indulgence. They contend that it stems from my never having outgrown my drummer’s desire to have something new to sell. “McDonald’s is in the hamburger business,” they say. “How can Kroc even consider serving chicken?” Or, “Why change a winning combination?”

Of course, it’s not difficult to demonstrate how much our menu has changed over the years, and nobody could argue wish the success of additions such as the Filet-O-Fish, the Big Mac, Hot Apple Pie, and Egg McMuffin. The most interesting thing to me about these items is that each evolved from an idea of one of our operators. So the company has benefited from the ingenuity of its small businessmen while they were being helped by the system’s image and our cooperative advertising muscle. This, to my way of thinking, is the perfect example of capitalism in action. Competition was the catalyst for each of the new items. Lou Groen came up with Filet-O-Fish to help him in his battle against the Big Boy chain in the Catholic parishes of Cincinnati. The Big Mac resulted from our need for a larger sandwich to compete against Burger King and a variety of specialty shop concoctions. The idea (p. 164) for Big Mac was originated by Jim Delligatti in Pittsburgh.
Harold Rosen, our operator in Enfield Connecticut, invented our special St. Patrick’s Day drink, The Shamrock Shake. “It takes a guy with a name like Rosen to think up an Irish drink,” Harold told me. He wasn’t kidding. “You may be right,” I said. “It takes a guy with a name like Kroc to come up with a Hawaiian sandwich . . . Hulaburger.” He didn’t say anything. He didn’t know whether I was kidding or not. Operators aren’t the only ones who come up with creative ideas for our menu. My old friend Dave Wallerstein, who was head of the Balaban & Katz movie chain and has a great flair for merchandising–he’s the man who put the original snack bars in Disneyland for Walt Disney–is an outside director of McDonald’s, and he’s the one who came up with the idea for our large size order of french fries. He said he loved the fries, but the small bag wasn’t enough and he didn’t want to buy two. So we kicked it around and he finally talked us into testing the larger size in a store near his home in Chicago. They have a window in that store that they now call “The Wallerstein Window,” because every time the manager or a crew person would look up, there would be Dave peering in to see how the large size fries were selling. He needn’t have worried. The large order took off like a rocket, and it’s now one of our best-selling items. Dave really puts his heart into his job as a director, now that he’s retired and has plenty of time. There’s nothing he likes more than traveling with me to check out stores.
Our Hot Apple Pie came after a long search for a McDonald’s kind of dessert. I felt we had to have a dessert to round out our menu. But finding a dessert item that would fit readily into our production system and gain wide acceptance was a problem. I thought I had the answer in a strawberry shortcake. But it sold well for only a short time and then slowed to nothing. I had high hopes for pound cake, too, but it lacked glamor. We needed something we could romance in advertising. I was ready to give up when Litton Cochran suggested we try fried pie, which he said is an old southern favorite. The rest, of course, is fast-food history. Hot Apple Pie, and later Hot Cherry Pie, has that special quality, that classiness in a finger food, that made it perfect for McDonald’s. The pies added significantly to our sales and (p. 165) revenues. They also created a whole new industry for producing the filled, frozen shells and supplying them to our stores.
During the Christmas holidays in 1972, I happened to be visiting in Santa Barbara, and I got a call from Herb Peterson, our operator there, who said he had something to show me. He wouldn’t give me a clue as to what it was. He didn’t want me to reject it out of hand, which I might have done, because it was a crazy idea–a breakfast sandwich. It consisted of an egg that had been formed in a Teflon circle, with the yolk broken, and was dressed with a slice of cheese and a slice of grilled Canadian bacon. This was served open-face on a toasted and buttered English muffin. I boggled a bit at the presentation. But then I tasted it, and I was sold. Wow! I wanted to put this item into all of our stores immediately. Realistically, of course, that was impossible. It took us nearly three years to get the egg sandwich fully integrated into our system. Fred Turner’s wife, Patty, came up with the name that helped make it an immediate hit–Egg McMuffin.

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.
(Note: ellipsis and italics in original.)

Ray Kroc’s Account of How Filet-O-Fish Came to McDonald’s

One of the challenges of efficiently running a business is when to encourage experimentation and innovation among employees, and when to enforce standardization. Sam Walton seemed to have handled this well at Wal-Mart.
In the passage quoted below, Ray Kroc gives a glimpse of how he handled the issue at McDonald’s.

(p. 137) . . . , the quality of our french fries was a large part of McDonald’s success, and I certainly didn’t want to jeopardize our business with a frozen potato that was not up to our standard. So we made certain that the frozen product was thoroughly tested and that it met every condition of quality before we made it part of the system.

There was another product being tested at this time that would prove to have a tremendous effect on our business. This was the (p. 138) Filet-O-Fish sandwich. It had been born of desperation in the mind of Louis Groen in Cincinnati. He had that city as an exclusive territory as a result of some horse trading he’d done with Harry and me back in the days when we were using everything but butterfly nets to catch franchisees. Lou’s major competition was the Big Boy chain. They dominated the market. He managed to hold his own against them, however, on every day but Friday. Cincinnati has a large Catholic population and the Big Boys had a fish sandwich. So if you add those two together on a day the church had ordained should be meatless, you have to subtract most of the business from McDonald’s.

My reaction when Lou first broached the fish idea to me was, “Hell no! I don’t care if the Pope himself comes to Cincinnati. He can eat hamburgers like everybody else. We are not going to stink up our restaurants with any of your damned old fish!”

But Lou went to work on Fred Turner and Nick Karos. He convinced them that he was either going to have to sell fish or sell the store. So they went through a lot of research, and finally made a presentation that convinced me.

Al Bernardin, who was our food technologist at the time, worked with Lou on the type of fish to be used, halibut or cod, and they finally decided to go with the cod. I didn’t care for that; it brought back too many childhood memories of cod liver oil, so we investigated and found out it was perfectly legal to merchandise it as North Atlantic whitefish, which I like better. There were all kinds of fishhooks in developing this sandwich: how long to cook it, what type of breading to use, how thick it should be, what kind of tartar sauce to use, and so forth. One day I was down in our test kitchen and Al told me about a young crew member in Lou Groen’s store who had eaten a fish sandwich with a slice of cheese on it.
“Of course!” I exclaimed. “That’s exactly what this sandwich needs, a slice of cheese. No, make it half a slice.” So we tried it, and it was delicious. And that is how the slice of cheese got into the McDonald’s Filet-O-Fish.
We started selling it only on Fridays in limited areas, but we got so many requests for it that in 1965 we made it available in all our stores every day, advertising it as the “fish that catches people.” I (p. 139) told Fred Turner and Dick Boylan, both of whom happen to be Catholic, “You fellows just watch. Now that we’ve invested in all this equipment to handle fish, the Pope will change the rules.” A few years Later, damned if he didn’t. But it only made those big fish sales figures that much sweeter to read.

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.

Entrepreneurial Judgment Can Be Right Even When It Is Hard to Articulate

Entrepreneurs may develop a good sense of people, even though they cannot articulate their judgment. Yet their firms, and our economy, might be more efficient and productive if they were allowed to follow their judgments, rather than follow Human Resource Department credentialism and paper trails.
The entrepreneurs might make mistakes, but in an open economy they would pay a price for their mistakes in profits foregone, and hence would have an incentive to correct the mistakes. And there would be plenty of alternative jobs for anyone mistakenly fired.

(p. 91) I’ve been wrong in my judgments about men, I suppose, but not very often. Bob Frost, one of our key executives on the West Coast, will remember the time he and I were checking out stores, and I got a very unfavorable impression of one of his young managers. As we drove away from the store I said to Bob, “I think you’d better fire that man.”
“Oh, Ray, come on!” he exclaimed. “Give the kid a break. He’s young, he has a good attitude, and I think he will come along.”

“You could be right, Bob,” I said, “but I don’t think so. He has no potential.”
Later in the day, as we were driving back to Los Angeles, that conversation was still bugging me. Finally I turned to Bob and yelled, “Listen goddammit I want you to fire that man!”
One thing that makes Bob Frost a good executive is that he has the courage of his convictions. He also sticks up for his people. He’s a retired Navy man, and he knows how to keep his head under fire. He simply pursed his lips and nodded solemnly and said, “If you are ordering me to do it, Ray, I will. But I would like to give him another six months and see how he works out.”
I agreed, reluctantly. What happened after that was the kind of (p. 92) personnel hocus-pocus that government is famous for but should never be permitted in business, least of all in McDonald’s. The man hung on. He was on the verge of being fired several times in the following years, but he was transferred or got a new supervisor each time. He was a decent guy, so each new boss would struggle to reform him. Many years later he was fired. The assessment of the executive who finally swung the ax was that “this man has no potential.”
Bob Frost now admits he was wrong. I had the guy pegged accurately from the outset. But that’s not the point. Our expenditure of time and effort on that fellow was wasted and, worst of all, he spent several years of his life in what turned out to be a blind alley. It would have been far better for his career if he’d been severed early and forced to find work more suited to his talents. It was an unfortunate episode for both parties, but it serves to show that an astute judgment can seem arbitrary to everyone but the man who makes it.

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.

“How Am I Going to Live without Google?”

GoogleChinaFlowers2010-01-25.jpg “A woman examined bouquets and messages left by Google users on Wednesday outside the Internet search company’s headquarters in Beijing.” Source of caption and photo: online version of the NYT article cited way below (after the citation to the quoted article, which is a different article).

David Smick in The World as Curved, has suggested that restrictions on the internet in China, limit entrepreneurship, and ultimately economic growth.

(p. 5) BEIJING — At the elite Tsinghua University here, some students were joking Friday that they had better download all the Internet information they wanted now in case Google left the country.

But to many of the young, well-educated Chinese who are Google’s loyal users here, the company’s threat to leave is in fact no laughing matter. Interviews in Beijing’s downtown and university district indicated that many viewed the possible loss of Google’s maps, translation service, sketching software, access to scholarly papers and search function with real distress.
“How am I going to live without Google?” asked Wang Yuanyuan, a 29-year-old businessman, as he left a convenience store in Beijing’s business district.
. . .
Li An, a Tsinghua University senior, said she used to download episodes of “Desperate Housewives” and “Grey’s Anatomy” from sites run by BT China that are now closed. “I love American television series,” she said with frustration during a pause from studying Japanese at a university fast-food restaurant on Friday.
The loss of Google would hit her much harder, she said, because she relies on Google Scholar to download academic papers for her classes in polymer science. “For me, this is terrible,” Ms. Li said.
Some students contend that even after Google pulls out, Internet space will continue to shrink. Until now, Google has shielded Baidu by manning the front line in the censorship battle, said a 20-year-old computer science major at Tsinghua.
“Without Google, Baidu will be very easy to manipulate,” he said. “I don’t want to see this trend.”
A 21-year old civil engineering student predicted a strong reaction against the government. “If Google really leaves, people will feel the government has gone too far,” he insisted over lunch in the university cafe.
But asked whether that reaction would influence the government to soften its policies, he concentrated on his French fries. “I really don’t know,” he said.

For the full story, see:
SHARON LaFRANIERE. “Google Users in China, Mostly Young and Educated, Fear Losing Important Tool.” The New York Times, First Section (Sun., January 17, 2010): 5.
(Note: the online version of the article has the title “China at Odds With Future in Internet Fight” and is dated January 16, 2010.)
(Note: ellipsis added.)

The source of the photo at the top is the online version of:
KEITH BRADSHER and DAVID BARBOZA. “Google Is Not Alone in Discontent, But Its Threat Stands Out.” The New York Times (Thurs., January 13, 2010): B1 & B4.
(Note: the online version of the article has the slightly different title “Google Is Not Alone in Discontent, But Its Threat to Leave Stands Out” and is dated January 14, 2010.)

The reference to the Smick book is:
Smick, David M. The World Is Curved: Hidden Dangers to the Global Economy. New York: Portfolio Hardcover, 2008.

Scientist Helped Kroc Learn Secret of McDonald’s French Fries

One recurring puzzle is the role, if any, for science in innovative entrepreneurship. The episode chronicled below provides one piece of evidence:

(p. 71) I had explained to Ed MacLuckie with great (p. 72) pride the McDonald’s secret for making french fries. I showed him how to peel the potatoes, leaving just a bit of the skin to add flavor. Then I cut them into shoestring strips and dumped them into a sink of cold water. The ritual captivated me. I rolled my sleeves to the elbows and, after scrubbing down in proper hospital fashion, I immersed my arms and gently stirred the potatoes until the water went white with starch. Then I rinsed them thoroughly and put them into a basket for deep frying in fresh oil. The result was a perfectly fine looking, golden brown potato that snuggled up against the palate with a taste like . . . well, like mush. I was aghast. What the hell could I have done wrong? I went back over the steps in my mind, trying to determine whether I had left something out. I hadn’t. I had memorized the procedure when I watched the McDonald’s operation in San Bernardino, and I had done it exactly the same way. I went through the whole thing once more. The result was the same–bland, mushy french fries. They were as good, actually, as the french fries you could buy at other places. But that was not what I wanted. They were not the wonderful french fries I had discovered in California. I got on the telephone and talked it over with the McDonald brothers. They couldn’t figure it out either.

This was a tremendously frustrating situation. My whole idea depended on carrying out the McDonald’s standard of taste and quality in hundreds of stores, and here I couldn’t even do it in the first one!
I contacted the experts at the Potato & Onion Association and explained my problem to them. They were baffled too, at first, but then one of their laboratory men asked me to describe the McDonald’s San Bernardino procedure step-by-step from the time they bought the potatoes from the grower up in Idaho. I detailed it all, and when I got to the point where they stored them in the shaded chicken-wire bins, he said, “That’s it!” He went on to explain that when potatoes are dug, they are mostly water. They improve in taste as they dry out and the sugars change to starch. The McDonald brothers had, without knowing it, a natural curing process in their open bins, which allowed the desert breeze to blow over the potatoes.
With the help of the potato people, I devised a curing system of my own.

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.
(Note: ellipsis in original.)

Kroc Increased the Mortgage on His Home to Regain Control of His First Entrepreneurial Venture

Ray Kroc was the founder of the McDonald’s chain, who wrote an autobiography called Grinding It Out. Back on August 12, 2009, I made a few comments on the book, and said that in some future entries, I would be quoting a few passages that I thought were worth remembering.
Well, the future has finally arrived.
Kroc’s first entrepreneurial venture was Multimixer, a machine that efficiently made milkshakes. Kroc had sold a controlling interest, and wanted control back:

(p. 56) “All right,” I said, “how much?”

I don’t know how he kept from choking on his own bile as he mouthed the figure: “Sixty-eight thousand dollars.”
That’s all I remember of our conversation. I’m sure I said something. But I was so benumbed by his outrageous demand that I couldn’t think straight. To add acid to the irony, he wanted the whole thing in cash. Of course, I didn’t have that kind of (p. 57) money. So what we worked out was the culmination of the devilish deal he had tied me to. I had to agree to pay him $12,000 cash. The balance was to be paid off over five years, plus interest. My salary had to remain at the same level and my expenses in the same range. So, in fact, what I was doing was paying him the profits of my company.
I didn’t know where in the hell I was going to raise the money, but I had made up my mind to do it. In the end, most of the cash came from my new home in Arlington Heights. I managed to get an increase in the mortgage, much to Ethel’s dismay. Her apprehensions about my becoming Mr. Multimixer had been laid to rest at this point, and I don’t think she ever got over the shock of discovering that we were nearly $100,000 in debt. She couldn’t seem to handle it.
For me, this was the first phase of grinding it out— building my personal monument to capitalism. I paid tribute, in the feudal sense, for many years before I was able to rise with McDonald’s on the foundation I had laid.

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.

Venture Capitalists Invested 37% Less in Start-Ups in 2009

(p. B5) Venture capitalists, whose money provides fuel to technology start-ups, last year invested the lowest amount in such companies since 1997, according to a report from PricewaterhouseCoopers and the National Venture Capital Association released on Friday.
. . .
In 2009, venture capitalists invested $17.7 billion in 2,795 start-ups — 37 percent less cash and 30 percent fewer deals than in 2008. Internet companies, which have excited investors for more than a decade, took a big hit as investment declined 39 percent.

For the full story, see:
CLAIRE CAIN MILLER. “Venture Capital Was Tight for Tech Start-Ups in ’09.” The New York Times (Fri., January 22, 2010): B5.
(Note: ellipsis added.)

Entrepreneur Kurzweil Brought Sunshine to Stevie Wonder’s Life

(p. 265) On the snowy morning of January 13, 1976, . . . , there was unusual traffic on Rogers Street. Outside the gray one-story buildings with their clouded tilt-out windows, vans from various television channels maneuvered to park. A man from the National Federation of the Blind struggled over a snow bank onto the sidewalk and began tapping earnestly to get his bearings. A dark-haired young man set out on a three-block trek to the nearest vendor of coffee and donuts for the gathering media. In the room at number 68, two engineers poked at a gray box that looked like a mimeograph machine sprouting wires to a Digital Equipment Corporation computer. Several intense young men in their early twenties debated when to begin a demonstration of the device. The short, curly-haired leader of the group, twenty-seven-year-old Raymond Kurzweil, refused to start until the arrival of a reporter from The New York Times.

The event was a press conference announcing the first breakthrough product in the field of artificial intelligence: a reader for the blind. Described as an “omnifont character recognition device” linked to a synthetic voice, the machine could read nearly any kind of book or document laid face down on its glass lens. With a learning faculty that improved the device’s performance as it proceeded through blurred, faded, or otherwise illegible print, the machine solved problems of pattern recognition and synthesis that had long confounded IBM, Xerox, and the Japanese conglomerates, as well as thousands of university researchers.

. . .
(p. 266) Stevie Wonder, the great blind musician, called. He had heard about the device after its appearance on the “Today Show” and it seemed a lifelong dream come true. He headed up to Cambridge to meet with Kurzweil.

. . .
As Kurzweil remembers, “He was very excited about it and wanted (p. 267) one right away, so we actually turned the factory upside down and produced a unit that day. We showed him how to hook it up himself. He left with it practically under his arm. I understand he took it straight to his hotel room, set it up. and read all night.” As Wonder said, the technology has been “a brother and a friend . . . . without question, another sunshine of my life.” Wonder stayed in touch with Kurzweil over the years and would play a key role in conceiving and launching a second major Kurzweil product.

Source:

Gilder, George. Microcosm: The Quantum Revolution in Economics and Technology. Paperback ed. New York: Touchstone, 1990.
(Note: italics in original; all ellipses added except the ellipsis internal to the last paragraph, which was in the original.)

Self-Financing was Key to Chips & Technology’s Survival

At a key juncture, Gordon Campbell’s self-financing was essential to the survival of his Chips & Technology firm. Chips & Technology produced the chip technology that was the foundation of the clones of the IBM AT (286) PCs. And Chips & Technology turned out to be profitable after one year.

(p. 228) Campbell remembered the words of Nolan Bushnell: “You are not a real entrepreneur until you’ve got to meet a payroll from your own bank account.” There was truth in those words. There was a sense in which Gordon Campbell was still real a real entrepreneur.

If you are a real entrepreneurial hero, you do not get your start by rolling out of bed one morning in rumpled pajamas to answer the telephone at Oakmead Plaza and find that it’s the man from Kleiner-Perkins announcing you’ve won the lottery (for spinning out of Intel with Dr. Salsbury and the rest). Real entrepreneurs do not usually become paper millionaires and Ferrari corsairs in a public offering without ever experiencing the warm sensation of a profitable year. Raphael Klein had put up his house to save Xicor; he was an entrepreneur. In the desperate silicon panic of the summer of 1985, Gordy Campbell too was going to join the club.

The venture capitalists were all waiting for Campbell to fail. He had no chance of money from them. But other sources would also be difficult. Campbell had been careful to buy no real assets and channel all his money into intellectual capital. Morris Jones’s Amdahl 470–a powerful mainframe that ran the company’s CAE programs—was a second-hand machine, leased by the month. The rest of their CAD and CAE equipment was either designed by Jones and his team. including two defectors from Silicon Compilers, or it consisted of various IBM workstations. The company’s most valuable asset, beyond its ideas, was a compaction algorithm that Jones had developed from a Bell Labs model. It allowed the scaling down of CMOS technology into difficult non-linear volt warps near 1-micron geometries. Couldn’t mortgage that at a bank.

Campbell could scarcely believe what was happening to him. There was nothing to do but use his own personal money to keep the company afloat. But if the truth be known, his personal funds were running a bit low. It was out of the question, of course, to sell the Ferrari. He could hardly putter forth onto Route 280 and down toward Sand Hill Road like a beggar with some tin cup from Toyota. Campbell’s other wealth, though, was mostly in SEEQ stock that was then selling at $2 per share and going down.

Campbell would have to sell at the very bottom of the market and use his own last personal wealth to finance a company with no revenues and a burn rate of some $4,000 a day. He gasped and did it. He went through a couple of cliff-hanging months, with shortened fin-(p. 229)gernails. But the act of personal sacrifice was catalytic. Within a few weeks, several of the employees and other friends also put up some money, including $200,000 from his financial officer, Gary Martin. Before the year was our he had raised another indispensable $1.5 million from a number of companies in Japan, including Kyocera, Mitsui, Yamaha, and Ascii, Kay Nishi’s PC software firm that represented Chips in Asia. By July, the IBM graphics enhancement chip set was finished and Chips & Technologies was a company almost fully owned and controlled by its employees.

By July 1986, when the chip set for the IBM AT computer was finished, most of the world had decided that the AT would be the next major personal computer standard. In the United States, Tandy, PC’s Limited (now Dell), and several other then unknown manufacturers bought the Chips & Technologies set. Tandy became the leading AT compatible producer, assembling the computers in a factory in Fort Worth manned by immigrants from twenty countries led by an immigrant from Japan. Among the purchasers of the Chips set in Europe were Olivetti, Apricot, Siemens, and Bull. Nishi signed up NEC, Sony, Epson, and Mitsubishi in Japan; Goldstar, Samsung, Daewoo, and Hyundai in Korea; a number of companies in Taiwan; and the Great Wall Computer Company of China. Most of these firms –plus Compaq and a slew of producers of IBM add-in graphics gear–also were buying the graphics enhancement chip set.

At the outset. Campbell had boldly predicted profitability in a year and a half: In fact, the firm was profitable by the last quarter of the first year.

Source:

Gilder, George. Microcosm: The Quantum Revolution in Economics and Technology. Paperback ed. New York: Touchstone, 1990.