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Hamburger Heaven

How McDonald's created modern-day franchising
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My kids don't like Burger King. Or Wendy's. Let me drive by a McDonald's, however, and suddenly there's a chorus of entreaties emanating from the backseat. Like Pavlov's dogs, my children know when to start salivating.

I've never understood their selectivity. To me there's not much difference between McD.'s, as we call it, and its three or four look-alike, taste-alike competitors. But I think I'm in a minority, and I don't mean just in my family. With nearly 10,000 restaurants worldwide, the company sells as much fast food as the next three chains combined.

These figures, duly verified by INC., come from an engaging and informative -- if sometimes cloying -- history of the company called McDonald's: Behind the Arches (Bantam Books, 1986), by former Business Week correspondent John F. Love. What makes the book required reading, at least for anyone remotely connected with franchising, is its explanation of how McDonald's Corp. outstripped the competition back when the fast-food market was up for grabs.

No one in 1955 would have expected the company to come out on top. To be sure, the McDonald brothers' original drive-in in San Bernardino, Calif., was doing a land-office business, and, yes, the guy who had just bought the franchising rights, Ray Kroc, was a smooth talker. But he had no money to speak of, and no experience in the restaurant trade. He wasn't even first off the mark. Such established chains as Dairy Queen and Big Boy sandwich shops already dotted the landscape, and aggressive new competitors like Kentucky Fried Chicken and InstaBurger King (later shortened to Burger King) were eagerly marking out their turfs.

What Kroc did have was the most effective strategy for managing his business. As a milkshake-mixer salesman, Kroc had seen plenty of franchised outlets go under, plagued by poor management and uneven quality and milked by their parent companies. His system would be different. He would establish a level of control over operations no franchisor had ever dreamed of, let alone tried to implement. Yet, paradoxically, he would tie his own fate to the initiative and hustle of his franchisees.

To Kroc, half the battle in fast-food franchising was controlling exactly what the franchisees served and how they served it. He set up a training program that was and is the most extensive in the industry. He spelled out operating procedures in a manual that by now has grown to 600 pages, and he hired field inspectors to visit restaurants and grade the operators. He also demanded unheard-of levels of quality from his suppliers. Astonished potato distributors, Love reports, would watch wide-eyed while young McDonald's technicians measured potatoes' moisture levels with funny-looking devices called hydrometers, rejecting potatoes whose solids content fell below McDonald's standards. Meat packers suspected of cutting corners on their hamburger -- a common practice at that time -- might find McDonald's inspectors visiting their plants at 3:00 a.m., ready to cancel contracts if they found any doctored meat.

Other chains had standards too -- just not as strict. "I don't think we had the dedication to quality [McDonald's] had," one competitor from the 1960s told Love. Another explained, "We all had star stores that could keep up with the best of McDonald's stores, but on a company-wide basis, nobody compared."

What helped set McDonald's apart was its built-in incentive for franchisees to maintain the standards. Dairy Queen, Burger King, and others made money by licensing whole territories -- master franchises -- in return for sizable up-front payments. Kroc, who believed that "when you sell a big franchise territory you give up the business to the man who owns the area," sold franchises for only one outlet at a time. Operators would be considered for more only if they lived up to McDonald's strictly policed standards.

In the early years, this passion for control cost Kroc dearly -- the reason, no doubt, that none of his competitors chose to emulate him. Other franchisors, says Love, got by with a central staff of 5 or 10 people, who had little to do but sell new franchises and carry the cash to the bank. Kroc's dedication to quality and rigorous supervision required a staff several orders of magnitude larger -- but his only sources of income were individual franchise fees and royalty rates, both kept low to attract new operators. In McDonald's first six years of operation, its restaurants grossed some $75 million. McDonald's Corp., with its high overhead, netted a total of only $159,000 over the same period. Never mind: Kroc looked to the long term, not to quarterly earnings reports. And what he created in the long run was the one thing no other chain could duplicate: nationwide standardization. McDonald's was the first to guarantee its customers, whoever and wherever they might be, reliable food and quick service in a pleasant restaurant with clean bathrooms.

At first glance, Kroc's passion for uniformity seems like a relic of another, more authoritarian era. Today, anyone responsible for managing remote locations -- essentially what a franchisor does -- learns different precepts. Trust your on-site managers. Encourage their entrepreneurial spirit. Don't try to dictate operations from a distant, unresponsive central office. To see the lessons of McDonald's as dated, however, is to misread both Kroc's system and the nostrums of modern management. Kroc might spell out operations in detail, "right down to the temperature required for french fries." But for more than a decade he did virtually no marketing, relying instead on his franchisees to figure out how to sell the product. And since nearly all his revenues came from royalties on sales, he essentially entrusted his company's success to their efforts.

This gamble on mutual dependence paid off: franchisees poured energy and money into various forms of promotion. An operator in Minneapolis tried radio jingles. One in Milwaukee developed direct-mail campaigns. Groups of franchisees set up regional cooperatives to buy ads, and some began experimenting with television. A five-store operator in Washington, D.C., hit on the idea of sponsoring a children's TV program called "Bozo's Circus," hiring a young announcer named Willard Scott (now weatherman on NBC's "Today" show) to play Bozo. Later the franchisee's ad agency transformed Scott's Bozo into another TV clown character, this one dubbed Ronald McDonald. Eventually, of course, McDonald's Corp. created national marketing programs, including the now-ubiquitous Ronald. But the pioneering task of creating a market fell almost exclusively to the franchisees.

In effect, Kroc established in those early years what the book In Search of Excellence would later call a system of simultaneous loose-tight properties. "Organizations that live by the loose-tight principle," write Excellence coauthors Peters and Waterman, "are on the one hand rigidly controlled, yet at the same time allow (indeed, insist on) autonomy, entrepreneurship, and innovation from the rank and file."

A paradox? Not if the controls refer to a "set of shared values and rules about discipline, details, and execution" around which experimentation takes place. That, in a nutshell, was McDonald's. Franchisees knew exactly what was expected of them, but they also knew exactly where the expectations ended and the hopes began. Few young franchise operations today would find this particular lesson out of date, and Love's account of McDonald's teaches it well.

There are times, it should be said, when Love's adulatory attitude toward his subject may make you gag. Kroc was "an inspired entrepreneur"; his staffers were "young tigers, fiercely loyal to Kroc and dedicated to his mission"; and so on. Still, unlike a lot of fawning profiles, this one doesn't omit the warts. Kroc was a domineering, opinionated individual, quick to anger and slow to forgive; he had bitter feuds with a lot of people who had helped him, including the McDonald brothers themselves. And McDonald's as a company has had its share of tribulations, ranging from the famous worms-in-the-hamburger rumor of the last decade to the perennial plastic-food charges of nutritionists and social critics. Though Love typically puts a favorable gloss on the company's history, he never fails to relate the facts.

And it's the facts, in the end, that are as hard to argue with as my children. Franchising is a slippery business, one that has frequently left entrepreneurs on both sides of the contract hanging by their fingertips. Kroc, and McDonald's, evidently did it right.




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