SPEAKER_03: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising.
SPEAKER_00: Hello, I'm Emma Twin. I'm a virtual twin for Dassault Système. My job, simulate multiple medical conditions on myself to develop new treatments for all. Basically, I'm like a crash test dummy for healthcare. It may sound like science fiction, but in fact, it's just science. I explain it all on my LinkedIn account. Look up Emma Twin from Dassault Système.
SPEAKER_04: 50 Things That Made the Modern Economy with Tim Harford
SPEAKER_01: The way Ray Kroc tells the story, when he encouraged the McDonald Brothers to open more hamburger restaurants, they winced. The year was 1954. The place? San Bernardino, California, then a quiet town on the edge of the desert, some 50 miles east of Los Angeles. Kroc sold milkshake machines. Dick and Mac McDonald were among his best customers. Their restaurant
SPEAKER_01: was small, but sold lots of milkshakes. Clearly they were doing something right. But they didn't want to do more of it, and Mac McDonald explained why. We sit out on the porch in
SPEAKER_04: the evenings and watch the sunset. It's peaceful. Opening more branches would be a headache,
SPEAKER_01: travelling around, finding locations, vetting managers, staying in motels. Why bother? They were already making more money than they could spend. That might sound reasonable to many people, but not to Ray Kroc. His approach was utterly foreign to my thinking, Kroc later recalled. He convinced the brothers to let him expand their restaurant chain. By the time Kroc died, three decades later, McDonald's had thousands of restaurants, bringing in billions of dollars. Which goes to show successful entrepreneurs aren't all the same. They want different things, they have different talents. Take Dick and Mac. They were brilliant at figuring out more efficient ways to make hamburgers. Working with a local craftsman, they invented a new kind of spatula, a new dispenser that squirted the same amount of ketchup and mustard every time. A rotating platform to speed up assembling of burger, bun and condiments. What Henry Ford had done for cars, the McDonald brothers did for hamburgers and french fries. They broke down processes into simple, repetitive tasks. This meant they could churn out food quickly, cheaply and consistently. There was nothing else like it. But when it came to the wider world, the brothers seemed to have been fairly clueless. When competitors started peering through the windows, taking out notepads and sketching plans, Dick and Mac laughed about it. When anyone asked about those ingenious condiment dispensers, they cheerfully named their craftsman friend. None of them had bothered to patent the design. Some wanted more than snatched sketches, so the brothers sold franchises, after a fashion. For a one-off fee, you could buy blueprints to their building, with the golden arches, a 15 page description of their speedy service system and a week's training. After that, the franchisees were on their own. Dick and Mac didn't expect that their trainees would serve the same menu, or even use the same name. When their very first franchisee mentioned that he would also call his new restaurant McDonald's, Dick replied, what the hell for? Into this smooth running kitchen and half-baked franchising operation walked a man with different skills and desires. Ray Crock was in his 50s and managing health problems from diabetes to arthritis. But he was keener on money than peaceful sunsets, and he loved life on the road. Crock later wrote, finding locations for McDonald's is the most creatively fulfilling thing I can imagine. Whether the
SPEAKER_01: brothers had rethought French fries, Crock now rethought the franchise. The idea itself wasn't new. In ages past, a monarch might grant you a franchise to organise a market, say. The exclusive right to do a certain thing in a defined area for a set time. In the 19th century, you might buy the exclusive right to sell Singer sewing machines in your local area. Nowadays, franchise operations are everywhere. Stay in a Hilton or Marriott, rent a car from Hertz or Europcar, shop at a 7-Eleven or Carrefour, and you're likely to be dealing with a franchise owner. The idea of the business format franchise seems to have started in the 1890s with Canadian Martha Matilda Harper, who built an international network of beauty salons. She was a former servant, and her franchises transformed the lives of other servant girls. But it was 1950s fast food that gave the franchise its modern form, with not only McDonald's, but Burger King, Kentucky Fried Chicken, and many now forgotten brands. Ray Crock's big insight was the importance of conformity. You don't just sell the right to use the company's name and learn its methods. You impose an obligation to do things in a certain way. McDonald's opened a full-time training centre, Hamburger University, drilling students in subjects such as which kind of potatoes to buy. Inspectors went round to write 27-page reports on whether franchisees cooked food at the right temperatures and kept the bathrooms clean. At first glance, the appeal to the budding restaurateur isn't obvious. Wouldn't you want to design your own branding and develop your own menu? Why pay the McDonald's corporation $45,000 plus 4% of gross sales just so they can send an inspector to watch you scrub your own toilets? Well, much of what you're paying for is the benefit of the brand. And if you're being monitored to make sure you don't cut corners that damage the brand, you can feel reassured that your fellow franchisees are too. As for the franchisor, why not own and operate new branches yourself? Many companies do both. McDonald's owns about 15% of its 36,000-odd outlets. But franchisees bring a lot to the company. There's cash. A McDonald's restaurant can cost more than a million dollars to launch. Franchisees also provide local knowledge, especially important if you're expanding into a new country with an unfamiliar culture. And there's motivation. An owner-manager with their own money at stake might put more effort into keeping costs down than a manager on a corporate salary. The economist Alan Kruger found evidence that may support this idea. Workers and shift supervisors apparently earn more in company-owned fast-food outlets than franchised ones. Of course, both sides bear some risk. The franchisor has to trust that the franchisee will work hard. The franchisee has to trust that the franchisor will create and advertise exciting new products. When both sides worry about the other side shirking, it's known as double-sided moral hazard. A branch of economics called agency theory tries to understand how franchise contracts solve this problem through their mix of upfront fees and percentage payments. But it seems to work. Perhaps because, like Kroc and the McDonald brothers, different entrepreneurs want different things. Some people want the freedom to run their own business day-to-day, but aren't interested in developing products or building a brand. One of the McDonald brothers' early franchisees decided he didn't much like their golden arches. So he got his builders to make them pointy and named his restaurant Peaks instead. Those were freewheeling times. These days, the division of entrepreneurial labour is as regimented as a carousel full of hamburgers.
SPEAKER_00: We relied on John F. Love's book, McDonald's, Behind the Arches. For a full list of our
SPEAKER_04: sources, please see bbcworldservice.com slash 50things.
SPEAKER_02: For teenagers like me, it's hard to imagine a world where the tech we take for granted didn't exist. So in our new podcast, WorldWiseWeb, 12 of us from around the world will be spending time with the people who invented it, finding out how they came up with their ideas, and
SPEAKER_02: asking for advice. That's WorldWiseWeb from the BBC World Service.
SPEAKER_04: To hear more about it, search for WorldWiseWeb wherever you get your podcasts.
SPEAKER_03: And look out for the first episode on the 10th of January.
