BREAKPOINT CONTENTS
1
2
3
4
5
6
7
8
9
10
11
12
BONUS
Introduction
Reindeer
Networks
...........................................................
Milkshakes
Burgers
Credibility
................................................................i
Ants
Anternets
Manure
...........................................................
Acknowledgments
Cannibals
Brains
Internets
...........................................................
Appendix
Slaves
Neurons
The Web
...........................................................
Notes
Bread
Mobile
Social
...........................................................
Index
Chiefs
Search
Context
...........................................................
Crowds
Poets
Shakespeare
...........................................................
Squirts
Profit
Traffic
...........................................................
Pheromones
Language
Mirrors
...........................................................
EEG
ESP
AI
...........................................................
Conclusion
Termites
Extinction
...........................................................
Afterword:
The Internet is
a Brain
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
BONUS
i
Milkshakes
Burgers
Credibility
n 1951, Raymond Albert Kroc was a milkshake mixer salesman in a dead
end job. At 52 years old, his hopes for doing something more with his
life had long since faded. His background was in music but he had always
dreamed of running a business. His first venture was a music store that he
started while in high school. That business left him a penniless teenage dropout, so he joined the Red Cross toward the tail end of World War I. When he
returned from service, he spent the next 40 years doing odd jobs, eventually
landing at Prince Castle, selling their newfangled milkshake mixers.
A few years into his new job, one of Ray’s customers started purchasing
increasingly large numbers of mixers for a small restaurant in San Bernardino, California. Ray couldn’t figure out why they needed so many mixers so
he drove out from his home in Des Plaines, Illinois to learn more. Ray was a
consummate salesman; his hope was to figure out why this store needed so
many mixers and then use that insight to sell more of them.
But what Ray found was something that surprised him. The restaurant
was buying more mixers because they were actually selling milkshakes. Many,
many milkshakes, in fact. The restaurant was like no other that he had seen:
there were no seats or tables. Instead, the crowd lined up to place orders at
a window. Ray was so blown away that he convinced the owners to let him
open his own franchise back in Illinois.
The Des Plaines restaurant quickly became as successful as the one in
San Bernardino. And with that, Ray began opening more franchises. The
history of McDonald’s had begun.
Most businesspeople have heard some version of the McDonald’s story,
but few understand that underlying the success of McDonald’s is two stories,
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not one. The first story is how the original owners, the McDonald brothers,
created a new model for selling food that turned the whole restaurant industry upside down. They opened a single “fast food” store and ran it remarkably well. It was this small business that Ray Kroc franchised, exploited, and
then bought for a mere $2.7 million. The McDonald brothers invented fast
food. Ray Kroc furthered that concept, but his real innovation had less to do
with food than it did with the laws of networking.
Kroc did not build his McDonald’s empire on a foundation of food.
People may remember him as the king of hamburgers, but that’s not the way
he thought of himself. When asked what business he was in, Kroc never said
restaurants or fast food. Instead, he would respond, as he did one summer in
1974 to a handful of MBA students: “Ladies and gentlemen, I’m not in the
hamburger business. My business is real estate.”
Kroc saw the strength in the McDonald’s business model, which focused
on speed and consistency, but he realized that in order to expand, he would
need a network of restaurants. To do that, he studied how people travel, work,
eat, and live. He strategically purchased land within those hubs of interaction
and placed his restaurants right in the center of the action. Fast food was incidental other than the fact that it was particularly suited for this model, as it
did not require a change in behavior. Kroc built one of the first modern social
networks, just using real estate and fast food instead of computers and web pages.
I
Kroc studied people, but he could have just as easily studied any social animal to learn about network distribution and food habits. Ants, bees, and other social insects, for example, forage for food in predictable ways. They leave
their nests and hives, travel short routes, and return home. People do something very similar. We too are social animals. We forage, live in communities,
and stay relatively close to home. Our routes are predictable. Kroc realized
this instinctively, and built his establishments around these habits. He built
franchises in areas that had the most traffic, that were densely populated, and
could become intersections of social life.
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Kroc moved quickly, knowing that he had to dominate the landscape
before anyone else could. His first McDonald’s was opened in 1955; by 1959
he had one hundred locations and had already sold his hundred millionth
hamburger. By 1968, McDonald’s became the largest landowner on planet
earth, handily surpassing the previous record holder, the Roman Catholic
Church. It was fast becoming a cult, a religion, a staple, an American icon.
McDonald’s saw exponential growth on the order of what Facebook is seeing today, albeit with hamburgers instead of people, and real estate instead
of websites.
But Kroc also knew that networks have limits, and he was smart enough to
avoid exceeding a breakpoint. Kroc was eager to grow, but he was cautious not
to oversaturate any market with too many McDonald’s restaurants. He carefully
studied geography and plotted all McDonald’s restaurants such that they were
sufficiently far away from each other. Once a geographic region became saturated
with too many McDonald’s and hit a breakpoint, Kroc stopped and began a shift
from growth in stores to increased quality and profitability.
Figure 1: The Breakpoint of McDonald’s
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The McDonald’s network is not about food, not even about real estate;
rather, it is about geography. Geography is subtly but importantly different than the old adage of “location, location, location.” While a high-end
restaurant would do well to locate in an affluent area with a high density of
foodies, McDonald’s franchises are located irrespective of affluence. While
a pizza shop may require a high-density location such as a strip mall with a
large anchor tenant, McDonald’s are rarely located within larger subsystems.
Instead, McDonald’s restaurants only need to be located in areas with people
who are mobile, eat food, and can afford to buy fast food. This leaves franchises open to locate virtually anywhere. Thus the map of McDonald’s locations in
the United States looks very similar to the map of human population density:
Figure 2: McDonald’s Locations
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Figure 3: Population Density of the U.S.
McDonald’s succeeded because Ray Kroc built a network that was so
rich and robust that very few others have been able to penetrate. In the burger wars, outside of McDonald’s, Wendy’s and Burger King, all other large
multi-national chains have failed. For every Burger King and Wendy’s, there
were countless other competitors to McDonald’s that failed spectacularly: going directly against a large network is as futile as going after a large monopoly.
II
Once a market is dominated so ubiquitously, there is little opportunity
to compete at the same level. Instead, smaller businesses must adapt and
focus on owning local markets. It turns out that large networks do have disadvantages; namely, that they are nondescript, have a nonspecific customer
base, and generally are not terribly special. These weaknesses present an
opportunity for small businesses to thrive.
Look no further than two independent companies with the same name
for a great set of examples. Consider Varsity, a burger joint in Anaheim,
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California. As a company, it couldn’t be more different than the McDonald’s empire. Varsity boasts a single location as compared to McDonald’s
more than 30,000 restaurants. The company’s formal mission is to create “a
fun gathering place to enjoy good old fashioned burgers…” And it is. The
restaurant is always crowded; oftentimes folks can’t even get a table. Varsity enjoys great reviews, both online and through word of mouth, and is a
landmark in the community. The owners are longstanding members of the
Downtown Anaheim Association and they sponsor local schools and sports
teams. They have done what McDonald’s cannot—created a fixture in the
community, a local attraction.
Interestingly but not surprising, there is no McDonald’s within the vicinity of Varsity, nor is there a Wendy’s or Burger King:
Figure 4: Varsity Anaheim
The same is true of another fast food establishment in Atlanta, Georgia.
This restaurant, only by coincidence also named Varsity, has been a fixture in
the area since 1928. It too has created a local experience that no other burger joint, including McDonald’s, can match. The location of the Varsity has
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become a fixture in Atlanta. Three US Presidents have dined there, and the
Coca-Cola Company chose the Varsity as the place to launch “New Coke.”
It is the largest drive-through in America, spanning over two acres, with lines
out the door and waits as long as one hour. But people keep coming back
for the fast food that takes a minute to make and an hour to receive. In a
single day, the Varsity serves upwards of 30,000 people, and makes two miles
of hot dogs, a ton of onions, 2500 pounds of potatoes, 5,000 pies, and 300
gallons of chili from scratch.
Unlike the Anaheim Varsity, this restaurant is not a family place; it is more
geared toward college kids. It is fun, rowdy, off-putting, and not terribly clean.
The Atlanta Varsity became a local phenomenon in its own way. But like the
other Varsity, the one in Atlanta dominates its market and the big franchises
all steer clear. Throughout its remarkable history, it has remained local, having
expanded to only seven locations, all in close proximity to the original.
Figure 5: Varsity Atlanta
While McDonald’s regularly places restaurants in close proximity to
Wendy’s and Burger King, McDonald’s avoids areas where there is a Varsi-
BONUS viii
ty style restaurant. McDonald’s is probably faster and more consistent, and
serves food that has been perfected by a small army of the world’s best food
scientists and marketers. Yet they simply cannot compete with a restaurant
like the Atlanta Varsity that has US Presidents singing their praises, or the
Anaheim Varsity that has customers yelping “the manager knows my family
and greets us by name every time” and “recently moved into the neighborhood…the cook came out to thank us for trying a Varsity burger” and “anytime I have friends over from other cities I always take them there.”
Just as McDonald’s has grown to dominate the landscape of the United States, small businesses must dominate their own markets. The Varsity
restaurants dominate their respective markets so much so that the venerable
McDonald’s – with all its marketing might – cannot penetrate. But just as
McDonald’s isn’t in the burger business, the Varsity stores are also in a business not obvious to the naked eye. Both Varsity restaurants cater to people
looking for a certain experience: the manager greeting them by name, the
feeling their business is appreciated, the pride of showing local flavor to
friends from out of town. These experiences can’t generally be found at McDonald’s, and McDonald’s must cede those locations as a result.
Of course, there are more than a few advantages to being a huge
multi-national corporation, but small businesses also have many unique advantages to leverage. The most important of these are authenticity and credibility. For a brick-and-mortar store, being and acting local gives a company
almost instant authenticity. A local company with a presence on Main Street
that supports the local middle school enjoys a built-in authenticity that is
much more difficult for a large chain to achieve.
All of these ideas are closely related to the concept of building strong
networks. Both the network of people who frequent McDonald’s and that
of the two Varsity stores are incredibly strong but in fundamentally different ways. The network of people that go to McDonald’s is humongous – A
majority of Americans can place an order from there without consulting the
menu. Yet being a McDonald’s customer does not establish a strong bond
among people. Imagine you meet someone on a bus and find that the only
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thing you have in common with her, besides the fact that you each have
four limbs and require oxygen, is that you are both occasional McDonald’s
customers. You would probably conclude that you have nothing in common
with this person. The ties that bind together the McDonald’s network are
broad, to be sure, but not deep. On the other hand, patrons of the Varsity
shops share much stronger ties, even though the overall network is smaller. It
is a network advantage that can be exploited only by a small business mentality.
III
The first rule of networks for small businesses is to act local and “dominate small.” Often, small businesses cannot dominate a large market. The
trick for a small business is to redefine the market until it is small enough to
own. Brick and mortar stores can easily start with their local geography, aim
to reach every target customer in the neighborhood, and make those customers brand ambassadors.
Many find this surprising, but Mark Zuckerberg did something similar, albeit online, when he started Facebook. When the social network was
launched in February of 2004, MySpace was the dominant social network
and there was no hope for Facebook to compete. In a stroke of brilliance,
Zuckerberg limited his network only to Harvard students. While others
thought of the internet as a way to go big, Zuckerberg was thinking small.
That allowed Facebook to dominate a much smaller market instead of risking competition with then dominate MySpace. Within a few months, half
of Harvard’s student body was using Facebook. Facebook was authentic to
Harvard in a way that MySpace was not and could never be. It became Harvard’s online Varsity, and “McSpace” had no chance of competing.
Only after hitting a breakpoint and dominating the Harvard market did
Facebook open to students at other Ivy League schools. Slowly, it allowed
all college students, then high school students, to join. It took another three
years before Facebook opened the network to the world. Facebook adeptly
moved from a Varsity model to a McDonald’s approach while remaining
true to its local roots. The growth curve of the Facebook social network is
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suspiciously similar to that of McDonald’s burger network.
All businesses can learn from the Facebook story. For the largest businesses with the biggest goals, this “network of networks” approach is a great
way to move into a market. If your sights are broad, first tackle a smaller
market and then use that network dominance to move into other markets
until you reach your ultimate goal.
For smaller businesses, it is critical to focus on a market that can truly
be owned. If Zuckerberg was thinking small, he could have limited his network to Harvard and reaped the rewards of a small but dominant network.
That would have worked perfectly well, and his dominance at Harvard would
likely still persist today. The idea for a small business is to focus on an appropriately sized market, geography or category, and dominate that niche.
There are many companies using this strategy to compete against a dominant monolith. CafeMom is a great example of a company that built a vertical
network to compete directly with Facebook. It did precisely what Facebook
did before it, effectively using Facebook’s own strategy against it. CafeMom
was started by two men who were looking for a way to help their wives meet
other moms with similar interests. They narrowly focused the CafeMom network on moms and their needs. The company describes the social network in
this way: “Moms come to CafeMom to connect, give and get advice, be entertained, and make friends.” In other words, Facebook for moms. The network
was founded in 2006 and as of 2013 it boasts over ten million unique users
every month. In less than five years, it became one of the top 200 most visited sites on the internet. Time Magazine counted the network as one of the 50
best websites in 2011. CafeMom generates more than $30 million in revenues
each year, has raised $17 million in funding, and is valued at more than $150
million. For its target audience (moms), the site offers an experience that no
other network can match. And the company continues to perfect that vertical
strategy, going after more niche markets: in 2012, it launched a network specifically geared toward Hispanic moms called MamásLatinas.
Both CafeMom and the Varsity restaurants were successful precisely because they remained focused on a target market. But that also limits their
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ability to grow beyond their respective markets. That is where Facebook’s
“network of networks” model can be applied, online or offline. Facebook
was able to successfully use this strategy to grow beyond Harvard but even in
the burger wars, smaller restaurants have used this strategy to great success.
Consider In-N-Out, the West coast fast food chain that has successfully expanded regionally to compete with McDonald’s. In-N-Out was actually the
first ever drive-thru restaurant (all others used carhops), but it never franchised. To this day, it remains family-owned and operated.
Like the Varsity fast food stores, and even McDonald’s, In-N-Out started with humble beginnings: a single store in 1948 located in Baldwin Park,
California. In-N-Out dominated its market and created a strong barrier to
entry locally, just as each Varsity did in Anaheim and Atlanta.
But then, they expanded their network just as Facebook has done online. They waited three years to open a second restaurant, less than ten miles
away from the first. In the new restaurant they recreated the same experience as the first, with the same results. From there, the founders expanded,
concentrating on locales that they could dominate, but in markets where
they could oversee each restaurant closely to ensure it followed the original
model. Across the next 25 years, 16 more stores were opened, all in Los Angeles County. The company was profitable enough—and demand was high
enough—that it could have grown much faster, but the company’s owners
insisted upon controlling growth and opening stores in clusters. Today, the
company boasts 281 restaurants but remains limited to five states.
In-N-Out put a restaurant in San Francisco’s Fisherman’s Wharf in 2001,
a major coup because business leaders and shopping center managers had
previously refused all fast food bids, including one from McDonald’s. One
such manager, Chris Martin, explained it this way to the San Francisco Chronicle: “It isn’t as if we love fast food. Ordinarily, all of us would be up in arms
about a fast-food operation coming to Fisherman’s Wharf. This is different.”
The idea that this is different is exactly how In-N-Out has been able to
achieve such great success. The chain is just like many other burger chains:
they sell burgers, fries, and shakes. The menu is surprisingly sparse. From
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the beginning, the goal was to produce only a few items and make them as
high quality as possible, including cooking the fries and burgers to order and
using only fresh ingredients. In-N-Out does not use any previously frozen
ingredients, which is rare for any restaurant, much less a fast food joint. In
fact, they don’t even have freezers in any of their stores. To achieve this, the
company does not open any store more than a day’s drive away from their
regional distribution center, so that fresh food can be delivered quickly.
In-N-Out’s customer network is both strong and vocal. The network includes many who don’t support any other fast food—famous chefs including
Gordon Ramsay, Thomas Keller, and Julia Child are all devotees. In his exposé on the unhealthy and unethical practices of the fast food industry, Fast
Food Nation author Eric Schlosser praised In-N-Out for its quality food and
exemplary employee relations. In-N-Out is a rare example of a chain that has
created a strong and supportive network in an industry where the product
itself (fast, unhealthy, impersonal food) makes earning that kind of loyalty
difficult. They’ve done it by being local, authentic, and credible. Customers
and employees alike trust In-N-Out, and unless they jeopardize that trust,
their dominance will continue.
IV
Businesses don’t have to create their own network (or even have more
than one location) to benefit from network strategy. Most businesses aren’t
in the network-creation business, but almost all can leverage other networks.
Today, the online world of social media is more important than ever to all
companies, both online and offline. Consider that two loyal Atlanta Varsity
customers are part of Varsity’s network, even if the customers have never
met or interacted. There is a link between Customer #1 and Varsity and a
link between Customer #2 and Varsity, and those links are strengthened every time each customer enjoys a Varsity burger. Then there is Varsity’s Facebook page, which has almost 100,000 “likes” and thousands of check-ins.
If Customer #1 “likes” Varsity’s Facebook page, that connection becomes
stronger. If Customer #2 adds a photo of himself eating a Varsity burger
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and Customer #1 comments on that photo, now the link between both customers and Varsity has been strengthened, but even more importantly, a new
connection has been made between Customer #1 and Customer #2. Repeat
this a couple hundred or a couple thousand times, and the network takes
on a life of its own. It is wider, deeper, and stronger than the sum of the
company’s one-way relationships with its customers. This creates a strategic
advantage that the company can enjoy by leveraging the network in subtle
but meaningful ways.
Naked Pizza is one company that has figured out how to utilize this network strategy to great success. The business collected followers on Twitter,
market by market, to expand from its native New Orleans to 20 locations
in the United States and abroad. Naked Pizza would blanket a small market,
tweet repeatedly, gain a following, and then aggressively market the launch of
an upcoming restaurant—effectively growing a customer base before opening a store. Once Naked Pizza had a critical mass of Twitter followers in a
given market, they opened a store and used the network to generate excitement and demand. Entrepreneur Magazine noted that the buzz for Naked
Pizza was disproportionate to its size, and The New York Times highlighted
Naked Pizza as one of 11 companies whose Twitter strategies should be emulated. The company’s founders perhaps stated it best when they explained
that rather than running a pizza company, they are actually “running a social
media operation that happens to sell pizza.” Like Ray Kroc before them, the
founders of Naked Pizza realize that it is the network rather than the product that really defines their business.
Naked Pizza provides an interesting example of how a small business
can grow larger without hitting a breakpoint. Note how Naked Pizza grew
across rather than within markets. They created buzz in a new market, opened
a small outlet locally, and then moved on to a new market. In deep contrast
to Dominos, Pizza Hut, and the myriad other national chains, Naked Pizza is
able to act local by opening single storefronts regionally so that each restaurant remains unique and novel.
Perhaps most importantly, Naked Pizza’s customer network believes
BONUS xiv
that the company is authentic and credible. This certainly has to do with the
quality of the product: as the name suggests, Naked Pizza is a healthier alternative to traditional pizza, made with real grains and probiotics and without
sugar or hydrogenated oil. But it’s more than just the food. Naked Pizza
strives to truly connect with its customers. The company states on its website
that it uses social media because “it’s an honest, immediate, transparent way
to communicate. Social media is about authentic dialogue—between you and
us and you and your friends. Full frontal, no secrets. For too long, fast food
companies have talked about ‘secret’ ingredients that we’ve come to find
out are making people less healthy. We think that’s crummy so we use social
media to help change it.”
It’s not just pizza, it’s a transparency revolution. The internet in general
and social media in particular are great democratizers; they have given everyone a voice. It’s no longer the case that a large corporation speaks (through
an expertly crafted, focus-group-tested marketing message) and unsuspecting
consumers eat it up. The only things companies—even those offering substandard products or services—feared in the past were consumer advocacy groups
and overly ambitious investigative journalists. With the proliferation of social
media, anyone with a grievance can be heard by thousands within minutes.
Naked Pizza has a tight-knit customer network. Imagine what would happen if someone posted a YouTube video of the pizza cooks mixing some high
fructose corn syrup into the dough. It would spread through that network
instantaneously and probably take down the company. Conversely, if Naked
Pizza contributed to the rebuilding of its native city after Hurricane Katrina,
as it did in 2006, that news would spread just as easily and generate goodwill.
A strong network is a reputable company’s best asset and a disreputable
one’s worst nightmare. This is as true for a small business as it is for a large
corporation, and as true for a local business as it is for a multi-national. Now,
and even more so in the future, companies will not be able to survive without
honesty, authenticity, and credibility.
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NOTES
INTRODUCTION
Ray Kroc’s story has been retold many times. It can be found on McDonald’s own website, Wikipedia, and at Biography.com. Kroc also published an autobiography in 1977 called Grinding It Out: The Making of McDonald’s (Chicago, IL: Contemporary Books).
The story of Ray Kroc telling an MBA class that he was in the real estate
business rather than the hamburger business was retold by Robert T. Kiyosaki in his 1997 book Rich Dad Poor Dad: What The Rich Teach Their Kids About
Money - That The Poor And Middle Class Do Not! (New York: Warner Books).
I
A Google images search will return many different maps showing the
locations of McDonald’s in the United States and around the world. The
global reach of the restaurant chain is truly staggering.
II
The homepage of Varsity Burgers in Anaheim, California can be found
at www.varsityburgers.com and its customer reviews can be found on Yelp.
The maps of fast food locations were created using MapMuse.com, where
one can create personalized interactive maps using their huge database of restaurants, stores, and service providers. In addition to favorites like nail salons and
fuel stations, they have an extensive list of more off-the-beaten-path attractions,
like “Nude and Clothing Optional Beaches” and “Indoor Skydiving Centers.”
Information for The Varsity in Atlanta, Georgia can be found at www.
thevarsity.com.
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III
Find out more about CafeMom, including the statistic that they have ten
million unique users every month on their site, www.CafeMom.com. Business Insider covered CafeMom in a May 18, 2011 article by Alyson Shontell:
“How to Use Your Mother to Make $30 Million Dollars Per Year.” Also on
August 16, 2011, Time Magazine listed CafeMom as one of “50 Websites
That Make the Web Great” in an article by Harry McCracken. More recently,
The Huffington Post listed CafeMom as one of “The 10 Hottest Startups to
Watch in NYC in 2013” by in a March 6, 2013 article by Heather Huhman.
In-N-Out offers an interactive historical timeline on its website. Gear
Patrol provided a comprehensive history in its article “The History of InN-Out Burger: One Family’s Patty-Filled Chapter in the Book of American
Dreams” by Ben Bowers, published October 26, 2012. The San Francisco
Chronicle article mentioned was published March 3, 2001 by Jenny Strasburg, entitled “In-N-Out Burger Beefs Up the Wharf.” For additional detail,
read the book In-N-Out Burger: A Behind-the-Counter Look at the Fast-Food Chain
That Breaks All the Rules by Stacy Perman (New York: Harper Collins, 2009).
IV
Read more about Naked Pizza’s success strategies in Fawn Fitter’s 2010
article “The Sizzling Success of Naked Pizza,” Entrepreneur, October 8,
2010. See Naked Pizza’s story in their own words on their website.
Make sure to go to BreakpointBook.com for updates and more.
/BreakpointBook
@Breakpoint