Burn the Business Plan

by Carl J Schramm

  CHAPTER 7

  Copycat Entrepreneurs

  Scott Norton and Mark Ramadan, seniors in the class of 2008 at Brown, were studying international relations and economics. Neither had taken a course in entrepreneurship, so they weren’t under the gun to come up with a great business plan. Somehow, one night, their casual talk turned to starting a new company.

  The unexpected prompt was a four-year-old story in The New Yorker, in which Malcolm Gladwell posed what they saw as a challenge. Gladwell had done an extensive story on the nature of taste, reporting that some products, including Coke, Pepsi, and Sara Lee Pound Cake, had “amplitude,” a rare quality reflecting a special combination of flavors. Such products resonate with consumer tastes so uniquely that they occupy categories all by themselves. Hellmann’s, for example, is, for most Americans, synonymous with mayonnaise.

  Gladwell cited another example, Heinz ketchup. He told the story of how it had been conceived by Henry J. Heinz in his kitchen in Pittsburgh. Prior to Heinz, ketchup was made at home. Housewives cooked scrap tomatoes, making sauce to flavor soup, fish, and meat. Heinz introduced the first commercial ketchup in 1906. He used perfect tomatoes because they made a better-tasting product with a longer shelf life. The taste of his product was an instant hit; both sweet and tangy, Heinz’s recipe was a thick sauce compared to watery homemade ketchup. Together, its taste and consistency achieved the illusive property of a category-defining product. After a while, homemade ketchup no longer tasted right. Gladwell wrote that, because of the magic of amplitude, the flavor of Heinz ketchup was impossible to beat. Despite other food companies having tried for decades, no one could dethrone Heinz from its dominant market position.

  Gladwell’s story also recounted how Grey Poupon had been managed into a major brand in the 1970s. A French-style Dijon mustard, made in Connecticut since 1946, Grey Poupon had never enjoyed anything but a tiny share of the gourmet market. Mustard in America was a choice between two colors, bright yellow (French’s) or yellow-brown (Gulden’s). As Julia Child spread the gospel of French cooking with her PBS television show in the 1960s, marketing professionals saw an opportunity. They reinvented Grey Poupon. The makeover involved using a large-mouthed glass jar, stenciled with the French flag. It was to appeal to higher-income consumers and its television campaign, one of the most famous ever, featured English aristocrats passing a jar of Grey Poupon from one Rolls Royce to another. The advertising experts were in pursuit of “snob appeal.” Within a decade, Grey Poupon was the most powerful mustard brand in the country, selling at more than twice the price of its competitors.

  After reading the piece, Norton and Ramadan mused about inventing a new ketchup and trying their own variation of the Grey Poupon marketing strategy. Maybe they could upend Heinz’s hold on the American ketchup market. After graduation they went their separate ways, taking entry-level positions in a bank and a brokerage firm. But they continued to muse about a new ketchup company. Two years later, both quit their jobs and went to work formulating a recipe that was even thicker than Heinz’s.

  Having created a distinctive product, they set out to devise an innovative branding strategy. Their objective was to build a customer community, people who related to their brand as loyalists, the way drivers become loyal to cars made by certain manufacturers. They invented a fictional globe-trotting Englishman to give his name to their product and company. A graduate of Oxford, who had been stationed throughout the British Empire, Sir Kensington was famous for collecting exotic recipes. Once, so the story was told, he whipped up the precursor of modern-day ketchup while entertaining Catherine the Great. Norton and Ramadan were lucky enough to discover the “long lost” recipe in, of all places, the Brown University library.

  The image of Sir Kensington, a mustachioed insouciant gentleman wearing an Edwardian collar, top hat, and monocle, appears on every jar, above the company’s motto “A Divine Alternative.” The company’s product is packed in distinctive glass jars; they can’t be squirted, only spooned. Its website presents Sir Kensington’s history, prompting customers to retell the product’s clever backstory.

  Norton and Ramadan debuted Sir Kensington’s at the New York Fancy Foods show in 2010. Williams-Sonoma and Dean & DeLuca ordered on the spot. Within a month, Dean & DeLuca was back for more. Whole Foods, where shelf space is a new food company’s dream, wanted to carry the brand. Norton and Ramadan also sold directly to upscale New York restaurants and hotels, including the Ritz-Carlton, as a way of introducing their brand to affluent travelers who then would ask for it back home. In their first year of operations, Sir Kensington’s sold ten thousand jars of ketchup.

  Seven years later, Sir Kensington’s is in grocery stores all over the country. The company has developed three other products: mayonnaise, mustard, and a vegan mayonnaise-like spread, Fabanaise, which is made with water used to process chickpeas. With sales growing by over one hundred percent annually, the company was purchased in 2017 by Unilever.

  Sir Kensington’s success is related to copying two ideas. Norton and Ramadan did not invent ketchup; they created a new recipe for a staple of the American diet. Likewise, they devised a marketing strategy that was presaged by Grey Poupon some forty years earlier. This chapter examines how copying existing ideas serves as an alternative to starting a company with a unique innovation.

  Copied Ideas

  In fact, like Norton and Ramadan, most entrepreneurs are “replicative,” that is, they take an existing product or idea and make it better. This is what Howard Head and James Dyson did. This process of incremental or iterative improvement is the basis of almost all innovation. Innovation proceeds in phases; inventors take what exists and create accretive combinations. Often an innovation comes down to having brought existing things together in a way never before seen. Dozens of search-engine startups existed before Google. The company copied others, becoming successful by analyzing individual searches for patterns that could be sold to advertisers.

  The notion of emulating others’ ideas seems foreign to many people when they think about entrepreneurs and startups. This reaction is heavily influenced by the mythology of Silicon Valley—that every entrepreneur must invent a distinct, totally original, technology.

  No invention, however, stands apart from history. This reality is nowhere more clearly demonstrated than by examining patents issued by the federal government for new products. As a condition of government recognizing an idea as intellectual property, thus granting the patent holder the exclusive right to commercially develop the idea for twenty years, it must be made public.

  Today all the records of the Patent Office are online. These records serve as the best history of how technology develops; right there in front of you is the record of the evolving state of the art. Most of the time spent in securing a patent involves differentiating the applicant’s idea from previously protected ideas. Every applicant must refer to existing patents to demonstrate that his idea is really new. Thousands of employees of global companies read patent applications professionally, trying to discern the trajectory of new technological developments. Their employers hire them because they know that their findings can prompt novel combinations of new discoveries with existing technologies, leading to successive innovations.

  In this regard, patents serve a larger societal purpose. Although originally conceived as a means to protect the property rights of inventors to their ideas and products, the patent process actually stimulates the process of innovation itself. This effect was easier to visualize in the past. Prior to the 1920s, every patent application had to be accompanied by a physical model of the invention. These models were exquisitely rendered miniatures, so detailed that surviving ones are regarded as works of art. Limited to twelve by eight inches, some have tiny cast-iron frames, often holding smaller gears made of steel and brass. Others have very small steam valves that actually open and close.

  Once a patent was granted, its model was displayed at the Patent Office in Washington. For decades, this co
llection was the most visited place in the capital. Would-be inventors from around the nation came to study the hand-crafted miniatures of Samuel Morse’s telegraph key, John Deere’s steel plow, and Edison’s phonograph. George Westinghouse’s air brake, descendants of which continue to stop every train in the world, could be studied as well as his earlier patents for seed drills that automated corn planting. Visitors could see Eliphalet Remington’s model for an improved shotgun, which became every hunter and frontiersman’s weapon of choice, and, separated by two decades, the model for the Remington typewriter that revolutionized business correspondence.

  The Patent Museum served as a school for inventors. Visitors came from all over the country, intent on creating a new product. If they looked carefully, they took away with them the lesson that most inventions are incremental improvements to what already had been invented.

  Business Model Innovation

  Today, one can see only a small collection of patent models in the Smithsonian. Two are preserved because of their extraordinary importance: Cyrus McCormick’s reaper and Isaac Singer’s sewing machine. Each machine was, in fact, a remarkable combination of previously patented ideas, all part of an irrepressible drive to mechanize harvesting and sewing for more efficient food and garment production. The reason that we see each as emblems of such technical importance has as much to do with the business models that McCormick and Singer developed, which made their respective companies so historically notable.

  McCormick’s reaper permitted farmers to harvest with many fewer hands, increasing their productivity many times over. As a result, farmers could own bigger farms and enjoy economies of scale. Of equal importance, harvesting became much faster, greatly reducing the risk of losing matured crops to incoming bad weather. Reapers were so expensive, however, that most farmers could not afford them.

  To get his machine into the hands of customers, McCormick hit upon the idea of installment purchasing. McCormick’s idea wasn’t new; farmers had long used mortgages to pay for their land and houses. McCormick’s company, International Harvester, operated much like a bank for the farmer’s machinery. The underlying relationship of trust paid dividends for decades. Many farmers are still International Harvester loyalists for reasons reaching back to the company’s help to their great-grandfathers.

  Singer, by inventing the modern sewing machine, revolutionized an industry. But model evidence shows how close others had come to his design; his breakthrough actually is rather a minor improvement on several previous patents. Singer’s machine, like McCormick’s, was so expensive that few could afford to buy it. When sewing machines first appeared in the 1850s, each cost more than a seamstress’ average annual wage. Singer borrowed McCormick’s idea of installment buying, which greatly increased his sales. With growing demand, Singer continuously devised production efficiencies that caused the price of a machine to fall so quickly that, within just a few years, it was the equivalent of a month’s wages.

  Inventing Entrepreneurial Partners

  To reach a mass market, however, Singer faced a problem even more formidable than price. Customers had to be converted to the idea of machine sewing. Through all of history, clothes had been made at home and by hand, and for the wealthy, by skilled servants. Outside of the rarified privileged class, the skilled handiwork of sewing was a fundamental skill of a good housekeeper, and a competence that contributed to a woman’s marital eligibility. The sewing machine, as a household appliance, had no predecessor. The idea of machines as labor-saving devices outside of factories was unknown. Singer’s machine predated mass-produced vacuum cleaners and washing machines by nearly six decades. To most women, sewing other than by hand was unimaginable.

  To expand his market, Singer had to invent a new business model, one that solved two problems never before encountered. First, he had to demonstrate to housewives the benefits of sewing by machine. To do this, he needed a national network of sewing schools. And, if his relatively complex machines were to be adopted, he had to ensure quick repairs were available. Singer’s foot-pedal powered sewing machine was the first mass-marketed technology that required technical support.

  Not able to finance the cost of building a national network of sewing schools and service centers, Singer created a profoundly important innovation. He would leverage the entrepreneurial ambitions of others to be his partners, to start businesses that were mutually supportive. Singer recruited entrepreneurs to run sewing schools, sell his machines, and provide repair service for their customers.

  Singer gave the customer relationship to his partners, allowing him to concentrate on manufacturing. Aspiring entrepreneurs paid Singer a licensing fee to sell his machines and, in return, he provided them with exclusive sales territories and promoted the Singer brand with print advertising in national women’s magazines.

  Singer had invented the modern franchise. He accelerated his entrepreneurial ambitions by recruiting and training entrepreneurs who built businesses around his revolutionary product. Five decades later, Henry Ford copied Singer’s distribution model, selling exclusive territory licenses to build a dealer network responsible for selling and servicing his cars.

  This long history of symbiosis between innovator–entrepreneurs like Singer and Ford, and the entrepreneurs who owned nodes on their sales networks, is obscured by the modern king of franchising, Ray Kroc. Kroc worked for a small Illinois company where he sold machines capable of making five milkshakes at once. While most customers bought one machine at a time, a restaurant in San Bernardino, operated by Dick and Mac McDonald, bought eight. Curious, Kroc found his way to San Bernardino, California, to see who was making so many milkshakes. Arriving at McDonald’s, Kroc knew he was seeing something different. The McDonald brothers had industrialized the production of hamburgers, fries, and milkshakes. They could produce an affordable, delicious meal in a matter of minutes, what we now know as fast food.

  Around Southern California, McDonald’s was already something of a legend. Before Kroc’s visit, Keith J. Kramer and Matthew Burns had come to California to study the McDonald’s system. Upon returning to Jacksonville, Florida, they started Insta-Burger, a chain that later was renamed Burger King. Glen Bell, a World War II veteran living in California, opened a stand selling hot dogs and hamburgers just down the street from the McDonalds’ location. After watching the McDonald brothers’ business grow, he decided to apply their system to what had become a local food craze. He opened his first Taco Bell in 1962. Unlike the hamburgers that McDonald’s made, Bell had to introduce large parts of America to what, he joked, many people called “Tay-kohs.” But, as his sixth year closed, there were 325 Taco Bells across the western states.

  It was Kroc, however, who in 1955 talked the McDonalds into a national franchise license. Within seven years, Kroc had bought out the brothers and had built a franchise network of 230 stores. Kroc recruited first-time entrepreneurs, independent owner–operators, to become his partners. He recognized McDonald’s as an innovation that could be copied all over the country. He recruited franchisees as partners to whom he sold localized rights to his great idea, and worked hard to see that they would prosper with him.

  Co-entrepreneurship

  Like practically every fast-food franchisee, Bob Carlucci became an entrepreneur using someone else’s idea. Growing up in Boston, he wanted nothing more than to be a musician. After high school he enrolled in the New England Conservatory of Music. When his father died unexpectedly, Carlucci dropped out to help his mother, who worked as a seamstress, support his three younger brothers. He got a night job at a General Electric factory. Along the way he bought two candy vending machines and installed them in the pool hall he managed on the side.

  Having concluded that a classical music career was out, and hating his work at GE, Carlucci decided that starting a business was his best path forward. He built his first company on the only experience he had: vending. Reading the Boston Globe one morning, he discovered that Lechmere, a local department store, was planning
to open fifteen auto-service centers. On an impulse, Carlucci wrote to the company, proposing that he provide vending to each of its new stores. Miraculously, the store’s purchasing manager asked for a meeting. Carlucci had cards printed indicating that he was the sales manager for R&R vending. The interview ended with Lechmere asking him to bid. He responded with a few paragraphs, describing a company that didn’t exist.

  In a meeting a few weeks later, Carlucci was asked to install soft-drink and coffee machines in the company’s new auto centers and also its warehouse and employee cafeteria. Driving home in a cold sweat, he remembers saying to himself, “I am a fraud.” He was only twenty-three; his corporate assets consisted of two vending machines and what his mother would call “a lot of nerve.”

  When Carlucci explained his situation to his uncle, an accountant, and the only family member who knew anything about business, he got a crash course in how to build a spreadsheet projecting sales and costs. Next, Carlucci’s uncle took him to meet the president of the local bank. After hearing about Carlucci’s opportunity, the bank’s president agreed to lend him money to get started. More important, he said, “We will meet once a week and I will teach you how to do business.”

  Within a decade, Carlucci was providing corporate vending as far away as Washington, D.C. As he looked into the future, however, he saw an industry heading for trouble. He knew that selling cigarettes from vending machines, the industry’s most profitable item, was soon to be outlawed by government. Carlucci wanted out of the vending business, so he began to explore franchises. “I knew I had gotten pretty good at running a business, but I didn’t have any particularly great new ideas. Inventing a new product and building a business around it involved more risk than I wanted to take.”