by Lewis Schiff
But Frankel had his own reason for calling it the Five-Dollar Footlong. “I like round numbers,” he said.
On the first weekend of Five-Dollar Footlongs, sales volume doubled at Stuart Frankel’s two shops, and although his food costs went up, so did employee productivity. Even at the cut-rate price of $5, Frankel found he was making money on the increased volume. It took a few months, but other Subway owners in the Miami area took notice. A failing Subway shop in Ft. Lauderdale copied the $5 idea and sales instantly doubled there, too. Then the largest Subway franchisee in South Florida, the owner of three dozen shops, ran Five-Dollar Footlong promotions in stores where sales had been flagging and saw a 35 percent increase in revenue. By 2006, Subway franchise holders in other cities all around the country were imitating the Five-Dollar Footlong and getting good results.
Most franchise companies are based on ordinary ideas, and Subway ranks among the most ordinary of all. There is nothing innovative about making sandwiches from cold cuts, so each Subway shop owner needs to constantly hone his or her execution skills and stay on the lookout for little ideas that have worked well for fellow operators. As the Five-Dollar Footlong spread to other markets around the country, Frankel and some other franchisees tried to get national advertising dollars behind the effort. But when Frankel made a proposal before Subway’s franchisee marketing board, it was voted down. Too many owners feared that cut-rate Footlongs would drive up food and labor costs, despite Frankel’s evidence to the contrary. For two years, the Five-Dollar Footlong promotion languished at Subway’s national level, even as more and more shop owners reported glowing success when they ran the promotion on their own. Finally the marketing board relented and gave the go-ahead for a four-week campaign in 2008. By then, the Five-Dollar Footlong had been tested at so many Subway shops that there was no need for any formal market research. It was the first ever time that Subway made such a large investment in national marketing and advertising dollars without spending a dime on research.
Subway rolled out its national Five-Dollar Footlong promotional campaign on March 28, 2008. The “irritatingly addictive” TV jingle, coupled with hokey hand signals signifying “five” and “foot-long,” became a campy cultural phenomenon as thousands of teenagers recorded their own renditions and posted them on YouTube. Subway even spoofed its own jingle by putting an extended-play dance remix on its website. In the Five-Dollar Footlong’s first year as a national campaign, Subway’s sales rose 17 percent, while revenues sagged everywhere else in the fast-food industry. Subway estimated that the promotion boosted sales nationally by $3.8 billion. Other fast-food players responded, with Domino’s, KFC, and Boston Market all coming up with $5 promotions of their own. One restaurant consultant told Businessweek, “Five dollars is the magic number now.”
I tell this story because it shows how imitation, which sounds like it should be a simple process, is actually very difficult to do because even proven ideas can face an uphill struggle for acceptance. Paul Orfalea, the founder of Kinko’s Copies, encountered a similar battle in the 1980s. It took him three years of coaxing and cajoling to get his independent storeowners just to try moving to a 24-hour schedule like other successful convenience businesses. Kinko’s owners objected that staffing the stores all night would be too difficult and they worried about keeping their employees safe. When the first Kinko’s stores that tested a round-the-clock schedule saw revenues jump by as much as 50 percent, most other owners remained unconvinced. At one annual meeting when the subject was being debated yet again, an exasperated store owner stood up and said, “If you like money, then do it.” Eventually, 24-hour operations became the norm, and today anyone looking back would wonder what the fuss was all about.
A legend called “The Egg of Columbus” illustrates how simple ideas like the Five-Dollar Footlong or the 24-hour copy shop are commonly undervalued because they seem so ordinary and obvious in retrospect. When Christopher Columbus first set sail, most educated people already knew that the Earth was round and accepted that the Far East could be reached by sailing westward. So when Columbus returned from his first voyage, not everyone was impressed. Over a late-night dinner with some Spanish gentlemen, Columbus was confronted by the question of whether he’d done anything special, or if he had merely been the first to follow through on an ordinary idea. Columbus responded by handing the men a hard-boiled egg and asking each of them to attempt to stand the egg on its end. One by one, they tried and failed. When the egg was returned to Columbus, he tapped it gently on the tabletop, cracking and flattening the shell just enough to allow the egg to stand up. “What is easier than to do this which you said was impossible?” Columbus asked his dinner mates. “It is the simplest thing in the world. Anybody can do it—after he has been shown how.”
Damien Hirst, the conceptual artist profiled in chapter 2, often hears people react to his work by telling him that anyone could do what he does. In 1995, he told the New York Times, “It’s very easy to say, ‘I could have done that.’ After someone’s done it. But I did it. You didn’t. It didn’t exist until I did it. It’s like me saying I could have written ‘She Loves You.’” In similar ways, the Five-Dollar Footlong and the 24-hour copy center might seem in retrospect like natural, obvious business tactics that any company in a similar situation might have made. But that interpretation is no different than the criticism Columbus faced. It overlooks the persuasive efforts, the commitment, and creative problem solving it takes to deliver on any idea, even an ordinary one. In the cases of Subway and Kinko’s, their shop owners realized billions of dollars in new revenue thanks to the determination of Stuart Frankel with his Five-Dollar Footlong and a few forgotten Kinko’s owners who took the lead in staying open all night. Just as society so often exalts innovation, it often denigrates or dismisses the significant challenges posed by executing on ordinary ideas. And since ordinary ideas are, by definition, much more common than extraordinary ideas, executing on them has a far greater impact on most companies’ profits.
When Paul Orfalea sold off his remaining interest in Kinko’s to a Wall Street buyout firm for $116 million in 2003, the stories in the business press often emphasized that Orfalea had been the beneficiary of a great social and technological wave. Kinko’s, the media decided, had emerged as the McDonald’s of copy centers during a period when millions of Americans began working for themselves from home and needed places like Kinko’s to get their reports and presentations bound and reproduced. It’s true that, even by Orfalea’s own estimation, 42 million Americans were working out of their homes when he left Kinko’s in 2003, compared with just 7 million when he opened his first store three decades earlier. But attributing Orfalea’s great success to social trends would suggest, similar to the Spanish gentlemen in the Egg of Columbus story, that anyone could have done what Orfalea did. It ignores the question of how Kinko’s managed to far outperform its competitors, all of whom presumably stood to benefit just as much from the same changing trends in American work habits.
Kinko’s began as a one-man operation in 1970 when Orfalea, then twenty-two, opened a tiny photocopy and stationery shop near the University of California, Santa Barbara. The 100-square-foot store was so crowded that when he leased a second copier, he had to move the machine out onto the sidewalk every morning. A friend of Orfalea’s called him “Kinko” in reference to his mop of curly red hair, so “Kinko’s” is the name Orfalea put on the shop.
It was while working alone behind the counter at his first store that Orfalea had the insight that would make him a multimillionaire. It had nothing to do with technology or innovation. (The truth is that the founder of Kinko’s has never learned how to service a copy machine.) Instead, Orfalea’s insight involved his customers and human nature. One by one, as students and professors came into his shop with their science papers or test forms, Orfalea noticed that almost all of them were in some kind of agitated emotional state. “The customer walks into a store stressed out and confused,” he wrote in his autobiography, Copy
This! “She doesn’t know what she wants and she wants it done yesterday.” Orfalea came to realize that “we weren’t so much selling copies as we were assuaging anxiety.”
As Orfalea grew the business by taking on partners and opening new stores near college campuses all over the country, his chief concern was that copy centers might become a commodity industry with very low profit margins. Any competitor could lease a few photocopiers and compete with Kinko’s on price, driving down profits to the point where no one could make any money. But Orfalea also knew that customers in a fragile emotional state will tend not to concern themselves with price, as long as you assuage their anxieties. It became Kinko’s chief guiding strategy to charge more than competitors, but also to offer better service.
Throughout Copy This! Orfalea details the many ways he executed on this very ordinary idea. For instance, a casual conversation with a convenience store operator led to Orfalea’s fervent conviction that Kinko’s should stay open 24 hours a day. The store owner told Orfalea how surprised he was to see overall revenue go up by 50 percent once he started keeping the store open all night. Late-night foot traffic was fairly light and couldn’t possibly account for the increase in sales. It was a mystery to him, until he realized that his regular customers were now coming in more often at all hours of the day. The man reasoned that the customers had become more loyal to his store, perhaps without even knowing it, because they liked the feeling that the store was always there for them. Staying open around the clock had relieved them of worry. After that, Orfalea wrote, “I became possessed, absolutely possessed, with the idea that this was a change we had to make.”
Orfalea always tried to look at a Kinko’s location from the standpoint of a stressed and anguished customer. People should feel soothed when they walked in the front door, he decided, and that meant nice pale blue walls, clean carpeting, and orderly spaces for people to work. “We wanted them to see more than a copy shop,” Orfalea insisted. “We wanted them to see a sanctuary where they could come to solve their problems.” Orfalea even consulted with an uncle who owned a tavern about how to make the Kinko’s environment more welcoming and comfortable. He got angry when he caught store managers failing to leave out little freebie items like liquid paper, pens, and paper clips in the work areas. The managers complained, reasonably, that too many of these items were disappearing. But Orfalea had to explain that if Kinko’s wanted to keep charging higher prices, managers had to stay focused on their customers’ anxieties. Panicked customers who needed pens or a few paper clips on the way to their meetings would never forget they were able to snag these items for free at Kinko’s.
At a place where copying documents was the main source of revenue, Orfalea made sure that copying ideas became the main source of inspiration. He was manic about far-flung store owners sharing bright ideas with each other. In the years before e-mail, Orfalea installed a voicemail system that allowed each store owner to broadcast observations and ideas to hundreds of colleagues all over the country. It wasn’t unusual for owners to get 30 such messages a day. Once, Orfalea persuaded the local owner of a McDonald’s to give him a tour behind the counter so he might pick up some tips about efficient workspace design. “I often told our coworkers, ‘everything has a place and everything in its place,’” Orfalea wrote. “McDonald’s really taught us how this principle looked in action.” Fast service, supported by an orderly workplace, was just another way for Kinko’s to take care of its customers and their emotions.
“In retail there are few secrets,” Orfalea likes to point out. “Ninety percent of what we do . . . is obvious.” It was his company’s mastery of the obvious, of the mundane, that inevitably attracted the attention of the investment community. Why would a New York private equity firm spend hundreds of millions of dollars to enter a low-profit commodity industry like copy centers? The reason lies with the unique culture Orfalea built at Kinko’s, which kept profits high through the exceptional execution of an ordinary idea, and through imitation, not innovation.
The Blinding Flash of Genius
Losing out to Bill Gates and IBM was personally painful for Gary Kildall, but it hardly left him a pauper. In 1991, he sold Digital Research to Novell for $120 million—almost five times as much as the $26 million asking price Bill Gates had rejected six years earlier. Kildall moved to Texas, where he kept a collection of 14 sports cars at a lavish lakeside ranch. A licensed pilot since his teenage years, Kildall could now afford to fly his very own Lear jet.
Throughout the 1980s and into the 1990s, Kildall never stopped innovating toward his vision of a world made better by personal computers. Digital Research remained about ten years ahead of Microsoft with its pioneering work on desktop networking and application multitasking. In a separate venture, Kildall led the first effort to put an entire encyclopedia on a single laser disc (this was years before CD-ROMs). He founded another company, called Prometheus Light and Sound, that came up with many of the earliest innovations in wireless technology.
But Kildall never managed to make peace with certain facts of life in the computer industry. For instance, he hated how BASIC continued to be the most common programming language taught to children. Kildall’s complaint was that BASIC didn’t help children to think in a way that would solve programming problems, so he personally wrote a superior program based on an educational language called Logo. But Digital Research’s Logo, nicknamed Dr. Logo, didn’t sell very well. Kildall was disappointed to discover that since BASIC was the language computer teachers had learned when they were young, they preferred not to switch to Dr. Logo. For all its inadequacies, BASIC was the language they felt most comfortable teaching.
“I expected too much of educators,” Kildall wrote in a personal memoir that has never been published. “It was then that I learned that computers were built to make money, not minds.” Paul Orfalea might have counseled Kildall to try and figure out ways of making teachers feel more comfortable with Dr. Logo. Stuart Frankel might have suggested price-cutting, loss-leader giveaways, and a promotional campaign so children and parents would demand Dr. Logo. But Kildall, for all his genius, preferred to blame the entire computer industry for Dr. Logo’s failure rather than seek out ways to improve the product and its marketing.
Maybe Kildall’s obstinacy was a by-product of how easily his first success had come to him. Kildall had created CP/M with no thought of ever selling it. His simple devotion to excellent code-writing had made him a millionaire. Then, having profited so handsomely from this first flash of innovative genius, Kildall kept expecting the same relatively effortless success to arrive with each subsequent innovation. He never accepted that executing on any idea can be just as difficult an intellectual challenge as developing the idea itself. Instead, with each setback, Kildall got more frustrated and resorted to blaming the entire computer industry for having its priorities out of whack.
Disappointed inventors often suffer from this kind of debilitating sense of injustice. The 2008 movie Flash of Genius starred Greg Kinnear in the role of Robert Kearns, a garage inventor who designed the first intermittent windshield wiper, only to see his creation stolen and copied by the auto industry. Based on a true story, the movie shows how Kearns’s lawsuits against the carmakers yielded prompt settlement offers worth millions of dollars, all of which Kearns refused. Kearns wanted the manufacturers to admit their thievery and return all manufacturing rights for the wiper to him, even though lawyers cautioned him that these demands were unrealistic.
By the time Kearns finally won several of his lawsuits, his legal costs and other debts had consumed almost all the money the courts awarded him. Although the movie provides a gauzy bittersweet ending to the story, in reality Kearns died alone and on the verge of madness. His dream had been to employ his children and grow rich in a family business manufacturing windshield wipers. Instead, his obsession destroyed his family. When he died, his wife had been long gone and he was estranged from most of his children.
Kildall’s final years, tho
ugh not so desperate, were also clouded in bitterness and disappointment. He and his wife Dorothy divorced in the 1980s. Kildall remarried, and then that marriage failed. He was diagnosed with a heart condition, so his private pilot’s license was revoked, cutting him off from one of his greatest personal passions. As both the wealth and myth of Bill Gates grew ever larger, Kildall started drinking more and obsessing about his nemesis.
One particularly galling moment for Kildall came when he was invited to attend the 25th anniversary celebration of the computer science department at the University of Washington, where Kildall had studied and had been among the first computer science Ph.D.’s. The invitation stated that the evening’s featured speaker would be one of the department’s most generous donors—Bill Gates. That was almost too much for Kildall to take. He called to complain to the head of the computer science department, who hung up on him.
As recounted in the Harold Evans book, They Made America, Kildall wrote bitterly in his unpublished memoir about the irony of Gates being honored at the university where Kildall got his computer training. “Gates takes my work and makes it his own through divisive measures, at best. He made his ‘cash cow,’ MS-DOS, from CP/M. So Gates, representing wealth and being proud of the fact that he is a Harvard dropout, without requirement for an education, delivers a lecture at the twenty-fifth reunion of the computer science class. Well, it seems to me that he did have an education to get there. It happened to be mine, not his.” This reference to Gates was the last line that Kildall wrote.
One evening in 1994, during a visit to Monterey, Kildall was discovered lying unconscious on the floor of a biker bar, under a video game machine. No one could say whether he’d fallen or if someone had hit him. Twice that weekend Kildall visited a local hospital to complain of headaches. Three days after sustaining his injuries, he died in his sleep of a brain hemorrhage at the age of fifty-two.