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About Value Creation in Business

 

The McDonald’s story illustrates important elements of the dynamics of the march of knowledge from mystery to heuristic to algorithm: the paring away of information and the simplification of the world’s complexities. The gain in understanding comes from picking out salient features of the environment and out of them building a causal understanding of it: “I think that Californians would like a quick-service hamburger joint.” The heuristic doesn’t attempt an encyclopedic understanding of the new Californian beach culture and how the freeway system brought it into being. It focuses instead on a specific facet of that culture: the consumers’ desired out-of-home eating experience.

To create an algorithm from that heuristic requires clear-cutting more vast tracts of possibility. Ultimately, one answer along innumerable dimensions had to be plucked to provide McDonald’s’ defining algorithm. Judgment was removed, possibilities were removed, and variety was removed.

What is the value to a business of driving through the knowledge funnel from mystery to heuristic to algorithm? The reward is a massive gain in efficiency. By paring away possibilities from the mystery of what and how Californians want to eat to the limited menu, drive-through, quick-service burger joint, the McDonald brothers could focus on a few important things and replicate the model several times over, extending its success.

When Kroc converted the heuristic into a precise algorithm, he was able to scale the chain to a size previously unimaginable. Restaurant site selection followed an efficient algorithm, so sites could be found and developed quickly in each desired locale. Staffing the restaurant was easy, because the procedures for hiring the unskilled labor needed were precisely laid out and the new employees could be readily taught the precise in-restaurant procedures from comprehensive manuals. Supply of food and beverage items to the new restaurant could be easily added to the precisely organized supply chain, making that supply chain even higher scale and more efficient.

By solving the mystery before its competitors, McDonald’s created an efficiency advantage. By honing and refining the heuristic, it extended that efficiency advantage. By converting that heuristic to algorithm, new owner Kroc drove the efficiency advantage still further ahead of its competitors, creating an enterprise worth billions of dollars—all from one new-style burger joint.

 

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