Simplify
Global business success
Description
The key to overtaking competitors in high-growth markets is finding ways to simplify the prevailing business model. Nearly all great 20th century success stories simplified in some way, creating immense value for customers, society, and shareholders. There are two simplification strategies that lead to market dominance.
Simplifiers either dramatically cut prices to exponentially grow the market, or they introduce an easy-to-use product with a simplified value proposition, creating substantial new markets that did not exist before. Whichever strategy you choose, be uncompromising in executing it. Decide whether you will simplify via lower prices or an easier product. Then fully commit to that path to succeed.
Table of contents
01History's greatest innovators .
The essence of commercial triumph lies in simplification, a strategy employed by giants like Ford, Google, and Amazon. By streamlining operations, these companies reduce costs and enhance customer experiences, transforming complex processes into intuitive ones, leading to increased satisfaction, efficiency, and success. Markets can grow exponentially when prices are dramatically cut. Halving the price may increase demand five fold or more rather than just doubling it. To make this work, the product must be simplified to cut costs by at least 50%.
Another approach is creating a useful, appealing product without unnecessary features. This can establish a new, premium market. Making the product a joy to use means people will pay more for perceived added value. As Tom Peters said, long-term survival requires simultaneously pursuing perfection and destruction of what you created. Many companies succeeded through price simplification, including:
Henry Ford's 1908 car company was much like competitors, selling to rich gentlemen. With an epiphany, Ford decided to build "a motor car for the great multitude. It will be large enough for the family but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men...after the simplest designs that modern engineering can devise. But it will be so low in price that no man making a good salary would be unable to own one."
In 1907, Ford began selling only the standardized Model T, slashing the price from $2,000 to $600. For the next decade, he relentlessly cut costs through the world's biggest factory, new steel alloys, production lines, etc. By 1920, the Model T cost just $360 and Ford sold 1.25 million cars, up from 1,599 in 1907. Simplified manufacturing and ease of use grew Ford's market share. As Ford said, "The ordinary way of doing business is not the best way. I am coming to the point of my entire departure from the ordinary methods. From this point dates the extraordinary success of the company."
02Executing effective innovation
In the competitive landscape of business, growth can be driven by two distinct strategies: price simplification and proposition simplification. Choosing the right approach is crucial and involves a careful evaluation of four key factors.
Firstly, the Attitude Test examines your corporate culture to determine if it favors cost reduction or product innovation. The existing policies and norms within your company will provide insights into which strategy is more congruent with your organizational ethos. It's essential to identify the simplification type that will resonate with your team.
Secondly, the Market Gap analysis involves looking at your competitors to see if there's already a dominant player in the price simplification or proposition simplification space. If a competitor has firmly established themselves as a simplifier, it may be challenging to displace them, and this should be a significant consideration in your strategy decision.
Thirdly, a Capability Assessment is necessary to understand what capabilities are crucial for success as a simplifier. By examining other simplifiers in adjacent markets, you can determine whether your company has the necessary ingredients for successful simplification. Lastly, the Skills Edge requires you to assess whether your company has superior skills in simplification compared to your rivals. It's not enough to have the skills; you must also be able to execute them more effectively than anyone else.
03Responding to market disruption
Being the market leader might give you a sense of invincibility, but maintaining that position requires constant attention. The market is always evolving, and simplifiers—companies that offer more straightforward products at lower prices—are a significant threat to established players. These simplifiers come in two varieties: price simplifiers, who compete on cost, and proposition simplifiers, who compete on user experience.
Price simplifiers bring to the market products that are "good enough" yet priced significantly lower than the offerings of established companies. These products are not inferior knockoffs but solid alternatives that lack unnecessary features. They often come from new entrants with different business models and lower expectations for profitability, which allows them to capture market share through aggressive pricing. Despite operating on thin margins, these upstarts can experience rapid growth as they aim for long-term market positioning.
They achieve lower manufacturing costs by avoiding the legacy production methods that established players are tied to. On the other hand, proposition simplifiers focus on offering a product or service that is significantly easier and more enjoyable to use. They may not compete on price but on the simplicity and intuitiveness of their offerings, which can attract customers even at a premium price. These simplifiers often come from outside the industry, bringing fresh perspectives unburdened by traditional ways of doing things. Established companies may find it challenging to replicate these experiences due to organizational barriers or a fear of cannibalizing their existing products.
04The rewards of innovation
Simplification has proven to be a highly successful and enduring strategy in the business world, offering immense financial rewards that often last for decades due to the network effects it generates. Although not a panacea for all business challenges, simplification stands out as one of the most effective strategies throughout history. Companies that have embraced price simplification have seen remarkable success. For instance,
Ford Motor Company began its journey towards simplification in 1906, introducing the moving assembly line in 1913, which allowed for a significant reduction in the prices of the Model T until 1920. This strategy led to a 76 percent decrease in prices from 1906 to 1920, while revenue skyrocketed from $2.4 million to $359 million, marking a 150-fold increase. During the same period, Ford's market value also grew 150-fold, equivalent to an annual growth rate of 43 percent.
Similarly, McDonald's experienced an 11.4-fold increase in market value between 1948 and 1961, the year Ray Kroc acquired the company. Kroc expanded the simplified restaurant model across America and overseas, resulting in McDonald's value soaring from $2.7 million in 1961 to $93 billion in 2014, a staggering 34,627-fold increase or a 21 percent compound annual growth rate. In comparison, the S&P 500 grew 28-fold during the same period.
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