– Introduction –
Simplify: how the best businesses in the world succeed… by Richard Koch [rhymes with ‘gosh’], an entrepreneur who’s made $300mm starting and investing in businesses, and Greg Lockwood, founder of a London-based VC firm that invests in businesses with network effects.
– Why simplify? –
Richard Koch has been successful in business and investing by applying what he calls the Star Principle: starting or investing in companies that can become Stars.
The definition of Stars is based on a 2×2 matrix developed by the Boston Consulting Group. It categorizes businesses based on i) their market share position in a market, and ii) that market’s growth. Companies with a leadership position in a high-growth market are Stars.
But how do they become Stars? What’s the common thread across companies like Apple, IKEA, Southwest Airlines, McDonald’s, Google, and Uber? The answer is: simplification.
– How to simplify? –
The authors have identified 2 ways to simplify. You can either be a price simplifier OR a proposition simplifier. The former is about the science of cutting costs. The latter is about the art of delighting customers.
Price simplifying means that you can remove all the bells and whistles in order to bring down costs by 50 or even up to 90%! Think of Ford, or the McDonald’s food assembly line, or IKEA asking customers to do their own furniture assembly.
This is obviously hard… Usually, you have to go back to first principles: what’s the primary function of a product or service, and what can we do without, or change. Maybe it’s about cutting out intermediaries, or crowdsourcing…
Price simplifying works because when you cut prices so drastically, there’s exponential new demand coming out of the woodworks that will further drive down costs and produce sustainable profits.
Proposition simplifying on the other hand, means that you create a product that’s a true joy to use. Think of Apple and Uber. Here, the absolute priority is: adding convenience. And the focus is on the user experience. It has nothing to do with cost, and in fact when you proposition simplify you can charge a premium for the convenience and delight you provide.
– Conclusion –
So which one is better: price- OR proposition- simplifying? And which one is right for you?
A price simplifier has the advantage that radically lower prices result in huge volume, which can drive costs lower… resulting in a virtuous cycle. A competitor would have a very difficult time to compete, unless they have extremely deep pockets and it’s worth splitting the market.
In contrast, a proposition simplifier enjoys fat margins but is in the somewhat precarious position that they need to stay ahead of evolving behaviors and trends.
At the end of the day though for most companies it’s not really a choice. Rather you have to figure out what type of simplifier you CAN be, based on your resources, skills, and capabilities.