Simplify: How the Best Businesses in the World Succeed

by Richard Koch

In business, being mostly correct and decisive typically yields better results than taking the time to figure out what is perfectly correct.

If the price is halved, demand does not double. It increases fivefold, tenfold, a hundredfold, a thousandfold or more.

Price-simplifying can involve radical redesign not only of a product but also of the way that the industry is organized — what is called in the jargon business system redesign.

Our term for the second strategy, which is very different but equally effective, is proposition-simplifying. This involves creating a product that is useful, appealing, and very easy to use, such as the iPad (or any other Apple device of the last decade), the Vespa scooter, the Google search engine or the Uber taxi app.

Proposition-simplifying creates a large market that did not previously exist in the same form, or at all.

Prices don’t have to be slashed in half immediately. Instead, a virtuous circle can be created, where the first cost reductions create a larger market and greater market share, with the benefits of greater scale subsequently lowering costs and prices, and raising demand further.

Take a lesson from Ford: Redesign your product from first principles, cutting out unnecessary or costly parts. Reduce product-line variety and if possible standardize on a single “universal product.” Reduce the number of components. Eliminate frills and unnecessary options. Use different, new, lighter, and cheaper materials. Go for volume and production facilities that are far larger than those of your rivals. Organize tasks to maximize the specialization of your workforce. Automate tasks.

By testing new designs in a few stores first, IKEA works out which lines will work and which will not, so it doesn’t order large quantities of goods that won’t sell and will have to be discounted

Before IKEA came along, the furniture industry was a mess — highly complex and sub-scale in all three stages (production, retail, and distribution), with poor coordination across these stages.

Limited product variety within each category, so more of each product line can be made and sold; as a result, stock-keeping costs are decimated.

A designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away. Antoine de Saint-Exupéry1

The McDonald’s formula was invented in miniature by its two founders. It was made into an economic powerhouse by one person who took the system, standardized it, and cloned it on a scale that its creators could never imagine. So look for a simplifying system that already exists on a tiny scale but could be made into a universal product and rolled out around the globe.

In Jobs’ own phrase, the product has to be “insanely great.” In our phrase, the product must be a joy to use; it must have a palpable “wow factor.”

The worst fate, as with IBM, is to fall between the two simplifying stools — to be out-proposition-simplified and out-price-simplified.

So when a price-simplifier creates a mass market, it tends to collapse segmentation within the existing market, or at least decimate the sales of other players in that market.

For Uber to succeed over the long term, it has had to grow at a phenomenal rate in order to shut out its rivals. And that exponential growth rate is becoming even more crucial, since some of those rivals are now receiving heavy backing and have global ambitions.

Oliver, Alexander and Marc Samwer — founders of Rocket Internet in Germany — have practically turned cloning good ideas into an art form, scouring the United States for proof of concept, then rolling the idea out in dozens of countries simultaneously.

As with price-simplifying, proposition-simplifying can dramatically enlarge a market. While price can make a product affordable for more people, a better proposition can result in much more frequent use of a product.

Simplicity for the user is complexity concealed.

Products and services can create a new market or niche they then dominate for decades merely by performing an operation much faster than their rivals.

Proposition-simplifying is an innovation treadmill, and very few firms stay on it for more than a decade or two.

Price-simplifying works differently. It generates much lower margins, but greater defensibility.

The most effective and successful price-simplifiers think of what they do as a mission, a crusade to bring at least some of the good life to people who have not been able to afford it before.

It turns out that there are five reasons why managers in market leaders don’t simplify, and they are all traps. We call them: the Overhead Trap; the Cannibalization Trap; the Customer Trap; the Complexity Trap; and the Skills Trap.

It seems that firms develop their own rules of thumb about acceptable margins and then become addicted to them.

New entrants with simpler products do not have the handicap of success in more complex, more profitable products, and the overhead and margin assumptions that such success generates.

The Customer Trap is when you assume that your customers aren’t interested in the new business model.

With increased learning and volume, the simpler product becomes ever cheaper, which makes the price difference between it and the premium product increasingly hard to ignore.

When the firm has the ambition to expand, or when sales slow, the default mode is to increase complexity — more solutions, more varied products and customers, more customization, more markets and more diverse activity.

Yet managers who are used to progressing only by adding complexity often see simpler products not as a step forwards but as a step backwards.

The Skills Trap — The firm may not have the right skills for simpler products, but it also fails to appreciate that these can be acquired, often quite cheaply.

By contrast, you cannot counter a proposition-simplifying product if you are unaware of it.