Simplify: How the Best Businesses in the World Succeed

by Richard Koch

Vital

Developing new projects

Basics right every time

It is fine to take big risks, even if they don’t pay off

Impress the customer with great value every day

Designing the business system underpinning the production and delivery of the product or service

High

the left-hand side represents the typical answer of a proposition-simplifier, and the right-hand side that of a price-simplifier.

There is no substantial leaning towards either form of simplifying. This is a red light — your organization is probably unsuitable for either strategy.

Honda started with a 50cc bike and then gradually worked its way up, eventually challenging Harley in all but the most powerful and expensive bikes.

Disruptive strategy

Honda actually started with the wrong strategy and found the right one only by accident.

the company’s market research showed that Americans liked heavy, fast, powerful bikes . . . and that price was relatively unimportant to them.

Preliminary research

To cut a long story short, these three Dinky Toy bikes were noticed and admired by the other dirt-bikers, with many of them asking where they could buy

Untested market (possibly thought to be too small or didn't even get noticed in market research) and real world validation

The U.S. motorcycle market grew from 550,000 units in 1959 to around five million a year by 1975, almost all driven by Honda’s small-bike policy.

As the company sold more bikes, it was able to cut costs and retail price even further, and the market exploded.

The moral of this story is that Honda initially chose the wrong strategy — it targeted ground that was already well occupied b...

Instead, it should have aimed for a gap through price-simplifying, for which it alrea...

“Does a competent competitor already occupy the ground we plan to target?” If the answer to that question is “Yes” — as it would have been in this instance — that is always a red flag.

“Can we simplify to provide a product that is better in terms of usefulness, ease of use and/or art?”

a clear ...

If there is a gap and no firm is occupying the price-simplifying ground, and you can think of a way to cut prices in half, go for it.

the extra value for customers far exceeded the additional cost for Pepsi-Cola.

what if there is already a mass market, yet no substantial premium market?

If no firm is the clear leader in proposition-simplifying, and you can simplify to deliver a much better product or experience, go for it!

we can restate the lesson in one rule:

Go for the gap — and do the opposite from the market leader before anyone else does.

These keys are almost never based on market research. Instead, they come from insight

Your secret, according to thiel

there is usually a cluster of keys.

Another finding is that the keys for the two main types of simplifying are different, yet similar within each type.

there are only a handful of ways to achieve the objective of price-simplifying, and a different handful of ways to meet the contrasting aims of proposition-simplifiers.

The sole objective of price-simplifiers is to cut costs by at least half.

your firm needs to have the right skill set for your market, but it must also be better at simplifying in that way than any current or potential competitor.

Xerox PARC utterly failed to capitalize on its discoveries.

First, the research unit had weak or non-existent commercial skills, and no other department within Xerox had them, either.

Second, and more fundamentally, the folks at Xerox PARC did not have the simplifying mentality of Steve Jobs.

This was because they never viewed the computer as a consumer product.

They snatched defeat from the jaws of victory because they liked complexity more than they liked simplicity.

The simplicity tests outlined above would have indicated in no uncertain terms that IBM’s position was hopeless right from the start (without desperate measures and complete transformation), because it faced one rival that was more skilled at proposition-simplifying and several others that were more skilled at price-simplifying.

This is the skills test; do you possess the ability to price simplify or proposition simplify and then execute on the strategy?

Yet if the company’s bosses had explored whether they were able to pursue either form of simplifying better than their rivals they would have seen the writing on the wall.

Take the Attitude Test. See whether your firm is a “natural” price- or proposition-simplifier.

Alternatively, for a startup, begin with a gap assessment and then build your strategy the attitude test for your simplifying strategy

The Keys Test

The best clues may be what previous very successful simplifiers of your type did in other markets.

your company must have the skills to execute one of the two simplifying strategies

possess those skills to a higher degree than any competitor.

Striving to increase product performance multiplies both product and organizational complexity, making it harder for many customers to afford or use the product or service easily. When firms become more complex, they distance themselves from their customers, executives lose sight of what they should be doing, and products become even more elaborate and expensive. Then the music stops. One or two new entrants decide to simplify and slash prices. The new product or service they offer is often technically inferior but simpler and much cheaper (between 50 and 90 percent cheaper than its rivals). Demand explodes and the industry changes forever.

He price-simplified by totally redesigning the product. After declaring, “I can teach you the secret to running this airline in thirty seconds. This is it: We are THE low-fare airline,” he added, “Once you understand that fact, you can make any decision about this company’s future as well as I can.”3 Kelleher was being modest. He simplified Southwest’s product in several crucial ways, including: only point-to-point routes; one class of travel; no free refreshments or lounges; a fleet consisting solely of Boeing 737s, simplifying maintenance, scheduling, and training; ten-minute turnaround at the gate; utilize smaller, secondary airports, which are cheaper and faster than the main hub airports; and sell direct to customers. The system worked because low prices meant the planes were usually full and costs were pared to the bone.

As we know, with price-simplifying, price is everything. Price is the strategy. Everything else is tactics — the means to arrive at the target price. Price-simplifying rests on the observation that if you can halve the price, the market will more than double (and may well increase by ten times or more).

How can you test this assumption in your market? Is there already a low cost provider? Is it a commodity? Are there buyers expressing pain due to cost who always have substantial play in the market?

Even with a clear price target, it is an abstraction until you relate it to your future customers — those who are currently denied the product because it is too expensive. With price-simplifying, you are on the side of these target customers who want to buy the product or service but simply cannot afford it. Put yourself in their shoes and provide your product for a fraction of the current price.