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then co-opting independent players into your new system.
Creating leverage within your supply chain
Michael Dell’s business model combined orchestration with direct selling.
This may appear to contradict our advice to standardize and eliminate variety as much as possible, but every rule has an exception.
Does the rule impede the goal? Override the rule with a better tactic for your business
Dell found a low-cost way to personalize machines by working to order and thus avoiding the most dangerous cost of variety
Operating on short cycle times, with redu...
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Having the lowest operating costs in the industry.
it operated on negative working capital, receiving money from customers before it paid its suppliers.
Dell’s prices were much lower and its net margins significantly higher than those of its competitors.
move upmarket and started to manufacture several products that did not fit within its price-simplifying formula.
Interesting...price simplifying may be constrained to down-market while proposition simplifying may be better up-market, and your firm should treat it as a new business with a new strategy
Because these two orchestrators enjoy such enormous customer volumes, they are able to force their suppliers to cut their prices to the bone; and because their prices are so low, they are able to maintain enormous customer volumes.
There is an implicit deal with the customers — they take on some of the functions that used to be performed by the firm, and in exchange the firm cuts prices down to levels that the customers can afford.
Transferring some of the work to the customers with the value to the customers
In McDonald’s, the customer takes on the job of the waiting staff, some of the kitchen staff and even some of the cleaners. By participating in this system, the customers enjoy lower prices and faster service than they would in a traditional restaurant; and McDonald’s benefits because it greatly reduces its labor costs.
When added together, these compromises make a large economic difference. The customer cheerfully accepts them because the end result is an unbeatably low price
Firms that co-opt customers are really orchestrating them. Like all forms of orchestration, the benefits of vertical integration are enjoyed without the cost of ownership.
Co-opt and orchestration (both require leverage or buy-in along supply chain) as vertically integrated without ownership and overhead of integration
Suppliers are seduced by high volumes. Customers are seduced by rock-bottom prices. The market is redefined because the suppliers and customers complement each other,
Price-simplifying through direct selling kicks in when at least two of the following three conditions apply: An expensive middleman is eliminated. New technology is used in some shape or form. There is a clever simplifying idea at the root of the new business.
Clever simplifying idea is a secret or insight that enables a better strategy or business model
The index fund idea rested on three decades’ worth of academic work which indicated that fund managers, in aggregate, underperformed stock market indices.
Insight brought to the industry
was fascinating, but nobody had done anything about it before Bogle.
The Innovator’s Dilemma by Harvard professor Clayton Christensen. He documents how new, technically inferior, yet much cheaper technology — what he calls disruptive technology — changes markets and usually results in a new market leader.
The story typically plays out in the following way. First, the new technology satisfies only the bottom end of the market.
Second, big companies, although they have the option to use the new technology, shun it. They tend to do this for several apparently very good reasons. One is that big companies’ customers usually say that they are not interested in the new technology and its cheaper products because their performance is inadequate for their needs. Another is that “it is very difficult for a company whose cost structure is tailored to compete in high-end markets to be profitable in low-end markets as well” — established companies are used to operating with high overheads. Finally, “small markets don’t solve
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These are all powerful arguments against the adoption of many new technologies.
Third, since the established market leaders fail to embrace the new technology, it falls to generally small-scale recent entrants to the industry to champion the new products and try to find a market for them through trial and error; typically, at first, in new applications.
This is the typical pattern: the new technology improves its performance until it ultimately satisfies most or all of the main market.
the old technology usually improves at the same time, but to such an extent that it eventually outstrips the requirements of almost every customer.
Moves beyond its utility and benefit into confusing it's customers with roo many features or unnecessary additions
“when the performance of two or more competing products has improved beyond what the market demands . . . the basis of product choice evolves from functionality to reliability, then to convenience, and, ultimately, to price.”
Commodities eventually compete on price
if there is a new, inferior but much cheaper technology that has not yet been seriously adopted in your industry, and if it has the potential to cut costs in half, you would be wise to jump in before anyone else does. Construct a business system around it so that you can become — and remain — the low-price player.
If the price cut is significant, if the design is good and you have developed a universal product, and if the business system is unique, simple, and elegant, you will win . . . unless another firm copies your approach and builds volume faster than you do.
Now raise capital and grow!
Maximize sales and take an early lead, even if that means operating at zero or negative margins for a few years. If cash is a constraint, seek venture capital. As volumes build, your costs will decline and you will be able to take a small margin on high revenues.
Once the concept is proven in one place, take it nationwide, then international and global as quickly as possible.
The first of these is competitive security and therefore solid margins, because no rival can attain the same scale and hence the same low-cost position.
The second big advantage of price-simplifying is that it lends itself to growth through internationalization, which dramatically increases revenues while also enhancing scale and margin benefits.
If you have a well-designed, low-cost product that can be sold for half the price of a comparable product, go for it, even if that rival product is technically superior.
In every case, halving prices multiplied the market size;
the revenues of the price-simplifier rose by several thousand times
the value of the company rose sharply,
the compound annual growth rate of value increased impressively,
outperformance relative to a comparable non-simplifying company or the stock market was also striking,
the value increase continued over several decades, even when the company stopped innovating or cutting prices.
proposition-simplifier because it made book shopping (and then shopping in general) so much easier.
offering extraordinary range and the convenience of buying almost anything immediately,
“1-click” system made it even easier to buy.
reviews and suggestions provide a wealth of information to inform the purchase decision
the creation of the Amazon marketplace has allowed other sellers to play along, which has enhanced convenience and increased product range
Important for their flywheel.
Amazon makes it a joy to shop, principally through greater ease of use,
The true measure (for all businesses) should be the proportion of “value-added” that price-simplifiers remove in a price cut.
proposition-simplifiers who have a genuine breakthrough product can extract their pound of flesh: unlike price-simplifiers, they do not have to accept a trade-off between growth and margins.
The packs costs more than conventional containers, yet customers save more money than they pay Tetra Pak. This is achieved because there is less need for refrigeration, spoilage is reduced, and transportation, storage and disposal costs are all cut.
Yet the advantages that accrue to the company’s customers in terms of ease of use, greater speed in production, and logistics — as well as further advantages for its customers’ customers (supermarkets) — fully justify calling Tetra Pak a proposition-simplifier.
there is no evidence that price-simplifying is better than proposition-simplifying, or vice versa.
