For the past forty years I’ve searched for simple, elemental, elegant and parsimonious principles to help individuals create great businesses. To qualify, a principle must be so overwhelmingly powerful that ordinary mortals – such as you or me – can reliably create extraordinary results, just by following the principle carefully.
In business there are just a few such principles.
Now I’ve found a new one – perhaps the best and most useful ever – and I’m really excited about it.
Up to now, I’ve believed that the best principle in business is the Star Principle – the best businesses are “stars” – they hold the number-one position in a market that’s growing fast. Stars can be incredibly valuable because they can grow exponentially, while also being very profitable and even cash-positive. I’ve started a few star businesses and invested in others and the results have been very good.
But there’s a problem. The Star Principle tells you whether or not an existing business is already a star. But if it isn’t – and 99% of businesses aren’t – the Star Principle does not tell you how to create a star business, nor how to overtake the market leader in a high-growth market and thus become a star.
So for many years, I’ve been searching for another Principle that can tell you how to do that, reliably, with a high chance of success.
Now I’ve found it.
The answer is to simplify a business and a market.
And there are two different and dependable ways to do that.
The Red Thread Running Through Stunning Business Success
It turns out that nearly all the great success stories of this century and the last one are stories of simplifying. This is the secret of Ford, McDonald’s, IKEA, Honda, Walt Disney, Penguin books, the Boston Consulting Group, Bain & Company, Southwest Airlines and its European imitators, Sony, Dyson, Tetra Pak, Charles Schwab, Vanguard, Apple, Amazon, Google, Facebook, and Uber.
Simplifying is the way to offer incredible value for money and so to make a market grow thousands or even millions of times.
There are two ways to simplify, as described by venture-capitalist Greg Lockwood and me in our forthcoming book Simplify.
The first we call price-simplifying. This requires cutting the price of a product or service in half, or more – sometimes over a number of years the price can be cut to a tenth of its previous level. If the price of a product is halved, demand doesn’t double. It soars. And if the product or service is simple enough, it can be sold everywhere around the world. When Dick and Mac McDonald cut the price of a hamburger from 30 cents to 15 cents in 1948 – and Ray Kroc held that price constant until 1967, despite high inflation – the hamburger market exploded, so that it is now measured in billions.
Yet price-simplifying only makes financial sense if you are able to make the product simpler to make and therefore cut costs by at least half. This is not easy. As Oswald Spengler wrote, “the simple notions are always the most difficult.” But it can be done – as demonstrated by Ford, McDonald’s, budget airlines, mini-steel mills, IKEA, Penguin and Kindle books, online brokerage, index funds, personal computers, and many other mega-successful ventures. And there is a reliable method followed by nearly all price-simplifiers, which can in principle at least be applied to any product or industry. It usually involves using radical product or service re-design, restricting variety and creating a universal product, cheaper materials, new technology in the broadest sense, massive scale, reorganizing an industry around the innovator’s business system, and co-opting customers so that they do much of the work.
Greg and I call the second and very different strategy proposition-simplifying. Think of any Apple device – the Mac, the iPod, the iPad. Or the Google search engine, or the Uber taxi app. Proposition-simplifying works if you can make the product a joy to use, because it is easier to use, more useful, and more beautiful.
As with price-simplifying, there is a common proposition-simplifying formula. It involves hiding incredible complexity through extremely clever product design, and a relentless focus on making the product both more useful and simpler to use.
Whereas price-simplifying is all about making it simpler for the producer, proposition-simplifying is all about making it simpler for the customer.
What the Two Simplifying Strategies Have in Common
They are different ways to provide value for money – either because the product becomes so much cheaper, or because it becomes so much better. And one thing that we can prove is that when a product or service is radically simplified, market size mushrooms – and most market share also goes to the simplifying innovator.
The result is that market value of the simplifying firm can increase by thousands or hundreds of thousands times.
In my next blog, I will describe a little more about how price-simplifiers operate, and in the subsequent blog I’ll do the same for proposition-simplifiers.
Simplifying is not the only viable business strategy. There are many others, that work perfectly for their practitioners.
Still, two cardinal points should be remembered.
The first is that the large majority of business returns accrue to simplifiers. For anyone interested in super-high returns, simplifying is a dominant strategy – probably the dominant strategy.
Even more important, from a consumer and human perspective, simplifying strategies benefit huge numbers of people. One of the defining aspects of humanity, ever since we began to fashion tools from flint, is the way we have been bound up with technology broadly defined. We have created our own environment through technology, one nestling within, yet transcending nature.
The techno-human environment is immensely enriching and stimulating, yet is also unrelenting in its pace. Everything always goes faster, and most things get more and more complex. So it is the simplifying strategies that are able to deliver the benefits of technology in ways that are relatively human-friendly. Without simplifying, we might drown in the torrential waves of technological progress, and might forget that the main justification for business is not the money it makes for some, but the good it does for the many.
No matter how the future plays out, it will be the simplifiers who deliver benevolent change in acceptable, understandable, affordable, and exciting ways.
Why shouldn’t you be one of the simplifiers?
Simplify by Richard Koch and Greg Lockwood will be published by Piatkus on April 7. The US edition will be published by Entrepreneur Press in September.