“Long runs on Broadway,” Tom Peters notes laconically, “are rare.” Are market leaders naturally vulnerable to simplifiers?
Well, there are many instances where they have been – IBM suffering from DEC’s simplified ‘minicomputers’ in the 1960s, and in the 1980s been beat up in PCs both by proposition-simplifiers such as Compaq, HP and Dell, and by proposition-simplifier Apple; DEC and Wang also falling to the PC price-simplifiers; Xerox succumbing to Canon and Ricoh with their smaller, simpler desk-top copiers; Bethlehem Steel and USX losing market leadership to price-simplifier Nucor with its lower-cost mini-mills; Pan-Am, TWA and American Airlines all going bust after losing US market leadership to Southwest Airlines; Kodak falling to Sony’s digital cameras; Lotus, once the world’s top software firm, being supplanted by Microsoft; Encyclopaedia Britannica, dominant in its market for 222 years, being wiped out by Encarta and Wikipedia; Nokia losing leadership in mobile phones to Apple; Blockbuster being outgunned by Netflix; Alva Vista being replaced by Google search; Barnes & Noble humbled by Amazon – and then all the other digital players ousting their real-world counterparts.
In all these cases market leadership was forfeited to a simpler and cheaper provider, or to a proposition-simplifier whose product or service is a joy to use.
There is no inevitability to the decline of market leaders. But it is prudent for them to check whether they are in danger.
Warning Signals from Price-Simplifiers
- A much cheaper product emerges. It does not matter if its performance is inferior – it will get better over time. Anything that is 25-50% cheaper, if it is good enough for at least one segment of the market, is a serious threat.
- The new product comes from a new firm – it may play the game differently.
- So is the new entrant different? Is their product smaller, lighter, faster, or all three? Is it based on new technology? Is its business system different? Is the company more specialized? Is its product range narrower?
- Is there a simplifier who is growing fast, even if it is currently tiny?
- Does the new firm have lower margins than you? This may discourage you – wrongly – from supplying the new product yourself.
- If the new firm had your volumes, would it be able to undercut you by 50 percent or more?
- Your firm could make the new product, but decides not to. That decision will be hard to rescind, even when the product takes off.
Warning Signals from Proposition-Simplifiers
- The product or service is designed differently. It is radically simpler, using a new method or technology, or it is based on different assumptions about what the customer wants.
- The new product is a joy to use.
- It is priced at a premium to your product, yet eating into your sales.
- The new product comes from a recent entrant to the market.
- And at least one new entrant is growing fast.
- Your firm either can’t make the new product or chooses not to.
Five Bad Reasons Why Managers in Strong Firms Don’t Simplify
It is not that leading firms can’t simplify. Rather, there are deep managerial tendencies making companies both reluctant and slow to simplify:
First, there is the overhead trap. Companies have expectations about gross margins and are unwilling to develop products that deviate either up or down from their existing overhead and margin levels.
Second, beware the cannibalization trap. The leading firm does not want to eat its own lunch. So they allow challengers to do it for them.
Third, recognize the customer trap. The firm rejects the new product because its best customers do. Further down the line, customers may change their mind.
Fourth – one of the most insidious traps is complexity. Managers, especially if they are engineers, love complexity. Or else they become accustomed to it, thinking it is the only route to progress. After all, this is how most products evolve.
Finally, there is the skills trap. The firm may recognize correctly that it doesn’t have the right skills for simple products. But it fails to recognize that these can be obtained through acquiring a young, small firm – often quite cheaply.
These, then, are deep-rooted reasons why number one firms usually do not simplify. So is managerial failure inevitable?
No, no, no. There are many exceptions to the typical pattern. If the leaders of leading firms understand what might happen, they can correct for the managerial bias towards complexity.
How Market Leaders Can Simplify Without Tears
To repulse a simplifier, all a “dinosaur” has to do is to commit to providing the purest possible form of either price- or proposition-simplifying. Then it must adopt the structure that best fits its chances of doing that.
Acquisition of a disrupting firm is often the best and easiest way – provided you can resist the temptation to interfere afterwards.
It is easier to counter price-simplifying than proposition-simplifying. In the latter case, early acquisition of the simplifier can be the only antidote to catastrophe.
Dinosaurs lived a very long time. So can the market leading firm run by a smart CEO.
To identify the best option for your company if you face a simplifying rival, visit www.simplifyforceos.com
This is the fifth and final post on Simplify. The gods of economics and customer psychology look kindly on simplifiers. A small new venture – following either of the templates we have discussed – can hit the jackpot.
More importantly, simplifiers not only help themselves, but also benefit society and everyone in it to a much greater degree than non-simplifiers.
Remember – although there are limits to the genius of simplifiers, there is no limit to the number of simple universal products that can be imagined. And if they can be imagined, they can be created.
GO FORTH AND SIMPLIFY!
Simplify by Richard Koch and Greg Lockwood was published by Piatkus on April 7th.