Simplification leads to outsized business success (2 of 2; 4 min read)

What do the following people have in common?

Henry Ford; the McDonald Brothers and Ray Kroc; Walt Disney; Ingvar Kamprad; Herb Kelleher; Steve Jobs and Jony Ive; Akio Morita; Bill Bain; James Dyson; Mitt Romney; Jeff Bezos; Pierre Omidyar; Larry Page and Sergey Brin; Daniel Ek; Joe Gebbia; and Travis Kalanick and Garrett Camp.

They all believed in the words of Antoine de Saint-Exupery:

“A designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away. “

They built businesses, offered services and crafted solutions that were simple.  In his book, Simplify, Richard Koch, shares the principles behind his successful investment approach.  He looks for Stars. Stars are companies that are superior to their counterparts in many ways: they are great places to work, offer customers the solutions to best meet their needs and, great investments. Koch amassed the bulk of his wealth, achieving a 50% success rate, by investing solely in Stars.  This is impressive since the average investment success rate hovers around 10%. He earned a 53-times multiple on his money investing in only 16 companies over about as many years.

How to Simplify

Koch describes two strategies – price-simplification and proposition-simplification.  These two strategies are quite easy to understand but can be difficult to create.  Let’s take one at a time:

Price-Simplification

There are three precepts in this strategy

1. Make something much cheaper both to make and to supply. This must always be the primary objective.
2. Eliminate what Koch calls “expensive utility” — anything the customer can do without.
   • McDonald’s dispensed with waitresses and originally offered only nine menu options.
   • IKEA provided one style of furniture, reduced variety within each product category, and eliminated expensive shipping through flat-packed furniture and customer pickup.
3. Increase utility where it can be provided at little or no extra cost. Substitute cheap utility for expensive utility.
   • Henry Ford helped to perfect vanadium steel which made a lighter, more robust car that was much easier to drive and maintain. However, car costs were kept low. Simple design, lighter materials, and an automated production system all contributed significantly.
   • Dick and Mac McDonald provided better hamburgers and fries than were available at the local coffee shop. They created an assembly-line preparation process with well-documented procedures resulting in little to no wait time for hungry customers. The combination of these attributes allowed them to price their burgers at half the cost of their rivals while still being as or more profitable.
   • IKEA takes a necessary but typically unwelcome process and makes it fun. They know their customers and cater to their needs. By providing play areas for young families, inexpensive restaurants and offering those famous meatballs to give us the energy to keep going we stay longer and buy more.  Most important, IKEA turned a dreaded experience into an enjoyable one.

Coming up with the right combination of expensive and less necessary things to take away and inexpensive things to add takes patience and trial and error. However, the results can be spectacular and well worth the trouble. Knowing your customer and breaking free from the conventional thought processes are key to coming up with clever ways to offer just the right amount of value.

Proposition-Simplification

There are two precepts for the Proposition-Simplifier strategy:

1. Make something a joy to use.  Add utility through greater ease of use in the first place; then greater usefulness and/or art.
   • Apple is famous for the relentless pursuit of simplicity.   They have proven themselves as the best provider of simplicity with numerous products such as the MAC interface, the single button mouse, the iPod, the iPhone, iTunes, Apple Pay, etc. They add utility by making things easy to use meeting customers’ needs before they even know they need them.
2. Use simplicity to make the product cheaper to make; or at least to ensure that the extra utility far outweighs the extra cost.
   • Dyson’s bagless cleaner is see-through, easy to empty, and elegantly designed.  The “art” in the design and use of this premium product commands a higher price.
   • The Nest thermostat with its beautiful and well-thought out design and learning capability can cost up to $300.  The thermostats in my house are 1/10 that price.

Having the discipline and patience to design something that is a “joy to use” is rare. Apple is a good example, Dyson is another, Disney is a third. All of these companies can demand a high price and generate high profit (e.g. Apple has about 14% market share and 70% profit share) because they do three things extremely well:

1. They make their products and services extremely easy to use
2. They make them useful and,
3. Emotionally appealing.

What kind of simplifier are you?

Koch offers four questions that will help you decide:

1. Do your firm’s attitudes — its policies and culture — make it more disposed to pursue price-simplifying or proposition-simplifying?
2. Has a competitor already occupied one or both of the target positions?
3. Can you see the key to unlocking either position?
4. Does your firm have people with the necessary skills to execute the target strategy? If not, do you know how you might recruit them and from where?

Koch also provides a number of tests in his book, Simplify, to provide guidance on which strategy is best for you and where your business may have gaps to fill.  If you are looking to learn more, I recommend these additional resources:

• The Star Principle – Richard Koch
• http://simplify.fm/
• Richard Koch’s You Tube Channel

Thank you for reading!

Be Exceptional!

(www.catalystgrowthadvisors.com; bill@catalystgrowthadvisors.com)

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