What do the biggest business success stories – from Ford to Uber via McDonald’s and Ikea – have in common? Author, consultant and serial entrepreneur Richard Koch offers the answer – and it’s anything but rocket science
Leonardo da Vinci once referred to simplicity as “the ultimate sophistication”. No argument there from Richard Koch. The celebrated author has spent four decades analysing the international business landscape in a quest to identify the basic principles that underlie smart entrepreneurial practice – and has come to a conclusion that forms the bedrock of his latest book, Simplify: How the best businesses in the world succeed.
“Whether you’re a large or small business, if you really want to succeed, the best and most reliable way to do it is to simplify,” Koch tells Director.
“Nearly all of the most successful businesses of the last century – those which have made a huge amount of money, gained huge market valuations and lasted a long time – they’ve all adopted one of two basic ways of simplifying.”
Koch refers to the first of these as ‘Price Simplifying’. “The essence of it is, you make the product simple to manufacture and deliver; reduce variety, and design the product or service in such a way as to eliminate as many features, and as much product line, as possible; you then make [your commodity] universal and sell it throughout the world.
“When McDonald’s was first set up in 1948, [founders] Dick and Mac McDonald took the classic American coffee shop menu, which traditionally had hundreds of items on it, and reduced it to nine,” he explains.
“Then they simplified the service – no one was used to lining up for food at that time – then co-opted the customers into clearing up after their meal. This way, they were able to halve the price of a hamburger from 30 to 15 cents. It was an incredible achievement.”
Ray Kroc, who purchased the business from the brothers in 1961, then turned the venture global. By the time he died in 1984 a new restaurant was opening every 17 hours.
McDonald’s wasn’t the first business to spawn an entirely new industry using the Price Simplifying method. “Henry Ford focused on very simple design and functionality – his Model T was made out of four components where traditionally it had been made out of 100 – and got the cost down to 20 per cent of what it had been.
“He then distributed on a scale never contemplated before. Traditionally, only rich hobbyists were motorists – so he made cars available to the middle and skilled working classes. The market size exploded, and the world’s geography changed dramatically with freeways, malls and so on.” Ford’s market share, meanwhile, surged from nine per cent in 1908 to 61 per cent in 1921.
A more contemporary example is Ikea: “It’s completely changed the furniture industry, making it on a scale that no one ever had done before,” says Koch.
“The flat-pack came in because half the cost of furniture comes down to transport. By co-opting the customer to drive to one of the megastores and do the assembly themselves, they’ve made prices 50-80 per cent lower than comparable items elsewhere.
“They have a lot of categories but limited range within them. They get manufacturers to make the stuff for them on a scale they couldn’t previously have done because there was no one to take the product.
“Their huge stores and non-ownership of the manufacturing process enable a massive increase in volume. Then, like McDonald’s, they’ve internationalised it. The concept is an incredible leap of imagination.” Ikea currently boasts 298 stores in 26 countries, and $36bn (£25bn) in revenue per year.
The major commercial benefit of Price Simplifying, says Koch, stems from a thumb-rule whereby, as long as you at least halve the price without compromising the basic commodity – budget airlines still get you to the same destinations, safely, and in the same time-frame as any other airline – you won’t just double sales but increase them up to 100-fold.
The other way to harness simplicity, Koch refers to as ‘Proposition Simplifying’. “It looks at things from the customer’s point of view and dictates you provide something which is a pure joy to use; which totally transforms the user experience. There are three elements to that: making things easier to operate, more useful and finally, more beautiful aesthetically.
“Steve Jobs’s biographer, Walter Isaacson, has noted that Jobs ‘made devices simpler by eliminating buttons; software simpler by eliminating features; and interfaces simpler by eliminating options’,” says Koch.
In the decade after 2001 – the year in which Jobs introduced a now-iconic MP3 player which, preposterously at the time, had no on/off switch – the company’s stock went up in value about 3,000 per cent.
Google is another prime example, says Koch – quicker and easier to use, with its complexity concealed from the user – as is Uber, which “has doubled in value despite all the controversy, because it’s a joy to use – you don’t have to flag down a cab, they’re not going to take the long way round, you don’t have to tip, you can split the fare easily, you know when it’s going to arrive…”
So what could British SMEs do to take advantage? Both modes of simplifying offer increases in value for money, but are suited to entirely different commercial entities, he says.
“If you have a production-based DNA, you could think about price simplifying,” says Koch, “while if you’ve got a customer and marketing DNA, you should think about proposition simplifying. Think about gross margins too. Companies that have very low gross margins are naturally orientated towards scale.
“If you’re setting up a hotel chain and asking the question, ‘Can we take on the Hiltons or Marriotts of the world?’, which would fall into the Proposition Pricing bracket, you could take some lessons from boutique hotels, and consider what people like about them – excellent service, quirky design – and make a better proposition than the existing ones.”
In essence, with Price Simplifying the customer has to fit in with the company, while with Proposition Simplifying, the company fits in with the customer. Whichever model suits you and your business, that nugget of Renaissance wisdom – “Simplicity is the ultimate sophistication” – may just be the breakthrough your business needs.
Richard Koch spoke to an audience of business leaders at the IoD’s Breakfast Time Books event in May. Afterwards he sat down with the James Sproule for a further discussion. Watch here
Richard Koch CV
Early career Shell, Pedigree Petfoods, Boston Consulting Group, Bain & Co
1983 Co-founds LEK Consulting, the fastest-growing global strategy boutique of the 1980s
1990 onwards Operates as a venture capitalist, investing his own capital, backing successful rescues of Filofax and Plymouth Gin and the start-up of Zola hotels and Belgo restaurants. Koch was also an early investor in Betfair and FanDuel
1997 Publishes The 80/20 Principle: The secret of achieving more with less. It has since sold more than a million copies and been translated into 34 languages
2016 Simplify: How the best businesses in the world succeed, by Richard Koch and Greg Lockwood is published on 7 April
Watch a clip of Richard Koch