The following excerpt is from Richard Koch and Greg Lockwood’s book Simplify. Buy it now from Amazon | Barnes & Noble | iTunes
Are market leaders naturally vulnerable when faced with firms that start to simplify their markets? The honest answer is: We don’t know.
Related: How This Successful Company Simplified the Business Consulting Industry
On the one hand, a long and impressive roll-call of blue-chip firms have seen their market value and profits collapse almost overnight when challenged by simplifying insurgents. Here are some examples:
- In the 1960s, IBM lost a large portion of its market when DEC introduced “minicomputers,” which, as the name suggests, were much smaller and simpler than mainframes.
- Two decades later, despite being the PC market leader from 1981 to 1985, IBM again suffered at the hands of simplifiers, outflanked by the price-simplifiers Compaq, Hewlett-Packard and Dell, and unable to stop proposition-simplifier Apple securing the lucrative upper tier of the market. IBM finally stopped making computers in 2005.
- DEC and Wang also lost their businesses to the PC price-simplifiers in the 1980s, having been the dominant forces in their respective segments — minicomputers and word processors.
- Xerox succumbed to Canon and Ricoh after the insurgents introduced smaller, simpler copiers that could sit on a manager’s desk.
- Integrated steel mills, such as Bethlehem and U.S.X, lost market leadership to price simplifier Nucor with its lower-cost mini-mills.
- Pan-Am, TWA and American Airlines all filed for bankruptcy after losing U.S. market leadership to Southwest Airlines.
- Kodak lost out to Sony when the latter introduced digital cameras.
- Lotus, once the world’s leading software firm, fell to price-simplifier Microsoft.
- Encyclopedia Britannica, which had been the market leader for 222 years, was wiped out by price-simplifiers Encarta and Wikipedia.
- Nokia, once the dominant mobile phone manufacturer, was devastated by Apple’s and Samsung’s introduction of smartphones.
- The video-rental market leader, Blockbuster, was outgunned by Netflix.
- AltaVista lost its lead in online searching to Google.
- Barnes & Noble was humbled by Amazon.
In light of this list, it would be easy to argue that simplifying firms with clearly superior propositions and/or simpler business models typically win — as long as the change they initiate is sufficiently radical.
The problem with this argument, however, is that it’s statistically weak. There just aren’t enough examples to generalize. There’s also the issue of survivor bias: We don’t celebrate — and rarely even recall — when a leading firm sees off the challenge of a simplifying rival.
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For sure, there’s a general tendency for simplifiers to emerge victorious, but it’s not inevitable. There are plenty of counter-examples, such as the hotel industry, which has quite complex international systems, yet nobody has come close to challenging Hilton or Marriott. Airbnb — valued at $10 billion in a private equity transaction in April 2014 — may triple the size of the bed-and-breakfast industry, eat into the lower and middle reaches of the hotel sector and, as it owns no hotels itself, become extremely profitable, but it’s no threat to the luxury hotels. They’ll only succumb to a “joy to stay” innovator, and it’s hard to see that happening yet. At present, the big boys’ rivals are mainly local boutique hotels that are able to trade on their unique locations and the individual skills of their owner-managers, so they cannot be replicated on a large scale.
There’s also the food industry, where giants such as General Mills and Kellogg’s don’t appear to be vulnerable to simplifying rivals. Similarly, the hugely complex firms of Unilever and Procter & Gamble have faced no serious challengers. Their brands — many of which are several decades old — seem to insulate them from competition. How long this situation will last is a matter of conjecture, not statistics.
Furthermore, simplifiers don’t always face a single dominant player. Sometimes the dinosaurs form a large pack of similar-sized animals. McDonald’s, Direct Line, Starbucks, Twitter, IKEA and many other simplifiers transformed their industries without replacing a dominant leader, because there wasn’t one when they began. These simplifiers didn’t kill Goliath; they drove dozens of smaller operators out of business.
Warning signals tests
Certainly, dominant firms can’t afford to be complacent. The sensible approach is to watch out for the wrecking ball, and take steps to avoid it before it’s too late. The attacks can come from price-simplifiers and/or from proposition-simplifiers. Their respective warning signals are somewhat different from each other.
Warning signals from price-simplifiers
1. A much cheaper product emerges. It doesn’t matter if the new product’s performance is inferior. If it’s good enough for the market, it’s a serious threat. The mere existence of a product that is 25 to 50 percent cheaper should set off alarm bells for the leader. The only safe assumption to make is that the new product will gain in performance and become even cheaper as volume increases and its business system develops. It also doesn’t matter if the new product is rejected by your customers and attracts only a new type of customer. Your customers may change their minds later, once the product improves and becomes even less expensive.
2. The firms making the new product are recently established. This means their impact can’t be determined yet and they may not be constrained by traditional ways of operating.
3. The new entrants are playing the game differently. Their product may be smaller, lighter, faster or all three. It may be based on new technology or on customers accepting some of the work that’s performed for them in the established system. The business system itself may be different. The challengers may be more specialized, making only one product or a few, so their product range is far narrower than those of established firms.
Related: 3 Ways to Redesign Your Product and Spark a Price Revolution
4. At least one simplifying firm is growing fast. Even if it has a tiny market share at present, it may soon start to grow exponentially. This is easy to overlook or underestimate. Don’t rely on market statistics; investigate the firm’s potential growth directly.
5. The new firm has lower margins than yours. Its business may seem to be unprofitable, or only marginally profitable. This is a warning because it may discourage you from making the new product yourself.
6. The new product has the potential to cost much less to make than your rival product. If the new firm were to achieve your volumes, would it be able to undercut you by 50 percent or more?
7. Your firm could make the new product but chooses not to. If you want to make a new product, you’ll find a way to do it. If you decide not to make it, your decision will be hard to rescind, even when the product becomes viable.
Warning signals from proposition-simplifiers
You’ll notice that the first three warnings here are different from those in the previous list:
1. The product or service is designed differently. It’s radically simpler, using a new method or technology, or it’s based on different assumptions about what’s important to the customer.
2. The new product is a joy to use.
3. The product is priced at a premium to yours, yet it’s eating into your market share.
4. The challenger is playing the game differently.
5. The firm or firms are recent entrants to the market.
6. At least one of the new entrants is growing fast.
7. Your firm either can’t make the new product or chooses not to.