Post by: Richard Koch | Entrepreneur | Published on: 12/06/2016
Product redesign is crucial when price-simplifying. But the price-simplifier has an even more fascinating and far-reaching mission than that: Once the product’s been simplified, they need to transform their total business system and ensuring that it is scaled up to become dominant and irreplaceable.
There are six key steps in the overall process. Typically, one step is pre-eminently important while a couple of others are significant as well. You may skip a step entirely if it isn’t relevant to your business, provided that you settle on one or two that have the potential to turn your industry upside down. Having said that, in most of our case studies, the first two steps have proved vital.
Step 1: Automate.
By “automate,” we mean you should standardize a product or service so that it can be repeated more automatically, with the result that it demands fewer resources and/or less managerial intervention, and enables you to operate at much greater scale while maintaining consistent quality. The common theme is a dramatic reduction in cost.
But automation can take many different forms, and the payoff is greatest when an entrepreneur automates something that’s previously been regarded as “impossible” to automate. For example, the moving assembly line made it possible to automate the production of cars; the Betfair betting exchange automated placing a bet; and the Uber app automated ordering a taxi.
To see how it can be done, let’s think about how Henry Ford automated car production, because this is still one of the best examples for any price-simplifier to follow. Ford started by redesigning his Model T in such a way that its production could be automated.
There were four milestones in Ford’s quest for automation. First, he built the biggest factory in the world. Second, he organized production so employees moved from one work station to another in a prescribed order. His third milestone involved concocting a series of conveyor belts, rollways and gravity slides, so that the manufacture of everything except the chassis was put on to a moving line in 1913. The production line had arrived, replacing batch production. The fourth and final step was when Ford put the assembly of the chassis on to a moving line as well. Prior to this, it took 12 hours and 28 minutes to assemble each chassis; by the spring of 1914, the assembly line had cut this to just 1 hour and 33 minutes. The price of the Model T fell from $950 in 1909 to $360 in 1916.
You can simplify almost anything if you view it as a product to be standardized and automated as far as is humanly possible. Opportunity lies wherever an industry has not yet been automated.
Step 2: Orchestrate.
Orchestration means pulling the strings in an industry by seizing the high ground — the customers — and then co-opting independent players into your new system. They benefit, but you benefit even more.
IKEA is a prime example of how to orchestrate. Before IKEA, you had furniture-makers, most of whom were small scale. You also had retailers, again mostly small scale. You had customers, most of whom were confused as to where to go to buy what they wanted, and often daunted by the high prices of decent furniture. And you had logistics providers — transport companies that were mainly firms outside the industry, for whom furniture was a minor product. No strong brands. No integration. No economic logic. High prices, but generally low profits.
IKEA provided a unifying plan — to the great benefit of customers and to IKEA itself. The business system is close to perfect, because:
- It achieves stunning economic benefits for customers, who are happy to play their part in the orchestra.
- The combination of retail scale and design/brand power renders manufacturers subservient.
- Once the system was fully in place, there was no room for a larger imitator. The IKEA system could have been imitated in a particular national market, but without IKEA’s overall scale, any imitator would have been hamstrung by much higher costs and prices. As with any successful business system, scale feeds its power, providing protection against all comers.
Step 3: Co-opt customers.
IKEA makes an implicit deal with its customers — they take on some of the functions that used to be performed by the firm, and in exchange, the firm cuts prices down to levels that the customers can afford.
With IKEA, the customer assumes the job of final assembly — a huge part of the total old system cost. The customer also effectively takes on the traditional role of the salesperson by using a catalog and following signs to find the product they want. They then carry their goods to the checkout and take them home — jobs that in the old system required expensive warehouses and a fleet of delivery trucks.
Firms that co-opt customers are really orchestrating them. Like all forms of orchestration, the benefits of vertical integration are enjoyed without the cost of ownership. For example, IKEA’s customers are the equivalent of an in-house delivery service. The orchestrator is like a benign spider, welcoming suppliers and customers into its web, with the main technique being seduction. Suppliers are seduced by high volumes. Customers are seduced by rock-bottom prices. The market is redefined because the suppliers and customers complement each other, and both gravitate to the common space demarcated by the orchestrator.
Step 4: Sell direct.
In the early nineteenth century, there were no chain stores selling general merchandise. But with the advent of the railways, it became possible to ship goods across countries, even one as vast as the United States. First to take advantage of this new transport system to sell goods by mail-order catalog was Aaron Montgomery Ward in 1874. The following decade, the great publicist and salesperson Richard W. Sears entered the industry. But he went further, because his firm, Sears, Roebuck, was willing to accept cash on delivery and offer a money-back guarantee. By providing a better deal than Montgomery Ward, and undercutting retail stores by about a quarter, Sears had become the market leader by 1900.
Sears’ new business system was based on offering the widest range of goods, making the largest purchases of items from producers large and small, and the company’s extraordinary catalog. Sears was about “the humbling of the products,” noted one business expert. Some products may have been available only in certain areas, but Sears brought them everywhere. Other products may have been technically complex or expensive, previously sold only to the upper class, but. Sears lowered the price and sold them to the average citizen.
Price-simplifying through direct selling kicks in when at least two of the following three conditions apply:
- An expensive middleman is eliminated.
- New technology is used in some shape or form.
- There is a clever simplifying idea at the root of the new business.
Can you think of a new way to sell direct, using new technology that nobody has yet applied to your industry?
Step 5: Use simpler technology.
New, technically inferior, yet much cheaper technology that’s more convenient to use changes markets and usually results in a new market leader. Recent examples include computer tablets and smartphones disrupting the laptop market, and apps such as Uber and Airbnb challenging the traditional taxi and cheaper hotels markets.
The story typically plays out in the following way. First, the new technology satisfies only the bottom end of the market. Second, big companies, although they have the option to use the new technology, shun it. Third, since the established market leaders fail to embrace the new technology, it falls to generally small-scale recent entrants to the industry to champion the new products and try to find a market for them through trial and error; typically, at first, in new applications. The new technology improves its performance until it ultimately satisfies most or all of the main market. And while the old technology usually improves at the same time, it does so to such an extent that it eventually outstrips the requirements of almost every customer. It becomes unnecessary to use the old technology because the new, simpler products are more than adequate.
Enter the price-simplifier. One of the newcomers to the industry tends to win by being in the right place at the right time, adopting the new technology, providing the lowest-cost and price product, and scaling up to take the leading market position.
So, if there’s a new, inferior but much cheaper technology that hasn’t yet been seriously adopted in your industry, and if it has the potential to cut costs in half, you’d be wise to jump in before anyone else does. Construct a business system around it so that you can become — and remain — the low-price player.
Step 6: Scale up and roll out internationally.
Your firm will be most vulnerable when you’ve redesigned the product and the business system and have just started to put them in place. If the price cut is significant, if the design is good and you have developed a universal product, and if the business system is unique, simple and elegant, you’ll win . . . unless another firm copies your approach and builds volume faster than you do. If that happens, you’ll almost certainly lose.
Scaling up quickly is therefore vital. Maximize sales and take an early lead, even if that means operating at zero or negative margins for a few years. If cash is a constraint, seek venture capital. As volumes build, your costs will decline and you will be able to take a small margin on high revenues.
Once the concept is proven in one place, take it nationwide, then international and global as quickly as possible. History shows that when a firm with a genuinely universal and attractive product, such as Coca-Cola, leaves a gap in a market, allowing a local imitator to grab first-mover advantage, they may never recover. For instance, Coke was slow to enter the Middle East and, as a result, Pepsi took the lead there, a lead it’s never surrendered.
Reference Article: https://www.entrepreneur.com/article/284568