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The Better Skills Test: How to Determine If You Should Price or Proposition Simplify Your Business In order to succeed as a simplifier, your firm needs to have the right skill set for your market, but it must also be better at simplifying in that way than any current or potential competitor.

By Richard Koch

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The following excerpt is from Richard Koch and Greg Lockwood's book Simplify. Buy it now from Amazon | Barnes & Noble | iTunes

In order to succeed as a simplifier, your firm needs to have the right skill set for your market, but it must also be better at simplifying in that way than any current or potential competitor. This is a hard test for companies and it is easy for them to delude themselves, or to miss one vital skill that they don't possess while some other firm does.

Think back to the personal computer war of the 1980s and 90s -- a war whose effects we're still feeling today, not least because it crippled not one but two giant corporations (IBM and Xerox) and was crucial in the rise of another firm (Apple), which may prove to be the biggest and longest-running success story of our era.

First, let's think about what happened to Xerox. That corporation -- or rather a spin-off from it -- could have become the most valuable in the world from the 1980s onwards. The computer scientists at Xerox PARC invented the modern PC and much else besides. They can lay claim to developing the desktop and the mouse, and they could -- perhaps should -- have been able to claim the power and the glory, too.

Related: The Keys Test: How to Determine If You Should Simplify Your Business

Imagine for a moment what would have happened if Steve Jobs, who was hugely impressed by what he saw at Xerox PARC in 1979, had decided to throw in his lot with the company. Imagine what would have happened if the leaders of the copier-company had enjoyed a collective fit of intelligence and decided to buy Apple. They could have funded such an acquisition out of their petty cash. Imagine what would have happened if the Xerox bosses had merged Xerox PARC and Apple, if they had put Jobs in charge of "Xerox Apple," if they had then spun it off to Xerox shareholders as a separately quoted company, with Jobs and his pals as substantial shareholders in the new entity.

It's a lot to imagine. Yet Xerox's cash coupled with Apple and Xerox PARC's expertise would surely have delivered a terrific second-generation PC -- complete with desktop, mouse, smooth scrolling and plenty of power -- not in the late 1980s (when the Mac finally achieved the feat), but in 1981 or 1982 at the latest. If that had happened, Jobs never would have been thrown out of Apple, and "Xerox Apple" wouldn't have messed around with the Newton, but instead would have moved on to the brave new world of the iPod, the iPhone and the iPad in the 1990s, rather than the 2000s. And Jobs, not Bill Gates, would have become the richest person in the world.

History tells a different story, though. On its own, Xerox PARC utterly failed to capitalize on its discoveries. There were two reasons for this. First, the research unit had weak or non-existent commercial skills, and no other department within Xerox had them, either. True, excellent product management skills could have been employed, but a head office that didn't understand the need for them was never likely to do that -- and it didn't! Xerox probably subtracted more shareholder value than any other company in the past century by not understanding the potential gold mine it possessed out in California.

Second, and more fundamentally, the folks at Xerox PARC didn't have the simplifying mentality of Jobs. They didn't understand the importance of ease of use. If they had, they would have made their mouse far easier to use, would have cracked the issue of smooth scrolling, and would have commercialized their version of WYSIWYG much more quickly. Nor did they think to make their machine as useful as it could be, or understand the importance of a slick appearance and a stylish design. This was because they never viewed the computer as a consumer product.

In short, the Xerox PARC engineers -- brilliant and trail-blazing innovators though they were -- didn't share Jobs' vision of a simple product. They easily comprehended, and rather relished, the complexity with which they wrestled every day. By contrast, they had no interest in simplifying because they liked complexity more than they liked simplicity. Anyone who has compared the Xerox Star with the Macintosh knows this to be true. The former was clunky, over-engineered and hard to use; the latter was intuitive, elegant and, once it had sufficient power, a joy to use.

And what about IBM? It wasn't a natural price-simplifier. It never aimed to provide the cheapest PC on the market, nor even the cheapest "quality" PC. And it was hobbled by being a high-overhead company. But was it a proposition-simplifier, or could it have become one?

Related: The Gap Test: How to Determine If You Should Simplify Your Business

If we propel ourselves back to the early 1980s again, we might argue that IBM set the standard in PCs, and it did so by simplifying. It introduced its PC in 1981, and within two years, it commanded a full quarter of the market, easily outselling the Apple II. Yet, from the moment the Macintosh arrived in 1984, it was clear that IBM had lost the proposition high ground because the Apple's operating system was so much easier to use. IBM scrambled around in alliance with Microsoft to produce its Windows equivalent, but it never caught up. True, IBM continued to outsell Apple by a wide margin for many years, but Apple kept the premium market in its pocket, as a higher-value and more profitable business as IBM continued to lose money on each and every PC it sold.

IBM should have gone one of two ways: either produce a machine that was clearly superior to the Mac (i.e. more useful, easier to use and more aesthetically appealing) or sell the lowest-price machine by some distance. It did neither. Instead, it remained stuck in the middle, outflanked by Apple at the top and by Hewlett-Packard, Compaq and Dell in the mass market.

But were the better options ever really options at all? In the premium market, IBM would have succeeded only by buying Apple and then allowing a "reverse takeover," whereby the leaders of the puny Apple would have been handed the reins of the mighty IBM. Such a scenario was always extremely improbable. So what about the mass market? IBM could have insisted that Microsoft -- then a small company that relied on its association with IBM -- not license its Windows software to other computer manufacturers. But IBM would still have been constrained by its high-cost structure -- its successful sales force and matchless technical support -- and its customer base, which was confined mainly to large and some medium-sized companies. It's hard to believe that HP, Compaq, Dell or another company wouldn't have found a way around the software problem -- possibly by sponsoring one of Microsoft's rivals -- and then leapfrogged IBM by selling direct to customers, rendering IBM's highly paid sales force a liability rather than an asset.

One possible salvation for IBM might have been to scour the world for the lowest-cost PC manufacturer and outsource all its manufacturing, closing its U.S. factories, dismantling its sales team and adopting the Dell model of direct selling. But then, of course, IBM wouldn't have been IBM.

IBM's position was hopeless right from the start (without desperate measures and complete transformation), because it faced one rival that was more skilled at proposition-simplifying and several others that were more skilled at price-simplifying. Nobody in the late 1970s or early 1980s realized that IBM was set to fail. Yet if the company's bosses had explored whether they were able to pursue either form of simplifying better than their rivals, they would have seen the writing on the wall.

Richard Koch

British Author, Speaker, Investor, and former Management Consultant and entrepreneur.

Richard Koch is an entrepreneur who has made over $300 million from starting businesses and investing in early stage venture capital. His businesses have included Filofax, Plymouth Gin, Belgo Restaurants, Betfair, FanDuel, and Auto1. Formerly he was a consultant with the Boston Consulting Group and a partner of Bain & Company before cofounding LEK consulting. He is author of many books on business and ideas, including The 80/20 Principle, which has sold over a million copies and been translated into 35 languages, and his newest title Simplify: How the Best Businesses in the World Succeed. Richard wrote the foreword to the Entrepreneur Press bestseller, 80/20 Sales and Marketing by Perry Marshall.

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