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At a very high level, a company may be viewed as a “system” that delivers products, services or  a combination of both.

These products or services can be made highly specific to fulfill the most convoluted customers’ requirements or even to meet artificially bloated expectations. They can be geared toward meeting detailed and intricate specifications or...they can also be made quite generic.

Obviously, the more generic the products or services are, the simpler the delivery system – i.e. the commercial or public organization – can be. Alternatively, the more specific, personalized or ad hoc the products or services are, the more sophisticated and flexible the delivery system has to be. The cost of running and operating the delivery system increases even faster than its sophistication level because the resources that it then needs are more expensive. 

The key element that ultimately determines the market success of a product or a service is the "customer value/price" ratio (except for a few markets like the luxury market or safety and security services). There exists an implicit proportionality relationship between customer value and price. However that relationship is "quite loose" and the overall purpose of Strategic simplification is to de-correlate, to the largest possible extent, the two components of that relationship in order to maximize customer value while minimizing cost. Customer value is increased by raising process efficiency and the delivering cost - and therefore also the price - is compressed by pruning off unnecessary complexity.

This places the organization at an efficiency optimum that goes along with sharp growth for a commercial organization or with optimal social service for a public institution. 

The optimum is reached by focusing on the most easily achievable 80 % businesses objectives while working out the inefficiencies of the remaining 20 %. This does not necessarily translate itself in a significant amount of lost business. Customers have a much greater resilience to adaptations in product or service specifications than what is usually assumed. However they always show little tolerance toward breaches in product or service quality. Much of the complexity is driven up by customers trying to get the best possible bargain from their suppliers (see complexity drivers). This includes negotiating all possible details (product or service features, pricing structure, payment conditions, delivery conditions, packaging, warranties, etc.). If the supplier makes no concession in order to keep its offering as standard as possible the customer can either walk away or consider that he gets enough value for its money and still make the deal. The crux of it all consists in accepting that a few customers walk away because making the necessary concessions to keep them would add too much operational complexity and therefore too much operating cost. Based on the Pareto law the number of customers so impacted (pushed toward the exit) is marginal whereas the effect on cost and therefore on margin is quite significant.

It takes always business courage to forfeit some customers simply because attracting them would deteriorate operational efficiency too much. It goes against the ingrained commercial tendency of maximizing the turnover. It also goes against the idea that companies have to attract customers by offering high added-value services in order not to have to compete on price. One must always keep in mind that the prevailing purpose of business is to maximize its growth rate. This becomes translated into maximizing shareholders' value because the market, by nature, internalizes growth perspectives. This growth is best achieved by skimming the most profitable parts of a business and then moving on to another market segment or to another geographic area or doing both.

Even though this methodology might look simple at first glance it is quite sophisticated and far from easy to implement. It requires to vanquish  numerous and heavy natural internal resistances. Whatever biased this might sound achieving success in that sort of endeavor requires to resort to external assistance. We would feel honored if you contacted us to share our respective view on this strategic topic.

Ó IT Cortex

Origin ] [ Heuristics ] Pareto Law ] Theory ] Examples ]