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.
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.
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…