Simple Is Beautiful
By: Hubert Crowell
Business people seem to love complexity. No sooner is a simple business successful than its
managers pour vast amounts of energy into making it very much more complicated. Take a
company with sales of $100 Million and total profits of $5 million. The 80/20 Principle suggests
that $20 million of the sales have produced $4 million of the profits, a return of 20%. And $80
million of the sales have produced just $1 million of the profits, a return of only 1.25%.
Routinely, when executives are presented with the facts, they at first refuse to believe the data.
Next they refuse to get rid of the 80 percent of the business that is unprofitable
Unprofitable business is so unprofitable because it requires the overheads and having so many
different chunks of business makes the organization so complicated. Very profitable businesses
do not require as much overhead. Ideally you could have a business solely composed of the
profitable business and it could make the same profits, provided that you organized things
differently.
The cost of complexity
The problem is not extra scale, but extra complexity. Additional scale, without additional
complexity, will always give lower unit costs. But that is seldom the case. When we enlarge the
business, we enlarge everything and try to provide more services, therefore increasing the
complexity and cost.
Understanding the cost of complexity allows us to take a major leap forward in the debate about
corporate size. It is not that small is beautiful. All other things being equal, big is beautiful. But
all other things are not equal. Big is only ugly and expensive because it is complex. Big can be
beautiful. But it is simple that is always beautiful.
Go for the most simple 20 percent
What is most simple and standardized is hugely more productive and cost effective than what is
complex. Always try to identify the simplest 20 percent of any product range, process, marketing
message, sales channel, product design, product manufacture, service delivery, or customer
feedback mechanism. Refine the simplest 20 percent until it is as simple as you can make it.
Make the simplest 20 percent as high quality and consistent as imaginable. Whenever something
has become complex, simplify it, if you cannot, then eliminate it.
Managers love complexity
Complexity is stimulating and intellectually challenging, it creates interesting jobs for managers.
Unless firms are facing an economic crisis, or have an unusual leader who favors investors and
customers rather than his or her own managers, excess management activity is virtually
guaranteed.
The 80/20 Principle
Always recall the 80/20 Principle, if you study the output your firm generates, the chances are
that a quarter to a filth of the activity accounts for three-quarters or four-fifths of profits.
Multiply that quarter or filth. Multiply the effectiveness of the rest, or cut it out.
Because business is wasteful, and because complexity and waste feed on each other, a simple
business will always be better than a complex business. Because scale is normally valuable, for
any given level of complexity, it is better to have a larger business. The large and simple business
is the best.
Assignment: Read Chapter 5 of The 80/20 Principle, by Richard Koch, ISBN 0-385-49174-3
Save this URL for future reference in your favorites folder.
Your comment will be graded and returned with a link to the next topic, if you have a good grasp
of the 80/20 Principle, then you will move on quickly. A lesser understanding will result in a
slower pace covering more material.
Exam: Explain in your own words why simple is better than complex.
Permission is granted to freely print, unmodified, up to 100 copies of the most up to date version of this document from http://www.hucosystems.com/articles/The_80_20_Principle_6.htm, or to copy it in off-the-net electronic form. On the net/WWW, however, you must link here rather than put up your own page.