3 min read

Simplicity in Business

In this essay, I explain why simplicity in business creates the best moat against competition.
Simplicity in Business
Photo taken during a walk. Credits: BL

The best businesses have one interesting feature when the company’s vision and strategy are described by the founder of the company: the business strategy for the company is extremely easy to communicate but difficult to execute.

This insight came about after I read the book “Warren Buffett: Ground Rules” by Jeremy Miller based on insightful analyses of Buffett’s annual letters to the shareholders from Berkshire Hathaway and Elon Musk’s two blog posts on Tesla’s strategy in 2006 and 2016 repeatedly.

What is remarkable about all these writings centered on how these founders can state their strategy without fear of being copied by anyone out there and yet no one can achieve the same feat as they have done. They encapsulate clear thinking from first principles that very few can match. If you can state the mission and vision of your company without fear and lay out the strategy to how you can achieve them with the next steps, it can be a competitive advantage for you against all the other competitors. The methods that they adopt require a tremendous amount of hard work and a strong attention to details and can never be achieved by people who are either out to flip a company for exit or clone an original company for another market.

If you read Buffett’s annual letters to the shareholders of Berkshire Hathaway, the concepts he utilized to explain his investment thesis are remarkably simple. He distinguish how simple compounding and treatment of the stock market as a voting machine in the short term but weighing machine in the long term can lead to the returns that Berkshire Hathaway can achieve. Anyone can easily replicate his approach and yet no one manage to do so and that includes Goldman Sachs. Yet, no one can match Warren Buffett and Charlie Munger in how they have built and managed a successful investment portfolio in Ohama without the noise coming from Wall Street. The reason is that Warren Buffett takes a long term view on how he invests in companies and stick to simple fundamentals such as compounding, merger or acquisition arbitrage and market indexing in how Berkshire Hathaway evaluates a company for investment. The lesson here is that Warren Buffett does not need any complicated jargon to hide how the value investment thesis works. While reading Buffett’s letters, I appreciated the clarity in how he can apply a simple principle in finance to drive a point in how he operate with Berkshire Hathaway.

Elon Musk’s blog post on Tesla’s strategy in 2006 was another gem about simplicity in business strategy. In that post, he simply outlined the strategy and master plan to how Tesla will achieve its mission with the electric car over ten years by building three versions of the electric car:

“Build sports car.
Use that money to build an affordable car.
Use that money to build an even more affordable car.
While doing above, also provide zero emission electric power generation options.” — Elon Musk in 2006

How did Elon Musk achieve the above roadmap in the past decade? The first electric car was the Tesla roadster, a high end sports car which the rich can afford, followed by a sedan electric car which is the Tesla S pegged at the value of the Mercedes Benz and finally to an affordable electric car at US$30k which is the Tesla 3 that generated a total of 300k orders pledged by potential customers within a week. If you have traced Tesla’s timeline and milestones, Elon Musk has simply achieved the entire roadmap in ten years. Any car company can replicate his strategy and yet they did not choose to do so and fail when they tried to. Even though Musk’s strategy is easy to state, it is hard to execute as Tesla has to build itself into a brand where it can actually achieve a great amount of interest when it launched Model 3. Once he achieved the first strategic roadmap, he has recently written a new blog post to highlight where Tesla will be in the next 10 years, which makes it not a car company but a sustainable energy company. Here is Elon Musk’s planfor the next decade:

“Create stunning solar roofs with seamlessly integrated battery storage.
Expand the electric vehicle product line to address all major segments.
Develop a self-driving capability that is 10X safer than manual via massive fleet learning.
Enable your car to make money for you when you aren’t using it” — Elon Musk, 2016

When a company’s vision and business strategy is easy to communicate and difficult to execute, it sets up an intangible type of barrier to entry for the business against their competitors. This is analogous to the concept to how great companies are depicted by the triangulation of product, company & category to become category kings as depicted in the book “Play Bigger”. Most of the time, people will laugh at the declaration and dismiss that their ideas are against conventional wisdom. Yet we all know that the true visionaries are not afraid to move forward with their convictions and take on challenges that are difficult, and build the future.