What is the right balance between complexity and innovation? According to a Bain & Company survey of more than 900 global executives, nearly 70% admit that complexity is clearly hurting profits. And there are examples of this all around you. A recent case in point: Sony’s PlayStation 3.
Sony struggled to bring out its most important product in years, delaying the launch of PlayStation 3 in Europe by four months and halving shipments in the US and Japan. Behind the headlines about Sony’s problems is a dilemma that many successful companies face. Customers are crying out for innovation. Yet, if you create too many offerings, complexity increases dramatically and costs spiral out of control; create too few and you miss profitable sales. Partly because traditional accounting systems do not capture the full costs of complexity, most companies tip the balance toward too much innovation. But companies that find the right balance—their “innovation fulcrum”—can dramatically improve their performance. Not only do costs go down, by as much as 35%, but sales also typically rise by up to 40%, thanks to the gains in efficiency and focus that result from reducing complexity.
The problem is where to start cutting complexity. The usual response—an incremental cut of the least profitable products or shifting to a “lean operations” programme—falls short because it cannot get at the root causes.
What’s needed is a mechanism for peeling all the layers away to find the full effects of complexity, both in costs and lost sales. We call this approach Model T analysis. On the operating side, companies must imagine how processes would look with just one standard version of their core offering—like Henry Ford’s Model T, which famously only came in black. On the customer side, companies need to understand where variety counts—something Ford missed when competitors introduced colourful autos in the 1920s and stole a march. The secret then is to add back only those options valued by attractive segments of customers, testing one variable at a time, then trace the effects through the value chain. That leads to a step function change in the way an organization does business.
Once you’ve found the right fulcrum point, four practices can help stem complexity creep:
Start by raising the bar. Requiring a higher rate of return on new products not only makes it more difficult to arbitrarily add variations, it also boosts internal innovation discipline.
Postpone complexity. The farther down the value chain you introduce complexity, the less it costs. A few years ago, Starbucks began “semi-automating” its latte process. Today, Starbucks patrons still customize their lattes by size, type of milk, temperature and flavours—but all the variations work off a single platform.
Institutionalize simplicity in decision making. Executives must pinpoint responsibility for innovation decisions. At one food company, marketers ordered up numerous packages for a popular snack, creating manufacturing nightmares. Today, its brand managers must meet checkpoints with manufacturing and sourcing managers before introducing new packaging. The results: double-digit cost savings and revenue gains of 25-30% on a variety of products.
Stay balanced. A company’s innovation fulcrum can shift. Japanese automakers provide a classic example. In the 1970s, US automakers competed on their breadth of choices. Rather than offering millions of possibilities, Honda offered 32 build combinations with only four colours. That allowed them to compete more effectively on price and quality. The result: increased sales and profitability. Customers valued cost and quality more than having all those choices. Technology, postponing complexity to later in the value chain and changing customer tastes can all affect where the right fulcrum point is.
So, what’s the right balance? It’s a question Ford failed to ask early on. Eventually, he introduced the Model A, replete with multiple hues, but the company never regained its early leadership position in the auto industry. The lesson remains: Companies that strike the right balance between innovation and complexity create more efficient operations and more profitable customer relationships. No doubt, Sony will be looking hard to find its own innovation fulcrum as it seeks to regain momentum.
Ashish Singh and Mark Gottfredson
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( This column will carry columns by consultants of Bain & Company and will offer interesting perspectives on management and strategy for practitioners. Ashish Singh (email@example.com) is managing director of Bain & Company India. Mark Gottfredson (firstname.lastname@example.org) is a partner at Bain & Company in Dallas and a leader of its global Performance Improvement practice.)