All companies aspire to be innovative. So few really are. Mark Gottfredson and Luca Caruso believe that innovators have a secret weapon.
It’s a problem faced by global leaders from Nokia to Starbucks. Customers are hungry for more innovation – “Give us something new to buy!” – while investors realise that the innovative company is usually the one to place a stock watch on. Yet, innovation is costly: create too many new marketplace offerings and your costs could spiral out of control; too few and you miss out on the profits from growing revenues.
What, then, is the right balance? How much can companies invest in the innovations that will drive their businesses tomorrow, before the costs outweigh the benefits? We have found that the best-performing companies maintain a thoughtful balance between the old and the new, between the operational status quo and imaginative innovation. Firms that locate this “innovation fulcrum” between product variety and operating complexity can boost their performance with revenue improvements of 5 to 40 per cent, and potential cost savings as high as 35 per cent. Indeed, when we analysed the performance of 74 companies in 12 different industries, we found that the companies with the lowest complexity in their operations and product lines grew 1.7 times faster than their average competitors.
That should come as no surprise. Reducing complexity almost always increases sales because it requires firms to focus more closely on customers. With new economies of scale and lower costs, companies can provide more attractive prices. The honed product line doesn’t eat up valuable retail or catalogue space. And sales forces tend to know their products better, so they can steer customers consistently to the right one.
The hard part is recognising where to start. According to a Bain & Company survey of more than 900 global executives, nearly 70 per cent admit that excessive complexity is raising costs and hurting profits. The pain is just as acute in Europe, where 67 per cent of respondents acknowledge that they suffer from the same operational weakness. Even so, most companies fail to recognise how complexity begins in their product lines. The usual response – launching a Six Sigma or other “lean operations” programme – often falls short because standard accounting systems don’t pick up complexity’s full costs. Gradually, systems and mechanisms for managing complexity build up, masking the impact that complexity has on performance. What customers actually want tends to get overlooked.
Consider how Nokia’s CEO, Olli-Pekka Kallasvuo, tackled complexity in his previous role heading the firm’s handset division. Because Nokia has a welldefined platform strategy, it can use the same components to engineer more products, offering innovation at lower complexity and lower cost. However, this very fact had filled R&D pipelines with more potential offerings than the company could effectively deliver on time. By reining in the proliferation of models in development, Kallasvuo was actually able to launch a greater number of clear-cut innovations, on time.
Although it may sound like an anachronism, we think of this approach as “Model T” analysis. On the operating side, a company needs to think about what its processes would look like with just one standard offering – like Henry Ford’s 1920s Model T, which came only in black. On the customer side, firms need to understand where variety really counts – something Ford missed completely when competitors introduced colourful autos.
Choosing the right “Model T” can be tricky. Firms should first identify a basic version of their core product or service. This allows managers to imagine whole systems and processes that could be radically changed in a simple environment. Having established the baseline, companies need to think carefully about adding back features that are valued by attractive segments of customers. The secret: Add only a single variable at a time and then trace the effect through the value chain.
Getting rid of complexity is only half the challenge. Companies need to keep things simple. Based on our observations, firms that have located the innovation fulcrum between product variety and operating complexity tend to excel in three areas: They set strong criteria for greenlighting new products; they involve the right people in decisions to innovate; and they add product features downstream from manufacturing to help stem complexity creep.
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