Choose Innovation Over Complexity

‘Innovate or die’ is a commonly-heard phrase these days, aptly describing the urgency of driving growth through innovation.  And yet many managers I’ve spoken to say, ‘We have no time or resources left for innovation; we’re buried just supporting our day-to-day business and solving problems’.  While everyone agrees that innovation is the path to success, only a few companies -- the Apples and Procter & Gambles of the world --seem to actually get around to it. Why is this the case?

The answer, in a word: complexity. Everywhere you look, companies are reeling from self-induced complexity.  In their frustrating search for high growth in low-growth markets, they have substituted proliferation for innovation.  They have proliferated everything – products, customers and markets – but innovated in virtually nothing, and the result is a tidal wave of extra work that leads to huge hidden costs.  Because there are few-to-no metrics to track complexity and its adverse impact, it continues to fly below the radar, costing companies millions and in some cases, billions.  Worst of all, it keeps people from working on the highest-potential opportunities.

The least-recognized source of waste is the hidden cost added by complexity.  It is hidden because no accounting systems identify its causes until it’s too late.  Complexity creeps into a company and infects every part of the business, consuming time, money and resources.  The  good news is that there are solutions to this problem.  Once complexity has been exposed and managed – either driven out or put to good use – there will be more resources, more time and more money to devote to innovation.  Following are three approaches to reducing complexity in your organization.

Solution 1:  Sort and Simplify
Some organizations use complexity to great advantage, streamlining processes and using a high-variety, high-value strategy.  Others must get rid of it to free time and resources for better uses.  The key for both is to ‘sort and simplify’, then focus on the future.  First, sort products and customers’ annual sales and profits in descending order and calculate the cumulative percentage each contributes.  It’s no surprise if you find that the top of the list – 20 to 25 per cent of the items or customers – generates most of your sales and profits.  The bottom 20 to 25 per cent is populated with mostly ‘losers’ that generate very little in sales or profits.  You have to get rid of them, but not indiscriminately.  That’s the key point of developing a sixth sense.

Solution 2: Use a Sixth Sense to Engage Customers
You know that most of those bottom-dwellers need to be dumped.  However, a few of them might be high-potential future stars or important niche fillers in an overall product line or market segment.  A new, improved approach is needed to determine this: just as we use our five senses to evaluate our physical surroundings, it’s necessary to develop a ‘sixth sense’ to use in this case.  Our senses help us make decisions, and using this sixth-sense process will help identify what is important to customers and consumers, both current and prospective.  

While this is easy to say, it is much harder to do.  Customers’ decisions are based on complex considerations that even they usually don’t fully understand.  Too often, companies deal with this by trying a little (or a lot) of everything, and the result is that a few tries hit the target, but most miss and lead to more complexity. The sixth-sense process is critical to sorting the few winners from the many losers at the bottom of your list.   It also helps reinforce why many of the big winners are so successful, adding insights that will create more winners.  The key is to make this process routine; engage customers and translate their desires, wishes and preferences into the best kinds of products and services to offer.  Sort and simplify first, and then engage customers next.  Clean out the bottom of the list wisely, and do it several times each year.  Suddenly, instead of creating complexity and waste, you are eliminating it with carefully-targeted solutions.  Next, it’s time to solve the stickier problems.

Solution 3: Optimization
Typically, when there are many available options (e.g., accessories on a car), the question becomes how to plan for them.  Accommodating all variations is wasteful, since few cases result in every available option being selected.  Accommodating each uniquely is also wasteful; it leads to enormous variety and no volume-cost advantage.  Optimization is something we do every day, such as deciding which route to take to work, based on time, traffic, etc. Deciding which phone features to buy is another example.  We estimate our usage of the features and ‘optimize’ by purchasing a plan that meets most of our needs.  To handle a large number of variables (as in the auto example), computer algorithms analyze the choices. Fortunately, such solutions exist.  Rather than guess or err to either extreme, it’s better to use proven methods to reduce unnecessary complexity and make the optimum choice.

Next: It’s Time for Innovation
You’re driving along, and you decide to change lanes. You check your rear-view mirrors, give a quick sideways glance, and activate your turn signal.   Suddenly a horn blares and a fender flashes in your peripheral vision.  You react, but were you fast enough to avoid the imminent collision?  A car was in your blind spot.  What does this have to do with global business?  Everything.  There is a new ‘blind spot’ going unnoticed.  

We are certainly in the most complex business era in human history.  The range of issues management must consider is staggering—terrorist threats, foreign exchange, off-shoring, financing debacles, illegal immigration, new regulations, energy/commodity shortages, and technology that’s growing at warp speed. As if this array of issues isn’t enough, there’s another layer of complexity -- a new ‘blind spot’ if you will -- just waiting to cause problems: the layer of complexity caused by the desperate pursuit of double-digit growth in low (or no) growth markets.  

Emerging mega-customers command huge buying leverage, as competitors fight for growth around the globe.  Just as a well-intentioned lane change exposed the danger of your blind spot in the example above, this relentless search for growth causes a new blind spot—complexity caused by proliferation, done with the well-intentioned quest for growth where there is little, or none, to be had.  This new blind spot exists because of two factors, which together cause tectonic shifts in global competition.
•    Latent Overcapacity for everything, somewhere in the world:  if it isn’t on-stream now, it can be in a very short time.  Just like that car lurking in your blind spot, it can hit you before you ever see or hear the warning.

•    Rapid Knowledge Transfer: due to communications and information technology combined with the speed of air travel, knockoffs/copies are upon you in a blink.  Just like the car in the blind spot, warning time is little—or none.  

Any idea, knowledge, design, or skill set can now be instantly transferred anywhere and followed quickly by people who know how to use it, which enables an incredible number of ‘adjacent possibilities’.  When pressured to grow faster than markets are growing, managers resort to proliferation of all kinds.   They develop new products, but usually they are derivatives of the old ones;  they enter new markets, but the markets are only new to them;  entrenched incumbents await, ready to defend themselves.  Proliferation leads them to enter more markets, open more locations, add more variations, create more choices.  The result: complexity abounds.

None of the vaunted 21st century accounting systems captures the financial impact of this hidden layer of complexity.  Complexity costs hide in the accounts used as “catch alls” with titles like returns, allowances, deductions, variances, non-recurring charges, miscellaneous, obsolescence, bad debt reserves, premium freight charges, closeouts, rework, scrap, and interest costs. Complexity also hides in higher levels of SG&A (Selling, General & Administrative) and Overhead.  True, the expenses are ‘recorded’ – but only after the fact – and without an identified cause.  These are blameless crimes perpetrated with the best of intentions and a frightening unawareness that these profit killers are lurking in new blind spots – unnoticed – until the end of accounting periods.  Then, at month-end, quarter-end or year-end, the top line may go up, but the bottom line almost always goes down.

In closing
What should management be doing?  First, recognize that this hidden drain on profits exists.  Complexity not only hinders current earnings; it strangles the future.  Complexity keeps coming back like weeds after a spring rain.  You must know where it hides, how to find it and how to measure it.  Once you understand it, you face a strategic fork in the road: choose to remove the complexity and keep it out, or structure your business to capitalize on it.  Selling customized, high variety products and services can be very profitable – but only if done right.

When you’ve ‘taken the antidote’ and removed wasteful complexity, you’ll find that hidden costs drop away and the resulting clarity of focus energizes your entire organization.   Instead of dying from overwork and complexity, it will be spending its time working on important customers and creating valuable new products for them, instead of wasting time and money on losers.   My prediction: you will come storming out of the downturn, stronger than ever.

John Mariotti is the founder and CEO of The Enterprise Group, a coalition of time-shared executive advisors.  He previously served as president of Rubbermaid Office Products Group and Huffy Bicycles.  He is the author of The Complexity Crisis: Why Too Many Products, Markets and Customers are Crippling Your Company – And What to Do About It (Platinum Press, 2008).

[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]