THE ENTERPRISE
BOOK UPDATE: My latest book is midway in the publishing process. THE COMPLEXITY CRISIS—Why Too Many Products, Customers & Markets Are Crippling Companies & Destroying Profits-And What You Can Do About It. I have seen the cover design in a near final form and the copy edit is done, too. Next come the actual galleys of the typeset, in which I will have to read my own stuff for the umpteenth time (UGH). The target is to have the book produced late this year for distribution early in 2008. More updates as progress continues.
BUT...as time goes on, the "crisis" I describe in the book gets worse and worse. Companies all over the world struggle to achieve top line revenue growth and in doing so (often with the best of intentions) proliferate almost everything, to little avail. Worst of all, current accounting systems simply fail to track the hidden costs of complexity. These costs pile up in places that are usually not product or customer specific, and thus never get attributed to the causes--at least until it's too late. The result is that the top line may grow, but the bottom line doesn't—in fact, it often goes down. OUCH! That wasn't what was intended or desired.
In spite of this complexity crisis, companies must continue to innovate if they are to grow and prosper. The question is how, and particularly, how to do it without worsening complexity. To that end, I am reproducing the draft of an article I wrote recently dealing with that topic. I hope it is useful and spurs some feedback, new ideas, other examples, etc.
DRAFT
INNOVATION IN AN AGE OF COMPLEXITY
©John L. Mariotti 2007
CHOICES ARE INCREASING FASTER THAN EVER
We live in increasingly complex times. The choices available to most societies are overwhelming. Do we really need two hundred varieties of cookies and crackers in the neighborhood supermarket? How many ways can a few brands combine the same 5-6 over-the-counter medications for allergies, congestion, cough, cold symptoms and pain/fever control? The answer is “a nearly infinite number.” Then there are the “delivery systems.” Do you want gel caps, or liquid filled gel-caps, tablets or liquids, chewable or timed-release, or how about a transdermal patch?
The number of models offered by cell phone makers is not even computable. It changes too fast. The number of autos, not even counting variations within a model is exploding. Consumer Reports devotes an entire issue to autos. The 2006 issue has listings of 6 “vehicle profiles” per page (e.g., Acura has 6 listed, Audi has 5, but this doesn't include variants due to trim, engines, features, etc.) The list starts on page 40 and ends on page 78, thus using 39 pages, to “evaluate” 234 different vehicles. The 2007 issue changed format to show 8 vehicles per page, starting on page 46 (which also contains “What the Info Means”) and ending on page 78. The page count is down to 33, but the car count is up 10% to 258. If the number of option, trim and engine variations were counted the explosion of choices grows even faster.
TOP LINE GROWTH IS ELUSIVE
Every company I talk to or read about is struggling to achieve “top line sales growth.” Why? Because I mostly encounter companies from within the US, where growth is low-population growth at 3%/year-about the same as growth in Gross Domestic Product. However, as I study other markets, I find the same consistent pattern of low growth where there is high per capita income (and high growth where there is low per capita income). In many mature product categories, saturation is occurring. Some folks have all the “stuff” they need or want, especially since quality improvements of the late 20th century made things work better and last longer. In Less Developed Countries, market growth is greater. China's economy is growing at around 10% per year, and India's growth rate is not far behind, but per capita income is significantly lower. Thus, while there is growth, there is not commensurate spending until earnings and disposable income catches up.
So what do we do?” ask management everywhere. “Innovate,” comes the answer. “But how?” Simply creating new versions of older products just adds to the complexity as the existing sales are spread across more and more varieties, creating an even more confusing array of choices. This complexity costs money, adding all kinds of hidden costs: inventory obsolescence, more overhead, increased administrative costs, higher transaction costs, overloaded information systems, added facility costs, increased logistical costs, and the costs to create, document and maintain new items, customers, etc. and on and on. The most common form of costly, unproductive “innovation” is more suitably described as rampant proliferation of everything: products, customers, markets, models, services, locations, facilities, etc. Thus the gauntlet is thrown down: how to innovate in a time of great complexity, without creating even greater complexity.
INNOVATION IS ABOUT CHOICES
The first key to innovation, especially when the goal is to do it without creating more complexity is to get rid of the “losers.” This means “losers” in any category you might describe: products, models, customers, markets, facilities, locations and so forth. This process is both useful and instructive because it identifies the types of products, customers, etc. that fail to contribute to profitability or actually undermine it. It also “makes room” for the addition of new items, distribution, etc. without increasing the complexity of the business.
INNOVATION'S FIVE RULES
There are some rules about “Innovation” that should be carefully observed. First: simple creativity is not innovation. Brainstorming sessions may yield many interesting ideas, but until someone converts them to commercializable products, services, etc. they are simply that; “interesting ideas.” Once these ideas have been evaluated, considered, converted to a commercially viable product or service, and marketed successfully, then and only then, has there been true innovation.
Second: innovating successfully means meeting some unmet need, or meeting some recognized need in a better, more effective or higher value way. Since value is defined as function plus esteem per unit cost, an innovation must either be better, cheaper or more desirable. When it is, it has what one of my former employers, Rubbermaid (in its good days) called a “Compelling Competitive Advantage” or a shortened way of saying it, a CCA.
Third: A CCA must create an edge in value. Perhaps it is a narrow edge (like New, Improved Tide®-a detergent that has been truly improved many times over its long and successful life), and perhaps it is a wide edge one (like the Swiffer®, which filled the role of a rag, a dust cloth, a mops and an assortment of other cleaning devices in a better, more convenient way). Sometimes the CCA is just enough of an advantage that it is the “tie-breaker” when many of the value elements of two products seem nearly equal, or are difficult to perceive at the point of purchase (like Tide). At other times, the CCA is clearly understandable and can be readily perceived in the store (like the Swiffer). In both cases another part of innovation was used to signal consumers about the value proposition-a brand.
Fourth: a brand is a promise made to the customer that the product or service will provide a predictable and reliable package of value. It represents a relationship between the maker and the user, which is based on trust and experience. Strong brands always stand up to the test. Consider the legendary case of tainted Tylenol capsules. The maker, Johnson & Johnson acted immediately to remove the product from the shelves. In doing so, it protected a brand, which has grown to be the signal of trustworthiness to billions of purchasers.
Fifth: innovations are not limited to just products. Services offer great innovation opportunities. FedEx was never even imagined to be necessary until Fred Smith initiated the service, and over time, made it an indispensable part of our times. FedEx's initial slogan was brilliant in communicating its promise: “When it absolutely, positively has to be there on time.” For another example, consider why anyone would pay 5-10 times as much for lettuce that had been chopped and bagged in ready to serve quantities? Because they were busy, and this saved them time-and time is a perishable asset, which can never be replaced once it is gone. But the price premium for convenience was a timesaving, innovative idea that spawned a multi-billion dollar market. Products and services can be bundled to yield another innovation advantage. The cellular telephone field is one place where this commonly occurs.
INNOVATIONS CAN ADD COMPLEXITY--ACCEPTABLY
Sometimes innovations that add complexity are worthwhile because they serve market trends. Subway sandwich shops expanded its assortment of “breads” and then added a “wrap” to serve flavor or health conscious consumers. Salty snack maker Frito-Lay introduced miniature Doritos® in 100 calorie packs, to serve the incurable snackers who were low on will power but willing to pay extra for portion management.
Other innovations thrive on complexity by adding functionality, style, colors, cachet and a funky trendiness. Consider Crocs®, the injection molded, surprisingly comfortable footwear that is not pretty, but comes in a rainbow of colors. Crocs are not affected by water or body oils, fit comfortably and now have even spawned a an accessory market selling stylish little snap-on buttons for adornment. This product is highly profitable because of its low manufacturing cost and simplicity, enabled by its proprietary resin material. This permits selling a wide variety and still remaining profitable, after accounting for complexity. Even then, there are some colors and styles that flop (pun intended) and must be quickly discontinued.
THE MARKETPLACE IS THE TRUTH TELLER
In each case, there is one over-arching rule that must be followed. Even the most brilliant innovation must pass one crucial test to avoid adding crippling complexity. It must sell! And it must sell in enough volume to justify pushing some less productive items off the bottom of the list and into oblivion.
No one can fool the marketplace for long. It is the relentless truth teller and the arbiter of value. Get the innovation right, and it sells, profitably. Control the complexity and there is more room for innovation. Finally, remember that above all, innovation means commercializing good ideas that can be converted to offer the best value of all. In the end, the best value wins.
After several editions of THE ENTERPRISE dwelling on political or general interest topics, I thought it might be a welcome change to get back to the topic of managing better. Somehow, the fundamentals of management get overlooked too often, and the further away from the fundamentals we venture, the murkier things become.
Business is actually pretty simple. It's the people and proliferation of situations that make it complicated. Over the months between now and the time my book is released into distribution, I will deal with several more of the issues that arise as complexity is revealed, addressed and eliminated.
Best, John
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