It's a dilemma faced by even the most successful companies. Customers are crying out for innovation. Yet if you create too many offerings, costs spiral out of control; create too few and you miss profitable sales. Because traditional accounting systems do not capture the full costs of complexity, we have found that most companies tip the balance toward too much. Companies that find the right balance-their "innovation fulcrum"-can often dramatically improve their performance, with cost reductions of as much as 35%, along with up to 40% increases in sales.

The problem is where to start. According to Bain & Company's survey of more than 900 global executives, nearly 70% admit that complexity is hurting profits. But many miss its origins in the product line. The usual response-an incremental cut of the least profitable SKU's or a "lean operations" program-falls short because it cannot get at the root causes.

The farther down the value chain you introduce complexity, the less it costs. -Mark Gottfredson Listen to the audio presentation Read the text transcript of the presentation

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 came only in black. On the customer side, companies need to understand where variety counts-something Ford missed when competitors introduced colorful autos in the 1920s. The secret: Add back only those options valued by attractive segments of customers, testing one variable at a time; then trace the effects through the entire chain of activities, from your suppliers to your customers. That leads to a dramatic change in the way your 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 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 flavors-but all the variations work off a standard 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.

 
 

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 colors. That allowed the company 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, postponement and changing customer tastes can all affect where the right fulcrum point falls.

What's the right balance? It's a question Henry Ford failed to ask early on. Eventually, he introduced the Model A, replete with multiple hues-but the company has never again regained its previous leadership position in the auto industry. The lesson remains: Companies that hit the right balance between innovation and complexity create more efficient operations and more profitable customer relationships.

Mark Gottfredson is a partner at Bain & Company in Dallas and the head of the firm's Global Performance Improvement Practice. Phil Deane is a Bain partner in Amsterdam.

To learn more about how to identify your innovation fulcrum, read "Innovation Versus Complexity: What Is Too Much of a Good Thing?" by Mark Gottfredson and Keith Aspinall in the November 2005 issue of Harvard Business Review.