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The Conference Board Review® Article
Complexity Anxiety
Both businesses and consumers are feeling overwhelmed. There are ways to make things easier.
By George Stalk
George Stalk is senior vice president at the Boston Consulting Group and author of a number of books on corporate strategy. From Five Future Strategies You Need Right Now (Harvard Business Press). ©2008
There is much discussion today about the issue of complexity, particularly as it relates to the proliferation of products and services. The dominant view — as expressed in the popular media and in general conversation around the world's conference and dinner tables — is that the product and service environments have gotten so complex that most ordinary mortals have lost their ability to cope. It's time to simplify, simplify!
In business, I hear similar complaints from executives who view complexity as an enemy with which they constantly do battle. They watch as their company — usually in response to a perceived customer need and at the urging of its marketing and sales teams — adds more features and capabilities to its current products, creates variants, adds new models, enters more diverse markets, and develops additional ways to personalize and customize its offerings.
As the operational people become increasingly burdened with manufacturing, distributing, and supporting this ever-more daunting array of products — many of which are not turning much of a profit or are even losing money — they push back. Pretty soon, the internal disciplines are bickering so intensely that the noise can be heard by more than one member of the C-suite. A multifunctional task force is duly formed. It spends months in investigation. The product portfolio is weeded and pruned. Costs go down, and profits go up. Heroes are anointed . . . and then forgotten as customers are lost and sales targets are missed.
In response, marketing and sales call for more products and services, and the C-suite, concerned about dipping performance results, supports them. And so the cycle repeats itself.
Yes, there is an emergency brewing that relates to complexity, but it's not about finding ways to eliminate it — it's about finding the best way to embrace complexity in order to achieve competitive advantage.
Making It WorkComplexity is a powerful phenomenon that drives many management costs, most typically overheads. My experience is that for every doubling of complexity (almost no matter how complexity is measured, just as long as it is measured and measured consistently), the overhead costs per unit being measured/produced increase 20 to 35 percent. Companies typically try to recover their increased costs by raising prices, increasing the volume of business, or both. These recovery efforts rarely succeed, except in the very early stages of complexity escalation, when the base is low — for example, when the product portfolio increases from one to three. When a company has twelve offerings and bumps the number up to fourteen, it's tough to get back the incremental costs through price and volume increases.
It's tempting to think that complexity can be managed through simplification — by cutting, chopping, eliminating, and reducing. Many companies turn to "better forecasting" — they try harder to predict what they think customers will want and tailor their portfolios accordingly. They go in for extensive consumer research, trial and error, and very active product-portfolio management — adding and pruning products and services ceaselessly and ruthlessly. However, this is a discipline that works best in fashion-driven industries — apparel, consumer electronics, high-end food, and retail. And even in those categories, very few companies have learned to do it well.
In the past several decades, as complexity has increased — and as management science (including flexible manufacturing) has gotten more sophisticated in finding ways to manage costs and benefits — smart companies have developed many ways to create competitive advantage by embracing complexity. Four of them are of particular interest: enticing the heavy spender; reducing complexity anxiety; specifying the best choice; and searching permutations.
Comments? Write a letter to the editor.
Return to the March/April 2008 The Conference Board Review® issue.
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