Complexity and lack of focus are the key. When we assess a company, we often begin by asking executives to answer five questions. It’s a quick test that helps us identify possible trouble spots. You can try it yourself: How would you respond to each of the following?
- Do you strive to invest enough to win in all of your product markets, all the regions you compete in and every division of the company?
- Does your product portfolio offer enough options to appeal to all types of customers?
- Is your organization designed to provide support for all of your company’s processes and functions?
- Do you expect every function in the company to redesign its processes to maximize internal efficiency?
- Are your IT systems and applications built to enable all of your existing business processes?
At first glance, the questions seem to define objectives that every company should be pursuing. Many executives nod their heads enthusiastically as they read through the list.
But here’s the twist: If you answer or strive to answer “yes” to any of them, it’s a red flag—a sign of too much complexity and a resulting loss of focus. And that can be a company killer.
Look again at the questions. A truly focused company—one that has cut complexity to the minimum—does not invest to win in every element of its business. It invests primarily in its core, the business in which it can outperform everybody else. A focused company does not try to appeal to every potential customer. It concentrates on the most profitable customers, those whom it can serve better than any competitor can. And so on down the line. When respondents answer “yes” to the questions, it usually indicates that their core business, the capabilities and assets that really distinguish their company from competitors, has been swamped by complexity. Executives no longer have a clear sense of priorities. They spend their days putting out fires. They wonder why the latest change initiative has once again failed to achieve the hoped-for goals.
Where complexity comes from. Complexity is a natural trait of any large organisation—“natural” because it is a by-product of business decisions that are sound and rational. Every day, your customer service people are creating new processes to better address customers’ problems. One new process a month means 60 new processes in just five years. Can the organisation handle that? Every day, your engineers and marketers are trying to get a little more shelf space or share of wallet, so they add a feature or a product or three new options. Let that go on for a while and before long you have 10,000 SKUs, with only a small percentage in any one outlet. Growth itself begets complexity. You move into one new market and then another; soon your organisation is a tangled web of reporting relationships. You acquire one new business and then another—and you wind up with a portfolio of unrelated companies requiring large amounts of management attention.
Is it any wonder that CEOs in a recent survey identified complexity as the primary challenge they face? Nearly 80% said they expected high levels of complexity over the next five years. Far fewer felt prepared to cope with it.
Faced with such concerns, most companies try to take action. Teams attack product-line complexity, organisational complexity and complexity in IT systems. They create new structures. They reengineer processes. They put in more stage gates and ROI hurdles for new products, and they pursue functional excellence. Unfortunately, what they usually find is that fixing complexity in one area is like squeezing a balloon: It just pops up somewhere else. Though one element of the organisation may seem to work more smoothly, costs continue to rise and decisions continue to be bogged down in bureaucracy. One director we talked to was ready to throw his hands up in dismay. His company—a major energy producer—had spent close to £100 million on a series of process reengineering initiatives, every one reportedly a complete success. Yet somehow costs kept rising faster than revenues. “If you add up all the savings we’re supposed to get from the reengineering,” he said, shaking his head, “we should have negative costs right now. Instead, it keeps on going up.”
Stop squeezing the balloon. There’s a better way to fight complexity—a better way to create a focused company.
The key, we have found, is to follow the connections where they lead. As anyone who has tried to squeeze the balloon can attest, the different kinds of complexity really are interrelated. It’s hard to get results by attacking just one aspect of the business, such as processes. But that interrelationship also creates a web of opportunity: Simplification in one area opens up possibilities for simplification in others. Instead of leading to frustration, an attack on complexity in one part of the business can establish a beachhead for rooting it out elsewhere. The result of such a multipronged approach, ultimately, is a truly focused company—and results that last.