Harvard Business Review
The Idea in Brief
Walk into the In-N-Out Burger restaurant on Fisherman’s Wharf in San Francisco, and one of the first things that may strike you is the number four. Four colors: red, white, yellow, and gray; four cash registers with four friendly faces behind them; and just four items on the menu. You can buy burgers, fries, shakes, and sodas. All the ingredients are delivered fresh to the store, where they’re prepared in the open kitchen behind the cashiers. You’ll see a few folks eating at the restaurant’s tables or tucking into their food outdoors on patio benches, but most customers come in with a handful of cash—no credit or debit cards, thank you—and head back out with their meals.
Four is In-N-Out Burger’s innovation fulcrum—the point at which the number of products strikes the right balance between customer satisfaction and operating complexity. Four means simple purchasing, simple production, and simple service. And, it turns out, in a world where fast-food restaurants are forever adding formats and menu items, simple means profitable growth. With its chain of about 200 restaurants throughout California, Arizona, and Nevada, the family-owned company expanded its sales by 9.2%, to $308 million, in 2003, a rate just about double the fast-food standard. Analysts estimate In-N-Out’s margins at 20%, again supersized for the industry.
So where’s your company’s innovation fulcrum? What’s the number of product or service offerings that would optimize both your revenues and your profits? If you’re like most managers, you’re probably scratching your head right now. You don’t have a clear idea of where that point lies. All you know—or at least strongly suspect—is that it’s considerably lower than where you are today.
The fact is, companies have strong incentives to be overly innovative in new-product development. Introducing distinctive offerings is often the easiest way to compete for shelf space, protect market share, or repel a rival’s attack. Moreover, the press abounds with dramatic stories of bold innovators that revive brands or product categories. Those tales grab managerial and investor attention, encouraging companies to focus even more insistently on product development. But the pursuit of innovation can be taken too far. As a company increases the pace of innovation, its profitability often begins to stagnate or even erode. The reason can be summed up in one word: complexity. The continual launch of new products and line extensions adds complexity throughout a company’s operations, and, as the costs of managing that complexity multiply, margins shrink.
Managers aren’t blind to the problem. Nearly 70% admit that excessive complexity is raising their costs and hindering their profit growth, according to a 2005 Bain survey of more than 900 global executives. What managers often miss is the true source of the problem—the way complexity begins in the product line and then spreads outward through every facet of a company’s operations. As a result, the typical corporate response to complexity—launching a Six Sigma or other lean operations program—often falls short. Such efforts may reduce complexity in one obvious area, but they don’t address or root out complexity hidden elsewhere in the value chain. Profits continue to stagnate or fall.