The Edge

Manager@Work: The fulcrum for growth

Consumers are demanding new products and services; but if companies offer too few innovations, consumers may walk away, hurting profits. Yet, if they offer too many, costs will soar.

By Mike Booker and Mark Gottfredson

Published on September 25, 2006
min read


Asian firms' new struggle to balance innovation and complexity Asia is enjoying rapid growth, with Malaysia and other Southeast Asian economies on track for gross national product increases of 5% or more for the year. As companies depend on innovation to feed this growth, they run a risk that plagues even global market leaders: hardwiring complexity—and its resulting costs—into their business processes. The dilemma that companies face may seem like a Catch-22. Consumers are demanding new products and services; but if companies offer too few innovations, consumers may walk away, hurting profits. Yet, if they offer too many, costs will soar. The challenge is finding the right balance between product variety and operating complexity—what we call the "innovation fulcrum". It's the pivot point between where businesses are able to satisfy customers and still curtail costs. We've found that firms that strike the right balance see revenue increases of up to 40% and potential cost savings of 35%. For Asian companies, complexity is an especially urgent challenge. A recent Bain & Co survey of more than 900 global executives found upwards of 80% of the Asian participants admitting that excessive complexity is raising costs and hurting profits. In other parts of the world, including North America and Europe, the number was closer to 70%. The reason: To spur growth in such a diverse cultural and economic marketplace, Asian companies rely on expanded product lines and acquisitions, both of which can bloat portfolios and add layers of processes and systems. Finding the right balance between complexity and innovation begins with the product line. Consider the tale of two Chinese electronics companies: Hisense and TCL. Both companies are eager to leverage Asia's increased demand for televisions. Hisense relies on a tightly focused, innovation-driven product line. It makes a limited number of products with limited options. Competitor TCL has taken the opposite approach, frequently launching new products, even from its older lines, in the belief that broad variety helps build brands and gain market share. The proof is in the revenue gains in 2005: Keeping its product line simple, Hisense celebrated 28% revenue growth. TCL's increase was just 4.8%. The 'Model T' approach Too often, companies take steps to improve operating efficiency, when what they really need to do is systematically review the product line, weed out low-performing products and focus on the more profitable ones. That's what Nokia—the second-largest foreign firm in terms of sales in China—did with its mobile handset division. Nokia's well-defined platform strategy allowed it to use the same components to build more products: Low complexity at low cost. But this capability triggered complexity problems in the R&D pipeline. It was clogged with more potential offerings than the company could deliver. By reviewing and refocusing its R&D projects, Nokia could launch more innovative products on time, providing a crucial competitive edge in the fast-changing mobile communications industry. We call the starting point for this systematic review "Model T" analysis—after Henry Ford's Model T, which came only in black. On the operating side, executives need to ask: What would processes look like with just one standard offering? But on the customer side, they must pose a question that Ford missed: Where does variety really count? Ford found that out when competitors started offering colourful autos and his company's sales plummeted. Coming up with the right Model T approach is tricky, as Ford discovered. Firms can start by identifying a basic version of their core offering, allowing managers to imagine whole systems and processes that could be radically changed in a simple environment. With this baseline in place, companies then can add back options valued by the most attractive customers. The trick: Add just one variable at a time, and trace the impact through the value chain. Mike Booker is a partner in Bain & Co Southeast Asia and leader in the firm's Asia-Pacific Performance Improvement Practice. Mark Gottfredson is a partner in Bain & Co's Dallas office and leads the firm's Global Performance Improvement Practice.

Asian firms' new struggle to balance innovation and complexity

Asia is enjoying rapid growth, with Malaysia and other Southeast Asian economies on track for gross national product increases of 5% or more for the year. As companies depend on innovation to feed this growth, they run a risk that plagues even global market leaders: hardwiring complexity—and its resulting costs—into their business processes.

The dilemma that companies face may seem like a Catch-22. Consumers are demanding new products and services; but if companies offer too few innovations, consumers may walk away, hurting profits. Yet, if they offer too many, costs will soar. The challenge is finding the right balance between product variety and operating complexity—what we call the "innovation fulcrum". It's the pivot point between where businesses are able to satisfy customers and still curtail costs. We've found that firms that strike the right balance see revenue increases of up to 40% and potential cost savings of 35%.

For Asian companies, complexity is an especially urgent challenge. A recent Bain & Co survey of more than 900 global executives found upwards of 80% of the Asian participants admitting that excessive complexity is raising costs and hurting profits. In other parts of the world, including North America and Europe, the number was closer to 70%. The reason: To spur growth in such a diverse cultural and economic marketplace, Asian companies rely on expanded product lines and acquisitions, both of which can bloat portfolios and add layers of processes and systems.

Finding the right balance between complexity and innovation begins with the product line. Consider the tale of two Chinese electronics companies: Hisense and TCL. Both companies are eager to leverage Asia's increased demand for televisions. Hisense relies on a tightly focused, innovation-driven product line. It makes a limited number of products with limited options. Competitor TCL has taken the opposite approach, frequently launching new products, even from its older lines, in the belief that broad variety helps build brands and gain market share. The proof is in the revenue gains in 2005: Keeping its product line simple, Hisense celebrated 28% revenue growth. TCL's increase was just 4.8%.

The 'Model T' approach

Too often, companies take steps to improve operating efficiency, when what they really need to do is systematically review the product line, weed out low-performing products and focus on the more profitable ones. That's what Nokia—the second-largest foreign firm in terms of sales in China—did with its mobile handset division. Nokia's well-defined platform strategy allowed it to use the same components to build more products: Low complexity at low cost. But this capability triggered complexity problems in the R&D pipeline. It was clogged with more potential offerings than the company could deliver. By reviewing and refocusing its R&D projects, Nokia could launch more innovative products on time, providing a crucial competitive edge in the fast-changing mobile communications industry.

We call the starting point for this systematic review "Model T" analysis—after Henry Ford's Model T, which came only in black. On the operating side, executives need to ask: What would processes look like with just one standard offering? But on the customer side, they must pose a question that Ford missed: Where does variety really count? Ford found that out when competitors started offering colourful autos and his company's sales plummeted.

Coming up with the right Model T approach is tricky, as Ford discovered. Firms can start by identifying a basic version of their core offering, allowing managers to imagine whole systems and processes that could be radically changed in a simple environment. With this baseline in place, companies then can add back options valued by the most attractive customers. The trick: Add just one variable at a time, and trace the impact through the value chain.

Mike Booker is a partner in Bain & Co Southeast Asia and leader in the firm's Asia-Pacific Performance Improvement Practice. Mark Gottfredson is a partner in Bain & Co's Dallas office and leads the firm's Global Performance Improvement Practice.