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The power of managing complexity to stay lean

The power of managing complexity to stay lean

Downturns reveal a company's weaknesses. An organization that seemed nimble and focused during a period of expansion may be sluggish and ineffectual when demand drops off.

  • May 13, 2009
  • min read

Article

The power of managing complexity to stay lean

Downturns reveal a company's weaknesses. An organisation that seemed nimble and focused during a period of expansion may be sluggish and ineffectual when demand drops off. Survival can depend on quickly determining which products are making money, what customers really value, and where organisational bottlenecks are getting in the way of effective action.

One major cause for this sluggishness is complexity—product complexity, organisational complexity, and process complexity. The costs of complexity are usually hidden, so executives often don't grasp the magnitude of the problem until a downturn hits and the business feels dangerously close to stalling out.

The challenge is that some complexity is advantageous, even in a downturn. For example, country or regional business units are more likely to know what local customers want than headquarters. This kind of complexity in a global organisation can be vital to sustain sales through a recession.

A similar challenge arises when firms struggle to balance complexity and innovation. Adding new products, features, and options creates complexity. But companies become leaders by offering new choices, and in a downturn innovation may be a salvation. The key is not to eliminate complexity but to balance benefits with costs.

A useful way of analysing a company's level of complexity—and separating complexity that's beneficial from complexity that hurts the business—is to begin from a base of zero. Imagine that your company produced just one product or service with no variations, sort of like Henry Ford's classic Model T. A manufacturer with only one product would still need a supply chain, a factory, a distribution network, and a sales-and-marketing function. But it could greatly simplify its IT systems, its distribution and sales efforts, and its forecasting.

The point of the exercise is to determine your zero-complexity costs, and then assess the costs of adding variety back in. For example, you might decide to eliminate individual options and instead offer customers a small number of configurations that include the most popular features. Thus Honda's CR-V comes in just eight configurations and 13 interior/exterior colour combinations. This is far fewer choices than most cars offer, yet the CR-V is the hottest-selling vehicle in its class.

Similar kinds of analyses can diagnose organisational and process complexity. We've found that companies get the best results by attacking product complexity first and organisational complexity next and only then focusing on process complexity. The reason is this: complex processes often reflect unnecessary product variety or poor organisational design.

Unfortunately, most companies usually begin with processes, often through efforts such as "lean Six Sigma". Typically the emphasis is on how to execute all their current operations faster and with fewer resources. But that's actually the wrong place to start.

Reducing process complexity should be the last step, and it involves looking for the process improvements that add the most value and by eliminating unnecessary data collection. One of the world's largest natural-resources companies, for example, found that only 25 of the 483 process improvement projects in the works would deliver a significant impact. In line with product and organisational simplifications, the company was able to boost operating income by more than 20%.

All these complexity-management efforts help a company become lean and flexible enough to adjust to the changing market conditions in a downturn. And when the economy improves, a company that has stripped out enough complexity can accelerate quickly out of the downturn.
 
Sharad Apte is a partner with Bain & Company's Southeast Asia practice, where he overseas the regional energy and natural resource practice. Mark Gottfredson is a partner with Bain & Company and head of the firm's global Performance Improvement practice. Adapted from the forthcoming book,
Winning in Turbulence, by Bain & Company published by Harvard Business Press.

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