Rising costs, ongoing supply chain disruption, and swollen product portfolios have convinced many executive teams to pare down their product offerings. That’s a smart strategy. Top-performing companies often trim their portfolios in difficult times, a move that can accelerate growth by focusing resources on the most competitive product mix.
These leaders understand that complexity is the silent killer of margins and growth. Product proliferation increases costs and strains organizational resources. It spreads R&D dollars thin, channeling funds to sustaining engineering rather than to innovation, and aggravates supply chain problems. Inflation increases the pain. The business case for slashing complexity is strong: Fewer products and streamlined processes improve margins and resilience and can even fuel growth. For customers, choosing the right product becomes less confusing. The result is a strong competitive advantage.
In fact, many leadership teams that trimmed product offerings during the pandemic have become convinced of the benefits of a smaller portfolio. Some, however, are seeing complexity start to creep back into their organizations, and that’s not surprising. Creating an optimum product portfolio requires ongoing work—and tough choices. It’s not a one-time fix.
The key challenge for teams trying to reduce complexity is figuring out which products or stock-keeping units (SKUs) to cut. It’s not difficult to eliminate those that produce little revenue or profit. But cutting low-revenue products won’t do much to boost the company’s performance. Leading companies build a winning portfolio by evaluating all their products, not just the losers, and paring down to a simpler, more efficient mix that shrinks inventory, spurs top-line growth, improves margins, and benefits customers (see Figure 1). Importantly, these leaders regularly reevaluate which products to keep and cut based on customer needs, cross-functional input, and their evolving strategic priorities.
Companies can reap big benefits by reducing complexity
Obstacles to success
Portfolio simplification may sound straightforward, but companies determined to root out complexity often fail to significantly improve their performance. The gap between average results and successful efforts is large.
In our experience, four common pitfalls hinder the effort to build and maintain a winning portfolio. First, managers take the path of least resistance, cutting only low-revenue products, or “the tail” of the product lineup. That approach rarely delivers significant performance improvement. Second, teams neglect to consider customer needs and end up eliminating products without providing clear alternatives. That can erode brand loyalty and prompt customers to switch to a competitor’s products.
A third common pitfall is failing to build the complete business case for product cuts. Companies often cut products but take a narrow view of the related cost-saving opportunities across the organization. For example, many fail to calculate inventory savings or the benefits of migrating customers from a lower-margin product to a higher-margin product. To understand total performance improvement, leaders capture how each profit and loss statement will be affected, from design through supply chain and sales and marketing.
Finally, organizations neglect to build savings into the budget to capture the value of streamlining the portfolio. Many executives assume that savings will accrue automatically as they trim complexity. But some fixed costs such as plant assets don’t disappear when the company stops producing a product. Leaders make sure individual managers are accountable for anticipated cost reductions and address the ongoing costs of fixed assets, such as machinery, and other expenses that rise or fall based on a given threshold of activity, such as real estate leases and administrative headcount.
Leading companies understand that attaining the most competitive product mix is not just a SKU-rationalization exercise. An excessive number of SKUs often reflects complexity that has been introduced on a higher level, including multiple brands or product families that are tailored to specific geographies, retail channels, or customer groups. A key step in rooting out complexity is understanding the business decisions that have led to the creation of similar products and SKUs.
Leadership teams seeking to evaluate portfolio complexity focus on several key indicators. The most obvious ones are legacy products that compete with new-generation products and mergers or acquisitions that may have led to overlapping products. A plant network and supply chain struggling to handle product complexity also point to an overstretched portfolio. Another red flag is successful competitors with much simpler product lineups.
Reducing complexity is particularly important for products that have long life cycles, such as capital equipment. Once complexity is woven into these products and processes, it can take years to eliminate. In some industries, government regulation may require companies to support a product and offer spare parts for years after the product is phased out.
Leading companies follow a few key guidelines to shape a more efficient product offering. The first is building a cross-functional team of leaders to define the optimum product offering. The team assesses the benefits to the entire organization of keeping products to satisfy customer preferences versus cutting specific products or SKUs to reduce costs. Clarifying decision roles is vital to the process. No leader should have veto power over portfolio decisions. The cross-functional team provides critical input, but one person has the decision rights.
A second important guideline is to make bold choices. Companies with top-performing portfolios cut revenue-bearing products and SKUs and even whole branches of a product tree. A global consumer products company cut 30% of SKUs in one product category, aiming for a 5% increase in margins. It also standardized components, reducing the number of bottle types it used by 40%, cutting cap options (color, size, and shape) by 30%, and standardizing 40% of its carton offerings. Those moves, which customers hardly noticed, were forecast to improve overall equipment effectiveness by 5 percentage points.
Finally, these leaders embed complexity management processes throughout the product life cycle, from launch to end of life. They regularly benchmark their portfolios against peers; they enlist strong cross-functional input before adding new products to the lineup; and they set complexity targets for the size and shape of each product family. During the design process, for example, teams consider complexity implications and life cycle costs, such as components that will require service, repair, or replacement. For each product and SKU, managers create a smart migration pathway, including a timeline for replacing products and plans to transition customers to next-generation products. Incentives and customer communication can help ensure clients transition easily to a new product.
Over the next decade, managing complexity in all its forms will become even more central to cost leadership, as well as profits, growth, and sustainability. The growing market for personalized and customized products encourages insidious cost growth. At the same time, global supply chain disruptions and geopolitical uncertainty are likely to continue. In a turbulent macroeconomic environment, a complex portfolio increases operational and financial risk. Finally, as consumers migrate to more sustainable products, companies will face pressure to eliminate products with a large carbon footprint.
Leaders have begun rooting out complexity and paring portfolios to a set of high-performing products. Companies that start down that path today will be well positioned to outperform in a new era.