Mastering Complexity

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Mastering Complexity

An article in the Harvard Business Review1 highlighted the In-N-Out Burger chain of restaurants  as an example of how a company can manage  complexity well.  The company uses the number four. 

  • The decor is done in four colors:  red, white, yellow, and gray. 
  • There are only four items on the menu:  burgers, French fries, milk shakes, and sodas.
  • There are four cash registers.
  • There are four people to ring up customers' purchases.

Four is what the authors call the company's "innovation fulcrum;" the number at which complexity is kept in balance with innovation to produce the most profit.  In other fast food restaurants, there is an epidemic of runaway innovation, with new items being added to menus faster than employees or customers can keep up with them.  But those competitors don't do as well as In-N-Out Burger, which has a whopping 20 percent profit margin.

Every company must manage complexity by finding its own innovation fulcrum.  That means determining the right number of products or services that will bring in the most money and produce the highest profit margin. 

The truth is that most managers don't know what that number is.  In most cases, it's a smaller number — not a bigger one — than the current number of products or services.

Product innovation is highly touted because it's an easy way to compete.  You can force more shelf space out of a retail outlet or you can garner a larger market share.  Product innovation is also exciting and it attracts attention.  Investors like it, customers like it, and the press likes it.  It gives the company something to talk about. 

But the record shows that, as companies push product innovation beyond a certain point, they actually begin to see their profits shrink or stall.  The reason is simple:  Each time a new product or service is added, the entire organization becomes more complex at every level.  Complexity costs money because it slows down the functioning of the company.  It requires more people, more training, and more processes. Managers know this.  In a survey of executives by Bain & Company, where the authors of the Harvard Business Review article are partners, some 70 percent said that their costs were going up because things were just too complicated.2 

Complexity often begins with the expansion of the product line and is then carried throughout the organization and perpetuated by inaccurate economic data, inflated sales expectations, and unexamined assumptions on the part of management...

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