Article

Finding your innovation fulcrum

Customers are crying out for more and more innovation. Yet if you create too many offerings, costs spiral out of control; too few, and you miss out on profitable sales.

Par Mark Gottfredson and Mike Booker

First published on décembre 20, 2005
min


It's a constant trade-off faced by even the most successful companies, from Nokia to Honda to Starbucks: Customers are crying out for more and more innovation. Yet if you create too many offerings, costs spiral out of control; too few, and you miss out on profitable sales. The dilemma puts a premium on finding just the right balance. In our experience, firms that master this "innovation fulcrum"—between product variety and operating complexity—can boost their balance sheets, with cost reductions of as much as 35% along with up to a 40% increase in sales. The problem is where to start: According to a recent Bain survey of more than 900 global executives, nearly 70% admit that excessive complexity is raising costs and hurting profits, but many miss how complexity begins in the product line. The usual response—launching a Six Sigma or other "lean operations" program—falls short because standard accounting systems don't pick up complexity's full costs. Incremental approaches miss the gradual buildup of systems and mechanisms for managing complexity. Nor can they gauge actual customer desires. What's needed, then, is a systematic review. H-E-B, a supermarket firm operating in Texas and Mexico, took a look at its overall offerings and found that it could simplify and improve the perception of variety by tailoring store offerings to local tastes and streamlining processes. In its Rio Grande Valley stores, for example, H-E-B focuses on traditional border customers and their ethnic preferences. Its Central Market division, however, offers a world of produce to upscale shoppers with "a passion for fresh and unique food." Yet all stores have a simple, standard operating model with similar ratios as targets for sales and gross margin. We think of this approach as "Model T" analysis: On the operating side companies need to think about what processes would look like with just one standard offering—like Henry Ford's Model T, which came only in black. On the customer side, firms need to understand where variety really counts—something Ford missed when competitors introduced colorful autos in the 1920s. Choosing the right "Model T" can be tricky. Firms should identify a basic version of their core offering. This allows managers to imagine whole systems and processes that could be radically changed in a simple environment. Big companies that find it difficult to isolate a "typical" offering should look for a proxy—a smaller, perhaps non-traditional competitor operating with a simpler set of offerings. Having established the baseline, companies need to add back those options valued by attractive segments of their customer base. The secret: Add only a single variable at a time and then trace the effect through the value chain. Of course getting rid of complexity is only half the challenge. Companies also need to keep things simple. Four practices help stem complexity creep: — Start by raising the hurdle rate. Requiring a higher rate of return on new products not only makes it more difficult to arbitrarily add variations, it also boosts innovation discipline. — Postpone complexity. The further down the value chain you introduce complexity, the less it costs. A few years ago, Starbucks began "semi-automating" its latte-manufacturing process. Today, Starbucks patrons can still customize their lattes by size, type of milk, temperature and flavors—but everything works off the same standard platform. Smart suppliers to do-it-yourself chains offer products that can be customized at the last step in the assembly or distribution process. — Institutionalize simplicity in decision making. Executives must pinpoint responsibility for making innovation decisions. Take the example of one food company. Marketers used to order up numerous packaging concepts for a popular snack, creating manufacturing nightmares. Today, its brand managers must meet checkpoints with manufacturing and sourcing managers. — Stay balanced. A company's innovation fulcrum can shift over time. Japanese auto makers provide a classic example. In the 1970s, U.S. auto makers competed on their breadth of car choices. Toyota and Honda went another route. Rather than offering millions of possibilities, Honda offered 32 build-combinations with four colors. Today, Honda has redesigned its engines to reduce fuel consumption and emissions, and streamlined engine manufacturing. What's the right balance? It's a question Henry Ford should have asked before his competitors' colorful vehicles started appearing everywhere. Eventually, he introduced the Model A, done up in multiple hues. But the lesson remains: Companies that hit the right balance between innovation and complexity create more efficient operations and more profitable customer relationships.

It's a constant trade-off faced by even the most successful companies, from Nokia to Honda to Starbucks: Customers are crying out for more and more innovation. Yet if you create too many offerings, costs spiral out of control; too few, and you miss out on profitable sales. The dilemma puts a premium on finding just the right balance. In our experience, firms that master this "innovation fulcrum"—between product variety and operating complexity—can boost their balance sheets, with cost reductions of as much as 35% along with up to a 40% increase in sales.

The problem is where to start: According to a recent Bain survey of more than 900 global executives, nearly 70% admit that excessive complexity is raising costs and hurting profits, but many miss how complexity begins in the product line. The usual response—launching a Six Sigma or other "lean operations" program—falls short because standard accounting systems don't pick up complexity's full costs. Incremental approaches miss the gradual buildup of systems and mechanisms for managing complexity. Nor can they gauge actual customer desires.

What's needed, then, is a systematic review. H-E-B, a supermarket firm operating in Texas and Mexico, took a look at its overall offerings and found that it could simplify and improve the perception of variety by tailoring store offerings to local tastes and streamlining processes. In its Rio Grande Valley stores, for example, H-E-B focuses on traditional border customers and their ethnic preferences. Its Central Market division, however, offers a world of produce to upscale shoppers with "a passion for fresh and unique food." Yet all stores have a simple, standard operating model with similar ratios as targets for sales and gross margin.

We think of this approach as "Model T" analysis: On the operating side companies need to think about what processes would look like with just one standard offering—like Henry Ford's Model T, which came only in black. On the customer side, firms need to understand where variety really counts—something Ford missed when competitors introduced colorful autos in the 1920s.

Choosing the right "Model T" can be tricky. Firms should identify a basic version of their core offering. This allows managers to imagine whole systems and processes that could be radically changed in a simple environment. Big companies that find it difficult to isolate a "typical" offering should look for a proxy—a smaller, perhaps non-traditional competitor operating with a simpler set of offerings.

Having established the baseline, companies need to add back those options valued by attractive segments of their customer base. The secret: Add only a single variable at a time and then trace the effect through the value chain.

Of course getting rid of complexity is only half the challenge. Companies also need to keep things simple. Four practices help stem complexity creep:

— Start by raising the hurdle rate. Requiring a higher rate of return on new products not only makes it more difficult to arbitrarily add variations, it also boosts innovation discipline.

— Postpone complexity. The further down the value chain you introduce complexity, the less it costs. A few years ago, Starbucks began "semi-automating" its latte-manufacturing process. Today, Starbucks patrons can still customize their lattes by size, type of milk, temperature and flavors—but everything works off the same standard platform. Smart suppliers to do-it-yourself chains offer products that can be customized at the last step in the assembly or distribution process.

— Institutionalize simplicity in decision making. Executives must pinpoint responsibility for making innovation decisions. Take the example of one food company. Marketers used to order up numerous packaging concepts for a popular snack, creating manufacturing nightmares. Today, its brand managers must meet checkpoints with manufacturing and sourcing managers.

— Stay balanced. A company's innovation fulcrum can shift over time. Japanese auto makers provide a classic example. In the 1970s, U.S. auto makers competed on their breadth of car choices. Toyota and Honda went another route. Rather than offering millions of possibilities, Honda offered 32 build-combinations with four colors. Today, Honda has redesigned its engines to reduce fuel consumption and emissions, and streamlined engine manufacturing.

What's the right balance? It's a question Henry Ford should have asked before his competitors' colorful vehicles started appearing everywhere. Eventually, he introduced the Model A, done up in multiple hues. But the lesson remains: Companies that hit the right balance between innovation and complexity create more efficient operations and more profitable customer relationships.