New Venture Lab: Equipping Christian Entrepreneurs

Simplification is in.  Some of the hottest-selling books right now feature instructions on how to lead a simpler, lower-cost lifestyle.  And for good reason, given that we are in the middle of a global economic meltdown.  Entrepreneurs need to adapt that same attitude of simplification with their businesses since much of the current malaise no doubt sprang from too much complexity.  The article below points out some excellent examples of companies that have recently simplified their operations and their product lines.

The next big trend is simple: to simplify.

This is not news to anyone who's been around the track a few times. An emphasis on focus, speed, streamlining processes, and finding common platforms has characterized the best companies for years. The Internet has helped cut out intermediaries and enabled direct connections, instant feedback, and more information transparency. In design, sleek looks have replaced ornamentation.

But simplification is not the norm, and that's a problem. The world is complex enough without human actions making it more so. We have been paying a price for too much complexity, creating -- or allowing -- so much variety that it is hard to sort through it, and adding so many loops to the chain that no one feels personal responsibility for the whole system or even comprehends it fully.

Last fall's global economic meltdown stemmed from financial systems that had become so complex that lenders did not have to take responsibility for underlying value. The Madoff fraud was carried off by inserting a chain of intermediaries that hid the ultimate money-handler. Some say that health care costs are too high in the U.S. because of complex insurance systems that stand between physicians and patients.

Companies sow the seeds of their own decline in adding too many things -- product variations, business units, independent subsidiaries -- without integrating them. They create complexity, which makes costs increase faster than the potential gains from the new parts.

Seagate Technology's first losing streak, about a decade ago, stemmed in part from acquisitions that were simply tacked on, unintegrated, resulting in quasi-independent units that each wanted its own array of functions. Seagate had the highest R&D costs in the industry and the lowest R&D productivity. Steve Luczo, who replaced the founder as CEO, led a turnaround that simplified the structure. Now Luczo, who had stepped down as CEO, is back to do the same thing in a company where complexity had again raised costs.

In good times, the temptation to accumulate can be indulged because growth masks inefficiencies. As each set of variations requires management attention, companies add administrative staff simply to handle the information and oversight. That is why companies face diseconomies of scale as they get larger -- the ratio of administrative costs to production costs burgeons.

That sounds like the U.S. auto industry. Just why did General Motors need 47 brands of cars? Was that responsible for its top-heavy load of managers? Or for cannabilization within the company? While GM continued to lose money and bleed cash, requiring billions in a U.S. government bailout that probably will not be enough anyway, Ford took a different tack. While GM struggled, Ford started its "One Ford" campaign to integrate its international units and simplify its global structure. Ford was profitable despite industry woes in the first part of 2008 and did not require government assistance.

Timberland started by developing waterproof boots which later became an urban youth sensation, making Timberland a leading outdoor shoe company. But it added numerous lines of shoes and apparel until it had thousands of SKUs (stock-keeping units, or product variations) and a complex organization structure. Now a fashion company, its response to competition was still more incremental variations. A shoe R&D unit called the Invention Factory (iF) worked on finding dramatic breakthroughs like the waterproof boot or Euro-hiker shoe, but meanwhile Timberland proliferated SKUs and tacked on acqusitions such as SmartWool as independent subsidiaries. It is no surprise that after 4 years of dramatic growth, Timberland went into a financial tailspin. The solution was to simplify the structure and cut the number of SKUs, focusing on areas where Timberland had depth.

After 15 quarters of decline, Gillette took nearly a year to cut SKUs, because everyone had a reason why their favorite niche product was essential though inefficient (e.g., special toothbrushes for orthodontists). Eventually, a recovered and highly profitable Gillette was acquired by Procter & Gamble, no stranger itself to SKU-proliferation. But for anyone who ever felt paralyzed by the choices of kinds of Crest toothpaste, and whether to emphasize tartar control, whitening, or gum disease prevention, P&G created Crest Pro, which combines every solution in one premium-priced product.

The Crest Pro example is instructive. As companies cut the clutter and simplify their structures, some will also find business opportunities. When everyone else suffers from over-complexity, there is a market for products and services that simplify life.

By: Rosabeth Moss Kanter

Source: Harvard Business Publishing