Finding your innovation fulcrum

Companies that limit their product lines to the most profitable ones and thereby keep their operations as simple as possible reap greater increases in revenue as well as higher cost savings.

by Business Strategy Review
Last Updated: 23 Jul 2013

An investigation of 74 firms in 12 sectors revealed that companies with the lowest complexity in their operations and product lines grew 1.7 times faster than their average competitors.

Companies can reduce their operational complexity by identifying the basic version of their core product as Henry Ford did with his famous Model T. Managers can then see what systems and processes they need as a bare minimum.

They can add new features one at a time, based on the effect it has through the supply chain. A European plastics parts company simplified its operations by reducing the number of items it produced from 400 to 110, which made up some 80% of its revenue.

It also reduced the number of customers it served from 45 down to its 12 best.  From then on, the company produced new items only if they could be produced in high volumes at the right price. It went from negative earnings to 3% to 7% by the end of the third year of its complexity-cutting programme.

Companies cannot avoid complexity, but they can try to find their 'innovation fulcrum', the right balance between product variety and operational complexity.

Mark Gottfredson and Luca Caruso, Business Strategy Review, August 2006  

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