When customers have many choices, companies feel the pressure to expand their product lines. Whether in capital goods or fast food, it’s tempting to add another SKU or slightly tweak a product to meet a customer’s request. This results in a broader range of offerings and increased complexity across engineering, production, sales, and fulfillment. While businesses often try to factor the cost of complexity into their financial projections, this can become its own quagmire. The better approach is to consider strategy directly when managing product line complexity.
The Illusion of Project Economics
At first glance, new products or variants seem like they’ll pay off. However, as the number of offerings grows, the hidden costs of complexity can outweigh any incremental gains in sales. These costs don’t show up in the bill of materials (BOM) but are buried in indirect costs that are allocated across products. The challenge is that these hidden costs are slow to appear and often unevenly distributed. As a result, while individual products may seem profitable, the margins for the entire portfolio can erode over time.
Complexity Can Be Dangerous
Some companies run into serious trouble when their product lines become too complex. For example, Boeing’s decision to offer extensive customization options for the 787 Dreamliner backfired. The resulting production complexity and delays ultimately forced Boeing to suspend production, incur over $9 billion in charges, and lose $45 million per airplane in 2013. In the late 2000s, Dell’s just-in-time model thrived with a narrow product range. But when they expanded to include more consumer PCs, laptops, and peripherals, their operations struggled to keep up. This led to declining profits, stagnating stock prices, and ultimately Michael Dell taking the company private to reset its strategy.
In both cases, these companies strayed from their core product offerings in pursuit of additional revenue, only to be bogged down by accumulating complexity.
The Quagmire of Estimating Complexity Costs
As the burdens of complexity become apparent, operations teams may try to estimate the costs of complexity in an effort to reduce demands for more products and product variants. Yet calculating the cost of complexity is problematic. Many companies hope to simply estimate these costs and incorporate them into their financial models. However, this often becomes a quagmire of complexity itself.
Benchmarking, scenario analysis, and process simulation can help justify reducing complexity, but they don’t always offer convincing guidance on what to cut. Plus, getting product owners to simplify their offerings for the greater good of the company is a tough sell.
Even when cost savings are clear, it’s hard to get teams to commit to complexity reduction, especially if it means limiting their product options for customers. Companies often find that avoiding costs isn’t as motivating as direct cost reductions. And without clear buy-in from product owners, complexity reduction efforts stall.
Climbing Out of the Quagmire: Strategic Scoring
Instead of getting caught up in better accounting for complexity costs in your project financials, live with the cost allocations you have and instead evaluate projects based not only on financial returns but on strategic value as well. A simple scoring model can help. Projects can be rated based on two dimensions: their impact on target market segments (where you choose to compete) and their impact on strategic pillars (how you plan to win in those segments). Products that score highly on both dimensions should be prioritized.
To implement this, companies need a clear strategy that defines where they will compete and how they will win. The “where” is usually determined by prioritized market segments. If you can estimate your market share in each segment, you can put the incremental revenues of a product variant into context: will this variant increase our share? Will it prevent loss of share? The same revenue gains are worth more in a high-priority market segment than in a low-priority segment. Does the proposed product or variant address a high priority market segment? Is it required to defend share in a high priority segment, or to deter a new market entrant? You might accept lower returns (and increased complexity) to defend a key segment against an adjacent competitor, or one moving up the value chain.
The “how” describes how a company plans to beat its competitors in those segments — the strategic pillars. For example:
- Bringing to market an integrated solution suite employing a particular new technology
- Partnering with strategic high-growth OEMs
- Controlling the high-performance end of the market
- Delivering more value than competitors on key product dimensions
Does the proposed product or variant directly help you achieve some of these strategic ends? Is it required? A positive financial return is necessary, but it is not sufficient — not all incremental revenue is worth the trouble.
When you are comparing several projects / products competing for limited funding (or for portfolio simplification), you can score each of them against the others to define relative position on each axis [in the chart below, for a medical equipment maker, each bubble represents a product or potential product]:
Clearly, projects in the upper right are higher priority than those on the lower left, even if they are nominally smaller.
Combining Financial and Strategic Metrics
By integrating financial and strategic metrics, companies can form a more complete picture of a project’s value. For example, we helped a machinery OEM create a one-page scorecard that evaluated projects based on:
- How the new product or upgrade improved performance on the value proposition dimensions of performance, uptime, and cost. For each dimension, we developed objective metrics for comparing current products, proposed products, and competition; projects that delivered the biggest boost over competitors on these three dimensions were favored.
- Which priority market segments would be impacted, and how
- Financial metrics, including volumes, sales, ROI, and R&D costs
This scorecard helped the company develop the products that best fit the value proposition and avoid me-too projects that didn’t align. Complexity in the product portfolio (such as product variants) was materially reduced over time — by focusing on strategic value, in addition to financial metrics.
Over the development cycle after this value proposition (and enabling scorecard) were introduced, the OEM’s revenues increased by over 50% while net income more than doubled — despite an intervening industry recession.
Don’t Get Distracted
Focusing too much on calculating the costs of complexity can be a distraction. While it’s tempting to distill these costs into a single number for financial models, this oversimplification can lead to bad decisions. Companies that align their product decisions with both financial expectations and strategic goals tend to outperform over the long run. The winning approach is to avoid getting bogged down in cost debates and stay focused on the strategic factors that matter most.