Unfortunately, we see that many companies in growth are unable to realise the maximum benefits from the increased top line because of this very same complexity increase. Complexity that results in increased costs, consequently ruining the bottom line. So the answer to the above question is no! It does not have to be that way, but it is necessary for the executive team to have a focus that goes beyond growth.
Why is it that growth can result in negative financial consequences? The answer lies not just in the increased complexity and the resulting increased costs. The answer lies in the real cost connected with bringing each individual product to market and selling it. We have seen examples in which up to 60% of the company’s product portfolio was unprofitable in that perspective, and up to 35% of the customer relations in reality eroded a company’s profit.
This is why it is crucial to continuously adjust all elements of your value chain to your growth and trim wherever you can. But it has to be done intelligently.
Larger does not always mean better
The problem does just not appear overnight, and it can be challenging for executives to determine when the product portfolio has become too large and complex to remain profitable, and where the issues with costs lie.
And it is not just the product portfolio that can grow too big. It can also be worthwhile to investigate whether your sales channels are in fact profitable, whether it pays off to focus on all existing customer groups, and whether the supply chain is in fact optimised. Perhaps it has also been a while since you last checked if it was worthwhile to consolidate your orders with selected suppliers?
Companies that work continuously on assessing costs connected with each product area and which also continuously trim their product portfolio will have a simpler and more agile platform for growth. Here, resources are spent where they add the most value. That form of continuous assessment should be incorporated into your corporate governance and annual wheel to ensure that complexity is not accumulating as this can be challenging to reduce in the long term.
Reduced complexity is good for both the top and bottom line
It is a good idea to keep focus on continuously reducing complexity in your value chain to avoid that your company drowns in its own success. An optimised product portfolio may be easier to communicate and sell to the right customers, it may help reduce sales costs and make pricing and new product introductions more efficient. This increased focus in the sales organisation will often offset any reduced turnover because of phased-out products and services, resulting in an improved top line, not least thanks to the elimination of units that do not make a profit.
The bottom line will similarly benefit from the reduced complexity in the company’s sourcing processes that are a result of having fewer components and suppliers and an increased sourcing volume for the remaining units. Finally, most companies will experience an improvement in capital tied up in stock, translating into released working capital.
Three steps to reduction of complexity in your company
The following is of course a highly condensed version of the process, but if you go through all three steps, you will be well on your way to eliminating unnecessary complexity in your business:
1. Transparency and facts
Reduction in complexity will not mean the same thing to all companies, and the executive team should therefore begin by achieving an overview of facts. You will benefit from creating transparency on where you make your money, and what the root cause of your cost issues is. In this connection, you may ask yourself the following questions:
- What is our actual profit on the individual product, service and customer categories?
- How many products/services/customers are behind 80%/15%/5% of our turnover and profit?
- How can we simplify and improve our company and provide as much value as possible?
2. Targets and mandates
The next critical step is to define the target for the task. In most cases, our recommendation will be: Set ambitious targets. A 20% reduction of your product portfolio is merely housekeeping. It will often take a reduction of 50% or more to really get results. Your target should be aligned with your company’s overall strategy to ensure that you do not end up eliminating important products or services.
It is important to realise that complexity reduction will also mean changes. Not everyone will see this as a good thing. This is why it is critical that the executive team gives the necessary mandates to make sure that the target can be realised and does not drown in resistance from within the company.
3. Portfolio simplification
The third step is where you really begin to cut to the core of your business. However, portfolio simplification may be difficult to do as one “big bang”. It may often be more efficient to do it in three steps with continuous implementation throughout company processes:
- Dead products: Remove “dead” products (e.g. with no sales) from catalogues, systems, procurement lists and production
- Duplicates: Consolidate products that basically serve the same function to customers
- Consolidate the remaining product portfolio: It may add more value to migrate customers to the most profitable products in order to free up more products
Top-line growth should result in an improved bottom line, and you can ensure that this is the case by focusing just as much on the complexity in your company as on the actual growth.
Originally published in Børsen Ledelse.