Return to the Fundamentals
© IMD
Professor Michael Wade
1
CUMULATIVE
PROFITS
0
CUMULATIVE REVENUE
© IMD
Professor Michael Wade
Adapted from Wilson and Perumal, 2010
2
CUMULATIVE
PROFITS
CUMULATIVE REVENUE
© IMD
Professor Michael Wade
Adapted from Wilson and Perumal, 2010
3
© IMD
Professor Michael Wade
4
Who is to blame for most of the complexity in
our businesses?
…WE ARE!
WE CREATE OVERLY COMPLEX STRATEGIES…
WE ADD MORE AND MORE PRODUCTS AND SERVICES…
Too many things?
# of SKUs
1970
Today
15
60
3
40
6
240
Blackberry vs iPhone
© IMD
Professor Michael Wade
8
What do you do in a mature market?
Answer: Target narrower and narrower
groups of customers by adding new
products and services to your portfolio.
But…
Do people eat or drink more, wash
their hair more, use their phones
more frequently just because they
have more products or services to
choose from?
© IMD
Professor Michael Wade
9
More things, higher…
•
•
•
•
•
•
•
•
•
© IMD
Set up times
Training requirements
Time to market
Inventory
Logistics
Probability of defects
Marketing costs
Working capital
Coordination costs
Professor Michael Wade
10
WE ADD MORE AND MORE PROCESSES…
…BUT DON’T RATIONALIZE OR STANDARDIZE THEM
WE MEASURE AND REWARD LOTS OF THINGS…
…BUT NOT COMPLEXITY
WE BUILD CONVOLUTED ORGANIZATIONAL STRUCTURES…
…UNTIL WE ARE NOT SURE WHO IS RESPONSIBE FOR WHAT
The Complexity Curve
CUMULATIVE
PROFITS
MANAGING
GOOD
COMPLEXITY
REMOVING
BAD
COMPLEXITY
0
CUMULATIVE REVENUE
© IMD
Professor Michael Wade
Adapted from Wilson and Perumal, 2010
14
How many LEGO
Chefs do you
need?
How many people do
you have developing
new products versus
rationalizing product
assortments and
eliminating old
products?
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Professor Michael Wade
16
Which is simpler?
236 Planes, 9 types
Three classes of service
Revenue: £8B; Net income: (£425M)
© IMD
189 Planes, 2 types (Airbus A319, 320)
One class of service
Revenue: £3.5B; Net income: £225M
Professor Michael Wade
17
Complexity is caused by the number of things,
the variety of things, and the interaction
among things
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Professor Michael Wade
18
Here’s Another Curve
% TOTAL
PROFITS
GOOD COMPLEXITY
BAD COMPLEXITY
300%
200%
100%
0%
© IMD
100%
50%
% TOTAL PRODUCTS/CUSTOMERS/PROCESSES/ETC.
Professor Michael Wade
Adapted from Wilson and Perumal, 2010
19
© IMD
Professor Michael Wade
20
Excuses you will hear
“This product/service/process/customer is strategically
important”
“It’s a loss leader”
“It defines who we are” or “It’s our core competence”
“Customers will react negatively”
“It’s early in the lifecycle. Profits will come.”
“It’s all marketing/manufacturing’s fault”
And the hidden one…”I may lose my job if you get rid of it”
© IMD
Professor Michael Wade
Adapted from George and Wilson, 2010
21
Where are you?
% TOTAL
PROFITS
300%
PERFORMERS:
NEED TO AVOID
THE ONSET OF
BAD COMPLEXITY
COMPLICATORS:
NEED TO REVERSE
THE SLIDE INTO BAD
COMPLEXITY
SIMPLETONS:
NEED TO ADD
MORE GOOD
COMPLEXITY
STRUGGLERS:
NEED TO REDUCE BAD
COMPLEXITY AND
MANAGE GOOD
COMPLEXITY
200%
100%
0%
© IMD
100%
50%
% TOTAL PRODUCTS/CUSTOMERS/PROCESSES/ETC.
Professor Michael Wade
Adapted from Simplicity Partnership, 2011
22
Steps to managing organizational complexity
Step 1: Make it a priority!
Step 2: Visibly push it from the top
Step 3: Set up clear governance structure
Step 4: Measure it (warning: your normal accounting will not work)
– if you can’t measure it, you can’t manage it
Step 5: Draw your complexity curve(s) and set goals
Step 6: Action – cut out bad complexity IN CHUNKS
– Cut unprofitable products/services, fire unprofitable customers, consolidate
suppliers, eliminate duplicate and non-value adding process
Step 7: Standardize remaining non-differentiating activities (the core)
Step 8: Optimize differentiating activities (the edge)
Step 9: Repeat steps 6-8
© IMD
Professor Michael Wade
23
“Everything
should be made as
simple as possible,
but not simpler”
“We’re surrounded. That
simplifies the problem.”
General Lewis B. ‘Chesty’ Puller, U.S. Marine
Corps, Battle of Chosin Reservoir, Korea
Return to the Fundamentals
© IMD
Professor Michael Wade
25
Back up slides
The Complexity Cube
PRODUCTS/
SERVICES
Where
internal complexity
comes From
STRUCTURE
PROCESSES
Adapted from Wilson and Perumal, 2010
Vodafone ‘Simply Brilliant’ Program
Strategy
(how you compete)
Structure
Rewards
(how you are
organized)
(How you
incentivize)
People
Processes
(Skills and capabilities)
(how you do things)
The STAR Model
Vodafone ‘Simply Brilliant’ Program
Strategy
PROBLEM:
Strategic direction not clear
Conflicting agendas
Company not profitable
SOLUTION:
2 year strategic turnaround divided into 8 quarters
All top 85 managers must define 5 priorities each quarter
Each priority must be 6 words or less
Performance self-rated after quarter (green, yellow, red)
Strategies from all 85 managers fit on a single A3 sheet
All strategies and results shared with top 400 managers
BOTTOM LINE: Law of the jungle negotiation leads to strategic clarity
Vodafone ‘Simply Brilliant’ Program
Processes
PROBLEM:
12,500 processes
Huge amount of duplication, redundancy, and waste
SOLUTION:
Rigorous examination of all processes
Duplicates and weak processes eliminated
Where to start? 1. Surveyed customers and employees:
What do you hate about us the most?
2. Asked: What would Amazon do?
Cancelled all 400 senior management phone contracts
Strong processes strengthened and made new standard
Some new processes added (10%).
BOTTOM LINE: Rigorous portfolio and process reduction, i.e. 32 SIMs to 3
Vodafone ‘Simply Brilliant’ Program
Structure
PROBLEM:
Bureaucratic organization. Byzantine governance.
SOLUTION:
One weekend: Painted all walls white - no tribal symbols
Another weekend: Removed all offices.
Removed 30% of meeting rooms
Installed some quiet areas, otherwise all open spaces
No permanent desks – anything left on desks incinerated
Removed bands of seniority
Attractive severance packages offered
Closed 15 buildings in Newbury, and 30 throughout UK
5,500 now in HQ, that before could fit only 3,200
BOTTOM LINE: Lower structural complexity changed corporate culture
Vodafone ‘Simply Brilliant’ Program
People
PROBLEM:
12,000 people when CEO arrived – too many, but by how
much?
Tribal culture
SOLUTION:
Day 2, cut 2,000 people. Which 2,000? Doesn’t matter.
Then cut another 1,000 people 6 months later
Silos broken down – tribal signs removed
headcount from 12,000 to 8,000 – feels about right
BOTTOM LINE: Cut out people who don’t add value to customers
Vodafone ‘Simply Brilliant’ Program
Rewards
PROBLEM:
No clear incentive to change the status quo
No incentive to manage or remove complexity
Firefighter culture – come to us in a crisis
Blame culture: at least the hole is not at my end
SOLUTION:
No rewards for ‘Dunkirk’ spirit
Public rewards for preventing problems, eliminating
complexity, and innovation
40-50 bottles of champagne (or Islamic equivalent) / mo
Rule: Thou shall not miss thy child’s sports day
Flexible office time (but available all the time)
Local hotels came to complain
BOTTOM LINE: Reward behaviour that promotes good complexity