value insights

Profitable Growth Complexity Challenges- Valutrics

Corporate R&D departments, Product Development, Marketing, Sales work to innovate and create new products, sell to new customers, and open new channels of distribution, all in hopes of achieving elusive growth targets. The more difficult or slower growing the market, the harder they push and the more complexity they create.

The most common cause of management-induced complexity is the constant striving of companies to achieve high growth in low-growth markets. They struggle; they stretch; they create more new products; enter new markets; expand distribution; add facilities and staff; expand systems—all the while adding complexity at a far greater rate than revenue or profits.
The more possibilities managers see, the more proliferation they create in blind hopes of finding some sort of competitive advantage and the profitability that goes with it. Add to that the complexity of globalization, outsourcing, fragmented and transient work forces, and the increased use of temporary employees or contractors and the challenges become even more complex. The purpose of any company should not be to stifle growth through innovation. It should be to make it productive and profitable.

If complexity is born of the runaway proliferation of everything in search of high growth in low-growth markets, why does management do it? They do it with the best of intentions, reaching for goals that are set too high, or without understanding the consequences of their actions until afterward. Just think about the excitement when there is a major new product or new market initiative undertaken to gain sales and (hopefully) profit growth. That excitement often blinds management to the obstacles and complexity that lie ahead.

Globalization just makes this growth-driven complexity problem worse, especially if American companies do not understand the cultural differences of the markets in which they’re trying to compete.
Creating legal business entities abroad is a complex and costly endeavor. Protecting intellectual property rights abroad—if there is enough law enforcement to do so—is equally costly and complex. Dealing with social and labor customs is different, and that leads to many other issues. Just imagine the initial challenges that add to complexity: language, currency, regulations, politics, culture, tax, import/export, customs, logistics, and many more.

How to grow faster than the market is growing
There are mainly  five ways to grow faster than the market is growing

Take share from existing competitors.
First, and most obvious, is trying to take market share from competitors, as it involves participation in the same markets, competing with familiar competitors, products, etc. Choosing this path to growth usually doesn’t add complexity unless the share you go after is a different kind of product, customer, distribution, etc. Then it can be doubly difficult, since there will be the dual risk of entering quasi-
new markets with less-familiar products, battling it out on pricing and deals, and still adding complexity in the process. This approach is also one of the most difficult from the perspective of profitability and likely competitive retaliation. You fight for their share, and get some—at a cost—and they come right back after a piece of yours.

Expand the market with innovative new offerings.
The second choice, expanding the market through innovation, sounds great. It’s just much easier to say than to do. Innovations are not too predictable and are subject to copying, knockoffs, or product life-cycle limitations. Good ones can be very powerful, but for every few that work, many will fail. Or, they’ll cannibalize older, existing products/services. This is also an attractive trap. New products, new customers, new markets, etc. all lead to new complexity, which won’t be apparent in the financial projections, but it will show in the financial results.

Change the mix to sell higher-price-value products.
The third option, changing the mix, is a very effective way to impact profitability and would be a great solution for growth—if everyone else wasn’t also trying to do the same thing. Still, it is important to analyze the relative profitability of the products and customers, and to evaluate if you can shift the mix from the less-profitable to more-profitable customers or products and from lower-growth to higher-growth product or market segments. This is also a strategy that is less likely to cause more complexity and might actually lead to simpler product and customer combinations.

Enter new market segments or an entirely new market
The fourth choice has appeal because the grass is always greener on the other side of the fence. New markets look so attractive because we aren’t as familiar with them. Remember, however, that while new markets may be new to you, they are some incumbent’s current market, and that incumbent will defend its market position. What you will do is add a huge number of “news”—products, specs, customers, locations, etc.—all of which will add hidden complexity and the costs associated with it.

Create an entirely new product and market
Finally, the fifth option is a wonderful one. It is also the most difficult and uncertain, and contains elements of the prior four. FedEx created a whole new market, but its core business of delivering packages and “information in packets” was previously done by mail, freight, fax, phone, etc. And each of these market segments had entrenched incumbents defending its turf in one way or another.
One of the most interesting new market-growth efforts was created by the realization that time-starved U.S. consumers would pay handsomely for the convenience of buying bagged, chopped lettuce. This created a new, multi-billion-dollar market. This kind of a breakthrough is rare.
The more innovative the new entrant—like eBay—the more immediately successful it can be versus less desirable, older ways (newspaper classified ads, yard sales, thrift stores, etc.). The more advantages the new method offers (like the ability to use digital photos on eBay to show products), the more likely it is to displace the older method. But remember, eBay built itself on three big new technological advances: widespread access to the Internet, wide acceptance of digital photography, and cashless payment systems (PayPal, and others).
These great new growth successes look so obvious now, but each had its own risks of complexity and hidden costs of doing unfamiliar things in unfamiliar ways.

Bottom line: achieving profitable growth is difficult without creating and managing new complexity. Finally, these challenges of growth are being recognized more widely. Managing complexity before the resultant problems cause a crisis is imperative. Consider these thoughts from “Innovation vs. Complexity—What is too much of a good thing?” a 2005 Harvard Business Review article. The authors, Mark Gottfredson and Keith Aspinall, consider the appropriate balance between innovation and complexity. “But the pursuit of innovation can be taken too far. As a company increases the pace of innovation, its profitability often begins to stagnate or even erode. The continual launch of new products and line extensions adds complexity throughout a company’s operations, and, as the costs of managing that complexity multiply, margins shrink.”Innovation-driven sales growth is the reward for success. Failure creates problems of complexity with its hidden costs.

Few companies properly count and track the exploding number of products, customers, markets, variations, facilities, people, suppliers, etc., which lead to an even greater explosion of part numbers, processes, bills of materials, invoices, payments, entries, transactions, lenders, legal entities, countries/cultures, currencies, etc. The list of how complexity spreads is almost endless. As financial pressures mount, finding new markets and new products with which to grow is a daunting task. Doing so without dramatically increasing complexity is even harder. Yet, innovation is essential; but it must be managed innovation, not simply rampant proliferation.

Leader’s role and responsibilities
Strong leadership is imperative. Even with the strongest of partners, the right leadership is critical to success. leaders have roles and responsibilities

The role has three parts:
• To create a clear understanding of, and healthy dissatisfaction with, the current reality
• To build a shared vision of a new, better reality as a goal
• To create an environment in which people are motivated to move from former to latter

There are four key responsibilities of a leader in this role:
• To provide and/or assure that the necessary resources are available
To clear obstacles, maintain progress, develop metrics to measure progress, and stay on track
• To go along on the journey
• To celebrate wins, mourn losses, and never give up striving for the shared vision of the goal

When complexity afflicts an organization, it is easy for people to lose their bearings and lose their way. A leader will keep them on track and focused on the end goal. To manage that complexity, a leader’s toughest decisions involve setting priorities. It is here that strong leaders must have three characteristics:
1. Courage—to make the tough decisions
2. Character—to be worthy of the organization’s respect
3. Competence—to know the right things to do and when to do them

If the leader is deficient in any of those three, the pressures of unprecedented complexity will bring him or her down.
Once those three are in place, that leader must then do three more things so his/her organization will be successful in the face of adversity and complexity. The leader must help the people:
1. Find meaning in what they are doing
2. Find the points that provide the most leverage
3. Above all, create a sense of purpose among the people

A leader who does this with passion will be ready to face complexity and turn it to the advantage of his/her organization. Start as you would any journey. Figure out where you are now. Then chart a path to where you want to be.