Innovation Versus Complexity

Innovation Versus Complexity: What Is Too Much of a Good Thing?
Mark Gottfredson and Keith Aspinall
Harvard Business Review, November 2005

What’s the number of product or service offerings that would optimize both your revenues and your profits?  For most firms, it’s considerably lower than the number they offer today.

The fact is, companies have strong incentives to be overly innovative in new product development.  But continual launches of new products and line extensions add complexity throughout a company’s operations, and as the costs of managing that complexity multiply, margins shrink.

To maximize profit potential, a company needs to identify its innovation fulcrum — the point at which the level of product innovation maximizes both revenues and profits.  In “Innovation Versus Complexity:  What Is Too Much of a Good Thing?” in the November 2005 Harvard Business Review, the authors of Bain & Company explain how to root out the complexity hidden in your company’s value chain.

For example, at the In-N-Out Burger restaurant on Fisherman’s Wharf in San Francisco, there are just four items on the menu:  burgers, fries, shakes, and sodas.  Four is In-N-Out Burger’s innovation fulcrum — below that number, sales would drop.  Above that number, complexity would add costs and hurt profits.

Four means simple purchasing, simple production, and simple service.  And, it turns out, in a world where fast-food restaurants are forever adding formats and menu items, simple means profitable growth.  With its chain of about 200 restaurants throughout California, Arizona, and Nevada, the family-owned company expanded its sales by 9.2 percent, to $308 million, in 2003, a rate just about double the fast-food standard.  Analysts estimate In-N-Out’s margins at 20 percent, again super-sized for the industry.

As a company increases the pace of innovation, its profitability often begins to stagnate or even erode.  The reason can be summed up in one word:  complexity.  Managers aren’t blind to the problem.

Nearly 70 percent admit that excessive complexity is raising their costs and hindering their profit growth, according to a 2005 Bain survey of more than 900 global executives.

But, by finding the right balance between complexity and innovation — the way In-N-Out Burger has — companies can reduce costs by as much as 35 percent and lift revenues up to 40 percent.  For many businesses, the innovation fulcrum becomes a turning point toward higher profits and greater sales.

For example, in 2003, the global food company H.J....