Is Your Business Scalable?

December 08, 2015

Creating and executing a growth strategy to capture the benefits of scale

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What are “economies of scale”?

• Leverage existing resources to sell more products or services

• Sell more items without the need to add incremental costs

• Revenue growth exceed the growth in their cost base

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New technologies and business management techniques were expected to drive greater productivity, efficiency, and ultimately…economies of scale

Global supply chains Global communication

Social media

Internet

Laptops

Cell phones

Management tools

The technology revolution over the last 20-30 years should have led to greater economies of scale…

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…but labor productivity growth is actually slowing…

Despite growth spikes from the internet bubble and downsizing from the last recession, the overall trend in labor productivity growth is clearly down

Downsizing with the last

recession

Internet bubble burst

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…and a surprising number of companies are failing to achieve economies of scale

Economies of scale

DIS-economies of scale

S&P 500 companies with economies (or dis-economies) of scale

Almost half of S&P 500 companies are actually

becoming less efficient as they grow

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Failing to achieve economies of scale is due to an inability to control costs…it’s not a lack of growth

• The bottom 20% of companies (those with the greatest DIS-economies of scale) actually have the highest revenue growth

7.4% 6.8%6.1%

6.8%

9.2%

Companies with greatest economies of scale

Companies with least economies of scale (dis-

economies)

Revenue growth of S&P 500 companies by scale quintile

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This lack of cost control manifests as failing to control either COGS, R&D, or SG&A

• Failing to control COGS while revenue is growing leads to dis-economies of scale 55% of the time

SG&A 20%

R&D 25%

55%COGS

• Companies over-invest in R&D without seeing an associated uplift in revenue or profits

• Companies over-invest in sales or overhead at a faster rate than their revenue growth

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“Individual productivity”

Volume

Cost

Pre-Industrial Age

Driven by variable costs

“Economies of Scale”

Volume

Industrial Age

Driven by fixed costs

“Complexity”

Complexity

Post-Industrial Age

Driven by complexity costs

Complexity is the opposite of scale, and the #1 driver of cost competitiveness

Complexity is the main driver behind companies inability to control costs

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VALUE(diminishing returns)

COST & RISK(exponential growth)

Level of complexity you can support

$

#Items #links

1 0

2 1

3 3

4 6

5 10

…

10 45

Complexity

About half of companies are

here

But a surprising amount of companies are here

Failing to account for complexity is causing many companies to achieve DIS-economies of scale

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The variety of and within the products (and services) you offer

The number of processes, steps, handoffs, etc.

The number of facilities, assets, functional entities, organizational units, systems, policies, etc.

• Unprofitable products• High inventory levels• Product shortages• Customer confusion

• Duplication• Rework• Work-arounds• Frustrated employees

• Poor asset utilization• Bloated organization• Functional silos• Everything takes too long

Product

Process

Organization

Type of complexity Description Symptoms of too much

Complexity can be good or bad,but companies almost always have too much

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We are increasingly seeing product complexity as a key driver behind failure to control costs

$10B Paint Manufacturer

F500 Building Tool Company

$5B Animal Feed Provider

• Company was a third the size of competitors, but had almost twice as many products

$200M Industrial

Equipment Provider

• Too much variety was hampering product availability…the #1 thing customers valued

• Excess capacity drove management to tell sales force: “sell anything and we’ll find a way to make it”

• R&D driven company was causing SKU growth to exceed revenue growth by over 4X

Company

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So how do you position your business to capture the benefits of scale?

“Everything should be made as simple as possible, but not simpler.”

- Albert Einstein

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Step one: understand if you have a complexity problem

…to help determine how far to the right your company is

Understand what complexity symptoms your company has…

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Step two: free-up cost and resources by removing your existing product complexity

Understand how complexity impacts your profitability

Balance incremental revenue vs. incremental cost

Substitutability: unsung hero of portfolio optimization

Don’t just “cut the tail”

Tips and lessons learned:

1

2

3

4

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Step three: control complexity going forward

1) Incorporate the impacts of complexity into your future growth and innovation strategy – Consider complexity impacts when expanding your business– Focus on leveraging existing assets to grow

2) Build in a complexity management function – To help prevent complexity from

building up again in the future

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“The ability to simplify means to eliminate the unnecessary so that the necessary may speak.”

- Hans Hofmann

If interested in learning more, stop by our booth to chat and register to win a

Complexity Workshop

1) Determine if your current strategy is creating scale…or complexity

2) Understand the symptoms of complexity and how to spot them

3) Remove complexity to position your business to grow with scale

4) Incorporate complexity impacts into your strategy

Is Your Business Scalable?

Jacob CarrConnect via e-mailConnect on LinkedInMore about Jacob