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The Global Simplicity Index 2011 10.2% – The Hidden Cost of Complexity


Contents A simple question..........................................................................................................3 About us..............................................................................................................................3 What is Business Complexity?................................................................................4 Why write this report?.................................................................................................4 Research Methodology..............................................................................................5 Simply put: a summary of what we learned.................................................6 The Complexity Curve................................................................................................7 Good Complexity..............................................................................................8 Bad Complexity..................................................................................................8 The financial impact of complexity....................................................................9 Where will you find bad complexity?................................................................9 What are the most harmful types of complexity?..................................10 External Drivers of Complexity...............................................................11 Strategic ..............................................................................................................12 Complexity Drivers........................................................................................12 People Complexity Drivers.......................................................................13 Organisational Complexity Drivers......................................................14 Process Complexity Drivers......................................................................15 Product & Services Complexity Drivers.............................................16 The 10 Biggest Drivers of Internal Complexity.............................17 The Global Simplicity Index..................................................................................18 Simplicity League Table..............................................................................18 Complexity League Table..........................................................................18 The Simplicity Matrix................................................................................................19 Case Studies...................................................................................................................21 What should business leaders do about complexity?.........................23 Appendix: Industry-Level Learning..........................................................................................24 Pharmaceuticals..............................................................................................24 Automotive........................................................................................................25 Petrochemicals Firms...................................................................................26 Telecommunications Firms .....................................................................27 Retail Firms ........................................................................................................28 Banking & Finance.........................................................................................29 ICT Firms...............................................................................................................30 Food/FMCG Industry....................................................................................31 Appendix: Why so complex?...............................................................................32

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A simple question... If you knew that your business was wasting 10% of its R&D spend or 15% of its marketing budget, you would do something about it. Very quickly. So what if we told you that your business is wasting over 10% of your profit each year because of complexity? You would do something about it, wouldn’t you? Are you? Are you doing enough?

About us Simplicity is a management consultancy with one principal aim – to help our clients identify and remove harmful complexity from their business. Our academic work with Simon Collinson, Professor of International Business and Innovation at Warwick Business School and member of the Advanced Institute of Management (AIM) Board of Directors, focuses on understanding and quantifying the causes and consequences of complexity in business.

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What is Business Complexity? Something is often described as complex if it has many interrelated components or features. The complexity of any system or organisation increases according to: 1. The number and variety of components in the organisation/system. 2. The interrelationships between the components. 3. The pace at which these relationships and the components are changing. Business complexity is the result of adding new products, processes, people, organisations and strategies into your business. All of these things increase the number and variety of components in your business, the interrelationships between these components and the pace at which these relationships and the components change.

Why write this report? Despite complexity being widely acknowledged as one of the biggest barriers to business success, there are surprisingly few robust academic studies in this area. While several books have been written on the subject, most of them focus on the more philosophical aspects of the problem and the general business challenges it creates. Very little has been written that would help business leaders to quantify this problem and identify and implement tangible solutions. To this end, our academic research programme sets out to address four major questions: 1. 2. 3. 4.

Is complexity a good thing or a bad thing in business? What are the financial and performance consequences of complexity? What are the biggest sources of business complexity? What can managers actually do about business complexity?

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Research Methodology Our conclusions and insights are drawn from two primary research programmes. We believe that together they represent the most robust analysis to date on this significant business issue.

The Global Simplicity Index

is a comparative statistical model of business complexity, based on published data, developed by Professor Simon Collinson. This data covers 18 drivers of complexity and business performance. The sample set for this model is the Fortune Global 200, i.e. the 200 biggest companies in the world. The data is consistent and comparable across this sample. Selection of the complexity and

performance drivers were based on a detailed review of published academic research and covers all of the complexity areas, as shown in the diagram below.

The Complexity Management Survey is based on a structured survey

involving over 500 managers and leaders working in companies with 10,000+ employees across Europe. This study looks at more than 100 separate complexity sub-drivers within over 300 companies, identifying the most common and harmful complexity challenges faced by managers daily.

Product & Services Complexity caused by the number of products, their design, and the structure of your portfolio.

Strategic The choices you make concerning where to focus and how to win in your market.

People The everyday behaviours of yourself and your managers.

Organisational How you organise and structure your business to deploy people and make decisions.

Process The complexity of the business processes that you use.

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Simply put: a summary of what we learned QQ There is an inverted U-shape relationship between complexity and profit (EBITDA), proving that in some circumstances complexity can be good for business performance, but continually adding complexity will be bad for performance.

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All companies have both good and bad complexity within their businesses, and so every single company has the opportunity to improve their performance by removing bad complexity. On average, the 200 biggest companies are losing an estimated 10.2% of their profit (EBITDA) as a result of the bad (value-destructive) form of complexity. That is, $1.2bn of lost profits on average per firm and over $237bn across all our 200 firms. In other words, removing all the bad complexity would increase the average EBITDA of each firm by $1.2bn and the total EBITDA profits of the 200 by over $237bn. Using a comprehensive Complexity Drivers model, it is possible to pinpoint where the bad complexity is within your business, and to work out how much it is costing you. Once identified, this bad complexity can be removed.

QQ Within specific industries, all companies face similar levels of external complexity but some companies manage this much better than others. QQ Leaders should strive to achieve strategic simplicity, since the complexity of your strategy and changes to it are a major cause of complexity. QQ Complexity does not create itself, it is created by people. Long-term changes in management behaviour are therefore essential in addressing business complexity. QQ Organisational complexity has a major impact on performance. This includes the inefficiencies that arise when firms try and do ‘too much’ in-house, spreading themselves too thin along their industry value chains. Getting the right balance between what you do and what you leave to other firms and the market is critical. QQ Restructuring initiatives, joint ventures and acquisitions whilst necessary, also create complex integration, coordination and communication problems that can outweigh the envisaged benefits of the change. QQ Another key driver of damaging complexity is the size of your product and service portfolio. Firms with over-complicated business models spread themselves across too many market segments and try to serve too many different kinds of customers. 6

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The Complexity Curve The theory of an inverted U relationship between performance and complexity was proposed by Davis, Eisenhardt & Bingham in 2009.

an inverted U-shape curve. We call this the Complexity Curve. This curve represents the statistical relationship between profit and complexity only.

Their study measured the effect on performance when more rules were added to a team game. As the number of rules increased, performance first improved and then declined. In simple terms, increasing the number of rules too far detracted from the team’s focus on their performance.

In other words, our model removes all other factors that may impact on profit, leaving us in no doubt that complexity alone can destroy value.

Until now, this hypothesis had not been validated using real business data.

We observed that the good and bad forms of complexity are simultaneously present in all 200 global companies in our data set.

This seems intuitive, as we know that all companies do some things better than Our research proves that there is a direct and others. Put simply, every firm can improve its measurable relationship between company performance by reducing bad complexity. profit and complexity, taking the form of

Profit (EBITDA)

10.2% Good Complexity

Improves your performance

Bad Complexity

Increases cost and destroys value

Complexity 7

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Good Complexity As your business grows, it adds systems and processes which improve performance; it expands into new geographies, hires more people and develops new products. During this phase, good complexity outweighs bad complexity.

Bad Complexity Companies do not however stop evolving, and so they continue to add further complexity. Eventually they reach a tipping point where increasing complexity adds cost and slows them down. Complexity is now damaging performance. This bad form of complexity destroys value in your business. Once firms pass the peak in terms of the optimum balance between complexity and performance, the trend line for average declining performance is exponential: that is, after this tipping point the cost of complexity accelerates, as firms become more complex. 8

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The financial impact of complexity Understanding the Complexity Curve allows us to put a financial value on bad complexity. The figures are startling. ÆÆ On average, the 200 biggest companies are losing an estimated 10.2% of their profit (EBITDA) as a result of the bad (value-destructive) form of complexity. ÆÆ That is, $1.2 billion of lost profits on average per firm, and over $237 billion across all our 200 firms. ÆÆ In other words, removing all the bad complexity would increase the average EBITDA of each firm by $1.2bn and the total EBITDA profits of the 200 by over $237bn.

Where will you find bad complexity? Complexity is all around us. It can be difficult to identify which bits are good and which are bad. Knowing you have an expensive problem somewhere in your company is only vaguely helpful, like knowing there is a hole in your swimming pool, but not knowing where it is. So managers need to be able to pinpoint the exact source of this loss and have the right tools to stem the leak. As part of our study, we interviewed over 500 middle and senior managers,

all of whom deal with various types of complexity every day. We covered over 300 different companies, across all major industries. Our aim was to identify the most common sources of complexity in modern business and understand how they impact on performance. Our academic and preliminary research identified over 100 common sources of complexity in business. They are grouped into the six overall categories we mentioned at the start of this report:

1. 2. 3. 4.

External drivers: Such as regulation, or economic turbulence. People: The everyday behaviours of yourself and your managers. Process: The complexity of the business processes that you use. Strategic: The choices you make concerning where to focus and how to win in your market. 5. Organisational: How you organise and structure your business to deploy people and make decisions. 6. Products and services: Complexity caused by the number of products, their design, and the structure of your portfolio. 9

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Our study was designed to help you to understand more about the different types of business complexity you may face and the impact that complexity can have on your success. It also allows you to benchmark your business against these different Complexity Drivers, so you can pinpoint the specific forms of bad complexity which your business should focus on.

What are the most harmful types of complexity? External Strategic People Organisational Process Product Complexity Impact Score

0

{

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40

60

80

Complexity Impact Score = level of complexity caused by this driver multiplied by the impact it has on performance.

100

120

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External Drivers of Complexity The external complexity drivers were seen by managers as having the biggest overall impact on business complexity and performance. Within this category, the three biggest sub-drivers were:

Fluctuations in the performance of economy

168

The number of competitors

165

Social changes in customer base

164

Complexity Impact Score

0

It could be argued that these external Complexity Drivers are outside of a single company’s control. However, each company within an industry is faced by similar external forces, but choses to respond in a different way. Some companies respond by developing more complex strategies, processes, management systems and organisations. Others respond with less complex approaches.

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100

150

200

This partially explains why two companies facing the same external complexity drivers may have very different levels of internal complexity, as shown in our industry comparisons below. Internal complexity does not have to be an inevitable consequence of external complexity – you do have a choice.

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Strategic Complexity Drivers Perhaps surprisingly, strategic complexity drivers were seen as being the second-biggest source of complexity in business. Put simply, your strategy can itself be a major source of complexity. This is ironic, given that the role of strategy is to provide clear and consistent guidance on what a company needs to do in order to win. Within the strategic drivers category, the three biggest sub-drivers were:

Strategic planning process

129

Changes in company’s core strategy

128

Company’s strategy being too complex

120

Complexity Impact Score

0

40

80

120

160

200

The strategic planning process itself was seen most important projects as quickly as they as being too long and complicated in many would, if you were more focused. companies. This process often ties up many hours of senior management time each year. Our study suggests that all of these strategic complexity problems are common in Changes in strategy were also seen as being modern business and that they all have a a complicating factor. These changes can major impact on success. Further, strategic result in managers being unclear about what complexity can have a cascade effect, giving your strategy is, which makes it hard for them rise to complexity problems elsewhere in the to deliver it, or means that they work hard business. doing the wrong things! So finding true strategic simplicity should be Equally, if there are too many strategic a key objective of any leader who wants to projects, your managers will disperse their eradicate and prevent harmful complexity. efforts too thinly and will not deliver the 12

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People Complexity Drivers This form of complexity stems from managers failing to create a culture of simplicity, allowing people to routinely overcomplicate work, to over-engineer processes, structures, communication, products and systems. Within this category, the three sub-drivers that created harmful complexity were:

Management behaviours (creating complexity)

108

Internal communications behaviour

99

Internal politics

80

Complexity Impact Score

0

40

80

120

160

200

Complexity does not create itself, it is created by us. Our work shows that in order to have a long-term impact on complexity, it will be essential to change the day-to-day behaviour of managers. Otherwise, complexity may be removed in the short term, but will slowly creep back in. In this sense, creating a culture of simplicity could be the single most important thing that managers can do. A simplification project should not end at the conclusion of the project. The challenge for leaders is to create a culture of simplicity that thrives in the DNA of their business and has longevity. 13

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Organisational Complexity Drivers Our study shows that organisational complexity has a major impact on performance, with the bureaucracy of the system, complexity of the organisation and layers of management acting like treacle. Within this area, the three biggest sub-drivers of complexity were:

Levels of management and organisation structure

108

Measurement and reporting of too many KPIs

104

Decision-making process Complexity Impact Score

90 0

40

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In large companies, there are many layers on customer demand or profit each day. of management and multiple interactions between internal departments and So the challenge in large, multinational, matrix organisations is clearly to outside companies. make sure that everyone understands People’s roles often overlap across how their day-to-day activities create functions and geographies, and there customer value. are many competing demands on management time. Our study also found Management information demands that in many companies, decision- are increasing, although much of the making processes and responsibilities data generated is unused or redundant. If your were unclear. managers spend As your business grows, individual too much time managers become more detached from measuring and the original value-generative purpose reporting, life will of the organisation. It is hard for them to be complex. understand how they can directly impact Š 2011 Simplicity Partnership LLP. All rights reserved.

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Process Complexity Drivers Whilst intuitively we might expect business processes to be a major complexity problem, in fact they were a moderate driver of overall business complexity. The three biggest sub-drivers within the process complexity area were:

Complexity of core business processes

80

Complexity of production processes

78

Introduction of new IT systems

68

Complexity Impact Score

0

40

80

120

160

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It would be surprising, however, if each company was perfect in this area, so inevitably there will be opportunities to remove or simplify core business processes.

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Product & Services Complexity Drivers

Product and services were a less significant driver of complexity than we expected. This perhaps reflects the effort that has already gone into product, service and brand rationalisation over the last decade. The three biggest sub-drivers were:

Developing and launching new products and services

158

Number of customers to manage

116

Diversity of customer demands

102

Complexity Impact Score

0

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80

120

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By far the biggest source of complexity within this category was the development and launch of new products and services. This creates complexity across all functions of a company. Clearly, keeping a focus on a smaller number of high-potential new products/services is key. The other big source of complexity in this category was managing the number of customers and their changing expectations. This suggests that rationalisation of your customer base or re-organisation of how they are managed could be a key way to reduce complexity.

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The 10 Biggest Drivers of Internal Complexity Decision-making process Internal communication behaviours Diversity of customer demands Measurement & Reporting Levels of management & organisation Management behaviours Number of customers Changes in core strategy Strategic planning process Launching new products & services

0

40

80

120

160

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So our study shows that it is possible to identify and target specific forms of bad complexity. A good first step in attacking complexity is to understand which forms of complexity are having the biggest impact on your company’s profitability. 17

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The Global Simplicity Index Our study also allows us to understand complexity at both an individual company level, as well as industry level. Unsurprisingly, we found that some companies are managing complexity much better than others. Even at an industry level where each company faces the same external forces, we saw significant differences between companies in terms of their ability to manage complexity.

Complexity League Table The Complexity League Table lists the ten most complex companies identified in our study of the Fortune Global 200. All of these companies will have sacrificed profit as a result of high levels of complexity, however, the degree of profit impact will vary significantly.

Simplicity League Table # COMPANY 1 Lowe’s 2 Walgreen Co. 3 The Dai-ichi Life Insurance Co. 4 The Home Depot 5 Target 6 The Kroger Co. 7 Itaúsa Investimentos Itaú 8 Nippon Life Insurance Co. 9 Meiji Yasuda Life 10 Anheuser-Busch InBev

# COMPANY 1 Itochu 2 Deutsche Post 3 SK Holdings 4 Siemens 5 Nokia 6 Hewlett-Packard 7 Nestlé 8 Allianz 9 Berkshire Hathaway 10 BASF

In the Simplicity League Table we do the reverse, ranking the simplest companies at the top of the league table. This league is dominated by American retailers and Japanese life insurers. Only two out of the ten simplest firms made above average profits (EBITDA).

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See the appendix for further commentary on each company in the Complexity League Table. 18

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The Simplicity Matrix Looking at complexity levels alone is clearly simplistic, as some companies are managing complexity much better than others. The Simplicity Matrix therefore divides companies into four main typologies, depending on their levels of complexity and their profit performance (EBITDA). Although the model is based on data from the Fortune Global 200, any company can be added to the matrix. In doing this, you can understand where you are on the Complexity Curve and what actions you should be taking to address complexity in your organisation.

Profit (EBITDA)

Performers

Complicators

These companies are performing strongly without overcomplicating their businesses.

Some of these companies are performing well despite high complexity levels, however all complicators are losing some profit due to bad complexity.

Key challenge:

Key challenge:

To prevent bad complexity increasing.

To prevent complexity increasing further and reduce bad complexity.

These companies have very simple business models but are not delivering high profits.

These companies are struggling to manage very high levels of complexity and losing significant profit as a result.

Key challenge:

Key challenge:

To harness good complexity to grow.

Simplifiers

To dramatically reduce the bad complexity.

Strugglers Complexity 19

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Simplifiers

Most of these companies tend to operate in stable and predictable domestic markets, with relatively simple strategies and structures. The majority of American retailers (Lowe’s, Walgreens, Target, and Home Depot) and Japanese life insurance companies (Meiji Yasuda Life and Sumitomo) are positioned here. These firms have an opportunity to add good complexity (e.g. entering new markets, geographical expansion) to boost profits.

Performers

Many of these are state-owned companies with monopoly positions in large asset-based businesses; examples include Gazprom and China Mobile Communications. Much of the success of these companies comes from their focus on one market or geographical region. Although these companies have —until now— managed complexity very well, they risk driving complexity too far and damaging their profits, as they add new products, services and processes.

Complicators

These companies operate with relatively complicated strategies involving wide product portfolios and/or wide geographical reach (e.g. Nestlé and Novartis). Some of these companies are performing well overall but are still losing both profits and speed, due to increasing levels of bad complexity. They risk damaging their profits even more if they fail to prevent complexity increasing further.

Strugglers

...are companies that are failing to cope with complexity. They have complex organisational structures and strategies, often within turbulent industry sectors or economies (e.g. Sony and Kraft). Their profit levels are being directly and heavily impacted by complexity.

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Case Studies Performers GlaxoSmithKline

is one of the bestperforming pharmaceutical companies in the World; it also has one of the simplest business models in our survey, particularly compared to counterparts such as Pfizer, Roche and Novartis. Last year, GSK achieved an impressive profit level of 19.5% of sales, well ahead of these more complex rivals. Two dimensions of the pharmaceutical industry in particular can create harmful complexity. One is R&D, the other is acquisitions and both revolve around the drive for innovation. GSK spends over $4.6bn on R&D each year but manages a tightlyfocused product-development strategy and a simple, efficient organisational structure for its research.

As with other firms in R&D-intensive businesses, it also frequently acquires partners and competitors, like Stiefel Laboratories and Pfizer’s HIV business in 2009 and Laboratorios Phoenix in Argentina in 2010. Although this can create an overload of organisation restructuring initiatives in order to integrate new assets and people into the firm, GSK has so far managed to derive maximum value with minimal disruptive complexity from new acquisitions. Its success in both of these areas is the result of a careful balancing act orchestrated by senior management. Over-extending itself along either dimension could lead to the rise of harmful complexity, reducing its strategic focus and the efficiency of its coordination, leading to a significant drop in performance.

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Simple high performers with lessons for others.

Simpler low performers that need to develop good forms of complexity.

Renault, France’s number two car maker, has

struggled to maintain profitability over the past ten years. In 2009, the firm recorded a $4.3bn net loss and missed its sales targets by almost one million cars. The firm has a relatively narrow product portfolio – in some industries this may well be a positive form of simplicity. But in Renault’s case it represents a failure to match its better-performing competitors in terms of portfolio of designs and ability to target a wide range of market segments. Toyota is a little more complex with reference to its product offering and global structure, but it is a world apart when it comes to performance. Toyota managed almost double Renault’s revenue per employee last year.

Renault remains relatively dependent on France for both manufacturing inputs and sales. This makes for a simple corporate structure, but indicates that the firm has failed to respond to the significant internationalisation drivers currently affecting the automotive industry. Other firms have invested in manufacturing capacity in China and other emerging economies to tap into cheaper local endowments and sell into growing markets. Failure to follow suit on Renault’s part could simply lead to its demise.

Simplifiers 21

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Complicators

IBM,

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arguably one of the greatest corporate success stories of the last century, has managed to re-invent itself throughout its history to remain in step with its changing competitive environment. In the 1970s, it moved from mainframe computers to PCs, which dominated its business model in the 1980s. In the 1990s, under Lou Gerstner, its Global Services Division grew from $7bn to over $35bn in revenues, by developing a network of 72 client partnerships. IBM became a service company and further extended this model with Sam Palmisano’s takeover of PWC in 2002. Now with over 400,000 employees and $96bn in revenues, IBM is one of the world’s most diversified and international firms. Key sources of strategic and organisational complexity for IBM are the range of client partnerships it operates, and the global network of R&D centres and collaborations through which

it channels $6bn of R&D expenditure each year.

In recent years, IBM has performed well and, as such, is one of the most admired and benchmarked companies in the world. This has not always been the case: as its turbulent history of reinvention shows, there have been a number of dangerous tipping points. In the financial years from 1991 to 1993, the firm suffered cumulative losses of $20bn, before Gerstner instigated the radical restructuring that shed the firm’s overcomplicated manufacturing business model, sold off fixed assets and focused on services. Almost 20 years on, IBM has once more become highly complex and a radical push towards strategic focus and structural simplification is likely to be needed again.

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High performers on the brink of over-complicated business models.

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Low performers suffering from complexities they cannot cope with.

Nokia is one of our most complex firms and amongst the weaker performers. This would have been unthinkable at the start of the last decade, as Nokia became the world’s leading mobile phone maker with a fivefold increase in turnover between 1996-2001. It is even more surprising when we consider that the firm is still the leading handset maker by volume and sales, yet it experienced a 90% fall in profits in the first quarter of 2009 and an overall 21% fall in the year 2009-2010.

Continued falls in market share and profits have resulted from its inability to respond to competition from smartphone developers, particularly the Apple iPhone. From 2006, when

it launched the N95, it conducted a series of restructurings, acquisitions and joint ventures. Loudeye, Twango, Enpocket, NAVTEQ, Novarra and MetaCarta are all firms bought by Nokia to extend its business model into new media areas. In the process, Nokia shares lost two thirds of their value in the three years following the launch of Apple’s iPhone in 2007. Internationalisation, product diversification, overstretching the brand, new divisions (and new CEOs) and other sources of increasing complexity have all left the firm struggling. Time will tell whether the most recent grand partnership with Microsoft (one of our leading performers) will add value for Nokia, or just more costly complexity.

Strugglers 22

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What should business leaders do about complexity? Seek out and destroy!

The first priority is to identify bad complexity, work out how much it is costing you and then eliminate it. For the first time, our study shows how to pinpoint and put a value on the bad complexity.

Change management behaviours

The next challenge is to change management behaviours. Complex systems, processes and organisations do not create themselves. Business complexity comes from the everyday activities of management and the consultants employed to help them. Therefore, to beat bad complexity, you also need to change management behaviours for the long term.

Prevent unnecessary complexity evolving

Leaders also need to prevent complexity increasing too far. Before implementing new projects/processes, you should examine the impact they will have on overall business complexity and ensure that you are implementing the changes in the simplest way possible.

Nurture the good

Finally, managers need to identify and nurture the good complexity, using it to create growth and competitive advantage, always recognising that each level of complexity can push you closer to future problems.

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Appendix: Industry-Level Learning Some industries are inherently more complex that others, so comparing companies across industries can be misleading. It is better to juxtapose them within the same industry to see how different companies measure up to their competitors.

Pharmaceuticals Not surprisingly, this is one of the most complex industries. Firms operating here have complex products, large product portfolios, intricate internal organisational structures and high investment in R&D. Although the majority of firms in the industry performed well, on

Performers GlaxoSmithKline Sanofi-Aventis

average the Performers (e.g. GlaxoSmithKline) outperformed the Complicators (e.g. Novartis). Bayer is struggling the most to deal with high complexity.

Complicators Johnson & Johnson Pfizer Roche Holdings Novartis

Bayer

Simplifiers

Strugglers 24

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Performers

Complicators

Toyota Ford Volkswagen BMW

Honda

Nissan Peugeot Renault

Daimler Mitsubishi Fiat

Simplifiers

Strugglers Automotive Automotive firms operate in a relatively low complexity environment. The majority of firms in this industry are either Simplifiers or Performers. Daimler, Fiat and Mitsubishi are battling the most with high complexity, which is having a significant impact on their profits. Only Honda managed to combine high complexity with above average profits. 25

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Petrochemicals Firms The major petrochemicals companies are generally performing well, with five sitting in the Performers category. Many firms in this industry operate in governmentmandated oligopolies, reducing their levels of competition and promoting simpler strategies. Again, excess complexity hinders some firms in this industry with the most complex, SK Holdings, being one of the worst-performing.

Performers

Complicators

Exxon Mobile Gazprom BP Petrobras Chevron

ENI Total

Lukoil Marathon PTT Petronas

SK Holdings

Simplifiers

Strugglers

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Complicators

Performers AT&T China Mobile Communications Nippon Telegraph and Telephone Verizon Communications Vodafone

Deutsche Telecom Telecom Italia

Simplifiers

France Telecom

Strugglers Telecommunications Firms Within the telecommunications industry, the majority of firms were either Simplifiers or Performers. This was due to simpler structures and limited product portfolios. High barriers to entry into this market have also created oligopolies. This fairly inert competitive structure suits simpler firms, with simpler strategies. Many telecommunications firms have utilised this simplicity to become some of the most profitable in the entire Fortune 200.

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Retail Firms Retail firms tend to be a lot simpler than firms in most other industries. Those retail firms with a high level of complexity (e.g. Metro) were lower performing than their rivals. Walmart were the exception in this industry, with slightly higher complexity than the majority of rivals, and higher performance levels.

Performers

Complicators

Walmart Tesco Home Depot

Carrefour Seven & I Costco AEON Group Safeway

Simplifiers

Metro

Strugglers

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Performers

Complicators

Banco Santander Goldman Sachs Agricultural Bank of China

Bank of America Barclays UniCredit Credit Suisse Deutsche Bank

Banco do Brasil Citigroup UBS Legal & General

HSBC Royal Bank of Scotland Zurich ING

Simplifiers

Strugglers Banking & Finance Banking & Finance firms varied significantly, both in terms of their complexity and performance. On average, Performers (e.g. Banco Santander and Goldman Sachs) were more successful than Complicators (e.g. Credit Suisse and Deutsche Bank) in this industry.

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ICT Firms ICT firms tend to be more complex than highest performing within the Fortune Global companies in other industries. 200. These include Apple and Cisco. This is due to the highly dynamic operating Microsoft in particular have managed to reduce environment in which they operate with rapidly complexity in comparison to most of their changing technology. competitors by building a dominant market position within a key segment of the software The firms that dealt well with complexity within industry. the ICT industry are also ranked amongst the

Performers

Complicators

Microsoft Cisco LG

Samsung Apple HP

Hon Hai Fujitsu NEC

Hitachi Sony Nokia Toshiba Panasonic Dell

Simplifiers

Strugglers

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Performers

Complicators

Anheuser-Busch InBev

Procter & Gamble Nestlé

PepsiCo

Unilever Kraft

Simplifiers

Strugglers

Food/FMCG Industry FMCGs are generally diversified and geographically spread, operating with large economies of scale. Nestlé are the most complex firm in this industry, with complexity pushing them well beyond the tipping point. Procter & Gamble were the most profitable firm in the industry but were marginally to the right of the tipping point, suggesting that any further complexity will be increasingly detrimental to profitability.

*

The industry quadrants within this report do not feature every company included into our analysis. To discover where your company is positioned, please contact us.

© 2011 Simplicity Partnership LLP. All rights reserved.

31


Appendix: Why so complex? # COMPANY 1 Itochu

One key source of complexity for Itochu is its wide product portfolio across many diverse business segments (textiles, food, and insurance, to name a few). They have also grown rapidly through acquisition, adding the complexities of integrating a large number of new employees into the firm within the last year. This in turn spurs process, organisational and behavioural complexity.

2

Deutsche Post

3

SK Holdings

4

Siemens

5

Nokia

6

Hewlett-Packard

7

Nestlé

8

Allianz

9

Berkshire Hathaway

10

The convoluted departmental processes at Deutsche Post clearly account for some of their complexity, which has significant knock-on effects on organisational and people forms of complexity. Their complexity stems from the diversity of their business units (incl. telecommunications, petroleum, and financial securities) combined with a high level of employee turnover. The complexity levels at Siemens were caused by having a wide range of products, and from operating in highly innovative technology intensive industries. These things subsequently propel very high levels of process and organisational complexity. High levels of technological innovation, combined with large-scale restructuring leading to high staff turnover, all add to Nokia’s complexity. Large product portfolio (incl. computers, smartphones, printers, etc.) increased their level of complexity connected to the internal divisional structure and intensive R&D efforts, as well as the diversity of technologies and consumer markets it competes in. Operating across a very wide range of business sectors (confectionary, food, drinks, pet food, etc.) drives the complexity at Nestlé. Each business unit still has a relatively high level of autonomy, which has led to high levels of strategic, process and organisational complexity, as well as higher levels of duplication. Nestlé is also one of the most multinational of companies, operating assets and managing employees all over the world. Excessive organisational change brought about by acquisitions, resulting in process & organisational complexity, raised the complexity at Allianz. This holding company has a large number of subsidiaries operating across a wide range of unrelated industries. Clearly, the structure of the small centre and the influence of the highly-respected Warren Buffett helps the firm cope with this level of complexity.

BASF

This company is characterised by its wide product portfolio spread across different industries and business segments. BASF also engages in a large number of acquisitions. These two factors combine to elevate the levels of process, organisational and strategic complexity.

32

© 2011 Simplicity Partnership LLP. All rights reserved.


Diagnose: We identify the valuedestructive complexity within your business and how much it is costing you.

Change: We help to change the management behaviours that create complexity.

Solve:

We help our clients solve their complexity problems.

Melvin Jay

melvin.jay@simplicitypartnership.com www.simplicitypartnership.com +44 (0) 77 9626 5845 The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate, as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. ©2011 Simplicity Partnership LLP. All rights reserved. The Simplicity Partnership LLP name, logo and “Creating value by simplifying your business” are registered trademarks or trademarks of Simplicity Partnership LLP. Publication date: March 2011

The Global Simplicity Index 2011  

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