Five Reasons Managers Don’t Simplify

 

There is plenty of anecdotal evidence that managers in large, successful firms consistently tend to act to make their businesses more complex rather than simpler. But why do they do that?

It turns out that there are five reasons why managers in market leaders don’t simplify, and they are all traps. We call them: the Overhead Trap; the Cannibalization Trap; the Customer Trap; the Complexity Trap; and the Skills Trap.

Nearly always, market leaders could simplify; it’s just that they choose not to. Those whom the gods wish to destroy they first make complex.

 

The Overhead Trap

It seems that firms develop their own rules of thumb about acceptable margins and then become addicted to them. So, if simpler, lower-margin products come along, it is hard for any successful company to embrace them and realize that, although the margins are lower, the overheads are too. New entrants with simpler products do not have the handicap of success in more complex, more profitable products, and the overhead and margin assumptions that such success generates.

The Cannibalisation Trap

The trap here is that the market leader believes its customers will not switch to a new product, and so ignores the threat from the new product. The typical pattern can be summarized as follows: The performance of the new product gradually improves, and after a while it meets the requirements of all but the most demanding customers. With increased learning and volume, the simpler product becomes ever cheaper, which makes the price difference between it and the premium product increasingly hard to ignore.

The Customer Trap

The trap here is that the market leader believes its customers will not switch to a new product, and so ignores the threat from the new product. The typical pattern can be summarized as follows: The performance of the new product gradually improves, and after a while it meets the requirements of all but the most demanding customers. With increased learning and volume, the simpler product becomes ever cheaper, which makes the price difference between it and the premium product increasingly hard to ignore.

The Complexity Trap

In the early stages of industry innovation, companies typically build new and better products through heavy investment in both product and process complexity. The product is hard to make, hard to use and expensive to produce. In the search for expansion, product variety, product proliferation and customization are all vigorously pursued, greatly adding to the complexity of the firm’s offering and operations.

The Skills Trap

The requirement for different skills is not necessarily a barrier to effective simplifying, provided the new skills are developed and kept outside the original operation, even after acquisition.