Unique Point of View
"The greatest challenge to any thinker is stating the problem in a way that will allow a solution."
— Bertrand Russell
Our Point of View is rooted in the observation that as the world has become much more complex, companies have evolved into complex systems—systems characterized by a large number of interconnected variables, with a complex web of cause and effect and a dynamic all their own.
This perspective provides us with a more fundamental understanding of the systemic issues at work in companies today, giving us valuable and often counterintuitive insights into these issues and showing us how many traditional management paradigms are now outmoded.
Our unique point of view:
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Complexity is a Geometric (Exponential) Issue. Read more
Cost and operational risk do not grow proportionally with complexity but geometrically, or exponentially, with complexity. Complexity exists across multiple dimensions. Product, process, and organizational complexity combine to increase cost, impede delivery, and increase risk of failure. While complexity can be good or bad, companies invariably have too much of it. This is in large part because while the benefits of complexity are local, its costs are distributed. What does too much complexity mean? It means that at some point the geometric growth of complexity costs overtakes revenue growth and destroys profits.
Many companies today have passed this point.
Complexity—the Opposite of Scale. Read more
Scale exists at many levels: not just the aggregate size of the business but also down to the shop floor and the individual worker (for example, higher volume products and activities have more scale than smaller volume ones). However, in a pursuit of scale at an aggregate level, companies have inadvertently added complexity and compromised scale at lower levels. Consider what has more scale, a large pile of small pieces, or a smaller pile of larger pieces? Scale builds a larger pile. Complexity breaks it up into smaller pieces.
Complexity is therefore the opposite of scale. If you build complexity faster than scale you erode profitability. In light of this, economies of scale are better termed economies of density. Revenue may depend on scale, but today profitability depends on density. This means that companies must be thoughtful about where, or at what level, to best build scale.
Fixed & Variable Costs—an Outmoded Paradigm. Read more
There are really three types of costs: variable costs, fixed costs, and complexity costs. The traditional fixed/variable cost paradigm motivates companies to pursue economies of scale as the path to profitability. But in a quest for scale companies too often add significant levels of complexity and with it massive complexity costs, which negate the benefits of scale. Today, we see that a company’s cost competitiveness is driven primarily by where it falls on this balance between traditional economies of scale and the geometric growth of complexity costs.
The traditional fixed/variable cost paradigm therefore no longer works. Companies today whose strategy has relied on economies scale often fail to realize expected returns. By misreading complexity costs as variable costs, and simply spreading these costs in proportion to volume (i.e., "peanut butter spread"), these companies underestimate the cost of complexity and the disproportionate cost of small volume products and activities. By misreading complexity costs as fixed costs they overestimate their potential for fixed cost leverage. These dynamics do not average out—they compound, leading these companies to have too much complexity and mediocre returns.
A Merging of Strategy and Operations. Read more
Strategy (where to compete) and Operations (how to compete) have traditionally been treated as separate domains. But in the face of complexity this distinction quickly blurs. At its core, strategy is about the allocation of limited resources, which has traditionally been a question of which markets, regions, segments, etc. to compete. But with complexity, we now see the competition for limited resources as a dominant issue at all levels within a company.
Operations issues therefore are now also centrally a question of allocation, whether how to allocate changeover time across a myriad of products on a production line or project resources across an ever growing list of improvement initiatives. Typical operations tools which seek to optimize each product, process, or project in isolation no longer work. In a complex system, instead of considering each item individually you must consider all of the items competing for those same resources. This requires a strategist’s mindset, but also a fluency in operations.
The Perils of Over-emphasizing Specialization. Read more
With all of its benefits—division of labor, interchangeable parts, and mass production—the value of specialization is rooted in our ethos. This is particularly true in America, which grew up during the industrial revolution. It is no coincidence that Adam Smith’s The Wealth of Nations, in which he described economic specialization, was first published in 1776.
But with all of its advantages, an overemphasis on specialization leads to a piecemeal understanding of the system, and we find that companies that are essentially a collection of specialists are ill equipped for managing the complexities in their business.
Attacking issues in a complex system therefore benefits from top-down approaches. We find that companies are most effective when they take targeted, focused actions rooted in a broad understanding of their business, its operations, and the markets in which it competes. However our observation is that companies often get this backward, taking broad actions based on a piecemeal understanding, often leading to poor results.
In fact, many of the major advancements in the world today are being forged by deep generalist at the point of integration between previously separated disciplines. Similarly, we find that the larger opportunities lie with how the pieces of a business are put together, more than on the performance of the individual pieces.
The Illusion of Differentiation (The Horse Race).Read more
Everyone wants to stay out of “commodity hell”. But while differentiation offers the potential for premium returns, in today’s rapidly changing world the advantages of differentiation are increasingly short-lived, and differentiation itself as a lasting competitive advantage becomes an illusion.
Rather, most companies are engaged in a horse race where, absent true barriers to entry, the advantage is not differentiation itself but the capability to consistently differentiate faster, more effectively, and less expensively than competitors—to consistently stay a nose-length ahead.
Companies that see differentiation itself as their competitive advantage risk throwing many things at the wall in the hope that something sticks—but in doing so clog up their innovation processes and dilute resources. Companies that see the ability to differentiate as their competitive advantage recognize that in the horse race, separating good from bad complexity is paramount and winning is less like a dominant blow and more like a series of small victories.
