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Imagine a retailer that has 10 million products and hundreds of variations for each product yet keeps it simple for customers to make a choice. Impossible? Not today. Amazon.com Inc. creates value from its product complexity with simple customer-facing processes, such as search, ratings, reviews and suggestions. Now imagine a diversified high-tech company with locally differentiated products in 60 categories in more than 100 different countries. A mess of internal processes and systems? Not necessarily. Royal Philips creates value by providing locally relevant products to different markets, while keeping the vast majority of its processes standardized on digitized platforms.
Until now, managing business complexity has usually involved a trade-off. This trade-off forced companies to compromise between creating value from complexity and benefiting from the efficiencies of simplicity. As businesses entered new geographies, developed new products, opened new channels and added more granular customer segments, they made their offerings more complex with the intention of adding value. But, as an almost inevitable consequence, companies also made it more difficult for customers to interact with the company and more unwieldy for employees to get things done.
However, with today’s increased digitization,1 companies can finesse this trade-off; they can increase value-adding complexity in their product offerings while keeping processes for customers and employees simple. Our research suggests that companies operating in this “complexity sweet spot” outperform their competitors on profitability. (See “About the Research.”) In this article, we explain how companies achieve this breakthrough in the digital world.
Why Companies Continue to Add Complexity
We define business complexity as the amount of variety and links in your company.2 Variety is the difference in one or more important characteristics, and links are connections or dependencies.
Complexity can show up in many parts of a company: its product and service offerings, its organizational structure and processes, or the environment it faces.3 We found that product and service complexity and the business process aspect of organizational complexity have the biggest impacts on achieving top performance.
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1. “Digitization” involves the creation and enriching of resources (products and processes) by adding IP addresses, indexing, tagging, automating, imaging and making them available online.
2. Oxford University Press defines “complex” as “consisting of many different and connected parts.” Herbert Simon defines a complex system as “one made up of a large number of parts that interact in a nonsimple way.” See “Complex,” 2014, www.oxforddictionaries.com; and H.A. Simon, “The Architecture of Complexity,” Proceedings of the American Philosophical Society 106, no. 6. (Dec. 12, 1962): 467-482.
3. These broad sources of business complexity mirror results seen in other studies. Recently, both IBM and the Economist Intelligence Unit asked executives about sources of complexity. In a global study, CEOs described four major forces creating business complexity: market factors, technological factors, macroeconomic factors and people skills. In an online survey and in a series of interviews, executives and industry experts highlighted rising customer expectations, increased regulations, rapid growth and number of geographies with operations as major sources of business complexity. See “Capitalizing on Complexity: Insights from the IBM 2010 Global Chief Executive Officer Study,” IBM, 2010; and C. Witchalls, “The Complexity Challenge: How Businesses Are Bearing Up,” Jan. 31, 2011, www.economistinsights.com.
4. For example, S.A. Wilson and A. Perumal differentiate between good and bad complexity in “Waging War on Complexity Costs” (New York: McGraw-Hill, 2009).
5. M. Mocker and J.W. Ross, “ING Direct Spain: Managing Increasing Complexity While Offering Simplicity,” working paper no. 390, MIT Sloan CISR, Cambridge, Massachusetts, June 2013.
6. M. Mocker, J.W. Ross and E. van Heck, “Transforming Royal Philips: Seeking Local Relevance While Leveraging Global Scale,” working paper no. 394, MIT Sloan CISR, Cambridge, Massachusetts, February 2014.
7. Being overwhelmed by product options and combinations is referred to as the “paradox of choice.” For a more in-depth description, see S.S. Iyengar and M.R. Lepper, “When Choice Is Demotivating: Can One Desire Too Much of a Good Thing?” Journal of Personality and Social Psychology 79, no. 6, (December 2000): 995-1006; and B. Schwartz, “More Isn’t Always Better,” Harvard Business Review 84, no. 6 (June 2006): 22. Whether high choice generally leads to lower sales has been questioned in B. Scheibehenne, R. Greifeneder and P.M. Todd, “Can There Ever Be Too Many Options? A Meta-Analytic Review of Choice Overload,” Journal of Consumer Research 37, no. 3 (October 2010): 409-425.
8. See P. Spenner and K. Freeman, “To Keep Your Customers, Keep It Simple,” Harvard Business Review 90, no. 5 (May 2012): 108-114.
9. For example, S. Collinson and M. Jay propose that there is a “tipping point” where good complexity turns into bad complexity, in “From Complexity to Simplicity: Unleash Your Organisation’s Potential” (New York: Palgrave Macmillan, 2012).
10. In fact, there are various proposals for measuring a “complexity factor” (J.L. Mariotti), “complexity quotient” (R. Ashkenas), “index of complicatedness” (Boston Consulting Group) or “Global Simplicity Index” (S. Collinson and M. Jay). Despite the many options to measure complexity, 70% of respondents in a 2011 KPMG survey stated that complexity is one of the biggest challenges their companies face. See J.L. Mariotti, “The Complexity Crisis” (Avon, Massachusetts: Adams Media, 2008); R. Ashkenas, “Simplicity-Minded Management,” Harvard Business Review 85, no. 12 (December 2007): 101-109; Y. Morieux, “Smart Rules: Six Ways to Get People to Solve Problems Without You,” Harvard Business Review 89, no. 9 (September 2011): 78-86; Collinson and Jay, “From Complexity to Simplicity”; and “Confronting Complexity: Research Findings and Insights,” KPMG International, May 2011, kpmg.com.
11. B. Upbin, “Why Hipmunk Is the World’s Best Travel Site,” June 29, 2012, www.forbes.com.
12. M. Mocker and J. Ross, “USAA: Capturing Value From Complexity,” working paper no. 389, MIT Sloan CISR, Cambridge, Massachusetts, March 2013.
13. “USAA, Kaiser Permanente, Amazon.com, Pandora, Costco, Wegmans, Apple, TracFone, Southwest and Westin Among the Highest in Customer Loyalty in the 2014 Satmetrix Net Promoter Benchmarks,” press release, Satmetrix, San Mateo, California, March 5, 2014.
14. “Driven: 2012 Report to Members,” (San Antonio, Texas: USAA).
15. D. Robertson and K. Ulrich, “Planning for Product Platforms,” Sloan Management Review 39, no. 4 (summer 1998): 19-31.
16. J.W. Ross, P. Weill and D. Robertson, “Enterprise Architecture as Strategy: Creating a Foundation for Business Execution” (Boston, Massachusetts: Harvard Business Press, 2006).
17. S.K. Sia, P. Weill and C. Soh, “DBS Bank: Developing Tech and Ops Capabilities for Pan-Asian Growth,” working paper no. 391, MIT Sloan CISR, Cambridge, Massachusetts, August 2013.
18. We used operating income as a percentage of revenue, adjusted for industry, as our measure of profitability. We averaged three years of company profitability and then subtracted the respective three-year industry average for profitability (to adjust for industry).
19. P. Weill and S.L. Woerner, “The Future of the CIO in a Digital Economy,” MIS Quarterly Executive 12, no. 2 (June 2013): 65-75.
20. See C. Anderson, “The Long Tail,” Wired, October 2004, 170-177; and more recently, E. Brynjolfsson, Y.J. Hu and D. Simester, “Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales,” Management Science 57, no. 8 (August 2011): 1373-1386.
21. M.L. George and S.A. Wilson differentiate between “deliberate complexity” and “unmanaged proliferation” in companies’ product portfolios in “Conquering Complexity in Your Business” (New York: McGraw-Hill, 2004).
22. Customer Effort Score was introduced by M. Dixon, K. Freeman and N. Toman in “Stop Trying to Delight Your Customers,” Harvard Business Review 88, no. 7-8 (July-August 2010): 116-122. Both CES and NPS correlate well with customer repeat buying.
23. For a more detailed description of this process, see P. Weill and S.L. Woerner, “Optimizing Your Digital Business Model,” MIT Sloan Management Review 54, no. 3 (spring 2013): 71-78.
24. ING Direct Spain’s NPS is 61, and the runner-up’s score is -1. See “Customer Loyalty in Retail Banking: Global Edition 2012,”2012, www.bain.com; and www.ingdirect.es.
25. Increasing cooperation and making conflicts explicit by closing feedback loops have been identified as critical to avoiding “complicatedness” in complex companies. See Morieux, “Smart Rules.”
26. See N.O. Fonstad, “Three Ways to Thrive,” INSEAD 2012 IT Enabled Leadership Report, INSEAD, 2012; R. Sarsam, “Bayer Material Science: Größter Umbau der Firmengeschichte,” April 27, 2012, www.cio.de; and M. Mocker and J.W. Ross, “Rethinking Business Complexity,” MIT Sloan CISR briefing 13, no. 2 (February 2013).
27. M. Mocker, J.W. Ross and P. Ciano, “DHL Express: Implementing and Maintaining a Global Process Standard,” working paper no. 393, MIT Sloan CISR, Cambridge, Massachusetts, January 2014.