To Reduce Complexity in Your Company, Start with Pen and Paper

Companies that grow face a predictable problem: over time, the business becomes way too complex for its own good. I see this a lot in companies that have moved heavily into what I call the “exploitation” phase of a competitive advantage, or the phase that comes after the initial launch and successful ramp-up. Chris Zook and James Allen have also recently tackled this issue their recent HBR article “Reigniting Growth.”

With the warm glow of steady and more-or-less predictable profits to depend on, more and more policies are introduced, more new ways of extracting profits are developed, the company loses touch with its customers, fewer activities are directly related to what Geoffrey Moore famously called the “core” and instead have to do with context, and the company seems to lose its agility. The internal world comes to matter more than what is going on outside the boundaries of the company and it just sort of loses its edge. The difficulty here is that this doesn’t happen overnight. Convinced that they have a sustainable competitive advantage (always a risky way to think about your business), executives allow bureaucracy to take over and decision-making to become sclerotic.

To give an example of just how hard it can be to prevent this from happening, let’s consider the case of Nokia. For years, the company was a poster-child of success, earning admiration from business executives and academics alike. The voluminous case studies and articles about the firm would fill entire file cabinets in the typical business school storage area. I myself wrote admiringly about the firm’s practices with respect to venturing in an article that was published in 2006. Nokia’s CEO was featured on the cover of Forbes magazine in 2007, with the headline “Nokia: A billion customer and counting. Can anyone catch the cell phone king?” You could forgive executives in the company for believing that they had it nailed.

And yet…2007 was the year that the iPhone was introduced and Android commercialized. Despite Nokia’s global footprint, it was nowhere in the US and carriers disliked the company’s arrogance, built up during its day as the dominant handset maker. I’m told that at one point the management-through-presentation culture of the company was so extensive that they were actually investigated by 3M for potentially re-selling the huge volumes of acetates used in those days to make slides for overhead projectors!

I started to get communications from the company that felt like really bad news. In one, a star researcher said that he was leaving as there was no space for creativity anymore, as the company squeezed budgets and eliminated roles without a clear ROI. The venturing process that I so admired was essentially dismantled, to be replaced by a numbers-driven group that went hunting for near-term success. And I wasn’t the only one concerned about the company’s direction – in 2008 my colleagues Yves Doz and Mikko Kosonen wrote about the “rollercoaster” that was strategy at Nokia for many years, just before the Apple phenomenon decimated the company’s handset business.

This is a story without suspense – eventually, we know, Kallasvuo was fired and Stephen Elop was brought in as CEO, penning a call to arms for the company, hisfamous “burning platform” memo. In what was clearly a “Hail Mary” pass, Elop engineered a tie-up with Microsoft that never really worked out, eventually setting the stage for the sale of the company’s entire handset business. And this despitehaving working prototypes of devices that could have come to market as the iPhone or iPad – years before Apple invented them. The problem, according to people like Qualcomm CEO Paul Jacobs, was sclerotic decision making that caused the company to miss opportunity after opportunity. Sounds like what Zook and Allen are talking about.

This is exactly what I look at when a company has gone far too heavily in the direction of exploiting. You can think of it as the “tangle” of growth. Without the pressure to move quickly and make decisions fast with imperfect information, it is all too easy for the balance between pressing forward into the future and exploiting the current situation to get out of whack. The focus becomes internal, politics take over decision-making, senior leaders are not told the bad news they need to hear, technical experts’ voices are not heard and, for reasons nobody can quite put a finger on, everything seems to be moving at a leaden pace.

What is the remedy that Zook and Allen propose? Clean house by eliminating under-performing units, while reducing complexity and eliminating excess cost. Focus on what they call the “front line”– that part of the company that actually touches the customer. Get senior teams out of the office to encounter one-on-one what is really going on in their markets and with their customers. Eliminate bureaucracy. Rediscover the mission.

Pragmatically, you can begin to do this without a whole lot of drama. I start by making a model of the business. I like to look at variables in 4 columns:

• Outcomes (what you are trying to achieve, as in sales)
• Drivers (what you believe causes the outcome to occur, or not)
• Leading indicators (how do you know how you are doing on the drivers?)
• Work streams (what are you doing to influence the leading indicators)

In a recent retreat with the executive team of a retailer that is facing a genuine tangle and trying to get back on track, we kept it simple. I used a hand-drawn picture of what the model for their business would look like. The handwritten, unsophisticated part is important – remember that a lot of the tangle is characterized by over-engineered PowerPoint presentations and way too many reports. What you want is to get clarity about what really matters to your business and what is just noise. So what we drew as outcomes for this retailer were results such as in-store sales, revenues from secondary products, revenues from on-line sales, and then the various contributors to cost. Next, we looked at what we believe caused those things to happen, for good or for ill (things like traffic from which customer segments, average spending, median spending, nature of what was bought, share of wallet, etc.). Then we looked at what indicators might predict whether our drivers were improving or not (customer complaints, net promoter scores, sign-ups for a loyalty program, and so on).

With this picture firmly in front of the whole team, we next dove into the implications for what the organization should be focusing on – and more importantly what it could safely stop doing. If an activity didn’t have an impact on a leading indicator, we resolved to eliminate it. If a unit couldn’t clearly show the linkages between what they do every day and the outcomes we were trying to drive, it was a candidate for being shut down. If one member of the leadership team owned a key driver, the goal was to let them manage it rather than everybody being in micro-management mode.

Eventually, the changes that were implemented led to a redefinition of the company’s core strategy and a renewal of its relationships with its customers, without a wrenching restructuring or devastation to morale. Perhaps even more impressive than these strategic outcomes were the effects of this “detangling” on the organization. The senior team was able to more effectively prioritize the use of their time. Before the detangling exercise, they had fallen into the classic trap of continuing to “do stuff” when really their very senior roles were to ensure that the right things were being executed down the organization. They were now more able to clearly separate out responsibilities so that less communication and fewer meetings were required as they realized that the responsible person should tackle the action plans. Decisions were made more quickly. A big thrust, ongoing at the moment, is to re-energize their workforce which had been drifting in the direction taken by Circuit City and Home Depot, namely replacing experienced and deeply knowledgeable staff with part-time and less knowledgeable people which eventually damaged the reputation of both firms (and in the case of Circuit City ultimately led to its demise).

Getting tangled up is easy. Getting untangled is hard. Absent the pressure from either a major corporate crisis (such as a burning platform) or a CEO and senior team that insist these things be part of the ongoing work of the organization, the tangle will dominate. The reason this strikes me as a critically important issue today is that in a world of transient competitive advantage, even very good companies, like Nokia, can fall victim to this syndrome. Far better to tame it before it sinks you.

Harvard Business Review