CHAPTER 1

The Imperative for Waging This War(And the Need forBetter Battle Strategies)

We're surrounded. That simplifies the problem.

—General Lewis B. "Chesty" Puller,U.S. Marine Corps

A few years ago, Procter & Gamble reduced product cost by more than $2/case overa three-year period as a result of a program of simplification andstandardization, accounting for nearly $3 billion in savings. An additional $1billion was generated through the closure of 10 plants as a result of thesimplification. Its margins over that period increased from 6.4% to 9.5%.

Similarly, Motorola generated savings of $2.6 billion in operating and materialcosts in two years of a "War on Complexity," at the same time reducing inventoryby $1.4 billion and capacity by 40% as fewer factories and distribution centerswere needed.

These cost reductions were all made before the current economic downturn savagedrevenues. The implication is even in boom times there was opportunity. But nowthat "the list of bad news is almost endless" (as The EconomistIntelligence Unit put it), the opportunity, and challenge, has beenmagnified manyfold.

Early in 2009, The Economist forecasted the worst global GDP performancesince the end of the Second World War. Global in nature, pan-industry, and toall indications sustained, this contraction is not only putting immediate costpressures on companies, but also threatening to reshape the economic landscapein ways that may last a decade or more. To what exactly, no one knows. But asthe landscape changes, so too must companies.

The contraction marks a sharp divide between the last decade and the next.Companies over the past decade were part of a rising tide that floated allboats, growing and expanding in sync with the consumer. They rushed to marketwith new products and line extensions, expanded into adjacent markets andservices, and grew rapidly into new geographies driven by steadily growingconsumer demand.

Consider, for example, the trajectory of many food retailers in the past decadeand the demands of growth, as they ...

• Expanded into new formats, from the traditional grocery store format tovariants including city center stores and the out-of-town megastores

• Stretched their processes and supply chain to handle an explosion in newranges, both inside existing grocery categories and beyond—into hardware,clothing, and electronics (in fact, many stores now carry more than 100,000 SKUsin diverse categories)

• Grew their organizations to expand into new geographies, from home basecountries to high-growth markets in China, India, and elsewhere

The consumer packaged goods companies, as suppliers to these retailers, havekept apace, launching a volley of new products: new versions of Oreo cookies, anaisle of potato chips, hundreds of types of toothpaste. The retailers, theconsumer goods companies, and their suppliers have all rightly rushed tomeet consumer demand, but not without considerable adjustment.

Think about the impact of all that change on the supply chain that "grew up"over many years getting cans of soups from the supplier to the shelf edge. Thatsame supply chain now has to also support flat-screen TVs ... now extend acrossmultiple countries ... now support different format stores, and on and on.

You may not be in the business of retailing soup or flat-screen TVs, but chancesare your business has gone through similar changes. You have seen your range ofproducts and services expand to meet the growing diversity of customer demands.Your internal processes, organizational structures, and technology have likewisegrown in complexity. Your business has stretched and rapidly grown to meet adecade of growth but has left in its wake an enormous burden of complexitycosts.

An Island of Profit in a Sea of Cost

As the P&G and Motorola stories illustrate, the prize for cutting complexitycosts can be substantial. At a general level, we've found that it's possiblefor companies to reduce costs by 15% to 30% in significant portions of theirbusiness by waging war on complexity costs.

How is this possible? Consider how profit is usually concentrated within acompany. A so-called Whale Curve (Figure 1) demonstrates this effect,plotting a company's cumulative profit as a function of products ranked by theirprofitability. (There are a variety of Whale Curves, each showing cumulativeprofits against various drivers, such as products, customers, and revenue.)

What does the Whale Curve tell us? Often the most profitable 20% to 30% ofproducts generate more than 300% of the profits in a company. Becauseactual profits can't exceed 100% of the total,...