2.4 Zero-Base-Budgeting

The challenge with managing complexity is that some complexity is required and advantageous for certain targets. Companies want to offer a variety of products or services to their costumers. They want to have a varied assortment to reach as many costumers as possible. But adding new products, services, features, and options creates complexity of all kinds. The key is not to eliminate complexity but to balance its benefits with its costs. A helpful way of analyzing the stage of complexity is to start from a base of zero.  That means that you imagine you have only one product or service in your company with no varieties or options. It is only one simple product that still needs a supply chain, a factory, staff, a plan, logistic etc. 


Goal of this method is to determine your zero-complexity costs and then measure the costs of adding variety back to the product. The key is to manage these balance points, keeping costs low while maintaining the level of variety and innovation that customers value. You need to decide to eliminate individual options, and instead offer customers a small amount of configurations that include the most popular features. Similar kinds of analyses can diagnose organizational and process complexity. It has been shown that companies get the best results by paying attention to product complexity first and organizational complexity next, and only then focusing on process complexity. The reason is that complex processes often reflect unnecessary product variety or poor organizational design. If they attempt to simplify a process without changing product or organizational complexity, they find even more complexity coming up in some other process area. 


2.4.1 Product complexity

Unnecessary product complexity means offering products, services, or options that relatively few customers want. Managers often overestimate buyers' wants and willingness to pay for all those choices. Sometimes, indeed, it's obvious that companies have carried innovation too far. Sometimes the introduction of too many varieties have exactly the opposite effect from what the company hopes: Customers are turned off, and sales drop.


2.4.2 Organizational complexity

As a company expands its product variety or moves into new markets, managers are likely to add organizational complexity. For example, they may try both to maximize scale and to stay close to the customer. Pursuing both these objectives often leads to complex matrix structures, duplicated costs at different levels, and a lack of clear accountabilities.


2.4.3 Process complexity

Companies that do attempt to manage complexity usually begin with processes, often through efforts such as Lean Six Sigma. Typically the emphasis is on how companies can execute all their current operations faster and with fewer resources.

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