Products galore – but no profit

Handelsblatt — 31 August 2007

Would-be buyers have the choice of more than 800 different types of baby carriages, including strollers, buggies, pushchairs, three-wheelers and joggers from 40 manufacturers. And every day new products are pouring on to the market. Inevitably, the question arises: is so much complexity really worthwhile from the producers' point of view?

Even the managers have lost sight of the bigger picture – a fact which is accentuated by failure to think "outside the box", cronyism within the company, organizational "silos", and complex global matrix structures. As a result, managers frequently make decisions on the basis of their gut feelings. What's more, if the wrong person makes the right suggestion, it is often rejected simply because it didn't come from the right person – from the boss's favorite, for example. Cronyism mustn't be neglected! Markets are changing faster than ever, product ranges and technologies are proliferating. This situation can be blamed on the pressure to achieve competitive edge, coupled with a lack of transparency about the indirect costs of the flood of new products – costs on which no one can put a real figure.

Which marketing expert knows how an adhesive manufacturer's cost structure is going to develop for each product as a result of introducing red, blue and black color variants? Especially if cleaning the drums often takes eight hours each time the colors are changed. Customer and market requirements only appear to play the key role in such scenarios.

IT systems costing millions and expensive market research can be used to analyze everything down to the last detail – except those factors which make enterprises really profitable. The battle for market share is driving marketing teams to keep on outperforming one another. Their colleagues in Development can only shake their heads at so much zeal and so many new ideas. And to make sure no one comes off badly, all sorts of gimmicks are added to the new products – things that nobody needs. Sales gets bogged down by all this, while Production just can't keep up. Purchasing is totally overstretched and frustrated.

Everyone does their very best, for themselves, then for their department, then somehow for the company as a whole. The marketers hunt for market niches – and they find them. Whether the products are baby carriages, pet foods soups, lipstick, hair dyes or mobile telephones, you as the consumer have the dubious pleasure of finding the most suitable one from a range of hundreds. The best of luck!

As a result of segmentation into the smallest conceivable yet seemingly profitable market niches, the lifecycles of consumer goods such as mobile phones, washing machines and face creams are being reduced to a paltry 12 to 15 months – indeed, "six month wonders" are not uncommon either. Who can keep pace with all this? It has all the attributes of a vicious circle.

All too often, 20-year-old products serve to subsidize newer launches and ensure that business remains profitable. This is a truly sobering fact and inevitably raises questions of cause and effect. A lack of clarity with regard to the costs of complexity shrinks profit levels by as much as five percentage points. For Dax-listed companies alone, that translated as potentially €30 billion of wasted profits in 2005. This profitability potential doesn't lie hidden in the individual departments of a company: it lies precisely at the interfaces between them and can only be tapped by way of a cross-departmental effort.

Oliver Scheel is a corporate transparency expert with
A.T. Kearney management consultants.

(Translated with permission from original version.)