wpc cso presentation 151208 clean
TRANSCRIPT
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Is Your Business Scalable?
December 08, 2015
Creating and executing a growth strategy to capture the benefits of scale
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2Wilson Perumal & Company, Inc.
What are “economies of scale”?
• Leverage existing resources to sell more products or services
• Sell more items without the need to add incremental costs
• Revenue growth exceed the growth in their cost base
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3Wilson Perumal & Company, Inc.
New technologies and business management techniques were expected to drive greater productivity, efficiency, and ultimately…economies of scale
Global supply chains Global communication
Social media
Internet
Laptops
Cell phones
Management tools
The technology revolution over the last 20-30 years should have led to greater economies of scale…
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4Wilson Perumal & Company, Inc.
…but labor productivity growth is actually slowing…
Despite growth spikes from the internet bubble and downsizing from the last recession, the overall trend in labor productivity growth is clearly down
Downsizing with the last
recession
Internet bubble burst
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5Wilson Perumal & Company, Inc.
…and a surprising number of companies are failing to achieve economies of scale
Economies of scale
DIS-economies of scale
S&P 500 companies with economies (or dis-economies) of scale
Almost half of S&P 500 companies are actually
becoming less efficient as they grow
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6Wilson Perumal & Company, Inc.
Failing to achieve economies of scale is due to an inability to control costs…it’s not a lack of growth
• The bottom 20% of companies (those with the greatest DIS-economies of scale) actually have the highest revenue growth
7.4% 6.8%6.1%
6.8%
9.2%
Companies with greatest economies of scale
Companies with least economies of scale (dis-
economies)
Revenue growth of S&P 500 companies by scale quintile
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7Wilson Perumal & Company, Inc.
This lack of cost control manifests as failing to control either COGS, R&D, or SG&A
• Failing to control COGS while revenue is growing leads to dis-economies of scale 55% of the time
SG&A 20%
R&D 25%
55%COGS
• Companies over-invest in R&D without seeing an associated uplift in revenue or profits
• Companies over-invest in sales or overhead at a faster rate than their revenue growth
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8Wilson Perumal & Company, Inc.
“Individual productivity”
Volume
Cost
Pre-Industrial Age
Driven by variable costs
“Economies of Scale”
Volume
Industrial Age
Driven by fixed costs
“Complexity”
Complexity
Post-Industrial Age
Driven by complexity costs
Complexity is the opposite of scale, and the #1 driver of cost competitiveness
Complexity is the main driver behind companies inability to control costs
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9Wilson Perumal & Company, Inc.
VALUE(diminishing returns)
COST & RISK(exponential growth)
Level of complexity you can support
$
#Items #links
1 0
2 1
3 3
4 6
5 10
…
10 45
Complexity
About half of companies are
here
But a surprising amount of companies are here
Failing to account for complexity is causing many companies to achieve DIS-economies of scale
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10Wilson Perumal & Company, Inc.
The variety of and within the products (and services) you offer
The number of processes, steps, handoffs, etc.
The number of facilities, assets, functional entities, organizational units, systems, policies, etc.
• Unprofitable products• High inventory levels• Product shortages• Customer confusion
• Duplication• Rework• Work-arounds• Frustrated employees
• Poor asset utilization• Bloated organization• Functional silos• Everything takes too long
Product
Process
Organization
Type of complexity Description Symptoms of too much
Complexity can be good or bad,but companies almost always have too much
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11Wilson Perumal & Company, Inc.
We are increasingly seeing product complexity as a key driver behind failure to control costs
$10B Paint Manufacturer
F500 Building Tool Company
$5B Animal Feed Provider
• Company was a third the size of competitors, but had almost twice as many products
$200M Industrial
Equipment Provider
• Too much variety was hampering product availability…the #1 thing customers valued
• Excess capacity drove management to tell sales force: “sell anything and we’ll find a way to make it”
• R&D driven company was causing SKU growth to exceed revenue growth by over 4X
Company
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12Wilson Perumal & Company, Inc.
So how do you position your business to capture the benefits of scale?
“Everything should be made as simple as possible, but not simpler.”
- Albert Einstein
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13Wilson Perumal & Company, Inc.
Step one: understand if you have a complexity problem
…to help determine how far to the right your company is
Understand what complexity symptoms your company has…
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Step two: free-up cost and resources by removing your existing product complexity
Understand how complexity impacts your profitability
Balance incremental revenue vs. incremental cost
Substitutability: unsung hero of portfolio optimization
Don’t just “cut the tail”
Tips and lessons learned:
1
2
3
4
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15Wilson Perumal & Company, Inc.
Step three: control complexity going forward
1) Incorporate the impacts of complexity into your future growth and innovation strategy – Consider complexity impacts when expanding your business– Focus on leveraging existing assets to grow
2) Build in a complexity management function – To help prevent complexity from
building up again in the future
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16Wilson Perumal & Company, Inc.
“The ability to simplify means to eliminate the unnecessary so that the necessary may speak.”
- Hans Hofmann
If interested in learning more, stop by our booth to chat and register to win a
Complexity Workshop
1) Determine if your current strategy is creating scale…or complexity
2) Understand the symptoms of complexity and how to spot them
3) Remove complexity to position your business to grow with scale
4) Incorporate complexity impacts into your strategy
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Is Your Business Scalable?
Jacob CarrConnect via e-mailConnect on LinkedInMore about Jacob