Survival Strategies for 2004

Feb. 1, 2004
By Barry Jaruzelski, Vice President and Managing Partner, US Communications & Technology Practice, and Frank Jones, Vice President and Managing Partner,

By Barry Jaruzelski, Vice President and Managing Partner, US Communications & Technology Practice, and Frank Jones, Vice President and Managing Partner, US Operations Practice, BOOZ ALLEN HAMILTON INC. ·

Managing Complexity through Smart Customization

Buyers of industrial equipment increasingly are reciting a familiar mantra: "I want what I want." They are demanding ever-higher levels of customization, knowing that, in an economy characterized by greater and greater transparency and mobility, they stand an excellent chance of obtaining the tailored service they seek @ from one supplier or another. The fine-tuning of customer demand presents a terrific growth opportunity for businesses: A 2003 Booz Allen Hamilton study found that companies executing "high customization" strategies are 71 percent more likely than other companies in their sector to have above-average profit margins.

"Smart customizers" are still by far the exception, not the rule. For most firms, adding variety to their [product/service] mix results in increased complexity @ and escalating costs. The complexity eats into the bottom line everywhere. Costs rise almost uncontrollably as companies take on more products, processes, channels, customer segments, campaigns, etc. Innovation is stifled, as management discovers that operations aren't nimble enough to adapt to the major new ideas advanced by product development, marketing, or sales.

Few companies have kept complexity under control. Simplification efforts like culling the portfolio of underperformers rarely yield expected benefits because they don't tackle the underlying drivers of cost. In fact, some have resorted to focus (e.g. Southwest Airlines) to sidestep the challenge of offering variety altogether.

We don't think you can fix this with a bolt-on information system or singular focus on cycle time reduction. Providing smart customization requires striking a balance between the value of variety in the market and the cost of complexity in provision. And that's not just today—companies also need ways to refresh the solution as they evolve new growth strategies from the addition of new products and services or entry into new markets.

Smart customization consists of three components: getting the source of the demand value clear, understanding the drivers of cost, and aligning the two by tailoring the firm's business streams. Think of these Tailored Business Streams (TBS) as separate, mini-operating models. Each stream may contain people, processes and technologies required to deliver parts of the product/service offering. Each stream caters to different expectations for cost, quality, speed, and innovation. Each has the appropriate management tools and processes in place to deliver at the lowest cost with the greatest return. But these streams flow together in a consciously integrated whole that isolates the highly complex and expensive parts of the business from the standardized portions, assuring that the company's cost structure is not distorted by the high-customization needs of specific customer segments.

TBS builds on your company's strengths and gets complexity under control so you can go to market faster and cheaper. Businesses can flow the simplest and most predictable products/services through the most efficient and least expensive business stream. Harder, less predictable undertakings flow through a more robust (and expensive) infrastructure. The streams are kept separate to prevent pollution—easy operations don't require expensive management and operational infrastructure that complicated activities need. The streams also include guidelines to tune them as market conditions and costs change over time.

We have developed and implemented Smart Customization strategies for many companies in numerous industries, ranging from complex, engineered products (e.g., aerospace) to customer service applications in services industries such as banking. Smart Customization through Tailored Business Streams has had a profound impact at these companies. We used TBS-based business models to help an industrial technology manufacturer grow profitably into adjacent segments, an aerospace company cut billions of dollars from its cost structure, a telecom service provider double its installation rate, and a call center to a significant revenue lift.