Bigger is always better, right? Not always, especially in the world of business. The biggest challenge facing companies today is not how to continue growing, but how to grow profitably. We take a look at a few key things that separate those that simply grow and those that grow profitably.

1. Is Your Business Scalable?
December 08, 2015
Creating and executing a growth strategy
to capture the benefits of scale

2. Wilson Perumal & Company, Inc. 2
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

3. Wilson Perumal & Company, Inc. 3
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…

4. Wilson Perumal & Company, Inc. 4
…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

5. Wilson Perumal & Company, Inc. 5
…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

6. Wilson Perumal & Company, Inc. 6
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

7. Wilson Perumal & Company, Inc. 7
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

8. Wilson Perumal & Company, Inc. 8
“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

9. Wilson Perumal & Company, Inc. 9
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

10. Wilson Perumal & Company, Inc. 10
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

11. Wilson Perumal & Company, Inc. 11
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

12. Wilson Perumal & Company, Inc. 12
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

13. Wilson Perumal & Company, Inc. 13
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…

14. Wilson Perumal & Company, Inc.
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
14
Substitutability: unsung hero of
portfolio optimization
Don’t just “cut the tail”
Tips and lessons learned:
1
2
3
4

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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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“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

17. Is Your Business Scalable?
Jacob Carr
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