The Marketing Executives Group International

Written by: Mike Harris
LinkedIn Profile: http://www.linkedin.com/in/harrisconsultingllc

Over-complexity originates in a company’s passive attitude toward unfettered proliferation in any functional area. Marketing over-complexity destroys profitability by:

• creating product lines or services that cannot be made or delivered efficiently;
• creating product lines or services that add unsupportable costs to overhead such as customer service and sales support;
• specifying features that industry pricing will not support;
• adding non-budgeted marketing costs

In all viable organizations everything is always shifting. When left unchallenged product lines, services and marketing activities will shift toward unnecessary complexity that quickly erases profits. Worse, the damage is often buried in variances and accounts that have nothing to do with marketing so it’s difficult to find and resolve.

Marketing must function as the security guards of profitability, at least to the operating margin (Income From Operations, IFO). Marketing must be the clearing house between sales and production, funneling relentless customer requests through a filter that highlights potential profit eroding complexity. To do this, marketing needs to be educated about complexity and assertive about resisting it.

The damaging costs of marketing over-complexity often fall into these buckets:

- Manufacturing Variance - Inventory

- Marketing Costs - Overhead

Manufacturing Variance

Google ‘manufacturing variance’ and you’ll come up with scads of reading that would seem to marketers to tranquilize an elephant. Why? Because all of it was created by smart left-brain thinkers. Left-brain thinkers (aka ‘management’) are logical and analytical. They look to history and precedent for predicting outcomes. Marketers, on the other hand, are right-brain thinkers. Right-brain thinkers are visual and intuitive. They look to things not yet seen which often makes discussions with ‘management’ difficult because each speaks a different language.

It is far more important that marketers understand manufacturing variance than vice versa. Manufacturing variance is an accounting bucket where the financial difference between manufacturing costs budgeted vs. manufacturing costs incurred is stored.

How do marketers whipsaw manufacturing variance and erase profitability? Before the beginning of each fiscal year every department turns in a budget. Marketing forecasts products and volumes and manufacturing uses this forecast to build its budget, which helps forecast cost of goods sold (COGS). If the marketing department says it’s going to offer 10 different boat anchors to customers next year, the manufacturing team plans its operating costs based on the level of throughputs, JIT inventory, changeovers and hundreds of other variables required to produce various volumes of 10 different boat anchors, each with a specific size, color, shape and features.

But half way through the year Sales goes to Marketing and says New Chain Customer wants two new variations of boat anchor #9 because Big Chain Competitor, whose locations are always on the next street corner, is already selling boat anchor #9 and why should they try to compete selling the same thing at the same price? Because Sales is sooo convincing (and Marketing doesn’t understand over-complexity) the product managers specify two new boat anchors which are added to the line and produced for the remainder of the year. As predicted, the company gets new sales revenue from New Chain Customer.

Story finished? Not hardly. By adding two new products to its production schedule, manufacturing has to shift things around a bit in one of its factories. This factory, located in Hunglow, China is already at capacity so it adds a new line with two changeovers and several new JIT bins plus tweaks dozens of variables that contribute to manufacturing costs. If accounting could isolate costs by product offering (which it can’t because of systems issues) it would see that the two new products are delivering operating income in the range of 15%, which is a lot lower than the entire original boat anchors product line of 31%. By the end of the year the entire product line’s overall operating income has dropped to 25% on increased volume. Unfortunately the incremental margin from increased volume does not offset the reduced amount of operating margin. The decrease in forecasted margin is dumped into ‘manufacturing variance’ and a platoon of accountants starts examining everything from the costs of toilet paper to foreign exchange rates.

Inventory

Do we really need to elaborate? Suffice to say that the company will now own new inventories of parts at the factory and new inventories of finished goods at each of four regional warehouses in the U.S.

It will also own the new costs of capital needed to support the new inventory, which CEOs typically regard with a very dim view.

Marketing Costs

The two new boat anchors will require new packaging, new retailer sales materials, new merchandising, advertising co-op funds and a dozen more expense items. These, in turn, will require new costs for photography, graphic designers, packaging firms, copywriting, merchandising kits, fulfillment houses and others. This doesn’t take into account the distraction in the marketing department from fine-tuning details of the next big tradeshow, the next big marketing campaign, expanding internet presence, ad infinitum. Even if the new requirements are ‘only’ variations of existing materials, the costs of creating them will approach the same costs as creating the originals.

Overhead

Now is the story finished? Nope. Since customer service was also at capacity it had to add a new rep to help handle any customer inquiries about buying, installing and using the two new boat anchors. In addition, sales assistance also had to add a new body to field calls from 1,200 New Chain Customer locations around the country who have questions about the new product and the merchandising plan which are not in previously produced customer sales materials, which marketing has not yet produced. This means human resources must wade through hundreds of Monster.com resumes and begin the arduous process of interviewing maybe a dozen different people to make sure that the right “team members” get hired. Background checks are conducted, urine samples are analyzed and psychological tests are administered. Someone has to enter the new employees’ information in the payroll system and new forms must be filed with Uncle Sam and the governor at a minimum. And so on. We all know where these costs end up…the dreaded and amorphous ‘overhead’.

The conclusion is that marketing over-complexity can negatively impact an entire business ecosystem. Since sustained profitability is the only way we know of to retain employment in a capital enterprise it is the prudent marketer who understands the profit impacts of all their recommendations.

Additional resources:
1. Motorola’s Complexity Index - http://scm.ncsu.edu/public/hot/hot040623.html
2. The George Group – Conquering Complexity http://www.georgegroup.com/conquering_complexity.php
3. The Marketers’ Consortium – Managing Marketing Complexity http://unicashare.typepad.com/share/managing_marketing_complexity/
4. Simplicity Marketing: End Brand Complexity, Confusion & Clutter, by Steven M. Cristol and Peter Sealey

1- Al Ries, Advertising Age, Feb. 4, 2009

2009 © Copyright. Harris Consulting Inc. All rights reserved.

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CASE: A Branded Consumer Electronics Example

Industry Trend

In the 1990s the large screen television segment of the consumer electronics industry was about eight years old and growing steadily. The $2 billion U.S. consumer electronics division of one of the largest global CE conglomerates, Philips Electronics, had literally founded the mass market for large screen television but the division had not turned a profit in 7 years, although annual sales exceeded $120 million.

The Company

At the time, Philips was a $30 billion plus global concern manufacturing consumer electronics, semi-conductors, light bulbs, medical equipment and other products. The U.S. consumer electronics division was based in Knoxville, TN and had about $2 billion in revenue from sales mostly in the U.S. The company operated its own manufacturing plants and had upwards of 1,400 employees.
The brands being manufactured and marketed by Philips included Magnavox, Philips and several OEM brands.

The Situation

Even though Industry CAGR was averaging about 7%, the division's revenue CAGR for the past 3 years was -12%. The division had experienced a quality crisis and retailers had started migrating to competing brands. At that time there were about 20 companies offering large screen TVs and Philips' share had eroded from more than 60% to less than 25%. The company began shifting resources to other opportunities and the CFO strongly recommended that the large screen TV division be shut down. The CEO assigned the task to a young executive with previous experience in exit strategies.
Using modeling techniques picked up in previous experiences he discovered in about 4 weeks that the root cause of most of the marketing problems was extensive product line complexity which had, in turn, been caused by ceding control of product development to the sales team.

Because of the corporate culture at the time, sales was extremely strong and had undue influence on product development. Under their control, the product line had quickly proliferated into a complex smorgasbord that attempted to address every retailers' desire for something unique. Parts commonalities diminished, factory throughput slowed to a crawl and the product and engineering team became unable to keep up with a growing and ever changing stream of requests from sales. Quality plummeted, sales shrank, margins shrank as marketing struggled to keep share, and the division's morale hit bottom.

Strategy

After analyzing the market's growth trends and profitability, the newly appointed executive asked to create the company's first business team and pulled together the division leaders from every functional area. He explained the imminent shut-down of the division, presented a bold turnaround plan focusing on pruning the product line, an all new styling approach, creating consumer incentives and strong new partnerships with retailers. Bluntly asking for their support, he promised the demoralized product management, engineering and manufacturing teams (about 200 employees), if they agreed to this new product line and marketing plan, he would freeze the new product line for one year and not allow sales to make any changes of any nature.

Next Steps

• The new business team became joined at the hip. The leaders from each functional division met weekly. In each meeting the team reviewed the financials first. The remainder of the meeting was devoted to the new product line development and understanding the financial implications of each decision impacting the new line.

• The new product line was created quickly, focusing on parts commonalities and differentiation that could be easily appreciated by consumers and retail buyers but did not require unusual changeover times in the factory.

• A new marketing plan was created focusing on national TV advertising, retailer merchandising and sales promotions.

• The young executive leading the turnaround hit the road with the top sales people and helped convince key retailers to give the new product line a try.

Results

The turnaround took a year to execute and another year to demonstrate sales results. At the end of that second year sales were up, market share was up and the division had turned in a $7 million operating profit, following an operating loss of -$5 million the year before. Of all the divisions in the $2 billion company, this division was one of two that turned a profit that year. The team were treated like company heroes and the large screen television division went on to become a significant strategic component of the parent company's overall consumer electronics strategy.

2009 © Copyright. Harris Consulting Inc. All rights reserved.