Consequently, customization programs frequently fuel an “arms race” with competitors that constricts growth and lowers profit margins. When companies provide customization for too many customers without asking the critical question, Is the additional complexity worth the costs incurred?, standardization opportunities or economies of scale are undermined. At the same time, unwarranted customization takes resources away from the highest-priority accounts and limits a company’s ability to invest in more of the “right” opportunities.
Determining the value of customer segments is essential. Companies must align their infrastructures so that the most costly supply-side delivery systems are reserved for the highest-return opportunities, while inexpensive delivery and production systems are geared for the lowest-value needs. A one-size-fits-all business model can’t do that. In most companies, in most situations, some 80 percent of what businesses typically do is basic and stable, and transferable across product or service segments; only 20 percent requires some form of tailoring to customer demand. Yet in an effort to simplify their businesses, most companies try to run all products and services through a single set of operations, which are built — and frequently jury-rigged — to serve the needs of the most complex offerings the firm delivers. In businesses we have studied, this can lead to a tripling of the cost base. (See Exhibit 2.)
The mobile telecommunications industry provides a clear illustration of the kind of complexity-burdened customization that has resulted in a profit-draining arms race among companies. Most carriers offer consumers and businesses a seemingly infinite number of calling plans. To keep up with their rivals, carriers continually add new programs, with distinctions few customers can understand, while providing a proliferating array of sweeteners to win and retain customers. Consumers are offered free minutes and handset rebates. Business customers are pitched “fleet management” services for hardware distribution, usage tracking services, and wireline-network integration — “solutions” that all too often are offered indiscriminately to highly profitable and marginally profitable customers.
Compounding matters, customers are typically funneled through the same help and sales lines, where high-cost specialists, unversed in the multiple variations on calling plans, service packages, and subscriber issues, cannot handle inquiries effectively. Instead of devising a tiered approach to customer service, where higher-end customers are provided higher-touch service to match the value they represent, carriers have used the most expensive sales and marketing system for all customers — and provided inadequate service to all of them.
This senseless customization competition is eroding industry profitability. Operating margins for a composite of publicly traded wireless carriers in the U.S. fell from an average of 10 percent in 2000 to –13 percent in 2002.
Value of Variety
Companies don’t set out to add valueless variety to their product or service mix. Rather, the gap between smart customizers and most of the companies in our research seems to grow over time, as customer strategies change. (See Exhibit 3.)
Out-of-control business complexity almost always evolves from the best of intentions. Consider the average startup company as operating in a “state of nature.” It is founded by an individual entrepreneur with a passionate belief that his or her product or service can fill an unmet customer need. Whether it’s a new software company with a tool that can do complex calculations more simply than any other, or a small grocery in a dusty backwater miles from other retailers, such firms are characterized by their utter simplicity: a single product or service for an identifiable customer base, made, marketed, and sold by a focused staff. When customers have no choice — or no knowledge — simplicity serves them as well as it does providers. Thus Henry Ford’s famous offer for his original Model T: “You can get it in any color, so long as it’s black.”