BCG Henderson Institute

Generic filters

The recipe for streamlining an enterprise is familiar: benchmark costs against those of competitors, set cost reduction targets in each area to par (adjusted for scale and scope), and implement. Or, even more simply, set and pursue the cost reduction targets required to increase profitability to desired levels. It seems like a matter of simple arithmetic and an infallible recipe for increasing profitably—but this is not necessarily so.

Take the example of a global airline that was less profitable than its competitors. The reasonable approach, it seemed, was to increase the utilization of each of the most important components of cost—pilots, planes, and flight attendants—thus reducing resource intensity to industry benchmark levels. Benchmarking seemed to reinforce this logic, given that costs for these items indeed exceeded competitors’ costs.

However, closer inspection revealed that the entire system was greatly interconnected. And we know that complexity grows as systems become larger and more connected, and that when that happens hidden costs generally soar beyond costs that can be explicitly planned.

Sources & Notes