The Economics of Complexity

Unlocking profit through product portfolio streamlining

Product Portfolio Streamlining Porsche Consulting
22.08.2025 | 文章

In the industrial heartlands of Europe, and particularly in Germany, a key pillar of success has long been the ability to tailor products to the specific and sometimes highly nuanced demands of customers. Over time, this commitment to customization has evolved into a default mode of product development: each customer request, no matter how small, finds its way into the portfolio. New variants are added, but few are ever retired. The result? A sprawling portfolio burdened with complexity.

This path-dependent growth often leads to portfolios with hundreds – if not thousands – of Stock Keeping Units (SKUs) that add little value. Many of them are produced in low volumes, deliver minimal margins, and require disproportionate internal effort. Yet, because they exist across multiple departments and systems, their full cost and impact remain obscured. It’s only when organizations step back and conduct a systematic review that the magnitude of the problem becomes clear.

In today’s business environment – shaped by global competition, rising input costs, and a shift towards agile, customer-centric operations – this unchecked complexity is no longer sustainable. In fact, it poses a strategic risk. Companies that fail to address it may find themselves outpaced not just on cost, but on innovation speed, market adaptability, and customer satisfaction.

 

When variety becomes a burden: long tail, low returns

The economics of a bloated product portfolio follow a pattern that’s as well-known as it is frequently ignored: the 80/20 rule. Typically, around 80 percent of products generate only 20 percent of revenues – and contribute even less to profit. These low-performing SKUs hide in the so-called "long tail" of the portfolio. Their individual impact might seem negligible, but collectively they represent a significant drain on margin, focus, and operational bandwidth.

Behind each product lies an infrastructure of cost. From sourcing unique materials and configuring production lines to maintaining documentation, training staff, managing logistics, and integrating the product into IT systems – each SKU leaves a footprint. Multiply this by hundreds of products, and the hidden cost base becomes substantial.

Streamlining this long tail isn’t just about cost savings. When executed effectively, it becomes a margin-enhancing, growth-enabling measure. Internal benchmarks suggest that trimming just 20 percent of the portfolio can lead to a 5–10 percent increase in EBITDA. Add to this a reduction in obsolete stock of up to 40 percent, improved delivery performance, and lower working capital, and the business case becomes undeniable.

 

What holds companies back? Four systemic issues

Despite the benefits, many companies are slow to act. The reasons often lie deeper than operational inertia – they are embedded in how organizations think about growth, risk, and customer value. Four issues are especially prevalent:

  • Lack of visibility regarding profitability

Many companies still lack SKU-level transparency on margins. While top-line revenue per product is tracked, the true cost-to-serve – across supply chain, service, and admin functions – is rarely fully calculated. Without this insight, poor performers remain hidden in plain sight.

  • Life cycle management gaps

New products are launched frequently, often as a response to specific customer needs. Yet few companies apply the same rigor to retiring outdated or underperforming products. The result is an aging portfolio with high maintenance overhead and little strategic coherence.

  • Misaligned customization incentives

Sales teams are often incentivized to close deals – even if that means triggering custom developments with high internal cost and low long-term payoff. Over time, this leads to a fragmentation of the offering that benefits few and burdens many.

  • Weak response to market shifts

In rapidly changing markets, portfolios must evolve. Yet many companies find it hard to adjust quickly due to entrenched structures, unclear decision rights, and limited cross-functional alignment. Legacy products linger, while newer, more relevant solutions are underrepresented.

 

Overcoming barriers: from awareness to action

Even with a clear economic rationale, portfolio optimization efforts frequently stall – not due to flawed strategy, but because of organizational barriers. Interdependencies between products – whether in sales, supply chain, or procurement – can make rational cuts appear risky. Internal resistance also plays a significant role: teams accustomed to the status quo may fear disruption, especially if incentives are tied to legacy KPIs. Moreover, lacking market intelligence can obscure shifting customer preferences, particularly in niche segments where intuition often replaces data. To move forward, companies must build cross-functional alignment, invest in transparent analytics, and foster a change-ready culture. Only then can streamlining initiatives gain the momentum needed to succeed.

 

Turning insight into action: a proven three-step process

Effective portfolio streamlining follows a structured methodology that aligns financial logic with strategic intent. Porsche Consulting applies a three-phase model:

Filtering matrix: profitability in relation to revenue share.
Filtering matrix: profitability in relation to revenue share.
Filtering matrix: profitability in relation to revenue share.
Filtering matrix: profitability in relation to revenue share.
  1. Filter

Start by identifying low-margin, low-revenue products using internal data. This can be achieved through a simple matrix plotting contribution margin against revenue share. Products in the lower-left quadrant become prime candidates for review.

  1. Analyze

For the filtered products, conduct a deep-dive analysis. Consider additional factors such as market growth outlook, customer importance, technical dependencies, and required investments. AI tools can support by identifying overlaps between products and visualizing complexity using "gravity models" or heatmaps.

  1. Decide

Based on this multidimensional assessment, products are classified into action categories: Cut – Phase out quickly to stop further losses.
Push – Strengthen performance via pricing, promotion, or repositioning.
Maintain – Retain due to strategic relevance or interdependencies.

This approach ensures that decisions are not just cost-driven but support long-term portfolio health and competitiveness.

 

Modularity: a strategic enabler of variety management

One of the most effective ways to contain complexity while preserving customer choice is modularity. Instead of designing each product variant from scratch, companies build from standardized, interchangeable modules that can be configured to meet different needs.

The benefits are manifold. Standard parts contribute significantly to cost reduction by minimizing sourcing and production complexity. They also enable faster delivery, as predefined modules help shorten lead times. Scalability is improved because fewer new developments are required to meet incremental needs. Additionally, maintainability is enhanced through the use of shared parts, which simplify both service operations and spare parts management.

Adopting a modular architecture also improves cross-functional collaboration. Engineering, procurement, and sales work from a shared playbook. This not only enhances internal efficiency but also improves the consistency and reliability of customer delivery.

 

Case insights: what good looks like

In recent transformation projects, companies that pursued structured portfolio optimization achieved tangible results within months:

  • Portfolio Reduction: Up to 20 percent of SKUs removed without customer impact.
  • Profitability Boost: EBITDA improvement of 5–10 percent, even in mature markets.
  • Inventory Efficiency: Obsolete stock reduction of 30–40 percent.
  • Innovation Focus: Product vitality index (share of new products in revenue) increased by ca. 30 percent.

These gains stem not only from better product economics but from increased organizational focus. By removing noise, leadership can concentrate on core products, scale innovations faster, and align the organization around a clearer value proposition.

 

Organizational enablers: making it stick

Streamlining should not be treated as a one-time initiative; instead, it must evolve into a core management discipline. This transformation requires strong executive sponsorship, ensuring that portfolio decisions are made at the highest level rather than being delegated to isolated product silos. Incentives must be aligned, with sales and product management KPIs reflecting profitability rather than focusing solely on volume. Data transparency is also essential, supported by real-time dashboards and analytics tools that enable continuous monitoring of progress. Finally, governance routines such as regular portfolio reviews and lifecycle checkpoints are crucial to institutionalizing the streamlining process.

 

Key Takeaways

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80 percent of products typically generate only 20 percent of revenue – and even less profit. Streamlining unlocks hidden value.
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Cutting just 20 percent of a portfolio can raise EBITDA by up to 10 percent and reduce complexity across the business.
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Modular architectures offer the best of both worlds: tailored solutions with scalable efficiency.

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