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Published: May 29, 2012
 / Summer 2012 / Issue 67

 
 

Is Your Company Fit for Growth?

A more strategic approach to costs can help you prepare for the next round of expansion.

Note: This article was originally published by Booz & Company.

Is your company fit for growth? Many companies today are not. The way they manage costs and deploy their most strategic resources is preventing the expansion they need. But they don’t realize it — at least not yet.

To be sure, many of those companies are in better financial shape today than they’ve been in for a long time. Having implemented cost-cutting and austerity programs during the recession, they have relatively healthy balance sheets and sizable reserves of working capital. They have strengthened their ability to weather downturns and improved their productivity in ways that could potentially last for years. All these restructuring actions were required for survival between 2008 and 2011.

But as they shift their focus from the cost side of the ledger to the revenue side, searching for ways to move beyond cost cutting — entering new markets, commercializing innovative products and services, offering more compelling customer value propositions — these companies are strategically and financially out of shape. They have not made the hard choices involved in channeling investments to the capabilities that are needed most, and deemphasizing or eliminating their other expenses.

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The Executive Guide to Strategy This article is featured in the strategy+business compendium “The Executive Guide to Strategy,” designed exclusively for smartphones and tablets. The collection features our best thinking on creating and implementing the right strategy for your organization—with insights from top leaders including Capable Strategist author Ken Favaro, HBS Professor Cynthia Montgomery, strategy expert Ram Charan, and Kellogg School’s Mohanbir Sawhney.

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How can you tell if your company is fit for growth? Here is a simple, three-question diagnostic:

  • Do you have clear priorities, focused on strategic growth, that drive your investments?
  • Do your costs line up with those priorities? In other words, do you deploy your resources toward them efficiently and effectively?
  • Is your organization set up to enable you to achieve those priorities?

The easiest way to answer these questions is to imagine the opposite.

If you do not have clear growth priorities, there are several warning signs. You have so many initiatives that you can’t remember them all. Your executives go to multiple meetings on unrelated topics every day. Asked to name the most important capabilities your company has (the things it does well) or how they relate to your strategic objectives, different leaders give different answers. Your best people are working on so many programs and projects, they are burning out. Meanwhile, you are underinvesting in some areas — which might include parts of R&D, market development, and customer experience — where you could potentially build a distinctive edge against your competitors.

If your costs are not deployed appropriately, that’s also painfully apparent — especially in the amount you spend on nonessentials. Staffing levels in different parts of the organization are out of sync; for instance, you might have twice as many finance people counting the money as salespeople bringing it in. Your highest-priority initiatives falter because their investments do not get sufficient attention, while legacy programs with very little impact continue to be funded. Every function pursues an agenda of professional excellence, striving to be “best in class,” no matter what the cost. Each department’s annual budget is calculated as “last year’s, plus 3 percent.” Every once in a while, in moments of high pressure, you institute across-the-board cost-cutting programs that force the businesses to temporarily reduce overhead, but everyone knows that it won’t make any long-term difference.

If you don’t have a well-designed organization, that is evident as well. You are not nimble enough to move quickly, or aligned enough to work in harmony. It takes a week to get a sales quote approved, while your competition wins the business. Information is not readily available to the people who need it. Managers oversee fewer than four employees, on average, and get far too involved in their subordinates’ work. Incentives (such as bonuses and rankings) motivate people in ways that actually undermine the behaviors needed to achieve the company’s stated growth priorities — for instance, people put internal reports ahead of customer responsiveness. You have “shadow” HR, finance, and IT staffs popping up in places outside your shared-services organization. Since most suggestions are rejected, people become afraid to take calculated risks — and that derails the most innovative growth- or savings-oriented ideas.

 
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Resources

  1. Shumeet Banerji, Paul Leinwand, and Cesare Mainardi, Cut Costs, Grow Stronger: A Strategic Approach to What to Cut and What to Keep (Harvard Business Press, 2009): E-book laying out a more detailed process for setting expense priorities.
  2. Vinay Couto, Ashok Divakaran, and Deniz Caglar, “Seven Value Creation Lessons from Private Equity,” s+b, Jan. 30, 2012: What top-tier PE firms can teach public companies about creating and sustaining value over time.
  3. Ken Favaro, David Meer, and Samrat Sharma, “Creating an Organic Growth Machine,” Harvard Business Review, May 2012: How chief executives can set a tone and context for expansion.
  4. Gary L. Neilson and Julie Wulf, “How Many Direct Reports?Harvard Business Review, April 2012: More explicit advice on span of control.
  5. Jaya Pandrangi, Steffen Lauster, and Gary L. Neilson, “Design for Frugal Growth,” s+b, Autumn 2008: Template for an organizational design that enables expansion while cutting costs.
  6. Scott Thurm, “For Big Companies, Life Is Good,” Wall Street Journal, Apr. 9, 2012: Analysis of financial climate at a cash-rich but uncertain moment.
  7. For more thought leadership on this topic, see the s+b website at: strategy-business.com/organizations_and_people.
 
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