These are common symptoms, even among well-run and well-managed companies. Unfortunately, company leaders cannot afford to be complacent about them right now — not if their goals involve expansion and profitable revenue growth. In just about every industry and region, companies are contending with a deflationary economic environment. It is relatively easy to find capital, but difficult to find attractive markets and opportunities that can offer promising returns. Emerging economies are still alluring but remain challenging, and achieving scale in them requires patience. Many companies have understandably implemented share buybacks to increase their stock price so as to offer a higher near-term return to shareholders, but that won’t make them competitive. Nor can companies wait for expansionary economic conditions to return; the global economy will probably be facing macroeconomic headwinds for some time.
However, the fact that everyone is struggling also provides a great opportunity for companies that are willing to prepare for growth through a more deliberate, lean, fit-for-purpose operating model. Some companies are already doing this. They are streamlining their operations by making disciplined choices concerning their capabilities, and undertaking continuous improvement of their efficiency and effectiveness. This is the corporate equivalent of a fitness regimen that focuses, in effect, on building muscle — developing the capabilities that define a company’s distinction — while cutting fat. By contrast, across-the-board cost reductions are the corporate equivalent of crash diets — they are ineffective because they do not last, and at worst they can cut into productive muscle. A successful program to become fit for growth contains three main elements:
- Set clear strategic priorities, and invest in the capabilities that allow you to deliver them.
- Optimize your costs, developing lean and deliberate practices that will deploy your resources more appropriately and efficiently.
- Reorganize for growth, establishing a nimble, well-aligned organization that can execute your new strategic priorities.
These elements reinforce one another; when launched together, they provide the wherewithal for growth, even for companies facing today’s macroeconomic challenges.Setting Clear Priorities
A growing body of research and experience has shown the importance that capabilities have in strategy. A capability, in this context, is the combination of processes, tools, knowledge, skills, and organization that allows your company to consistently produce results. Walmart’s virtuosic supply chain management, Southwest Airlines’ energetic customer service and asset utilization (of which its rapid turnaround time is an example), and Procter & Gamble’s open architecture innovation model are all well-known examples of distinctive capabilities that few, if any, of those companies’ competitors can match. These capabilities don’t stand alone; in each case, they are part of a mutually reinforcing system that works to give the company its advantage. Walmart’s supply chain management, for example, combines with the retail chain’s signature approach to store design, its in-depth knowledge of its rural and suburban customers, and its renowned expertise in real estate and store location.
Because a company’s most distinctive capabilities are cross-functional and are applied to most products and services, they require a great deal of attention and investment; even the largest companies have only three to six distinctive capabilities in their capabilities system. Hence the need to set clear priorities. Business leaders recognize that working capital is finite. They know they must marshal their resources according to strategic need, not to corporate politics or past legacy. (For more about capabilities and their strategic role, see Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy [Harvard Business Review Press, 2011].)
When you focus on priorities, costs are not problems. They are choices. The priorities most worthy of high levels of investment are those that align with the growth priorities of your business, helping to build the capabilities that distinguish your company and contribute substantially to its success. These capabilities are steadily funded — their investment levels may even increase — while other categories of expense are seen as necessary but not special. The other expenses receive just enough cash to be on par with competitors’ spending or to simply “keep the lights on” in the company’s operations. (See Exhibit 1.) They are subject to strict scrutiny, constant pruning, and a continuous search for leaner efficiency.