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strategy and business
Published: May 29, 2012
 / Summer 2012 / Issue 67

 
 

Is Your Company Fit for Growth?

In setting clear spending priorities, your first step is to identify which capabilities are worthy of greater investment. The precise mix is unique for each company; articulating the priorities requires strategic clarity on the part of your management team. We have found that management teams at most companies generally agree about which capabilities matter most. After their first exercise in distinguishing strategic costs, they often become devoted to the practice, and thereafter they continuously review resource deployment to fund capabilities for growth while keeping other expenses relatively low.

Ikea, the Swedish manufacturer and retailer of affordable customer-assembled furniture, went through this kind of exercise in the late 2000s, when it reworked its priorities. It was already a frugal organization; from its founding in 1943, the drive to reduce costs has been integral to Ikea’s culture. As company founder Ingvar Kamprad once wrote, “Wasting resources is a mortal sin at Ikea.… Expensive solutions to any kind of problem are usually the work of mediocrity.”

But this new fit-for-growth initiative was defined as far more than a cost-cutting effort. Ian Worling, Ikea’s director of business navigation, introduces the strategy by quoting Kamprad’s original statement of the company’s ambition: “to create a better everyday life for the many people.” As Worling explains, “That means we offer home furnishings at such low prices that as many people as possible can afford to buy them. That colors everything we do.” Thus, for example, Ikea’s executives travel economy class and stay in moderately priced hotels, and the company maintains relatively inexpensive office space.

Like many other housing- and consumer-related businesses, Ikea was hit hard in the global recession, while the price of many of its materials went up. “We asked ourselves what we could do during this period to lower our costs and, instead of increasing the bottom line, turn every euro back to lower prices for our customers,” recalls Worling.

The chain’s leaders chose to continue investing in the capabilities that differentiated Ikea — for example, its custom-designed stores, which included distinctive Swedish restaurants and child-care facilities, needed to be places where customers felt at home. “To make up the difference,” says Worling, “we had to become very good at lowering operational costs.” With that goal in mind, Ikea sought additional efficiencies in its supply chain, collaborating with suppliers where possible. Industrial designers worked diligently on reducing packaging: “Even a few millimeters can make a big difference in fitting more pieces into a container. We hate transporting air,” says Worling. Nonessential costs were pared as much as possible. Before authorizing an expense, says Worling, “we always ask ourselves, ‘Would our customers want to pay for that particular item themselves?’ If the answer is no, then we try to find a way to do without it or to do it in a cheaper way.”

Optimizing Your Costs

Fit-for-growth companies are lean and deliberate in spending money. They manage their costs for both efficiency and effectiveness. In all their investments, they seek long-term value. This means continually pursuing the lowest-cost way to run their operations and organization, taking full advantage of economies of scale and scope. In our experience, companies that become fit for growth do not see cost optimization as a single, “big bang”–style event. Instead, they make it a continuous process, embedded in the daily fabric of business.

This type of ongoing discipline represents a natural outgrowth of your work on setting priorities. Indeed, by choosing to cut costs proactively, you can operate from a position of strength. Without the panic and aggression displayed by business leaders who feel pressure from outside, you can allocate your cuts more rationally — and be far more effective in reinvesting your savings. (To be sure, sometimes a more dramatic shift in your cost structure is called for. See “When a Step Change Is Needed.” )

 
 
 
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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.