strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: May 29, 2012
 / Summer 2012 / Issue 67

 
 

Is Your Company Fit for Growth?

As anyone who has lost weight and kept it off can tell you, the secret to fitness is to never return to old habits and to instead follow an ethic of continuous improvement. Fit-for-growth companies commit to a lean mind-set and are always honing their capabilities and cost structure, so they don’t have to undertake large programs every several years. They reorient themselves for growth as well, adjusting their resource deployment year after year. Most importantly, they do all this with a watchful eye on their unique value proposition and the distinctive capabilities that will allow them to grow.

Becoming fit for growth may seem like an onerous task. But as suggested by the examples of Ikea, Aetna, and Pitney Bowes (see below), it can also be the beginning of a new virtuous cycle. As resources move from nonessential to critical capabilities, your company can put more capital into growth strategies. The cost side of your ledger will read less like a list of burdens and more like a register of enabling choices, with a direct link between the money you spend and your prowess in the marketplace.

When a Step Change Is Needed
by Deniz Caglar, Jaya Pandrangi, and Ashok Divakaran

Companies may need to address their cost structure suddenly for one of many reasons, such as reacting to dramatic changes in the marketplace, correcting a large drop in profitability, or enabling a new strategy. Companies in such straits can still operate from a position of strength, by following these principles in a cost-transformation program:

• Look for early quick wins. Rapid cuts in nonessential costs help motivate people and provide cash to fund the initiative. If you reinvest those funds in more productive directions, these early wins also demonstrate that you are serious.

• Start with the end in mind. You are cutting costs not just to survive, but to focus your future efforts. Start by determining your value proposition and the capabilities you need.

• Tackle the root causes of high costs. Think freshly about the business; look for dramatic step-change shifts that can free up capital.

• Establish stretch targets. Target an aggressive but credible figure, representing enough funds to reinvest in growth and build a cushion for savings erosion. Such stretch targets stimulate new ideas and help high-potential managers reach beyond comfortable limits.

Hold managers accountable for specific targets. Otherwise, savings tend to evaporate.

Make a public commitment to the program and explain the “fit for growth” philosophy to your shareholders. Commitment reinforces the strategic importance of the program and protects your ability to reinvest some of the savings in your most important capabilities.

• Explicitly describe how you expect to identify and implement cost savings. The top team should deliver this message, convey a sense of urgency, and set an example by cutting back costs associated with their own day-to-day practices.

• Design a single cohesive process, not a collection of separate expense-reduction projects. Put a single steering committee in charge, overseeing cross-functional teams that suggest specific measures. Schedule frequent reviews to assess progress and make decisions.

• Assign good people to carry it out. Staff the cross-functional teams with up-and-comers; give them the information and authority they need.

• Take on sacred cows. Some nonstrategic capabilities have entrenched supporters. Encourage people to bring these controversial opportunities and thorny issues to light, and give them ways to do so without becoming vulnerable.

• Track progress in a standardized way, tied to the bottom line. Report results on an ongoing basis.

• Stick to your purpose. Some managers will say, “Give me my cost reduction number, and let me take care of it.” This is not that kind of effort. Its purpose is to redefine the work and to position the company for enhanced growth, using a shared understanding of the value and differentiation provided by each activity and capability. If you keep your eye on that goal, others will follow.

— D.C., J.P., and A.D.

 Ashok Divakaran is a partner with Booz & Company in Chicago.
 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

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.
 
Close