Strategic cost cutting with Strategy&'s Fit for Growth approach
While the global economy is improving its momentum, many organisations still find themselves faced with lacklustre growth and profitability. By strategically cutting costs and using the ‘Fit for Growth’ approach however, companies can bolster their financial health, according to Marco Kesteloo, a partner at consultancy firm Strategy&.
Economic, social and political developments are making the world increasingly complex. The expectations of consumers, investors and shareholders play a role, in addition to increasing competition, regulatory pressure and ongoing digitalisation. According to Marco Kesteloo, a partner at Strategy& in Europe, which is PwC’s strategy consulting arm, “If companies fail to manage the increasing complexity, this leads to costs, while reducing costs is crucial for healthy business growth.”
Consciously save and invest won costs
“It is better not to reduce costs by chopping indiscriminately with a cleaver,” Kesteloo says. “You have to make conscious choices about where you save, what you invest in and what you can do efficiently or in a better way. It's about making sustainable growth possible and not saving through one-time costs cutting, to survive. If done incorrectly or ad hoc, cutting costs can make a company weaker and that is disastrous in this period.”
New competitors
To indicate how fast organisations need to respond to market changes and complexity, companies should consider the competition offered by new digital players as an example. "These companies have different business models and cost structures, and can become fierce competitors of existing companies on a very short time-scale,” Kesteloo states. “Take the supermarket landscape. Digital players are gaining a share rapidly, while new entrants are forming a new breed of competition. The acquisition of Whole Foods by Amazon for instance is a signal to the established order that formerly pureplay digital players are competing in more traditional channels. This trend demands adaptability and agility at incumbent companies.”
Good and bad costs
The Fit for Growth approach, derived from the management book ‘Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring, and Renewal’ (authors: Vinay Couto and Deniz Caglar, both from Strategy& in the US), offers this form of manoeuvrability by structuring companies to be permanently lean-and-mean. The method distinguishes between good and bad costs, taking into account the strategy of an organisation as a starting point.
Kesteloo: “It's key for an organisation to invest in areas which add value to its competitive edge, while saving costs in areas that are not in line with the strategy. That is the key to sustainable growth and success. From this viewpoint, utilising benchmarks is less relevant as the strategy is of course different for each organisation.”
Structural causes
When looking for ways to save costs according to the Fit for Growth method, no departments or parts of an organisation are left unturned. “The message must be: we are all in the same boat,” says Kesteloo. “It's also important to always look forward and not to dwell in the search for those at fault for mistakes in the past. However, you need to investigate the structural causes of excessive costs, because you learn from it as an organisation.”
New digital opportunities
Digital developments are disrupting existing business models, but also open the door to new opportunities. “Similar to new digital players, existing organisations can use digital solutions to work more efficiently and save costs. In addition, existing organisations can develop new capacities based on digital capabilities, enabling them to distinguish themselves in the marketplace and increase their revenues. The key to success is that the approach is embedded in the strategy and processes, and that leadership is committed to the transition.”
People and communication
The Fit for Growth approach is about 'hard numbers', but also about people and communication. “We look at both the decisions that need to be made and the norms underlying them, because if you understand the corporate culture, you can better implement cost savings.”
“To implement a new (cost) strategy, a CEO must clearly demonstrate commitment and ensure that managers want to convey and implement the change programme. Change in an organisation demands a lot of people's engagement and energy. Good communication is crucial, because it is the only way to get people to follow the new plan. Managing a few quick wins at the beginning can help.”
Permanent change
It is important that, leveraging the Fit for Growth approach, lasting change is realised. Nevertheless, organisations often end up cutting costs that return over time. On this, Kesteloo concludes, “Staying on the diet requires a lot of discipline and focus, yet it is necessary because cost savings will pave the way for investment and growth.”
