Is Your Company Fit for Growth?
A more
strategic approach to costs can help you prepare for the next round of
expansion.
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.
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.
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.
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. They are subject to strict scrutiny, constant pruning, and a
continuous search for leaner efficiency.
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.
When you are ready to rethink and streamline your operations,
organization, and management practices in this way, you have a large menu of
techniques, practices, and analyses to choose from.They can be implemented at
many levels of the organization, by many different teams that, ideally, learn
from one another as they work. These methods include the kinds of continuous
improvement associated with lean management, the efficiencies of scale that
come from consolidating separate activities, the savings that emerge from relocating
nondistinctive work to lower-cost sources, and the value derived from strategic
sourcing that reduces the expenses of materials and components. Whichever
techniques you choose, depending on your circumstances and needs, the object is
the same: to be deliberate in taking out costs, making sure you don’t cut into
productive muscle.
Some of these methods may seem familiar to you, but they take on
new meaning in the context of a capabilities-driven growth initiative. By
reducing expenses in this way, you release cash for potential investment. This
is generally the most reliable way to fund the development of distinctive
capabilities that are strategically important for growth.
One company that has used cost optimization to fund its
development of strategic capabilities is Aetna Inc., a US$34 billion
diversified healthcare-benefits company. “With the enactment of healthcare
reform, 40 million Americans are theoretically going to be entering the market
for health insurance,” says Meg McCarthy, executive vice president of
innovation, technology, and service operations. “There will be significant
growth in the cost-competitive individual business. Our aim is to be the global
leader in empowering people to lead healthier lives. That’s our strategy.”
Developing the necessary consumer retail capabilities — “the art
and science of getting and keeping every single customer every single day,” as
McCarthy puts it — requires significant new investment. As part of building and
strengthening these capabilities, Aetna has prioritized investment in several
areas, including information, health information exchange, and clinical
decision support. Of course, in a market that is highly price-sensitive, such
as small group and individual insurance, cost vigilance is a necessity. “Our
infrastructure — both process and technology — needs to operate at the lowest
possible unit cost,” says McCarthy, “so that we’re market-competitive and
attractive to consumers. We still have further progress to make, but we’ve
taken significant first steps to reduce the costs of complexity.” For example,
Aetna is restructuring its back-office operations — including claims processing
and customer service — to realize greater efficiencies.
“We used to take a step-change approach to cost management,”
McCarthy adds. “Now we are adopting a continuous improvement methodology, in
which we remove waste constantly. We’re searching for nickels and dimes and any
way to reuse assets. It’s like a can of Legos — we need to put the pieces
together in new and different ways to grow our business.”
Reorganizing for Growth
A well-designed organization model is critical to enabling growth
in two important ways. First, it makes possible and sustains the cost reductions
that are required to invest in differentiating capabilities. It does this by
sharing resources across businesses and functions, and by trimming management
overhead. In most large organizations, long-standing relationships have
developed in an ad hoc fashion among the central core, the local business
units, and the shared pools of resources that provide, for example, human
resources and information technology services. Local leaders may have too much
power over functional activities (thus duplicating one another’s efforts and
promoting inconsistencies), or the central hub may be too controlling (which
generates unnecessary work).
The solution typically involves redesigning the company to create
more appropriate structures and spans of control. This may mean having more
people report to each manager and reducing the number of hierarchical layers.
Pay scales may be rationalized so that compensation matches the complexity of
the job performed, or the company may take more deliberate approaches to sharing
resources and outsourcing less-critical functions. When these measures are
consistent and broadly understood, they are typically supported by people
throughout the company.
Second, a well-designed organization model can fuel dramatic
growth by empowering managers to act like owners of the business. The managers
of business units are given explicit financial and operational targets, along
with clear decision rights that spell out what they can and cannot do by
themselves to reach those targets. They are also given greater control over the
resources assigned to them, and they can deploy these resources more flexibly.
With incentives (such as bonuses and promotions) determined accordingly,
business unit leaders become accountable for results, which are aligned with
the company’s broader objectives in both the long term and the short term.
This tightly linked chain of empowerment, accountability, decision
rights, and incentives allows the company to make decisions as close to the
front lines as possible. Managers can capture opportunities in the market,
while the corporate core focuses on building and maintaining the capabilities
that all the business units share and on driving the company’s overall strategy
and performance. People respond quickly to opportunities, collaborate across
organizational boundaries well, make decisions resolutely, and execute
effectively. Executives spend less time fighting political turf wars and more
time thinking about their customers and competitors. Finally, costs naturally
come down, and the potential for growth improves, because the organizational
structure reinforces the practices developed through cost optimization.
A number of large companies have used organizational design to
become fit for growth, without publicly explaining their internal changes. One
example is a global energy company, which adopted a new cost-restructuring
initiative in the early 2010s. During the previous decade, the company had
grown rapidly through acquisition, buying a number of companies and developing
an overly complex structure along the way. As one executive leader later noted,
the company had gradually become “a bit of a patchwork.” Some of the business
units were centered on countries or regions, whereas others were built around
product lines. There were also functional groups — charged, for example, with
marketing and sales or with manufacturing — that operated either globally or
within regions, sometimes duplicating others’ efforts.
The cost-restructuring initiative was conceived as a multiple-year
project, affecting the company’s processes, systems, people, and way of doing
business. It reorganized the hierarchy into several global strategic business
units, a tightly knit collection of corporate functions such as HR and finance,
and a group of shared services to provide support. Although the concept of
regions was preserved, P&L accountability shifted entirely to the strategic
business units. To manage this new streamlined structure, the company created a
single global framework for decision rights: It determined at a central level
who would make critical company-wide decisions involving finance, planning,
legal liability, procurement, the supply chain, sales credit risk, human
resources, manufacturing, and technology. This new structure allowed the
company to realize massive savings through scale and by eliminating
redundancies. At the same time, the organizational units — strategic business
units, shared services, and corporate functional groups — all had their own
explicit decision rights. In short, the company created a new common global
framework for its organization, while providing the business units and
functions with sufficient latitude to run their operations nimbly.
Some companies use cost-restructuring efforts to dig deep into
business units, reorganizing every process. This effort did not micromanage in
that way; separate operational change initiatives were embedded in the new
business units and corporate functions. But this program aligned the
organization for growth, enabling it to be, as one observer put it, “a truly
global company.”
Sustaining the Gains
When a large company pursues cost management and growth
simultaneously, it must act as one unified entity. Avoiding disconnects and
misalignments requires effective governance and business management practices.
Financial, strategic, and operational planning processes should be treated as
leading activities: They should set clear priorities and plans that involve all
parts of the organization in the company’s “way to play” and central capabilities
system. A business unit or function that does not fit with the common strategy
is probably too expensive to keep in its current form. Corporate, business
unit, and shared-services leaders should also collaborate informally to
exchange knowledge and make sure that business units receive the support they
need, consistent with their local conditions and the company’s overall way of
creating value.
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, 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.
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.
Before the global
recession hit in 2008, my company, Pitney Bowes Inc., had already embarked on a
concerted effort to evolve the business and rebalance revenues toward growth
areas. Nearly a century old, with 33,000 employees and US$5.6 billion in
revenues, Pitney Bowes had two different businesses. Our traditional business,
serving small and medium-sized customers, was very focused on hardware — the
sale, servicing, and financing of postage meters and other mail and workflow
equipment. Our enterprise segment, on the other hand, was much more of a
services- and software-based business model, selling to large, multinational
companies. Those revenues had grown considerably over the last decade, in part
through acquisition.
In May 2009, we decided
to launch a thoughtful and comprehensive review of our progress. Everything was
on the table: sales, general, and administrative expenses (SG&A);
engineering and manufacturing; indirect and direct procurement; the size and
skills of our workforce; IT, HR, and finance; and, most importantly, the
overall structure of the company. We had grown up as a set of vertically
integrated individual businesses managed as a loose portfolio. We needed to
become a much more integrated company with an infrastructure and business model
that served the distinct needs and growth potential of our two very different
customer segments.
In addition, one of my
personal key goals was to create a lot more variability in our cost structure,
so we could migrate resources across businesses as we saw opportunities arise.
Naturally, at the height of the recession, we looked for cost-saving measures
that we could implement quickly and temporarily, like deferred wage increases
and temporary changes to employee benefit programs. But more importantly, we
also explicitly looked for the type of cost savings that were sustainable over
time.
We created nearly a dozen
cross-functional teams to examine every company resource and process, and a
project management office to coordinate these teams. They were responsible for
developing and defending the business case for their proposed actions and
investments. These were then brought to senior management for review. The
senior management team dedicated a half day every month to considering these
action items and investments. I was part of a smaller subset of that team,
called the Transformation Steering Committee, which was focused on formally
approving, monitoring, and implementing the resulting projects.
To create room for the
new priorities, we looked at our historical investments and either limited or
eliminated many old systems and processes. We redirected that investment into
the new platforms and new capabilities that we needed.
Our senior management
team identified three key areas for investment. The first and most basic was
infrastructure. We replaced our old Web infrastructure with a much more
contemporary and flexible platform that consolidated the websites from all of
our various acquisitions and enabled direct interaction with our customers.
Behind the scenes, we consolidated 85 disparate data centers into six regional
centers.
We called the second capability
“the agile workforce”: communication tools to provide employees with the
flexibility to work anywhere rather than being bound to a particular facility
or office. For example, we began using voice over IP and aggressively reduced
our real estate footprint.
Third, we gave more
employees the ability to interact with our customers on a more holistic basis
and cross-sell to them. We built an enterprise selling organization, unifying
around common processes and technologies (such as using Salesforce.com as a
sales automation tool).
In addition to these
priorities, we launched a number of new digital products (some internally
developed, others created through partnership) to drive revenue growth per
customer as well as our overall customer base.
As a result of this
initiative, we’ve gone to a much higher degree of global shared services. The
finance and marketing groups, for example, have moved from regional to global
models, leaving decision support to the individual businesses. We have a global
learning and development organization focused not only on product training, but
also on education about our company’s core mission — customer communications
management.
Pitney Bowes has also
expanded its use of outsourcing and offshoring. First, we aggregated and standardized
certain high-cost and transactional work internally. Then we outsourced much of
it; nearly half of our finance transactions, for example, are conducted by
suppliers.
We continue to look for
ways to move from fixed to variable costs on a day-to-day basis, so we won’t
have to undertake another restructuring.
Our hard goal when we
started this process was $150 million to $200 million in annual cost savings,
net of reinvestment back in the business. We announced in our 2011 fourth
quarter that we had exceeded our revised target of $300 million, one year ahead
of schedule. Almost 45 percent of the savings came from non-personnel-related
actions, such as better procurement, smaller facility requirements, systems
automation, and similar efforts. Out of the total savings, we reinvested about
$200 million back into the business.
We had plenty of
challenges along the way. We had the typical organizational boundary issues
that you encounter when solutions cut across traditional lines of demarcation.
Often, we worked through these issues by using cross-functional teams. We are
still working on the concept of continuous improvement, incorporating into our
culture the requirement that everyone look at efficiency and productivity as
the funding source for future investment in the business, and driving home the
concept of competition for finite resources.
At the end of the day,
the best parts of the Pitney Bowes culture prevailed. We have an organization
of people who are very committed to the company. Once everyone accepted that we
were serious about this transformation, they got on board and drove its
incredible success.
Michael
Monahan is the chief financial officer of Pitney Bowes.
by Deniz Caglar, Jaya
Pandrangi, and John
Plansky
http://www.strategy-business.com/article/12205?gko=ebe6b&utm_source=itw&utm_medium=20170112&utm_campaign=resp
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