Praise for Cut Costs, Grow Stronger
“Most companies cut costs randomly and without regard to strategy. In this short book you will find not only clear thinking about strategic capabilities, but also much-needed advice about how to cut costs without losing the capabilities that make your firm distinctive in its industry.”
—Tom Davenport, President’s Distinguished Professor in
Information Technology and Management, Babson College
“Cut Costs and Grow Stronger explores a novel way to think about costs and details a method of becoming cost effective in good times and bad. Approaching the subject of costs on a strategic and capability-driven basis by segregating discretionary and nondiscretionary costs enhances focus and as a consequence, produces a far more valuable outcome. A particularly useful read given the times!”
—Larry Bossidy, former CEO,
Honeywell International
MEMO TO THE CEO
Authored by leading experts and examining issues of special urgency, the books in the Memo to the CEO series are tailored for today’s time-starved executive. Concise, focused, and solutions-oriented, each book explores a critical management challenge and offers authoritative counsel, provocative points of view, and practical insight.
Climate Change: What’s Your Business Strategy? by Andrew J. Hoffman and John G. Woody
Five Future Strategies You Need Right Now by George Stalk, the Boston Consulting Group
High Performance with High Integrity by Ben Heineman, former General Counsel of General Electric
Lessons from Private Equity Any Company Can Use by Orit Gadiesh and Hugh MacArthur, Bain & Company, Inc.
Manage the Media (Don’t Let the Media Manage You) by William J. Holstein, award-winning writer for the New York Times, Fortune, and Barron’s
Reward Systems: Does Yours Measure Up? by Steve Kerr, former CLO of General Electric and Goldman Sachs
Strategic Alliances: Three Ways to Make Them Work by Steve Steinhilber, Vice President of Strategic Alliances at Cisco Systems
Succession: Are You Ready? by Marshall Goldsmith
Top Talent: Keeping Performance Up When Business Is Down by Sylvia Ann Hewlett
MEMO TO THE CEO
Cut Costs, Grow Stronger
A Strategic Approach to What to Cutand What to Keep
Shumeet Banerji
Paul Leinwand
Cesare R. Mainardi
Booz & Company
Harvard Business Press
Boston, Massachusetts
Dedication
To our families, our friends, our clients, our colleagues, and everyone who understands that despite the pain of cutting back, there is always an opportunity to set your company on the right path.
Copyright 2009 Booz & Company Inc.
All rights reserved.
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No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to [email protected], or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.
1
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Changing the Conversation About Costs
IF YOU ARE LIKE MOST executives, you have been spending a lot of time lately thinking about costs. Many businesses are struggling to survive, as the worst global economic crisis in more than seventy years unfolds. Others, even if they’re doing relatively well right now, are reducing expenses to make sure they are well prepared for future uncertainty. The pressure to cut costs—whether driven by your cash flow, your shareholders, your uncertainty, or your investment needs—is extraordinary.
But there is a positive side to this situation. Dramatic cost cutting gives you a chance to refine or even reformulate your overall strategy. After all, you’re never just cutting costs. You’re making a decision that something is no longer strategically relevant, and that other things are essential to keep. Yes, you may have to lose some product lines and activities, and perhaps some of your employees and customers. You also, however, have the opportunity to help your company grow stronger in the process.
We reject—and you should emphatically reject—the idea that cutting costs makes your business weaker or more limited. Sustained cost reduction tends to correlate with corporate performance over time; the perceived opposition between these two goals is a false dichotomy. To be sure, if you reduce expenses in a panic, or without an eye to strategy, you could do great harm to your company’s competitiveness. But if you focus on your priorities and on your future potential, cutting costs can be a catalyst for exactly the change you need.
The current moment of financial stress—indeed, any moment of cost pressure—is a signal from the world at large to your business. It is saying that you need to choose your strengths and use them more effectively. The signal may also be telling you that the market has changed, and that old paths to profit are uncertain. It is time to put your stake in the ground, to say what your company is about and what it needs to become, and to make many of the hard choices that your company has needed to make for some time.
Why tackle the challenge of cost cutting so explicitly? Because most companies are cutting costs ineffectively. They focus, mechanically and program-matically, on the topic of cost. They either spread the pain as evenly as they can across the company or target high-cost areas first. And they look for short-term reductions without fully considering the impact on their long-term position or prospects. Figure 1-1, summarizing surveys conducted with executives of leading corporations, shows how strongly these approaches prevail. When companies cut costs this way, they risk making the enterprise weaker and (in many cases) they doom themselves to more cost cuts down the road.
FIGURE 1-1
Cost reduction and revenue growth priorities
Faced with mounting pressure to cut-costs, most companies continue to go about it the wrong way. Executives are assigning higher priority to short-term cost-reduction tactics and demonstrating less appetite for longer term initiatives. They have defaulted to standard downturn defenses such as across-the-board cost-cutting and layoffs
Instead, we say that cost itself is an outcome of the choices you make about where to invest. The right way to think about costs—whether or not your company is under huge pressure now—is to take a hard look at the capabilities you need most and to invest only in those that will give you a “right to win” in the marketplace. The resulting approach is unique for each company and results in greater and faster cost reduction, less risk to the business, less chance of costs returning, and a greater likelihood that you’ll have made the company stronger and positioned it to grow more quickly when good times return.
This approach involves a new way of thinking about capabilities. We have found that previous research in the field—about skill sets,