by Rodger Howell
Today’s CEOs are increasingly pessimistic. Three years ago, the annual CEO Survey revealed a focus on innovation and growth. Concerns about regulation, skills, exchange rate volatility, geopolitical uncertainty and taxes have shifted that focus to ensuring companies are sized right for the current economic and political environment. Overall, the percentage of CEOs who think global growth will improve over the next 12 months dropped from 37 percent in 2015 all the way to 27 percent in 2016.
Given that backdrop, it comes as no surprise that 71 percent of U.S. CEOs plan to initiate cost-cutting initiatives in the next 12 months. Even so, outright cost-cutting is not a sustainable path to long-term growth.
In times of uncertainty, forward-looking companies use cost cutting to further align their costs with their business strategy. Strategic cost cutting helps lower the cost structure, but it’s not about getting cheaper. Instead, strategic cost cutting helps ensure an organization is ready for growth. It focuses on the aspects of the business that are controllable while freeing up resources to fund transformation and future growth.
Cost Classification: Bad Costs, Good Costs and the Best Costs
One of the first steps to smarter, more strategic cost cutting is identifying and understanding the differences between bad costs, good costs and the best costs:
- Bad costs – These are costs that do not align with the overall growth strategy of the company. Good companies cut waste and funnel the resources to better areas, and bad costs are the first to get cut.
- Good costs – These costs drive initiatives and strategies that support the company’s overall growth goals. They are based on an understanding of customer preferences and match them with the organization’s operations.
- Best costs – Some of the best costs build and expand a company’s truly differentiated capabilities. These are the handful of capabilities that make a company truly unique and drive its value. These capabilities stand out as true differentiators that are hard to mimic and difficult to replicate.
Once a company’s costs are classified, strategic cost cutting becomes a process of minimizing exposure to bad costs and maximizing investment in the best ones. The practice helps create a more resilient growth model, particularly important during times of uncertainty.
Be Mindful of Geography and Understand the Customer
How are forward-thinking companies applying this process in today’s environment? We’re seeing a number of companies focus in on two areas – geography and customer experience. Many multi-nationals have expanded heavily and are now looking for ways to be smarter, leaner and more fit. Overall, companies are evaluating their geographic footprint and looking for new ways to address complexities.
Equally important to where companies operate is how they do it. Customers look for value not only in the product or service itself but in how easily they are able to understand a company’s offerings, how easy it is to purchase the product or service and how easily that product or service can be maintained over its lifecycle. More and more companies are looking at global trends while simultaneously addressing the regional differences.
Individual customers have to deal with many of the same uncertainties faced by today’s companies. Those challenges change more than corporate behavior; they have a significant impact on consumers, as well as their preferences and expectations. As a result, companies are improving their ability to sense customer sentiment and are developing capabilities to respond quickly to evolving needs.
A bad cost for one company may be a good cost for another, so it’s critical to understand how each expense impacts the company’s overall business strategy before jumping into cutting. Classifying an organization’s bad, good and best costs – and understanding how those costs overlap with what customers want – empowers companies to turn their cost-cutting strategy into a growth strategy.
How does your company use cost cutting to fuel its growth strategy?
This article was written by Strategy& from Forbes and was legally licensed through the NewsCred publisher network.