By Paul Leinwand & Vinay Couto
The best-run companies think of cost management as a way to support their strategies, and of costs as precious investments that fuel their growth. They put their money where their strategy is and cut bad costs to redirect resources toward good ones.
Management teams at such companies base their decisions about where to cut and where to invest on the need to support their greatest strengths: the capabilities that enable them to create unique value for customers. This important distinction is a way of life at leading companies we have studied, like Amazon.com, Cemex, Frito-Lay, Ikea, Lego and Starbucks. These firms cut costs to grow stronger.
Five mind-set shifts can help you and your organization manage costs the right way.
- Connect costs and strategy. Regard cost-cutting as an opportunity to channel investments toward the strengthening of your value proposition.
2. Rethink costs in terms of capabilities. In many companies, the investments you make in capabilities are hidden within an array of functional budgets. Create a meaningful discussion about what you really need in order to win in the market.
3. List all the expenses related to the activities of the enterprise, move them into a metaphorical “parking lot” and then, one by one, decide whether to let them back in. Distinctive capabilities will get the resources they need. You’ll pay for them by cutting everything else. We call this “zero basing”: It enables you to break free of traditional budgetary practices, which at many companies amount to variations on the theme of “last year plus X percent”.
4. Make your cost-management plan sustainable. Build financial systems that create more transparency around “good” costs, those associated with differentiating capabilities, and dispensable “bad” costs, leveraging your culture to increase awareness of the difference.
5. Be proactive. Fix the roof while the sun is shining. Once you’re in trouble, you may not have the luxury of making the right decisions.
Paul Leinwand is global managing director with Strategy&, PricewaterhouseCoopers’ strategy consulting business. Vinay Couto is a principal with PwC US.