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strategy+business

ISSUE 67 SUMMER 2012

Is Your Company
Fit for Growth?
A more strategic approach to costs can help you prepare
for the next round of expansion.

BY DENIZ CAGLAR, JAYA PANDRANGI,

AND JOHN PLANSKY

REPRINT 12205
This article was originally published by Booz & Company.
features organizations & people

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i s yo u r c o m pa n y

Fit for
Growth? b y d e n i z c ag l a r , jaya pa n d r a n g i ,

features organizations & people


a n d joh n pl a nsky

A more strategic approach to costs


can help you prepare for the next
round of expansion.

Is your company fit for growth? Many companies the ledger to the revenue side, searching for ways to
today are not. The way they manage costs and deploy move beyond cost cutting entering new markets,
their most strategic resources is preventing the ex- commercializing innovative products and services, of-
pansion they need. But they dont realize it at least fering more compelling customer value propositions
not yet. these companies are strategically and financially out of
To be sure, many of those companies are in bet- shape. They have not made the hard choices involved
ter financial shape today than theyve been in for a long in channeling investments to the capabilities that are
time. Having implemented cost-cutting and auster- needed most, and deemphasizing or eliminating their
ity programs during the recession, they have relatively other expenses.
Illustration by Paul Wearing

healthy balance sheets and sizable reserves of working How can you tell if your company is fit for growth?
capital. They have strengthened their ability to weather Here is a simple, three-question diagnostic:
downturns and improved their productivity in ways Do you have clear priorities, focused on strategic
that could potentially last for years. All these restruc- growth, that drive your investments?
turing actions were required for survival between 2008 Do your costs line up with those priorities? In
and 2011. other words, do you deploy your resources toward them
But as they shift their focus from the cost side of efficiently and effectively?
Deniz Caglar Jaya Pandrangi John Plansky This article is based on a body
deniz.caglar@booz.com jaya.pandrangi@booz.com john.plansky@booz.com of work on cost fitness and or-
is a principal with Booz & is a partner with Booz & is a partner with Booz & ganizational change developed
Company in Chicago. He Company in Cleveland. Her Company in New York. He at Booz & Company. For more
focuses on organizational work focuses on growth and specializes in IT strategy, information, see booz.com/
design and cost fitness in the cost fitness strategy as well as large-scale transformations, fitforgrowth. Also contributing
consumer packaged goods and sales and marketing effective- and cost fitness initiatives for were Booz & Company senior
retail industries. ness for consumer products financial-services firms. partners Vinay Couto,
and retail companies. Michael Connolly, and Barry
Jaruzelski; partners Scott
Corwin, Ashok Divakaran,
Marco Kesteloo, and Martha
Turner; and principals Bas
Kemme and Tara A. Owen.

Is your organization set up to enable you to If you dont have a well-designed organization, that
achieve those priorities? is evident as well. You are not nimble enough to move
The easiest way to answer these questions is to quickly, or aligned enough to work in harmony. It takes
features organizations & people

imagine the opposite. a week to get a sales quote approved, while your com-
If you do not have clear growth priorities, there petition wins the business. Information is not readily
are several warning signs. You have so many initiatives available to the people who need it. Managers oversee
that you cant remember them all. Your executives go to fewer than four employees, on average, and get far too
multiple meetings on unrelated topics every day. Asked involved in their subordinates work. Incentives (such
to name the most important capabilities your company as bonuses and rankings) motivate people in ways that
has (the things it does well) or how they relate to your actually undermine the behaviors needed to achieve
strategic objectives, different leaders give different an- the companys stated growth priorities for instance,
swers. Your best people are working on so many pro- people put internal reports ahead of customer respon-
grams and projects, they are burning out. Meanwhile, siveness. You have shadow HR, finance, and IT staffs
you are underinvesting in some areas which might popping up in places outside your shared-services orga-
include parts of R&D, market development, and cus- nization. Since most suggestions are rejected, people be-
tomer experience where you could potentially build a come afraid to take calculated risks and that derails
distinctive edge against your competitors. the most innovative growth- or savings-oriented ideas.
3
If your costs are not deployed appropriately, thats These are common symptoms, even among well-
also painfully apparent especially in the amount run and well-managed companies. Unfortunately, com-
you spend on nonessentials. Staffing levels in different pany leaders cannot afford to be complacent about
parts of the organization are out of sync; for instance, them right now not if their goals involve expansion
you might have twice as many finance people counting and profitable revenue growth. In just about every in-
the money as salespeople bringing it in. Your highest- dustry and region, companies are contending with a de-
priority initiatives falter because their investments do flationary economic environment. It is relatively easy to
not get sufficient attention, while legacy programs with find capital, but difficult to find attractive markets and
very little impact continue to be funded. Every function opportunities that can offer promising returns. Emerg-
pursues an agenda of professional excellence, striving to ing economies are still alluring but remain challenging,
be best in class, no matter what the cost. Each depart- and achieving scale in them requires patience. Many
ments annual budget is calculated as last years, plus companies have understandably implemented share
strategy+business issue 67

3 percent. Every once in a while, in moments of high buybacks to increase their stock price so as to offer a
pressure, you institute across-the-board cost-cutting higher near-term return to shareholders, but that wont
programs that force the businesses to temporarily re- make them competitive. Nor can companies wait for
duce overhead, but everyone knows that it wont make expansionary economic conditions to return; the global
any long-term difference. economy will probably be facing macroeconomic head-
When you focus on priorities,
costs are not problems.
They are choices.

winds for some time. tools, knowledge, skills, and organization that allows
However, the fact that everyone is struggling also your company to consistently produce results. Walmarts
provides a great opportunity for companies that are virtuosic supply chain management, Southwest Airlines

features organizations & people


willing to prepare for growth through a more deliberate, energetic customer service and asset utilization (of which
lean, fit-for-purpose operating model. Some companies its rapid turnaround time is an example), and Procter
are already doing this. They are streamlining their op- & Gambles open architecture innovation model are
erations by making disciplined choices concerning their all well-known examples of distinctive capabilities that
capabilities, and undertaking continuous improvement few, if any, of those companies competitors can match.
of their efficiency and effectiveness. This is the corpo- These capabilities dont stand alone; in each case, they
rate equivalent of a fitness regimen that focuses, in ef- are part of a mutually reinforcing system that works to
fect, on building muscle developing the capabilities give the company its advantage. Walmarts supply chain
that define a companys distinction while cutting management, for example, combines with the retail
fat. By contrast, across-the-board cost reductions are chains signature approach to store design, its in-depth
the corporate equivalent of crash diets they are inef- knowledge of its rural and suburban customers, and its
fective because they do not last, and at worst they can renowned expertise in real estate and store location.
cut into productive muscle. A successful program to be- Because a companys most distinctive capabilities
come fit for growth contains three main elements: are cross-functional and are applied to most products
4
Set clear strategic priorities, and invest in the ca- and services, they require a great deal of attention and
pabilities that allow you to deliver them. investment; even the largest companies have only three
Optimize your costs, developing lean and deliber- to six distinctive capabilities in their capabilities system.
ate practices that will deploy your resources more appro- Hence the need to set clear priorities. Business lead-
priately and efficiently. ers recognize that working capital is finite. They know
Reorganize for growth, establishing a nimble, they must marshal their resources according to strategic
well-aligned organization that can execute your new need, not to corporate politics or past legacy. (For more
strategic priorities. about capabilities and their strategic role, see Paul Lein-
These elements reinforce one another; when wand and Cesare Mainardi, The Essential Advantage:
launched together, they provide the wherewithal for How to Win with a Capabilities-Driven Strategy [Har-
growth, even for companies facing todays macroeco- vard Business Review Press, 2011].)
nomic challenges. When you focus on priorities, costs are not prob-
lems. They are choices. The priorities most worthy of
Setting Clear Priorities high levels of investment are those that align with the
A growing body of research and experience has shown growth priorities of your business, helping to build the
the importance that capabilities have in strategy. A ca- capabilities that distinguish your company and con-
pability, in this context, is the combination of processes, tribute substantially to its success. These capabilities
Exhibit 1: Becoming Fit for Growth
A cost-fitness effort must address four types of investment priorities,
each changing to meet its own level of strategic relevance. This chart
shows how a hypothetical company might evaluate its expenses.

COST
CURRENT PERCENTAGES POSSIBLE

20% Differentiating Capabilities 30%


30% Three to six differentiated capabilities that 40%
provide sustained competitive advantage,
different for every company
Examples: distinctive product innovation and
design, ultra-premium brand building,
exceptional consumer insight for target markets
Focus attention and staff here
Invest to reach best-in-class levels
Design for quality, innovation,
and productivity

20%
30%
Competitive Necessities In setting clear spending priorities, your first step
These table stakes are required to is to identify which capabilities are worthy of greater
compete in a sector
investment. The precise mix is unique for each com-
features organizations & people

Examples: logistics, strategic sourcing,


back-office processes, integrated IT pany; articulating the priorities requires strategic clarity
architecture
15% on the part of your management team. We have found
Increase efficiency and reduce costs 25%
Maintain good enough quality that management teams at most companies generally
agree about which capabilities matter most. After their
10% first exercise in distinguishing strategic costs, they often
Basic Business Capabilities
20% become devoted to the practice, and thereafter they
Required to keep the lights on and
maintain operations
10% continuously review resource deployment to fund ca-
Examples: tax reporting, real estate and
facilities maintenance, energy management
15% pabilities for growth while keeping other expenses rela-
Aim for cost levels below your tively low.
competitions
Increase efficiencies
Ikea, the Swedish manufacturer and retailer of af-
Outsource fordable customer-assembled furniture, went through
this kind of exercise in the late 2000s, when it reworked
30% 20% its priorities. It was already a frugal organization; from
All Other Activity
50% 45% its founding in 1943, the drive to reduce costs has been
Legacy investments that may or may not
5 contribute value integral to Ikeas culture. As company founder Ingvar
Examples: review boards, outdated regulatory
compliance, many long-standing practices
Kamprad once wrote, Wasting resources is a mortal sin
Challenge all and eliminate many at Ikea. Expensive solutions to any kind of problem
Be parsimonious with the rest
Reduce service levels
are usually the work of mediocrity.
But this new fit-for-growth initiative was defined as
Note: Cost percentages are illustrative, based on hypothetical examples.
far more than a cost-cutting effort. Ian Worling, Ikeas
Source: Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with director of business navigation, introduces the strategy
a Capabilities-Driven Strategy (Harvard Business Review Press, 2011), Booz & Company
by quoting Kamprads original statement of the com-
panys ambition: to create a better everyday life for the
are steadily funded their investment levels may even many people. As Worling explains, That means we
increase while other categories of expense are seen offer home furnishings at such low prices that as many
as necessary but not special. The other expenses receive people as possible can afford to buy them. That colors
strategy+business issue 67

just enough cash to be on par with competitors spend- everything we do. Thus, for example, Ikeas executives
ing or to simply keep the lights on in the companys travel economy class and stay in moderately priced ho-
operations. (See Exhibit 1.) They are subject to strict tels, and the company maintains relatively inexpensive
scrutiny, constant pruning, and a continuous search for office space.
leaner efficiency. Like many other housing- and consumer-related
shifts that can free up capital. Schedule frequent reviews to assess
When a Step Establish stretch targets. Tar- progress and make decisions.
get an aggressive but credible figure, Assign good people to carry it

features organizations & people


Change Is Needed representing enough funds to rein- out. Staff the cross-functional teams
by Deniz Caglar, Jaya Pandrangi, vest in growth and build a cushion for with up-and-comers; give them the
and Ashok Divakaran savings erosion. Such stretch targets information and authority they need.
stimulate new ideas and help high- Take on sacred cows. Some
potential managers reach beyond nonstrategic capabilities have en-

C ompanies may need to ad-


dress their cost structure sud-
denly for one of many reasons, such
comfortable limits.
Hold managers accountable
for specific targets. Otherwise, sav-
trenched supporters. Encourage peo-
ple to bring these controversial op-
portunities and thorny issues to light,
as reacting to dramatic changes in ings tend to evaporate. and give them ways to do so without
the marketplace, correcting a large Make a public commitment to becoming vulnerable.
drop in profitability, or enabling a new the program and explain the fit for Track progress in a standard-
strategy. Companies in such straits growth philosophy to your share- ized way, tied to the bottom line. Re-
can still operate from a position of holders. Commitment reinforces the port results on an ongoing basis.
strength, by following these principles strategic importance of the program Stick to your purpose. Some
6
in a cost-transformation program: and protects your ability to reinvest managers will say, Give me my cost
Look for early quick wins. some of the savings in your most im- reduction number, and let me take
Rapid cuts in nonessential costs help portant capabilities. care of it. This is not that kind of ef-
motivate people and provide cash to Explicitly describe how you fort. Its purpose is to redefine the
fund the initiative. If you reinvest those expect to identify and implement work and to position the company for
funds in more productive directions, cost savings. The top team should de- enhanced growth, using a shared un-
these early wins also demonstrate liver this message, convey a sense of derstanding of the value and differen-
that you are serious. urgency, and set an example by cut- tiation provided by each activity and
Start with the end in mind. You ting back costs associated with their capability. If you keep your eye on that
are cutting costs not just to survive, own day-to-day practices. goal, others will follow.
but to focus your future efforts. Start Design a single cohesive pro- D.C., J.P., and A.D.
by determining your value proposition cess, not a collection of separate
and the capabilities you need. expense-reduction projects. Put a Ashok Divakaran
Tackle the root causes of high single steering committee in charge, ashok.divakaran@booz.com
costs. Think freshly about the busi- overseeing cross-functional teams is a partner with Booz & Company in
ness; look for dramatic step-change that suggest specific measures. Chicago.
Before authorizing an expense,
says Ikeas Ian Worling, we always ask ourselves,
Would our customers want to pay for
that item themselves?

businesses, Ikea was hit hard in the global recession, collaborating with suppliers where possible. Industrial
while the price of many of its materials went up. We designers worked diligently on reducing packaging:
asked ourselves what we could do during this period to Even a few millimeters can make a big difference in
features organizations & people

lower our costs and, instead of increasing the bottom fitting more pieces into a container. We hate transport-
line, turn every euro back to lower prices for our cus- ing air, says Worling. Nonessential costs were pared as
tomers, recalls Worling. much as possible. Before authorizing an expense, says
The chains leaders chose to continue investing in Worling, we always ask ourselves, Would our custom-
the capabilities that differentiated Ikea for example, ers want to pay for that particular item themselves? If
its custom-designed stores, which included distinctive the answer is no, then we try to find a way to do with-
Swedish restaurants and child-care facilities, needed to out it or to do it in a cheaper way.
be places where customers felt at home. To make up the
difference, says Worling, we had to become very good Optimizing Your Costs
at lowering operational costs. With that goal in mind, Fit-for-growth companies are lean and deliberate in
Ikea sought additional efficiencies in its supply chain, spending money. They manage their costs for both ef-

Exhibit 2: Leverage for Cost Management


A multifaceted effort to become fit for growth can involve a large number of tools and practices, generally grouped into three categories: Focusing on
7 distinctive capabilities (What do we do?), shifting the sources of activity (Where do we do it?), and streamlining your operations and organization
(How [and how well] do we do it?). The width of the pyramid at each level illustrates the comparative number of people involved.

What do we do? Articulate strategic value proposition


Product and Set clear priorities for growth
Service Portfolio Choose which capabilities to invest in
Rationalize product portfolio
Capabilities System Clarify role of the corporate center

Where do we do it? Footprint Strategy Reconsider the organizational structure


Redesign the supply chain network
Shared Services Rationalize facilities
Outsourcing and Offshoring Consolidate back-office and routine
work in low-cost locations
Process and Technology Harmonization Shift IT platforms to be fit for purpose
strategy+business issue 67

How (and how well)


De-layering and Resource Reallocation Improve processes, routines
do we do it?
Harmonize IT infrastructure
Lean Processes Automate manual work
IT and Automation Strategic Sourcing Prioritize functional activity
Instill collaborative practice

Source: Booz & Company


Exhibit 3: Cash Released by an Exemplary Cost by choosing to cut costs proactively, you can operate
Transformation Program from a position of strength. Without the panic and ag-
This initiative, conducted by a Fortune 500 company, released more than gression displayed by business leaders who feel pressure

features organizations & people


a billion dollars in gross savings. About one-fourth of that money a
remarkably large percentage, compared with most cost initiatives was from outside, you can allocate your cuts more rationally
reinvested to bolster and expand the companys distinctive capabilities. and be far more effective in reinvesting your savings.
Management &
(To be sure, sometimes a more dramatic shift in your
Administration 9% New cost structure is called for. See When a Step Change Is
investments 25%
Technology 9% in critical Needed, page 6.)
capabilities
When you are ready to rethink and streamline your
Sourcing 22% operations, organization, and management practices in
75%
this way, you have a large menu of techniques, practices,
and analyses to choose from. (See Exhibit 2.) They can
be implemented at many levels of the organization, by
Operations 60% many different teams that, ideally, learn from one an-
other as they work. These methods include the kinds
of continuous improvement associated with lean man-
agement, the efficiencies of scale that come from con-
8
solidating separate activities, the savings that emerge
from relocating nondistinctive work to lower-cost
sources, and the value derived from strategic sourcing
GROSS REINVESTMENT NET
that reduces the expenses of materials and components.
SAVINGS SAVINGS Whichever techniques you choose, depending on your
Source: Booz & Company circumstances and needs, the object is the same: to be
deliberate in taking out costs, making sure you dont
ficiency and effectiveness. In all their investments, they cut into productive muscle.
seek long-term value. This means continually pursuing Some of these methods may seem familiar to you,
the lowest-cost way to run their operations and organi- but they take on new meaning in the context of a capa-
zation, taking full advantage of economies of scale and bilities-driven growth initiative. By reducing expenses
scope. In our experience, companies that become fit for in this way, you release cash for potential investment.
growth do not see cost optimization as a single, big This is generally the most reliable way to fund the de-
bangstyle event. Instead, they make it a continuous velopment of distinctive capabilities that are strategi-
process, embedded in the daily fabric of business. cally important for growth. (See Exhibit 3.)
This type of ongoing discipline represents a natural One company that has used cost optimization to
outgrowth of your work on setting priorities. Indeed, fund its development of strategic capabilities is Aetna
Becoming on the table: sales, general, and ad- project management office to coordi-
ministrative expenses (SG&A); engi- nate these teams. They were respon-
Fit for Growth at neering and manufacturing; indirect sible for developing and defending

Pitney Bowes and direct procurement; the size and


skills of our workforce; IT, HR, and
the business case for their proposed
actions and investments. These were
by Michael Monahan finance; and, most importantly, the then brought to senior management
overall structure of the company. We for review. The senior management
had grown up as a set of vertically inte- team dedicated a half day every month

B efore the global recession hit


in 2008, my company, Pitney
Bowes Inc., had already embarked on
grated individual businesses managed
as a loose portfolio. We needed to be-
come a much more integrated compa-
to considering these action items and
investments. I was part of a smaller
subset of that team, called the Trans-
a concerted effort to evolve the busi- ny with an infrastructure and business formation Steering Committee, which
ness and rebalance revenues toward model that served the distinct needs was focused on formally approving,
growth areas. Nearly a century old, and growth potential of our two very monitoring, and implementing the re-
with 33,000 employees and US$5.6 different customer segments. sulting projects.
billion in revenues, Pitney Bowes had In addition, one of my personal To create room for the new priori-
two different businesses. Our tradi- key goals was to create a lot more ties, we looked at our historical invest-
features organizations & people

tional business, serving small and variability in our cost structure, so we ments and either limited or eliminated
medium-sized customers, was very could migrate resources across busi- many old systems and processes. We
focused on hardware the sale, nesses as we saw opportunities arise. redirected that investment into the
servicing, and financing of postage Naturally, at the height of the reces- new platforms and new capabilities
meters and other mail and workflow sion, we looked for cost-saving mea- that we needed.
equipment. Our enterprise segment, sures that we could implement quick- Our senior management team
on the other hand, was much more of ly and temporarily, like deferred wage identified three key areas for invest-
a services- and software-based busi- increases and temporary changes ment. The first and most basic was in-
ness model, selling to large, multina- to employee benefit programs. But frastructure. We replaced our old Web
tional companies. Those revenues had more importantly, we also explicitly infrastructure with a much more con-
grown considerably over the last de- looked for the type of cost savings that temporary and flexible platform that
cade, in part through acquisition. were sustainable over time. consolidated the websites from all of
In May 2009, we decided to launch We created nearly a dozen cross- our various acquisitions and enabled
a thoughtful and comprehensive re- functional teams to examine every direct interaction with our customers.
9
view of our progress. Everything was company resource and process, and a Behind the scenes, we consolidated

Inc., a US$34 billion diversified healthcare-benefits prioritized investment in several areas, including infor-
company. With the enactment of healthcare reform, mation, health information exchange, and clinical deci-
40 million Americans are theoretically going to be en- sion support. Of course, in a market that is highly price-
tering the market for health insurance, says Meg Mc- sensitive, such as small group and individual insurance,
Carthy, executive vice president of innovation, technol- cost vigilance is a necessity. Our infrastructure both
ogy, and service operations. There will be significant process and technology needs to operate at the low-
growth in the cost-competitive individual business. Our est possible unit cost, says McCarthy, so that were
aim is to be the global leader in empowering people to market-competitive and attractive to consumers. We
lead healthier lives. Thats our strategy. still have further progress to make, but weve taken sig-
strategy+business issue 67

Developing the necessary consumer retail capabili- nificant first steps to reduce the costs of complexity.
ties the art and science of getting and keeping ev- For example, Aetna is restructuring its back-office op-
ery single customer every single day, as McCarthy puts erations including claims processing and customer
it requires significant new investment. As part of service to realize greater efficiencies.
building and strengthening these capabilities, Aetna has We used to take a step-change approach to cost
85 disparate data centers into six re- tion focused not only on product train- along the way. We had the typical or-
gional centers. ing, but also on education about our ganizational boundary issues that you
We called the second capability companys core mission customer encounter when solutions cut across
the agile workforce: communication communications management. traditional lines of demarcation. Of-
tools to provide employees with the Pitney Bowes has also expanded ten, we worked through these issues
flexibility to work anywhere rather its use of outsourcing and offshoring. by using cross-functional teams. We
than being bound to a particular facil- First, we aggregated and standard- are still working on the concept of
ity or office. For example, we began ized certain high-cost and transac- continuous improvement, incorporat-
using voice over IP and aggressively tional work internally. Then we out- ing into our culture the requirement
reduced our real estate footprint. sourced much of it; nearly half of our that everyone look at efficiency and
Third, we gave more employees finance transactions, for example, are productivity as the funding source for
the ability to interact with our custom- conducted by suppliers. future investment in the business, and
ers on a more holistic basis and cross- We continue to look for ways to driving home the concept of competi-
sell to them. We built an enterprise move from fixed to variable costs on a tion for finite resources.
selling organization, unifying around day-to-day basis, so we wont have to At the end of the day, the best
common processes and technologies undertake another restructuring. parts of the Pitney Bowes culture
(such as using Salesforce.com as a Our hard goal when we started prevailed. We have an organization

features organizations & people


sales automation tool). this process was $150 million to $200 of people who are very committed to
In addition to these priorities, million in annual cost savings, net of the company. Once everyone accepted
we launched a number of new digital reinvestment back in the business. that we were serious about this trans-
products (some internally developed, We announced in our 2011 fourth formation, they got on board and drove
others created through partnership) quarter that we had exceeded our re- its incredible success.
to drive revenue growth per customer vised target of $300 million, one year
as well as our overall customer base. ahead of schedule. Almost 45 per- Michael Monahan
As a result of this initiative, weve cent of the savings came from non- editors@strategy-business.com
gone to a much higher degree of glob- personnel-related actions, such as is the chief financial officer of Pitney
al shared services. The finance and better procurement, smaller facility Bowes.
marketing groups, for example, have requirements, systems automation,
moved from regional to global mod- and similar efforts. Out of the total
els, leaving decision support to the in- savings, we reinvested about $200
dividual businesses. We have a global million back into the business.
10
learning and development organiza- We had plenty of challenges

management, McCarthy adds. Now we are adopting large organizations, long-standing relationships have de-
a continuous improvement methodology, in which we veloped in an ad hoc fashion among the central core, the
remove waste constantly. Were searching for nickels local business units, and the shared pools of resources
and dimes and any way to reuse assets. Its like a can of that provide, for example, human resources and infor-
Legos we need to put the pieces together in new and mation technology services. Local leaders may have too
different ways to grow our business. much power over functional activities (thus duplicating
one anothers efforts and promoting inconsistencies), or
Reorganizing for Growth the central hub may be too controlling (which generates
A well-designed organization model is critical to en- unnecessary work).
abling growth in two important ways. First, it makes The solution typically involves redesigning the
possible and sustains the cost reductions that are re- company to create more appropriate structures and
quired to invest in differentiating capabilities. It does spans of control. This may mean having more people
this by sharing resources across businesses and func- report to each manager and reducing the number of
tions, and by trimming management overhead. In most hierarchical layers. Pay scales may be rationalized so
The secret to fitness is to never return
to old habits and to instead follow an ethic
of continuous improvement.

that compensation matches the complexity of the job through cost optimization.
performed, or the company may take more deliberate A number of large companies have used orga-
approaches to sharing resources and outsourcing less- nizational design to become fit for growth, without
features organizations & people

critical functions. When these measures are consistent publicly explaining their internal changes. One exam-
and broadly understood, they are typically supported by ple is a global energy company, which adopted a new
people throughout the company. cost-restructuring initiative in the early 2010s. During
Second, a well-designed organization model can the previous decade, the company had grown rapidly
fuel dramatic growth by empowering managers to act through acquisition, buying a number of companies
like owners of the business. The managers of business and developing an overly complex structure along the
units are given explicit financial and operational targets, way. As one executive leader later noted, the company
along with clear decision rights that spell out what they had gradually become a bit of a patchwork. Some of
can and cannot do by themselves to reach those targets. the business units were centered on countries or regions,
They are also given greater control over the resources whereas others were built around product lines. There
assigned to them, and they can deploy these resources were also functional groups charged, for example,
more flexibly. With incentives (such as bonuses and pro- with marketing and sales or with manufacturing
motions) determined accordingly, business unit leaders that operated either globally or within regions, some-
become accountable for results, which are aligned with times duplicating others efforts.
11
the companys broader objectives in both the long term The cost-restructuring initiative was conceived as a
and the short term. multiple-year project, affecting the companys processes,
This tightly linked chain of empowerment, ac- systems, people, and way of doing business. It reorga-
countability, decision rights, and incentives allows the nized the hierarchy into several global strategic business
company to make decisions as close to the front lines units, a tightly knit collection of corporate functions
as possible. Managers can capture opportunities in such as HR and finance, and a group of shared services
the market, while the corporate core focuses on build- to provide support. Although the concept of regions
ing and maintaining the capabilities that all the busi- was preserved, P&L accountability shifted entirely
ness units share and on driving the companys overall to the strategic business units. To manage this new
strategy and performance. People respond quickly to streamlined structure, the company created a single
opportunities, collaborate across organizational bound- global framework for decision rights: It determined at
aries well, make decisions resolutely, and execute effec- a central level who would make critical company-wide
strategy+business issue 67

tively. Executives spend less time fighting political turf decisions involving finance, planning, legal liability,
wars and more time thinking about their customers and procurement, the supply chain, sales credit risk, hu-
competitors. Finally, costs naturally come down, and man resources, manufacturing, and technology. This
the potential for growth improves, because the orga- new structure allowed the company to realize massive
nizational structure reinforces the practices developed savings through scale and by eliminating redundancies.
At the same time, the organizational units strategic Becoming fit for growth may seem like an onerous
business units, shared services, and corporate function- task. But as suggested by the examples of Ikea, Aetna,
al groups all had their own explicit decision rights. and Pitney Bowes (see page 9), it can also be the begin-
In short, the company created a new common global ning of a new virtuous cycle. As resources move from
framework for its organization, while providing the nonessential to critical capabilities, your company can
business units and functions with sufficient latitude to put more capital into growth strategies. The cost side
run their operations nimbly. of your ledger will read less like a list of burdens and
Some companies use cost-restructuring efforts to more like a register of enabling choices, with a direct
dig deep into business units, reorganizing every process. link between the money you spend and your prowess in
This effort did not micromanage in that way; separate the marketplace. +
operational change initiatives were embedded in the Reprint No. 12205
new business units and corporate functions. But this

features organizations & people


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 ef-
fective 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 Resources
organization in the companys way to play and cen-
Shumeet Banerji, Paul Leinwand, and Cesare Mainardi, Cut Costs, Grow
tral capabilities system. A business unit or function that Stronger: A Strategic Approach to What to Cut and What to Keep (Harvard
does not fit with the common strategy is probably too Business Press, 2009), strategy-business.com/ccgs_book: E-book laying
expensive to keep in its current form. Corporate, busi- out a more detailed process for setting expense priorities. 12
ness unit, and shared-services leaders should also col- Vinay Couto, Ashok Divakaran, and Deniz Caglar, Seven Value
Creation Lessons from Private Equity, s+b, Jan. 30, 2012,
laborate informally to exchange knowledge and make strategy-business.com/article/00102: What top-tier PE firms can teach
sure that business units receive the support they need, public companies about creating and sustaining value over time.
consistent with their local conditions and the compa- Ken Favaro, David Meer, and Samrat Sharma, Creating an Organic
nys overall way of creating value. Growth Machine, Harvard Business Review, May 2012: How chief
executives can set a tone and context for expansion.
As anyone who has lost weight and kept it off can
tell you, the secret to fitness is to never return to old Gary L. Neilson and Julie Wulf, How Many Direct Reports? Harvard
Business Review, April 2012: More explicit advice on span of control.
habits and to instead follow an ethic of continuous im-
provement. Fit-for-growth companies commit to a lean Jaya Pandrangi, Steffen Lauster, and Gary L. Neilson, Design for Frugal
Growth, s+b, Autumn 2008, strategy-business.com/article/08305:
mind-set and are always honing their capabilities and Template for an organizational design that enables expansion while
cost structure, so they dont have to undertake large cutting costs.
programs every several years. They reorient themselves Scott Thurm, For Big Companies, Life Is Good, Wall Street Journal,
for growth as well, adjusting their resource deployment Apr. 9, 2012: Analysis of financial climate at a cash-rich but uncertain
moment.
year after year. Most importantly, they do all this with
For more thought leadership on this topic, see the s+b website at:
a watchful eye on their unique value proposition and
strategy-business.com/organizations_and_people.
the distinctive capabilities that will allow them to grow.
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