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Strategic Cost Management and Profitability

Strategic Cost Management and Profitability 1

Cost Management
Planning Organising Directing Monitoring Control

Target costing

Target costing is used to determine the cost at which a new

product must be manufactured to achieve desired profitability.
After companies develop a basic idea for a new product, they
ask their customers to help them identify important product
features that should be added, and also to identify features
that can be eliminated. They ask potential customers to
estimate a price range for such a product. From this price
range, companies set a target selling price.

RM Lab Admn Sellin Depn. Intere Profit

RM Lab Adm Selling Depn. Inter Profit

Achieving Target Costs

Medical Instrument Co uses a manufacturing costing system with one

direct cost category (direct materials) and three indirect cost

2005 2006
(a)Set up, production order , materials Rs 8,000 Rs 7,500
handling cost per batch
(b)Total Manufacturing Operating Costs per 55 50
machine hour
(c)Cost of engineering changes that vary with 12,000 10,000
the number of engineering changes made

Prepared by Dr Ahindra Chakrabarti, Professor and Director PGDM Programme at
Great Lakes Institute of Management, Gurgaon.
The management of Medical Instruments Co wants to evaluate
whether value engineering has succeeded in reducing the target
manufacturing cost per unit of one of its products HJ6, by 10%. Actual
results for 2005 and 2006 are :

2005 2006
Units of HJ6 produced 3500 4000
Direct Materials Cost per unit of HJ6 Rs 1200 Rs 1100
Total number of batches required to 70 80
Total Machines hours required to produced HJ6 21000 22000
Number of Engineering Changes made 14 10

How do we (a)Calculate the manufacturing cost per unit of HJ6 in 2005.

(b) Calculate the manufacturing cost per unit of HJ6 in 2006. (c) Did
Medical Instruments achieve the target manufacturing cost per unit for
HJ6 in 2006. (d) How Medical Instrument Company reduced the
manufacturing cost per unit of HJ6 in 2006.

Answer (a) and (b)

2005 2006
Per Total Per Total
Unit Unit
Per Unit 3500 4000
Direct Material2 1200 42000 1100 44000
00 00
Batch Level Costs3 160 56000 150 60000
0 0
Manufacturing Operations Cost4 330 11550 275 11000
00 00
Engineering change costs5 48 16800 25 10000
0 0
Total 1738 1550

©Target manufacturing cost in 2006 should have been Rs 1564.2 = (Rs

1738 x.90). In actual terms it has come down to Rs 1550.00 lesser than
that. (d) No. of Engineering changes made and cost of that has come
down; Manufacturing operation cost has come down; Material cost has
come down along with batch level operations cost. The company has
applied value engineering approach to use those activities which has
been built as per the requirement of the customers and eliminated the
rest non value added activities to achieve the target costs.

1200 X 3500; 4000x1100..
Rs 160=(70 X8000)/3500; Rs 150=(80 x 7500)/4000
Rs 330 =(Rs 55 x 21000)/3500; Rs 275 =(Rs 50 x 22000)/4000
Rs 48 =(14 x12000)/3500; Rs 25 =(10 x10000)/4000
Below presented a diagram of how Toyota applied target costing system
in improving the value and reducing cost of Lexus Car.(Taken from
Japanese Management Accounting –published by Productivity Press

Life Cycle Costing: We will explain this with an example

Polaris , a company engaged in Decision Support System is examining

the profitability and pricing policies of three of its recent engineering
software packages :

Packag Domain Selling Units to be Units to be

es Price Sold Sold
Yr -1 Yr -2
EE Electrical Engg Rs 2500 2000 8000
ME Mechanical Rs 3000 2000 3000
IE Industrial Rs 2000 5000 3000

Polaris engineers were analysing Life Cycle Costs and Revenue to

ascertain profit for each of the product which is given below:

Rs (‘000)

Electrical Life Mechanic Life Industrial Life

Engg al Engg Engg
Year Year Year Year Year Year
1 2 1 2 1 2
A.Revenue 500 200 250 600 900 150 1000 600 160
0 00 00 0 0 00 0 0 00

R &D 700 0 700 450 0 450 2400 0 240
0 0 0 0 0
Design of 185 150 200 110 100 120 800 160 960
Product 0 0 0 0
Manufactu 750 225 300 105 105 210 1430 650 208
ring 0 0 0 0 0 0
Marketing 140 360 500 120 150 270 2400 208 448
0 0 0 0 0 0 0 0
Distributio 150 600 750 240 360 600 600 360 960
Customer 500 325 375 450 105 150 2200 388 608
Service 0 0 0 0 0 0
B.Total 116 985 215 854 406 126 983 713 169
Cost 50 0 00 0 0 00 0 0 60
C.Profit/ (66 101 350 (25 494 240 170 (11 (96
(Loss) 50) 50 0 40) 0 0 30) 0)

Growth Imperatives and Strategic Cost Management

A company is a going concern .It has to maintain a sustainable level of

growth as well as profit. This is possible when a company maintains this
momentum. To sustain growth momentum the company has to
innovate continuous pipeline of business-building initiatives – i.e it is
on a constant constant growth path . This Will keep the pipeline full
and the company will have new growth engines ready when exiting
ones begin to falter.
But if the answer is that simple, why aren’t all companies constantly

 The problem is day to day pressure to deliver targeted short term

performance keep most managers preoccupied with their
existing businesses.
 They need to learn to focus their attention as much on where
they are heading as on where they are today.
 But companies often lack a way to talk and communicate across
the organization , coherently about current businesses, new
enterprises coming on stream, and future options.

To address the issue a way of thinking about growth that balances the
competing demands of running existing businesses and building new
ones, and that offers a language that leaders at all levels of an
organization can use can be termed as the “three horizons” of growth.

The three horizons:Thinking about growth and decay is dominated by

the image of a single lifespan, animal or vegetable. Seeding, full
flower and death. “The flower that once has bloomed forever dies.”
But for an ever-renewing society the appropriate image is a total
garden, a balanced aquarium or other ecological system. Some things
are being born, other things are flourishing, still other things are dying –
but the system lives on.
Only an exceptional organization manages to sustain growth when its
core business matures. Just one out of ten companies that exceed the
growth of their industry in any year is able to repeat that performance
every year for a decade.

Wherever we look, the case is easy to make: businesses mature and

decline. As a company’s businesses and revenue streams mature, it
must have others ready to take their place. If continual growth is the
goal, the pace of replenishment must be faster than the pace of
decline. To sustain growth, there must be a continuous pipeline of new
businesses that represent new sources of profit. What distinguishes the
corporations that carry on growing is their ability to create these new
businesses. They can innovate in their core businesses and build new
ones at the same time. What they have mastered is the art of
managing their pipeline so that fading sources of growth are
replenished at exactly the right moment.

Three horizons of growth: A three-stage pipeline is useful in that it

allows us to distinguish between the embryonic(budding), emergent
(evolving), and mature phases of a business’s life cycle - these stages
can be referred as the three horizons of growth. Each horizon
represents a different stage in the creation and development of a
business. Each calls for radically different business initiatives. And
each poses a different management challenge.

What is horizon 1:Horizon 1 encompasses the businesses that are at

the heart of an organization – those that customers and stock analysts
most readily identify with the corporate name. In successful
companies, these businesses usually account for the lion’s share of
profits and cash flow. Horizon 1 businesses are critical to near-term
performance, and the cash they generate and the skills they nurture
provide resources for growth. They usually have some growth potential
left, but will eventually flatten out and decline (Figure 1.1). Without the
support of a successful horizon 1, initiatives in horizons 2 and 3 are
likely to stagnate and die.

Horizon 3
Create viable options

Horizon 2
Build emerging business


Profit Horizon 1
Extend and defend
Core businesses

Management’s primary challenge in horizon 1 is to shore up

competitive positions and capture what potential remains in the core
businesses. Even when these are mature, continuing innovation can
incrementally extend their growth and profitability. Traditional
salesforce stimulation programmes, product extensions, and marketing
changes can all contribute. Restructuring, productivity enhancement,
and cost reduction measures will also help maintain healthy
performance for as long as possible.

What is horizon 2: Horizon 2 comprises businesses on the rise: fast-
moving, entrepreneurial ventures in which a concept is taking root or
growth is accelerating. The emerging stars of the company, these
businesses are attracting investors’ attention. They could transform
their company, but not without considerable investment. Though
substantial profits may be four or five years away, they have customers
and revenue and may already generate some profit. More important,
they are expected to become as profitable as horizon 1 business in
What is horizon 3:Horizon 3 contains the seeds of tomorrow’s
businesses – options on future opportunities. Although embryonic,
horizon 3 options are more than ideas; they are activities and
investments, however small. They are the research projects, test-
market pilots, alliances minority stakes, and memoranda of
understanding that mark the first steps towards actual businesses,
even though they may not produce profits for a decade, if ever. Should
they prove successful, they will be expected to reach horizon 1 levels of
A company that thinks it has a promising horizon 3 just because it
compiles a long list of whiteboard ideas at a management retreat is
fooling itself. Without deliberate initiatives to develop good ideas into
horizon 3 opportunities, a company’s long-term growth prospects will
fade. The options in horizon 3 are rarely proven opportunities, but they
need to be promising and to have the support of management.
Building successful businesses means seeding numerous options.
Some will fail for internal reasons; others will fall victim to shifting
industry winds. Most will never grow to become successful new
businesses. Given these odds, a great deal of horizon 3 activity is
needed to cover the multitude of possible futures. A company’s goal
should be to keep the option to play without committing too much
capital or other resources. The challenge is to nurture promising
options wile ruthlessly excising those with diminishing potential. When
companies adopt a very conscious growth strategy , it also focuses on
cost management through scalability ; through this approach
companies will be able to offer products and services at competitive

Customer Centric Management

At the core, every business function is marketing~ and every business
needs to be customer centric. So to begin customer centric thinking
mangers need to reverse executives

The Traditional Value Chain

Core Inputs ,
7 Produ
Physical Compete Raw The
ncies Material
Assets and Chan Custo
Servic nels mer
It’s paradigm shift from product-focused culture , to a customer-
focused culture, where success is measured more by customer
satisfaction rather than short-term profits from product sales.

The Modern Customer Centric Value Chain

Customer Centricity requires Customer Care and Insight
Priorities Inputs,
Inputs, Physica
Offerings Raw Compet
Raw ll Assets
Material encies

What is Customer Care What is Customer Insight

Customer oriented information driven Customer oriented business intelligence

processes related to marketing, selling and analytics that provide fact based
or servicing customers. input to drive intelligent business
 Enterprise Marketing Processes decisions.

 Sales Processes  Market Analysis

 Customer Service Processes  Customer Segmentation

 Compliance processes if any  Customer Profitability

(telecom ,banking, Gas  Channel usage, preference and
connections) profitability;
 Process truncation and  Product profitability and design
Optimization  Business Performance Management

Organizations need to Create Information Agenda
Creating a vision guide decisions &help the
Strategy organization determine how to best support
business goals
Informati Identifying the technology components &
on Informatio capabilities to establish a common
Agenda n information framework
Implementing policies & practices for
Informatio managing ,using, improving & protecting
n organizational information
Establishing a plan for executing discrete
Roadmap projects to realize short and long-term returns
on investment.

Building Blocks of Customer Care and Insight

Information Insight Business Channel

Foundation Process Integration
Information Foundation
Master Data Data and Process Models Data Quality
Customer Data Data Warehousing House/Hand
Integration holding
Presence of Information Integration 3RD Party Data
Service Oriented

Customer Business Insight Search and Threat and
Analytics Discovery Fraud
Analytics Intelligence
Segmentation Branch Analyze Form Entity Analytics
Performance Notes
Customer Financials Monitor Service Name
Profitability Levels Recognition
Predictive Product Churn Title
Analytics Profitability Detection Investigation
Channel Planning Legal
Preference Discovery

Marketing Sales Processes Service Compliance
Processes Processes Process
Enterprise Enterprise Enterprise Enterprise
Business Business Business Business
Process Process Process Process
Content Content Content Content
Management Management Management Management
Business Business Business Business
Applications Applications Applications Applications

Example : Optimization of Customer Care and Insight with Information

Innovation in Financial Services /Insurance Industry

Core Customer Life Cycle

Customer Analyze Demographies,Channel
Analytics Usuage,Profitability
CUSTOME Product Create Personalized Product and Services with
R Management Dynamic Pricing
Marketing Perform
Analytics Segmentation,Personalization,Channel
Effectiveness and Propensity to Buy Analysis
Campaign Manage multistage, multichannel campaigns
Management with accurate and timely customer
Sales and Use process management to optimize sales
Channel and distribution
Service Leverage real time view of customer
relationship and channel integration to
provide exceptional service.
Self Service Deliver multi-channel ,real-time client
information to self service channels
Process Perform Risk analysis and business
Management performance reporting with accurate trust
worthy information.

Balancing Efficiency & Growth in Important

Too much focus on Too much focus While too much We must find
cost reduction on customer focus of revenue right balance
experience and profit
Can lead to poor Can hinder cost Can ruin the Or Optimally
customer reduction and customer ,maximize all
experience and profit growth experience and three.
there by affect hinder cost
revenue reduction

Customer Centric Management

1.0 What is a customer centric business

It’s paradigm shift from product-focused

culture , to a customer-focused culture,
where success is measured more by
customer satisfaction rather than short-
term profits from product sales.
2.0 Customer Centricity requires Customer Care
and Insight

What is Customer Care What is Customer

Customer oriented Customer oriented
information driven business intelligence
processes related to and analytics that
marketing, selling or provide fact based
servicing customers. input to drive
 Enterprise intelligent business
Marketing decisions.
Processes  Market Analysis
 Sales Processes  Customer
 Customer Service Segmentation
Processes  Customer
 Compliance Profitability
processes if any  Channel usage,
(telecom ,banking, preference and
Gas connections) profitability;
 Process truncation  Product
and Optimization profitability and
 Business

3.0 Organizations need to Create Information


Creating a
Strategy vision guide
Agenda &help the
how to best
business goals
Information the
Infrastructure technology
components &
capabilities to
establish a
Information policies &
Governance practices for
improving &

Establishing a
Roadmap plan for
projects to
realize short
and long-term
returns on

4.0 Building Blocks of Customer Care and


Information Insight Business Channel

Foundation Process Integration
Information Foundation
Master Data Data and Process Data
Managemen Models Quality
t System
Customer Data Warehousing House/Hand
Data holding
Presence of Information 3RD Party
Service Integration Data

Customer Business Search Threat and
Analytics Insight and Fraud
Discovery Intelligence
Segmenta Branch Analyze Entity
tion Performan Form Analytics
ce Notes
Customer Financials Monitor Name
Profitabilit Service Recognition
y Levels
Predictive Product Churn Title
Analytics Profitabili Detection Investigatio
ty n
Channel Planning Legal
Preferenc Discovery

Marketing Sales Service Compliance
Processes Processes Processes Process
Enterprise Enterprise Enterprise Enterprise
Business Business Business Business
Process Process Process Process
Content Content Content Content
Managem Managem Managem Manageme
ent ent ent nt
Business Business Business Business
Applicatio Applicatio Applicatio Application
ns ns ns s


5.0 Optimization of Customer Care and Insight
with Information Innovation in FS/Insurance

Core Customer Life Cycle In

Customer Analyze Demographies,Channel
Analytics Usuage,Profitability
OME Product Create Personalized Product and
R Manageme Services with Dynamic Pricing
Marketing Perform
Analytics Segmentation,Personalization,Channel
Effectiveness and Propensity to Buy
Campaign Manage multistage, multichannel
Manageme campaigns with accurate and timely
nt customer information
Sales and Use process management to optimize
Channel sales and distribution
Service Leverage real time view of customer
relationship and channel integration
to provide exceptional service.
Self Deliver multi-channel ,real-time client
Service information to self service channels
Process Perform Risk analysis and business
Manageme performance reporting with accurate
nt trust worthy information.

16.0 Strategic Business Design

A Business Design composed of four strategic elements:

Customer A business has opportunity to choose and to segment its

Selection customers based on the customer set to which it is best
suited, or the one it is best able to serve. A business may
change the customers it chooses to serve as value migrates
to a new customer set or new customer segments. Moving
away from customers is among the most difficult decisions a
company can make. It is important for company to ask
Whom do I choose not to have as my customers.
Value Capture Traditionally companies have captured value through
product sales or service fees. Product centric thinking limits
itself to these traditional means of capturing value. Today
reinventor companies employ a more extensive repertoire of
value capture mechanisms than they ever have before:
financing; ancillary products; solutions; licensing; and many
others. They get rewarded for the value they deliver to
customers in highly innovative ways.
Strategic It is important for company to be able to protect its profit
Control stream. The company has to find appropriate answers when
it’s ask Why a customer buy from this company ?
Strength of strategic control is a critical element in
successful business design innovation.
Scope It refers to the company’s activities and its product and
service offerings, Companies increase and decrease their
scope constantly. The key question for business designer is:
What changes in scope do I need to make to remain
customer relevant , to generate high profits and to
create strategic control.

16.1 Strategic Control Point Index

Profit Protecting Power Index Strategic Control Point

High 10 Own the Standard
9 Manage the Value Chain
8 Super Dominating Position
7 Own Customer Relationship
Medium 6 Brand Copyright
5 Product Development Lead
2 years
Low 4 Product Development Lead
1 year
3 10-20% Cost Advantage
None 2 Commodity with cost parity
1 Commodity with cost
16.2 Moving away from Product Centric Model to Customer
Centric Model

Disney’ Business Design vs Industry Standard

Disney Block Buster Approach

General Film Block Buster

Cost 6
$20-$100 $150-$200
million million
Revenues $10-300 million $300-$500

Disney Business Design

The Cost Overrun The Disney Profitable

Industry Standard Filmmaker Model
Customer Selection  Adults  Children
 Some Children  Families
Value Capture  Own the risk  Profitable Films
 Breakeven Films  Diversify the Risk
 Theme Park
Differentiation/Strate  Star Driven  Story Driven
gic Control
Scope  Many Films  Few Films
 CAA/Agent  Disney Assembled
Packed  Theme Parks
Operating Approach  Cost Overrun  Strict Budget
 Low cost stars
 Low cost locations

16.3 Value of the Business Design to be ascertained

Return on
on Profit
Profit Asset
Asset Strategic
Strategic Market
Sales Growth
Growth Efficiency
Efficiency Control
Control Value
Index /Sales

EBIT/Sales Projected Assets/Sales Explained (Market

Growth above Value of
Share x
Depends primarily on stars,special effects, marketing budgets and shooting locations.

17.0 The Concept of Value Migration

It is widely acknowledged that products go through cycles from

growth through obsolescence. It is not as well recognized that business
designs also go through cycles and reach economic obsolescence.
Customer priorities - the issues that are most important to them ,
including and going beyond the product or service offered - have a
natural tendency to change ; business designs tend to stay fixed.
When the mechanism that matches the company’s business design to
the structure of customer priorities breaks down ,Value Migration begins
to occur.

Value migrates from outmoded business designs to new ones that are
better able to satisfy customers’ most important priorities. A business
design is the totality of how a company selects its customers, defines
and the tasks it will perform itself and those it outsource, configures
its resource , goes to market ,creates utility for customers and captures
profit. It is the entire system for delivering utility to customers and
earning a profit from that activity. Companies may offer products, they
may offer technology, but that offering is embedded in a
comprehensive system of activities and relationships that represents
the company’s business design.

The migration of value can affect a specific division of a company ,or

even a whole industry as customers make de facto choices about the
business designs that best meet their needs. Value can migrate to other
business designs within an industry or flow out of one industry and into
another with designs better configured to satisfy customer priorities
and make a profit.

In steel industry value can flow within industry from the integrated
steel makers to alternative business designs and the next generation
integrated mills in Japan and Korea. Value can still flow out of entire
steel industry -as companies in other industries – plastic and
aluminium - emerged with business designs that better satisfied the
emerging priorities of specific customer groups such as canners and
auto makers.

There are several benefits associated with value migration. Gaining and
maintaining a competitive advantage is one of the most common
advantages arising from using this type of marketing strategy. By
constantly thinking of where consumer demands and preferences will
move next, it is possible to stay ahead of competitors, sometimes
seizing business opportunities and creating a presence before others
begin to notice a newly developing avenue to a niche audience. This
type of value migration is especially pronounced when a company is

able to project the popularity of an emerging technology early on, and
adapt its products for use in that new technology. An example would be
paper companies who made copy paper in the middle 20th century but
envisioned the advent of the desktop computer and home publishing,
and adapted their product lines to meet those needs before those
markets actually began to grow.

Another benefit of value migration is the ability to make use of an

established and trusted brand to enter into new markets with relative
ease. Drawing on consumer confidence in the brand, it may be possible
to attract attention in newer markets and successfully compete with
emerging companies in those markets. Doing so is especially important
when demand for the older products offered by the business are in
decline due to changes in consumer tastes or the advent of new
technology that renders the older products obsolete. This approach can
mean that if a company was once known for manufacturing high-quality
typewriters, creating a new line of netbooks and handheld devices
bearing that same brand name may increase the chances of capturing
a significant amount of market share.

The process of value migration can make it possible to take advantage

of opportunities that may have not been viable in years past.
International air travel paved the way for entertainment companies to
create and provide options such as music, movies or even rebroadcasts
of television shows to passengers during an extended flight. More
recently, the adaptation of certain types of software to run on several
different types of operating systems means the ability to reach more
consumers and increase the manufacturer’s bottom line, simple
because those products can provide value to a wider range of

Value Migration among Top Indian Companies :2007-2013

Company 200 2007 2013 Ran

7 First Half k
Ran Mkt Cap Revenu Profit Mkt Rev Profit
k e Cap
Reliance 1 245483. 118353 11943. 26918 3791 21003 2
Ind. 25 .71 91 6 90
ONGC 2 189331. 59686. 15642. 25866 9285 20926 4
04 90 92 0 4
Bharti 3 160742. 17794. 4033.2 12136 4685 5097 11
Airtel 39 43 3 8 0
NTPC 4 134750. 32838. 6864.7 11918 7148 12619 12
85 10 0 3 1
TCS 5 112710. 14942. 3757.2 32082 5065 12786 1
92 09 9 8 7
Infosys 6 110926. 13166 3782 15363 3906 9116 7
92 5 5
DLF 7 106576. 1133.4 406.91 39
22 8
Reliance 8 104685. 12756. 2408.8
Comm 02 30 5
ICICI Bank 9 92977.4 29532. 3110.2 11830 4885 5097 13
9 84 2 6 0
Sun 10 10543 4447 1930 14
Pharma 5
BHEL 11 75324.3 19195. 2414.7 40527 5381 6615 33
4 21 0 0
SBI 12 75871.9 45946. 4541.3 13164 1367 14105 8
9 42 1 3 21
Wipro 13 74441.3 13758. 2842.1 97411 3464 5650 15
5 50 0 2
L &T 14 61515.2 17999. 1402.2 83426 6405 4910 16
1 50 3 6
ITC 15 61374.9 18806. 2699.9 26146 4314 7419 3
6 36 7 2 8
SAIL 16 59984.8 41288. 6202.2
9 89 9
IOC 17 50323.8 255764 7498.5 60519 18
5 .07 6
HDFC 18 49388.6 5883.2 1570.3 12685 2143 4871 10
1 6 8 0 9
Reliance 19 47223.9
Petro 3
HUL 20 44408.0 13191. 1855.3 12758 2857 3797 9
7 30 7 2 6
NMDC 21 42829.5 4185.8 2320.2 45970 1295 6342 30
5 4 1 9
Unitech 22 41125.3 2443.0 984.00
4 7
Sterlite 23 38033.9 12457. 784.03
Ind. 1 57
HDFC 24 37698.6 8461.6 1141.4 15564 4228 6726 6
Bank 6 6 5 7 0
Tata Steel 25 37692.1 19772. 4222.1 27229 48
7 13 5
Suzlon 26 37245.0 5388.9 1061.1
Energy 5 5 4
Satyam 27 30805.5 6228.4 1423.2
Comp. 6 7 3
Idea 28 30613.5 2795.2 277.72 47201 2215 808 29
Cellular 5 5 7
Hindustan 29 29673.0 9221.3 4441.8 28
Zinc 9 5 1

Tata 30 27159.2 31118. 1913.4 81014 5149 303 17
Motors 7 22 6 6
GAIL 31 26092.0 19261. 2386.6 40249 4904 4022 34
8 37 7 7
Coal India 18629 1155 9794 5
8 6
HCL 59033 19
Axis Bank 57810 20
Cairn India 57353 21
Mahindra 55145 22
Bajaj Auto 53521 23
Kotak 53451 9281 24
Ultratech 25
Power Grid 26
Nestle India 27

18.0 Companies which are Fit for Growth 7

Booz &Company Study carried out by Ashok Divakaran and Vinay Couto
Many companies have been trying to figure out the best way to
reposition themselves for greater performance and success in the
future. The answer involved some combination of
growth strategy and cost management. Booz Allen &Hamilton found :
When companies do three things has made successful performance
among other things. They first created clarity and coherence in their
strategy ,articulating the differentiating capabilities that they will need
to win in the market place . Second they put in place an optimized cost
structure and approach to capital allocation, with continual investment
in the capabilities critical to success, while proactively cutting costs in
less-critical areas ,to fund these investments. Third they build up
supportive organizations .They redesign their structures, incentives,
decision rights, skill sets, and other organisational and cultural
elements to more closely align their behaviour to their strategy , and
to harness the collective actions of their people.
This approach is expected to build competitive muscle while cutting
corporate fat that weighs a company down. Companies that use this
approach ,cost actions are proactive and strategic (as opposed to
reactive and tactical ), freeing up funds to be reinvested in those parts
of the business that are most important for growth.
At the same time, an organizational fabric is put in place that guides
employees to do right things day in and day out ,thus helping the
entire enterprise build and sustain competitive advantage.

Fit for Growth Framework

Strategic Clarity : Articulates how the business creates differentiated

value for customers
Resource Alignment: Release Funds: Invest in higher Value Added
Supportive Organization: Enable and Sustain Reductions

Strategic Clarity
• Clearly articulated and coherent Strategy
• Sustainable and Differentiated capabilities for Growth;
• Presence in critical product ,market and customer segments
Resource Alignment
• Systematic investments in differentiating capabilities;
• Proactive and tailored cost reduction actions;
• Lean cost structure in low criticality areas;
Supportive Organization
• Organizational Structure that is market-back and tied to the basic
characteristics of the business;
• Coherent and supportive incentives ,decision rights, skill sets,

The study found company types based on recurring patterns

evident in the Fit for Growth Index results. They are :
Strategically Distracted; Capability In the Game; Ready for

Adrift; Constrained; Growth

Strategically Adrift
 Low score on Strategic Clarity and Coherence (regardless of
scores in resource alignment and supportive organization)
• Strategy and critical priorities are unclear and not widely
understood even among top management;
• Differentiating capabilities needed to win in the market are not
clearly articulated or exhibit large gaps.

 Medium score on strategic clarity and coherence , and low or
medium score in both resource alignment and supportive
organization .
• Generally middle of the pack in effectiveness and efficiency;
which jeopardizes the longer term right to win.
• Core elements of strategy and some critical capabilities exist at
the table stakes level, but are not distinctive enough to serve as
a competitive advantage.
• Lack of a focused and differentiated strategy makes it difficult to
mobilize investment and elevate performance to top quartile

Capability Constrained
 High score on strategic clarity and coherence and low and
medium score in both resource alignment and supportive
• Category includes many companies traditionally thought of as
competent performers;
• Have strong strategies , and a coherent and clearly articulated
set of capabilities;
• However ,execution isn’t keeping pace with intent -critical areas
of the business may not be receiving enough investments , and
cost structure may be misaligned with strategic priorities;
• May be held back by inadequate practices, processes or
• Have a big picture understanding of what it takes to win, but
they need more discipline in execution.
In the Game
 High scores on both strategic clarity and coherence and on
resource alignment ;low or medium score on supportive
• From a market effectiveness perspective ,doing almost everything
• Strategy is clear, differentiated and well articulated;
• Capabilities are distinctive, well developed and drive clear
competitive advantage
• But are held back from achieving full potential by organizational
attributes ( complicated matrix structures, onerous governance
processes, high leadership turnover; talent gaps or a misaligned

Ready for Growth

High Score on all attributes .
• Strategy is clear, differentiated; well articulated ; and has
demonstrated resilience to market and environmental changes;
• Capabilities are highly advanced and lead the industry;
• Resources are systematically directed to initiatives and
opportunities with highest strategic and financial returns.
• Organizational structures support key capabilities ,with talent in
the right places and efficient decision making.
• Market success rests on a foundation of coherent ,proven, and
sustainable fundamentals, rather than on transitory factors such
as managerial talent or favorable market conditions.