Gregg Clark Americas advisory consumer products and retail leader Ernst Youn

Cutting Costs the Wrong Way Can Damage Your Brand

Jan. 16, 2013
Companies that view strategic cost reduction efforts through a cultural lens can produce long-term value.

A globally diversified consumer products company had spent five years attempting to cut costs. It had looked at expenses across the board, scouring each SG&A line item looking for efficiencies. From travel and procurement to HR and IT to core business services, the company sought savings.

Unfortunately, the cost-cutting decisions the company made did not go over well. The amount it saved was neither enough nor lasting -- and the company was still recovering from an executive revolt that stemmed from making senior employees travel in economy class.

In today’s volatile consumer products market, maintaining margins requires constant attention on cost and efficiency. Flat growth in mature markets has consumer products companies moving their attention to emerging markets. But geopolitical issues, foreign currency exchange rates and rapidly evolving consumer demographics create an unpredictable playing field. At the same time, investors continue to search for companies with the leanest operations. They want to invest in companies that are not only lean today, but also have a plan to stay lean into the future.

As competition intensifies, margins tighten and stakeholders demand maximum performance efficiency, 10% cuts across the enterprise aren’t going to work. Instead, consumer products companies have to fundamentally rethink their approach to cost effectiveness.

In a recent Ernst & Young Global Consumer Products Center survey of 285 C-suite executives and analysts, 74% of participants agree that they need to make significant changes to their business model to sustain historic margin levels. Fewer than 33% say that their company is very good at increasing efficiency or productivity; 13% rate themselves as poor.

Consumer products CEOs obviously are focused on reducing the bottom line. But it is not their sole focus. They also want strategic solutions that drive long-term enterprise value. Effective, sustained cost reductions release resources to fund growth and expansion plans. They can also often improve quality and alignment with strategy. Still, sustainable cost efforts aren’t up to the CEO alone. Employees need to buy in to cost reduction efforts to provide sustainable value.

A strategic approach to cost reduction that aligns cost-cutting with the company’s broader business objectives can help to make better decisions that improve efficiency and performance. However, to achieve lasting change, companies need to know their culture.

Focus on the Right Things

Consumer products companies tend to find the most success in achieving sustainable cost reductions when they focus on three core imperatives:

  1. Know the company.
  2. Align decisions to the business strategy.
  3. Apply a cultural lens.

Let’s look at each imperative in some detail.

Know the company

At a tactical level, companies need to know their operations inside and out to be able to make the right cost-cutting decisions at a detailed, program-by-program level. It’s about knowing which cost reduction opportunities will provide the most value.

With the right knowledge, companies can consider a full range of levers, including operations, overhead, tax and capital. By knowing which levers to pull, companies can implement changes that produce quick wins. One option may be to tighten travel policies. Another may be to eliminate projects that duplicate effort or offer a low return on investment. By making these changes first, companies can realize initial benefits within six months.

Align decisions to the business strategy

In addition to making tactical, program-by-program decisions, companies should be taking more strategic measures. Linking cost reduction efforts to the broader business strategy and to the operating model enables consumer products companies to be deliberate about where to invest in cost savings.

Using tools such as driver-based data analytics provides a framework to structure decision-making and deliver actionable insights. Analytics should look at cost reduction through both a top-down lens and a bottom-up, functional perspective to challenge the current cost structure and identify practical solutions.

Such solutions may include using new technology to automate manual work activities, establishing shared service centers, or standardizing tools and processes across functions or geographies to drive consistency.

Apply a cultural lens

Tactical and strategic changes to the operating model can produce success initially, but to produce sustainable value, companies need to apply a cultural lens to decision-making. They need to understand the cultural fabric of their organization and make decisions that offer the best fit.

Understanding the company’s ability to embrace change is a good place to start. It’s important to know what kind of change the company wants to achieve -- whether it is a light dusting or a deep cleaning -- and how employees will react to each level of change.

One way to gauge employee support is to conduct interviews and workshops. The more interactive the process is, the more employees will understand and embrace the company’s goals.

Once the company appreciates the cultural climate for change, it can then determine which cost reduction efforts would add the most value. Making changes that go against the grain of a company’s culture could damage its brand and its relationship with its people.

Any change that the company initiates needs to be supported by a robust change management program that opens the channels of communication. This will enable the company to not only listen and act as issues arise, but also instill a cost optimization mindset into the cultural DNA.

Focus on Governance and Accountability

To effectively execute these three core imperatives, companies will want to introduce a rigorous program management initiative that focuses on governance and accountability for outcomes and facilitates driver-based decision-making across each level of the enterprise.

The consumer products sector expects to experience cost pressures well into the future. Companies that tactically cut costs across the enterprise may achieve savings initially. Unfortunately, that success is often short-lived. A more strategic approach that incorporates driver-based decision-making and data analytics allows companies to be more targeted in where they invest and how they achieve value for the company.

However, companies that view strategic cost reduction efforts through a cultural lens can produce long-term value -- and more. By linking culture and strategy, companiescan free up much-needed resources to invest in growth initiatives. What’s more, it can give investors lasting confidence in the company’s ability to achieve strategic growth objectives and its vision for the future.

Gregg Clark is Americas advisory consumer products and retail leader with Ernst & Young.

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