How a strategic and capabilities-focused approach to cost can get Industrial Manufacturing & Services companies fit for growth
12 March 2018
In my conversations with sectors within the Industrial Manufacturing & Services (IM&S) industry, cost reduction invariably emerges as a key focus. This is hardly surprising, given the constant cost pressures facing the sector and the need to drive efficiency and competitiveness to ever higher levels.
In most cases, our conversations on cost control then move on to look at the company’s growth strategy and investment in its key capabilities. This is a debate that most executives are eager to engage in – especially since it deals with how the business is planning to navigate its path to a successful future.
However, one slightly worrying issue often strikes me during these discussions. It’s that implementing cost reduction initiatives and investing in the strategy are often seen as separate and largely unconnected activities – when in fact they’re two indivisible sides of the same coin.
This failure to link cost programmes with strategic execution can have profound and negative consequences for IM&S businesses. All too often, it results in organisations taking a tactical and short-term view of costs. And this view manifests itself in turn in reactive cost reduction programmes that have no alignment with strategic goals, and take little account of the need to target investment to generate sustainable growth.
The prioritisation of cost programmes over investment can be seen across and beyond the IM&S sector, and has been underlined by various PwC research studies. Our 20th Global CEO Survey found that 61% of Industrial Manufacturing CEOs worldwide were planning to launch cost reduction initiatives in the coming year. And our global Working Capital Report 2017/18 – Pressure in the system – revealed that the global manufacturing sector has experienced a steady decline in investment over the past five years.
So, what’s needed? In PwC’s view, companies need to move away from their dislocated and siloed view of cost, and instead adopt a more holistic perspective focused on using transformation to re-establish the link between costs, strategy and growth.
PwC’s Fit for Growth*, framework does just that. Our approach helps companies put their money where their strategy is by taking a strategic approach to managing their costs. By connecting and aligning choices about costs, investments in capabilities and organisational and cultural evolution, it enables businesses to invest resources in what truly differentiates them from the competition, and achieve higher returns as a result.
Fit for Growth does all this by combining and integrating four steps:
- Focus on differentiating capabilities
Identifying between three and six differentiating capabilities that enable it to compete most effectively in the areas where it chooses to do business.
- Align cost structure
Deploying investments against the business’s key competitive strengths — its differentiating capabilities, including its use of technology — to protect “good costs” while pruning “bad costs.”
- Reorganize for growth
Building an organisation that works in a new way, enabling it to sustain cost reductions while empowering managers to drive growth.
- Enable change and cultural evolution
Putting the organisation’s culture to work, by helping people change what they do and how they do it through focusing on a few critical behaviours. This culture-led approach is more effective in getting people ready, willing, able and committed to change.
Throughout all four of these steps, a consistent theme that we’re currently seeing with our clients is high levels of investment in digital capabilities and Industry 4.0 – a new industrial model characterised by the digitisation and interconnection of products, value chains and business models. A Fit for Growth approach at looks closely at how these digital investments fit with the strategy, and how resource can be redistributed and restructured to optimise capability development.
As this focus on digital underlines, what fundamentally differentiates Fit for Growth from traditional cost programmes is that it’s about enabling growth, not just cutting costs. And by helping an IM&S business build a robust platform for future growth, it equips it to capitalise on whatever changes come about in an uncertain and fast-changing environment.
We’re helping more and more companies across the subsectors of IM&S use Fit for Growth to transform and reposition their business for a successful future. In our forthcoming blogs, we’ll drill down into how companies in those subsectors are applying it – and the benefits they’re realising as a result. Stay tuned.