Strategic Planning

How to
StrategicallyCut Costs More
by Paul Leinwand
and Vinay Couto
March 10, 2017

Summary.   When companies cut costs, they often make across-the-board cuts

that are unconnected to their strategy, and fail to make the cuts sustainable. Most
organizations also wait to act until they have a problem – at which point they don’t
have the time to make... more
We’ve all been through it — the looming cost project. And for
many of us, it’s not a fond memory.

How many cost-cutting initiatives have our companies gone

through in the last dozen years? More important, do we look back
on those initiatives as transformative in helping us build success
and leading us to growth?
For executives at most large organizations, the answer to the first
question is probably “too many,” and the answer to the second is
“no.” Call it cost management fatigue. When doing research for
our book, we found that the main reasons most companies suffer
from this syndrome are that they make across-the-board cuts that
are unconnected to their strategy, and fail to make the cuts
sustainable. Most organizations wait to act until they have a
problem, at which point they don’t have the time to make the
right trade-offs for the long term.

The best-run companies, in contrast, think of cost management as

a way to support their strategy, and of cost as precious investment
that will fuel their growth. They put their money where their
strategy is and continually cut bad costs and redirect resources
toward good costs. After all, if we aren’t directing spending to the
right places, what chance do we have to grow?

Management teams at such companies spend a lot of effort

separating out the costs that truly fuel their distinct advantage
from the ones that don’t. They 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, CEMEX, Frito-
Lay, Ikea, Lego, and Starbucks. They cut costs to grow stronger.

You can see this different approach to cost allocation at work in

the way winning companies behave in times of adversity. When
Roger Enrico took the helm as CEO of Frito-Lay, in 1991, the
company was developing an innovative and distinctive approach
to direct-store delivery that would allow it to consistently deliver
the right products to the right stores at the right time. At the same
time, Eagle Snacks was gaining market share with innovative new
products and its own distribution system. Enrico realized that
Frito-Lay had to make a major investment in product quality to
meet the competitive threat. He resolved to start by cutting $100
million — 40% — in general and administrative costs. This was
painful, including laying off 1,800 managerial and professional
people in a single day. But the action removed layers of
management and many unnecessary practices, leading to a much
higher level of responsiveness and effectiveness, and freed up
money to invest in Frito-Lay’s distinctive capabilities — including
not only the direct-store delivery capability, but also product and
manufacturing innovation, and consumer marketing. Today,
Frito-Lay “owns the streets” in its markets, as well as several $1
billion brands.

Five big mindset shifts can help you and your organization
manage costs in the right way. First, connect costs and strategy.
Look at every opportunity to cut costs as an opportunity to
channel investments toward strengthening your value
proposition. Connect your budget directly to your strategic
priorities; if your budget doesn’t reflect your priorities, you have
very little chance of executing your vision. This entails viewing
costs not merely as an in-year expense but also as a multiyear
investment in differentiating capabilities designed to help your
company execute its strategy.

Second, rethink costs in terms of capabilities. In many

companies, the investments you make in capabilities are hidden
within an array of functional budgets. Unravel these budgets and
sort out the strategic implications of your current spending
patterns. It’s not easy to do, since most conventional expense-
tracking systems don’t assign costs to capabilities. It will likely
ruffle some cultural and operational feathers, but it can lead to
great success because it creates a meaningful discussion among
executives about what you really need in order to win in the
market.

Third, 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 to realize their full
potential. You’ll pay for them by cutting everything else. We call
this “zero basing”; it enables you to break free of the budgetary
practices of the past, which at many companies amount to
variations on the theme of “last year plus X percent.”

Fourth, 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. Closely link your budgeting process
with your strategic planning process to ensure that differentiating
capabilities continue to receive disproportionate investment,
while other expenses are tightly managed. In a true “ownership
culture,” cost-consciousness becomes an organizational
capability and a shared mindset, rather than a bunch of rules that
are resented and resisted. Even when no one is watching,
employees treat every spending decision as if the money
comes from their own pocket.

Last, 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
kinds of decisions. Creating a continuous cost-management
mindset that connects costs to strategy is the best way to ensure
that your company never gets out of shape.

Managing cost in this way will give your organization the freedom
to make the right choices over the long term, choices that are
required to close the gap between strategy and execution — and
the rewards are immense.

Paul Leinwand is the global managing director

for capabilities-driven strategy and growth at
Strategy&, PwC’s strategy consulting business.
He is a principal with PwC U.S., an adjunct
professor of strategy at the Kellogg School, and
the coauthor of several books, including
Strategy That Works: How Winning Companies
Close the Strategy-to-Execution Gap (HBR
Press, 2016) and the upcoming Beyond Digital:
How Great Leaders Transform Their
Organizations and Shape the Future. (HBR
Press, 2021).

Vinay Couto is a recognized thought leader

with PwC’s Strategy& in the people and
organization strategy practice.  He is a principal
 with PwC US and a leader of the global Fit for
Growth platform. He is the co-author of Fit for
Growth: A Guide to Strategic Cost Cutting,
Restructuring, and Renewal (Wiley, 2017).