At a Glance
- Caught in the bind of running vs. changing the business, many companies feel they need to “choose” between either margins or growth. Top-quartile companies can achieve both.
- With the right methodology, cost productivity discipline not only helps fuel steady growth and big initiatives, but also is rewarded by shareholders, leading to substantially higher TSR, in both good times and downturns, according to our long-term research.
- The best companies maximize their chances of success, especially during times of disruption. They invest to develop the right routines and capabilities by focusing on five themes: simplicity; automation and digitization; new ways of working; visibility; and resilience and sustainability.
As companies manage the tension between running the business and making bold bets that will help them outpace competitors in a highly unpredictable future, many business leaders struggle to choose between growth and costs.
What the best of them have learned is that they don’t need to sacrifice either.
There always will be competing pressure to boost productivity performance today and make big investments for future growth. But winners build lasting muscles that enable them to simultaneously excel at both.
In our recent briefs, “Accelerating Performance Despite Inflation” and “The New Recession Playbook,” we wrote about the steps that companies should take to get out ahead of rising prices and to prepare for the coming downturn. As we explained in those briefs, one proven method in any period of disruption is to take the opportunity to make bold moves aimed at growth.
But while some companies are fortunate enough to still see strong underlying growth, they may fail to realize that it’s not enough to focus only on the top line. Companies need to do something that only the best performers preemptively have been able to accomplish: find an approach that allows them to tackle cost productivity in tandem with growing their top lines. With the right methodology, cost productivity discipline delivers an added huge benefit: It is always rewarded by shareholders, leading to substantially higher total shareholder returns (TSR), in both good times and downturns (see Figure 1).
The growth/cost trade-off is a myth—the best value creators do both, always
Indeed, the tension between the need to generate profits by transforming the cost structure and the need to invest in a bold ambition can be managed. Companies need to build the lasting muscles to simultaneously run the business and change the business in a way that allows them to also invest in their bold ambitions over time. It is the cost productivity savings that help feed those investments.
Our research bears this out. The TSR top performers have focused on costs across all economic periods, while the TSR bottom performers watched EBITDA growth from cost control decline (see Figure 2). In fact, the top-quartile TSR performers outpace the bottom-quartile companies more than twofold in both revenue growth and cost productivity. It’s a pattern that can be seen across the 2007–09 recession, the recovery that followed, the slow-growth years of 2011–19, and even during the pandemic period of 2020–21. Although TSR growth varies by industry, we see the same link between productivity leadership and high TSR across industries. The connection between productivity gains and strong equity performance holds across fast-, medium-, and slow-growing companies.
The link between productivity gains and strong equity performance is consistent
Maximizing chances of success
In our experience, the best companies raise their chances of success, especially during times of disruption, by focusing on a tailored combination of five themes—and in the right areas of the business:
Simplicity. Disruptions give companies less freedom. The best option is to find ways to maximize gains by utilizing existing resources. This requires companies to tune the customer value proposition to focus on the highest-value areas and enable growth while eliminating complexity in offerings, structures, and processes.
This is an area of focus for Microsoft. As the Covid-19 pandemic kept many office workers at least partly at home, the company rapidly capitalized on expanding cloud-computing services and work software with products like Office 365 and Teams. Microsoft already had been moving in this direction, but Covid hastened the trend toward cloud computing, and the company responded with agility to stronger-than-expected customer demand for these services.
At the same time, Microsoft deprioritized lower-value areas. In another move aimed at focusing on customers and aligning its structures for simplicity, the company shifted from product-aligned sales teams to customer-aligned, solutions-centric sales teams. Such steps enabled the company to increase operating income by 32%, while boosting revenues by 18%, in fiscal year 2021.
Automation and digitization. Many companies accelerated their digital agenda in response to the Covid pandemic, making it table stakes for productivity leadership. Companies turned to automation to derisk business continuity, improve efficiency, and enhance performance. Technology also helped them stay connected with their customers, which became critical during the pandemic.
Automation and AI shape every aspect of Amazon’s way of doing business. The approach famously called the Flywheel has been a bedrock of the retailer’s growth as a market leader over the last decade and has generated significant business efficiency. The company’s integrated AI recommendation engine, for example, is now capable of making nuanced and dynamic personal suggestions to keep its customers engaged. Its home webpage has a comparatively low bounce rate (the average percentage of visitors who view only one page before leaving the website) since the company leverages product recommendations to engage customers from the start. The integrated recommendation engine is a major driver of Amazon’s sales and was one of the key contributors to its 21.7% revenue growth in 2021.
The company increasingly uses automation, robotics, and machine learning in its day-to-day warehouse operations, improving predictability and reducing costs with the likes of robot drive units and automated 3-D packaging robots, and by deploying AI to forecast product demand in real time.
New ways of working. Companies that are nimble enough to make fast decisions and speedily implement those decisions will win in the competition for scarce talent. The best companies will streamline the organizational structure, processes, talent, and tools to increase flexibility, remote collaboration, and variabilization of fixed costs. They’ll rely on gig workers to match talent demand, for example, and develop systems for effective remote working.
While many companies have been getting back to the office, Airbnb allows employees to live and work anywhere. The hospitality company didn’t want to limit its talent pool to those living within commuting distance of its offices. But at the same time, it acknowledged the need for in-person presence and collaboration. So, Airbnb implemented different programs to combine the best of the digital and physical worlds. For example, the company prioritizes selective events as culture drivers in which employees gather for weeklong meetings and connection. Early indicators suggest that these moves are successful. Though fully remote, Airbnb scores well in employee satisfaction and culture metrics, such as eNPS (employee Net Promoter Score℠), in which it ranks in the top quartile of all companies.
Visibility. With mounting uncertainty and change, executive teams need to increase the pace and clarity with which they both run the business and change the business. It’s difficult to make the best decisions for both without the right transparency and accountability. That means having access to a single version of the truth with accurate, timely data about how the business is performing. Another facet involves designing meetings that encourage robust discussion and debate. Such meetings should provide an opportunity for executives to align on and commit to future action, and to hold one another accountable. CEOs, together with their executive teams, should find a rhythm that is fast paced and efficient, and ensures the appropriate focus on present and future needs (see the Bain article “How to Make the Most of Executive Team Meetings”).
To create profit-and-loss accountability, Adobe aligned product and go-to-market teams in mini-commercial units around specific solutions. In addition to enabling better accountability, the new model helped prevent diffusion of responsibility between functions. The company also reorganized functional groups to report to function vice presidents, and it uses strong key performance indicator (KPI) tracking, weekly dashboard reviews, and cross-functional meetings
Resilience and sustainability. Building cross-functional resilience helps companies enhance productivity and better manage the risks that multiply in times of disruption. It also positions companies to improve their ability to address the growing sustainability imperative, an increasingly important issue for investors. Among global investors, 78% say that they place more emphasis on environmental, social, and governance (ESG) topics now than they did five years ago, and 65% believe ESG will become standard practice over the next five years. One global apparel company with ambitious targets for growth, profitability, and sustainability has focused on creating a more resilient and responsive supply chain as it balanced cost and execution feasibility. Backed with detailed studies and data analysis, it was able to diversify 20% of its manufacturing volume to regions with lower climate and country risk while also improving responsiveness. The company has enhanced its visibility into each link in the value chain—from raw materials to finished goods to recycling—as a way of ensuring traceability and boosting operations. While the journey has just begun, the company has identified more than $125 million in value to be created from the effort.
Today forward, future back
In the race to simultaneously spur growth and lower costs, no company can tackle everything all at once. Cost productivity champions prioritize these five themes by taking a “today forward, future back” perspective.
This begins with understanding the starting point—where the company is now. Executives must ask: Which areas of the business have been most impacted by turbulence today? To what extent? What actions have we taken to limit inflation risk, counter cost increases, and manage cash flow? What quick wins can we implement around pricing effectiveness, procurement, policy changes, and eliminating work to reduce costs and maintain margin?
Winners invest in what for many has become a lost art: scenario planning. They envision different futures and clearly articulate the decisions to make for each. Companies may determine the areas of the business that are most at risk for continued price increases or supply chain disruptions, for example. They develop the signposts for critical changes and the trigger points for actions to be taken—deciding which moves come first, second, and third.
This future-back view requires a rigorous assessment of key competitor and customer trends. Companies envision how customer needs and preferences will evolve in the face of persistent market disruptions, the likely competitor response to disruptions, and how it will potentially change the competitive landscape.
Among the questions asked and answered: How will a reinvented supply chain look—one that is disruption-proof and flexible against customer needs, and contains costs? How should we redesign how work gets done to meet a changing talent landscape and scale a self-funding automation program?
Companies also need to determine the distinct areas in which they want to outperform and build competitive advantage compared with the areas that won’t help the company advance its strategy but can be sources of significant savings. The best companies are explicit about which activities should be performed and how, all informed by the chosen strategy and the ways the company creates value.
Too often, companies have a hard time articulating exactly how they create value or how their cost structure aligns with their strategy. That makes it impossible to know which operation or function merits the next dollar of internal investment. They don’t get specific enough, and default to trying to achieve best-in-class capabilities everywhere. As a result, they are not able to achieve real cost transformation. Alternatively, they cut costs indiscriminately and to the bone, stalling growth.
For many, the hardest part involves building the capabilities and embedding the change to balance running the business and changing the business. The best companies embed speed and agility to keep moving forward—to know what is stuck and how to unblock it. They invest to identify the routines and processes that are vital to change the business. They celebrate their successes—celebrating cost heroes as much as growth heroes—and they focus on changing executive behavior.
It’s a tall order. But as top-quartile TSR companies have learned in good times and bad, building the long-lasting muscles to tackle cost productivity in tandem with growing the top line is the surest way to get shareholders’ attention.