Cost transformation: Lessons learned from previous crises for industrials

Dr. Michael Wagner Partner, Fit for Growth EMEA Leader, Strategy& Germany 08/07/20

For industrial companies, the current COVID-19 crisis could lead to particularly severe economic repercussions. Now that companies have taken care of their people, managed the cash situation and ensured business continuity, cost containment rises to the top of most companies’ executive agenda.

As companies prepare to manage costs, they must ask themselves how aggressively they should cut expenses and what is needed to stabilize the business while maintaining the ability to ramp up production and capture post-crisis opportunities. While this crisis is structurally different from any other we’ve witnessed thus far, it is helpful to consider lessons learned from previous crises that have allowed companies to emerge stronger and with an advantage.

Let us look at the example of a steel and metals producer at the heart of Europe and how it transformed its cost basis to emerge stronger from the 2008 financial crisis. The situation it found itself in resonates with what the industry is facing today. Indeed, demand has plummeted, driven by capacity reductions and production shutdowns in the automotive, aerospace, mechanicals engineering or oil and gas industries. Many steelmakers have reacted by reducing capacities as well as decreasing employees’ working hours.

This is comparable to what we saw a decade ago, when crude steel production in Europe declined by almost 30% in 2009. Like its peers, our example company implemented a group-wide cost restructuring program. But management was certain that demand would eventually come back with a vengeance and therefore decided to not only cut costs but position the company for growth in the post-crisis era. Reflecting on this transformation, here are some of the elements that have made a difference and that can serve as guiding principles for industrial companies today:

  1. Transform your cost structure in light of the post-crisis world: The company took decisive actions to significantly reduce its cost base and to manage spend with suppliers. They avoided cuts that would endanger their competitive position in the midterm but focused on optimizing for a post-crisis world and aimed at making cost structures as flexible as possible. For example, in maintenance, one of the larger cost items, they pooled teams across the value chain, ran an upskilling program and improved their external supplier management. Among many other measures, this allowed the company to save hundreds of millions of euros and at the same time retain their ability to ramp up operations fast when demand picked up again. Additionally, they were not only decisive about where to make cuts, but also where to keep investing, which brings us to the second learning.
  2. Be clear about your strategic differentiators so you build the right muscle that will allow you to emerge stronger: Management realized that there was no better time to reimagine the business and reassess their focus areas than during this crisis. They were convinced, for example, that maximum flexibility and transparency along the entire value chain would be a true advantage in any economic situation. Hence, they evolved their operating model and brought together the large number of previously autonomous operating companies into a much more integrated organization along the value chain. They also invested into their supply chain to enable an end-to-end integration and an improved supply chain steering. These investments into differentiating capabilities helped the company to innovate faster, to optimize volume flows through the network and to consistently deliver above average margins. They funded the investments from cost savings in other areas.
  3. Enable your leadership and engage the organization: Strong leadership was key to accelerating change. The Executive Board mandated a dozen of their strongest leaders from different businesses and functions to shape the cost transformation program as well as their future operating model and setup. It was this core team that owned the design and execution of the strategic transformation. Together with the Executive Board they engaged management, employees and the works council. As in many cases, the purpose of the transformation made the difference: They were clear where to make cuts, where to invest and how to build a stronger company post-crisis.

Today, steelmakers and most other industrial companies – be it from engineering, machinery and equipment, industrial products and services, metals or chemicals – are again facing tough market conditions that will require hard choices.

Companies that transform their cost structure with the right, strategic mindset, that focus on capturing opportunities, and that take a courageous stance to evolve their business and organization, will emerge stronger. They will be better prepared for post-pandemic growth.

Find more of our thinking in our Fit for Growth guide to respond and emerge stronger from the crisis, where we outline comprehensive actions to transform costs and reshape your business for growth.

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Dr. Michael Wagner

Dr. Michael Wagner

Partner, Fit for Growth EMEA Leader, Strategy& Germany