Profitability 2.0: A bigger vision than cost-cutting
Is your company as profitable as it could be? If not, it might be time to abandon conventional wisdom and do things differently.
Profitability 2.0 A bigger vision than cost-cutting
Mark Strom Operations Leader US Product & Services Industries (949) 437 5438 [email protected] Rich Stovsky US Leader Private Company Services (216) 875-3111 [email protected] Susan Kantor Advisory Liaison Partner for Private Company Services (617) 530-5446 [email protected] Glen Goldbach Director US Product & Services Industries (412) 355-7533 [email protected]
Is your company as profitable as it could be? If not, it might be time to abandon conventional wisdom and do things differently. Profitability pressures are relentless. Meanwhile, ongoing economic challenges in the post-recession landscape have prompted most companies to seek further ways to trim their operating costs: A tall order for businesses that thought they had done all they could to improve their cost structures and margins over the past several years. At the same time, businesses are intent on growth. Reconciling the need to trim with the need to grow entails working through a much more complex, multidimensional set of considerations than in the past. What we at PwC call “Profitability 2.0” requires a comprehensive analysis of these considerations. They include customer demand and segmentation, labor costs, talent availability, technology, transportation and energy costs, regulatory and tax regimes, and even foreign exchange rates. How can all those business components be aligned to improve the bottom line? The way to start is by looking anew at every operational expense in light of these components and across a long-term planning horizon. Companies that do this are likely to conclude that although costcontainment remains vital, cost-cutting by itself may in fact undermine profitability at times rather than boost it. Spending more in one area may drive down unnecessary expenditures in other areas. Likewise, reconfiguring a product portfolio or supply chain could improve profitability more than across-the-board cuts would. In the process, a company’s business model may change, potentially introducing new business risks, which a company should bear in mind when conducting its overall profitability analysis.
The ultimate goal? Higher customer value and lower costs, achieved in a way that not only delivers near-term benefits but also is sustainable. The following suite of infographics looks at what private companies have been thinking and doing lately where profitability is concerned. What’s your company doing?
Is cost-cutting enough?
Roughly one-third of private companies flag p rofitability challenges and decreasing margins a s major barriers to growth. It’s not surprising then that threequarters of private companies say cost containment is among their top three priorities. But cost-cutting will get companies only so far.
What CEOs are saying*
Profitability challenges are a growth barrier Cost containment is a top priority
1/3 of private-company
CEOs say this is a growth barrier
3/4 of private-company
EOs say this is among their C top three priorities
For cost containment to be sustainable, companies will have to find innovative ways of doing more with less, streamline unnecessary complexity, and respond nimbly to rapidly changing markets, technologies, and global cost structures.
* Trendsetter Barometer, PwC, 2013
Next wave of cost containment
Companies are looking at more than just driving down expenses
Top cost-containment goals
Where companies are focusing most*
Increasing cash flow
Decreasing operational spending Improving productivity
Doing more with less via innovative use of technology
Making the company more nimble * Trendsetter Barometer, PwC, 2013 Percentages in the graph denote private companies that ranked these costcontainment goals as “very important.” Multiple responses were allowed. Freeing up resources to focus on growth activities
Is your company pulling the right levers?
Companies can pull many different levers to improve profitability.
Increased sales volume Improved pricing Reduced costs Tax efficiency Reduced complexity Businesses often zero in on the cost lever instead of looking at the big picture.
Rarely is pulling one lever enough for sustainable results. Profitability 2.0 involves a comprehensive analysis of multiple, overlapping dynamics. They include customer demand, talent availability, labor costs, product/service innovations, technology, energy costs (including transportation), and tax regimes. To improve its bottom line substantially, a company will need to align these dynamics better, taking a fresh look at every operational expense in light of them. The resultant conclusions might surprise businesses, causing them to rethink conventional wisdom.
Tax regimes Procurement
Companies that focus on reducing operational complexity expect higher revenue growth
Businesses taking a bird’s-eye view of their operations find that concentrating on ways to reduce complexity makes better sense than a single-minded focus on selected cost budgets. B ut such businesses are in the minority. They’re also growing at a faster clip than their peers.
What CEOs are prioritizing*
17% are prioritizing
complexity reduction Firms’ projected 12-month revenue growth
58% are prioritizing
Firms prioritizing complexity reduction
Firms prioritizing cost reduction Revenue growth Priority focus
* Trendsetter Barometer, PwC, 2013: In this survey of US private companies, 17% of respondents ranked complexity management as a highly important supply-chain improvement, whereas 58% gave that ranking to supply-chain cost reduction. For more on profitability and o perations (including supply chain), please visit our website.
Rethinking your profitability strategy
How a new approach paid off for one company
Companies often assess procurement, production, distribution, and other operational areas separately rather than linking them together in the value chain to achieve greater profitability. And more often than not, the focus is on cost-cutting rather than on how to do things differently. One baked-goods company seeking to increaseits profitability went against the grain. Instead of zeroing in on ways it could reduce individual costs, the company chose to focus on increasing value and reducing complexity in its overall operations.
Here’s what the company did:
Switched to a more-expensive flour with a longer shelf life, reducing waste and flour reorders Used just one type of high-end flour in the b aked goods rather than a blend of three different flours, streamlining the number of suppliers Simplified distribution by limiting the shapes and sizes of the baked-goods boxes to several styles, differentiating the products with wrappers instead The end result? Greater profitability.
Customers liked the revamped products better. Sales increased as a result, while the overall cost of goods sold went down.
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