Do you put your money where your strategy is?

Now you can.

Today, UK businesses across all industries are facing an unprecedented array of challenges – from political and economic uncertainty to ongoing digital disruption, from intensifying regulatory pressures to rising customer expectations. Against this background, business leaders are under growing pressure to deliver profitable growth. The most critical question is “how?”.

The UK findings from PwC’s 21st Annual Global CEO Survey provides some pointers to answering this question. Some 58% of the UK business leaders we interviewed say they’re under increased pressure to deliver business results – meaning growth and profitability – within shorter timelines. When asked what activities they’re planning to help accelerate their growth, their top two responses are organic growth (87%) and cost reduction (67%). Significantly, the proportion of UK businesses planning cost reduction initiatives has leapt by more than one-fifth (from 55% the previous year).

However, other PwC research among businesses globally reveals profound misgivings about whether businesses can really cut costs without damaging their longer-term growth prospects. For example, only 23% of respondents to Strategy&’s worldwide Fit for Growth Index are strongly confident in their company’s ability to make the right choices on difficult “where to play” decisions. Another 51% say they’re only moderately confident, admitting that their track record is blemished by several poor decisions.

Our global research confirms that companies that adopt this approach generate substantially higher revenues and returns.

All of this begs the question of how business leaders can simultaneously cut costs and drive organic growth, if they aren’t clear on where they should redirect their investments. So, what’s causing this problem? Essentially, while companies want to reduce costs and generate organic growth, our research and daily experience suggest that many of them lack the insights needed to make the right decisions both on where to invest in their capabilities, and where to cut costs.

Other Strategy& research findings provide further supporting evidence. Asked to estimate the degree to which the initiatives and major projects they’re working on are aligned with their organisation’s strategy, only just over one-third of companies globally – 37% – say they’re “strongly aligned”.  The implication is that businesses are failing to target their investment in the key capabilities that enable their business to execute its strategy. Put simply, they need to find a way to put their money where their strategy is.

Strategy& has developed a framework called Fit for Growth that helps companies do this. It’s a strategic approach to cost management that connects and aligns a company’s choices about costs, its investment in capabilities, and its own organisational and cultural evolution. Our global research confirms that companies that adopt this approach generate substantially higher revenues and returns.

Figure 1 uses our Fit for Growth Index to compare the performance of four categories of business. The ‘ready for growth’ group have succeeded in aligning their costs and strategy – and are reaping the rewards, accelerating away from their counterparts that are hampered by capability constraints or are distracted by other priorities. The worst performers are ‘strategically adrift’, with a strategy that’s not fit for purpose – or for growth.

Figure 1: Fit for Growth companies generate higher returns

Our research suggests only 15% of businesses worldwide currently meet the criteria to qualify as fit for growth. So, how can UK companies join this select grouping?

We’ve identified four steps that will enable them to do this:

First, understand and focus on capabilities which are required to deliver the company’s strategy – to understand which of the business’s capabilities are truly distinctive and will underpin its future growth. 

Second, align the cost structure with these capability requirements – by protecting “good costs” and pruning “bad costs” while investing in the winning capabilities.

Third, reorganise for growth – hard-wiring the alignment between costs and strategy by building an organisation that can sustain cost reductions while also enabling and empowering managers to drive growth.

Finally, enable change and cultural evolution – putting the organisation’s culture to work, to foster a workforce that’s ready, willing, able and committed to change.

In a world where many UK business leaders are finding that short-term pressures are conflicting with long-term goals, Fit for Growth – implemented through the four steps just described – provides a way to reconcile the two.

It's time to rebuild the connection between strategy and cost control, and reenergise your growth.

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