Executing a strategy revolving around growth and cost cutting is difficult. In this video, McKinsey senior partner Duncan Miller discusses how a structured, holistic approach positions companies to achieve both goals. An edited version of his remarks follows.
When an organization begins to think about undergoing a transformation, it’s critical to balance between growth and cost cutting. Companies that focus disproportionately on margin expansion and performance tend to struggle. On the other side, companies that take a balanced approach across growing the top line while simultaneously expanding their margins thrive and succeed.
But we know this is a tough trick to pull off. Over the last decade, only 15 percent of companies that we’ve evaluated have managed to grow in a sustainable way while expanding their margins.
So, what is the winning formula?
A structured approach can help companies grow while reducing costs. First, they incorporate growth at the beginning of a transformation rather than as an afterthought. A common mistake people make is they rebase the cost of an organization and take that to the bottom line. Reducing all your costs, taking them to the bottom line, and giving them back to shareholders works well in the short term. But in the long term, it can tie your hands.
We’ve established that one of the biggest drivers of outperformance is proper resource allocation. Organizations should focus on allocating operating expenses and capital expenditures to the winning business units, winning initiatives, and areas where there’s headroom in the marketplace.
Another critical driver in achieving growth is employee engagement. Employees won’t be inspired by a goal that’s described as, “We are aiming to reduce cost over the next 12 to 24 months.” By addressing growth at the start of the transformation, you can create an inspirational reinvestment story line instead.
How do we embed growth into a transformation? A company should start with a robust, independent diligence on the business—like an investor looking to acquire an asset. This involves six to ten weeks of hard work, looking at every available growth lever—both the obvious and the not-so-obvious ones.
Obvious growth levers may include improving marketing performance, improving pricing and revenue management, and boosting customer experience. But it’s crucial to look at the less obvious levers, such as ones that fall under the digital landscape. Ask yourself, “How do I start a new digital business? How do I compete effectively with those that are trying to take my market share? How do I expand into products and services that my customers want, as opposed to what I deliver today?”
This approach takes a holistic view of the organization. It allows you to understand the near-term marketing-and-sales performance levers and also the medium- and long-term transformational strategies. In this way, you can reimagine and restage the organization for the next three to five years.