Navigating the Rising Cost of Business: Part 1

By Rich Daum, CJ Grasso & Cody Rothwell

To navigate the shocks inherent in today's economy and thrive in the market, businesses need to carefully balance pricing action, cost elimination, and productivity improvements. To avoid enhancing one at the expense of the others, corporate leaders must ensure their teams are aligned with the overarching strategy and consistently focused on the right priorities.

How Business Leaders Can Empower Their Existing Teams to Shore Up the Bottom Line

Significant events that impact the economy are rare but having two disruptive events back-to-back—the COVID pandemic and multi-generational high inflation—is truly unique and will challenge business leaders in ways not seen since the late 1970s. Rising material prices, wage pressure, supply chain disruptions, and increasing costs to finance debt do not appear transitory but may last well into the foreseeable future. Add to this the war in Ukraine and tensions in East Asia, and you get the geo-political uncertainties that will force many to rethink their approach to labor, productivity, and supply chain management.

Yet, few leaders today are experienced in navigating complexity and inflation of this magnitude. More than ever, leaders need to ensure their teams and operating processes are aligned for coordinated action and resources are allocated to the most productive initiatives that deliver value to customers and expected returns for shareholders.

To effectively deal with this crisis, management teams across all sectors must balance pricing actions, productivity improvements, and cost reductions to maintain margins and grow earnings. But can this be done effectively without neglecting one factor to solve for the others? Furthermore, given a tight labor market with spiraling wage inflation, can you solve for these problems with your existing team? The answer to both questions can be yes, though leaders must be intentional, and teams must move with a disciplined sense of urgency. In fact, this crisis provides an opportunity for teams that manage the factors successfully to maintain margin growth and outpace slower, less coordinated competitors.

Success in this operating environment depends on teams executing with a shared understanding of the business and its goals. Pricing, productivity, and cost-out decisions made in functional silos will be suboptimal at best and will most likely undermine your overall strategy. Faced with margin pressure, many companies gravitate to a combination of price increases and cost reductions as their first efforts, leaving productivity improvements as secondary considerations. Some argue productivity improvements may create unnecessary costs at the wrong time because they require planning, resources, and significant lag time to realize positive results. However, this view overlooks less costly opportunities to improve enterprise team dynamics that are fundamental to increased productivity and effective business practices.

What can you do now?

Most companies would benefit relatively quickly from improvements that ensure resources are focused on the company’s highest priority strategic initiatives and not diverted to less productive or low-margin activities. To ensure increased productivity and higher margins, business leaders at all levels must undertake efforts now to ensure clarity around enterprise strategy and priorities, effective collaboration, and link current execution to long-term strategy.

In this 3-part series, we’ll discuss each of these areas and provide practical recommendations leaders can take to ensure their teams are focused on the efforts that matter most.


Part 1: Strategy alignment creates clarity around the priorities the business must resource to deliver the bottom line as well as what it should stop doing

When it comes to the company’s resources, management teams are not hindered by a lack of ideas about how and where to approach the market or even which products and services return the highest margins. What they do struggle with is where to draw the line around what the enterprise will invest in and what it will not. Some companies try to “boil the ocean” and compete everywhere, thereby spreading the team and constrained resources thin. Or they struggle to overcome organic, entrenched inertia to stop investing in long-established but decreasing-margin lines. In both cases, hard decisions need to be made to ensure enterprise resources are allocated only to the most productive efforts and to new initiatives that have the highest probability for an acceptable return on investment.

For example, when was the last time your company conducted a comprehensive review of the entire product and services portfolio to scrutinize those with low sales and low margins? The question you should ask is why continue allocating resources to these laggards? Certainly, resources could be allocated to more profitable lines of effort or to new initiatives that show greater potential for higher sales and margins. Granted, there will be cases where low sales and low margin products or services are necessary to maintain a customer base, but those should be deliberate decisions routinely reviewed by a well-coordinated cross-functional team and should be exceptions, not the rule. A diligent enterprise review like this can provide cost elimination opportunities as well as productivity improvements by reallocating your existing team and resources from low return activities to more profitable initiatives.

Another issue is that senior leaders generally assume their teams understand the business strategy and are coordinating their actions when in fact this is not always the case. Misaligned teams are more common than leaders realize and can lead to considerable disruption in execution and confusion with customers. Data from McChrystal Group research of over 2 million data points and more than 65,000 respondents shows that only 35% agreed that teams within their company share the same perspective on how to succeed in their industry. Further, only 50% indicated their company's leadership articulates how their team's goals contribute to the company’s objectives. Misalignment of your teams leads to lost opportunity, lower revenue, and wasted resources, all of which reduce margins.

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How do you avoid the pitfalls of misalignment?

It is critical to ensure customer-facing teams in sales and marketing are aligned with the product and engineering teams and executing the same plan with the same shared objectives. Are pricing actions coordinated cross-functionally inside the enterprise to better understand the impact on the market, both with customers and competitors? What about the impact of cost-out initiatives on customer satisfaction? How will size, weight, or quantity reductions in your product be received by the market? Given today’s operating environment, strategy alignment ensures the teams responsible for pricing actions, productivity efforts, and cost-out initiatives support each other and collectively focus on what the company aims to achieve and what customers want.

A case in point is a Global Investment Bank that was struggling in their Equities Trading business to grow revenue and deliver value for their customers. The issue from the customers’ viewpoint was the sales and product representatives from each of the various business units were pushing their own individual investment products (a singular business unit’s plan) and not listening to what the customers really wanted. Furthermore, sales representatives were not sharing the customers’ requests they were hearing with the other business units and product teams. Customers were frustrated and the Equites business was losing revenue to competitors.

McChrystal Group partnered with the Equities Trading business to align its various business units around an enterprise strategy focused on its “Top 50” customers to ensure they were offering a coordinated portfolio of products tailored for what each of the customers were saying they wanted. After a year of implementation, the Equities Trading business realized a 1300 basis point year over year increase in revenue from the Top 50. There was very little overhead cost to execute the new strategy, and it utilized the existing team so most of the top line improvement dropped through to the bottom line for a sizeable margin increase. Customers clearly noticed the change and were pleased with the value and renewed attention they were receiving, and the Equities Business market share began to improve as well.

Another benefit of aligned teams is that a unified focus on the company’s strategic priorities equips senior leaders through front-line managers to make timely decisions within the broader context of the business strategy. Aligned teams make better decisions and will adapt and shift resources to where they are most productive. These high-performing companies are the ones that will ultimately outpace their competitors and effectively navigate the current operating environment.

In its simplest form, strategy alignment ensures all teams within the organization understand the long-term strategy and are working toward a common set of enterprise objectives and outcomes. From the chief executive to front-line workers, everyone knows the priority efforts the organization must resource and execute to achieve specific measurable objectives. And leaders at all levels actively ensure resources are allocated only to the priorities designed to deliver the objectives and are not diverted to non-productive efforts. This means that deciding what you are not going to do is just as important as what you will do.


Practical steps that CEOs and Executives can do now:

1. Go on a “listening tour” to see and hear from your mid-level leaders and front-line supervisors and ask:

  • What is their understanding of the company’s strategy and the priorities that must be resourced to achieve the intended objectives?
  • How does their team’s work support the company’s overall strategy and priorities?
  • Do their team’s resources match the requirements needed to produce the outcomes the company expects from them?

Note: Don’t be surprised if you get a wide dispersion of answers to these questions. It may indicate senior leaders are not cascading the strategy effectively or that your executive team is not as aligned as you think. Either way, it’s hindering your team’s ability to execute the strategy and optimize resources to deliver results.

2. Ask your business leaders, including the finance team to rank order the company’s product and service lines from most profitable to least. Then ask probing questions about the low end of the list and why we continue to pursue those lines. Do these lines provide the opportunity to take costs out and reallocate resources to more profitable lines?

If you are not satisfied with the results of these steps, you need to work on strategy alignment with the entire team, from the executive level to first-line supervisors, to ensure the company’s resources are focused on the priorities that will deliver the bottom line. Once you have the team aligned around the strategy, you need to ensure your teams are communicating and coordinating their actions effectively to execute the strategy.

Part 2 in our series will discuss cross-team coordination and collaboration and steps you can take to ensure your teams are approaching the market effectively.

Rich Daum

Senior Principal

Rich Daum is a Senior Principal and leads client engagements in the industrial and manufacturing, aerospace, and financial services sectors. He is an expert in strategy formation and translating strategy to action to realize corporate objectives.

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CJ Grasso

Associate

CJ Grasso is an Implementation Associate currently advising a technology company on strategy alignment and overcoming operational challenges.

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Cody Rothwell

Associate

Cody Rothwell is an Implementation Associate, where he leverages his past experiences as an investment analyst to assess organizations, uncover areas for improvement, and implement solutions to address their most pressing challenges.

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