Worldwide, companies in developed and emerging economies are facing significant challenges.
These include the economic slowdown, regulatory pressures, structural cost problems, and the inability to make strategic decisions.
Many companies are battling to jump-start flattening revenues and deliver higher returns to investors. In order to do so they need to focus on managing costs rigorously as they concentrate on growing revenues.
But often there is a common and potentially dangerous flaw in how many executives think about their company’s costs: Many spend their resources on the wrong things or cut expenses on the wrong things for the wrong reasons. This is according to Jorge Camarate, Strategy& partner and partner in PwC’s financial services division.
According to PwC’s recent research of more than 500 executives globally across a broad spectrum of industries, CEOs say their companies are not ready to deal with instability. A vast majority of CEOs globally (83%) say their strategy is not well understood across the entire organisation, and 81% say the way in which management allocates its resources is not driven by strategic objectives.
“The best companies tend to outperform their competitors because their strategies are clear and well-articulated”
Commenting ahead of next week’s World Economic Forum on Africa where Africa’s business leaders and governments will gather to debate issues such as economic uncertainty, the utilisation of skills and job creation, Camarate says only the fittest companies will survive in the current climate.
According to Strategy& and PwC’s research, companies become fit for growth by doing three things consistently and continuously:
1. They focus on a few differentiating capabilities – what they do better than any other company;
2. They align their cost structure to these capabilities – they take proactive and strategic cost decisions; and
3. They organise their businesses for growth.
The best companies tend to outperform their competitors because their strategies are clear and well-articulated. Their most important capabilities are highly advanced and lead their industries.
However, very few companies are well positioned for sustainable growth – the rest are struggling to find their way. Instead senior executives are plagued by a number of problems. These arise from three main causes which tend to reinforce each other: a lack of clarity around the company’s strategy, a lack of organisational support, and cost misalignment.
“If a company’s cost structure is not aligned to its strategy, its leaders tend to base their spending on initiatives that do not have a clear link with growth or profitability,” Camarate adds.
One can spot these companies because of symptoms like high staffing levels and attrition, as well as low productivity and investment returns.
In addition, if a company is not organised for growth, inefficiencies can arise and decision-making becomes uncertain.
In the current economic climate, business leaders cannot afford to let their organisations get or stay out of shape. They need to focus on what they do best and align the cost structure.
“Companies that manage their cost structure in this way will be able to make the right choices in the long-term. Effectively, they will be able to close the gap between strategy and execution. The rewards will be immense,” concludes Camarate.