BOOZ & COMPANY Fit for Growth Study finds strategic approach to cost management is key

Leading global management consulting firm Booz & Company recently announced the results of the 2013 Fit for Growth* Index study, which finds sustainable company performance is driven by the extent to which corporations are able to link their strategic and cost and resources agendas.

“Since the 2008 economic crisis, when many firms had to slash costs and resources in a rush, executives have been increasingly pressured to determine how to best reposition their companies for growth and economic recovery. Many companies are sitting on healthy balance sheets, but few are really clear about how to make the most of their resources,” said Vinay Couto, Booz & Company senior partner and coauthor of the study.

“Booz & Company’s Fit for Growth approach is a proven way forward for companies that want to more efficiently utilize their resources to grow stronger” said Dr. Walid Fayad, Booz & Company partner.

 “The Fit for Growth Index measures how well a company connects its cost and resources and growth agendas by assessing companies in three key areas: strategic clarity and coherence with a clear and aligned set of capabilities; aligned resource base and cost structure; and supportive organization,” Fayad added.

In an interview with Capital Business, Fayad and Manish Mahajan, Booz & Company Principal explained that the survey sample comprised of 197 publicly listed companies across 17 industries globally. Companies were chosen to yield a balanced sample of high, low, and moderate financial performers in each industry, based on their total shareholder returns over a two-year period (November 2010 – November 2012).

“To supplement our own knowledge of the companies, we examined information from research databases, analysts’ reports, earnings call transcripts, and business periodicals so that we had as much information as possible to assess a company’s performance in each Fit for Growth* dimension,” Mahajan explained.

To measure the connection to corporate performance, Booz & Company determined the Fit for Growth Index score for each company and analyzed the correlation with the company’s total shareholder returns (TSR) over a 2 year period. They found a strong correlation between shareholder returns and Index scores – 73 percent of companies with high Index scores had high or medium-high TSR scores and companies scoring lower on the index had lower TSR scores.

“Once we had established the link between index scores and market returns, the next logical question became: What specific elements, if any, in the index framework best explain strong performance? This led to the development of company archetypes which was well supported by the data we had for the Fit for Growth Index scores for each company,” Fayad said.

Based on the Fit for Growth Index scores of the 197 companies, 6 percent had the highest scores and were classified as “Ready for Growth” companies; they were followed by another 11 percent of the companies which were classified as “In the Game” and a further. Companies with those two archetypes, amounting to 17 percent of the total, are the best equipped for expansion and most well positioned for growth.

Key Findings

  • There is a clear correlation between a company’s Fit for Growth Index score and its market performance. Companies that focus on the three key elements of strategic clarity and coherence, resource alignment, and supportive organization generate higher shareholder returns.
  • Although the steps may seem clear and the positive impact is obvious, less than one-fifth of the companies (17 percent) are well positioned to grow. Only a small subset of those (6 percent of the total) perform well along all three dimensions of the Fit for Growth Index.
  • Companies fall into five broad “archetypes,” each with its own characteristics and challenges. The study identifies a specific set of recommendations for companies in each archetype.
  • Companies with the highest Fit for Growth Index score tightly link their strategic and cost and resources’ agendas while building supportive organizations. They clearly understand which capabilities are truly critical for winning with their strategy, and they funnel the bulk of their resources to those differentiating capabilities. Finally, they strive to build supportive organizations so that the collective actions of their people align more closely to their strategy.

“Having worked with many leading companies across a variety of industries, we have the unique opportunity to gain insights into what winning organizations do to return to sustainable high performance,” said Mahajan. “The Fit for Growth Index provides a measurable, quantifiable metric that assesses the benefits of how a company can build competitive muscle while cutting the corporate fat that weighs the company down.”

Linking Strategy, Cost, and Resources

“Since the 2008 economic crisis, many companies have been trying to figure out the best way to reposition themselves for growth and economic recovery,” Fayad explained.  “At Booz & Company, working with many leading businesses across of industries, we gained deep insights into what winning organizations do to return to sustainable high performance.  It’s a combination of three things:”

  • First, they create clarity and coherence in their strategy—being clear about how they’re adding value and articulating the differentiating capabilities they need to win in the marketplace.
  •  Second, they put in place an optimized cost structure and approach to capital allocation—continuously investing in the capabilities critical to success, while proactively cutting costs in less critical areas to fund these investments.
  • Third, they build supportive organizations—redesigning structures, incentives, decision rights, information flows, skill sets, and other organizational and cultural elements so the collective actions of their people align more closely with their strategy.

“Such a Fit for Growth approach builds competitive muscle while cutting the corporate fat that weighs a company down,” Fayad said. “Companies that follow this approach take proactive and strategic cost actions (as opposed to reactive and tactical ones), freeing up funds to reinvest in those parts of the business that are most important for growth.”

MENA companies fit for growth

“Cost or resource alignment is a critical element of a company being able to achieve its strategic growth objectives. High performance companies tightly link their growth and cost agendas,” Fayad said when speaking to Capital Business.

“They clearly understand which capabilities are truly critical for winning with their strategy, and they funnel the bulk of their resources to those differentiating capabilities. When cutting costs, or realigning resources, the most important aspects to look at are that companies employ a disciplined process; have a clear and objective investment criteria that prevents department rivalries from interfering, and manage spending strategically,” he said.

In the MENA region, common themes have emerged signifying critical areas for companies to grow.

“companies are excited and projecting high growth over the next 15-20 years but are also aware of a global reduction of available investment resources and want to invest wisely in their growth strategies,” Mahajan explained.

“We really think this is the dawn of a high growth era in MENA and are excited to partner with our clients in achieving their goals. With Fit for Growth, we really see the genesis of a platform that helps companies understand themselves and their strategies in a different light and helps us connect with them in an even more meaningful way,” Mahajan added.

“The Middle East has recovered from the global economic downturn better than most other regions. We are now seeing companies in most of the sectors we deal with poised to unleash aggressive and ambitious growth plans covering the next decade or so,” Fayad said. “At the same time, there are lessons to be learned from the slowdown - companies should have the right resources - human and financial capital and their costs - well aligned to their strategies in order to maintain sustainable growth in the long term.”

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