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Cost competitiveness: from complexity to confidence - EY - Global

Growing Beyond: how high performers are competing for growth
in difficult timesCost competitiveness: from complexity to confidence

Sustainable growth
is now the ultimate goal for many,
and this requires focus on all cost
and revenue drivers.

Our survey revealed that top-performing companies are building flexibility into all aspects of their business to achieve the cost competitiveness they need. This requires a holistic approach to pricing, costs, cash and capital that covers both the organization itself and its wider supply chain.

Having the lowest costs is not a guarantee of market success. We see cost competitiveness as a level of operation that allows an organization to go on winning sales at a price that generates a sufficient level of return both for stakeholders and for the investment needs of the business.

We position this in contrast to those who believe that cutting costs in isolation is a strategic or sustainable practice: cutting costs is more often a sign of management failure than success.

The challenge moving forward is turning cost cutting into cost competitiveness.

Setting the right goals
Achieving cost competitiveness requires, as a starting point, explicit management intent. We asked respondents what was their most important financial objective:

  • Almost twice the level of high performers recognized the need for both revenue and profit growth, relative to low performers
  • Three times the number of low performers focus exclusively on profit, relative to high performers
  • Twice the number of low performers focus just on revenue

Winning market share through dropping price is only sustainable if the cost structure can sustain this. As we have argued before, the old maxim that “loss leaders lead to losses” is only true when the organization is unable to capture the longer-term benefits for which the loss was incurred.

On price:

High performers seek a deeper understanding of where value is created …
The consideration of cost competitiveness starts in the market with pricing. While it is true that, in economic theory, price is set by the market, it is equally true that, in the real world, this is a dynamic dialogue affected by many variables.

High performers are proactive in seeking to shape this dialogue – certainly away from price being treated in isolation.

In our recent research, we asked how companies had changed their approach to pricing:

Changes in pricing strategy to drive customer acquisition

There is a broad focus on seeking deeper understanding of where value is created for the end user.

High performers place significantly more emphasis on understanding competitors’ pricing. Not only does this set a general business environment, but it determines both when there is a short-term opportunity and also a more sustainable threat from a competitor.

... and put a stronger focus on premium pricing
Pricing is an increasingly complex process. In the research, high performers told us how granular the issue has become – one company even talked about their supplier using “flight by hour” pricing. At the other extreme, there is a tendency of lower performers to try to standardize for economies of scale.

To get pricing right, the company must identify the actual costs involved in supplying the service or product – right across the enterprise.

On cost:

Sustainable reductions come from process change
Efficiency is important – no one wants waste – but not all spending is bad. Budgets can be too low, and resources too meager to meet the demands of the market.

Lower performers were much more likely to be reducing costs in their main production line, reducing headcount or deferring R&D. In contrast, high performers are continuing to push forward. They are:

  • Four and a half times more likely to have off shored than lower performers
  • Twice as likely to have outsourced
  • Five times more focused on staff productivity and innovation

A majority intend funding growth through cash generation
An improved working capital position can free up cash, lower the costs of funding, improve flexibility and lead to improved margins.

Our research identifies that the majority of companies still intend to fund their growth through their cash reserves.

Affect of economic and market volatility on cost of capital in 2011

Our recent research revealed that some 66% of high performers are looking at M&A as an opportunity to take advantage of the current market, while only 15% of low performers are equally focused.

High performers are finding the cost of capital marginally lower than low performers, but they are finding access to capital markedly easier.

Tax matters
Tax can comprise a significant element of a firm’s costs. High performers are significantly ahead of others as a result of having optimized transfer pricing, reviewed intercompany lending structures and reassessed corporate and enterprise locations.

For further information on this subject, see Cost competitiveness: investing to secure advantage

Topics covered include how to turn cost cutting into cost competitiveness

  • Pricing – focus on flexible pricing; setting prices strategically; understanding the true value of customers
  • Costs – sustainable, competitive cost reduction; the role of outsourcing
  • Cash – optimizing working capital; the role of the supply chain; cash flow risk management
  • Capital – gaining greater flexibility; transactions, M&A; restructuring
  • The global perspective – capital markets; taxation issues
  • The role of the CFO

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