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As economic headwinds, price increases and geopolitical instability have become normalized, it is little wonder that consumers and the Consumer Packaged Goods (CPG) companies that serve them want to reduce costs to weather the storm. This highlights a need for cost reduction programs that streamline operating models to build organizational resilience.
But today, consumer companies have to consider additional variables before they can streamline their business. The EY 2023 CEO Outlook Survey of 1,200 CEOs found that consumer products and retail leaders cited digital disruption (75%) and new technologies are creating competing priorities, and sustainability and climate change risk are rising (76%) alongside regulatory scrutiny (77%) and geopolitical complexity (74%).
This creates a prioritization dilemma and the possibility of organizational fatigue as companies find themselves overwhelmed by trying to manage everything, everywhere, all at once. Companies that have spent years building agility are now looking to cut back to build resilience. While it is possible to strike a balance between the two, cutting too deeply today could come at the expense of relevance tomorrow.
How to create value in an evolving business environment
Executives who can strike a balance between long and short-term thinking are able to make better decisions and create effective strategies.
Before you start, it’s always good to know your destination. Identifying where you might be over or under spending compared to others can immediately cut through the complexity of managing competing priorities and provide a viable roadmap for informed cost optimization. Every company, based on its own strategic outlook, and the relative investment of its peers, will decide where to invest or cut back based on standard, tangible KPIs that they can measure and track.
Identifying these cost and process KPIs and then benchmarking them allows companies to focus on relevant cutbacks that are used to navigate business complexities, make informed decisions, and track the value realized. Such a benchmarking exercise can also help identify additional growth opportunities that can be funded from the cost-saving exercise.
However, we often find organizations focus on extremely short-term gains by using tactical KPIs in their cost management program without considering their strategic value and understanding their cost base compared to other peers.
For example, the EY 2023 CEO Outlook study highlighted that 92% of the consumer company leaders surveyed plan to adapt workforce related initiatives to address economic challenges. These actions include reducing training and development budgets (43%), restructuring, or reducing the employee base (39%) and shifting toward more contract work (35%). Short-term solutions can easily be found in workforce management. However, taking cost out of your workforce without understanding where and how your peers may be acting could lower your ability to deliver on your strategic priorities. This is especially problematic when economic cycles shift, and workforces are too thinly spread to help drive growth.
Following a route that explores cost in the context of your peers will enable some early or quicker wins and get you started on your transformation journey. But the pace of change in the consumer industry means that cost-cutting in isolation runs a risk of future obsolescence. Companies that make cutbacks in response to disruption may find themselves building resiliency today at the expense of agility tomorrow.
Cost optimization initiatives are often cyclical and market-driven, rather than structural changes for sustained cost savings. To address this, organizations need to review their inherent structures, processes and overheads. We analyzed the approach of several leading organizations and discovered that they have kept pace with disruption while pivoting to evolving consumer demands, technological disruption, regulatory and societal shifts by shaping plausible future scenarios based on emerging trends.
Examples from companies taking these actions include developing digital supply chains to simplify the end-to-end process, as well as building flexible sourcing strategies to drive down procurement costs and deliver manufacturing agility. Other examples such as hyper-automation, applying artificial intelligence (AI) and analytics, and focusing on personalized experiences for consumers and talent, are all driving fundamental cost savings.
Successful organizations always try to align their strategies, even cost reduction programs, to support their long-term vision. This involves understanding your organizational DNA, the traits that your business has today and what you need to thrive tomorrow.
Benchmarking against industry peers is a crucial step in identifying savings opportunities, but even among closely defined industry peer groups, the factors that define current and future success of an enterprise can differ. A soft drinks company focused on delivering affordability may have very different organizational traits to a similar company that focuses on speed and convenience, or one that focuses on personalization and experience. All will operate in the same categories but will apply different measures to deliver success.
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Read moreTraits also emerge during different stages of the macroeconomic cycle, in response to geopolitical disruption, or because of short-term shifts in consumer behavior. These traits are not mutually exclusive or collectively exhaustive, but the degree of integration defines how their strategic priorities will evolve. For example, companies may exhibit a combination of traits such as being fast to adopt new market conditions, ability to manage their brand portfolio or constantly simplifying their business processes.
These organizational traits all combine to effectively become your DNA, and they heavily influence the type of strategies and operating models that can be successful today and in the future. Many organizational traits, such as driving innovation or focusing on speed and efficiency, are baked into the culture of a company from the outset. Other organizational traits will be framed by structural shifts such as an emerging technology or new product regulations.
Based on our experience supporting many complex organizational transformations, and extensive proprietary research, EY-Parthenon teams have developed a range of operating model archetypes that can help guide future organization strategies.
No two organizations will face identical challenges, and each will design a unique operating model around their own priorities, which includes guiding principles, critical choices and strategic investment decisions. However, although every company operating model is different, by understanding the traits needed to succeed, companies can build out their target operating model by considering the right blend of organizational archetypes.
Within the consumer market, our ongoing research has identified several initial operating model archetypes.
Seeking to align a company operating model to a single archetype would be both impossible and undesirable, since prioritizing just one area of focus would exclude opportunities provided elsewhere. Although our research highlights a few organizations that come close to some of these archetypes, none of them would truly be cast as a single archetype. Equally, while every archetype has traits that all companies may aspire to, an operating model that fully reflected all the archetypes would be even more difficult and unwieldy to achieve since some archetypes may reflect contrasting or conflicting traits.
Instead, organizations need to understand their strategy, explore their ambition, and identify how to blend the distinctive traits of these archetypes into their future operating models. By mapping their traits to different archetypes companies can develop an operating model that reflects the right hybrid of archetypes for their needs. This will form their direction for transformation – a strategic vision of what they want to become and how they need to get there.
As companies look to implement cost-saving measures, they should resist the temptation to cut for the sake of cutting, but failing to recognize the economic realities in front of us runs a greater short-term risk to profitability. Companies can follow three phases in their efforts to balance cost with growth:
These may seem like common-sense steps, and in many ways they are. But sitting beneath them are a growing number of complex tools that companies can leverage to balance cost reduction with a growth agenda. These include access to a far broader array of benchmarkable metrics and underlying datasets than ever before, which can guide strategic decision-making with precision. Supporting these are fast-growing technologies such as generative AI (GenAI) that have clear and compelling use cases for scaling the delivery of better outcomes at cheaper prices.
In an environment where margins are constantly under pressure, applying these tools can enable targeted cuts to restore balance and help leaders to build resilience today without sacrificing relevance tomorrow.
Special thanks to the following individuals who contributed greatly to the development of this article: Bernardo Mas, Senior Manager, EY Parthenon, Ernst & Young US LLP and Sabrina Hassanin, Assistant Director, Ernst & Young AG.
Cost cutting is a necessary part of any business cycle and companies can often make quick operational savings by benchmarking spending against that of their peers. But in a “disruption as normal” landscape, companies should outline their future operating model needs to enable the strategic cuts and investments that will support resiliency today and relevancy tomorrow.
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