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Becoming Fit for Growth
The Restructuring and Renewal Journey

As competitive and economic pressures mount, we are seeing companies anxiously searching for ways to bolster returns and grow their business. They are looking for breakthroughs to innovate new products and services, enter new markets, or offer more compelling customer value propositions—either organically or through mergers and acquisition.

To capture that increasingly elusive growth, companies need to be Fit for Growth. They need to have gone through the rigorous discipline of identifying the three to six distinguishing strengths (or, as we call them, differentiating capabilities) that give them a “right to win”—the ability to compete more effectively than competitors in the arenas where they choose to do business. Then they need to build their strategy—and hence their cost structure and organization—around that right to win.

As we've noted, this strategic exercise requires hard choices—about what markets to participate in, what products and services to keep or cut, what customers to serve, and what capabilities to invest in or prune. Until companies make those hard choices about the few things they can and should do exceptionally well to thrive in the competitive space they've chosen—and consciously divert resources from everything else—they will not be Fit for Growth.

How do you know if your company is fit or unfit for growth? Our diagnostic is deceptively simple.

  1. Have you identified the differentiating capabilities that drive your growth strategy?
  2. Are your resources—which determine your costs—deployed toward those capabilities?
  3. Is your organization set up to enable and reinforce those capabilities?

A clear capabilities-driven strategy, cost alignment, and an enabling organization are the three pillars of the Fit for Growth model, and we will keep returning to them throughout this book. United they stand, divided you fall.

So, what do you do if your company is missing one or more of these pillars?

What you don't do is what many have done for decades: wait for a crisis before paying attention to a bloated and inefficient cost structure, then enact drastic measures that not only eliminate fat but cut into productive muscle. Familiar options include across-the-board budget cuts, voluntary severance and retirement packages, and the perennial fallback, layoffs. Diet alone (and crash dieting particularly) will not help a company achieve fitness. Exercise—in this case the exercise of deciding where a capability needs to be best in class and where it can be good enough or stripped to the essentials—is integral to getting and staying in shape over the long haul.

A successful Fit for Growth agenda will be embedded in a company's overall strategy and culture and addresses each of the three pillars (see Figure 2.1 ):

  1. Focus on differentiating capabilities
  2. Align the cost structure
  3. Reorganize for growth
Figure depicting a successful Fit for Growth agenda of a company's overall strategy and culture. The three pillars: (1) focus on differentiating capabilities, (2) align the cost structure, and (3) reorganize for growth are depicted.

Figure 2.1

Focus on Differentiating Capabilities

Achieving true cost fitness requires a more strategic perspective on what “cost” is. Costs are an outcome of the choices you make about where to invest your resources. The right way to think about costs is to align them with the strategic growth priorities of your business—those few capabilities that distinguish your company and contribute disproportionately to its success. Those capabilities should be fully funded, whereas other costs—those that are purely discretionary or may be necessary but are not differentiating—should be subject to stricter scrutiny and more intensive pruning. In capabilities-driven cost reduction, companies play clear favorites with finite resources.

The resulting approach is unique for each company, and delivers greater and faster cost takeout with less risk to the business, less chance of costs returning, and a greater likelihood that the company will emerge stronger and better positioned for growth. This approach involves a new way of thinking about capabilities—not as skill sets, core competencies, or individual corporate functions, but as combinations of processes, tools, knowledge, skills, and organization that enable a company to outperform.

A company's key capabilities drive most or all of its worthwhile discretionary costs. They can be counted on one hand, and almost always cross functional boundaries. Consider these examples: Walmart's “sharp-penciled” supply chain management, Southwest Airlines's energetic customer service and asset utilization, and P&G's open-architecture innovation model. These are examples of key capabilities in which these leading companies have consciously invested by directing resources away from less distinctive and differentiating activities.

It's not enough to have a single capability. Success derives from having mastered and institutionalized three to six capabilities, which come together in a distinctive, powerful, and mutually reinforcing way that is almost impossible to replicate. This is what we call a capabilities system .

Apple, for example, excels at more than exquisite product design. Its “secret sauce” is its combined ability to spot a burgeoning consumer need, bring technology to it (even if it's not theirs), make the interface intuitive and elegant, package and promote the result with a sleek simplicity, and, last, deliver it at a competitive price point—making it the default consumer standard. That's its winning capabilities system.

The first step in securing an enduring right to win in any industry is identifying the differentiating capabilities in your system. This will require clarity and consensus on the part of your senior management team. We discuss this strategic exercise in Chapter 4 .

Align the Cost Structure

Developing a lean and deliberate cost structure naturally follows from the work the senior executive team has done to identify the company's key capabilities. In a perfect world, the cost structure builds on the growth priorities that emerge.

Fit for Growth companies manage their costs not only tightly but also thoughtfully; they recognize not all costs are bad. Indeed, costs that strengthen a company's differentiating capabilities are good costs. These companies sometimes may even increase good costs, while rigorously managing the rest of the cost structure. Through tight cost management, Fit for Growth companies increase profits and free up funds to further invest in differentiating capabilities.

There are many ways to ensure your cost structure is appropriately lean and thoughtful. When we support our clients, we often evaluate their costs in light of three questions:

  1. What do we do? Start by analyzing everything you do. If an activity, process, or person furthers a differentiating capability, make sure it is adequately resourced and set up for success. Determine what non-priority capabilities and business segments can be eliminated or scaled back dramatically. Once these are determined, remove as much of the cost associated with them as possible.
  2. Where do we do it? Review where your operations and people are located and explore opportunities to consolidate and gain scale efficiencies or scope economies. Relocate work and people to lower-cost locations. Take advantage of shared services models and consider outsourcing or offshoring.
  3. How (and how well ) do we do it? Streamline inefficiencies in company execution. Review and reengineer business processes to eliminate waste. Exploit and improve automation. Implement strategic sourcing to reduce direct and indirect material expense. Delayer the organization, optimize management spans of control, and ensure pay scales match the complexity of the job performed.

This exercise will quickly illuminate those costs associated with your company's truly differentiating capabilities and those that are not. We categorize these latter costs as “table-stakes” and “lights-on” costs. These are activities that you spend just enough on to stay in the competitive game or to literally keep the lights on in your operations, no more. You may find that some costs are candidates for complete elimination. Figure 2.2 reveals the reallocation of costs and the savings realized by a consumer products company that went through this resource alignment exercise.

Figure depicting the reallocation of costs and the savings realized by a consumer products company.

Figure 2.2

You need to be thoughtful and deliberate in taking out costs, to avoid cutting into productive muscle. You want to change the way the company operates, redesign the business processes, and redefine how the work gets done so that unnecessary, non-differentiating costs go out and stay out.

You will find that systematically and objectively evaluating your cost structure releases dramatic savings, not only directly improving the bottom line, but also releasing cash for potential investment back into your critical capabilities and ultimately fueling growth.

Of course, companies do not always have the mechanisms in place to systematically and incrementally adjust their cost structure. They find their backs pressed to the wall—under short-term pressure to cut costs dramatically and rapidly, perhaps as a response to recessionary pressures or declining overall profitability, or to accommodate a new strategy. In such situations, a company has to design and enact a large-scale cost transformation program in short order. It must put everything on the table and review all costs dispassionately: given our strategy and capabilities agenda, what must we absolutely do, and what is the best way of doing all that we do?

In Part II of this book, we will cover in greater detail the assessment of a company's cost structure and the various levers you can pull to optimize it.

Reorganize for Growth

A company's organization can either make or break a Fit for Growth transformation—or any transformation or major initiative, for that matter. In the context of a Fit for Growth transformation, a well-designed organization model enables fitness and growth in two ways: by enabling and sustaining cost reductions (which can then be redeployed as investments in differentiating capabilities) and by creating the right conditions for managers to drive growth.

In the first way, the well-designed organization model unleashes a number of cost reduction levers. In most large organizations, long-standing relationships have developed in an ad hoc fashion among the central core, the local business units, and the shared pools of resources that provide, for example, human resources and IT services. Local leaders may have too much power over functional activities (thus duplicating one another's efforts and promoting inconsistencies), or the central hub may be too controlling (which generates unnecessary work).

The solution typically involves redesigning the company to create more appropriate structures and spans of control. This may mean having more people report to each manager and reducing the number of hierarchical layers. Pay scales may be rationalized so that compensation matches the complexity of the job performed, or the company may take more deliberate approaches to sharing resources and outsourcing less-critical processes. When these measures are consistent and broadly understood, they are typically supported by people throughout the company.

In the second way, a well-designed organization model can fuel dramatic growth by empowering managers to act like owners of the business. The managers are given explicit financial and operational targets, along with clear decision rights that spell out what they can and cannot do by themselves to reach those targets. They are also given greater control over the resources assigned to them, and they can deploy these resources more flexibly. With incentives (like bonuses and promotions) aligned accordingly, business unit leaders align with the company's broader objectives in both the long term and the short term, and become accountable for results.

This tightly linked chain of empowerment, accountability, decision rights, and incentives allows the company to make decisions as close to the front lines as possible. Managers can capture opportunities in the market, while the corporate core focuses on building and maintaining the capabilities that all the business units share, and on driving the company's overall strategy and performance. Managers respond to opportunities quickly, collaborate across organizational boundaries seamlessly, make decisions resolutely, and execute effectively. Executives spend less time fighting political turf wars and more time thinking about their customers and competitors. Last, costs naturally decline, and the potential for growth improves, because the organization reinforces the practices developed through cost optimization.

Key to effectively executing any strategy is redesigning and aligning the organization with the articulated strategy. In our experience, there are four elements to consider when redesigning an organization.

1. The Operating Model

Before you embark on redesigning your organization, you need to sketch out its outlines. What are its natural elements, and how do these elements fit together? In other words, you need an operating model.

In summary, a company's operating model defines what work is performed by what organization units in the company and how these units work together. As you redesign your organization, you need to define these organization units, their roles, and how they interact. To do this, you may need to start from square one: what are your natural business units and how do they face off with customers and compete in the market? Once you define the natural business units, you'll need to carefully consider the role of and interplay among your business units, your corporate headquarters, and your administrative and support functions. For example, do product-based business units own the P&L, or do regions? Should headquarters act as a hands-off holding company, giving business units a lot of room to operate, or be more actively involved in operations? Do functional resources report to corporate or to individual business units? How deep into the organization should our matrix structure permeate? As we will discuss in Chapter 7 , aligning the operating model with the capabilities system and cost structure is an essential step in a Fit for Growth transformation.

2. The Four Building Blocks of Organizational DNA

With the operating model defined, you can then design the organization. We have discovered four standard building blocks that define an organization and ultimately its effectiveness: decision rights, information flows, motivators, and structure. We call these the four building blocks of an organization's DNA.

  1. Decision rights: A critical determinant of organizational performance, decision rights describe decision-making authority and accountability and where they reside in an organization. If decision rights reside at too high a level, the organization bogs down waiting for senior management to sign off on every decision. Conversely, overly decentralized decision rights also lead to inefficiencies and redundancies, as each division invents its own wheel. Unclear decision rights are possibly the worst of all, as decisions are either made everywhere—or nowhere.
  2. Information flows: Properly allocated decision rights are great, but meaningless in the absence of appropriate and accurate information. Failure to furnish such information in a timely manner is a leading contributor to organizational inefficiency and hence higher costs, according to our research.
  3. Motivators: Properly designed and implemented, motivators can be a valuable key to unlocking organizational efficiency. Many companies have failed to capitalize on this opportunity by perpetuating salary and benefit structures that are out of touch with current market practices. Instead of, say, promoting and supporting lateral transfers as a valuable career move, companies continue to overemphasize the “onward and upward” trajectory, which just creates more organizational layers. Moreover, the lack of substantive differentiation in performance bonuses discourages the stars and overcompensates the weak links. Costs rise, but not the cream of the talent pool.
  4. Structure: Structure—the “lines and boxes” on the organizational chart—gets the lion's share of the attention in most restructurings, as the name would suggest. However, our research indicates that structure should be defined last, after the key organization roles and decision rights are defined. Structure-based solutions are still necessary and valuable. Companies should eliminate excessive organizational layers and increase managers' spans of control (i.e., more direct reports) to speed decision making, clarify accountabilities, and remove costs. Executives should reassess their primary and secondary organizational axes to align their cost reduction efforts with their strategic priorities. They should also centralize scattered and fragmented functions where such centralization would increase efficiency without sacrificing effectiveness.

3. Talent

The success of an organization ultimately rises or falls with its people. As you redesign your organization, think through the talent implications, too. For example, what are the critical roles in the organization, and what sort of competencies do you require in these roles to enable the transformation and build differentiating capabilities? Do you home-grow your talent or do you hire from the outside? If you do grow your talent, what methods do you use to develop them (e.g., mentoring, rotations, and development roles)? Do you value deep functional expertise or broad general management and leadership skills?

An organizational restructuring provides the perfect opportunity to refresh the talent in critical roles. This is the right time to take calculated risks to “ventilate the organization” and give stretch opportunities to the rising stars who have been “blocked” by long-tenured but mediocre senior and middle managers. Sometimes such changes are necessary—the old guard may be unwilling or unable to adapt to the new normal.

4. Management Processes

Management processes for developing strategy, prioritizing differentiating capabilities, designing accurate budgets and forecasts, and tracking business performance—all are critical elements of your organization. Are your long-term and short-term planning processes dynamically aligning capital and resources with priority opportunities? Do you have the right forums and debates so that big ideas are funded and the right investment trade-offs are made?

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Getting these four elements in place is critical to laying a strong foundation for growth, but perhaps more important in sustaining the gains of a cost transformation and institutionalizing new behaviors in the organization.

Enable Change and Cultural Evolution

Change on the scale of a Fit for Growth transformation must be grounded in the organization's culture. Those on the front line and in the back office have to embrace and enable the change, and the only way that will happen is if you leverage what works in your company's culture. The Fit for Growth journey is an arduous one and will require many if not most of your people to change not only what they do, but also how they behave day to day. That is a considerable ask, and it will go unanswered unless you put your culture to work.

Any corporate transformation—whether it's to encourage collaboration, unleash innovation, or improve productivity—requires people to alter their methods of working in big ways and small. But a cost restructuring is potentially the most dislocating and treacherous of transformations. You are asking some people to leave the company entirely, others to relinquish staff and perquisites, and still others to step into new roles or relocate to new cities or even countries. To get people to come on board and stay on board with the new normal, you have to enlist your culture—that intangible collection of instinctive, repetitive habits and emotional cues and responses that determine what people feel, think, and believe about their work.

You can't copy a culture. You can't even pin it down easily. So how do you enlist it or, indeed, exert any influence on it? Not easily, we admit. Formal efforts to change a culture or replace it with something new and different inevitably fail because they never reach their target: the hearts and minds of employees.

These initiatives start with a false premise: that you can swap out an established culture with a different one that you prefer. You cannot simply replace a culture like an old machine—if you could, it would not be your culture in the first place! But you can align some of its more useful cogs. Make use of what you cannot change by appealing to the positive elements and emotional forces in your existing culture to align it with the change you want to see happen. You work with and within your culture, rather than fighting it.

So, we recommend that change management campaigns focus on behaviors—the few most critical behaviors. Over time, as you shift these behaviors, they become embedded in the culture and influence mindsets, motivating employees, for example, to spend every dollar as if it was their own. We will discuss how you can influence these few critical behaviors and, by extension, your culture in Chapter 16 .

Continuous Cost-Fitness Renewal

As any out-of-shape person looking to take and keep weight off will tell you, there is no quick or easy fix. The road to fitness requires discipline and perseverance, and often the journey must be undertaken under difficult conditions—earnings pressures, supply chain disruptions, and organizational resistance, to name a few.

As it should, the fitness regimen we recommend starts with strategy—identifying and redeploying resources to those capabilities that give you a right to win in your chosen market—and ends with organization and culture—pulling the levers that will ensure your people and business make the transition and sustain the gains. In between is a programmatic and multifaceted approach to building a lean and thoughtful cost structure that will position your company for long-term growth.

But “starts” and “ends” are misleading terms. The secret to true fitness is continuous improvement. Fit for Growth companies are always honing their capabilities and cost structure so they don't have to undertake large programs every several years. They monitor and adjust their growth priorities and their resource deployment as an ongoing activity to help the company reach its performance aspirations year after year (see “What a Fit for Growth Company Looks Like”).

Being Fit for Growth may seem like an onerous task. But it can also be the beginning of a new virtuous cycle. As resources move from nonessential to critical capabilities, your company can put more capital into growth strategies. The cost side of your ledger will read less like a list of burdens and more like a register of enabling choices, with a direct link between the money you spend and your prowess in the marketplace.