Cost Structuring strategy

Cost Structuring: A Strategy For Efficient Growth

Companies can be affluent by playing in fewer industries, venturing fewer geographical markets, and having simpler product portfolios than peer firms.

Economic downturns are a common phenomenon these days and companies are compelled to make substantial changes to their cost structures. 

Most companies these days have been experiencing a significant rate of growth in costs that is proving to be too difficult to maintain.

With new economic and challenging factors emerging, CFOs must act fast to bring down the costs.

Competitive Factors

The cost structure of companies has been experiencing radical shifts with each passing day as businesses are dependent on technology and innovations. Although Investing in these comes with a price, but it serves the purpose of doing away with processes that otherwise affects the overall spend for companies.

Some of the key factors that decide the fate of current business include:

  • Industry transformation in making way for supplier pricing power and competition.
  • Increase in the prices of inputs, intermediary goods, and freight costs due to tariffs and geopolitical issues.
  • Demand in customised products and services with well-informed sophisticated buyers along with omnichannel purchasing options.
  • Broad adoption of new technologies — e.g., machine learning, industrial, and software robotics — are resetting the base requirements for efficiency.

Growth Efficiency

Few companies categorised as “efficient growth leaders” focus on starting with cost as the initial action rather than growth and later derive the cost performance. Here, CFOs approach growth from a different perspective than peers as it’s challenging to manage cost productivity at times of high-growth conditions.

These companies bank upon three criteria:

  • Long-term revenue growth
  • Long-term cost reduction
  • Short-term revenue and margin expansion

By doing so, they differentiate themselves from competitors and gain an unlikely foothold in the business.

Focused Growth

Efficient growth companies take calculated risks by concentrating on growth in fewer industries.

Processes are set up in such a way that leaders are encouraged to diversify and scout for the next opportunities. CFOs will oversee a series of acquisitions or invest in a completely different area of the value chain to branch out the growth while strengthening the path to expansion.

Companies’ focus is on a limited number of industries and domains where they can continue a high degree of learning, evolve proprietary technology, and make growth investments that maintain and protect their competitive advantage. However, setting out to new territory requires significant investment to stay alive in the competition.

Simplified Product And Service Portfolios

Companies having fewer or simple product lines benefit in capturing the market share and at the same time, spread fixed costs over more units.

A more favourable opportunity is created for the marketing team, finance team and technology function as simpler products require a simple service portfolio.

Creating Dense Customer And Operating Footprints

By narrowing down the costs and operating strategy, the revenue generation is on the higher side.

When companies target the most extensive geographic segment, it allows CFOs to focus on where they can make smart bets on the best geographies while protecting customer relationships.

This allows companies to enjoy an upper hand in making the customer experience as valuable as possible.

Conclusion

By adopting the cost restructuring strategy companies develop a bond with customers who are prevented from searching for switching to competitors. This, in turn, allows CFOs to invest extra time on customers and concentrate on building scale in cost structures rather than scope. Ultimately, companies earn a sizable return on invested capital over competitors.