When the global recession took root in recent years, slashing costs was a common response to the dramatic drop in demand. But as companies shift toward strategies focused on growth, they are tasked with the delicate question of how to expand in a time of uneven demand, all while continuing to make intelligent and appropriate reductions in cost to strengthen margins.
According to new research from Accenture, the answer lies in aligning price and costs. By developing a deeper understanding of how different customers perceive value in its offerings, then using this insight to synch cost structure with revenue and value, a company is better positioned to grow profitability.
Greg Cudahy, managing director of Accenture's Operational Strategy practice, recently sat down with Business Finance to discuss how companies can best optimize pricing, why cost-cutting programs are often unsuccessful and how to manage unanticipated economic jolts faster.
Business Finance: Tell us a little about the study and some of the key findings. What took you by surprise?
Greg Cudahy: Well, we went to 1,000 chief financial officers and chief marketing officers across the globe and the real focus was to find out how they are approaching growth and what the balance was of growth versus cost cutting.
We found three things. First of all, everybody thinks their company is going to outperform the industry. That wasn't too surprising. But the fact is that in this very tough economic environment, the average forecast for how they were going to grow was double the economic growth of their domestic economy. So that was a pretty strong level of confidence. But, at the same time, they are very focused on cost-cutting. And that's not how it usually happens when you're in a growth period. What has also become clear to us was this notion of permanent volatility, this general sense that they can't rely on long-term forecasts.
The second important point concerns rising commodity prices. That means that their input costs to serve their customers are going way up. Yet, three-quarters of respondents felt that they were going to be unable to pass along those cost increases to their customer base. They don't believe they're going to be able to grow through price increases. They're going to have to grow through volume.
The third point is that over 80 percent of respondents have launched cost-cutting programs in the last 18 months, which has been a big growth period for them with record earnings. Yet, less than half of them felt that their cost-cutting programs had been successful. So that implies that they're going to continue to keep focusing on cost-cutting but in a surgical precise way that doesn't damage their growth capability. I think that's a real challenge.
BF: Did the global crisis change the way companies are looking at growth and how they look to improve their profitability?
GC: Absolutely. The very clear message is that we are not going back to pre-2008, at least in the minds of CMOs and CFOs, anytime in the near future. This permanent volatility has fundamentally changed the way the large multinationals have to think. They are focusing on the need to be much more adaptive to the marketplace and that's a big change in thinking.
BF: Given this era of volatility, what are you seeing as far as the key growth and profitability levers that companies are going to be relying on?
GC: There's a great deal of focus on organic growth. We saw less focus on acquisitions this time around. In terms of driving that organic growth, two things were featured in particular: a focus on innovation. But interestingly enough, innovation is at a lower price point and usually when you think of innovation, you're the higher price point company if you're the innovator. Now, there's this focus on affordable innovation.
The second thing is a very heavy focus on promotions: really getting down to individual customers or consumers in the case of retailers and understanding their very specific needs and desires and being able to tailor their offerings to those very specific segments both in the product itself but also the price point of the value-added features. That happens to be where we see a lot of them. When they're going to cost cut, they're reinvesting that cash into the notion of promotion and innovation.
BF: Given all that CFOs and CMOs are facing today, where does pricing rank in terms of strategic priorities?
GC: Across the board, regardless of industry and regardless of geography, out of over 20 different options that were put out there for them to consider, pricing ranked in the top three. Usually, you think of pricing as something to focus on when you've got good pricing power in the marketplace. This is a little bit different in that because people don't think they're going to be able to pass through the cost increases to their customer base, they now have to get much more sophisticated and adaptive. That requires a level of sophistication that most companies just have not had in the past.
BF: What challenges do companies face as far as increasing prices to offset their higher costs? It's a delicate balancing act. GC: I think the issue here is that so many companies in past decades have used across the board price increases or decreases. It just doesn't work that way anymore because there's so many different price points and different consumers will want to have a different product offering. This means you can't just focus on price as the only lever. You have to improve the portfolio of products in a very, very surgical fashion, a very precise fashion, but also in a way that changes with products that have life cycles that are decreasing. That's the real challenge. You don't want to lose volume, but you also don't want to increase volume that's not profitable. You have to do that by geography, by product, by customer segment.
BF: What did the study uncover regarding how companies are managing cash today?
GC: Obviously, three years ago everybody was focusing on generating massive amounts of cash. What they were really doing was surviving. Now, they're trying to figure out where to place that cash and how much to keep if we have another downturn. Remember, when companies are saying they are going to on average grow at double the expected GT growth of their local market, that means they can't hoard it anymore. They've got to be very effective, particularly on things like the return on investment of their promotional activities.
There's an old saying that 'Half of my advertising spent is wasted. I just don't know which half.' Today, you actually have to know and you have to start tearing down that wasted cash that is ineffective. And that's where a lot of analytics are coming in today and the ability to execute those analytics.