The evolution of business dynamics has never been linear, but it's safe to say that businesses today are operating in the most fragmented, complex and challenging times.
Most businesses are facing multiple pressures simultaneously on their existing cost models, resulting in difficult operating conditions. External forces and trends range from inflation, market volatilities and supply chain disruptions amid a greater push towards sustainability and digitisation.
We now see signs in Thailand of the phenomenon known as The Great Resignation, which has been sweeping across the Americas and Europe as more people leave their jobs in the wake of the Covid-19 pandemic. Thailand is also facing widespread losses of migrant workers who left during lockdowns and aren't returning.
These disruptive forces can be grouped into three main themes -- rising economic nationalism, the digital integration of the world's people and businesses, and changing societal demands -- which we explored in our book, Beyond Great: Nine Strategies for Thriving in an Era of Social Tension, Economic Nationalism, and Technological Revolution.
The central proposition here is that enterprises can no longer settle for greatness and must go beyond great to embrace new levers of competitive advantage, especially as economies rebound.
Despite Thailand's positive growth trajectory, building competitive advantage remains a real challenge for many companies, especially small to medium-sized enterprises (SMEs). Many continue to struggle with balancing cost cuts while staying competitive and redirecting costs towards drivers of growth, especially digital adoption.
OUTDATED APPROACHES
Today's disruptive business climate necessitates a sound cost leadership strategy that allows businesses to offer high-quality products and services at lower costs while maintaining strong competitive advantage, healthy bottom lines and sound growth expansion targets. To understand what works, let's first look at what hasn't.
Most traditional cost leadership programmes struggle to deliver sustainable value as they lack strategic focus. This is the result of too many initiatives that don't drive the most impact. Integration of cost levers into operations and budgets is generally poor, and many of these levers are transient to begin with, which escalates costs rather than cutting back.
Most organisations take cost-cutting seriously, but lack a non-programmatic approach, which merely increases complexity in execution. Aggressive targets are set but with low ownership.
There tends to be a disproportionate focus on re-engineering or reimagining as companies push bold initiatives that require strong commitment and determination. Lastly, many of these programmes are not self-funded, which is key to unlocking savings for future investments.
Looking at these reasons, one word jumps out -- outdated. And outdated approaches in building competitive advantage belong in the past.
THREE-PART STRATEGY
Next-generation cost optimisation is all about targeting cost reduction sustainably. This requires a differentiated lens that challenges outdated status quos and paves the way towards re-engineering, busting silos and deploying horizontal levers across a new cost curve.
We're talking about a structural intervention to reimagine end-to-end core processes, embed digitisation within core operations, drive front-to-back re-engineering, adopt new channels and platforms to generate business, and integrate comprehensive offshoring, outsourcing or workforce model change, among others. Here is our three-way approach to "future-proofing" the cost model:
- Zero-basing is the new normal. This is a reverse approach to traditional budget planning and decision making. We've found that businesses are more successful when they re-establish their strategic minimum using a zero-basing methodology. They can then focus on their strategic activities while eliminating discretionary ones. Zero-basing can potentially generate cost savings anywhere between 5% and 15% of the current cost base.
- An operating model that unlocks value. Customising the right service model for target outcomes can unlock long-term value. This is about assessing how operations need to evolve, be it eliminating certain functions, outsourcing, offshoring/nearshoring, creating centres of excellence, streamlining, automating, and so on. Guiding principles and trade-offs for operating model changes should be defined up-front and can generate potential savings between 10% and 20%.
- Levers that drive process efficiency outcomes. To enhance efficiencies, it's important to overlay the right business, operational and organisational efficiency levers within each function. This may range from incorporating lean process optimisation levers, re-engineering/reimagining, automation, analytics-enabled processes, and organisational simplification among others. Potential savings from process efficiencies can range between 5% and 15%.
A solid cost leadership strategy will ensure that the transformation will be self-funded, with initiatives embedded over short, medium and long term.
The first three to six months should be all about quick wins to fund the transformative journey. Here we need to push short-term levers to close performance gaps and fund new growth engines. Requiring very limited funding, this phase can create significant value to fund investments in subsequent stages.
The medium term should focus on establishing a fundamentally different competitive positioning to secure mid-term revenue and earnings growth. While some investments may be needed, these measures should generally be self-funded, and any savings deployed for long-term business growth. From the second year onwards, the organisational culture must have embraced a "transformation" mindset with sustained, visible savings.
Vadim Kosin is managing director and senior partner of Boston Consulting Group in Singapore. Isada Hiranwiwatkul is managing director and senior partner of Boston Consulting Group in Thailand.
