Too much money are being funneled into low-priority initiatives and costs are being slashed indiscriminately, complain executives who responded to a global poll by Strategy&, a member of the PwC network of firms.
The executives also say that budgeting isn’t tightly aligned with strategic planning at their companies. Only less than a quarter of executives (22%) indicated budgeting at their company is aligned with strategic planning.
“Even in relatively good economic times, companies need to be clinical about cutting back on non-priority areas so they’re able to constantly invest in critical capabilities and businesses," says Vinay Couto, Senior Vice President at Strategy&, formerly Booz & Company, and a co-author of the research.
Couto says that investing a little bit in everything is not going to allow companies to grow. But that appears to be what many companies are doing.
“In a competitive environment, if you don’t invest strategically and cut ruthlessly, you’ll lose out in time to a competitor who does,” he added.
Most executives – 66% – said lower-priority initiatives or areas receive more than their fair share of funding.
About the same percentage (65%) said there are substantive businesses, products and/or services in their portfolios that are misaligned with the company’s overall strategy.
Few companies look at cost-cutting through the right lens
The research also shows that too few companies look at cost-cutting through the right lens.
"[Executives] should determine the few things that are critical to supporting the key enterprise-wide capabilities and build excellence there. Everything else can really be just good enough,” Couto said.
Only a quarter of executives said their companies cut costs based on priorities that are set for the whole organization.
Nearly half of executives (48%) said their companies cut costs due to external events or outside pressure, not due to their culture of continuous improvement.
A quarter of executives said their companies “peanut-butter” cost cuts – i.e., they have everyone give up a fixed percentage of spending – rather than reducing spending in a more strategic way.
“Strategic cost-cutting begins with recognizing that you do not need to, and in fact, cannot excel everywhere – only in the few capabilities that truly differentiate your company,” said John Plansky, co-author of the study.
Recommended action plan for leaders
The report also recommened an action plan for leaders. One advice is to conduct a rigorous review of the capabilities needed to achieve and/or keep a leading position in their industry, versus those that are secondary.
Executives should also carry out a dispassionate assessment of where they stand against these capabilities on two fronts: their level of effectiveness, and their relative levels of funding and investment.
Another recommendation is to undertake a periodic zero-basing exercise to scale back in the less-critical areas and to redirect funds from these areas to more critical needs.
The report also suggests a series of targeted organizational interventions to increase speed and quality of decision making throughout the enterprise.