Fit for Growth

Strategy& advises corporate spending focus on differentiating capabilities

Breaking out of stasis is neither easy nor instantaneous. Examples of temporarily suspended existence and reemergence in popular fiction range from space travel to medical miracles. Nobody has ever tried it of course, but in theory it makes sense to suspend a body in some sort of stasis for the duration of an interplanetary flight and revive it upon arrival — at least according to countless movie scripts and Hollywood logic.

Much rarer than a cold sleep sci-fi movie plot is the condemnation and rescue of an entire economy from stasis. Economic stagnation and revival has been associated with a single fairytale trope — Sleeping Beauty — many times since the tale was first committed to paper in 17th century France, and further popularized 100 years later as Dornröschen by the German Brothers Grimm. The falling of a whole kingdom’s economy into a deep sleep is only a collateral effect of the young heroine’s affliction, the solution as simple as a kiss that breaks the curse.

In this magic story, the economy-wide reawakening is portrayed as a seamless return rather than as a slow and gradual process of reanimation. This is indubitably more charming than depicting a struggle through a complicated and lengthy recovery, but leaves unresolved the intriguing matter of how one would actually go about reviving a dormant economy.     

Lebanon’s society and economy has not been comatose in recent years, nor has its government been fully paralyzed. Still, it seems that the economy urgently needs to wake up. This makes it prudent to consider the perils that companies will face from an administration that has been stuck for several years in the closest thing to a freeze imaginable in the warmth of the Beirut sun, while the world around kept moving.

While the first Cabinet debates after the adoption of the new electoral law did not hint at a uniform position on economic policy, signs point to a rise in government activity with regard to budgetary decisions and taxation.  Thus, the question is not whether there are new pressures on the horizon, but merely to what extent these pressures will be caused by new taxation, international economics and interest rate environments, increased energy costs and other factors. 

For local companies, this means that new cost pressures will be compounded with existing pressures on profits, which they have felt from domestic and international markets for the past six or seven years. In parallel, the Lebanese body politic, with all its administrative organs, must — if the functioning of state entities is to improve at all — engage in some serious body building, from the activation of dormant fiscal policy muscles to the detoxification of corrupted cells.

These challenges have been on the table since the beginning of the year, piquing Executive’s interest in sustainable business solutions. Cost-cutting is one avenue that companies tend to take when pressures build. But while cost-cutting is a necessary measure  under the capitalist mandate of competition, it also is one of the thorniest undertakings in an economy in need of job creation. It involves taking steps made no nicer by the various euphemisms employed — corporate restructuring, workplace rationalization, personnel efficiency enhancement — and their implied result: redundancies and involuntary separations.    

While considering the prospect that many Lebanese companies may soon face higher taxes and other cost pressures, we were attracted by a new book by Strategy&, a PWC consulting arm known in an earlier incarnation as Booz & Co. Subtitled a “Guide to strategic cost cutting, restructuring and renewal,” we wanted to find out if a book with the title Fit For Growth (FFG) could offer answers to Lebanese companies that might soon face the need to cut costs.

A closer look at FFG showed very quickly that it does not propose a new or revolutionary solution. Rather, the FFG framework is something that Strategy& has talked about for quite some time. Karl Nader, a partner in the company’s Beirut office who leads the FFG practice in the Middle East, quickly confirms that the book was authored by three of the firm’s principals to describe the result of “an evolution” in their work.

The book does not offer — even by the standards of books on management — a particularly gripping narrative. In short, it is a reference guide in three parts (a brief introduction to the concept, a manager’s guide, and a few afterthoughts on the “human element” and keeping up morale) that offers decision-makers access to insights and practices which Strategy& developed over years of strategic consulting. “What we realized over the last couple of decades is that you can’t cut costs independently. We have been doing a lot of work on strategy and on cost, and when the two come together, you get the most value,” Nader says.

The baseline proposition is simple: The book argues that contenders in the globally connected and disintermediated marketplace need to focus on managing cost as much as on growing revenue. “Companies across industries and geographies are realizing that the only way to unleash profitable growth is to cut costs,” it claims.

The trick, however, is how to do this right. Cost reductions are often done under duress, in undifferentiated fashion, and driven by reduction targets or benchmarks focused on matching the competition. In contrast to this blind slashing of numbers, the FFG approach is backed by a strategy; it “protects ‘good costs’ and reduces ‘bad costs.’”

Good costs in this framework are those that strengthen a company’s ability to differentiate itself. All other costs are either “lights-on” costs (needed to keep the company in operation, but that do not distinguish it from the competition), or costs which are not related to the company’s priorities. According to the authors, companies that embark on cost-cutting often focus too much on cost reduction targets, and too little on the development of “differentiating capabilities,” while a better path lies in achieving a balance between the two.

In defining and developing their differentiating capabilities, organizations need to understand what they are really good at, or what they want to be really good at, Nader explains. This is where consultants can help companies with complex organizations and many stakeholders to prioritize and work through the opportunities they identify.

“The role of a consultant is [to put together] an unbiased view of what is the best model for you as an organization,” he says, citing several examples of large companies in the Arab region that have come under pressure from dropping profits, in areas from luxury retail to distribution. “Across the entire region there are retailers, distributors, and manufacturers who are under pressure.” 

While conceding the existence of economic pressures across the Middle East and the need to cut costs, Nader reiterates that cost-cutting can mean things other than laying off employees. “The economy here is challenged, and companies are challenged, so it’s very easy to conclude that you have to cut costs or optimize operations, but there’s a need to really understand what I’m good at, and what [I’m] not good at, or not so good at, [to ask], ‘Where do I need to further invest to differentiate myself?,’” he says.

The FFG approach emphasizes that such a transformation is not immediate. “With FFG the journey is very long. Working on restructuring is not a one-day event,” Nader confirms. Moreover, it certainly does not appear to be painless, given the book’s references to the need to cope with organizational fears and affirmations that “a Fit for Growth transformation asks a lot from all the employees in the company.”

Finally, the question remains how far the concept is applicable in a small economy in the Middle East. While hiring a large consulting firm to help seems to be the more feasible road for companies in the Gulf region — according to Nader, some 50 percent of Strategy&’s FFG activities are with organizations in Saudi Arabia, and another 25 percent with organizations in the United Arab Emirates — he says SMEs in a smaller economy like Lebanon can apply the FFG approach on their own initiative and do it in-house.

Nader points to a Fit For Service (FFS) advisory practice that is parallel to the FFG approach. According to him, the method is designed to reduce headcounts and improve efficiencies in organizations that are part of public administration (see box).

Executive sadly did not find any evidence of a magic-kiss solution to revive the fortunes of the country’s private or public sector stakeholders, but it seems that available lessons clearly hint that approaches that cut costs in conjunction with the development of productivities and competitive capabilities are preferable.

Explainer:

Fit For Service components

According to comment text by Strategy& partner Salim Ghazaly, the public administration in Lebanon could engage in a four-step process to improve performance and enhance efficiencies:

1) Develop a national socio-economic plan to identify national priorities and mobilize government efforts and expenditures accordingly. This exercise should be structured around the competitive positioning of the Lebanese economy (such as in professional services, tourism, and potentially a new oil sector) and dropping sectors in which the country is not competitive.

2) Focus the role of the government on policy making, regulation and enforcement, and transition its other operations to the private sector — this could be achieved through implementing a national private sector participation program (privatization and PPP). This could result in a leaner and more efficient government, while spurring growth within the private sector. It could also result in Capex and Opex savings, and potential revenue from the sale of selected existing assets. The Lebanese government is well positioned to do this, as it already has a regulatory framework through the Higher Council for Privatization and a PPP law (currently being revised).

3) Launch a culture/management change program across ministries to instill a citizen-service culture — a good example is General Security.

4) Implement cross-sector enablers that contribute to higher efficiency and economic growth, such as digitization.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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