Integrating Cost Control and Revenue Growth

As global growth slackens in 2005, sustainable improvements in real economic value will require a better balance between the cost-control techniques companies honed during the downturn and the top-line growth strategies they developed in the recovery.

Corporations that binged on spending at the close of the last decade moved into purge mode during the 2001 recession and 2002 slowdown. In most sectors, companies exhausted their ability to restore profitability through cost reductions in 2003, and they reinstated strategies for top-line growth this year. But revenue improvements will become more difficult in 2005 as global growth slows and upward pressures on costs reappear

The economic forecast for next year includes moderately lower U.S. and global GDP increases, higher interest rates, rising inflation, and lower profit margins. The International Monetary Fund (IMF) has revised its earlier forecasts downward and now puts world output growth at 4.3 percent for 2005, down from an estimated 5 percent for 2004. Sluggish domestic markets in the United States, Europe and Japan and slightly slower growth in the developing nations will coexist with higher commodity prices and financing costs.

The second half of 2004 foreshadowed the lower-growth terrain that lies ahead and outlined the new terms for success in a distinctly chillier economic environment. The IMF expects U.S. GDP to grow by 3.5 percent in 2005 -- down sharply from its earlier forecast of 4.3 percent -- with inflation at 3 percent, driven largely by higher commodity prices. The Federal Reserve and most of the other G7 central banks have already signaled that they will likely increase interest rates over the next 12 months

Sustainable corporate growth in this phase of the cycle will require an integrated approach to cost control and top-line objectives. The new economic parameters for 2005 will also require rapid globalization in order to expand cost advantages and exploit new markets

Integrating Objectives

The new, more difficult conditions that surfaced in the second quarter of 2004 and will continue through 2005 - suppliers facing higher costs from escalating commodity and oil prices and miring in slowing sales. These conditions can be more easily navigated by integrating the dual objectives of cost control and revenue growth while pursuing globalization to build economic value on a sustainable basis.

To be successful, the top-line growth must be coupled with an intense focus on costs. To manage through the ups and downs of business in a product-technology-driven company, one should have a disciplined approach to achieving cost efficiencies in manufacturing operations. Cost reduction should be a simply a way of life.

In addition to manufacturing and selling technologically innovative products on a global basis, one should concentrate on the fastest-growing segments to drive revenues and profitable growth. These strategies will enable a company to consistently meet its long range growth profit targets

Integrating cost-control and revenue-growth objectives calls for a long-term strategy. Spend on R&D should go up and simultaneously focus on reduction in debts. Industries will face downturns as well as upturns many times before. Because of that, one should run business with a longer-term perspective. Any new investment decisions should be evaluated under a number of potential volume alternatives, ensuring to provide an adequate financial return even at lower industry production levels.

Also, during a downturn, one should make sure areas that are critical to long-term future are not cut such as R&D and capital spending. This will enable to grow business and improve profitability more quickly when the economy starts to strengthen again

Maximizing Globalization

In most industries, globalization is critical to both cost control and revenue growth, and it will become the primary corporate imperative for 2005. The drive to uncover efficiencies continues to fuel offshore outsourcing, foreign direct investment and global materials sourcing as essential elements in a comprehensive cost-control strategy. And the search for greater top-line growth means that companies must continuously explore new markets

Globalization will play a central role in quest for a diversified customer base that can protect it from cyclical economic swings and rapidly changing market share among the market players. This strategy will enable one to escape the precarious position of remaining tied to a particular economy and rise or fall with it.

Approach to new markets should differ from the regional strategy that many companies pursue. Actually the focus on growth should not be so much on geographic regions but on where the greatest demand for new product technology is.

High-Tech Outreach

The high-tech sector will continue to suffer in this uneven recovery and it will face the prospect of more difficult conditions in 2005. To cope with this one should accelerate globalization efforts to increase efficiencies and revive profitability

Investments to build-out of a strategic technology platform to focus on fast growing areas such as business process outsourcing and transformation should be stepped up. The goal is to make information technology a strategic advantage for the clients, enabling them to drive speed, agility and leverage into their enterprises. Indeed increased globalisation is central to cost control programme. Looking beyond the borders is to secure future growth.

New Geography

With costs rising and domestic markets slowing, continued foreign expansion will be the centerpiece of corporate growth strategies for most organisations in 2005

But globalization is no longer an exclusively advanced-nation phenomenon. Foreign direct investment outflows from developing countries have grown faster in the past 15 years than have those from developed nations. What's more, they are accelerating rapidly, according to a September 2004 report from the United Nations Conference on Trade and Development .

CFOs at companies based in developing countries increasingly realize that they need geographically diverse operations to achieve the ongoing cost efficiencies and high revenue growth necessary for international competitiveness. And they see different kinds of growth patterns in different regions throughout the world

Strategic CFOs

In 2005, CFOs will need to drive sophisticated strategies that integrate cost-cutting and top-line growth. By now most companies have taken as much cost out of their systems as they can; the well is going dry. Also, shareholders reward sustainable growth, and growing profits through cost-cutting is not sustainable. Eventually, you reach an end to effective cost-cutting strategies and need to demonstrate that you can grow revenues and earnings.

Finance executives sit at the center of new strategy development. Growth objectives and growth strategy are driven by the company's strategy board, which includes officers from all functions of the organization. The main role of a CFO is to evaluate the growth strategy and growth objectives from the investors' perspective; ensure that the right resources are in place to achieve these objectives; and maintain a disciplined focus on managing investments and cost structure so that growth strategy results not only in time-line growth, but -- more importantly -- in growth in economic value

A focused approach to strategic and operational planning is very essential and this is possible only by working with the executive management team to drive the overall long term strategy and underlying goals and objectives. And then work with the business units to create operating plans to executive these strategies and to meet or exceed the goals. During this process, the team should work to align the strategies with the operating plan, ensuring that investments and resource allocations are made to best

position for future growth and profitability.

For even the most astute CFOs, the business environment will be less conducive to growth in 2005 than it has been for the past two years. Finance executives in developing countries increasingly face fallout from economic and fiscal issues in the United States, including problems "created by increasing protectionism.

For U.S.-based companies, interest rates and inflation will rise more quickly than they will for most of their European and Asian competitors. Proactive CFOs recognize that a U.S.-centric approach only aggravates those disadvantages, and they are turning to global

flexibility as the solution

Leadership Skills for Sustainable Growth

To succeed within the new higher-cost, slower-growth economic parameters of 2005, companies will need to develop sustainable growth strategies that integrate their cost-control and revenue-growth objectives. It's a challenging task, and one that calls for specific leadership skills. The following three critical skills can be outlined for the senior executives to drive a sustainable growth strategy.

Flexibility and agility.

In a cost-cutting environment, executives and managers have a singular, fairly rigid focus on reducing expenditures. In a sustainable-growth environment, leaders must recognize unexpected opportunities and be flexible enough to take advantage of them. Top-performing companies equip their leaders with the agility required to retool their strategies as often and as quickly as necessary.

Effective communication.

When an economic downturn stunts top-line growth, executives and managers have a simple, easily understood message to deliver: Keep costs down. But sustainable growth strategies are more complex and less easily understood. Senior leaders and managers must be able to communicate clearly with employees to help them understand and act.

Perspective.

A company that's driven by cost cutting initiatives is, by nature, inwardly focused. Executives who succeed at implementing growth strategies are able to shift the perspective of other leaders and employees, turning it from an inward to an outward focus, from cost-cutting to revenue growth and from products to customers

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