Article

Of note: Taking the long-term view

Cost cuts produce quick and attractive year-on-year results, but such incremental steps don't always produce sustainable improvements.

Par Vijay Vishwanath

First published on octobre 02, 2013
min


Vijay Vishwanath Leader, Global Consumer Products practice The top consumer products companies have worked hard over the past five years to offset rising commodity costs. Operating margins reflect that; despite the higher costs, margins rose from 12.9% on average in 2007 to 13.6% in 2012. The discouraging news: Go back nearly a decade, and those improvements evaporate, with current margins matching those seen in 2004. Why are gains so hard to maintain? Our experience suggests that companies have typically buoyed their margins by making big cuts to their SG&A budgets. In fact, the average decrease in SG&A spending neared 20% over the last two years, according to a recent Bain survey of US companies. While those cuts produce quick and attractive year-on-year results, such incremental steps don’t always produce sustainable improvements. Rather than simply cutting, some companies have realized that, to succeed in the long-term, they need to invest in entirely new capabilities. For example, supply chains—in most cases decades-old and outmoded—are one of the ripest areas for new investments. In "Turn your supply chain into a profitable growth engine," we look at the impressive results some companies have produced by rebuilding their supply chains from the ground up to meet evolving market demands. And that’s just one example of how holistic thinking can trump incrementalism. In "The digital disconnect in consumer products," we lay out the profound changes that consumer goods manufacturers will need to make to their operating models and playbooks in order to win with digitally entitled consumers and pressured retailers. Quarterly results almost never support quantum leaps like those, but the decades do. Ten years from now, what accomplishments will your company be able to boast?

Vijay Vishwanath

Leader, Global Consumer Products practice

The top consumer products companies have worked hard over the past five years to offset rising commodity costs. Operating margins reflect that; despite the higher costs, margins rose from 12.9% on average in 2007 to 13.6% in 2012. The discouraging news: Go back nearly a decade, and those improvements evaporate, with current margins matching those seen in 2004.

Why are gains so hard to maintain? Our experience suggests that companies have typically buoyed their margins by making big cuts to their SG&A budgets. In fact, the average decrease in SG&A spending neared 20% over the last two years, according to a recent Bain survey of US companies. While those cuts produce quick and attractive year-on-year results, such incremental steps don’t always produce sustainable improvements.

Rather than simply cutting, some companies have realized that, to succeed in the long-term, they need to invest in entirely new capabilities. For example, supply chains—in most cases decades-old and outmoded—are one of the ripest areas for new investments. In "Turn your supply chain into a profitable growth engine," we look at the impressive results some companies have produced by rebuilding their supply chains from the ground up to meet evolving market demands. And that’s just one example of how holistic thinking can trump incrementalism. In "The digital disconnect in consumer products," we lay out the profound changes that consumer goods manufacturers will need to make to their operating models and playbooks in order to win with digitally entitled consumers and pressured retailers.

Quarterly results almost never support quantum leaps like those, but the decades do. Ten years from now, what accomplishments will your company be able to boast?