Reshaping your company business model Building for the future during the downturn Strategy& is part of the PwC network Contacts About the authors Buenos Aires/Santiago Munich Paolo Pigorini is a senior partner with Strategy& in Rio de Janeiro. He leads the Ariel Fleichman Stefan Frey organization and change practice in South Partner Partner America and specializes in business and +54-11-4131-0400 +49-89-54525-0 organizational models. stefan.frey @strategyand.pwc.com @strategyand.pwc.com Vinay Couto is a senior partner with Strategy& in Chicago. He leads the firm’s Chicago Frederic Pirker global organization strategy business and Partner has deep expertise in selling, general, and Vinay Couto +49-89-54525-0 administrative (SG&A) transformation Senior Partner frederic.pirker including shared services and outsourcing. +1-312-346-1900 @strategyand.pwc.com vinay.couto Ariel Fleichman is a partner with @strategyand.pwc.com Rio de Janeiro Strategy& in Buenos Aires and Santiago. He specializes in strategy, organizational Gary Neilson Paolo Pigorini change, and transformation for clients in Senior Partner Senior Partner multiple industries and sectors. +1-312-346-1900 +55-21-3232-6291 gary.neilson paolo.pigorini Carlos Eduardo Gondim is a partner with @strategyand.pwc.com @strategyand.pwc.com Strategy& in São Paulo. He specializes in strategy, organization design and review, Dr. Deniz Caglar São Paulo post-merger integration (PMI), and Partner operating/business models, for clients +1-312-346-1900 Carlos Eduardo Gondim mostly in South America. deniz.caglar Partner @strategyand.pwc.com +55-11-5501-6200 carlos.gondim Dubai @strategyand.pwc.com Per-Ola Karlsson Sydney Senior Partner +971-4-390-0260 Varya Davidson per-ola.karlsson Partner @strategyand.pwc.com +61-2-9321-1900 varya.davidson Andrew Horncastle @strategyand.pwc.com Partner +971-4-390-0260 andrew.horncastle @strategyand.pwc.com Olaf Schirmer Principal +971-4-390-0260 olaf.schirmer @strategyand.pwc.com 1 Strategy& EXECUTIVE There is widespread recognition that the typical corporate SUMMARY cost-cutting initiatives will not suffice in the current business environment. To navigate the global downturn and even prosper in the process, corporate leaders must take a step back and consider how best to implement long-lasting and effective initiatives aimed at fundamentally improving the way their companies operate. Strategy&'s approach focuses on three strategic questions: What do we do? How do we do it, and where? How well do we do it? Our experience shows that companies too often neglect the relevant issues related to their business model (“How do we do it?”). Focused efforts in this area can result in structural improvements in efficiency and effectiveness. This Perspective explores the commonly observed issues and derailers surrounding companies’ business models in light of important questions they currently face: Have we built into our operation the flexibility and resilience necessary to survive this crisis? Is our business model appropriate for navigating and succeeding in this global downturn? Strategy& 1 THE NEW CEO After a period of intense growth than it did only a few months ago. across almost all sectors and Current trends in major economic AGENDA regions, the global downturn has variables suggest that difficult times rapidly shifted CEOs’ agendas from are ahead, at least in the coming strategies for growth to how to months. Companies are already improve performance and tighten facing lower demand and are having cost controls. Though the crisis increasing difficulty in finding capital. started in the U.S. financial industry, it has quickly spread to virtually The time has come to clean house. all industries and geographies. As a rule, when demand is increasing All over the world, companies are rapidly, as it was in recent years, postponing or canceling investment companies must move fast to stay plans, reviewing their operating ahead of their competitors, which targets, reducing and sometimes even often leads to decisions being made temporarily suspending production, and implemented without a thorough announcing job cuts, terminating or analysis of the structural impact on reviewing contracts, implementing the organizational model. A typical cost-cutting efforts, selling or thinking outcome is the addition of people about selling assets, and more. and positions without the benefit of a holistic view of the consequences. This sudden change poses a new When the growth frenzy settles, challenge for CEOs, who find they companies should take a step back must quickly readjust their mind-sets and reevaluate the way they work. for a future that looks very different “Expanded restructuring actions are required to protect UTC profitability and are expected to position the company for resumed earnings growth in 2010.” — Louis Chenevert, CEO of United Technologies Corp. (March 2009) 22 Strategy& In a recession, softening demand eventually come back once the initial and review the way they operate. It generally makes it difficult to focus is lost. is time to seek short-term savings deliver results by relying simply on while building the foundations for revenue. Profitability is defended by The current economic crisis demands another growth period in the future. increasing the focus on cost control deeper reflection. The effects of this It is dangerous indeed to merely stand and operating efficiency. However, downturn are expected to last for in the wings as a passive spectator, while most companies are quick to quite some time, so companies should as this could create disadvantages start cutting costs, we argue that the consider long-lasting initiatives, vis-à-vis the competition or lead to outcome of most of these efforts— rather than temporary cost-cutting increasing pressure from shareholders, which may be necessary—tends to efforts. True transformational cost analysts, or creditors. In other words, be marginal and short-lived. Despite reduction opportunities need to break it is imperative that companies use the immediate results, cost reductions ingrained structures and behaviors the downturn to seize the future with generally do not structurally change throughout the company. Moreover, their own hands, before a top-down the way the company works, or how the downturn creates a window of mandate is imposed. its executives think, so those costs opportunity for companies to rethink “As a consequence of the unprecedented crisis affecting the global economy, which also affects the air transportation industry, it has become inevitable for Embraer to implement a revision to its cost structure and workforce.” — Embraer statement announcing a 20% reduction in production and administrative personnel (February 2009) Strategy& 3 Strategy&'s approach goes organizational model and in-house levers mentioned earlier, companies beyond traditional cost-cutting versus outsourcing (make or tend to neglect relevant issues related efforts, focusing on a set of three buy) choices. to their business model (“How do we strategic questions (see Exhibit 1). do it?”). Focused efforts in this area How well do we do it? Performance can result in structural improvements What do we do? A strategic review of assessments, identification of in efficiency and effectiveness. the company’s portfolio of products opportunities, and implementation of and services, as well as the markets operational improvement initiatives. The remainder of this Perspective and customers targeted. focuses on issues surrounding While the first question is addressed the company Business Models by How do we do it, and where? in yearly strategic planning processes, describing our view of these issues An assessment and rethinking and the third has to do with the and commonly observed derailers. of the company’s business and tactical performance improvement Exhibit 1 Companies’ Typical Performance Levers – Key Strategic Questions - Portfolio analysis What do - Products & services rationalization we do? Market, Customer, - Analyzis of customer segments & cost-to-serve Products & Services - Redefinition of the business & organizational models - Refocusing the corporate center - Redefining the business units & their accountability How do we do Business Model - Back-office consolidation & outsourcing it, and where? & Organization - Development of shared services - Manual vs. automated processes - Process redesign - Procurement optimization How well - Aligning service levels and costs Policies, Processes do we do it? & Technology Source: Strategy& 4 Strategy& BUSINESS MODEL The activities performed in a business client-driven functions that support organization can be split into three the business units and the corporate STRUCTURE blocks, or elements, according to center. Establishing an efficient their nature and their role in deliver- and effective support area requires ing results. Typically, the Corporate a clear definition of its operating Center performs activities related to model. Traditionally, these areas strategic leadership, Business Units can be centralized at the corporate house functions focused on the headquarters or decentralized product or customer value creation, to provide each business with a and Support Services provide internal significant level of autonomy. In client-driven services and manage out- most cases, support areas can be sourcing relationships (see Exhibit 2). consolidated in a shared services center, a model that defines new 1. Corporate center. The corporate relationships between internal clients center holds the functions that