Executive

Perspectives

The CEO’s Dilemma

Building Resilience Through
Competitive Cost Position
November 2022
Introduction to this document

COVID-19, followed by the war in Ukraine, has brought

general changes in customer demand (from services
to products, for example), commodity price growth,
inconsistent supply due to supply chain distress, and In this BCG Executive
the highest inflation since the 1970s crisis. Perspectives edition, we
address how to respond to
It is therefore imperative for businesses to optimize
their cost position to stay afloat or create competitive uncertainty and build
advantage. resilience through

Copyright © 2022 by Boston Consulting Group. All rights reserved.

competitive cost advantage
The best organizations know how to turn uncertainty
into opportunity. This document focuses on how
organizations can build a playbook that drives cost
reduction through operational and organizational
lenses.

2
Executive Summary | Building resilience through competitive cost position

The time to act is now Options to achieve and sustain value

Recent global disruptions have brought general uncertainty, By understanding their strategic starting point and objectives
testing companies' ability to handle labor shortages, high through rapid assessments, organizations can diagnose
inflation, eroding demand, broken supply chains, and surging inefficiencies and gauge savings potential. These evaluations
commodity prices. guide organizations to levers for achieving a competitively
advantaged cost position. While companies may employ
Our global economy makes instability contagious across different sets of levers, our research suggests they are
borders, so adaptability is vital for any company, regardless of typically combined in one of four common pathways:
financial position and industry condition.
1• Organizational streamlining: Simplifying structure and

Copyright © 2022 by Boston Consulting Group. All rights reserved.

reducing overhead cost.
Our research shows "winners" must programmatically
2• Direct/indirect materials optimization: Reducing
reduce cost to preserve margin/flexibility while investing
costs and cost variance through improved procurement.
freed funds to transform, build capabilities, and develop more
agile teams. Reducing costs now frees resources and 3• Operating model and process redesign: Holistically
reorients companies for any uncertain future, creating optimizing work, processes, and organization.
opportunities from instability. 4• Full strategic operations transformation: Processing
end-to-end value chain looking at inefficiencies in each
step of the process.
3
BCG Executive
Perspectives
AGENDA
A view of the world

The time to act is now

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Options to achieve and sustain value

4
Inflation and volatility are becoming the “new reality” across the globe

Drop in demand and Supply chain Volatility in Central banks fight Varying government
general uncertainty distress global markets with consequences support for COVID-19

-25 pp. (from 83% to 58%) 111 days (+34% y/y) new ~2 times higher S&P 500 Investors expect central Removal of foreclosure
drop in consumer freight time to US from volatility than in 2021 banks to raise global and eviction moratoriums,
sentiment index1 China monetary-policy rates to rental assistance, and

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~15-35% drop in major global almost 4% through 20234 stimulus payments in the US
+8.6% estimated to be global +25% rise in ocean freight stock market indexes
inflation in 20222 price index including US, Germany, and Nearly 4 dozen countries New wave of government
China (e.g., US, UK, Saudi Arabia, lockdowns imposed in
Layoffs and hiring freezes India) have raised rates China affecting millions,
are being announced3 Up to 40% commodity price ranging from 0.5% to 4% in including labor markets
growth (mostly energy, the last 6 months5
metals, and agrifoods) Despite increasing
infections in Europe, major
central banks withdrawing
stimulus packages

1. From 05/2021 to 06/2022 2. Euromonitor International; 3. Tesla, Netflix, Redfin, Meta, Twitter, Apple; 4. World Bank press release; 5. New York Times
Source: Federal Reserve Economic Data, US Bureau of Labor Statistics, World Bank, press search, BCG analysis 5
Global macro update | Economic snapshot for October

1 Global growth outlook 3 Financial markets 5 Labor market

GDP forecasts1 (Real GDP YoY) Equity market performance (YTD change)7 Job openings rate4
2021A 2022E 2023E 2024E Jul '22 Aug '22 Sep '22 Q1 '22 Q2 '22 Q3 '22 Change10
US 5.9% 1.7% 0.4% 1.4% S&P 500 -13.3% -17.0% -24.8% US 7.3% 6.8% 6.5% -0.3ppts
Eurozone 5.3% 3.0% -0.1% 1.5%
Eurostoxx 50 -13.7% -18.2% -22.8% Eurozone 3.1% 3.2% - +0.1ppts
Global 6.0% 2.9% 2.3% 2.9%
Unemployment rate5
Corporate spreads (High Yield)8
Jul '22 Aug '22 Sep '22 Change10
2 Commodity prices and inflation Jul '22 Aug '22 Sep '22 Change10
US 3.5% 3.7% 3.5% -0.2ppts
US 4.69% 4.84% 5.52% +68bps Germany 3.0% 3.0% - 0ppts
Commodity prices2
Jul '22 Aug '22 Sep '22 Change10 Eurozone 5.90% 5.60% 6.31% +71bps France 7.4% 7.3% - -0.1ppts
Brent oil

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98.6 89.6 79.5 -11.2%
Natural gas
US 8.2 9.1 6.8 -25.9% 4 Monetary policy 6 Manufacturing
Eurozone 194.7 228.9 165.0 --27.9%
Monetary policy rates6 PMI manufacturing (<50 = contraction)9
Consumer price inflation (YoY) 3

Jul '22 Aug '22 Sep '22 Change10 Jul '22 Aug '22 Sep '22 Change10 Jul '22 Aug '22 Sep '22 Change10

US 8.5% 8.3% 8.2% -0.1ppts US 2.5% 2.5% 3.25% +75bps US 52.8 52.8 50.9 -3.6%

8.9% 9.1% 9.9% +0.8ppts 0.5% 0.5% 1.25% +75bps Eurozone 49.8 49.6 48.4 -2.4%
Eurozone Eurozone

1. Bloomberg, data as of 11/01/2022. 2. Data presented as end of month figures. Brent oil in $/bbl; US Natural gas (Henry Hub) in $/MMbtu; Dutch Natural gas (TTF front month future) in
EUR/MWh. 3. CPI monthly seasonally adjusted data from Bureau of Labor Statistics; HICP monthly data for Eurozone from Eurostat. 4. Seasonally adjusted rates; Bureau of Labor Statistics for US;
Job vacancy rate from Eurostat for Eurozone. 5. Bureau of Labor Statistics for US; Eurostat for Eurozone. 6. Federal Reserve for US; ECB for Eurozone (main refinancing rate). 7. Bloomberg. 8.
Bloomberg US Corporate High Yield Average OAS; Bloomberg Pan-European High Yield Average OAS 9. ISM manufacturing PMI for US; S&P Global Eurozone Manufacturing PMI from Markit for 6
Eurozone. 10. Change Sep vs Aug 11. Change Q1 '22 vs Q2 '22. Note: All displayed numbers are based on end of month figures, and changes represent incremental changes vs. previous months.
BCG Executive
Perspectives
AGENDA
A view of the world

The time to act is now

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Options to achieve and sustain value

7
The time to act is now | Companies that build resilience rapidly in changing
environments have a much higher chance of success

Developing resilience is a key way for companies to create significant long-term value by increasing preparedness
to hedge against external shocks and disruptions
Building resilience creates competitive advantages
and allows companies to rise above their peers:
Resilient company
Total 1• Rapid execution of no-regret actions to absorb
shareholder
return the shock
3
Total 2• Adapt to new circumstances and ensure a high-
value of speed recovery
2 resilience 3• Reimagine their business to the new
circumstances in the 12 months following the

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shock
Shock
Industry
Transformations improved performance1 by…
1

+25pp -20pp
Recovery Time

For top quartile For bottom quartile

of resilience built of resilience built

1. Performance relative to industry in response to future crises, i.e., successful resilient transformations enhance company performance by 25%; Source: Press; BCG Henderson analysis 8
Cost pressure is increasing globally, exacerbated by an unprecedented labor
market disruption

… culminating in labor
Evolving skill needs Existing employees are …and some have left Talent shortage is
bottlenecks as demand
leave talent shortages looking for new the workforce especially pronounced
outpaces supply,
in key areas opportunities… altogether in digital roles
recruiting struggles

Global workforce Monthly US job openings Demand intensity index

Jobs reconfigured participation is 3pp below (millions) as of August 2022 (# of job postings/talent supply)
1B in the next 10 the pre-pandemic average
years

55% 62% 59%

15 5

4
Data scientist
Software engineer
US total
10

Copyright © 2022 by Boston Consulting Group. All rights reserved.

3
<5y Half-life of skills
2
5
Of knowledge workers open 1
to considering other positions
Orgs expected to 0
in the next year with
be affected by Average labor Average labor 2018 2019 2020 2021 2022
90% digital skill
20% actively looking for a new
participation, participation,
Jan-
2020
Jan-
2021
Jan- Sep-
2022 2022
shortages by 2025 role next year
2000-2019 2020-2022

Sources: Job switch data from Future Forum Pulse Survey, conducted January 27-February 12, 2022. Number of respondents = 10,818 knowledge workers across US, Australia, Germany, Japan,
France, and the UK; For labor force quits, participation and job openings: International Labour Organization, BLS, BHI Center for Macroeconomic, Federal Reserve, press search; Quit rates are
computed by dividing number of quits by employment and multiplying that quotient by 100; includes non-farm industries 9
Companies have ~doubled their SG&A costs since last crisis and successfully
passed it to consumers; that will no longer be possible in a recession

SG&A1 costs have grown 1.9х since 2009; that didn't affect But over the past 4 quarters, we
margin due to price increases see much higher margin pressure

Normalized volume, index (2009 = 100) Δ, 2009-2021 EBIT margin1

18
200
SG&A: 1.9x 17.2%
Revenue: 1.8x 17

150 16

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Margin: 1.4x 15.6%
15.2%
15
14.1%
0
2009 2011 2013 2015 2017 2019 2021 2021 2021 2022 2022
3Q 4Q 1Q 2Q

1. S&P 500 companies. Note: SG&A and revenue values were turned into indexes; 2009 value equals 100%
Source: S&P Capital IQ; Federal Reserve Bank of Minneapolis; Social Security Administration 10
BCG Executive
Perspectives
AGENDA
A view of the world

The time to act is now

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Options to achieve and sustain value

11
 Contributors to cost are numerous and complex – companies must pull
various levers to achieve a competitively advantaged cost position

Time to run rate x 3-6 months

x 6-18 months

Functional impact levers/sources of efficiency1

% savings potential on relevant baseline2 Non-exhaustive list

R&D & Procurement Manufacturing Sales, (bid) SCM After sales

engineering Plant project mgmt. logistics and services
Direct spending Indirect spending Network optimization
optimization
Design for value Syst. supplier review Bundle frame contracts Plant consolidation Material utilization Field force optimiz. Warehouse optimiz. Smart dispatching
Tool development Demand management Renegotiate terms. Utilization increase Lean manufact. Sales force effect. Digital supply chain Field network optimiz.
Product quality increase Make or buy optimiz. Lock-in budgets Network cost reduction Equip. asset optimiz. Service level adjust. Parts availability
Time-to-mkt. optimiz. Supplier development Services reduction Delivery times optimiz. Plant layout & flow Transport optimiz.

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Best country sourcing Activities cut Strategic sourcing Logistics optimization Inventory mgmt.
Industry 4.0 leverage Complexity optimiz.

~5-15% ~5-10% ~10-15% ~20-25% ~5-15% ~15-20% ~5-8% ~10-15%

G&A and organization and process redesign

Spans and layers Resource control & accountability optimization Automation and AI in selected workflows
Reducing low-value work/'Products' Technology landscape simplification Detailed process optimization
Leveraging cloud services Rationalizing geo location/sourcing model GBS Implementation
~15-30%
1.Leverage advanced analytics and software tools to rapidly size opportunity; 2. Savings potential based on BCG experience 12
Note: Percentages refer to savings on relevant baseline. Savings levers are not additive yet interlinked
Organizations should consider their strategic and immediate needs and pull a
set of levers that fit one of four common cost transformation pathways

In deciding which cost transformation … organizations should consider their needs

pathway to pursue… across these strategic dimensions
Magnitude of savings required
Company needs to secure significant labor
Organizational
1 streamlining
savings and enhance organizational 1 2 3 4
Ambitious savings targets
effectiveness, fast Relatively moderate

Urgency to bottom line

Direct/indirect Company intends to quickly reduce 1 2 3 4
outside spending and improve
2 materials procurement processes, without
3-6 mos. 6-24 mos.
optimization meaningful organization changes Readiness to address direct (e.g., blue-collar) labor costs

Copyright © 2022 by Boston Consulting Group. All rights reserved.

2 1 3 4
Operating model Company with very ambitious savings Low High
goals enhances operating model and
3 and process optimizes processes to significantly Viability of short-term procurement levers
redesign improve capabilities and cost posture 1* 3 4 2
Relatively low dependence High dependence
Company is prioritizing longer-term
Full strategic cost impacts across all strategic Willingness to invest to break cost/capability tradeoff
4 transformation dimensions (labor, direct and indirect 1 2 3 4
procurement) High ambition
Relatively low
*Procurement levers not relevant 13
 These four common pathways employ levers designed to address different
cost buckets and savings potentials
Pathways can go together:
1 2 3 4 in parallel or sequentially

ORGANIZATIONAL DIRECT/INDIRECT OPERATING MODEL AND FULL STRATEGIC COST

STREAMLINING MATERIALS OPTIMIZATION PROCESS REDESIGN TRANSFORMATION
• Spans and layers • Demand management • Activity optimization • Strategic sourcing
Sample
levers

• Simplification • Make or repair or buy • Tech landscape simplification • Digital supply chain
• Consolidation/scaling • Variance reduction • Lean manufacturing process • Production efficiency
• Redundancy elimination • Contract mgmt. (incl. tech suppliers) • Digitization, automation • Design to value

Support labor costs reduction Support labor costs Support labor costs
Support labor costs reduction
Value discovery sprint

Value discovery sprint

Value discovery sprint

Value discovery sprint

(e.g., indirect labor incl. SG&A labor) reduction reduction
Relevant cost

Support nonlabor costs red. Support nonlabor costs Support nonlabor costs
Support nonlabor costs red.
buckets

(e.g., nonlabor overhead incl. IT, mkting) reduction reduction

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Direct labor costs reduction Direct labor Direct labor
Direct labor costs reduction
(e.g., production labor; assembly, mfg.) costs reduction costs reduction
Direct nonlabor costs red. Direct nonlabor
Direct nonlabor costs reduction Direct nonlabor costs reduction
(e.g., direct material inputs) costs reduction

Increasing magnitude of total savings potential

potential
Savings

10-25% of addressable costs (e.g., 5-15% of addressable2 procurement

$ direct, indirect labor expenses)1 $ spending, incl. IT and tech spending $$ 20-30% of labor costs $$$ 10-20% of all operating costs

3-6 months to full impact 6-24 months to full impact

1. G&A, sales, all managers across enterprise; 2. 25-55% of operating costs, procurement spending includes IT and tech costs 14
 Pathway 1 | Organizational streamlining helps US-based airline reduce
costs while improving effectiveness

Example of network airline streamlining white-collar employees

An airline committed to a major restructuring, redesigning the organization for improved Leading to significant
accountability and customer service while significantly reducing costs and creating a talent-selection impact
process that improved overall talent levels

reduced costs from white-

15-20% collar jobs

removed, improved median

2 layers span of control by 1

Top-level Improve talent Optimize spans and

realignment selection layers Improved overall talent profile
of team members promoted or
Designed of “top of house” Built target organizations Decreased layers within
>5% staffed in new functions
operating model, including based on positions, influencing organization, speeding up
degree of function negotiation with employees planning, decision
centralization/decentralization and final staffing plan making, and execution

Source: BCG analysis 15

 Pathway 2 | Direct cost optimization for a global automotive original
equipment manufacturer

Example of auto equipment manufacturer improving procurement

After a successful launch of a new project portfolio, the international auto equipment manufacturer Leading to significant
set ambitious goals for material cost optimization, hoping to cut spending through procurement impact
optimization without sacrificing input quality.

direct product cost improvement,

~12% boosting margins

measures successfully
~2000 implemented and safeguarded

Systematic supplier Procurement Renegotiation/

review digitization management of contracts Cross-functional team enabled
and anchored in the organization
Leveraged value-chain and
Implemented regular analysis Utilized AI-coach-provided tips
pricing power understanding to
of the market and collection of on power balance, relevant
allow contract renegotiation
statistical data on suppliers, market data, and useful
with win-win rationale
materials, and equipment procurement tools before
negotiation

Source: BCG analysis 16

 Pathway 3 | Reorganization of a leading health care company facing slow
growth and rapidly rising coverage costs
Note: Pathway 3 builds on Pathway 1
Example of health care company rewiring operating model and processes
After struggling to hit growth targets and earnings goals, a leading health care company required Leading to significant
a major cost restructuring focused on increasing efficiency while cutting costs to free up resources impact
for investments in products, marketing, and sales.

in total costs cut within 9

~$1.25B months

reduction in spending with

~$350M third-party vendors

Reorganize org model Manage third-party Automate/implement

(e.g., spans of control) spending AI in selected workflows Exited low-value businesses,
using savings to invest in better projects

Increased spans of control and Rationalized IT portfolio and Eliminated low-value work and
reduced duplicative work reconsidered travel and optimized, outsourced, and
across the organization by expense policies to decrease automated processes for
consolidating locations low-value spending employees to focus on key
tasks

Source: BCG analysis 17

 Pathway 4 | Complete strategic operations transformation at a European
beverage company

Example of European beverage company transforming value chain

The beverage industry faced challenges due to a highly volatile market, increasing commodity prices, Leading to significant
and evolving consumer tastes. A major beverage company that struggled to match its competitors in impact
overall equipment effectiveness committed to a transformation of its strategic operations.

of estimated impact from cost

~$500M transformation program

reduction in total supply chain

~10% costs from deep dives

Digitize/promote supply Implement design Simplify value chain

chain excellence to value Aligned site plans with financial
targets and incentives to reduce conflicts
Introduced AI-based tools and Made use of expertise by Reduced fragmentation of
implemented rapid digitization fostering cross-functional and procurement purchases to
to improve demand forecasting, collaborative processes when scale advantages and lower
optimize footprint, and refining projects transaction costs using
manage logistics digital tools

Source: BCG analysis 18

 Prior to pursuing a cost transformation, companies can use a rapid
assessment to shape their approach

Organization setup, Identification of largest Quick wins and Recommendations on cost

benchmarks, first opportunities opportunity charters transformation pathway
hypothesis and roadmap forward

Groundwork for Largest opportunities related High-level design principles Roadmap built to achieve

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success established: to functional structure drafted: Support functions / savings: Includes cascade-
Organization Resources committed pinpointed: Org baseline (e.g., shared services externally cycles, timeline, and finalized
for the change mgmt. volume, locations, FTE, benchmarked with long-term org design criteria with
program performance) identified, analyzed strategic focus maximum savings based on
Analysis-based high-level estimate of full
change in progress: Resources focused on biggest Size, root causes, and feasibility potential
Internal data collected, priorities: Cost value drivers of opportunities identified: Loss
Operations including industry analysis complete & bottlenecks in levers analyzed (e.g., procurement, Findings validated; senior
benchmarks for talent planning, sourcing, mfg., contract services, labor productivity) leaders aligned on path
and material spending warehousing, etc., evaluated and bottlenecks identified forward
19
Learnings reveal imperatives for how to come out on top of today’s supply
and demand mismatches despite the challenges

Anticipate evolving Support growth by Act now while Prioritize sustainable

geopolitical and macro- engaging your supplier flexibility to maneuver cost reduction where
economic uncertainty ecosystem and by exists, and there is still capabilities are built –
by creating resilience "owning" value chains freedom to invest cut for short-term survival
within organization and product life cycles and build capabilities for
the longer term

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Don’t take a business- Be transparent with Emphasize getting the Address employee
as-usual approach employees to build trust, right people in roles to value proposition and
because the generate respect, make best use of capable actively brand the
macroeconomic context strengthen cohesion, and and respected employees program to reduce worry
requires transformation create a sense of regardless of original and effectively compete
deep within the org ownership position in organization for prospective talent
20
Connect with our Operations, People & Organization, and Tech & Digital
Advantage leadership team with any questions

North America Europe, Middle East, Asia Pacific Central Resilience Team
South America
Gideon Walter Frank Cordes Ravi Srivastava Tuukka Seppä
Managing Director & Senior Managing Director & Senior Global Leader Ops. Practice Managing Director & Senior
Partner, Operations Partner, Operations [email protected] Partner
[email protected] [email protected] New Delhi [email protected]
New Jersey London Helsinki

Laura Juliano Daniel Weise Grant McCabe Ryoji Kimura

Managing Director & Managing Director & Senior Managing Director & Senior Global Leader - Corporate
Partner, Operations Partner, Operations Partner, Operations Finance & Strategy
[email protected] [email protected] [email protected] [email protected]
Houston Düsseldorf Melbourne Tokyo

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Allison Bailey Henning Schierholz Zhigang Shi Alexander Roos
Global Leader - People & Managing Director & Senior Managing Director & Partner, Managing Director & Senior
Organization Practice Partner, People & Org People & Org Partner
[email protected] [email protected] [email protected] [email protected]
Boston Hamburg Shanghai Berlin

Kevin Kelley Michael Grebe Fang Ruan Daniel Feldkamp

Managing Director & Senior Managing Director & Senior Managing Director & Managing Director & Partner
Partner, People & Org Partner, Tech & Digital Adv. Partner, People & Org [email protected]
[email protected] [email protected] [email protected] Munich
Dallas Munich Hong Kong

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