EXECUTIVE SUMMARY
The days of over-relying
on cost cutting strategies
may be over. Mandates
for cost reduction can be
especially dangerous
when they limit a
company’s ability to
adequately fund growth
initiatives. We
recommend that
companies avoid a race
to the bottom in terms of
cost reductions and
instead emphasize
investments that
generate profitable
growth.
DEFINITION
• Elite Cost Cutters refers to
companies with negative average
annual growth of expense to sales
over both the 1994-2000 and the
2001-2008 periods.
Economic Analysis and Decision Support Group
© 2009 The Corporate Executive Board Company. All Rights Reserved.
Based on a comprehensive analysis of cost ratios and performance of 480 S&P as well as global
companies, we believe that a strategy of aggressive cost management may have run its course.
Companies ought to re-focus on generating top-line growth while maintaining cost agility.
I. Declining ability to take costs out the system: Despite the nearly 2% annual reduction in costs
they managed over the 1994 to 2004 period, the pace of cost reductions by elite cost cutters has
significantly slowed over the recent past. In fact, elite cost cutters within the S&P have seen their
COGS levels increase, albeit slightly, over the last year. As a result, elite cost cutters are currently
generating cost reductions by lowering SG&A.
We believe the potential for consistent reductions in SG&A to be very limited. Taken together with
the flattening of COGS, it suggests a declining ability on the part of elite cost cutters to take more
cost out of the system.
II. Focus on cost agility: However, elite cost cutters, whether defined globally, within the S&P, or in
terms of industry-specific cost metrics, have significantly lower costs relative to their non-elite peers,
and have managed to lower the share of costs even in recessionary environments. This suggests
that elite cost cutters are more agile, smoothing out the volatility in costs during turbulent economic
times due to better sensing mechanisms as well as better response capabilities such as resource
flexibility and decision-making autonomy.
III. Avoid cost cutting at the expense of growth: While elite cost cutters are rewarded in terms of
return-based financial metrics (such as return on investment, return on equity and total shareholder
return), they are at a significant disadvantage in terms of revenue growth, growing almost 3.5
percentage points slower than their non-elite peers. This result holds even when revenue growth is
measured relative to industry in order to control for varying degree of market maturity across
companies.
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