Pillars of Sustainable Cost Reduction

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Framework Primer
Pillars of Sustainable Cost
Reduction
Presentation created by
2
Develop
Institutional
Capabilities
3
Create
Sustainability
1
Adopt a CEO
Mindset
SUSTAINABLE COST REDUCTION

2This document is an exclusive document available to FlevyPro members - http://flevy.com/pro
Contents
Overview
Strategic Approach to Cost Reduction
Pillars of Sustainable Cost Reduction
Templates
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This framework discusses the foundational pillars required to create a
Sustainable Cost Reduction Program
Presentation Overview
Organizations in every industry, including high end products, can leverage Sustainable
Cost Reduction programs to gain a Competitive Advantage.
For most organizations, Cost Reduction efforts don’t produce meaningful or lasting
results. This is because they do not take a strategic approach to Cost Reduction. This
framework first clarifies the meaning, rationale, and importance of the strategic approach
to Cost Reduction.
Then, we delve into the 3 pillars to developing a Sustainable Cost Reduction Program:
Additional topics discussed include Continuous Improvement Mindset, Leadership
Actions, Competitive Advantage, among others.
This deck also includes a set of slide templates for you to use in your own business
presentations.
1
2
Adopt a CEO Mindset
Develop Institutional Capabilities
Create Sustainability3

Contents
Overview
Templates

The first step to achieving impactful savings is to take a strategic
approach towards Cost Reduction
By identifying poorly deployed resources, we can reallocate them to more value-added
activities to strengthen or re-position our organization.
Most organizations do not take a strategic approach to Cost Reduction. Thus, cost initiatives only achieve
marginal, short-term improvements
Leaders realize the shortcoming of
their Cost Reduction efforts. A 2015
survey of 700 senior executives
conducted by Bain & Co. found:
40% of company leaders said they
did not achieve their savings targets
80% of company leaders do not
expect the cost savings to be
sustainable
If we take a strategic approach, then Cost
Reduction can be a powerful means to
reinforce our organization’s strategic
direction and increase competitiveness.
We can view Cost Reduction as a resource-
allocation process in reverse.
– It is a systematic review of where and how
we will invest or divest scared resources to
ensure the success of our strategy
Source: Beyond Lean: Cost Transformation, Bain, 2015

-5
0
5
-10
-15
Yr
5-9
Yr
0-2
Yr
2-5
Studies that organizations considered Cost Leaders achieve this by
embracing the strategic approach to Cost Reduction
Strategic Approach vs. Conventional Approach
Sustained Cost Reduction is about doing more with less to generate impactful
productivity gains.
By linking cost structure to strategy, companies see noticeable improvement to performance.
Source: Beyond Lean: Cost Transformation, Bain, 2015
Conventional
approach “The
Rest”
Startegic approach
“Winners in good
times and bad”
18
14
11
7
2
Strong
leader
LeaderWeak
follower
Ø 10
ParityFollower
Return on Capital, %Change in unit costs, %
Cost leadership

Contents
Overview
Templates

In formulating a Sustainable Cost Reduction, there are 3 pillars to
consider
Sustainable Cost Reduction – Pillars
The bottom-up mobilization will inject our organization with new energy—by empowering
staff across the organization to contribute their ideas and energy.
As established, to create Sustainable Cost Reduction, we need to adopt a strategic approach to Cost
Reduction. This approach combines clear targets from the top, along with bottom-up mobilization.
The initiatives required to build Sustainable Cost Reduction can be categorized across 3 pillars:
2
Develop
Institutional
Capabilities
3
Create
Sustainability
1
Adopt a CEO
Mindset

Foremost, we must adopt the CEO mindset—this is a mentality
all teams must adopt
Pillar 1. Adopt a CEO Mindset
Our market position dictates our cost targets and goals—likewise, our strategy guides
investment priorities.
Adopting a CEO mindset provides the strategic context for Sustainable Cost Reduction. It shifts the focus
from cost effectiveness to “winning.”
All teams should adopt the
CEO mindset and we should
provide them with the proper
tools to do so
To frame the proper CEO mindset as it relates
to Cost Reduction, we need to answer the
following 3 strategic questions:
What is the strategic rationale for our cost
reduction goals?
What are our true sources of value and
Competitive Advantage?
What is our Future State cost position?
1
2
3

Cross-functional Teams Accountability
There are 3 core institutional capabilities that must be developed,
which will provide a foundation to Sustainable Cost Reduction
Pillar 2. Develop Institutional Capabilities
Individuals working on the front line will make cuts when they realize it will free
up resources for areas more strategic to the organization.
We need to develop the necessary capabilities to implement an effective Cost Reduction Program
Cross-functional teams
deliver a bottom-up
assessment that helps
organizations transcend
incremental improvements to
breakthrough ideas.
We can increase support for
Cost Reduction by engaging
cross-functional teams from
the start
Accountability and decision
rights are equally important.
Management teams should
clarify decision rights around
critical cost decisions, ensure
a closed loop with the CFO,
and make the savings flow to
the bottom line
Horizontal View
We should focus horizontally
across the organization for
savings, instead of just looking
vertically by business unit.
This is because excessive
costs grow in the seams of
organizations, where business
units and functions overlap and
decision rights become
ambiguous
The 3 critical institutional capabilities needed are:
1 2 3

Lastly, to achieve sustainability, we must adopt a Continuous
Improvement mindset
Pillar 3. Create Sustainability – Continuous Improvement Mindset
Principles in Lean Management (e.g. Kaizen, 5S, DMAIC, PDCA) can be adopted to drive
Continuous Improvement thinking within the organization.
It’s critical to create a Cost Reduction Program, where reductions are sustainable. Most conventional Cost
Reduction Programs see costs creep back over time
Sustainable Cost Reduction is not
easy, but the benefits are worth all
the effort invested. A successfully
implemented Sustainable Cost
Reduction Program frees up
resources, assets, and managers.
It also builds a competitive edge in
the areas that matter most—
whether it’s a strategic business,
talent, or training.
For Cost Reduction to be sustainable, we need
to create a culture of Continuous Improvement.
This makes cost containment part of the
company’ DNA
Everyone—from the front line to the C-suite—
should be thinking about how to reduce costs
down by 3% each year.

There are 4 actions leadership teams must take to have the cost-
containment mindset
Pillar 3. Create Sustainability – Leadership
For leadership teams to be cost-containment focused in their thinking, there are 4 actions we can take.
The CEO mindset, as outlined in Pillar 1, is critical to achieving
breakthrough gains.
Adopt clear rules and culture
change
1
Align incentives and
meaningful rewards to
executives for delivering value
by including Key Performance
Indicators (KPIs) in contracts
2
Lead by example and
consistently demonstrate the
model behavior
3
Be patient, diligent, and
disciplined
4
Leadership teams should select incentives that fit the cultural
and operating normal of the company. E.g., for some
organizations, compensation works best; for others, recognition
works best.
Sustainable Cost Reduction should be embedded in the
budgeting process. Likewise, it should be high on the agenda
at all key business review meetings.
Implementing true Sustainable Cost Reduction Programs takes
time. Those that success embrace a systematic, multi-year
process, tracking progress and adjusting over time.

In measuring the readiness and viability of our Cost Reduction
Program, here are questions we should answer affirmatively
Pillar 3. Create Sustainability – Key Questions
If the answer is “no” to any of the above questions, heed this as a warning that our Cost
Reduction Program may fall short of its full potential.
We can evaluate whether our Cost Reduction Program can feasibly deliver upon its goal by asking the
following key questions
Is the program reinforcing a Competitive Advantage?
Is it lead by cross-functional “A”-teams?
Is the Cost Reduction effort part of every management meeting and intrinsic leadership
behavior?
Is there an annual target for Cost Reduction embedded in the annual budgeting
process? Are efficiency gains automatically built into the budget?
Is our Cost Reduction Program visible deep in the organization? Do managers and staff
diligently pursue cost reduction, even when not supervised?

Contents
Overview
Templates

Insert headline
Sustainable Cost Reduction Pillars – TEMPLATE
Insert bumper.
2
Develop
Institutional
Capabilities
3
Create
Sustainability
1
Adopt a CEO
Mindset

Insert headline
Sustainable Cost Reduction Pillars – TEMPLATE ALTERNATE
Insert bumper.
2
Develop
Institutional
Capabilities
3
Create
Sustainability
1
Adopt a CEO
Mindset

Insert headline
Sustainable Cost Reduction Pillars – TEMPLATE ALTERNATE
Insert bumper.
1
Adopt a CEO
Mindset
2
Develop
Institutional
Capabilities
3
Create
Sustainability
SUSTAINABLE
COST
REDUCTION

Insert headline
Institutional Capabilities – TEMPLATE
Insert bumper
Cross-functional Teams Accountability
Filler text, filler text, filler text, filler text
Horizontal View
1 2 3
2
Develop
Institutional
Capabilities
3
Create
Sustainability
1
Adopt a CEO
Mindset

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Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
support@flevy.com
• Media/PR
press@flevy.com
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