BCG Executive Perspectives The CEO’s Dilemma Building Resilience Through, Competitive Cost Position November 2022
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 the highest inflation since the 1970s crisis. It is therefore imperative for businesses to optimize their cost position to stay afloat or create competitive 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. In this BCG Executive Perspectives edition, we address how to respond to uncertainty and build resilience through competitive cost advantage

The time to act is now
Recent global disruptions have brought general uncertainty, testing companies' ability to handle labor shortages, high inflation, eroding demand, broken supply chains, and surging commodity prices. Our global economy makes instability contagious across borders, so adaptability is vital for any company, regardless of financial position and industry condition. Our research shows "winners" must programmatically reduce cost to preserve margin/flexibility while investing freed funds to transform, build capabilities, and develop more agile teams. Reducing costs now frees resources and reorients companies for any uncertain future, creating opportunities from instability.
Options to achieve and sustain value
By understanding their strategic starting point and objectives through rapid assessments, organizations can diagnose inefficiencies and gauge savings potential. These evaluations guide organizations to levers for achieving a competitively advantaged cost position. While companies may employ different sets of levers, our research suggests they are typically combined in one of four common pathways: ❏ Organizational streamlining: Simplifying structure and reducing overhead cost. � Direct/indirect materials optimization: Reducing costs and cost variance through improved procurement. ● Operating model and process redesign: Holistically optimizing work, processes, and organization. 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 < Options to achieve and sustain value
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
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Global growth outlook

2
Commodity prices and inflation

3 Financial markets 5 Labor market Equity market performance (YTD change) 7
Corporate spreads (High Yield)8
6 Manufacturing PMI manufacturing (<50 = contraction) 9
Eurozone US Job openings rate4
4 Monetary policy Monetary policy rates 6
by Boston Consulting Grou © 2022 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 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 Labo Job vacancy rate from Eurostat for Eurozone. S. Bureau of Labor Statistics for US; Eurostat for Eurozone. 6. Federal Reserve for US; ECB for Eurozone (main refinancing rate) 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 Mar 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. pre Commodity prices² 6 BCG Executive Perspectives AGENDA 😊 A view of the world   The time to act is now (^) Options to achieve and sustain value
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: ( 1 ) Rapid execution of no-regret actions to absorb the shock ( 2 ) Adapt to new circumstances and ensure a high- speed recovery ● Reimagine their business to the new circumstances in the 12 months following the shock
1. Performance relative to industry in response to future crises, t.e., successful resilient transformations enhance company performance by 25%; Source: Press; BCG Henderso
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Evolving skill needs leave talent shortages in key areas 1B Jobs reconfigured in the next 10 years Half-life of skills Orgs expected to 90% be affected by digital skill shortages by 2025 Existing employees are looking for new opportunities… Of knowledge workers open to considering other positions in the next year with 20% actively looking for a new role next year
Global workforce participation is 3pp below the pre-pandemic average
… culminating in labor bottlenecks as demand outpaces supply, recruiting struggles Monthly US job openings (millions) as of August 2022 Talent shortage is especially pronounced in digital roles Demand intensity index (# of job postings/talent supply)
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, Germa France, and the UK; For labor force quits, participation and job openings: International Labour Organization, BLS, BHI Center for Macroeconomic, Federal Reserve, press sear computed by dividing number of quits by employment and multiplying that quotient by 100; includes non-farm industries
SG&A¹ costs have grown 1.9x since 2009; that didn't affect margin due to price increases But over the past 4 quarters, we see much higher margin pressure Normalized volume, index (2009 = 100) Δ, 2009-2021 EBIT margin 1 18
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 BCG Executive Perspectives AGENDA 😊 A view of the world < The time to act is now ✔ Options to achieve and sustain value
x   3-6 months Time to run rate x  6-18 months Functional impact levers/sources of efficiency¹ % savings potential on relevant baseline² Non-exhaustive list
Spans and layers Reducing low-value work/'Products' Leveraging cloud services G&A and organization and process redesign Resource control & accountability optimization Technology landscape simplification Rationalizing geo location/sourcing model Automation and AI in selected workflows Detailed process optimization GBS Implementation ~15-30% 1.Leverage advanced analytics and software tools to rapidly size opportunity; 2. Savings potential based on BCG experience Note: Percentages refer to savings on relevant baseline. Savings levers are not additive yet interlinked
In deciding which cost transformation pathway to pursue… 1 Organizational streamlining 2
シ4 Company is prioritizing longer-term Full strategic cost transformation impacts across all strategic dimensions (labor, direct and indirect procurement) … organizations should consider their needs across these strategic dimensions Magnitude of savings required Relatively moderate
Urgency to bottom line
Willingness to invest to break cost/capability tradeoff Relatively low High ambition *Procurement levers not relevant
1 ORGANIZATIONAL STREAMLINING Sample
 levers • Spans and layers • Simplification • Consolidation/scaling • Redundancy elimination sp elevant co
   buckets lue discovery Direct labor costs reduction (e.g., production labor; assembly, mfg.) alue discovery sprin Support nonlabor costs red. (e.g., nonlabor overhead incl. IT , mkting) Direct nonlabor costs red. (e.g., direct material inputs) Increasing magnitude of total savings potential 3 4 Pathways can go together: in parallel or sequentially
FULL STRATEGIC COST
TRANSFORMATION • Strategic sourcing • Digital supply chain • Production efficiency • Design to value Support labor costs reduction Support nonlabor costs reduction Direct labor costs reduction Direct nonlabor costs reduction
DIRECT/INDIRECT
MATERIALS OPTIMIZATION
• Demand management • Make or repair or buy • Variance reduction • Contract mgmt. (incl. tech suppliers) Support labor costs reduction (e.g., indirect labor incl. SG&A labor) • Lean manufacturing process • Digitization, automation Support labor costs reduction Support nonlabor costs reduction Direct labor costs reduction lue discovery sprin OPERATING MODEL AND PROCESS REDESIGN • Activity optimization • Tech landscape simplification lue discovery sprin 10-25% of addressable costs (e.g., direct, indirect labor expenses) 1 $ 5-15% of addressable² procurement 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 2 Savings
otentia

Example of network airline streamlining white-collar employees
An airline committed to a major restructuring, redesigning the organization for improved accountability and customer service while significantly reducing costs and creating a talent-selection process that improved overall talent levels Designed of “top of house” operating model, including degree of function centralization/decentralization layers Decreased layers within organization, speeding up planning, decision making, and execution Leading to significant impact 15-20% reduced costs from white- collar jobs 2 lavers removed, improved median span of control by 1 Improved overall talent profile team members promoted or staffed in new functions Built target organizations based on positions, influencing negotiation with employees and final staffing plan

Example of auto equipment manufacturer improving procurement
After a successful launch of a new project portfolio, the international auto equipment manufacturer set ambitious goals for material cost optimization, hoping to cut spending through procurement optimization without sacrificing input quality. Systematic supplier review Implemented regular analysis of the market and collection of statistical data on suppliers, materials, and equipment Procurement digitization Utilized AI-coach-provided tips on power balance, relevant market data, and useful procurement tools before negotiation Renegotiation/ management of contracts Leveraged value-chain and pricing power understanding to allow contract renegotiation with win-win rationale Leading to significant impact direct product cost improvement, boosting margins measures successfully implemented and safeguarded Cross-runctional team enabled and anchored in the organization
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 a major cost restructuring focused on increasing efficiency while cutting costs to free up resources for investments in products, marketing, and sales. Leading to significant impact otal costs cut within 9 ction in spending with Reorganize org model (e.g., spans of control) Increased spans of control and reduced duplicative work across the organization by consolidating locations Manage third-party spending Rationalized IT portfolio and reconsidered travel and expense policies to decrease low-value spending Automate/implement AI in selected workflows Eliminated low-value work and optimized, outsourced, and automated processes for employees to focus on key tasks
beverage company
Example of European beverage company transforming value chain
The beverage industry faced challenges due to a highly volatile market, increasing commodity prices, and evolving consumer tastes. A major beverage company that struggled to match its competitors in overall equipment effectiveness committed to a transformation of its strategic operations. Digitize/promote supply chain excellence Introduced AI-based tools and implemented rapid digitization to improve demand forecasting, optimize footprint, and manage logistics Made use of expertise by fostering cross-functional and collaborative processes when refining projects Reduced fragmentation of procurement purchases to scale advantages and lower transaction costs using digital tools Leading to significant impact mated impact from cost transformation program ~10% reduction in total supply chain costs from deep dives Aligned site plans with financial targets and incentives to reduce conflicts Prior to pursuing a cost transformation, companies can use a rapid assessment to shape their approach Organization setup, benchmarks, first hypothesis Identification of largest opportunities Quick wins and opportunity charters
Learnings reveal imperatives for how to come out on top of today’s supply and demand mismatches despite the challenges Anticipate evolving geopolitical and macro- economic uncertainty by creating resilience within organization Support growth by engaging your supplier ecosystem and by "owning" value chains and product life cycles Act now while flexibility to maneuver exists, and there is still freedom to invest Prioritize sustainable cost reduction where capabilities are built – cut for short-term survival and build capabilities for the longer term Don’t take a business- as-usual approach because the macroeconomic context requires transformation deep within the org Be transparent with employees to build trust, generate respect, strengthen cohesion, and create a sense of ownership Emphasize getting the right people in roles to make best use of capable and respected employees regardless of original position in organization Address employee value proposition and actively brand the program to reduce worry and effectively compete for prospective talent
North America Gideon Walter Managing Director & Senior Partner, Operations Walter.Gideon@bcg.com New Jersey Laura Juliano Managing Director & Partner, Operations Juliano.Laura@bcg.com Houston Kevin Kelley Managing Director & Senior Partner, People & Org Kelley.Kevin@bcg.com Dallas Europe, Middle East, South America Frank Cordes Managing Director & Senior Partner, Operations Cordes.Frank@bcg.com London
Daniel Weise
Asia Pacific Ravi Srivastava Global Leader Ops. Practice Srivastava.Ravi@bcg.com New Delhi Grant McCabe Managing Director & Senior Partner, Operations Mccabe.Grant@bcg.com Melbourne Zhigang Shi Managing Director & Partner, People & Org Shi.Zhigang@bcg.com Shanghai Fang Ruan Managing Director & Partner, People & Org Ruan.Fang@bcg.com Hong Kong Central Resilience Team Tuukka Seppä Managing Director & Senior Partner Seppa.Tuukka@bcg.com Helsinki Ryoji Kimura Global Leader - Corporate Finance & Strategy Kimura.Ryoji@bcg.com Tokyo Daniel Feldkamp Managing Director & Partner Feldkamp.Daniel@bcg.com Munich Alexander Roos Managing Director & Senior Partner Roos.Alexander@bcg.com Berlin Michael Grebe Managing Director & Senior Partner, Tech & Digital Adv. Grebe.Michael@bcg.com Munich Managing Director & Senior Partner, Operations Weise.Daniel@bcg.com Düsseldorf Henning Schierholz Managing Director & Senior Partner, People & Org Schierholz.Henning@bcg.com Hamburg Click here for additional insights and our latest evidence-based publications on Competitive Cost Position from Operations and Organization Strategy Allison Bailey Global Leader - People & Organization Practice Bailey.Allison@bcg.com Boston
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