The face-off between Cost Vs Innovation when driving profitability
Any talk of increased profitability eventually turns to its synonymous partner - cost cutting. With growing albeit volatile consumer market driven by digital transformations, merely being mindful of business expense cannot ensure long-term profitability. Instead, an innovation mind-set, driven by investments to increase product and service offerings and meet new customer demands, can fuel revenue and profitability for organizations.
Every financial downturn has called for a sharp focus on the classic balance of revenues versus expenses. So much so, that reducing costs to stabilise profitability has been the quintessential route to survival for most organizations. But should organizations to be proud of their profitability driven through cost savings? The short answer to that would be No.
A 2016 paper by Deloitte pointed to an interesting dichotomy. It noted that nearly 50 percent of companies that pursue cost reduction measures, fail to meet their targets, leaving the question of profitability continuously on the table. It is usually difficult to sustain realised cost savings, year after year, in a low growth and highly competitive environment.
I am not saying that cost-saving is not important. An overinflated HR portfolio for instance is not the ideal breeding ground for profitability. But cost cutting is merely the means to a micro end. In today’s dynamic marketplace, cost cutting alone cannot be the driver of a sustainable business strategy. It needs to be buttressed with an innovation strategy to remain profitable in the long term.
A profitable business strategy can only find its roots in growth and innovation
An ideal strategy is one built on fostering creativity and fuelling expansion. With new product offerings hitting the market on a continual basis, an organisation can only hope to realise a positive balance sheet by looking towards innovation. The successful exploitation of new ideas is essential in bringing more unique products into the market, increasing operational efficiency and most importantly, improving profits.
Market volatility has in the past, made innovation a lower priority with technical resources increasingly being redirected to cost savings efforts. However, it is no secret that, Innovation is vital in giving companies an edge in penetrating markets faster. While the most radical and profitably innovative ideas have come out of the blue, that should not discourage businesses to adopt this strategy on a more everyday basis. It is important to remember that innovation is not just limited to coming up with new product offerings.
Fundamentally, innovation means introducing something new into your business. This could be:
- Improving or replacing existing operational/mechanical processes to fuel efficiency and productivity with a focus on increasing quality of existing products or services
- Developing completely new product offerings to meet radically growing customer demand
- Adding value to an existing product line, in answer to competitors and increase the perceived value to the customers. Take, for example, Apple's incremental line-ups to the iPhone 6 and 7. While they were not radically different from its predecessors they were innovative enough to make a mark of their apparent significance
To make a better case for it, innovation has a critical impact on your businesses productivity and cost-cutting methodology. Not putting in the sustained effort to foster new ideas will have a detrimental effect on the organisation's profitability and margins over a period. However, there's no point considering innovation in a vacuum. To move the business forward, it is not only important to invest the time and money to study the marketplace but also to examine your existing business model with a newer approach.
Essentially, imbibe innovation in your business model and use strategic cost-cutting to free up resources to fund transformation and future growth. It is not about getting cheaper; it is about a leaner organisation with a focus on innovative strategies which will help transport profitability from the maintenance phase of your balance sheet to a more growth inspired outlook.
The writer is the Technology Editor and ROI Strategist at Dubai-based CXO Strategies. She can be contacted via twitter @CXOConnectME