Profitability & Cost Management Shared Interest Group

A CFO’s Guide to Aligning Cost Structure with Strategic Priorities ( Audio: https://on.soundcloud.com/GmdhUe36WBty9Px76 )

by Pedro San Martin, Principal Asher PwC Strategic Finance Center of Excellence Interamericas

Senior finance leaders often proclaim bold strategies for growth and innovation, yet many struggle to translate those ambitions into sustainable profitability. The culprit is frequently a misaligned cost structure – in other words, your budget is not backing up your strategy. As the saying goes, “Strategy isn’t what you say. It’s what you fund.” When costs are treated as mere expenses to cut rather than investments to direct, companies can fall into the gap between high aspirations and low financial performance. This article explores how CFOs can use cost management as a strategic mirror, reflecting and reinforcing what truly matters for competitive advantage. We will look at cautionary tales of inertial spending, highlight success stories (from LEGO’s dramatic turnaround to Natura, Danaher, and Frito-Lay’s strategic cost moves), and provide actionable tools – including self-assessment questions and first steps – to help align every dollar with your strategy.

Ambition vs. Profitability: When Strategy and Spending Diverge

It’s a familiar scenario: leadership announces a transformative strategy – becoming a customer-centric innovator or a digital-first disruptor – but performance hasn’t improved months or years later. Often, the reason is that while the strategy on paper changed, the spending pattern did not. The cost structure continued to fund legacy projects, low-value activities, or “business as usual” overhead at odds with the new direction. In effect, the company’s fundamental strategy remained what it spends money on, not what’s written in the strategic plan.

This misalignment can quietly erode profitability. Research in 2024 has highlighted that cost management is a top priority for CEOs and CFO, not just for efficiency’s sake but to refocus resources on what truly drives value. In a recent Boston Consulting Group survey, nearly two-thirds of global executives emphasized trimming non-strategic costs (like bloated supply chain and overhead expenses) to protect strategic investment. The message is clear: every dollar of cost should be viewed as a choice – does this spend fuel our differentiating capabilities, or is it just propping up activities that don’t set us apart?

Cost as a Mirror of Strategy

Every organization has a mix of differentiating capabilities (the things it does well that drive its competitive advantage) and other operations that are necessary but not unique. Ideally, the budget should heavily favor the differentiators – the R&D for product leaders, the customer experience for service innovators, the efficient supply chain for low-cost players, etc. In practice, however, many companies allocate resources by tradition or incremental tweaks, not strategic design. The result is a cost structure that mirrors an old strategy or no clear strategy at all.

Consider a global consumer goods company that proclaims a strategy of digital marketing and direct-to-consumer engagement, yet a large chunk of its budget remains tied up in traditional retail trade promotions and an outdated field sales force. This inertial spending (leftover from when wholesale channels were the priority) saps funding from e-commerce and data analytics, which are the areas leadership says are critical. The cost structure reflects yesterday’s strategy, not today’s. As a CFO, shining a light on these mismatches is one of the most strategic actions you can take. It often reveals why bold ambitions aren’t translating into better profits.

Pull Quote: “Every dollar is a strategic choice. Audit your spending – it will reveal your true strategic priorities more honestly than your mission statement.”

Inertial Spending – The Silent Strategy Killer

One significant barrier to aligning costs with strategy is inertial spending – expenses that exist simply because “that’s how we’ve always done it.” These are the sacred cows, legacy programs, and habitual overhead costs that persist year after year, even if they no longer support the company’s direction. Inertial spending is dangerous because it’s often hidden in plain sight and rarely challenged during budgeting. It diverts resources from strategic initiatives and disrupts profitability without adding corresponding value.

For example, a large financial services firm discovered it was paying for dozens of software licenses and data subscriptions that employees weren’t even using – a remnant of past initiatives that no one owned. This cost inertia was consuming millions of dollars annually. Another company, a manufacturer, realized it had a recurring budget for an elaborate industry conference booth – something that made sense a decade ago for branding, but yielded little ROI in recent years. Such spending is carried on essentially because last year’s budget tends to become this year’s baseline. Unless CFOs and business leaders actively question each line item’s strategic relevance, inertial costs proliferate.

Concrete Example of Inertial Spending: One global bank noticed its branch network costs remained as high as ever despite a strategic shift to digital banking. They were staffing and maintaining under-utilized branches out of habit and fear of upsetting the status quo. When a new CFO performed a zero-based review, they identified dozens of branches in overlapping trade areas and legacy back-office processes that could be streamlined. By cutting these inertial costs, the bank freed up capital to invest in its mobile app and online customer experience, which was the real growth strategy. The bank’s subsequent increase in digital adoption and customer satisfaction proved the value of reallocating funds from inertial spend to strategic spend.

A Tale of Two Companies: Align or Falter  

Let’s contrast two companies to see how aligning cost structure with strategy can make or break an organization:

• Case 1 – Success through Alignment: Frito-Lay (the snack foods division of PepsiCo) decided to compete on product innovation and supply chain excellence. In the early 2010s, its leadership identified that world-class distribution and manufacturing efficiency were key capabilities. Rather than simply cutting costs across the board, Frito-Lay targeted investments in automation and a redesigned go-to-market delivery system. The result was a significant productivity boost – core operating profit increased about 6% annually for several years, outpacing revenue growth of ~3.8 %. In other words, by aligning spending with a strategic capability (a highly efficient supply chain), Frito-Lay lowered its cost-to-serve and fueled profitable growth. The cost structure (more funding for automation, less for low-value tasks) mirrored the strategy (be the lowest-cost, highest-service player in snacks) and delivered tangible results.

• Case 2 – Failure through Inertia: Blockbuster Video provides a classic counterexample. In the 2000s, Blockbuster’s strategy was to pivot to digital streaming to counter Netflix’s rise. However, it failed to align its cost structure with that new vision. Blockbuster kept pouring money into its vast network of 9,000 retail stores – leases, utilities, inventory, staff – which comprised most of its expenses. This inertial spending on an outdated brick-and-mortar model left little financial room to develop a competitive streaming platform. Netflix, by contrast, had a cost structure built for the digital strategy (no stores, a single technology platform, and investments focused on content licensing and distribution). Blockbuster’s inability to cut loose its legacy costs meant its declared strategy was never adequately funded or executed. The outcome? Blockbuster filed for bankruptcy, while Netflix, having truly funded its strategy, became a $150+ billion media powerhouse. The lesson is stark: hanging onto a cost structure that doesn’t fit your strategy is a recipe for strategic failure.

Aligning Costs with Capabilities: Lessons from LEGO, Natura, and Danaher

Strategic cost management is not merely about cutting for austerity; it’s about redirecting resources to reinforce what makes you win. Several companies’ experiences illustrate how aligning cost structure with key capabilities can drive remarkable turnarounds and performance improvements:

• LEGO’s Turnaround – Funding the Right Vision: In the early 2000s, LEGO Group was on the verge of collapse – sales had fallen 40% in two years, and the company was $800 million in debt, losing over $1 million per day by 2003. The crisis forced a hard look at costs. New CEO Jørgen Vig Knudstorp, with his CFO, applied strategic intent to cost-cutting: they slashed or sold off activities that didn’t fit LEGO’s core mission (such as theme parks, a bloated product line, and non-core ventures) and doubled down on funding the capabilities that did – product innovation in the classic brick toys, efficient manufacturing, and community engagement with fans. They cut 1,000 jobs, outsourced non-core production, and even halved the number of unique LEGO pieces to reduce complexity. Crucially, these moves weren’t random cuts; they were specific choices to realign the business with its core strategy – “systematic creativity” in toys. The results were astounding: LEGO's pre-tax profits quadrupled during the 2007–2011 recession years. In fact, LEGO’s profits grew faster than Apple’s from 2008 to 2010. The once-floundering firm became the world’s most profitable toy maker. By 2023, LEGO had transformed into a $9.7 billion global powerhouse in revenue. The LEGO story shows that when you ruthlessly align costs with strategy – investing in what makes you special and cutting what doesn’t – you can close the ambition-profitability gap dramatically.

• Natura’s Sustainable Growth – Cost Alignment with Values: Brazilian cosmetics giant Natura &Co provides another perspective. Natura’s strategy has long emphasized sustainable products and direct selling through its network of consultants, aiming to combine efficiency with a strong social/environmental ethos. For Natura, aligning cost structure with strategy meant streamlining operations while staying true to its values. This involved optimizing supply chain and marketing spend in its core Latin American markets to free up funds for innovation and digital expansion. The payoff is evident: In 2024, Natura achieved a 21.5% year-over-year net revenue increase while improving its cost efficiency. One key metric – selling, marketing, and logistics expenses in Latin America – dropped from 48% to 45% of net revenues (a 300 basis-point improvement) in Q4 202. By trimming non-critical costs and integrating its Avon acquisition more efficiently, Natura boosted margins and cash flow even as it invested in strategic projects. This balance of cost discipline and strategic spending has helped Natura protect profitability during its growth: for example, focusing on core markets and products (and pulling back from less aligned ventures) allowed it to remain resilient and reputation-leading in Brazil’s market. Natura teaches that a cost structure aligned with competitive strategy and company values (like sustainability) can yield strong financial and reputational outcomes.

• Danaher’s Discipline – The 30% Growth Machine: Danaher Corporation, a diversified science and technology conglomerate, is often cited for its exemplary strategic cost management via the Danaher Business System (DBS). Rather than seeing cost as something to simply minimize, Danaher uses its system to continually invest in and sharpen the company’s core capabilities – operational excellence, continuous improvement (kaizen), and smart acquisitions – while aggressively eliminating waste and inefficiency. The results speak volumes: Danaher grew profitably by nearly 30% annually for decades, reflecting an astonishing 80,000% increase in market valuation since the 1980s. How? By channeling resources to what matters – quality, innovation, and efficient processes – and squeezing out costs that don’t contribute to those priorities. For instance, every business Danaher acquires is put through the DBS playbook: redundant processes are cut, lean practices implemented, and capital reallocated to product development and sales in high-opportunity areas. Operational margins consistently improved as the company scaled. This relentless alignment of cost structure to strategy (in Danaher’s case, a strategy of being a high-growth, high-efficiency operator in niche markets) has made it one of the best-performing conglomerates in terms of shareholder returns. The Danaher case underscores that cost management is a continuous, strategic discipline – not a one-time project – and when done right, it fuels growth rather than hinders it.

These examples, spanning turnarounds and steady growth companies, reinforce a common theme: Companies achieve superior outcomes when costs are aligned to a clear strategy and well-defined capabilities. Profitability improves not by accident, but because the company stops spending on activities that don’t translate to competitive advantage and doubles down on those that do.

Making It Actionable: Is Your Cost Structure Supporting Your Strategy?

Realigning your organization’s costs with its strategy can feel like repairing an engine while driving at full speed. It’s challenging but squarely in the CFO’s wheelhouse as a strategic leader. Here are some tools and steps to begin closing the gap between ambition and profitability:

Self-Assessment: Strategic Cost Alignment

CFOs and senior leaders can start with a candid self-assessment. Ask yourself and your team the following questions:

• What are our top 3–5 strategic priorities or differentiating capabilities, and does our spending reflect that? (For example, if innovation is a priority, what percentage of our budget goes to R&D and innovation-enabling activities versus legacy operations?)

• Which cost areas are growing out of proportion to their strategic value? (Identify costs rising faster than revenue or consuming large resources without a clear link to competitive advantage.)

• Where might we be funding “sacred cows” or legacy programs that no longer align with our strategy? (List any significant expenditures justified primarily by history or habit rather than forward-looking value.)

• Do we have the data for profitability by product, service, or customer segment? (A surprising number of companies don’t. Without this insight, you might be pouring money into unprofitable areas unknowingly.

• If we had to cut 10% of our costs tomorrow, what would we cut first and why? (Would those cuts come from areas distant from our strategic differentiators? If you’re unsure, it’s time to map costs to strategy explicitly.)

Use these questions as a mirror. The answers will illuminate gaps – areas where you spend too much on non-strategic things, or not enough on what truly drives success. This exercise also helps build a case for change that stakeholders beyond finance can understand.

First Steps for CFOs to Align Costs with Strategy

Once you’ve identified misalignments, taking action is the next hurdle. Here are a few practical first steps a CFO can initiate immediately:

1. Categorize and Prioritize – Map your costs to strategy. Work with business unit leaders to categorize all major expenses into buckets: core strategic investments (directly supporting key capabilities or critical operations), context costs (necessary but not differentiating), and non-value-added costs. This resembles a lightweight version of zero-based budgeting focused on strategic value. It will quickly highlight, for instance, if a high percentage of spend is in areas that customers don’t value or that don’t set you apart. Those become prime targets for optimization or cuts.

2. Identify Quick Wins (Stop the Bleeding) – Look for at least one significant inertial spend to cut or redirect in the next quarter. It could be a pet project that’s no longer viable, an over-budgeted department with unclear ROI, or a vendor contract that hasn’t been revisited in years. By terminating or reducing one such cost and reallocating the funds to a strategic initiative, you save money and send a powerful signal through the organization: We fund what matters. For example, one company halted a decades-old annual corporate event (saving $2 million) and used the money to fund a new customer analytics program – a visible shift that underscored the new strategic focus on data-driven marketing.

3. Tie Budget to Strategy in Planning Cycles – Revamp your budgeting process to anchor it in strategic objectives from the outset. Rather than giving departments a generic percentage cut or increase, start budget talks by asking: “What initiatives deliver on our strategy, and what do they cost? What expenditures can we reduce to fund these initiatives?” By framing the dialogue this way, you encourage leaders to think of costs as investments with a purpose. Some CFOs institute a formal step in annual planning where each expense owner must articulate which strategic priority their budget supports – essentially, no strategy, no funding. This approach brings discipline and can surface opportunities to eliminate spend that isn’t pulling its weight. (As a bonus, it fosters a more strategic mindset across department heads, not just in finance.)

4. Leverage Analytical Tools for Visibility – Many organizations struggle to determine which costs drive value. Invest in improving your cost analytics and profitability modeling. Modern FP&A tools or targeted analytics projects (possibly using new techniques like AI to sift through spending patterns) can help identify cost-out opportunities and model the impact of reinvesting those savings. According to one survey, 58% of organizations using advanced analytics or AI have achieved measurable progress in cost optimization efforts. Action point: Set up a “cost transparency” dashboard for leadership, highlighting unit costs, cost of serving each customer segment, and other strategic cost metrics. This data-driven approach, powered by advanced analytics, will support more objective, fact-based decisions on where to trim and where to spend.

5. Engage and Communicate – Aligning cost structure to strategy is not a stealth CFO project; it requires buy-in from the CEO and business leaders. As a finance chief, you can kick-start this by sharing insights (from the self-assessment and analysis above) in a strategic finance review meeting. Bring a visual, like a simple diagram of the company’s strategy-capability-cost alignment: imagine a triangle where Strategy (at the top) dictates which Capabilities (bottom-left) the company must excel at, and the Cost Structure (bottom-right) is then tailored to fund those capabilities. All sides need to be balanced. If a capability is underfunded (the triangle is skewed), that’s a discussion point; if the cost structure has a big component not linked to any key capability (a stray bubble outside the triangle), that’s a red flag. Use this diagram to visually illustrate misalignments and focus the conversation. Such a visual tool reinforces the concept that budget changes are strategic changes. (See Figure 1 for a suggested diagram linking strategy, capabilities, and costs, which can be used in management discussions.)

Figure 1

Figure 1: A simple strategy-capabilities-cost alignment diagram. Strategy defines the few key capabilities to invest in, which dictate where costs should be concentrated (and where to cut). When all three elements align, the company becomes “fit for growth.”

By taking these initial steps, CFOs can begin to redirect the ship steadily rather than with abrupt, painful cuts. The goal is to institutionalize a mindset where cost is continually managed with strategic intent – every budget cycle, every major initiative, every new investment is an opportunity to ask, “Does this use of resources support what we say our strategy is?” If not, think hard about why it’s still there.

Questions for Your Next Budget Meeting

To further drive strategic alignment in your budgeting process, consider posing these questions in your next finance review or budget meeting with department heads:

• “Which of our strategic priorities does each major budget item support – and can you show the linkage?” (This prompts owners to justify expenditures strategically or risk phasing them out.)

• “What are we doing now that we wouldn’t start today if we had a blank slate? Why are we still doing it?” (A frank way to identify activities that exist only by inertia. It encourages a stop-doing list alongside the to-do list.)

• “Are there areas where increased spending could save money or drive long-term growth?” (Sometimes spending more on the right capability – e.g. automation, training, preventive maintenance – can reduce costs elsewhere. This question broadens thinking beyond just cuts to smart investments.)

• “How can we measure the ROI of major cost buckets regarding strategic outcomes?” (This pushes the team to define metrics – e.g., customer acquisition cost vs. customer lifetime value, R&D spend vs. new product revenue – ensuring that cost conversations focus on value, not just pennies.)

By asking these questions, CFOs create a strategic dialogue around costs. It shifts the culture from “expenses are bad” to “expenses are strategic choices”, which is exactly the mindset needed to close the gap between lofty ambitions and actual profits.

Conclusion: Closing the Ambition–Profitability Gap

Aligning cost structure with strategy is not a one-time project but an ongoing leadership discipline. It challenges us to rethink the role of cost from a passive outcome of operations to an active strategy lever. The upside of getting it right is significant: resources are freed up for innovation and growth, profitability improves, and the entire organization becomes clearer on what really matters. The downside of ignoring it is equally significant: wasted resources, strategic drift, and underperformance.

For CFOs and senior finance executives, the mandate is clear. Be the mirror that reflects strategy in the company’s finances. Scrutinize whether the organization's spending truly matches what it’s trying to become. Champion the hard choices to defund activities that don’t fuel the strategy, no matter how entrenched, and to double down on those that do. As we’ve seen from LEGO, Natura, Danaher, Frito-Lay, and others, courageously reallocating dollars toward strategic priorities can turn around fortunes and propel growth.

In today’s economic uncertainty and rapid change environment, this alignment is more crucial than ever. Cost optimization is again top-of-mind for companies in 2024, but doing it with strategic intent is what separates winners from the rest. Remember: every cost tells a story about your strategy. By making that story coherent, where ambition and allocation reinforce each other, CFOs can close the gap between ambition and profitability, driving their organizations toward sustainable success.

References

1. Boston Consulting Group (2024). Cost Management: The Top Priority for Global Executives in 2024. CFO Growth Advisors. Retrieved from cfogrowthadvisors.com

2. CFO Centre (2024). Lessons from the LEGO Turnaround: Strategic Cost Realignment Metrics and Outcomes. CFO Centre Insights. Retrieved from cfocentre.com

3. Danaher Corporation (2024). Danaher’s Continuous Improvement and Value Creation via DBS. Kaizen Institute Case Studies. Retrieved from kaizen.com

4. Frito-Lay (2024). Productivity and Profitability: How Frito-Lay Achieved Sustainable Profit Growth. Bakery and Snacks Industry Analysis. Retrieved from bakeryandsnacks.com

5. Natura &Co (2024). Natura’s Strategic Efficiency Gains and Cost Improvement (Q4 2024). MarketScreener Financial Reports. Retrieved from marketscreener.com

6. San Martín, Pedro (2024). Cost as a Mirror of Strategy: Why Your Budget Reveals Your Real Priorities. Medium Professional Articles. Retrieved from medium.com