BCG: Croatian companies must not repeat the mistakes of recent history

As economic and geopolitical uncertainty continues to disrupt business systems, keeping costs under control is at the top of the priority list for managers worldwide.

A study conducted by Boston Consulting Group has shown that concerns about short-term difficulties have not weakened the determination of most executives to strengthen their companies’ competitiveness. The BCG survey included 759 executives from around the world, including 200 from Europe.

Despite the fact that nearly three-quarters of surveyed executives indicated that inflation, rising interest rates, and potential recession are the main issues requiring solutions, as many as 79 percent of the executives believe that these obstacles will not undermine their companies’ prospects. Cost-cutting remains a priority, but in a way that is focused on the development of the company and increasing resilience, the statement notes.

This is true even for sectors where large layoffs have recently shaken public confidence. Leaders of top global technology companies indicated in the survey that in the coming year, retaining and directing talented employees, along with fostering innovation, are much more effective and desirable mechanisms than, for example, laying off employees, especially in North America.

Layoffs are a lower priority for directors in Europe, with seven percent identifying layoffs as priority moves in 2023, compared to 12 percent in North America. To reduce costs, 58 percent of leaders in Europe plan to restructure operational model processes, compared to 51 percent in North America and Asia. The analysis showed that Europe invests the least in growth, with 20 percent of executives admitting that they are currently stagnating in this regard.

The study revealed that companies that are most committed to improving resilience outperform their industry competitors in total shareholder returns and are more likely to reinvest their savings in areas that could provide them with a strategic advantage.

We must stop repeating mistakes

Companies are using a combination of strategies to control expenses and overcome uncertainty. Although 72 percent of executives globally reported that they are reducing costs, they are carefully considering how to do so. They pay the most attention to reducing costs through improving efficiency rather than through radical cuts to direct costs.

– Global experiences and expectations of the leaders of major global companies we surveyed before preparing this report indicate two things: the need for better cost control, but at the same time a deep awareness that when companies save, the development and growth of the company can suffer. The lessons that companies in Croatia can learn from this research are that they need to determine what they think should be the basis for growth and carefully cut costs so as not to jeopardize that part of the business, said Tomislav Čorak, Croatian partner and executive director at Boston Consulting Group.

Čorak emphasized that we must stop repeating the mistakes of the past and that many Croatian companies do not have a clear picture of which parts of their business they should base their future on, and as a result, they develop a wide range of products and services.

– When a crisis occurs, they cut costs linearly, which is the simplest approach, but it jeopardizes the survival of healthy parts of the company. The traditional belief is that diversification increases resilience because when a crisis occurs, some part of the company will surely survive. This makes sense when you are a large global player and proactively manage your portfolio. However, Croatian companies are small in global terms, and any internal fragmentation makes them even smaller and more vulnerable. Therefore, many of our companies have not fully recovered from such a way of saving, as our growth rates have lagged behind global and European companies for years after 2008, Čorak assessed.

According to him, only a few Croatian companies are aware of what they need to base their competitiveness on beyond the borders of Croatia and this region. Therefore, Čorak advises companies that even in the face of expected inflationary pressures and interest rate growth, they urgently recognize which parts of the company’s business have a chance to be competitive and must continue to invest in new knowledge and technologies that will strengthen those parts of the company, while other parts of the business should be used to cut costs, which will partially finance development.

New knowledge and technologies that will be key to success in the future include building capacity for business digitalization, using artificial intelligence, and operating according to ESG standards. If they fail in this, the Croatian business sector must prepare for further reductions in business activities and the outflow of highly educated labor to more developed EU member states, for which there are now no barriers.

Investment in business development is necessary

With pressures on price growth caused by rising labor costs, rising energy prices, and generally rising real estate prices upon entering the eurozone, the life of entrepreneurs in Croatia is no easier than that of their competitors in Europe. And precisely for this reason, companies need to keep in mind that they must invest in business development based on new knowledge and technologies, as these will help them increase productivity and thus ensure international competitiveness.

However, a complicating factor may be the reduction of investment potential for entrepreneurs caused by public sector interventions in the regulation of many market segments. This is, unfortunately, a natural reaction of various governments to protect consumers and gain the favor of voters. However, this can impact the decline in the attractiveness of the country for investment, which domestic entrepreneurs may also feel. As always, the long-term losers are the residents, i.e., the ‘voters’ because they have fewer employment options at home, and those who are competitive leave for other, more developed countries.

The leaders of Croatian companies certainly understand this cycle and need to help the government with constructive awareness of the vulnerability of investment projects, as well as the negative long-term impact on the economy. For example, all energy companies in Croatia are facing significant challenges in further investing in energy infrastructure that needs to ensure energy transition, as they have exhausted their investment potential on the amortization of energy price regulation last year and this year. As in the case of global warming, Čorak believes, the impact of such public sector interventions is not visible today, but the consequences of ignoring it will accumulate and be very visible in the long term.

Recognizing the importance of continuous competitiveness, most global companies have decided not to sacrifice long-term growth for short-term cost reductions.

Global executives are aware of the propulsion of the competitive market and the need to adapt skills to new trends and implement new technologies, with an emphasis on green transition and sustainability. More than half of global executives plan to invest in innovations, focusing specifically on new business model technologies.

A balanced approach pays off

However, certain sectors have their priorities. For example, executives in the industrial manufacturing sector and sectors related to financial, logistics, and healthcare services place the highest importance on monitoring costs. Interestingly, the study showed that cost-cutting is less important for technology, media, and telecommunications companies, despite recent announcements of large layoffs by leading companies in this sector.

In a survey conducted by BCG, 70 percent of global executives in these sectors indicated that they are most focused on employee development and engagement, while 60 percent cited innovation as their main activity, which actually indicates that layoffs are addressing non-competitive parts of the company.

Interestingly, 75 percent of global executives consider retaining competitive employees and developing their talents, as well as product and service innovations, and cybersecurity, as priorities. This is justified by the technological developments brought about by low-carbon and circular economies, and the increasing emphasis on artificial intelligence and data storage in the cloud.

This aligns with results in Europe where 55 percent of surveyed executives cited climate and sustainability as other priorities, in North America 63 percent of respondents said they plan to invest in employment, while in Asia 66 percent cited investments in digital technologies and artificial intelligence.

The BCG research shows that a balanced approach aimed at reducing costs and developing mechanisms that provide a competitive advantage is indeed worthwhile.

Respondents in this study were also asked to assess how well prepared they are to overcome challenges.

Thus, 12 percent of respondents believe that their companies have built strong resilience. They generated total returns for shareholders over the past 12 months that were 15 percentage points higher than the average for their industries. They are also significantly more optimistic about the success of their companies.

Awareness of cost management is at the forefront for the vast majority of executives, especially during yet another year of macroeconomic uncertainty and disruptions. However, the BCG research has shown that corporate leaders are very aware that they must continue to invest to remain market competitive and strengthen their resilience.