Should your business shrink to grow?

After years of chasing diversification, companies are now grappling with unnecessary complexity and costs with little topline reward. The solution? Shrinking their businesses to unlock greater profitability. But are they ready to make the tough calls?

• Simplifying business operations can unlock greater profitability by reducing unnecessary complexity and costs.
• By looking at five key areas – or ‘efficiency levers’, organisations can streamline their operations and focus on what they do best.
• Embracing simplification may involve making tough decisions, but it can lead to sustainable, long-term growth.

Supermarkets ventured into financial services and fuel. Utilities dabbled in mobile phones and battery storage. Telcos expanded into health and streaming. Pizza chains started selling cookies and fried chicken. Consumer package companies have introduced new products and different packaging. These moves were focused on profit but brought hidden costs, complexity, inefficiencies and consumer confusion.

The tipping point came in 2024, as inflation, rising interest rates, and tightening household budgets exposed bloated operations and shrinking margins.

Now, the era of consumers with deep pockets is over. According to the latest EY Future Consumer Index, 78% of Australians are concerned about the cost of living and over half (56%) feel more financial pressure than they did a year ago.

In this environment, businesses can no longer rely on growing demand or passing rising costs onto price-sensitive consumers.

Escaping the margin black hole

The signs of margin pressure are everywhere: the sea of specials tags on supermarket shelves; the endless array of new flavours, formats and sub-brands vying for attention. These tactics may temporarily boost sales, but they often compound inefficiencies, increase operational complexity and alienate consumers.

Changes to pricing, whether that involves increases, decreases, promotions or trade terms, can be a quick fix that often damages loyalty and long-term brand value, as many companies have discovered through backlash or loss of market share. Here’s just one proof point: Australian shoppers are increasingly turning to cheaper, private-label alternatives to combat the current cost-of-living crisis. In fact, two-thirds of those surveyed by the EY Future Consumer Index said they were just as satisfied with private labels as they were with branded products.

Faced with this dilemma, many companies have found themselves trapped in a “margin black hole” – struggling with tired products and promotions, and dragged down by the additional costs it takes to handle expanded operations. The solution lies not in adding complexity or costs, but in eliminating them.

The path forward requires intestinal fortitude and a shift in thinking. Instead of adding complexity, organisations must reduce it. This begins by revisiting first principles:

• What is our core competency or competitive advantage?
• Which products, services or markets align with this?
• What elements of our business are distractions?

Simplification isn’t easy, especially for companies with sprawling portfolios of sub-brands, regions and product variations. But by cutting back, businesses can redirect resources towards what they do best – and do it better than anyone else.

A smarter, leaner future

Balancing your revenue and costs – in other words, cost management – is not a new concept. Keeping a close eye on costs has been a hallmark of human activity. But the structured practices we recognise today are just over a century old.

In the 1910s, Henry Ford’s assembly line standardising processes, reduced production costs and scaled output. Japan’s Kaizen philosophy, pioneered in the post-World War II manufacturing era, minimised waste, improved quality and streamlined operations. By the 1990s and early 2000s, businesses moved production offshore to cut labour costs. More recently, just-in-time logistics synchronised production with demand, cutting inventory expenses.

Today, businesses face new pressures to balance profitability with investments in innovation, sustainability and resilience. Modern cost management is as much about creating long-term value as it is about controlling expenses.

Rather than cutting baseline costs – say, arbitrarily slashing 2-5% from every division’s budget – EY teams work with clients to identify unnecessary costs in preparation for real, sustainable market growth. Our specialist platform can rapidly identify non-core activity – and we typically help deliver a payback ratio anywhere between 12:1 and 20:1. Released from unnecessary activity, organisations can focus on what they do best.

The hard truth about shrinking to grow

For executives and boards, simplifying a business model – and accepting a smaller topline – can be an uncomfortable proposition. Key performance indicators often prioritise growth, and any suggestion to ‘shrink to grow’ can feel counterintuitive, even risky. The prevailing mindset is that growth is synonymous with topline growth. This is why so many large companies today are focused on ‘empire building’ within their own walls.

But the challenge for many companies is much bigger than surviving the next 18 months of flat growth. The broader and more pressing concern is to thrive in the long term, especially in an environment of escalating competition and uncertainty.

For many businesses, this may mean addressing uncomfortable truths – accepting that growth is not always linear and that, at times, pulling back is necessary to create a stronger foundation for the future. Leaders must be comfortable with the idea that simplifying their focus could mean smaller immediate revenues, but it could unlock far greater, more sustainable value over time.

Ultimately, embracing the discomfort of making hard decisions – whether it’s scaling back, simplifying operations, or repositioning a brand – could be the key to ensuring long-term viability.

The opportunity for today’s business leaders is to make bold decisions now so that their companies are poised for success, regardless of the unpredictable forces shaping the future. Are you ready to shrink today to position your company for sustainable, strategic growth?