The program has achieved its targets. Processes are leaner, costs are lower, and margins have risen noticeably. The board presents the figures with justified pride; the freed-up capital strengthens the balance sheet and reassures the owners. A clear success. Three years later, a different question arises: Where is the offering that was supposed to open up the next market? It never emerged, because the entire organization’s attention had been focused on cost cutting for years.
Efficiency frees up capital. What happens to that capital determines the company’s future—not the cost cutting itself.
One corporate division I advised had focused for years on reducing its unit costs. Every measure met its targets, KPIs improved quarter after quarter, and management was seen as reliable. What no one noticed: the savings flowed entirely into higher distributions and larger reserves. No investment was made in new offerings. A smaller competitor that consistently directed its savings into a new business model had caught up with the division on margins after four years and overtaken it on growth. The cost advantage was real. Yet it still did not secure the division’s future, because its earnings never flowed into growth.
This pattern is widespread, and it is based on a misunderstanding. Efficiency is treated like growth, even though it is fundamentally different. Those who confuse the two optimize themselves out of the market. Three levers prevent that. They require you to first understand what kind of innovation you are actually pursuing.
Clayton Christensen, who founded the theory of disruptive innovation, distinguished three types of innovation that compete for the same resources in every company. Market-creating innovations create new offerings for new clients. They tie up capital, take time, and create new roles. Sustaining innovations replace existing products with better ones. They keep a company competitive but hardly change its size. Efficiency innovations produce the same result with fewer resources. They free up capital and tend to reduce the need for staff.
The decisive difference is not the technology, but the impact on the company. Efficiency innovation promises a fast, measurable, and reliable return. Growth innovation promises a slow, hard-to-measure, and uncertain one. Faced with this choice, almost every rational manager opts for efficiency—again and again. That is precisely the danger. What is sensible in a single quarter erodes substance over years. While sustaining innovation merely secures the status quo, the real dilemma arises between the two ends of the spectrum: efficiency, which releases resources, and market creation, which ties up resources.
| Characteristic | Efficiency innovation | Market-creating innovation |
|---|---|---|
| Impact on capital | frees up capital | ties up capital |
| Impact on roles | tends to reduce the need | creates new need |
| Return | fast, measurable, reliable | slow, hard to measure, uncertain |
| Contribution to growth | low | high |
Reality in companies shows that most organizations do not manage this asymmetry—they are at its mercy. A mid-sized energy company I supported took a different path. Before launching an ambitious efficiency program, management defined that a specified share of the savings would be mandatorily invested in building a new, service-adjacent business area. Not whatever was left over at the end, but a fixed share reserved in advance. Four years later, this new business area contributed a double-digit share to results. The savings had not only reduced costs—they had financed the future.
The real outcome of an efficiency innovation is not the reduced cost ratio. It is the capital that is freed up as a result. Yet in most companies, its use is never decided deliberately. It disappears into reserves, distributions, or the general budget, without anyone asking whether it could have greater impact elsewhere. Anyone who cuts costs without weakening the company has solved the first part of the task. The second, more difficult part is deciding what happens to the freed-up funds.
Even when this decision is made, reallocation often fails in practice because of incentive systems. As long as a division head is measured and compensated solely on the cost ratio of their own division, they will defend every hard-won euro saved and are more likely to obstruct reallocation into a distant growth initiative than to promote it. Reinvestment must therefore be anchored in the target system of company management, not left to the discretion of individual divisions. Otherwise, you create an incentive to hold back funds instead of releasing them.
Saved funds behave in organizations like water. If you do not deliberately secure them, you will see them seep away in day-to-day operations—in an extra license here, another service provider there. Treat freed-up capital therefore like an earmarked growth fund, not like a result. What an efficiency program releases is transferred directly into this fund, kept separate from the general budget, and is not available for day-to-day operations. Even before a measure starts, it should be clear what the return will be used for. The same applies to funds freed up by ending hopeless initiatives. Capital that is no longer tied up in the past is the cheapest source of investment in the future.
Efficiency without direction optimizes whatever is right in front of it—including activities that have long been unnecessary. An organization that makes every activity equally more efficient also reinforces those activities that do not contribute to the strategy. The result is a company that does many things exceptionally well that it should not be doing at all.
Therefore, tie efficiency programs to the strategic question of what is valuable in the first place. Optimize what supports the strategy. What does not support it is not optimized, but questioned and, where necessary, discontinued. It is not enough to simply not optimize such a task, because it continues to tie up resources. Conversely, initiatives whose benefits cannot be immediately expressed in a number must also be allowed to count. Those who make non-monetary benefits visible protect these initiatives from systematically falling behind efficiency that can be calculated quickly.
When efficiency and growth compete for the same budget, the same attention, and the same key people, efficiency almost always wins. Its return is certain; growth’s is not. An organization that manages both together will systematically decide in favor of what is certain and at the expense of what is necessary—without this ever being explicitly decided.
Therefore, separate the two deliberately, and distinguish between origin and governance. Efficiency may provide the capital for growth, but once funds have been reallocated, they belong in a dedicated area with its own governance. If you make those responsible for growth fight month after month before the same committee for every euro that also receives reports from the core business, you have only separated them on paper. Then efficiency wins again, because its numbers are more robust.
The deeper reason lies in controlling. If you assess an uncertain growth initiative by the same standards as an efficiency program—for example, using net present value or short-term return targets—it already fails on the spreadsheet. Efficiency has calculable cash flows in the here and now; real innovation initially operates in uncertainty. Growth initiatives therefore need their own time horizon, their own budget, and their own metrics—measured by learning progress rather than by a return that cannot yet be quantified reliably. Quick wins and long-term build-up are not mutually exclusive, but they do require deliberate management of both time horizons.
First: Name the amount your last major efficiency program freed up. Can you say just as precisely where that capital is creating impact today? If not, that is exactly where the unused opportunity lies.
Second: Which activity in your company has become more efficient in recent years even though it does not contribute to the strategy? What would happen if you did not optimize it, but eliminated it?
Third: Before your next efficiency program, define what share of the expected savings will be mandatorily directed into growth. Write that share down before the program starts, not after.
Efficiency is necessary, but it is not sufficient. A company that only cuts costs will become profitably smaller over the years—until it is no longer profitable. The leadership task is not to choose between efficiency and growth, but to put one in the service of the other.
The question is therefore never whether you should become more efficient. The question is what your efficiency is financing. Anyone who has no answer to that is cutting costs for a future that someone else is building.
Operational excellence – Efficiency is decided in day-to-day operations, not in the program: how operational strength is built and sustained.
Strategy development – Without a clear strategy, there is no benchmark for what should be optimized at all.
All Insights can be found in the overview.
Proven tools and models for self-application are available under Solutions.
If you want to take these thoughts further for your company, a no-obligation initial conversation is worthwhile.
Proven tools and models for self-application are available under Solutions.
If you want to take these thoughts further for your company, a no-obligation initial conversation is worthwhile.
