In an environment characterized by uncertainty and global competition, margins are threatened like never before and cost optimization is running out of steam. How does margin relate to performance and how can margin be managed strategically? Dr. Patrick Reinmoeller Professor of Strategic Management Cranfield School of Management Cranfield University

1. MARGIN PERFORMANCE
Dr. Patrick Reinmoeller
Professor of Strategic Management
Cranfield School of Management
Cranfield University
EXPLORING HOW COMPANIES CAN
BEAT MARKET EXPECTATIONS

3. 1
Executive summary
In an environment characterized by uncertainty and global competition, margins are threatened like
never before and cost optimization is running out of steam. How does margin relate to performance
and how can margin be managed strategically?
In fact, little is known about margin management. The interdisciplinary nature of what it takes
to move margins has not made it a focal research area in any field, nor an easy target. Based on
conversations with C-level executives, and by analyzing the results of a survey of 200 CFOs and
CMOs, we find that executives see the importance of margins and how driving margins is linked to
outperforming competition and markets.
Yet, how to act is less clear. Providing insight into the current state of margin management, this report
distills some surprising findings. It provides orientation on how to overcome the margin gap in practice
and what to do about it. Suggestions for taking action are summarized in the Eight Actions Model.
1. Increase awareness of growth drivers
Raising margins drives growth. Create certainty about what drives your growth by gathering data to
challenge your assumptions.
2. Focus on margin
Successful leaders set priorities; they focus on maintaining or increasing margin. CFOs and CMOs
need to devote more time and resources to managing margins. Without their leadership, lower
levels in the organization may try but fail in helping the company focus on success.
3. Create a common ground
Companies handle half a dozen different definitions of what margin means. Capture the state of
confusion about margin in your boardroom and in your company, visualize it to motivate discussions
and develop a shared understanding to finally make margin meaningful.
4. Analyze how to increase margin
Many executives at companies that lag behind market expectations do not know how to increase
margin. Don’t be one of them. Acquire strategic capabilities. Increase how margin aware your
people are. Systematically seize the opportunities that big data1
presents. Address additional data
needs. Identify the key levers to manage margins more effectively.
5. Open the data vault
Provide accurate data and insight through systems and reports for larger numbers of employees.
Remove data bottlenecks quickly. Identify which employees, aligned to the levers identified above,
currently have the strongest need for access to data. Provide them the insight they need to broaden
margins.
6. Offer data that matters
Using a large volume of data can be good, however data quality and data relevance are paramount.
The happiness of employees with big data, data analytics and margin management programs
depends on the quality of the data. Ensure that employees receive the data quality they need to
make better decisions in real-time.
7. Help client facing employees exert better judgment
It is essential to bring information and intuition together. Enhance employees’ hard and soft skills;
help them to rely on their intuition with even greater success.
8. Ensure that awareness, analysis and action are linked
The ‘triple A’ of awareness, analysis and action need to inform each other. Create positive dynamics for
better judgment in the crucial moments when customers make decisions about your company’s margin.
1 Big data is used here as large volumes of structured and unstructured data and
application of analytics to unlock its meaning.

4. 2
Margin pressure: More-for-less demand and global rivalry
Many drivers increase pressure on margins across industries: costs are rising and it is harder to charge
customers more. Rising uncertainty and fast-paced competition challenge leaders of organizations
to hold onto their margins. Non-economic factors including country referendums, extreme weather
events, aging societies, and changing demographics in the geopolitical landscape2 increase expenses
for most companies and do not help raising prices to equal measure. In fact, increasing health care
costs from an aging population with seniors living longer than ever may exacerbate pressure in health
and welfare related industries.
Figure 1: Drivers of negative growth (reported by those in organisations that have experienced negative growth)
Economic challenges such as inequality further increase pressure on margins. While inequality between
the rich and poor is increasing in many countries, populous emerging economies including China have
seen millions lifted out of poverty. This leads to a swelling global middle class whose members start
consuming goods that are taken for granted elsewhere. Yet, this surge of the global middle class goes
along with a drop of its average disposable income. This increases pressure on companies to localize
and respond to sophisticated demand at lower price points. This prospect of having to offer more-for-
less across markets aggravates companies’ margin outlook.
Even more daunting is the ease with which emerging market companies have been able to capture
significant share in markets that had been thought cornered by incumbents. The increasing number
of new rivals in industries, ranging from manufacturing to services to Information Technology (IT) and
science, further pressures firms to protect and preserve their margins. Rapid growth of computational
power, which rose for decades according to Moore’s law, has contributed to a new kind of industrial
revolution3 with great opportunities as well as challenges. Navigating these challenges to harness the
potential of digitization and leverage big data is high on the agenda of company leaders as they seek
new ways to competitive advantage, even if it is only transient.4 However, the rising pressure to renew
strategies frequently requires investments in innovation, skills, talent and IT. All of which add to costs
and do not necessarily translate into increased willingness to pay any higher revenues. In response,
firms engage in rivalry to capture a larger share of the more-for-less demand with fewer resources.
2 Eurasia Group, 2016.
4 Porter, M.E. (2008) On Competition, Harvard Business School Publishing, Boston, MA; Gunter
McGrath, R. (2013) The End of Competitive Advantage: How to Keep your Strategy Moving as
Fast as your Business, Harvard Business Press.
3 Brynjolfsson, E. and McAfee, A. (2014), The Second Machine Age: Work, Progress, and Prosperity
in a Time of Brilliant Technologies. WW Norton & Company.
Price pressure
(competitors)
New market
entrants
Industry
regulation
Debt
write-down
M&A activity New market
entry / existing
market exit
59%
53% 52%
41%
33%
28%

5. 3
Figure 2: Margin pressures (reported by all respondents)
In 2016 the extreme pressure on margins puts even the largest rise in corporate earnings per share at
risk. Not only are markets taken aback by sudden profit warnings, often it is management itself that
is surprised at how unexpectedly their companies’ numbers have taken a turn for the worse. How
firms can address margin pressure and stay in control of performance is thus a key issue for executives
across industries.
Vendavo, a profit and margin optimization solution leader, commissioned a survey of top management
(C-level) to better understand the state of margin management. The results allow us to see what the
issues are, the gap at the C-level and how margin may be left on the table. This present study reviews
what we know about staying in control of margins and builds on the results of this survey of 200 CFOs
and CMOs.
There is much academic literature focusing on measures, low cost positioning, incremental
improvement and operational effectiveness. For practitioners, cost optimization has become business-
as-usual. Yet, profit growth has eluded many a company. Questions about how to create and capture
value, and how to drive profit growth, remain unanswered. Some leaders of organizations are
skeptical about negative margin developments, sensing that cost optimization has run its course. They
understand that they are less in control of what drives shareholder value than is desirable. The results
of this report provide pointers to (re)gaining control of margins at the conceptual and practical level.
61% 59%
54%
48% 47%
31%
Volatility in costs Rigid internal
structures
The margins
in our industry
are too low to
drive meaningful
improvements
Lack of insight into
margin and profit
performance
Board or
management
strategy to keep
margins at a
certain level
Unavoidable price
erosion over time

6. 4
About this research
This research report, written by Dr. Patrick Reinmoeller, Professor of Strategic Management, Cranfield
University, focuses on understanding the role of margins in strategy. The study shows the factors that
underpin companies’ strengths and weaknesses by examining the strategic role of organizational
capabilities in managing margins and ensuring a competitive advantage.
The ideas presented in this paper are based on original research conducted by Dr. Patrick Reinmoeller,
who conducted open interviews and held discussions with experts in the field of strategy, including
directors from leading multinationals in extraction, manufacturing and services with headquarters
mainly based in Europe. Formal and informal conversations have provided insights into the pressures
executives face, what holds them back and how they develop solutions.
A quantitative study, which was carried out in partnership with research organization Vanson Bourne
and profit and margin optimization solution leaders Vendavo, also informs the ideas presented in this
paper. This survey sampled 200 senior company leaders, equally split between CFOs and CMOs and
across four geographic areas: the UK and Ireland; Scandinavia; Austria, Germany and Switzerland;
and Italy. The CFOs and CMOs responded for companies that had revenue of at least $1.1bn (many
were significantly higher) across sectors including chemicals, manufacturing, transport and travel,
life sciences, medical equipment, pharma, IT and telecoms, wholesale distribution, construction and
engineering, and logistics.

7. 5
From hill tops and historic data to real time views of strategy
Strategy did not start with a focus on the bottom line. Inspired by military success, business leaders
sought to transfer strategic planning and apply the lessons learned by winning wars. After some
initial success in environments that were stable and predictable, strategy moved away from linear
strategic planning. Ongoing globalization, especially after China joined the World Trade Organization,
advancing digital technologies, greater complexity and uncertainty all blunted strategic planning. The
term ‘disruption’ became fashionable in the 1990s and today disruption, a fundamental shift in the
product/market and industry, is what executives expect.5 The disruption that killed margins in many
industries is the rise of low cost business models, such as Aldi, a discounter, or Ryanair, a budget
airline. Operating at lowest costs, yet with positive margins, has become best practice in dethroning
incumbents who relied too long on uncontested large margins in spite of their high cost base. Creating
such disruptions to gain advantage by surprise and superior cost competitiveness has become part of
manoeuvres in strategy.6
From detailing a plan and subsequent implementation directed ‘from a hill top’, strategy has
descended to being ‘in the field’, in close contact with customers and competitors, constantly required
to adapt to new circumstances. Company results are influenced by many decisions at different
levels of the organization. Therefore, companies need the skills to act in real time at all levels of the
organization to manage margins successfully.
Upsides: hard and soft skills
Clearly many of these changes have made competition
more relentless and reduced margins across many
industries. Yet, some of the same changes have
allowed companies to improve their game and to seize
new opportunities. If we focus on advances in IT (hard
skills) and our understanding of the new ‘soft’ skills
of leaders, we can see some upsides. IT, including the
emergence of the social web, has given companies
unprecedented opportunities to generate new, and
extract existing, data from multiple sources, internal
and external, and even dormant digital archives.
Greater computing power and easy-to-use software
enhance the level of detail and the speed with which
companies can distil from historic and current data insightful patterns. This provides these companies
with an advantage over rivals that understand less well. The best performing CFOs and CMOs use IT
to influence how strategies are developed. Larger data sets with structured and unstructured data
available in close to real-time allow early adopters of new analytical tools and techniques to turn data
into action and get most benefits.7 While such changes may provide competitive advantage now and
reward early adopters, they appear to become standard practice and force themselves on laggards.8
8 See also Porter, M.E. 2001 Strategy and the Internet, Harvard Business Review, 79(3); 63-79; Nijholt, J.J.,
Bezemer, P.J. and Reinmoeller, P. (2016) Following Fashion: Visible Progressiveness and the Social Construction
of Firm Value, Strategic Organization, 1476127015617673, first published on December 31, 2015 as
doi:10.1177/1476127015617673.
7 E.g. Lavalle, S., Lesser, E., Shockley, R., Hopkins, M.S. and Kruschwitz, N. (2011) Big Data, Analytics and the Path
from Insight to Value, MIT Sloan Management Review, Winter, 52(2): 21-31; Davenport, T.H. (2006) Competing
on Analytics, Harvard Business Review, January; Davenport, T.H., Barth, P. and Bean, R. (2012) How Big Data is
Different, MIT Sloan Management Review, 54(1): 43-46.
6 D’Aveni, R.A. (1999) Strategic Supremacy through Disruption and Dominance, MIT Sloan Management Review,
Spring, 127-135.
5 Favaro, K., Karlsson, P.-O., and Neilson, G.L. (2013) Captains of Disruption: The 2012 Global Chief
Executive Study, Strategy+Business, 71, Summer.
Figure 3: Tools and skills

8. 6
Clearly IT savviness is important, however the skillset leaders need to adapt to these changes is known
to be much broader. Intelligence alone is not enough. The new skillset includes broad awareness of
context; abilities to frame, gather, analyse the key information; to choose wisely, and to learn and
adapt pragmatically. They do not allow leaders to be cognitively, emotionally or socially constricted by
their area of expertise or any other comfort zone.
Quest for capabilities
Executives, who recognize that their environment
has become much more complex, dynamic and
uncertain, acknowledge that new tools, new
techniques and a new mind-set are needed. They
realize that competences which were helpful in the
past, may have lost their usefulness; some of them
may even have turned into rigidities or identity
traps which hold the company and its people back.
Clearly, building new capabilities is high on the
agenda for leaders who seek to deliver results.
These new capabilities are needed at the corporate
and business unit level to realize the potential
of the organization in the near present and in
the future. More specifically, companies need
capabilities to monitor what is going on, pick up
the weak signals, make the right calls and swiftly
align resources to seize emerging opportunities or
avert threats.9 These organizational capabilities,
and the speed by which companies can move
between thinking and doing, and between adding value and taking out costs and managing margins,
have become decisive to win in dynamic rivalry.10 Although organizational capabilities to understand
what is going on, to figure out what to do and get this done are clearly important, how these translate
to specific areas with direct bottom line impact needs further research because companies act through
their leaders and employees.
Facing the complexity of today’s business environment and uncertainty about the future, those
who lead companies need individual capabilities that allow them to remain aware of the relevant
context, draw conclusions from analysis and execute pragmatically.11 Building these capabilities
involves becoming aware of one’s own strength but also recognizing hidden bias. CFOs and CMOs who
understand ‘self’ better, a precondition for change, can explore how their thinking and behaviour is
hindered and, going forward, can help company performance.
11 Reinmoeller, P. (2014) How to win a price war, MIT Sloan Management Review, Spring, 55(3): 15-17.
10 Helfat, C.E. and Peteraf, M.A. (2014) Managerial Cognitive Capabilities and the Microfoundations of Dynamic
Capabilities, Strategic Management Journal, DOI: 10.1002/ smj.2247.
9 Teece, D.J. (2007) Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise
Performance, Strategic Management Journal, 28: 1319-1350; Eisenhardt, K.M. and Martin, J.A. (2001) Dynamic
Capabilities: What are they? Strategic Management Journal, 21: 1105-1121.
Figure 4: Understanding self

9. 7
Mind the margin gap
Clearly there are challenges in measuring company performance. Failure to address them can
not only lead to unhelpful conformity but it can also hamper creativity that stretches norms of
progress.12 Dropping well-established measures and adopting customized accounting measures
such as ‘annualized recurring revenue’ or ‘billings’, companies seek to signal good news but may
actually be dressing up what is depressing. Even profitability is less facile than one might expect.
There are pockets of knowledge about financial measures, means to add value and much about cost
optimization, yet little on how these factors influencing margin can be brought to bear.
Focus on measures
Although we know much about financial measures such as profitability or shareholder value, we
know much less about managing margins strategically. Analysts may use size, value, profitability and
investment patterns to explain average stock returns. Or they use the level of profitability as a proxy
for expected future profitability.13 Multiple relationships are known; more profitable firms have more
potential for future growth, and firm profitability is linked to future stock returns.14 Higher profitability
and higher stock returns in the past predict higher profitability in the future.15 Frequently, profitability
is measured with earnings and based on the efficient markets assumption, which suggests that prices
are the outcome of rational decisions. Similarly, it is known that in order to raise shareholder value
companies have to reduce working capital and/or fixed assets, lower the cost of capital and sell more.
Focus on value dimensions
We find several studies that emphasize different kinds of perceived value that can drive up the
willingness to pay. Since the economist, Veblen, in The Theory of the Leisure Class, many authors16
have shown the importance of not only the functionality of goods but also the experience quality
of their use, and their social value. These play important roles in enhancing perceived value at
the moment of purchase and during use. There is clearly much work on cost optimization. Lean
management, business process reengineering, business process outsourcing and many other tools
and practices in strategic management focus on cost reduction through operational effectiveness.17
Consider how operational excellence, focused positioning or differentiation can influence margins,
yet how these strategies are to be integrated is not clear. What is missing is an indication on how to
integrate choices about costs, value added and financial performance to raise profits. Such integration
requires strategic judgments in the critical moments.18
14 Haugen, R.A. and Baker, N.L. (1996) Commonality in the Determinants of Expected Stock Returns,
Journal of Financial Economics 41 (3): 401–439.
13 Fama, E.F. and French, K.R. (2015) A five-factor asset pricing model, Journal of Financial Economics, 116: 1-22.
12 Shumsky, T. (2016) Companies invent their own performance benchmarks, Wall Street Journal, Updated March
29, 2016 (accessed online); Nijholt et al. (2015) Following Fashion.
15 Cohen, R.B., Gompers, P.A. and Vuolteenaho, T. (2002) Who Underreacts To Cash-Flow News? Evidence
from Trading Between Individuals and Institutions. Journal of Financial Economics 66 (2–3): 409–462.
18 Nonaka, I. and Takeuchi, H. (2011) The Wise Leader, Harvard Business Review, May (accessed online).
17 Porter, M.E. (1990) What is strategy? Harvard Business Review, 74, 6: 61–78; Rigby, D. and Bilodeau, B. (2015)
Management Tool & Trends, Bain & Company.
16 LaSalle, D. and Britton, T.A. (2003) Priceless: Turning Ordinary Products into Extraordinary Experience, Boston:
Harvard Business School Press; Eisenman, M. (2012) Understanding Aesthetic Innovation in the Context of
Technological Evolution, Academy of Management Review, 38(3): 332-351.

10. 8
Trade-off and judgment
Seminal work on important generic strategies, including differentiation and cost leadership,
emphasizes the need to make trade-offs.19 Such trade-offs can be essential to strategies of companies,
yet where customers demand combinations, e.g. value for money, strategists need to carefully
understand how this influences their profit margins. Therefore, how to raise prices and lower costs
when facing a customer requires more research. In spite of insightful work done in the area, profit
margins are often taken as a dependent variable of more general factors such as the structure
of markets, competitor environment, the profits made in an industry, a company’s resources or
opportunity costs. Although we know that a corporation’s profit margins are influenced by the relative
strength of its capabilities, we also know how strategic decisions for diversification can trade off profit
margins in favor of growth.20 Understanding what influences the average return to capital across the
multiple businesses within a corporation may not help with business unit specific decisions or the
margin impact of judgment.
Knowing how to power margin
General patterns do not help to understand how companies can drive profitability by managing their
margin. How to increase profit margins, how to sustain elevated margins, which decisions interact to
influence margins, and how or why small firms accept low profitability remains unclear.21 Consider
that pioneering Rolls-Royce started speaking about ‘Power by the Hour’ more than thirty years ago to
capture higher profits by emphasizing services. Long term contractual agreements about performance-
based logistics predefine rights and obligations and lock companies into price levels, while the
developments of the costs cannot be known. This leaves the margin at risk. Although there is evidence
that more frequently scheduled maintenance and better care performed during each maintenance
event can lead to higher product reliability,22 early adopters of this approach to higher margin found
themselves suffering insufficiently realistic risk assessments of possible adverse margin developments.
As this example shows, while assessing margins in a moment is hard, seeking to optimize margins into
the future with a signature of a long term performance-based contract is harder. To sum, there is not
much evidence on how to manage margins strategically by adapting in a changing environment. This
is the core of what follows.
19 Porter, M. E. (1996) What Is Strategy? Harvard Business Review, 74, 6: 61–78.
20 Levinthal, D.A. and Wu, B. (2010) Opportunity Costs and Non-Scale Free Capabilities:
Profit Maximization, Corporate Scope and Profit Margins, Strategic Management
Journal, 31: 780-801.
21 Fama, E.F. and French, K.R. (2015) A five-factor asset pricing model,
Journal of Financial Economics, 116: 1-22.
22 Guajardo, J.A., Cohen, M.A., Kim, S.-H. and Netessine, S. (2012) Imact of Performance-
Based Contracting on Product Reliability: An Empirical Analysis, Management Science,
58(5):961-979.

11. 9
CFO and CMO perspectives on margin, performance and Challenges
In this section we reflect on the insights gained from the Vendavo survey and the numerous
discussions we have had with experts in the field of strategy and strategy practitioners. In particular,
we discuss why margin has come to play an important role in leading companies to success.
Importance of margins
More attention needs to be paid to margin. Company leaders across industries, but particularly in
logistics, distribution, IT/telecoms and health, see margin improvements as very important. Often their
executive team talks about ‘keeping an eye on the margin’, or ‘clawing our margin back’. What are
better ways to manage margin? Clear priorities emerge. Cost cutting appears to be strongly routinized.
When asked what to do, the immediate reaction is often ‘cutting cost, of course.’ Increasing revenue
and driving incremental improvements in margins are among the top priorities for the CFOs and
CMOs. Incremental improvements in margins is a top priority for many. CMOs see more potential for
such improvement than CFOs. Their professional orientation is clearly recognizable as CFOs are more
concerned with earnings per share and CMOs with increasing revenue. Taking the customer perspective
allows for thinking about how to improve margins by raising the willingness to pay. One CEO explained:
‘I make a point of visiting stores and talking with customers and our supply chain partners directly. I
always learn something I can improve.’ In contrast, taking the perspective of financial markets offers
fewer opportunities to make meaningful improvements for customers. The focus quickly returns to
costs.
However, CFOs and CMOs agree on the importance of driving incremental improvements in margins
and sustainable profitable growth. For most respondents, margin is important, and for a clear majority
it is very important to maintain or increase margin. Executives are concerned about decreasing margins
and share: ‘It is a constant battle for us.’ Recently, a senior executive commented on the challenges of
the relationship with his major client: ‘Every year the prices they offer come down. They take efficiency
gains for granted, if we achieve them or not. They base their new prices on what they expect. This
squeezes our margin every year, for years. And we see no end to it.’
Figure 5: Importance of margins (reported by all respondents)
30%
54%
14%
2% 2%
41%
51%
8%
0% 0%
33%
52%
10%
3% 2%
4%
61%
28%
2%
4%
Total Ahead of market growth
expectations
Aligned to market growth
expectations
Behind market growth
expectations
Vitally important Very important Quite important Not very important Not at all important

12. 10
Key factors that influence companies’ ability to maintain and improve margins.
Three kinds of factors matter: external, internal and cognitive factors. Competitive pressures, volatility,
price erosion and weak demand in mature markets emerge as key external factors that lie outside
of any company’s control. The challenges differ. Compare a CEO in the pharmaceutical industry’s
explanation: ‘We face erosion but we also face the patent cliff. As soon as our patents expire, our
entire profit and volume is at risk. Well, it is almost certain that a generics enters and alters the game.’
The fundamental challenge remains similar. Erosion of margins through, for example, legislative
change is well known across industries.
Internal factors matter most
The prominence of internal factors is striking; these include rigid internal structures, lack of insight
into margin and profit performance, limited communication between units, a paucity of tools, data
and business intelligence. Especially, experienced (and older) CFOs and CMOs (55 years old and older)
see the internal rigidity as key culprit. Although the context is challenging, many main challenges lie
within or can be influenced, including supply chain complexity and maturity of markets. Resignation
into a mindset that nothing can be done and that the margins are too low to drive meaningful
improvements is unfortunately common.
CFO and CMO are alike in why they differ
While the views of CFOs and CMOs are highly consistent there are two noteworthy differences. True
to type, CFOs are more acutely aware of the rigid internal structures, which appear to impede their
access to the data when they need it and how they need it. CMOs lament, even more than the CFOs,
the general lack of insight into margin and profit performance. Such lack of insight is acutely felt in
manufacturing, chemicals and wholesale distribution, whereas resignation is most strongly present in
IT/telecoms and life sciences/medical equipment/pharma. One executive summarized as follows: ‘The
markets are fast changing; it is us who are too slow adapting.’
Satisfaction with margin systems explains company performance
For listed companies the pressure from markets is high. Those companies that meet or exceed
expectations of analysts clearly perform at highest levels. Of all companies covered by the research,
58% have experienced negative growth during the last five years with an average of 1.39% negative
growth per annum. There is a clear view of what has driven negative growth: competitive price
pressures are clearly number one, especially in the life sciences, medical equipment, pharmaceuticals23
and logistics. New market entrants and industry regulation are the next two most important drivers.
Excellent performance comes with better margin management
Many CFOs saw their companies gain shareholder value (as measured in earnings per share) during
their tenure by an average of 4.8% or higher in chemicals, wholesale distribution and IT/telecoms
(compared to construction and engineering with 1.62%). There is a strong relationship between such
companies and their satisfaction with programs for margin performance. Of the 200 CFOs and CMOs
surveyed, 24% admit their performance is slightly or significantly behind market expectations. More
than 65% that meet or exceed market expectations are satisfied with and rely on the programs for
margin performance. Companies that are happy with the programs in place to manage margins beat
the markets’ growth expectations. These programs do what they are expected to do and their quality
is strongly correlated with superior performance.
23 Please note the life sciences/medical equipment/pharma finding is based upon a low base size.

13. 11
Caught in Clarity
Strategists may seek clear solutions and subscribe to the idea that decision making is about clear
trade-offs, and less about finding new solutions. With the idea of clear trade-offs in mind, strategists
make reasonable choices to secure the success of a company. They may consider generic strategies,
among which low cost positions are prominent. The clarity of such choices enables the implementation
of the low cost strategy. Such strategies’ focus and coordination allow for ‘reducing costs’, ‘taking costs
out’ and ‘bringing head count back’ and they may produce results in the short term. While clarity and
simplicity allows for a focus on costs, opportunities to manage margins more comprehensively may be
lost. ‘We wanted to improve our margin by focusing mainly on costs,’ explained one CMO, ‘We did this
for years…and only saw our margin come down. We did not look at what our efforts did to perceptions
of customers.’
Figure 6: Simply silos
Reverting to type
Many people are involved in the implementation of strategy. After successful careers largely within
silos, sometimes within a single organization, newly appointed leaders of organizations face complex
problems and great uncertainty for the first time. This challenge renders effective decision making
difficult and it requires capabilities that allow for making the right choices. Those who rose through
a functional discipline are likely to fall back to seek tools and solutions from that discipline. They
revert to type. Also leaders of companies tend to revert to type when they are confronted with such
a challenge. Leaders with an operations background may focus on efficiencies and reducing costs.
Others with a sales background may focus on promotions to gain market share. Their approaches to
implementation will rely on (re)employing the tools and techniques that have been useful in the past.
This effectively exploits what people know and can do well, yet it leaves opportunities that reside in
learning and in cross-functional collaboration unexplored.
Importance of simplifying not too much
The clarity of strategic thinking is necessary for alignment, however if this clarity involves
oversimplifications it limits leaders and their organizations in finding better ways to manage margins.
Similarly, constraints on a strategy based on functionally rooted thinking do not allow for more
complex strategies that involve pursuing lower costs and higher price points at the same time.
Exploiting current knowledge and routines can limit exploration and learning.24 Yet, Apple illustrates
that a low cost position does not force low price strategies. While integrating exploration and
exploitation may introduce some complexity, it allows for more than cutting costs, it can help manage
margin increase.
24 O’Reilly, C. A. and Tushman, M.L. (2013) Organizational Ambidexterity: Past, Present and Future,
Academy of Management Perspectives, 27(4): 324-338.

14. 12
Margin control: how to drive growth
Executives are concerned about margins because they know they are important. They know about the
close link between driving margins and outperforming competition and markets. Given these results,
five surprising findings provide deeper insights into the gap of margin management in practice and
what to do about it. They focus on the main challenges, definitions, knowledge of what to do, knowing
what the sales team does, and key tools.
The challenges: external and internal threats and ability erosion
Many challenges threaten margins. Competitors, new and old, fluctuations in markets, raw material
costs, weak demand, maturity of markets, cost of sale, and difficulty to identify new growth
opportunities undermine company efforts. Major political events, including the UK’s vote to leave the
European Union, also have the potential to trigger wider economic uncertainty and threaten margin.
Among these many are external and outside of the control of management. Yet, the cost of sale as
well as the ability to identify new opportunities for growth may well be within the remit of what
company leadership can choose to address. There are seven main challenges: supply chain complexity,
inadequate tools, limited access to data (e.g. on cost or performance), inefficient or outdated processes
or systems, lack of communication between teams, raw material costs and sub-optimal resource
management. Most of these challenges can erode companies’ abilities to maintain their margins.
They are all internal causes; executives can address each of these challenges and strengthen their
company’s ability to increase margins. Self-afflicted challenges are most unfortunate, yet, fortunately
they can be addressed effectively.
Figure 7: Challenges to improving margin (reported by all respondents)
Supply chain complexity
Inadequate management tools to
manage profitability or manage deals
Access to data; cost, performance, etc.
Inefficient or outdated (perceived)
processes or systems
Lack of communication between teams
Raw material costs
Sub-optimal resource management
Underperforming sales force
Unreliable sales forecasting
Limited intelligence on current or
potential customers
Lack of alignment of global divisions
Defecting customers
There are no challenges
31%
31%
29%
29%
27%
25%
25%
23%
20%
19%
17%
14%
4%

15. 13
Definitions: more than words – alignment through shared meaning
Margins are important to CFOs and CMOs. Yet, not all companies have clear definitions of what they
mean with ‘margin’ when they use the term internally. ‘Every unit seems to have its own definition,’
suggested a CEO. This may explain the lack of communication between units and lack of alignment
between units of large corporations. Without a clear definition of margin, it is likely that companies
do not focus on what drives growth. For 57% of the CFOs and CMOs, definitions of margins in their
companies are often open to interpretation across different areas of the business or regions; 18%
do not have any agreed consistent definition of margin and 5% are not sure whether there is such a
definition. The average number of definitions of margin, as estimated by the CFOs and CMOs is seven,
while 14% of the organizations have between 11 and 20 definitions. A minority, mainly in sectors such
as manufacturing, chemicals and wholesale distribution, report between 21 and 30 definitions. Such a
lack of consistent definitions that are used within the companies hampers these companies’ abilities to
drive growth.
Given the limitations in consistency, the lack of strength in measuring margin at 39% of the companies
is no surprise. Alignment without commonly shared definitions is elusive because companies lack
the foundations for organizational excellence. Without a common language companies are forced to
muddle through a lack of common understanding, coordination across units, focused action and shared
insights. Consistent definitions are mostly found at companies that are ahead of market expectations;
at companies that lag behind growth expectations the lack of any agreed consistent definition of
margin is conspicuous.
Evidently, the level of satisfaction with margin management systems appears related to sharing
a common understanding of what margin means. The lack of definitions is associated with
disappointment in the system. This shows how having a system helps, yet having a system without a
common definition may not be enough. Without a common language, views and shared meaning that
align people in exploiting the power of such systems, the benefits remain below potential. CFOs and
CMOs report that the accuracy and insight gained from margin performance systems enhances their
ability to measure deal profitability and their confidence in developing aggressive growth plans. ‘We
asked for facilitation to get this out of the way. We had to make sure we know what each of us means
when we are talking with each other. It was the best investment in ‘infrastructure’ we made so far.’
Figure 8: Consistency of definitions and satisfaction with margin systems (reported by all respondents)
Yes, there is one completely consistent definition used everywhere
Yes, to an extent, although this definition is often open to interpretation
across different areas of the business or regions
No, we don’t have any agreed consistent definition of margin
Unsure
Happy with accuracy and insight
of margin systems
Unhappy/neutral with accuracy and
insight of margin systems
31%
64%
48%
36%
10%
4% 1%
6%

16. 14
Knowing what to do: cut, create and shape
Executives at many companies did not know what to do to drive margins. Surprisingly, of all CFOs and
CMOs, 38% were unsure or did not know what to do to increase margins in their business tomorrow.
Smaller companies (between $5.1bn and $10bn) stand out with 49% of the executives feeling
uncertain. After years of cost optimization, they may have simply reached a point where they see
decreasing returns of repeating the same approach. One CEO confided: ‘We have done it; we have
done it so many times. We just need to find a better way.’
Figure 9: Not knowing what to do (reported by all respondents)
Excellence goes along with effectiveness
The difference between growth companies that defy expectations and those that cannot meet them is
clear. Companies unable to meet growth expectations have executives that are unsure about what to
do to increase margin. Those leading companies that outperform their peers know what to do, how to
do it, and they are confident to do so. When looking at those who know what to do, this study shows
three ways to increase margin; cutting costs, creating and shaping.
Cutting costs: Reducing IT costs is mentioned by more than 60% of those who know what to do.
Other areas to address are of course not exempt. Clearly, also increasing volume can help to reduce
costs. For companies in life sciences, wholesale distribution and travel and transport, reducing IT
costs was a clear way to address margin increases. Workforce redeployment (e.g. outsourcing)
seemed more important to CFOs and in the Nordic region.
Creating value: Ways that add value to customers and allow moving the price point north include
extending product cycles and increasing pressure on sales teams to improve margin. Industries such
as life sciences and IT/telecoms emphasized increasing the productivity of sales teams.
Shaping margins: Acknowledging some variation across regions and industries, we find that those
who know what to do have a clear understanding of how they can shape their margins by reducing
costs and raising their price point.
Knowing what the salesforce does
Sales teams make their pricing decisions relying on gut feel – more often than needed. Although the
majority of CFOs and CMOs are happy (57%) with the accuracy and insight provided by the companies’
systems and programs for margin performance, with CMOs being particularly pleased (65% are
happy), the use sales teams make of these programs is sobering. Only 30% report that their sales
teams base their pricing decisions on up-to-the-minute data at their fingertips. Looking into what
sales teams rely on when they make their crucial pricing decisions, we find that the relationships with
62% 73% 67%
33%
19%
19%
13%
15%
17%
16%
35%
33%
Total Ahead of market growth
expectations
Aligned to market growth
expectations
Behind market growth
expectations
Yes. Would know what to address No. Would not know what to address Unsure

17. 15
customers, recent prices in similar deals and gut feeling are most important across all firms. When
we compare the companies that beat growth expectations with those that do not, one pattern is
clear. Companies that disappoint market expectations rely most on gut feeling and prior relationships
while disregarding real-time data, yet companies that beat expectations rely on enhancing client
relationships with up-to-the-minute data to allow for better judgment.
The ability to use up-to-the-minute data is clearly linked to companies’ ability to drive growth in
margin and beat market growth expectations. After explaining how his CIO wants data, systems and
routines, and his sales leader wants experience, one company founder emphasized: ‘We want them
to use their gut feel, their experience and intuition after they have consulted the facts – not before or
instead of accurate and timely information.’
Figure 10: Sales force pricing decisions and shareholder value (reported by all CFO respondents)
More collaboration, better insight and stronger teams: the tools it takes
Driving margin requires both tools and ability. Although margins and margin management are seen as
very important, less than a fifth consider their ability to be strong enough to drive significant year-on-
year improvements in margins. Of all responding companies, 96% report to perceive clear challenges
to their ability to improve margins.
The emerging list of what assails their ability to drive growth is telling. Close to half of the respondents
consider their abilities to drive margin improvements as not strong. While delivery, product
management, pre-sales and after sales support are seen as mostly lacking understanding, three
organizational functions – marketing, sales and finance – are seen to best understand how to effect
margins. These functions also know their tools that may work. CFOs and CMOs ask for performance
tools that provide better insight into margin performance. In line with this, real-time dashboards
and a talented sales force to close deals at higher margin indicate that well-known tools are clearly
important. However, the top two tools are more collaboration across the business and better insight
into margin performance. Collaboration and stronger teams show how important people, and their
ways of doing things, are in efforts to raise margins. Although dashboards and sales force are
important, CFOs and CMOs are advised to also change perspectives and look into how people can gain
better insight and how they can collaborate better.
80%
62% 66%
28%
10%
33%
45%
28% 29%
71%
39%
45%
Low gains for shareholders (CFO only) Moderate gains for shareholders (CFO only) High gains for shareholders (CFO only)
Gut feeling/judgement
Relationship with customer
Recent prices in similar deals
Up-to-the-minute data at their fingertips
80%

18. 16
Figure 11: Tools to manage margins (reported by all respondents)
Figure 12: Sales force decision making, margin management abilities and shareholder value
(reported by all respondents)
More
collaboration
across the
business
Better insight
into market
performance
A stronger team A real-time
dashboard
Sales force to
close deals at a
higher margin
Unsure
61% 59%
55%
41%
36%
1%
44%
32%
40% 42%
16%
27%
23%
8%
29%
37%
48%
55%
Low ability
(1–6 rating)
Moderate ability
(7–8 rating)
High ability
(9–10 rating)
Behind market
growth
expectations
Aligned to
market growth
expectations
Ahead of
market growth
expectations
Total Sales team base decisions on the up-to-the-minute data at their fingertips

19. 17
Margin drivers: what CFOs and CMOs learned
Most effective: seven levers
In the last five years, most companies actively worked to respond to threats and challenges to
influence profit. The majority of companies worked on strategic programs to reduce costs and
increase efficiency, which had a business unit or corporate focus. Where industries like transport and
travel and life sciences/medical equipment/pharma have employed this lever much, others such
as manufacturing and chemicals seem less active. About half of the companies worked on pricing,
i.e. increasing or decreasing prices in specific product-markets. Out of seven profit levers, three
others were more remote from operations, i.e. actions shaping the scope of corporations. Companies
sought to influence profitability through mergers and acquisitions, division sell offs and market exit.
Finally, two levers, short-term derivative trading and currency trading are even further remote from
operations.
For all companies that sought to influence profits in the past five years in different ways, two stand
out. First, strategic efficiency programs and cost reduction programs have been very popular across
companies, especially among those disappointed with their results. This popularity may indeed limit
these programs’ ability to provide a competitive advantage for any company because each is seeking
operational effectiveness in very similar ways. With the repeated application of such programs – often
under different labels – companies are reaching a limit. With negative and unintended consequences
like job uncertainty and demotivation among employees on the rise, the decreasing returns of
expensive cost reduction programs no longer justify their repeated application. As one company leader
put it: ‘Cutting any further does not make sense.’
Second, the more successful companies found ways to make smarter pricing decisions. Clearly more
demanding than taking out costs, smarter pricing decisions are more information intensive and require
more intelligence because they can only be based on a firm grasp of the relationship with customers.
However, these more resource intensive pricing decisions allow companies to optimize margins in
accordance with changes in the environment. If managed to remain legitimate in the eyes of the
customer, smart pricing provides more opportunities more sustainably.
Besides the above there were other ways to influence profits. For larger firms in particular this included
mergers and acquisitions, business exits and division sell-offs. All companies found M&A and division
sell-offs to be least effective. Corporate objectives for these moves were not fully achieved for more
than 40% of the companies, which compares unfavorably with the high expectations most companies
had for achieving or out-performing their objectives.
Reason for profit levers
Companies can react to events or they can take strategic action, where careful anticipation of
developments allows making choices that can influence events. Research shows how companies can
beat market expectations by increasing the motivation to apply profit levers. A clear pattern shows the
more successful companies deploy profit levers as part of a long term strategy or a new strategy. At
times they deploy profit levers as a reaction to competitor actions. The firms that lag behind market
growth expectations mostly react to national and global economic events, competitor actions, and
industry events.

20. 18
Looking ahead
After reviewing what is known about margin management, we found three explanations for the
paucity of knowledge. One, margin sits between the fields of strategy, finance, accounting, marketing
and sales and has not benefited from concentrated research efforts. While each field touches upon
it, none has made it a focal area of analysis. Two, each area addresses topics adjacent to margin
and applies much rigor. The choice to focus, for example, on lowering costs and committing to this
approach became somehow tied to mass production and low margins, while the choice to differentiate
came to be linked to smaller lot sizes and higher margins. This is helpful, yet it has not allowed for
exploration of what only recently has gathered attention; hybrid strategies seek reconciliation of
paradox.25 Revisiting contradictions and trade-offs, strong and weak, opens up the opportunity to
understand how margins can be managed better. Raising prices/reducing costs and reducing prices/
raising costs reveals contradictions that practitioners face frequently. This study offers first observations
and sense making. Three, hard and soft skills have changed what is possible. Making the right decision
at the right time with up-to-the-minute information may have seemed like fantasy decades ago. Today
reconciling contradictions is already facilitated by IT, big data and analytics, and margin management
programs that provide reliable evidence to better inform judgment by experienced managers - just
in time for when they face their customers. Leveraging the advanced technology available now,
embracing data volume, data richness and algorithms to develop and test ideas appears a promising
path to bolster the performance of both CFO and CMO by advancing the company’s fortunes.
25 Smith, W. K. And Lewis, M.W. (2011) Toward a Theory of Paradox: A Dynamic
Equilibrium Model of Organizing, Academy of Management Review, 36(2): 381-403.

21. 19
Eight actions model
This study provides clear pointers to how companies can regain control of margins not only at the
conceptual but importantly at the practical level.
Figure 13: Eight Actions Model
1. Increase awareness of growth drivers
Raising margins drives growth. CFOs and CMOs at growth companies that raise their margins year-
on-year are more likely to report that their organizations outperform market expectations (31%
compared to 16%). Create certainty about what drives your growth by gathering data to challenge
your assumptions.
2. Focus on margin
Leaders set priorities. Company leaders who see their companies growing faster than market
expectations report that their growth companies are more focused on margins. For these
companies, 41% of the respondents emphasize that maintaining or increasing margin is vitally
important, compared to only 30% in all companies. CFOs and CMOs need to devote more time and
resources to managing margins. Without their leadership, lower levels in the organization may try
but fail in helping the company focus on success.
3. Create a common ground
Surprisingly, companies handle on average seven different definitions of what margin means. These
differences give rise to misunderstandings and misalignment and prevent an effective focus on
margin. What is needed is clear language, a shared view and meaning of what margin is and how
it is achieved and can drive growth. Capture the state of confusion about margin in your board room
and in your company, visualize it to motivate discussions and develop a shared understanding to
finally make margin meaningful.
Improve
judgement
Triple A
Open the
data vault
Offer real-time
data that matters
Exceeding growth
expectations
Awareness of
growth drivers
Focus on margin
Create a common
ground
Analyze how to
increase margin
Managing
margins

22. 20
4. Analyze how to increase margin
While executives of companies that lag behind expectations frequently do not know what to do
or how to increase margin, leaders at growth companies actively manage margins. They have
experienced working with different tools and used different profit levers. Unfortunately, their focus
and their experience in the last five years has been biased towards cost cutting. Going forward,
company executives need to acquire strategic capabilities that allow them to expand margins by
reducing costs and raising prices by creating value. Increase how mindful people are about what
influences margin; organize customer encounters, field trips and ‘pauper’ experiences to raise
employees’ awareness. Rigorously analyze the large volume of structured and unstructured data
already available to identify the key levers of margin after addressing additional data needs.
5. Open the data vault
Provide accurate data and insight through systems and reports for larger numbers of employees.
Opening access to data is similar to smart altruism, the giver will be given. At growth companies,
more than 75% of the respondents are happy with the accuracy and insight provided by systems
and reports meant to help with margin management. The strong association with data quality,
user satisfaction and ability to grow business through margin management, clearly needs
further research and clarification. Yet, providing intuitive tools that offer those making the critical
judgments with better insights appears to be important in raising the level of how organizational
knowledge is created and deployed. Remove the bottlenecks quickly. Identify which employees,
aligned to the levers identified above, currently have the strongest need for access to data. Provide
them the insight they need to broaden margins.
6. Offer data that matters
While large volumes of data can be good, its relevance is paramount. When sales teams make
decisions they are engaging with customers, often long standing relationships, and they rely on
gut feeling because often not much evidence is available. As the study shows, supporting decision
makers at all levels to exert better judgment based on better data, that is accurate, timely and
specific is a great opportunity all companies can seize. Happiness of employees with big data,
data analytics and margin management programs depends on the quality of the data. Ensure that
employees receive the data quality they need to make better decisions in real-time.
7. Help client facing employees exert better judgment
It is essential to link information and intuition. The study shows how important changing the scope
of corporations is to influence margins together. However, it is also clear that the high availability of
more abstract KPIs could support corporate decisions that carry a high risk but it could also nudge
decision makers to consider these high risk options more. The further we approach individual
clients, specific product-market combinations and take client relationships into account, relevant
data becomes progressively scarce. Many organizations suffer the lack of language, tools and
skills leaving gut feel and the status quo as the only points of reference. Better judgment needs
overview, parameters and grasp of detail over time. Shedding more light on the facts at the level of
detail needed for negotiations and client interaction requires a common language, understanding
and desire to raise the game. Enhance hard and soft skill of employees; they help them to rely on
their intuition with even greater success.
8. Ensure that awareness, analysis and action are linked
Awareness, analysis or action are not enough alone. Providing data alone without meaning,
offering analytical results without guidance on alternative options to take is not helpful. Continuing
and letting gut guide action is equally unwise. Awareness, analysis and action (Triple A) need
to inform each other. This requires creating overlaps, sequences and loops; continuous spiraling
generates better judgment in the crucial moments when customers make a decision about your
company`s margin.

23. 21
The eight actions require imagination and commitment. If a company is to take control of its margin,
its leaders need to reconcile contradictions internally and overcome barriers to data, communication
and collaboration. Empowering people across the company with tools that are fit-for-purpose and
abilities to access data in real-time enhances relationships with clients by providing more value at
higher margins. It is not fantasy to accurately measure and report profit and margin up-to-the-minute.
Companies that are already investing in such real-time solutions are outperforming their competitors
with healthy margins and sustaining leading positions in their chosen markets. Ambitious CMOs and
CFOs with their minds set to raising profits are best positioned to significantly create and shape margin
performance to increase shareholder value.

24. 22

25. 23

26. 24
About Vendavo
Vendavo harnesses the power of Big Data to generate actionable insights that enable businesses to sell
more profitably. Our margin and profit optimization solutions help global customers make better data-
driven decisions for pricing and sales effectiveness. Using cutting-edge analytics and deep industry
expertise, Vendavo boasts the largest number of implementations for B2B enterprises in the industry,
having helped more than 300 company divisions dramatically increase revenue, improve profit margins
and maximize shareholder value. Located across the globe, Vendavo is the solution of choice for Global
2000 companies in industries such as chemicals, industrial manufacturing, high-tech, and distribution.

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