I read a staggering misconception on the front page of the Financial Times last week. The Kraft Heinz merger, which is being undone, “was a bet that the Brazilian investment firm’s aggressive cost controls could drive strong earnings growth”.
This is an example of what I call the “anorexia strategy”: the belief that you can starve a company of resources and get growth. It doesn’t work.
Resource allocation is at the core of strategy
A core part of any strategy is resource allocation. Once you have determined your target market (where to play) and your competitive positioning (how to win), you need to allocate your resources to match your intention.
If you spread your resources too thinly across many areas, your progress will be slow and more focused competitors will beat you. But if you don’t invest any resources at all, you have nothing with which to create growth.
Don’t conflate reducing costs with enabling growth. Doing the one doesn’t automatically lead to the other. Certainly there are inefficiencies in all processes and organisations. That’s why LEAN exists – you need to keep making improvements to take out waste and free up resources.
Enabling growth is a separate activity. It requires you to invest those freed-up resources into the specific actions that are in the growth plan. Taking cash out and giving it to investors prevents you from doing that.
What Kraft Heinz teaches us about starving the growth engine
At the time of the Kraft Heinz merger in 2015, a JP Morgan analyst told CNBC, “While the deal can save costs through economies of scale, combining the companies does not create long-term revenue growth potential.”
The business was already suffering from slowing sales and declining volume and that hasn’t changed in the past ten years. The investors treated the business as a cash cow and did not invest in the brand or in innovation.
The business has lost even more market share, and now it is a dog (using the term from the BCG growth-share matrix). The prescription for a dog business is to sell it. The new owners may choose to invest in it to try to turn it around. If they believe it isn’t worth the investment, it will continue to fade away.
The real drivers of sustainable earnings growth
Back to the misconception. Aggressive cost cutting will drive an initial boost in profitability, so it will look like earnings growth at the start. But after that first round, the growth engine will be starved of fuel, and the growth will stop.
If you want to drive strong earnings growth then you need to focus on growth as well as earnings. How do you do that? By understanding the value drivers of the business: who the customers are, what value they are looking for, and how can you best deliver it to them. Then you need to invest to fuel the growth engine. Cost-cutting alone isn’t enough
© Veridia Consulting, 2025
