The US cost environment has changed, and the forces reshaping it are not affecting all companies equally. They are accelerating the separation between companies that have rebuilt their cost base for today’s economic realities and those still running yesterday’s cost improvement programs.
For CEOs and boards, the implication is clear. Cost programs that drive incremental improvements are no longer sufficient. Now is the time for a structural cost reset. Companies that continue to treat cost improvement as a periodic efficiency exercise will find themselves forced—by investors, activists, or macroeconomic shocks—into making reactive cuts. Those that redesign their cost architecture can unlock margin expansion, strategic flexibility, and the capacity to reinvest for growth.
The issue is no longer whether to manage costs better but how to rebuild the company’s cost base for a structurally different economy.
Converging Forces Demand a Structural Reset
Five forces have converged to render obsolete the cost programs most companies have relied upon. Each force compounds the others. Together, they are redefining what a competitive cost base looks like.
The K-shaped economy necessitates dual-speed performance. Since 2023, the US consumer economy has diverged, a dynamic described as the K-shaped economy. As pandemic-era support for lower-income households has faded, price-sensitive consumers have come under greater pressure. At the same time, rising asset values among higher-income households have supported continued strength in premium consumption. The result is a bifurcated market in which companies must serve consumers facing very different economic realities. Yet most companies run a single cost system designed to serve one type of consumer.
The effects of the K-shaped economy are visible in company performance. Consumer discretionary companies that entered 2023 with higher margins have subsequently outperformed lower-margin peers in margin expansion as well as TSR and revenue growth. (See Exhibit 1.) Stronger margins give companies greater capacity to absorb pressure in value-oriented segments while continuing to invest in differentiated products and experiences for more resilient premium consumers.
Competing effectively in this bifurcated economy requires a dual cost structure: radical efficiency to serve value-oriented customers and sustained investment to capture premium demand.
Geopolitical volatility has made static cost models obsolete. Trade disruptions, sanctions, and reshoring pressures have exposed the fragility of supply chains optimized primarily for efficiency. The risk of disruption has risen sharply compared with the previous decade, while recovery periods now average more than eight months.
Tariffs have added another layer of complexity. At the height of tariff uncertainty in 2025, the average effective US tariff rate rose to approximately 17% by April, from 2.2% at the end of 2024. Although a 2026 Supreme Court ruling curtailed many of the imposed tariffs, overall tariff policy remains in flux and still has the potential to disrupt business ecosystems.
The common strategic responses to this environment—such as diversifying supply chains and manufacturing footprints and building inventory buffers—are the right ones. But the resilience and options they provide come at a price. Leaders must make deliberate choices about where that tradeoff is worth accepting. They must also assess where legacy complexity, such as sprawling supplier networks and redundant processes, masquerades as resilience without actually reducing risk.
Labor costs remain elevated, but complexity is the deeper problem. Although labor market pressure persists, the root cause of high labor costs is often the accumulation of organizational complexity. Years of growth, M&A activity, and digital investment have led to layered roles, duplicated functions, and blurred decision rights in ways that annual head count reviews rarely surface.
Across-the-board cuts may remove capabilities without addressing this root cause. The opportunity lies in eliminating the complexity that has compounded over time, reducing layers, and clarifying accountability. By addressing this complexity through a structural redesign, companies can achieve the most sustainable margin improvement.
Shareholder activism has returned, with sharper demands. Today’s activists are pushing harder for structural changes. Beyond superficial overhead trims, they are demanding structural margin resets, portfolio simplification, and operating model redesign.
Their demands reflect cost management’s elevation to a governance issue. It is appearing on board agendas alongside capital allocation and strategic planning, no longer as a finance function update, but as an assessment of whether the organization is structurally equipped to compete. For companies that have not yet elevated cost discussions to that level, activism is frequently what forces the conversation.
AI is exposing weak foundations. The window for AI experimentation is closing. Investors expect to see margin impact, not pilots. But translating AI into measurable productivity gains requires trusted, connected cost data and clear accountability for cost outcomes. Where those cost governance foundations are weak—whether owing to fragmented systems, siloed reporting, or ambiguous ownership—AI struggles to generate reliable insight, let alone drive action.
Cost Resets Move Valuations—Not Just Margins
Investors reward cost resets not solely because they deliver savings but also because they signal management’s capacity to execute. Among a selection of US companies that completed cost reset exercises from 2016 through 2026, most saw meaningful expansion of three-year average forward EV/EBIT multiples—a measure of how richly the market prices expected future earnings—following the reset. (See Exhibit 2.)
This suggests that investors are recognizing the difference between a program that trims costs and a structural transformation that rethinks how capital is allocated and how the business is run. For boards, this insight affirms that cost architecture is a valuation issue.
Four Imperatives for the New Cost Agenda
To meet the challenges of the new cost environment, US companies must rebuild the architecture that determines what they spend. Four imperatives define what this means in practice.
1. Commit to a structural reset—and treat it as a C-suite decision. The most common mistake companies make in response to cost pressure is to reach for the familiar tools: head count targets, SG&A reviews, or procurement savings programs. While each of these has its place, none is sufficient. They address the symptoms of a misaligned cost base without touching the architecture that produced the misalignment.
A structural reset entails examining the organization as if building it from scratch to align with its future portfolio—not with the one that existed five years ago. It means confronting the complexity that has accumulated through growth or M&A: the duplicated functions, blurred decision rights, and organizational layers that consume management bandwidth without creating value. And it means making explicit choices about where the company will be leaner than its competitors, and where it will invest more. This is a strategic undertaking that requires C-suite and board ownership, even when the finance function plays a leading role.
2. Reset costs across the business, then reinvest with discipline. Competing effectively in a K-shaped economy requires cost discipline across the full portfolio. No part of the portfolio is insulated from structural margin pressure. The imperative is to reset costs everywhere, removing complexity and eliminating spending that does not earn its place, regardless of where it sits in the business.
What the K-shaped dynamic changes is the logic of reinvestment; leaders need to assess where investment creates the largest return. For price-sensitive segments, savings should strengthen unit economics and sharpen price competitiveness. For premium segments, reinvestment should fund the capabilities and experiences that justify the value proposition and defend margin. The discipline required to generate the savings is the same across both, even though the destination for those savings is different.
Most organizations struggle not because they lack ambition on cost but because they lack the governance to make these tradeoffs explicit. Without that discipline, savings are deployed too broadly or absorbed entirely into margin, while higher-return uses remain underfunded.
3. Elevate zero-based principles to embed governance and discipline. Applied properly, zero-based thinking forces leaders to justify costs in the context of future strategy rather than historical precedent. It uncovers areas previously considered off-limits in annual reviews, clarifies what genuinely differentiates the enterprise, creates explicit reinvestment pools, and links savings directly to capital allocation. In volatile conditions, this zero-based discipline becomes a mechanism that funds growth rather than starving it.
From a governance perspective, zero-based principles should underpin the board’s oversight of capital allocation, not just the CFO’s budget process. Elevating zero-based thinking to board governance helps to ensure that it is sustained rather than episodic. Cost decisions of sufficient scale deserve the same strategic scrutiny as any other major allocation of capital.
4. Use AI to accelerate the reset and sustain the gains. The first three imperatives describe what to build. AI facilitates execution and accelerates how soon companies see whether it is working.
AI-enabled diagnostics can isolate the underlying cost drivers and activities, surface duplication and hidden complexity, and detect margin leakage in real time. This precision is what separates targeted interventions from across-the-board cuts that remove capability alongside cost. For organizations with disciplined cost governance, the same transparency turns cost management from an annual review into a continuous discipline, protecting high-return investments while eliminating inefficient spending. Rather than replacing structural cost discipline, AI amplifies its benefits.
Investors are rewarding companies with cost architectures built for the new economic environment. Companies that defer a structural cost reset are accumulating risks: a widening valuation discount as the performance gap grows, increasing exposure to activists who will eventually demand the reset on their own terms, and diminishing capacity to absorb the next macro shock.
The reset will happen. The only question is whether corporate leaders execute it by design—making well-considered tradeoffs and investing in capabilities for growth—or by necessity, with the agenda set by activists or events.
