Cost reduction and strategy

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No surprise I suppose that many companies took the shock of the down-turn to focus on cost-cutting. In What worked in cost cutting—and what’s next? McKinsey’s report of a global survey offers mixed news – yes, plenty of costs were cut, but executives worry about sustaining those cuts and about continuing risks from the sluggish economy. What we don’t know – and probably never will – is the consequences. How many, for example, cut too much, in the wrong areas, and badly damaged their ability to deliver future growth? Some good tips though:

  • Across-the-board approaches to cost reduction are fast, relatively easy, and appears “fair”, but a differentiated approach is both more effective and more likely to be sustainable [big under-statement – across the board cuts are just dumb!].
  • One perennially hard-to-reach cost area concerns product or service specifications, and McK recommends significant changes to how products and services are designed and delivered—and a more sophisticated understanding of how customers perceive the value of product and service features. Add to this two continuing big problems [a] the need to trim over-extended product ranges in which the marginal revenue from tail-end products undermines the viability of the whole market proposition (I’ve just reviewed a horror-story example of this issue in an investment-fund provider) and [b] that in the switch to a service or ‘solution’ orientation, it’s important to ‘productise’ what’s offered to avoid constant re-inventing of wheels and gross inefficiencies in delivery.
  • Companies seem determined to extend cost reduction efforts further into the front line, at the risk of damaging the very system that makes the business work at all. Encouragingly, McK find a majority of companies are focusing on organizational factors such as talent and capability, and process innovation has a role here too (see recent post on this). 
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