Survival of the Fittest
When the last economic downturn hit, companies responded by ‘downsizing’, ‘rightsizing’ or some other euphemism for reducing staff numbers.
This time, this option is not so readily available as the ‘surplus’ staff is no longer there.
Companies are going to have to be smarter in how they reduce costs and remain ‘fit’ to survive.
So, how fit is your organisation? Companies currently appear in good corporate health – but this is often a veneer of damaged sinews and muscles, a damaged corporate innovative capability, which has only been sustained by the overall business boom.
So how do you ensure you are fit for success?
Cost-Cutting As A Marketing Issue
Reducing costs without a customer focus is, potentially, cutting your competitive edge.
Cost-cutting is not about having the lowest cost but the highest margin. It is, therefore, a marketing issue. If you are going to tackle waste, you need to define what value is, because the opposition is to waste is value. And you can only define value from the end-customer’s perspective.
Only when you really know what doesn’t add value to your customer can you start asking “How can we get rid of that?” Otherwise, you can be cutting costs and, potentially, customer value simultaneously.
Cost-Cutting As A Strategic Issue
Any company can cut costs, doing so does not necessarily give a customer advantage.
Customer advantage grows when your entire system of corporate activities aligns with and meets your customers’ needs and values. How all this fits together also determines your differentiation in the customers’ eyes and ultimately your profitability.
When you cut costs you change how your company works and fits together. If this is done without a strategic perspective this can result in the loss of your differentiation, your customer advantage.
Cost-Cutting As A Value-Delivery Issue
Sometimes an organization’s focus is too internal. Internal cost savings are achieved at the expense of suppliers who then go on to increase their prices eliminating the claimed cost benefits.
Any cost-cutting exercise must track the cost impacts right through the value chain, from your supplier to your customer. This will allow you to ensure that any costs cut are eliminated and not just moved around in the value chain.
Distinguish Between Quick Fixes And Long-Term Solutions
‘Slash and burn’ cost-cutting measures can make you thinner but not necessarily fitter. Yet it is well-developed fitness that makes for lasting health and competitive success.
Repeated studies have shown that radical cost-cutting has resulted in a deterioration of corporate performance over the next 2 or so years, achieving only short-term transitory gains.
You need to shift the focus to simplifying the business, eliminating waste and enabling growth. Then the opportunity is to create a ‘win-win’ with your staff. You can harness your staff’s energies and knowledge while using their skills to make your firm smarter at delivering customer value.
Cost-Cutting As The Acid Test Of Your Innovativeness
Innovation can be a major enabler of reduced costs. Finding simpler ways of doing business and delivering value are core to your future corporate “fitness”.
Unfortunately, some of the first casualties of cost-cutting exercises are often the creators, innovators and improvers – the R&D departments, the organisation-improvement sections, the corporate analysts and the trainers. Those people that enable innovation.
When innovative and improver sections are seen as “fat” and then cut their organisations can become so anorefastxic that they are unable to create or seize new opportunities. In fast-moving industries, these creative resources are often the difference between success and threatened survival.
Distinguish Between Fat And Reserves
Don’t cut too deep. No organisation can maintain a sprint for the length of a marathon. You can ask for a major effort to achieve some major goals, but after a while the energy and enthusiasm will fade.
Your cost-reduction (“fitness”) program must leave enough resources to both achieve the cost-reduction goals and then go on improving and cutting costs further.
Keeping The Right Focus
The key is to focus on the processes, not the numbers. You need to focus on how cost-effectively you can generate customer value (“fitness”) not how you can reduce the headcount numbers (“weight loss”).
Too often managers (and consultants) wish to improve the numbers in the accounts, ignoring the unmeasured dynamics of the organisation. ‘Savings’ made in one area then have damaging and costly implications for other parts of the organisation or your customers.
Focus on the end game — generating customer value at a lower cost and more profitably. The loss of one or two customers can be far more damaging to your profitability than the savings made from a reduction in headcount.
In survival mode, measure customer value, organisational alignment, the capability to change, sales margins and profitability — these are what count.
Exploit IT Effectively
Technology is a potential source of innovation. It can create new ways of doing business, eliminate existing constraints, and deliver increased value to your customers at a lower cost.
But IT is too often the cause of greater angst, costs, and service failures.
IT will only increase the value if the business can harness its power and potential – and can manage its effective implementation. In the next few years, this IT-management capability is likely to be a key differentiator between the winners and losers.
Survive And Prosper
During the recent boom times, many companies increased their costs again. Now is the time to take action to maintain your capability to generate and deliver customer value (fitness).
In Conclusion
You should aim to avoid the ‘cost-increase—cost-cutting’ cycle and, in so doing, profit greatly while your competitors struggle with their misconceived cost-cutting programs.
