Cutting Costs Strategically

The business environment today has become extremely competitive. Companies are not only facing competition from their local competitors but also from global ones. Different economic and geopolitical factors make global supply chains necessary.

The problem with having global supply chains is that operations become broad and complex. It is much easier to manage operations located in the same geography rather than those located in multiple countries.

Rising costs and increasing competitiveness are making it mandatory for companies to cut costs. Corporations also agree that up to 25% of their expenditures are wasteful in nature and could be eliminated. The problem is that they do not know which 25%?

Cutting the wrong kind of costs can lead to a decline in quality or customer service, both of which are sure to reflect as declining sales in the near future. In this article, we will understand the concept of strategic cost cutting and how it adds value, especially to global supply chains.

The Problem with Cost Cutting

Cost cutting can be very ugly if proper attention is not paid to how it is done. For instance, cost-cutting can lead to job losses. It can also lead to suppliers not being paid on time and so on.

The common link in ugly cost cutting is that the company tries to benefit by undermining somebody else’s interest. In the short-run, it might appear that every dollar saved will directly add to the bottom line. However, in the long-run, one will see the quality of products and services dropping drastically.

Thus, cost cutting if done incorrectly can cause the revenue of the company to fall. The damage done could be severe if the company begins to lose loyal customers. The cost of acquiring loyal customers is increasingly high nowadays!

Competency Based Approach

Costs should not be blindly cut. Instead, cost cutting should follow a strategy. That means that every single cost reduction must be a step towards achieving a larger goal. The common goal that most successful companies pursue is when they decide to align with their competencies.

Large multinational companies do a lot of things. For instance, consider a company like Nike. It is in the business of marketing sportswear. However, the company does not manufacture any of the products it sells. The company identifies itself as a marketing company. All the other functions which do not align with this competency are outsourced.

The key thing to note is that Nike keeps its marketing department extremely well-funded. The core competencies are provided the resources to be the best in the global marketplace.

Other less strategic tasks are outsourced to cut costs. This enables Nike to cut costs where things matter less and to redirect the financial muscle to future investments that will allow the business to thrive and to grow even faster.

What is a Competency?

A competency is a difficult thing to define. The difficulty is due to the wide nature of qualities that can be included in the competency. It could be related to people, technology, know-how or processes!

It is something that the company excels at relative to its peers. Every company must necessarily have a competency. It is not possible to survive in this cut-throat marketplace without having some core competency.

It must be recognized that competencies are all about focus. Companies can have a handful of competencies at most. If you have a list of competencies, then you probably have not defined your competencies right!

The Tradeoffs

Strategic cost cutting means that the companies can differentiate between the costs that they need to incur to survive. This would companies can identify mundane expenses like electricity, fuel, accounting costs, regulatory costs, etc. and contrast it with costs related to competencies.

The idea is to funnel all the money towards competency building and be as lean as possible in other expenses. Overheads must be identified, and incessant cost-cutting must be undertaken in those fields. However, at the same time, the competencies that allow the company to outmaneuver the competition should be developed over the long term regardless of the costs.

Disadvantages of Strategic Cost Cutting

Higher Management Buy In

Strategic cost cutting is a decision that needs to be made by the entire organization. The top management has to be involved in this approach.

The middle management can execute this strategy on their own to some extent. However, they will have to interact with the other areas of the organization which is not within their control. This is where strategic cost cutting would fail.

An AVP or a VP cannot implement this strategy by themselves. Instead, this strategy would only work if the decisions are driven from the top i.e. from the CEO or the board of directors themselves. Getting a buy-in at that level is not very easy. Hence relatively fewer companies indulge in this activity.

Time Frame

Strategic cost cutting does not work overnight. It takes years to build competencies that outmaneuver the competition. The problem is that most companies run with the short term in mind. They are only focused on their quarterly or annual results. If immediate cost reduction is the objective, there are huge limitations as to what this approach can achieve.

To sum it up, organizations must never cut costs in their core areas. They must identify administrative and non-critical areas and make the organization as lean as possible by focusing on those areas.

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Strategic Management