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If cost-cutting is your main strategy, you’re done

“There are no surer signs of the inadequacy and delinquency of corporate leadership than that cost efficiency should feature as the dominant issue facing the company, and that the tactics of outsourcing, shared services, reorganization and other short-term palliatives are being paraded as the main drivers of future profitability.”

JULES GODDARD & TONY ECCLES ‘Uncommon Sense, Common Nonsense’ (2012)

I return this week to that marvellously contrarian book, ‘Uncommon Sense, Common Nonsense’ .

In it I found an excellent chapter on the modern corporate emphasis on cost containment, cost efficiency and reorganizations aimed at reducing cost. The authors, messrs Goddard & Eccles, had this to say: “When executives reach for these remedies, you can be confident that the business has been mismanaged.”

Applause. The minute you think your only hope is to focus on your costs, you have become a price-taker rather than a price-maker. You cannot dictate any price in the market, because you do nothing to deserve it in the eyes of your customer. You have to accept a price that is at par with or lower than that of key competitors; and the only thing you have to focus on in order to save yourself is your cost line. Which is higher than it should be, because of your past mistakes.

This is 100% true. Study all the also-ran competitors in any industry, and you will see them trumpeting cost containment and waste reduction initiatives as “strategy.” Cutting costs isn’t a strategy; it’s a reaction to past failures. As Gary Hamel once put it, memorably: “A turnaround is a transformation tragically delayed.” Because we failed to create products that bested competitors and wowed customers, we are now forced to cut costs before we do anything else.

Being a low-price player as a permanent strategy, please note, is very different. The Walmarts and Southwest Airlines of this world aim to take that positioning in the market as a way of standing out, not due to a failure to compete with the big boys. They contain costs every day, not as a knee-jerk reaction to adversity.

There are particular problems with supposedly temporary cost containment initiatives. First, they will distract managers from the much more important, wealth-generating activities of innovation, differentiation and entrepreneurship.

Second, cost containment is just a fancy term for a set of initiatives that are inherently morale-sapping, demoralizing and defeatist. What actually happens? Ordinary staff are laid off (but almost never the leaders who made the blunders that led to panic cost reductions in the first place); cheaper suppliers are sought, to provide inferior inputs; and savings are made by shrinking the firm’s scope and footprint. What does this do to sentiment in the workplace and shopfront? You know the answer.

Third, firms rarely haul themselves out of trouble by just slashing everything in sight. They inevitably degrade the customer experience by reducing service standards and diminishing product quality. Often, a spiral is commenced where customers want to pay even less for a lesser experience, and cost pressures get even worse.

Remember this: Toyota was once a minnow next to the GM giant. It did not overtake GM by being a wannabe that copied outdated industry practices; it did it by reinventing the manufacturing process.

Firms do make mistakes, and costs do get out of synch with revenues. But the way to come out of these traps is to remember what greatness looks like: excellent products and experiences that customers are happy to pay for. Not skeleton staffing and fading premises selling the same old tired products, nor “rightsizing” and “streamlining.”

If that’s where your organization is today, get it out of there fast by taking a quick, clean hit and focusing on where success will next come from: your next big product or insightful change in revenue-generating strategy.

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