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Saturday, June 04, 2005
Batuhan: Cost cutting
By Allan S. B. Batuhan
UNDER PRESSURE. Cost reduction pro- grams are a staple in most business organizations. In fact, a friend of mine who works for one of the UK’s largest corporations once said to me—and I suspect he was not totally joking—that all they ever did in their company was cost reduction.
This is, of course, understandable. The pressure to perform has never been greater for any company, not least for those that compete in the global arena.
Trying to find a sustainably defensible corporate strategy has never been more difficult, as new technologies and the almost free flow of resources and knowledge has greatly shortened learning curves for new entrants.
Call it the “Murphy’s Law” of the Microsoft Age, but the new version now seems to be—“If anything can be copied, it will.”
Yes, anything and everything can be imitated by any competitor, both real and virtual. Not only that, with borders rapidly becoming more porous by the day, a competitor for a business could arise in a faraway land, just as easily as it could within the confines of its home territory.
Take DVDs, for example. My neighborhood Blockbuster rents out DVDs for £3.50 per night for new releases. If I wanted to buy a copy of a particularly good DVD, the same shop will likely sell it to me for £15 brand new.
Just a few clicks away, I could buy it for a store in the USA for $15, including the postage and packing. At the current exchange rate, that is almost half-price, if I am willing to wait about five days for it to arrive. And for about £8 brand-new, why should I pay £3.50 for a night’s rental, especially for a movie that I want to keep for my collection?
SPOILED. All these developments are very unsettling for most business organizations, who until recently have been spoiled by artificial barriers to trade that prevented competitors from abroad from posing a major challenge. But that cozy time is long gone.
As a result, more and more firms are losing favor with the investment community, unable to keep up with the earnings expectations that the markets have come to expect from them. They have become confused with the new competitive paradigms, and have failed to evolve their organizations to face the challenge.
PANACEA. Invariably, the response for most to get back into better profitability is to cut costs, and often to do so at all costs (no pun intended).
Cost cutting is seen as the panacea to all ills, in the sometimes mistaken belief that the underlying cause of low profitability is high costs.
But how can this assumption possibly be wrong? Is profit not increased if costs go down? Is not a dollar saved from costs, a dollar more to the bottomline? So how can cost reduction not be the right way to go?
Well, cost reduction programs are not wrong, per se. In fact, they are critical for all organizations to undertake, not only periodically, but day in and day out. What is fatally flawed is if cost reduction becomes purely a numbers game, trying to save nickels and dimes from all areas of the business in an indiscriminate fashion.
What’s more, no company has ever become market leader purely and simply on the basis of being excellent at reducing costs. On the contrary, those that eventually excel in their fields tend to spend a lot, and I mean a lot, in building sustainable competitive advantage.
(allan.batuhan@pzcussons.com)
(June 4, 2005 issue)
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