Wednesday, September 23, 2009

Cut Costs and Grow Stronger

To reduce expenses for the long term and lead the way to recovery, start by taking a strategic view of your capabilities

By Shumeet Benerji et al.

If you are a corporate leader, you have probably been spending a lot of time lately thinking about costs. In the aftermath of the global economic crisis of 2008–09, the pressure to cut costs — whether driven by cash flow, shareholders, uncertainty, or investment needs — has been extraordinary. Many businesses are struggling to survive. Others, even if they’re doing relatively well, are reducing expenses to make sure they are well prepared for future uncertainties.

But there is a positive side to this situation. Dramatic cost cutting gives you a chance to refine or even reformulate your company’s overall strategy. After all, you’re never just cutting costs. You’re making a decision that something is no longer strategically relevant, and that other things are essential to keep. Yes, you may have to lose some product lines and activities, and perhaps some of your employees and customers. You also, however, have the opportunity to help your company grow stronger in the process.

We reject the idea that cutting costs in itself makes a business weaker or more limited. To be sure, if you reduce expenses in a panic, or without an eye to strat­egy, you could do great harm to your company’s competitiveness. But if you focus on your priorities and on your future potential, cutting costs can be a catalyst for ex­actly the change a company needs.

Unfortunately, many companies are cutting expenses ineffectively. They either spread the pain as evenly as they can across all parts of the business or they target high-cost areas first. And they look for short-term reductions without fully considering the impact on their long-term position or prospects. Surveys conducted with executives of leading corporations show how strongly these approaches prevail. (See Exhibit 1.) When companies cut costs in this mechanical, programmatic way, they risk making the enterprise weaker in the long term and (in many cases) doom themselves to needing more draconian cost cuts down the road.

The right way to think about costs — whether your company is under pressure now or marshalling resources for the future — is to look at the capabilities you need most and to invest only in those that will give you a clear advantage in reaching the customers you care about most. This approach involves a new way of thinking about capabilities. They need to be seen for what they are: a defining factor in productivity, a critical element of success, and a major factor in determining strategy.
Your company’s key capabilities:
  • Drive most or all of your worthwhile discretionary costs.
  • Can be counted on one hand (as opposed to reflecting the multitude of activities that are currently funded within your business).
  • Should be spared in any cost-cutting program (related expenses may even be increased).
  • Work best when they are combined in sets to deliver a unique, hard-to-copy capability system.
  • Are rarely, if ever, bounded by individual corporate functions.
  • Can determine the composition of a high-performing portfolio of businesses — those that pull from similar capability systems.
  • Lend themselves to scale advantages, but need not be built or maintained in-house.
  • Represent, in combination, the difference be­tween what matters and what doesn’t.

Being Strategic When the Clock Is Ticking

It’s all very well to suggest a surgical approach to cost cutting that keeps strategy in mind and leaves key capabilities intact. But is it realistic? After all, depending on your reserves and your cash flow, you may have to act very quickly. Perhaps you don’t have a clearly articulated strategy — and it is very unlikely that you have a spreadsheet that organizes your costs by capability. You probably have your costs organized by function or by business unit, like everyone else. So what are you supposed to cut?

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