Traditional Cost Reduction Initiatives
Today’s globally competitive market place necessitates that the companies develop a robust cost down roadmap to remain competitive and offer high value to it’s customers.
Every year most companies take on a wide variety of cost reduction strategies however only the most successful companies perform a detailed analysis of whether these strategies are leading to profitable growth for the organization.
Most executives will state that “we have too many cost reduction opportunities” but when asked how many will specifically drive profitable growth then they may answer “I am not sure but they should”. Such broad based initiatives that are taken up as a result of problem can result in “cost reduction fatigue” where cost reductions are unsustainable or are not aligned with the long term profitable growth.
Cost a investment?
Most successful companies, in contrast, view cost management vs cost reduction as a way to support their strategy, and cost as a precious investment that will fuel their growth. Their strategic plans embrace LEAN principles to redirect resources towards “Good cost” and targeted elimination of “bad cost”. Resources is a valuable commodity for all companies and hence strategic allocation to maximize Return On Investment (ROI) is paramount.
What is Cost Management
Cost management starts with management teams spending a lot of time on identifying which costs will fuel differentiation and value for the customer vs cutting costs for the company. Excellent examples of such analysis and resource allocation can be found at Amazon, Lego, and Frito-Lay.
You can see this different approach to cost allocation at work in the way winning companies behave in times of adversity. When Roger Enrico took the helm as CEO of Frito-Lay, in 1991, the company was developing an innovative and distinctive approach to direct-store delivery that would allow it to consistently deliver the right products to the right stores at the right time. At the same time, Eagle Snacks was gaining market share with innovative new products and its own distribution system. Enrico realized that Frito-Lay had to make a major investment in product quality to meet the competitive threat. He resolved to start by cutting $100 million — 40% — in general and administrative costs. This was painful, including laying off 1,800 managerial and professional people in a single day. But the action removed layers of management and many unnecessary practices, leading to a much higher level of responsiveness and effectiveness, and freed up money to invest in Frito-Lay’s distinctive capabilities — including not only the direct-store delivery capability, but also product and manufacturing innovation, and consumer marketing. Today, Frito-Lay “owns the streets” in its markets, as well as several $1 billion brands.
Cost Management Culture
Management teams need to develop a cost management culture by focusing on five key areas.
- Connect cost to strategy, strengthen your value proposition
- Connect budget to strategy, resources and investments are aligned with business priorities
- Rethink cost in terms of capabilities, this is difficult however allows you to view costs and investments through the eyes of the customer
- Build and track financial metrics that provide transparency to all about the good and bad costs, their trend and impact on the growth. Awareness & ownership is key in cultural transformation
- Create a continuous cost management system, strategic cost management should be a common business practice vs a specific activity done during difficult times. Be proactive!
Strategic cost management in this way will act as a profitable growth enabler for your organization and it will give your organization freedom to make the right choices for the long term enterprise value creation.
Blog by Ketan Deshpande of Minnesota, MN also known as Ketan Sharad Deshpande of Minnesota, MN