Avoid Hurting Sales by Ill-Chosen Cost Cuts
Don't assume that cost reductions will leave sales unaffected: Take the time to consider what will probably happen before making cost cuts.
When is a cost reduction lead to a cost increase? When the cost reduction drives too many customers away!
Whenever you read in the financial press about a company making a large cost reduction, try to remember whether or not the same firm has done this before in recent history. Chances are that the latest announcement is just the latest in a series of such cuts. If layoffs and facility shut-downs are such a good idea, why didn't the company make all of the changes sooner? The usual answer is because the company didn't achieve its sales targets following the last round of cost-cutting.
Most ideas that companies have for cutting costs will also cut sales. In fact, some of these "cost reductions" will permanently reduce earnings because lost sales will more than offset lower costs. For a typical manufacturer, a one percent sales decline will have the equivalent profit impact of a six percent reduction in payroll costs.
While cost-cutting ideas are being generated, more analysis goes into examining how they will affect costs at budgeted or estimated sales levels than into how the sales levels themselves will be affected.
Layoffs, for instance, often mean delays in making existing and new offerings available, poorer service, and worse quality. Do those degradations in performance usually help sales? Usually not. These harmful effects occur as many productive employees choose to leave for better opportunities with generous severance pay packets in their pockets, and processes are disrupted as work is reassigned to those with less experience in the key activities.
Spend ten hours examining the potential sales impact of any cost reduction you evaluate for every hour you spend on considering how it will improve your business model. The best cost reductions will be those that lead to better quality, more effective performance, and greater benefits for customers and end users.
If you are careful, you can find sales-expanding ways to established lower-cost business models almost as easily as ones that harm profitable sales. Care in selecting the right sales-expanding quality is a key secret of the most successful companies who routinely improve their business models, and makes all of the difference in your long-run success!
Each time you repeat looking at ways to use costs to improve your business model, you will benefit by reinforcing the perspective of adding sales in different ways. For example, you might look at being more attractive to certain classes of customers where you have profit margin advantages.
On another occasion, you might consider cost reductions that can help increase sales from the most important trend-setting customers. At another time, your attention might focus on customers whose volume would fine-tune your operations to become vastly more efficient.
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ABOUT THE AUTHOR
Donald Mitchell is chairman of Mitchell and Company, a strategy and financial consulting firm in Weston, MA. He is coauthor of seven books including Adventures of an Optimist, The 2,000 Percent Solution, and The Ultimate Competitive Advantage. You can find free tips for accomplishing 20 times more by registering at: www.fastforward400.com