• Across-the-board approaches to cost reduction are fast, relatively easy, and appears “fair”, but a differentiated approach is both more effective and more likely to be sustainable [big under-statement - across the board cuts are just dumb!].
• One perennially hard-to-reach cost area concerns product or service specifications, and McK recommends significant changes to how products and services are designed and delivered—and a more sophisticated understanding of how customers perceive the value of product and service features. Add to this two continuing big problems [a] the need to trim over-extended product ranges in which the marginal revenue from tail-end products undermines the viability of the whole market proposition (I’ve just reviewed a horror-story example of this issue in an investment-fund provider) and [b] that in the switch to a service or ‘solution’ orientation, it’s important to ‘productise’ what’s offered to avoid constant re-inventing of wheels and gross inefficiencies in delivery.
• Companies seem determined to extend cost reduction efforts further into the front line, at the risk of damaging the very system that makes the business work at all. Encouragingly, McK find a majority of companies are focusing on organizational factors such as talent and capability, and process innovation has a role here too (see recent post on this). 

Some of these actions just might be unavoidable if the business is in real danger of collapse, but very few are in such a bad state. It seems most are doing these things for purely symbolic reasons – ‘We must be seen to be taking the problem seriously’ – or else to hold up short-term profitability because of perceived pressure from investors or analysts.

 I already asked why a company would chuck out consultants if they were doing useful work. Others I have recently come across:

• ban executive travel … so if someone is going to win a million dollar deal, you are going to stop them getting on the plane?
• stop all hiring … it’s only a year ago most companies couldn’t get the staff they needed, many still lack key skills, and now the peope they need are available and cheap!
• downsize staff numbers – even if staff are overloaded?
• aggressively renegotiate supply terms … just hope those suppliers will still be around when you need them in the recovery.
• cut all expenditure budgets by X% – no single number across all functions can possibly be the right choice

… and then there are some really daft ones that I had better not mention, to avoid embarassing valued clients.

• ban staff from

Good to see the Boston Consulting Group encourage us to focus on the core business (as we should have been doing in the first place), protect product development, look at competitors’ weaknesses etc. – and all with analysis too, rather than gut feel !

Unfortunate, though, that some of the proposals conflict, and some are positively dangerous. “.. begin with aggressive moves to cut costs and increase efficiency … some means of lowering break-even points are obvious: stripping out layers of the organization … consolidating central functions … “.

If you’re in danger of going under, maybe, but I keep coming across companies where everyone is ludicrously flat out and simply failing to get important things done. The strong impression is that many managements are grossly under-staffed, not top-heavy. And what goes out the door when you throw out those “time-wasters”? – the organization’s memory and knowledge of how to do simple, critical things. And those constant reorganizations do the same – in function after function, no-one knows how to do things because none of them have been there more than five minutes.

What you need in present conditions is settled people who really know what they are doing. [Reminds me of the three dimensions of organizational capability - the ability to do critical tasks well, fast, and cheap - see chapter 9 of Strategic Management Dynamics - analyst-driven obsession with doing things cheap does serious damage to doing things well, and fast.]

Then the article repeats that other current fad “Rethink your business model” – almost always wrong and in present conditions a bad distraction from making what you have work really effectively.

There’s some good stuff too though, so take a look – but with brain engaged!

First, it’s unlikely that making big throws on changing your strategic positioning will help much – it may even be damaging. Sure, you might get a bit of revenue support from adding or moving to a slightly lower-priced proposition as many retailers are doing, but if you fundamentally alter your position you will likely confuse and annoy existing customers with no guarantee of picking up new ones. So - solutions need to focus more on strategic management of what you have.

The start-point as always is recognising that revenue and profits reflect the quantities of resources in place – demand-side [customers, dealers ...] and supply-side [products, staff ...]. But it’s not just the quantity of these that matters, it’s the quality too. Just about every business has customers who contribute little or nothing to sales and profits, and products too. 

During good times, management can easily be seduced into a land-grab for any half-promising growth opportunity that shows up, and fear looking wussy if they don’t match up with competitors’ bold efforts. The good times ensure that the diluting effect of poor quality customers or inadequate product-range extensions remain invisible, but a slow-down or reversal in demand realises the damage to performance they cause [e.g. those sub-prime fools again!]. So what to do to repair that damage?

Well, the usual simplistic call to just ‘cut costs’ can be ineffective or positively dangerous – cutting sales effort or service costs for example risks damaging all the business, good customers and poor ones alike. And cutting long-term investments such as training and R&D of course theaten longer-term development. [I heard the CEO of SAP explain how they were cutting R&D spend because of market conditions, and say this would not cause any significant long-term harm because they had plenty of R&D staff. If so, why were they spending this money in the first place!]

What is needed is to bring the business back to a good quality ‘core’. In mild cases, this may mean no more than ceasing to serve a small fraction of customers, dropping a few unpopular products and – regrettably – losing just a few of the staff who are no longer needed to support that now-unprofitable business. In more serious cases, it can be necessary to take a knife to the bad-quality periphery of the business. This may mean shutting down whole segments of customers, discontinuing whole classes of products or services, closing down associated capacity and shutting operations in marginal regions.

This can be scarey. When sales are down because of tough market conditions, it’s bold to cut business still further, which is why management is often reluctant and goes for the ‘cuts across the board’ approach. However, pulling back to a healthy core of customers, products, channels, and operating units can substantially improve profits, even while revenues are cut. Much more important, though, is that this change puts the system back to a state where it can develop strongly into the future once again – rather as a gardener prunes weaker branches back so a plant’s energy is focused on the stronger limbs, management is pruning the weak activities that are dragging back the whole business so that remaining resources can start working again.

Really smart strategic management, of course, anticipates the risk of creating this problem in the first place, and avoids it by more thoughtful expansion efforts in the good times.

What our work often shows is way, way simpler – that firms are often just deploying entirely the wrong levels of resources to different business lines. In particular, huge expansion opportunities never stand a chance because of obsession with current cost control leaves them with nothing like the effort that would actually make them work.