Mistakes to Avoid
When times get tough the cost cutters get moving. Sometimes – even when the times are good the cost cutting accioutants get bored and do it as well!
Cutting bad/dumb costs is obviously smart. Cutting costs that will cause vital bleeding is not smart. Learn from the following mistakes – to avoid them
The biggest mistakes made by firms when looking to cut costs is cutting them in areas which will affect things their customers value as prime value/benefits to them (ie why they deal with you!0. This is largely because many of the cost cutters do not know what are the key determinates of their customers value needs. They mostly think it is lower price – so any cost that can cut price will be right – they think. And if they think this they think wrong.
NB – Not everyone wants the lowest price – but everyone wants the best value – there is a significant difference!
Answering questions such as, “what do are customers consider value and why do they pay for it? Will they buy less if we cut things that they really value? “How much value do we create? What type of value is it? How much does it cost us to create that value?” guides the process based on a strategic vision.
The second mistake is not having evaluation tools. Analyzing an organisation’s competitive margin, i.e., looking at both its potential and current performance, allows the organisation to identify opportunities for improvements.
Many organisations fail to outline a continuous improvement plan. When deciding to cut costs, it would be a mistake not to delineate a plan that contains improvement projects and makes the distinction between what is important and what is urgent. Without such a plan, the efforts made could be all for naught.
The third mistake is not understanding the difference between structural or circumstantial cutbacks.
If the goal is to cut back spending temporarily (circumstance), common sense will suffice: Identify any costs that are not yet committed and which, if eliminated, would not affect the company’s general progress.
Cutting costs at the structural level calls for more complex and elaborate management tools. This would include dropping a product line, or focusing on essential activities, either eliminating or subcontracting the rest.
The forth mistake is not evaluating the cause-and-effect relationships associated with spending reductions. For example, if a company were to do away with commissions, the decision might demotivate sales reps and ultimately hurt sales; a drop in sales would then force the company to look for a new cost to reduce in order to boost profits.
Mistake Five – cutting costs but not eliminating inefficiencies
Often, the biggest mistake involves trimming resources that could generate costs in the medium term, instead of the more important task of eliminating inefficiencies. Some cost cutting will increase inneficiency.
Mistake six is not knowing when to say no to bad and costly customers. Not all customers are worth having. To make a distinction, it helps to classify them based on strategic positioning and profitability. The kind of customers worth holding on to are those who bring high returns or helping bring in more and better business (those bringing low returns but good strategic positioning).
The organisation should focus its cost efforts on activities that create competitive advantage and differentiate it from the competition.. The organisation should reallocate resources away from any areas that are not required for maintaining customer value and competitive advantage