|Posted by Ted Sehl on January 10, 2011 at 12:50 PM|
Throughout the life of an enterprise, there will come times when a cost reduction strategy must be adopted. This is usually a result of a string of poor financial results – either unsatisfactory returns on investment or more commonly a string of losses. Unfortunately, it is nearly impossible to cost reduce a company back to health. This is not to say that the cost reduction is not important but rather that something else is going on here.
What is that something else? It is a failure of the company’s basic strategy – where they have chosen to compete, with what product offerings and with what key advantages over the competition? The fact that the returns are not acceptable means that the enterprise has failed the first test of a healthy strategy – can it consistently beat the market.
Research has shown that 80% of revenue growth is explained by choices about where to compete; leaving only 20% about explained by choices of how to compete (Baghai, Smit, Vigueirie, The Granularity of Growth, 2008 ) So, the first step is that a review should be taken of what market segments have attributed to growth and which have not. Resource allocations should be reviewed with an aim to supporting the growth areas.
The next step is to review the product offerings. Do they tap the key sources of advantage that the enterprise has over its’ competition? What about over substitutes that have entered the market? What has happened to erode this advantage? What can be done to regain it?
These are all tough questions that must be addressed. Cost reduction may stem the tide of losses for now, but the real turn around will come from the review of the enterprises’strategy.