As the economy is not doing too well in many markets, companies are finding ways to reduce their cost to maintain profitability. There are many ways to cost down your operation. If done right, it will serve the company well, if done wrongly, it may throw the company into a vicious cycle.
Cost down doesn't mean to go screaming at your managers to get them all to reduce their budget. Cost down should be broken down into levels. In a business, different operations should be placed with different importance level according to the phase of your business, the situation that your company is facing and most important of all, what is your company's core value? After you have defined the different importance level for each of your business units, you can then set a cost reduction target for each of them.
Don't cost down everything! Identify your business core value first!
I have been with a company that tried to reduce cost in every aspect of the business. I personally strongly disagree with this kind of strategy. Yes, as the economy fluctuates there are times that makes sense to reduce your operational cost. But not in everything! To me, this type of business management is very concerning.
In my opinion before going into cost reduction, the business should identify its core value. Why do customer purchase from us? What is our competitive advantage on the market? In general I breakdown the business core value into 6 areas.
- price competitive
- product specification advantage
- customer service excellence
- prestigious brand name
- niche market
- business model
Price competitive means that you are able to produce at a lower cost when compared to your competitors. Usually this means that you have an efficient production operation. If this is your core value, then don't cut cost in this area. Cut cost in R&D, marketing, sales, customer service...but not in your production operation.
Product specification advantage means that you have a technological advantage on the market. Your competitors aren't able to produce a product that matches your product's specification. Your product is either faster, more stable, has higher flexibility, stronger, durable...etc. In this don't cut your R&D's budget.
Customer service excellence means that your customer love your service. Therefore don't cut back on your travel cost, continue to visit your customers if needed. Don't cut back on infrastructures and systems that will improve your customer satisfaction. To continue to invest in people that are able to provide excellent customer services.
Prestigious brand name means that your customer choose you over your competitor mainly because of your brand. Some typical example would be Starbucks, McDonald's, Disney...etc. In this case don't cut back on your marketing budget. Do continue to promote your brand through events and advertisement.
Niche market means that you are able to deliver a special service for a small market. For instance you are the only supplier that can provide customized products, you are the supplier that is able to provide exclusive product and services, you are the supplier that is able to provide a total solution while other can only deliver in one area...In this case don't save cost in the things that makes you able to serve the niche market.
Business model means that you have a unique model that attracts your client. For example your product are for lease while other requires customers to purchase. Your company is able to provide installment plans while your competitors require the customer to pay in full. In this case don't cut back on the business model that makes you stand out from the crowd.
What I'm trying to say is, try not to cut cost in your business core area unless it is absolutely necessary. At the end of the day the economy will always come back up, when it does, will you able to maintain your core advantage? I think this is the question that each business owner will need to ask itself.