As a management consultant working with top management worldwide for many years, I constantly meet management teams that are immersed with the quest of reducing cost. It is common for top management to have a yearly goal of cost reduction and for all levels of management to be investing effort in finding ways for meeting these targets.

When I ask the top management why is it that they invest so much management attention on this matter, I usually get two types of answers:

  1. We are constantly under pressure (from the market) to reduce our prices
  2. We are constantly under pressure (from our share holders) to increase our profits and profitability.

I usually follow with another question – why is it that the major way for satisfying the above two needs is through cost reduction? I am not suggesting that cost savings opportunities are to be ignored, however I am wondering if there are no better ways of fighting the price pressure and increasing profits and profitability?

My personal overwhelming sensation is that focusing on cost reduction has many negatives, that outweigh dramatically the potential benefits:

The evidence shows clearly that in spite of the immense effort invested in cost reduction, rarely do organization succeed in reducing their overall costs. The explanation is always – “external circumstances’ and “if we had not made this investment in cost reduction, we would not pass through these external circumstances”.

However, these are intuitive arguments and not fact driven arguments. The truth is that the cost cutting initiatives are rarely delivering bottom line results (in spite of the fact that they may deliver local results). Their biggest attributes that enables the continuous investment in this futile effort are that it is measurable and seems to be totally under control.

On the other hand building a competitive advantage that will clearly lead to the ability to continuously increase revenues, profits and profitability is much less measurable and more than that, seems to be much less under control. It is even perceived to be impossible (why do we think cost reduction is possible?). So, yes organizations do invest effort in growth but with disbelief that they stand a meaningful chance of outperforming their markets. And hence, we are back to the cost cutting initiative. If we cannot outperform our market, we must make sure our costs are as low as possible.

If we invest the same amount of effort and attention that we invest in cost cutting in the creation of a meaningful differentiation in the market I am certain (and there are a few excellent examples) companies can find ways to outperform their competition to the extent they can be confident that profits and profitability are exceptional. And now, if there are clear cost saving opportunities we “bump” into, by all means we should exploit them. But, we do not need to waste precious management attention in active pursuit of them and then business performance excellence can become a reality.

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