Weekly Business Insights from Top Ten Business Magazines | Week 302 | Strategy & Business Model | 2

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 302 | June 23-29, 2023.

Cost Cutting That Makes You Stronger

How the most resilient companies position themselves to grow 

By Vinay Couto et al., | Harvard Business Review Magazine | July-August 2023 Issue

Listen to the Extractive Summary of the Article

In times of economic uncertainty, many leaders turn to an old standby: cost cutting. When so much in the world feels beyond our control, costs are, to a large extent, controllable. But cutting costs with the singular goal of realizing short-term savings is myopic. Whether they’re faced with an urgent need or not, leaders should view each expense line as a precious investment in the business—and recognize how the decision to increase, decrease, or maintain it will shape the company’s future.

Many companies take a one-off approach to cost-cutting and do it reactively when it’s the only obvious option for reaching profit targets. Unfortunately, in their hurry to eliminate things that seem discretionary, they often sacrifice some of their most important investments.

When cost-cutting programs are implemented in haste, as many of the current ones have been, there is little (if any) debate over the strategic intent behind spending. Typically, leaders dole out across-the-board targets, leaving functional groups and line managers to quickly figure out what (or who) must go. That winds up leaving organizations weaker, imbalanced, and in some cases desperate and without direction.  The authors studied what successful companies, in their pursuit to reduce cost, did right that the others got wrong?

To succeed at cost transformation, you need to start with a blank sheet and ignore sunk costs. This is the mindset underlying zero-based budgeting as well as Peter Drucker’s famous question “If you weren’t already in this business, would you enter it today?” Applying this lens to every project, line item, and role allows leaders to look at the cost structure strategically.  But simply challenging every line item isn’t enough.  You also need to take five critical steps: connect costs to outcomes, simplify radically, reimagine value chains digitally, in rapid sprints, rethink what work you and your ecosystem take on, and build a sustaining, cost-focused management system.

How to get started? To link costs to their strategy and avoid hastily made cyclical cuts that leave them weaker, companies should do the following:  align the top, build confidence through accelerators, aim for a two-year journey, build a dedicated infrastructure for change, enlist middle managers and frontline employees early, put your culture to work, and build mechanisms for an ongoing focus on costs.

2 key takeaways from the article

1. Today’s economy is putting cost management front and center in boardrooms and on leadership teams. In addressing this issue, executives face a choice. They can cut costs the traditional way and risk making their organizations weaker, or they can do the hard work of rethinking the very basics of their business: identifying the bold outcomes that will differentiate the organization, simplifying every part of their operations, creating savings through automation, leveraging their ecosystem to take on activities they shouldn’t be owning, and building cost management into everything they do.
2. To link costs to their strategy and avoid hastily made cyclical cuts that leave them weaker, companies should do the following:  align the top, build confidence through accelerators, aim for a two-year journey, build a dedicated infrastructure for change, enlist middle managers and frontline employees early, put your culture to work, and build mechanisms for an ongoing focus on costs.

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Topics:  Strategy, Business Model, Decision Making