Tuesday, October 16, 2007

Cutting our costs to spite our revenues [and our country]?

Have a look at the picture above - this is Checkers' current in-store promotion, and what I read to be their current new business strategy. Basically, they've put their promotions in "no frills" black and white [rather than the usual colour advertising] to bring "savings of R10 million every week!".

Cost-cutting. It's the first time I've seen this specific technique, but in the end all they're trying to do is cut costs.

What on earth are they thinking? This sounds like something a bunch of accountants dreamed up! [and I can say that because I've lived in that world]

Fantastic idea. For a handful of interested people - yes [investors, management and possibly a portion of their customer-base]. But not if we look at the big picture.

Lets just think about what's really happening when we cut costs in any business, say ABC Limited [I'm not picking specifically on Checkers here... this is applicable to tons of companies].
  • Step one - ABC's profits start declining, investors scream at the board who tell management to sort it out.
  • Step two - management sees that as sales have declined, prices have been dropped to bring customers back, leading to poor results. Well okay, if we can drop our costs, profits will go up. They look at the facts - hey, we're a big company... let's get all our suppliers to give us an extra 10% discount and boom we're done [or in Checkers' case, lets just cut our spending on "unnecessary" colour copies] - and they commence the creditor-crunching.
  • Step three - costs drop, profits go up [say] 20% and "everyone" in ABC's world [with our internally-focussed blinkers on] is happy.

In reality, what else has happened here?

  • First of all, management and the bean-counters take the easy way out rather than actually using their brains and finding out what the real problem is and solving this.

  • Second, cutting costs affects tens, hundreds or thousands of suppliers leading to their profits declining and effectively reduces the spending power of the individuals working in and investing in those businesses [in one way or another]. These individuals, in turn, have less to spend on ABC's products... big picture - in the long-term ABC loses more than it gains. Hello?

  • Thirdly, these suppliers all institute similar measures, resulting in widespread reductions in quality of life and spending power throughout the community [and country]... thereby effectively making the country poorer and worse-off [the really big picture].

How on earth can this be the best strategy?

What are the options? Well, there are many, but it starts at the beginning, getting to the real heart of the problem. Consider, for example:

  • ABC performs in-store surveys and discovers the store setup and product selection is wrong leading to customer frustration and them leaving for other stores.

  • Management hire experts to improve their store setup and alter their product selection to meet the needs of customers [hiring other companies - creating prosperity in the bigger picture; meeting customers needs - attracts customers, thereby increasing revenue rather than cutting costs]

  • End result - costs up, revenue up even more and profits soaring - "everyone" [BIG PICTURE everyone - customers in ABC's world, previously unrelated suppliers and in the end - the country at large] is happy!
I've oversimplified it here and this is just one very general example, but I think it communicates what I'm getting at. As businesses, we have to look at the BIG PICTURE and not make decisions in isolation. There's no point in me making a lot more money if the only way to do it is to make sure that everyone around me makes less.

Yes, I have been harsh here. But after seeing it happen time after time, I'm just sick of seeing businesses with their blinkers on pushing to get ahead by pulling down all those around them rather than considering the great scheme of things and coming up with a creative way to make a win-win situation for everyone. Here's a fantastic RealBusiness [net]work article on how cost-cutting can be handled virtuously.

We need a significant change in our thinking if we are to make South Africa thrive [economically and socially] and for us to grow together. We can do it!

I believe it! Do you?

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