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The industry is reducing costs aggressively

Symptom: The industry has seen a round of aggressive cost cutting.

Implications for the market:

  • Cost cutting is a universal response to the margin pressure that occurs when industries become hostile. The usual result is a reduction in absolute costs near term

  • But cost cutting must be done with great care. When it is done without a careful review of the company's overall competitive strategy, the result can be a reduction in product performance that is visible to the customer. For example, in an effort to cut costs the company may fail to copy the latest industry innovations, or its quality may slip, or it may put a squeeze on its distribution channels.

  • Changes that reduce benefits visible to customers will cause sales to fall. Even though absolute costs may go down, the cost reduction becomes self defeating because it leads to additional share loss. As share shrinks, overhead as a percent of sales increases, and unit costs rise.

Recommended Reading
For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

  • "Achieving The Low Cost Position"
    Most people think primarily of physical costs. However, a second, less understood type of cost is more important and holds the key to achieving the true low cost position

  • "Costs: The Last Consideration"
    As margins fall and profitability slides, the obvious first response is to cut cost. Knowing why that may be the wrong choice requires an understanding of the difference between effective cost control in hostile and non-hostile markets.

  • "Cutting The Right Cost"
    When markets turn hostile, managers turn to cost cutting. Reducing cost seems like the most direct route to improving profitability. Often, though, efforts to control costs make the situation worse.

  • "What We Do Know Can Hurt Us"
     A little knowledge is a dangerous thing. For the business leader, the very abundance of knowledge poses a danger.