What Is Cost Cutting?

Cost reduction refers to optimizing internal management, production, research and development, and sales processes, rather than reducing production or cutting corners.

Cut costs

Right!

Cost reduction refers to optimizing internal

1. Manage the cost structure. ^[1]

Obstacle 1: It is difficult to identify key capabilities. ^[2]

When management finds that cost-control measures must be taken quickly, it is usually because they have not been able to clearly judge the importance of assets. Even those companies with a prominent market focus sometimes make incorrect estimates of capacity. When they focus on estimating capacity from a certain business structure or department, they lose the overall systemic vision.

Maybe your company has hundreds of different assets, but not all assets can bring you profit. You must have a clear and complete view on this.

Investing a large amount of money in a certain business or department may not lead to ultimate overall success. In order to avoid this blind investment and identify the key capabilities of the company, the core team of the company must formulate a focused plan and carefully consider the following seven questions: How has the market changed? How will it change? What are the most significant market trends? How will this trend affect key areas of the business? Who are the successful companies in the market today? How do they gain advantage? How are these advantages changed by the constantly changing market? What are our advantages in maintaining high profit margins and increasing market share? How to take advantage of these distinctive advantages? Are we sustainable enough? What kind of capabilities does the market need? What kind of capabilities do we need to succeed? What kind of capabilities do we need to build to lay the foundation for the future? Which part of our assets can match these capabilities? Which do not match? What changes do we need to make to adapt to the market? How can we make the most of our capabilities?

Obstacle 2: Determine asset portfolio based on short-term performance.

In a bad economic environment, it is difficult to divest existing businesses, especially those that have created substantial profits for the company. According to traditional methods, people judge the quality of a business based on the performance of each aspect of the business, such as market share, growth, and profitability.

These metrics emphasize only current performance, and focusing solely on that will make you lack resistance to a changing future. To make matters worse, some companies even make decisions based on past profitability, instead of considering whether they can create value for the company and promote its continuous growth.

Enterprises need to think about which assets in the existing business model are most suitable for the company's core capabilities. Even if you cannot handle or sell those assets that need to be divested for the time being, through this compulsory discussion, you will be able to slowly instill a new idea and carefully control expenditures.

Obstacle three: Cost reduction is difficult to achieve in the short term.

When companies announce changes, they often change a lot. Management needs to be extremely optimistic and don't be scared by the pressing economic environment to make a strategy. If you think time is too tight to plan a strategy, then your cost control will be less strategic. There is a very significant difference between strategy and no strategy. Yes, you can make mistakes and pay for them, but without strategy, the loss will be even greater, because it is possible to reduce the capacity of each business. Don't be lazy to follow the previous strategy. Today's world economic environment has changed and is changing rapidly. Only when we have a clear understanding and grasp of the company's capabilities in a timely manner can we succeed.

Obstacle 4: Think that the company is world-class in all aspects.

Many companies tend to think that they are very good, so they blindly compare with competitors, which leads to repeated expansion of the company. Our recommendation is to be mindful of competitors' actions, but not to allow them to replace the understanding and building of key business capabilities. No company needs to be world-class in every aspect. You need to learn to satisfy, strive to identify the most critical capabilities of the business, and build a portfolio of assets that fits it. After discovering the company's capabilities, you can invest or cultivate appropriately, but others need to control and reduce costs to ensure that every penny is spent on the knife edge, that is, to meet customer needs.