Cost Reduction Fixation

Why are so many firms fixated on reducing costs? Obviously, the recent recession has resulted in a collapse of aggregate demand, and firms are faced with lower revenues as a result. In such an environment, reducing costs is the fastest way to maintain profit levels.

Yet, the obsession with reducing costs goes beyond the recession. Both Lean and Six Sigma are heavily promoted as methodologies which can help a firm to improve its profitability through the greater efficiencies. Both of these approaches pre-dated the recession.

My own answer to this question is that firms are often unprepared to do the heavy lifting that is required for thinking through the revenue side of their businesses. It is much easier to identify how you can reduce costs than figure out how to compete more effectively and create customers. An intellectual laziness, if you will.

As a result, firms learn to become quite adept at reducing costs, but much less good at determining how they will create and keep customers.The tacit assumption that firms make in cost reduction initiatives is that “our approach to the marketplace is fine. We just to need to improve our costs and everything will be OK.” The danger here is that if the assumption is wrong (as it often is), the firm is actually harming itself since reducing costs does little to enhance how the firm will enhance its ability to build a competitive advantage in the marketplace.

It is time to start looking less at operational cost reduction initiatives and more about how a firm can compete more effectively and create and keep customers. I’ll have more to say about this in future columns, including looking at how Lean and Six Sigma can be leveraged for revenue generation as opposed to cost reduction.

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