There is only one thing worse than doing nothing to respond to changing demand - and that is doing the wrong thing. The right thing is to manage cost, not simply reduce it.
Business basics
Let's get back to basics. Your business exists to provide goods and/or services at a price which represents value for your customers and achieves your profit objectives. Your success is dependant on developing your customer base and creating demand equal to or greater than your ability to supply.
To make a profit, you must achieve a return on your cost investment. The actual return achieved is the true measure of management effectiveness. The challenge is to review costs and invest in areas of higher yield to grow revenue and profitability.
If you are reading this article, it is unlikley price will be your competitive advantage. Whatever your competitive advantage, review your pricing. Ensure you are making a profit rather than contributing to your customer's wealth at your expense.
Cost management is more effective
There are four key reasons why cost management, rather than cost savings, is more effective in responding to changing demand:
- Recognises that cost as an investment
Cost is not an anathema but an investment. A revenue focus with a net profit target is the key. Cost managers review discrete areas to focus on, areas of low yield, and determine how to maximise the return.
- Strategic rather than operational
Often businesses get into survival mode when management has failed to understand and respond to the changing business environment.
Resistance to change is a natural human response. Managers are not immune. Cost managers understand the drivers of change and develop strategic insight to manage for improved results.
- Takes a long-term view
At times, cost savings alone is essential to business survival. "Slash and burn" achieves the survival objective, but often at a long-term cost. Cut back a tree to reduce its size if you want a smaller tree (or business). Remember though, if you effectively prune a rose bush, it grows to become more attractive.
Cost managers review why a cost was incurred to decide if, when and how the investment can be refocussed. Rather than merely reacting, they understand performance trends and how toimprove performance over time.
Business is like a marathon. It is not enough to remain in the race but essential to continually manoeuvre to the finish in front of your competitors.
- Models leadership
What has worked in the past, will not always work in future. In the face of a drop in demand, maintaining the status quo can only lead to reduced financial performance.
Leaders determine direction and move organisations through times of change. They make things happen by shaping a performance culture and mobilising resources. Staff value effective leadership in times of change and appreciate greater certainty, clear direction and understanding the rationale for change.
Leadership action plan
- Review your pricing - Determine target costing, acknowledging what the market will bear, the cost of goods sold plus your margin.
- Embrace cost management - Commit to moving resources from areas of low yield to areas of higher yield.
- Focus on delivering customer value whatever the economic conditions - Find new customers that recognise the value you provide and develop existing customers to strengthen your revenue stream.
- Refuse to allow negative thinking to limit your aspirations - Focus your organisation on successful in all times not just boom times.
- Model leadership and create willing followers - Focus on the things that will drive your success while providing clarity and certainty for your staff.
- Use a proven external cost management consultant - To focus the cost management effort and assist objective decision-making. An expert who can help staff embrace cost management from a revenue perspective and develop their capability to drive profit improvement.