Survival is Not Enough Part II: Cost Cutting vs. Business Transformation
Cost cutting is great, but quite frankly it’s simple during a recession. Yeah – I know. Trimming budgets can be brutal, cruel, heartbreaking and frustrating – but it’s also the path of least resistance when business slows down. It may be unpleasant, but it ain’t complicated. Sales fall so spending has to follow.
If you’re like many managers – particularly those who have never lived through a serious recession – you probably view cost-cutting as prudent reaction to lower profits (or bigger losses). You might feel that slashing expenses is an exceptional measure that you have to take until things get back to normal. Many owners and managers like to tell themselves that they have ALWAYS run a tight ship, but that they will react to extraordinary market conditions swiftly and decisively. Their goal is to return to the pre-recession status quo of their original business model. The smaller the deviation from business-as-usual, the better.
Unfortunately, many China-based managers will find that reactive cost-cutting in a recession is only going to take them so far. Many will fail somewhat slower than they would have. Cost cutting will never change the game for them. Unless they are extremely lucky, the economy will do that for them.
In a recession, reducing costs should not be a tactical decision – it’s a strategic one.
Game changers
Pop quiz, hotshot: The year is 2012, and the recession of ’09 is well behind us. Did it change the way your departments, company, industry or market functioned? Did it alter your competitive environment? Did it affect the way your potential customers viewed your company’s basic value message?
If your answer is ‘no, business returned to normal as soon as the economy picked up’, then you are probably in the minority (or are badly mistaken). It’s more likely that the answer is that your business, product mix, value proposition and operating methods were transformed by the recession.
Now the key is to forecast what types of transformations are likely, and get in front of that curve.
Incremental cost controls are ‘death by a thousand cuts’
If your big skill is reacting quickly then you are going to hit the breaks before you run into the brick wall. But that doesn’t mean that momentum or road conditions won’t carry you right along. You’ll just make less of noise when you inevitably hit.
The key to surviving a major recession is knowing where the wall is and changing course early enough to avoid it.
Ask yourself – and your top people – these 5 questions about your business:
1. Have your customers come to think about your product offering differently since the start of the recession? Will they think of you differently if things get worse? (Hint – If you sell bathroom fixtures, the answer is probably NO. If you sell super-luxury spa services, then the answer is probably YES.)
2. Have your relationships with partners or suppliers changed? Do you have more power or less? Are there gluts or bottlenecks in your supply chain?
3. Has your product offering expanded or contracted during the recession? Are customers asking for different packaging, price structures, break-points or services? Are you being asked to give away services that you once charged for?
4. Do you have the right mix of manpower, skills, facilities and technology? Do you have idle capacity? As you’ve downsized have you also reduced infrastructure and variable costs? (They guy who fires 35% of his team but still pays rent and fees for a full shop isn’t saving nearly as much as he thinks.)
5. Has your competitive environment changed? Many young entrepreneurs assume that recessions will decrease the level of competition as other firms fail. Often, however, competition increases as other firms move into your space – either in terms of product offering or physical territory.
If you and your advisors determine that you are doing everything right and you have no option other than hunkering down and waiting out the storm, then good luck and best wishes. But if you think the market environment for your business is going to be significantly changed for the long-term, then there is no time to waste.
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