The pandemic is forcing many companies to cut expenses. Many business crises require tightening the belt. But if you must cut costs, do so in the context of specific aims and criteria beyond helping the bottom line. Otherwise, you’ve reduced your future competitiveness.
Case in point. Kraft. Kraft split itself into two businesses in 2012, one an international snack and confection foods company (Mondelēz International, Inc.) and the other (retaining the Kraft brand) the North American grocery item business, consisting of cheese, Oscar Mayer deli meats, etc. In 2015, Heinz acquired Kraft. Kraft Heinz’s share value has dropped by more than half since the merger. One would think that the synergies between the two grocery-channel based businesses would lead to rising value. What happened?
The answer is simple. Kraft Heinz cut costs, then cut costs, then cut costs yet again in an attempt to capture the synergies promised in the acquisition. But its cost-cutting reduced advertising that kept the brands front and center in customers’ minds. The financial strategy also cut the heart out of its customer understanding and innovation work, which is what’s needed to keep brands relevant and differentiated. (A computer with an Artificial Intelligence program could have identified the cost cuts. Why then do we pay corporate leaders millions to fail so unequivocally? But I digress.) No wonder Kraft Heinz lost market share to store brands and differentiated brands riding the trends of organic, craft, and local.
Sadly, Kraft Heinz is now selling some of its cheese brands to France’s Groupe Lactalis SA for $3.2B to help reduce Kraft Heinz’s debt load. Watch Groupe Lactalis emerge as a new winner. It has already acquired Stoneyfield Organic Yogurt to add to its President Brand brie and ricotta cheeses in the US.
It’s OK to cut costs. But the idea is to cut non-value-added costs and become more efficient. If you have not defined where and how you want to win business and what spending creates customer value, you cannot separate necessary costs from non-value-added costs. And your cost-cutting is likely to cut away the seeds of tomorrow’s success.
I suspect that Boeing may be guilty of the same sin. In trying to cut the cost of its 737 MAX offering (e.g., by not requiring pilot testing), it sent a plane into the market that pilots in at least two developing countries failed to operate safely, resulting in deaths. To cut costs and increase speed to market in developing this 737, Boeing also forgot to remind the troops of a core principle of its brand: to always give pilots a redundant system, so that if one part failed (as it did in the recent deaths), another would not fail and pilots could find their way to safety. Recently two high-ranking Boeing executives involved with the development of the 737 MAX said there were no flaws in the company’s design processes and, as reported in the Wall Street Journal “didn’t concede any procedural mistakes during the plane’s six-year development process.” Boeing Board – are you listening? Something is wrong with the Boeing culture. The US House report on the 737, according to the New York Times, says the accidents “were the ‘horrific culmination’ of engineering flaws, mismanagement and a severe lack of Federal oversite.”
Here are some areas where you can explore for non-value-added cost reduction opportunities in your organization:
- Old offerings that should be milked for profits or removed from the market
- Processes that can be automated
- Processes that an outside firm can do as well if not better and at lower cost
- Layers of management who basically manage information flows
- Independent business units that might be better off together
- Personnel policies that keep workers not totally committed to their work or that lead to a loss of talent (a bad manager is the #1 reason workers leave)
- Customers that take more time than they are worth (i.e., profit margins are minimal or negative)
- Unfocused business development efforts that create a lot of waste in unsuccessful sales and marketing efforts
- Time delays – often by process redesign you can cut time and costs
Cut costs – but do so strategically. Make sure you’re preserving the core processes, skills, and functions that allow you to create value in the marketplace. When markets improve, you’ll be happy you have the ingredients to succeed.