What Price Cost Cutting?

What Price Cost Cutting? by Mike Powell and Justin Craig
Australian Center for Family Business, Bond University, Australia

In recent years, many family businesses have turned to cost cutting practices in order to become more efficient and stay competitive. Cost cutting is often introduced as a survival strategy that is forced upon the company in tough times and, as well as influencing the day-to-day operations of the business, may affect long-term viability.

Reducing, or at least controlling, costs and increasing productivity are at the core of management.Problems arise when family businesses look to these concepts to make strategic decisions.Decision makers can become so preoccupied with the idea of producing effectively and efficiently that they lose sight of what it is they are producing and in what direction the firm is truly headed.A company will lose sight of its vision if it only focuses on achieving short-term goals with no respect to future aspirations (Trott, Paul. 1998, Growing Businesses by Generating Genuine Business Opportunities: a Review of Recent Thinking. University of Portsmouth Business School).

As the organization is flattened and management is reduced through cost cutting initiatives, more tasks weigh down the remaining managers and employees. The organisation’s best employees are “rewarded” by having more responsibilities assigned to them.Paul Trott from the University of Portsmouth suggests that this can lead to burnout and a phenomenon known as “downshifting” whereby key employees forego their positions for lesser jobs in order to live a more balanced lifestyle.

Another way that cost cutting and productivity measures can detract from the competitiveness of a firm is when these practices become so dominant that the focus of the company subconsciously shifts from innovating and producing better products to simply producing goods effectively and efficiently.The problem with this is that it lowers the firm’s expectations from being competitive in the industry to merely surviving in the industry.When the goals of a business are lowered, overall quality and output will also be negatively affected.Sooner or later, profits will inevitably follow suit.

A further reason not to let cost cutting become an overly dominant issue is that the benefits of simply reducing costs are limited. Once every possible cost is reduced to its absolute minimum, what is a firm to do next?Any business that focuses on reducing costs to the bare essentials will eventually achieve just that.A business in this situation has just inadvertently stripped itself of all possible sources of new ideas and innovation.This results in a business unit with no strategy and arguably, no vision.

These negative consequences are magnified when a cost cutting strategy is employed in family owned businesses.Family businesses take on an additional dimension in comparison to their corporate equivalents.Many family businesses are successful for intangible reasons such as trust, loyalty, reputation, and customer service, not just simply because they remain “in the black” every quarter.

In today’s competitive environment, family businesses need every advantage available in order to compete with larger publicly owned firms.One advantage of a family business is usually their positive working relationship with the local community.This relationship is at risk if the public perceive a lack of commitment to the community on the family’s part through their drive to cut costs in all areas of the business.

Given that the family “lend” their name to the business, often the goal of the business is to be associated with the word “best”, rather than “biggest”. The family factor, which is usually connected to a long-term outlook, allows them to form solid relationships with all stakeholders.They are committed to satisfying the needs of customers by dealing with them on an individual basis.Customer satisfaction and loyalty is crucial to the family. Family businesses are fixated on achieving the highest level of customer responsiveness attainable, and they are usually prepared to forfeit a small amount of current profit in order to secure a superior reputation as an industry leader.

When used properly as operations management tools, cost cutting and productivity controls can help contribute to a firm’s profitability.However, while cost cutting and productivity measures are often necessary for a company to subsist, they must sometimes be sacrificed in order to provide the innovativeness necessary for a firm to attain long-term growth.It pays to remember that the future growth of a family business has a lot to do with present investment.