Advanced Strategy

Cost Cutting: A Case Study

Nitin GargLeave a comment

CostCuttingThis is an extension of my previous article on cost cutting. I thought of publishing it to offer my insights on how I arrived at the precautions (in my previous article), especially the three of the four thoughts I presented under “Precautions”. I’ve also provided the hyperlink to each of these two articles so that readers can easily steer and read them one after the other. Read my previous article on “Cost Cutting: Steps, Strategies and Precautions” here.

Precaution #1: If the CEO is not leading the project, it’s not worth pursuing it

In the past 2 years, I have helped organizations (up to US$ 50 million) improve performance, execute growth strategy and maximize their business value. In one of my assignments in India, I had the opportunity to serve one of my clients in the IT sector which had concerns with declining sales and operating margins. The President and CEO of this $33 million organization made a strategic move to expand their business to cloud computing, focusing on SME, USA. He made a directive to his Finance Manger to lead the cost cutting initiative and give him the updates on the progress such that he can concentrate on his business expansion project. Unfortunately, the Finance Head resigned to pursue opportunities outside the company, thereby forcing the Owner, President and CEO to delegate the cost-cutting project to his oldest employee, the next Finance Head. Being new to the job, the new Finance Head showed enthusiasm, commanding his team to meet the expectations of his new boss. But he committed mistakes on various lines, leading to a situation which the entire organization suffered.

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Cost Cutting: Steps, Strategies and Precautions

Nitin Garg106 Comments

CostCuttingOften companies launch new products, expand businesses (globally), diversify their portfolio or start new businesses with the aim of enhancing growth and increasing profitability. But in industries which have low barriers to entry and exit, new players enter the market by replicating existing business models and offering similar products and services at lower cost, thereby making it difficult for the existing players to sustain their market share. As the revenue growth per player shrinks over the years, companies explore ways to maintain their profit margins, leading to a situation where cost becomes more important and price becomes one of the key differentiating factors in the market.

In such situations, senior management start hunting for measures to reduce their costs and expenses to improve profitability. Cost cutting (also known as cost reduction) is one of the steps initiated by the Business Managers to improve profitability. The Leaders make an effort to monitor, evaluate and trim their expenditures, and explore options to streamline processes, restructure their organization and cut down flawed expectations. Cost reduction can be a formal company-wide program or limited to a single department. It usually becomes a company-wide initiative during economic recession when their revenue growth struggles and profit margins shrink consistently for quarters.

In this article, I offer my views on few steps, strategies and precautions while taking up a critical project like cost-cutting and run you through some of my thoughts. I welcome your views and suggestions in the comments section below.

(1) First step in the entire process is to identify a target – how much to cut? This requires a lot of deep-dive, number crunching, hour long sessions with your Business Head(s) to determine how much would be an effective range. You might have to identify the broken strategies, half executed business plans or even stop promising opportunities. As we brainstorm the numbers, we need to look at them from the perspective of 5 year strategic plan.

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Seven questions to ask yourself before executing your product idea

Nitin Garg1 Comment

There are four aspects that needs to be covered when we think of a new product idea.

Product Strategy

  • What problem is my product solving?
  • How is it different from the existing products in the market? What is its USP?
  • How does it fit into my existing product line (assuming this is not a start-up)? This is very important thought as there is always a danger of cannibalizing our own product that may be generating good revenue. At times, we might have to evaluate the amount of revenue your latest product will generate compared to its predecessor.

Customer Strategy

  • Who is my customer?
  • Why is he going to buy from me? What’s the value he gets?
  • How do we reach them? Can we reach them through Internet? (Internet is revolutionizing the way we do our business today)
  • How do we retain them?

Market Strategy

  • How does it affect my existing product line? Is it going to replace them? Does it cannibalize them?
  • Is this idea a reaction to my suppliers’, customers’ or competitors’ move?
  • Does it increase my sales revenue or my customer base?
  • Is the idea catering to a new market? If yes, we might want to look at many aspects, but predominantly barriers to entry and exit, players, size, growth, life-cycle of the economy and industry, impact of technology (internet), …
  • Who are the players in the market and their market share? How would the competitor respond to it?

Financing

  • How would you finance the product launch, if we get a ‘Go-ahead’?
  • What happens if the economy sours? How will I pay the debt, if I’m raising funds for it?

We need to understand the supply and demand aspect of the game. Many a times, we invest in new things only to realize that it’s a “desire” (and not a need) in the market. We approach the prospect and try to force sell them by continuous education/campaign. That is when the cost goes up. I suggest we do a demand analysis with a strong perspective on competitors move in such an area, and then try to find out why the other players haven’t done anything with it.

Questions I’d ask myself are:

  • Is there sufficient demand for such a product idea?
  • What’s the supply?
  • Why haven’t others identified it yet?
  • If they have, what are they doing with it?
  • Have they tried to cater to the need?
  • If they failed, what’s the reason behind it?
  • Are there any substitutes for it?
  • What are the barriers to entry and exit?

This post originally appeared in one of my blogs in public CXO forums: 

https://www.linkedin.com/groups/Seven-questions-ask-yourself-before-50556.S.263673928?view=&srchtype=discussedNews&gid=50556&item=263673928&type=member&trk=eml-anet_dig-b_pd-ttl-cn&fromEmail=&ut=3uETgoUjty-5Q1

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Copyright Nitin Garg | All Rights Reserved

How would you add an extra $10m in revenue in the next year?

Nitin GargLeave a comment

First, we need to understand the external factors – economy and industry. The questions that we need to ask ourselves are:

  • What’s the size of the market?
  • What’s its growth rate?
  • Which stage of the life-cycle is it in?
  • Performance for the last 2 years (it would be very difficult for a start-up to take a leap unless we have ample amount of “qualified” pipeline to generate this revenue). I suggest we do a comprehensive analysis and do a Specific, Measurable, Achievable, Realistic and Time-constrained (S.M.A.R.T.) projection to avoid disappointment and hence the cost of the effort (which can be huge).

Growth Strategy

  • Increase distribution channels
  • Diversify product line
  • Increase product and services
  • Acquire competitors (this needs cost-benefit analysis and due diligence of M&A targets)

Increase Sales Revenue

  • Increase price. This has to be done with caution and need smart approach to pass it on the customer. We need to anticipate the competitors’ response and check the substitutes available in the market. Otherwise, the customers/prospects will run away from you! 😉
  • Increase per unit sale
  • Increase volume (get more buyers, increase distribution channels, hire sales force, …)
  • Create a seasonal sale, if applicable
  • Invest in major marketing (one that has proven to be fruitful). Digital marketing is most cost-effective and efficient for larger target audience. We can hire an advertising agency for this with KRA like number of leads and conversion rate for the pay-off.

There might require certain changes to the pricing strategy as well as compared to your competitors’ price

This post originally appeared in one of my blogs in public CXO forums:

https://www.linkedin.com/groupItem?view=&gid=50556&type=member&item=264797155&commentID=155864030&report.success=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_155864030

If you wish to gain any privilege to this blog, please write your message to the author through the page “CONTACT ME” by filling in the required details in the form, OR by dropping an e-mail to him at nitin@gargfinanceblog.com

Copyright Nitin Garg | All Rights Reserved