Today’s SMEs are increasingly focused on ensuring their business models are optimised for current and upcoming economic uncertainties. This has increased the focus on a company’s cost structure and operating model.
It is all too easy to undertake untargeted reductions in costs but this is often unsustainable and may hamper long term growth. Forward looking companies will instead design and implement a cost cutting strategy that aligns with their overall business strategy. Strategic cost cutting therefore helps companies lower their cost base whilst allowing them to deliver their growth strategy.
In order to design a successful strategic cost cutting plan, cost must be identified and categorised.
At a simplified high level, costs can be categorised as Unnecessary Costs, Beneficial Costs and Advantageous Costs
Unnecessary Costs
Costs that are not aligned with the overall growth strategy of the company. Good companies cut these costs and transfer the resources to better areas. These costs are the first to cut.
Beneficial Costs
Healthy costs drive initiatives and strategies that support the company’s overall growth ambitions. They pay for the operations which are perfectly matched to the market dynamics and customer preferences.
Advantageous Costs
These are costs related to building and maintaining company’s areas of differentiation and competitive advantage. These costs must be approached with care; once lost, a company’s point of competitive advantage is difficult to regain.
It is vital that a company’s costs are classified to enable a process of minimising exposure to unnecessary costs and maximising investment in the most advantageous ones. The practice helps create a more resilient growth model, particularly important during the current climate of uncertainty.
How then are forward-thinking companies applying this process in today’s environment?
An unnecessary cost for one company may be an advantageous cost for another, so it’s critical to understand how each expense line impacts the company’s overall business strategy before jumping into cost reduction initiatives.
A detailed understanding of a company’s cost base and how it maps to the overall business strategy is therefore critical to ensuring costs can be removed whilst simultaneously priming a company for growth.
