Fit for Growth

Cutting costs isn’t about slashing budgets indiscriminately; it’s about focusing your resources on what makes your business thrive while trimming the rest.

1. Focus on What You Do Best

Every business has unique strengths that set it apart from competitors. These are called differentiating capabilities, and they should be the focus of your resources. Instead of trying to excel in every department, identify what your company does better than anyone else and double down on it.

Many companies make the mistake of spreading their resources too thin, trying to be "best in class" in every area. This approach often leads to underinvestment in the areas that truly matter. By concentrating on your differentiating capabilities, you can ensure that your business remains competitive and profitable.

For example, IKEA focuses on its strengths: simple, elegant designs, low prices, and a great in-store experience. To support these priorities, the company cuts costs in areas like supply chain and packaging, ensuring that its core strengths remain untouched.

Examples

• IKEA prioritizes product design and customer experience while cutting costs elsewhere.
• A tech company might focus on innovation while outsourcing customer support.
• A restaurant could invest in its signature dishes while simplifying its menu.

2. Don’t Wait for a Crisis to Act

Waiting for a financial crisis to start cutting costs is a risky move. When businesses act out of desperation, they often make poor decisions, such as cutting resources from areas that are essential for growth.

Proactive cost management is like maintaining physical fitness—it requires consistent effort, not just crash diets during emergencies. By regularly evaluating your cost structure, you can make thoughtful adjustments that prepare your business for long-term success.

For instance, companies that redesign their organizational models during stable times can avoid the chaos of rushed decisions. A leaner management structure, for example, can reduce costs and improve decision-making speed.

Examples

• A company that reduces management layers during stable times avoids layoffs during downturns.
• Regularly reviewing budgets helps identify wasteful spending before it becomes a problem.
• Businesses that invest in efficiency during good times are better prepared for economic challenges.

3. Leadership Drives Change

Successful cost-cutting initiatives start at the top. CEOs must act as champions of change, inspiring their teams with a clear vision for the future. This vision should explain why cost-cutting is necessary and how it will benefit the company.

Leaders often hesitate to act because they don’t have every detail figured out. However, involving employees in the planning process can lead to better ideas and stronger commitment. A collaborative approach ensures that everyone feels invested in the company’s success.

For example, a CEO might present a candid assessment of the company’s challenges and invite senior executives to contribute ideas. This approach not only generates innovative solutions but also fosters a sense of ownership among employees.

Examples

• A CEO who shares a compelling vision inspires employees to embrace change.
• Collaborative planning leads to innovative cost-cutting ideas.
• Employees are more committed when they feel involved in decision-making.

4. Outsourcing Can Save Money

Outsourcing isn’t just for large corporations. It’s a cost-saving strategy that businesses of all sizes can use to focus on their core strengths. By hiring external providers for specific tasks, companies can reduce costs and improve efficiency.

For example, outsourcing back-office functions like payroll or IT support can cut costs by up to 50%. Smaller businesses can also benefit by outsourcing specialized tasks like research and development, gaining access to expertise they couldn’t afford in-house.

The key is to outsource standardized processes with clear inputs and outputs. Complex tasks requiring judgment or creativity are better handled internally.

Examples

• A company saves money by outsourcing payroll to a specialized provider.
• Small businesses use external experts for product design and data analysis.
• Outsourcing IT support reduces costs while improving service quality.

5. Relocate to Cost-Effective Locations

Relocating parts of your business to low-cost countries can significantly reduce expenses. However, it’s important to consider factors like local talent, infrastructure, and wage trends before making a move.

For example, many companies have moved manufacturing to countries like the Philippines to take advantage of lower labor costs. However, rising wages in some regions may prompt businesses to relocate again. The key is to balance cost savings with access to skilled workers and reliable infrastructure.

Relocation isn’t just about manufacturing. Back-office functions like finance and IT can also benefit from being moved to areas with lower costs and better infrastructure.

Examples

• A company relocates manufacturing to a low-cost country to save on labor.
• Back-office functions are moved to regions with high-speed internet and reliable electricity.
• Rising wages in one region prompt a business to explore new locations.

6. Streamline Your Organizational Model

A company’s organizational structure can have a big impact on its efficiency. By reducing the number of management layers, businesses can cut costs and speed up decision-making.

For example, increasing the number of employees per manager reduces the need for middle managers. This not only saves money but also creates a more agile organization. Fewer layers of hierarchy mean decisions can be made and implemented more quickly.

Streamlining your organizational model is a sustainable way to cut costs without sacrificing quality or performance.

Examples

• A company reduces management layers to save money and improve efficiency.
• Fewer layers of hierarchy speed up decision-making.
• Increasing team sizes reduces the need for additional managers.

7. Middle Managers Play a Key Role

Middle managers are the bridge between executives and employees. During restructuring, they face the challenge of keeping their teams focused while dealing with uncertainty themselves.

One way middle managers can support their teams is by reinforcing company values and setting clear expectations. For example, introducing new performance metrics can help employees stay engaged and motivated.

Restructuring also presents opportunities for middle managers to develop new skills and improve team performance by addressing underperforming employees.

Examples

• A manager introduces customer satisfaction surveys to keep employees focused.
• Restructuring helps managers identify and address underperforming team members.
• Middle managers develop new skills during periods of change.

8. Avoid Cutting Differentiating Capabilities

When cutting costs, it’s tempting to make across-the-board cuts. However, this approach can harm the very areas that make your business successful. Instead, focus on reducing expenses in non-essential areas.

For example, a company known for its customer service should avoid cutting resources from its support team. Instead, it could look for savings in areas like marketing or logistics.

By protecting your differentiating capabilities, you ensure that your business remains competitive and continues to grow.

Examples

• A company protects its customer service team while cutting costs elsewhere.
• Marketing budgets are reduced to focus on core strengths.
• Logistics costs are trimmed without affecting product quality.

9. Cost-Cutting Is a Continuous Process

Cost-cutting isn’t a one-time event. To stay competitive, businesses must regularly evaluate their expenses and look for ways to improve efficiency.

For example, conducting annual reviews of your cost structure can help identify wasteful spending. Regularly updating your organizational model ensures that your business remains agile and efficient.

By making cost management a regular part of your business strategy, you can ensure long-term success.

Examples

• Annual cost reviews help identify and eliminate wasteful spending.
• Regular updates to the organizational model keep the business agile.
• Continuous cost management ensures long-term competitiveness.

Takeaways

1. Identify your company’s unique strengths and focus your resources on them.
2. Regularly review your cost structure to find areas for improvement.
3. Involve employees in the cost-cutting process to generate ideas and build commitment.