StrategyStreet / Diagnose / Costs / Quantifying Cost Reduction Objectives




Part 1: Quantifying Cost Reduction Objectives

Capsule: The Company uses public financial data to establish reasonable financial targets for the future. It measures its cost management shortfall against these financial goals, then seeks to close these shortfalls by matching competitive cost advantages and improving the proportion of sales to the Company’s best customers.

For helpful context on this step:

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Perspectives:

Symptoms and Implications:

Controlling costs is much like a game. A game has rules and boundaries. In business, the rules and the boundaries are set by competitors and customers. They establish how far we can push our cost reduction and revenue improvement efforts. The best of both the customers and competitors set the targets that we must reach.

Competitors

We use our competitors to establish the appropriate financial goals for the business. Our goal is always to become the low cost competitor in the industry by out-performing any other competitor. If we have a competitor whose cost is lower than ours, we use that competitor’s performance to set the minimum targets for our own performance.

Competitors also help us see new cost reduction opportunities. Much of what any competitor does is visible to us. As competitors find less expensive ways to serve customers, we can observe their actions and copy them where we believe they have an advantage on us. In particular, we can see their new initiatives in changing their rates of cost for people, purchases or capital, or in the approaches they employ to managing key functional costs in the business.

Customers

Our customers also have a contribution to make in setting our financial objectives. In particular, our Core customers allow us to earn at least our cost of capital throughout the business cycle. Near-core and Non-core customers will not allow us to achieve these levels of returns. The previous three sections of StrategyStreet segmented customers, developed new products and services for the target segments, and set appropriate pricing tactics. If these strategies and tactics succeed, we will improve our customer mix by selling more to Core customers and less to Near-core and Non-core customers. This improvement in our customer mix will increase our margins and help us meet our cost reduction and financial return objectives.

We cover each of these topics in more detail in the following sections:

Measuring Current Shortfalls in Financial Results
Capsule: The Company uses public financial data to establish reasonable targets for return on investment and its two major components. It measures its financial gap and sets priorities to close the gap.

Matching Competitive Cost Advantages
Capsule: There are three places to look for competitive advantages: rates of cost, approaches to managing functional costs and productivity, or Economies of Scale. The first two of these are visible to the Company and enable the Company to evaluate its opportunities to match competitive advantages.

Increasing Margins by Improving Customer Mix
Capsule: The Company may close part of its shortfall in financial performance by improving margins through selling a greater proportion of sales to Core customers.

We begin this diagnostic by setting our goals for financial performance and then measuring the distance we have to travel to them.

Basic Strategy Guide Users Return To: Step 24

SummaryPoints

Next: Measuring Current Shortfalls in Financial Results