62-Masters of the Cost Cutting Universe
General Mills is a $13.7 billion food company. In 2007, the company increased its profits by 13% on a 10% increase in sales. It enjoys higher margins than either Kraft or ConAgra.
The company reaches these margin heights by a constant and unrelenting focus on improving the efficiency of its operations. The attention to cost containment emanates from the very top of the company.
Here are some of the cost savings the company has implemented in the recent past:
- Get rid of some of the fourteen different pretzel shapes in its Hot’n Spicy Chex Mix.
- Eliminate half of the more than fifty versions of its Hamburger Helper product.
- Eliminate unimportant spice and cheese pouches in the Hamburger Helper product.
- Shrink the size of the product box, while keeping the product serving size the same in order to reduce shipping costs.
- Eliminate multi-colored lids on Yoplait yogurt.
We have studied patterns of cost reduction for a number of years. Costs are Inputs of people, purchases or capital. These Inputs produce product Outputs. The cost reduction objective is to reduce the ratio of Inputs to Outputs. We have observed that there are four separate approaches to reducing costs:
- Reduce the rates the company pays for the use of an Input
- Reduce the number of units of Input that are wasted or idle in the production of the Output
- Redesign the product or the process to avoid activities or steps that are currently undertaken in the production of the Output
- Find new customers and sales volume, i.e. more Output, for fixed cost Inputs
The examples of the real-world cost reductions at General Mills all fall under the third category redesign the product and the process in order to reduce activities. In this case, the company eliminated components of the product that brought little value to the customer. The components the company eliminated may have generated some revenues, but the revenues they generated were far lower than the costs they caused the company to incur. (See the Perspective, “Cutting the Right Cost”, on StrategyStreet.com.)
The Improve/Cost section of StrategyStreet contains several hundred brainstorming ideas to control costs in even the best of markets.
Year after year, General Mills turns in impressive revenue growth and cost management performance. General Mills’ competitors include Kraft Foods, Kellogg Company, Mondelez, and Kraft Heinz, among others. Since 2018, General Mills has had the highest average annual growth rate in revenue. In 2020, General Mills had the highest annual return on investment among its competitors as well as the highest average annual return on investment from 2018 to 2020. This appears to be the industry’s low-cost competitor.
The examples cited in the blog describe visible changes that General Mills made in its products. These cost reducing changes had little to no impact on customers so they did not affect the company’s market share. Less discussed, because they are less visible, are the economies of scale that superior size and growth confers on General Mills. HERE are some thoughts on measuring and creating economies of scale.
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