The industry is reducing costs aggressively
Symptom: The industry has seen a round of aggressive cost cutting.
Implications for the market:
Cost cutting is a universal response to the margin pressure that occurs when industries become hostile. The usual result is a reduction in absolute costs near term
But cost cutting must be done with great care. When it is done without a careful review of the company's overall competitive strategy, the result can be a reduction in product performance that is visible to the customer. For example, in an effort to cut costs the company may fail to copy the latest industry innovations, or its quality may slip, or it may put a squeeze on its distribution channels.
Changes that reduce benefits visible to customers will cause sales to fall. Even though absolute costs may go down, the cost reduction becomes self defeating because it leads to additional share loss. As share shrinks, overhead as a percent of sales increases, and unit costs rise.
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Perspectives: Conclusions we have reached as a result of our long-term study and observations.