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Ten top strategies for reducing costs

  1. Understanding what costs really have an effect on the profit line, both for the company and its competitors.
  2. Exploring how and where value is added in the company as raw materials are turned into the finished product or service.
  3. Understanding the linkages between areas, both for the company and its competitors. A classic linkage is that between quality and customer satisfaction: it may actually pay to insert extra quality checks to improve performance reliability even if this puts up the production cost.
  4. Radical thinking on what customers want in terms of product and service and how best to achieve this, perhaps even cutting some customers or reaching them by a new route such as the internet.
  5. Identify the main competitors, assess their capacity utilisation and future investment plans that have been announced by them. Any proposed saving for re-configuring costs must be reviewed in the context of competitive plans. For example, a cost saving of 20 per cent may be insufficient if competition is moving to save 30 per cent.
  6. Take an early lead in cost saving. The Experience Curve Effect suggests that catching up is more difficult.
  7. If a competitor takes an early lead on price cuts from cost savings, consider responding with an equal cut in prices even at some loss of profit. The benefit is that it may be possible to hold existing customers while the necessary investment in cost saving is then made. Protecting existing customers is valuable in some markets. But taking a price cut is only a short term solution.
  8. If the competitor has a major cost lead, then consider either making a major cost leap past this company or developing another market initiative such as a niche positioning. A technological leap may be needed to recover the situation or, alternatively, a move away from direct competition.
  9. Lay the emphasis on cost savings rather than sales increases to justify the investment involved. This strategy has a higher probability of being successful. In practice, it may not be feasible to rely wholly on a cost saving strategy with some increase in sales also being targeted. This is matter of emphasis, not absolutes.
  10. Investigate barriers or other market structural conditions carefully to ensure that the planned cost saving will be achievable and on what timescale.
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