Rather than focusing on increasing revenues (the numerator), many managers myopically focus on reducing costs (the denominator) to enhance the bottom line. Although cost cutting is, in general, a value adding initiative, over focusing on it indicates a sort of procrastination on differentiation or product innovation thus resorting to the easy option of austerity. Lean is a powerful and revolutionary management tool, but constantly pursuing ultra-optimal efficiency jeopardizes the business potential by limiting the time spent on leveraging it. Cost cutting on massive wastes is highly essential as it takes off burdens and allows optimal resource utilization, which is needed for boosting growth. However, aggressive budget slimming often leads to disastrous results on the long term in the innovation driven companies.
In today’s market place, differentiation should be the first priority for any organization seeking sustainable growth. But, since building a competitive edge is a long term process that requires short term give ups, too often, CEOs fall in the trap of quick wins under well-intentioned pressure from investors and accordingly drive all their attention to cost cutting whether for better margins or to remain price competitive. An example on how price competitiveness is not the only path to mass sales is Apple’s 896 million sold iPhones from 2007 to 2015 which has surpassed a billion by now. Considering that the iPhone is a premium-priced device, we should never undermine the power of differentiation.
While keeping in mind all the financial and operational benefits of cost cutting, we shall point out the major consequences of excessive cost cutting on the innovative capacity of an organization;
No room for class A calibres
A company with massive cost cutting and tightened budgets will neither be able to retain its best talents for long, nor acquire high competencies from the outside simply because creative or experienced calibres are always costly. Hence, sharp cost cutters will count on average workforce, which is not the best pathway for differentiation seekers operating in the highly competitive markets.
Levelling up stress
Having “cost cutting” as the buzzword in the premises is quite negative, especially in an atmosphere pursuing inspiration. Employees will be feeling the pressure even without a direct encounter with the financial measures. Ambitious or creative ideas will be prematurely eliminated, purely, out of being irrelevant to the harsh financial reality. This psychological factor drains creativity and drives people away from thinking different even in the spheres of efficiency and waste elimination.
Innovation is both costly and unpredictable. It requires the deployment of large financial and human resources besides leaving some room for deviations, failures, re-doings and learning from mistakes. Severe reductions in R&D budgets end up with cutting on some elements which later turn out to be critical for the success of the development process thus putting the whole investment in risk.
“Innovate or die” has become the unofficial motto of many industries, especially the high-tech in which product life cycles are getting shorter and steeper. Relying on price competitiveness is definitely valid, but sole reliance is dangerous due to the increasing competition from cheaper countries, currency fluctuations and rapid change in customer preferences. For instance, IKEA could have chosen to focus only on price competitiveness, but the Swedish tycoon has invested heavily in design, functionality and branding, which has kept it way ahead of competition.
Overloading your staff and getting them to work super efficiently pays off now but not, by default, tomorrow. Having their time fully booked for running the business as usual and handling urgencies kills the chances for learning, researching or developing. This does not only undermine the creative capacity needed in the innovation process, but also limits their professional growth on all aspects, which is the last thing a growth-seeking organization should be fine with.
To sum up, cost cutting is one of the few business trends that wasn’t sufficiently criticized and its drawbacks were rarely spotted; hence, the purpose of this article is not to belittle its value, but to red flag the consequences of expedience on innovation-driven businesses.