4.2 Effective Long-Term Cost Reduction: A Strategic Perspective by Michael D. Shields and S. Mark Young In the 1970's cost reduction programs relied on the employees, products, plants and overhead. Problems traditional method of simply cutting costs by eliminating arise, however, when the merging firms differ jobs and thus reducing payroll. A traditional cost significantly on corporate culture, types of products and reduction program is usually triggered by an immediate technologies. Those who remain in their jobs can suffer threat to the organization such as poor performance, loss motivation and morale loss. of contracts, or price reductions. Traditional programs tend to be short term in nature and often are ineffective in DIVERSIFICATION developing long term sustained change, Diversification into new industries is an approach that While these programs do reduce costs in the short run the associated reduction in the value of human assets firms often used when they are searching for less sets the stage for potential long-term failure. The five expensive operating environments. If a firm expands traditional cost reduction programs typically used are: beyond its core competency, however, it is likely to experience difficulties in developing and implementing THE TECHNOLOGY APPROACH new products, technologies, or distribution systems, with the result that costs are higher, rather than lower, than This approach focuses on replacing direct labor with technology to increase operating efficiency and to reduce expected the influence of unions. This approach is usually adopted or intensified after performance measures indicate poor STRATEGIC COST REDUCTION performance. This approach has not worked in many Strategic cost reduction as an alternative approach that companies especially those in which labor cost is a small focuses on a long term approach integrating competitive percentage of total product cost. strategy, technological strategies, human resource strategies and organizational design considerations to LEAN AND MEAN provide a focused and coordinated basis for sustaining The Lean and Mean approach uses a tough policy to competitive advantage. reduce the number of employees. A common approach is At the core of strategic cost reduction is the idea top to employ across-the-board cuts through layoffs and management will be clearly involved in developing a sound and humane approach to cost cutting, that reductions in pay and benefits. Lean and mean is not effective in the long term, because it attempts to reduce employees must be educated in being very cost conscious in the firm, and that employees are the ultimate source of costs by reducing workers, but it does not reduce the work that needs to be done to make and sell products, competitive advantage. To this end, the organization must attempt to offer long-term employment to employees in order to gain their trust and support and to OFFSHORE RETREAT increase their motivation, This approach relies on reducing costs by moving to Organizations must attempt to develop these types of locations such as Asia that offer the promise of lower labor norms before engaging in cost reduction. Since the five costs. The success of this type of approach is often approaches mentioned above have not been particularly contingent upon how employees at home are treated and successful to date, firms need to seriously consider the on the vagaries of exchange rates and currency strategic cost reduction approach. fluctuations. Employee morale at home can be hurt if domestic or local employees are laid off when the firm moves jobs offshore. QUESTION 4.2 What are five of the most frequently used MERGERS traditional cost reduction programs, and how Mergers purport to create economies of scale for the effective is each one? merging firms. The idea is to eliminate overlapping This article has been summarized from the original article by Michael D. Shields and S. Mark Young, “Effective Long-Term Cost Reduction: A Strategic Perspective," Journal of Cost Management (Spring 1992): 16–30. Reprinted with permission. Copyright © 1992, Thomson Reuters.
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