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4.2 Effective Long-Term Cost Reduction: A Strategic Perspective by Michael D. Shields and S. Mark Young* employees, products, plants and overhead. Problems arise, however, when the merging firms differ significantly on corporate culture, types of products and technologies. Those who remain in their jobs can suffer motivation and morale loss. In the 1970's cost reduction programs relied on the traditional method of simply cutting costs by eliminating jobs and thus reducing payroll. A traditional cost reduction program is usually triggered by an immediate threat to the organization such as poor performance, loss of contracts, or price reductions. Traditional programs tend to be short term in nature and often are ineffective in developing long term sustained change. While these programs do reduce costs in the short run the associated reduction in the value of human assets sets the stage for potential long-term failure. The five traditional cost reduction programs typically used are: DIVERSIFICATION Diversification into new industries is an approach that firms often used when they are searching for less expensive operating environments. If a firm expands beyond its core competency, however, it is likely to experience difficulties in developing and implementing new products, technologies, or distribution systems, with the result that costs are higher, rather than lower than expected. THE TECHNOLOGY APPROACH This approach focuses on replacing direct labor with technology to increase operating efficiency and to reduce the influence of unions. This approach is usually adopted or intensified after performance measures indicate poor performance. This approach has not worked in many companies especially those in which labor cost is a small percentage of total product cost. LEAN AND MEAN The Lean and Mean approach uses a tough policy to reduce the number of employees. A common approach is to employ across-the-board cuts through layoffs and reductions in pay and benefits. Lean and mean is not effective in the long term, because it attempts to reduce costs by reducing workers, but it does not reduce the work that needs to be done to make and sell products. STRATEGIC COST REDUCTION Strategic cost reduction as an alternative approach that focuses on a long term approach integrating competitive strategy, technological strategies, human resource strategies and organizational design considerations to provide a focused and coordinated basis for sustaining competitive advantage. At the core of strategic cost reduction is the idea top management will be clearly involved in developing a sound and humane approach to cost cutting, that employees must be educated in being very cost conscious in the firm, and that employees are the ultimate source of 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 increase their motivation. Organizations must attempt to develop these types of norms before engaging in cost reduction. Since the five approaches mentioned above have not been particularly successful to date, firms need to seriously consider the strategic cost reduction approach, OFFSHORE RETREAT This approach relies on reducing costs by moving to locations such as Asia that offer the promise of lower labor costs. The success of this type of approach is often contingent upon how employees at home are treated and on the vagaries of exchange rates and currency 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 MERGERS Mergers purport to create economies of scale for the merging firms. The idea is to eliminate overlapping What are five of the most frequently used traditional cost reduction programs, and how effective is each one? 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. 80
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SUMMARY OF YOUNG READER CASE
Traditional cost reduction programs.
Traditional cost reduction is a program that was used in the 1970s to reduce the cost that was used by the
organizations in the production. This program was used majorly due to;
1. Poor production
2. Reduction of price and
3. Loss of contracts.
This traditional programs can be applied in a short period of time because they could not sustain the longterm change of the organization.
As much as this programs serve the company well for a short period of time, in the long run, they might
lead to the failure of the company.
The following are the five major traditional programs that were used by the organizations.
1. The technology approach
2. Lean and mean
3. Off-shore retreat
4. Mergers
5. Diversification

The technology approach
This approach is usually used when the performance of the company seems to be very poor. It replaces
the direct labor with technology. However, this method is not the best and it has failed in most companies
where direct labor is not commonly used.
Lean and mean
This approach is used by most companies and it has not been successful in the long run. It is used by
reducing the employees of the company but maintain the same amount of job.
Offshore retreat
This program is used by companies by seeking places where they can reduce the co...


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