Question

Questions: Do you agree with the assertion that it is more effective, and profitable, to target specific elements for cost reduction, rather than just making across-the-board cuts? Why or why not? Also, think of a business with which you are familiar, either as an employee, or customer, or just because you know it. Give two examples of how you could use this approach to identify and reduce specific cost elements.

Answer 1

Yes, I agree with the assertion that it is more effective, and profitable, to target specific elements for cost reduction, rather than just making across-the-board cuts. I believe that targeted cuts would be more effective than across the board cuts. Making across the board cuts can lead to a cut in funding for departments that might be doing well, thereby harming the business. For example consider a situation where in you are the head of manufactiruing company that manufactures and sells paper. Two of the most important departments in the company are the manufacturing operations department and the sales department. You have realized that the profits last quarter were far less than projections. To compensate for that, you have decided to institute across the board cuts that afffect all the deparments. However, the actual scenario might be that the Sales team performed extremely well and sold everthing that was possible. However, it was the manufacturing team that did not meet the production targets, which led to lower sales. In these type of cases, across the board cuts would have demotivated the sales team as well, which would have to led to a worse performance by them the next quarter.

Consider the same scenario where you are the head of a paper manufacturing company. You have realized that profits have reduced substantially in the last quarter. You need to identify the reasons for the same.

First, you would broadly classify the company into multiple divsions, like Sales, manufacturing, procurement etc. Each department would have specific KPIs/metrics which would indicate the performance of that particular deparatment. For example, manufacturing would have production targets, sales would have revenues generated and procurement would have procument costs. Later you would need to deep dive into each department to see if any single department has not performed up to the expectations. This can be done by comparing your metrics with your previous data to see where you have underperformed. Your metrics can be compared with that of your competitors to see if you have not done well in a specific department. For example the reason for lower profits this quarter could be that sales did not meets its targets or procument costs have increased or that the manufacturing team under produced. After identying the issue, you could decide on targeted strategies or cuts to rectify the issue.