How to Cut Costs More Strategically

When companies cut costs, they often make across-the-board cuts that are unconnected to their strategy, and fail to make the cuts sustainable. Most organizations also wait to act until they have a problem – at which point they don’t have the time to make the right trade offs for the long term. In order to cut costs effectively, companies must connect costs to their strategy. To do this, management teams must figure out which costs fuel their distinct advantage, and which don’t. For example, former CEO of Frito-Lay, Roger Enrico, had to make a major investment in product quality to stay competitive. He resolved to start by cutting 40% in general and administrative costs, which freed up money to invest in assets such as direct store delivery, product and manufacturing innovation, and consumer marketing. To manage cost the right way, connect costs and strategy; think of costs in terms of capabilities; use a “zero-based” budgeting approach; make your cut sustainable; and be proactive.

We’ve all been through it — the looming cost project. And for many of us, it’s not a fond memory.