Effective Long-Term Cost Reduction

Introduction: ‘Effective Long-Term Cost Reduction: a Strategic Perspective’ is a study by Michael D. Shields, and S. Mark Young, that deals with the Cost Reduction Programs that were employed in the late 1970s, and throughout 1980s. The study further sets forth a more viable basis for effective long-term cost reduction. The study concludes with the findings that the long-term controllable costs are caused by employees, individually and in groupings that matter to the entire organization.

The study suggests that the key to a successful long-term cost reduction is to make cost reduction a part of the organizational culture. Analysis: The study firstly deals with the traditional cost reduction programs which primarily suggest that a cost reduction program is a distress tactic study targeted at all employees, which starts with an immediate threat such as poor performance, loss of contracts, or price reductions etc. There are five historical approaches which deal with different aspects of cost reduction in an organization:

APPROACHSTRENGTHSWEAKNESSES 1. Technology Approach: To replace employees with new technology for increased output. 1. Decrease in the influence of Unions, 2. Instant cost cut. 1. Increase in the requirement of highly skilled labor; 2. Increased autonomy to these highly skilled employees; 3. Increase in variable cost, as these employees are paid more; 4. Innovation never stops. 2. Lean and Mean: Tougher policies, including lay-offs, and reduced benefits. 1. Most popular since 1980s; 2. Highest autonomy with the management. 1.

Not applied in good economic times, hence increases inefficiency; 2. Rise of discontentment amongst the employees; 3. Loyalty remains on hold. 3. Offshore Retreat: Escaping to new places for low cost labor1. Reduced labor cost; 2. Reduced cost of production; 3. Sustains competitive prices1. New cost of initial set up; 2. Cultural issues; 3. Regulations of the new Govt. ; 4. Fluctuations in exchange rates; 5. Distant communication with top management. 4. Mergers: Amalgamation of two or more entities. 1. New build up on old goodwills and businesses; 2.

Saves cost of labor etc. 3. Saves cost of new setup1. Clash of Management Styles; 2. Clash of Organizational Cultures; 3. Clash of Product Cultures; 4. Distribution Issues. 5. Diversification: Venturing into new areas, in search of cheaper operating environments. 1. Cheaper Operating costs; 2. Reduced input; 3. Competitive price level. 1. Development of new products; 2. Development of new technology; 3. Development of new cost cultures; 4. Development of new distribution system. Strategic Cost Reduction:

It provides companies with better sustainability for an effective long term cost reduction aspect. It occurs continuously and is clubbed with variety of factors that vary with each firm. These factors are discussed below: (a)Focus denotes planning for cost reduction in production of an output. (b)Set of Methods denotes implementation of cost reduction strategy like Just in Time (JIM), Activity Based Management (ABM) and other coordinated ways. (c)Trade Offs denotes strategically increasing cost to achieve other competitive gains in a comparative manner. d)Refining Employees behaviors denotes valuing the skills, and to nurture their potentials, besides other things in order to develop an all round organizational culture. (e)Top Management must take initiative to adapt to new changes for a better result: i. It should motivate the employees by setting up appropriate examples; ii. It should develop a cost culture where employees are taught the value of all costs being incurred. iii. It should keep in mind that employees are human resources or organizational cost drivers whose productive capacities can be altered with alteration in their motivation. f)Organization Structure denotes the distribution of responsibilities within an organization: i. Vertical Structure is the historical or organic structure that denotes top-to-bottom flow of authority, and Bottom-to-Top flow of responsibility; ii. Horizontal Structure denotes the setup where authority and responsibility flow on the same levels of hierarchy within an organization. (g)Long Term Employment is significant in the development of loyalty of an employee, which results in better motivation, and increased productivity of the organization. h)Organizational Learning is the comprehensive manner in which all the above strategies can be used for the over all benefit of the organization as a whole. It signifies the study, observation and analysis of all the factors of Strategic Cost Reduction as discussed above. Conclusion: In my opinion, the traditional approaches to long term cost reduction have their own drawbacks. Hence, in order to have an edge over the fast changing environment, a business must change with the changing times.

For that purpose, a business must concentrate on the factors such as Focusing on objectives, Trade-offs in order to achieve competitive edge, Initiatives by the top management in decision making and developing a Cost Culture. Further it may also be suggested to have a long term relationship with the employees, as they hold key positions in developing a business. The management must have an understanding of Organizational learning, which can be achieved through the initiative by the management for attaining a competitive advantage through its Organizational process. *************************