Does Cost Cutting Create Competitive Advantage?

Does Cost Cutting Create Competitive Advantage?

Many Fortune 500 companies have shown us that you can make more profit with fewer sales. Sealy Mattress’ second quarter 2012 sales down 2.9%, profits up 1.5%. MillerCoors’ domestic first quarter sales to retailers was down 1.6 percent but net income rose 16.6 percent. 3M’s second quarter sales were down 1.9 percent while income rose 3.75 percent. DelMonte Foods swung from a loss of $73.5 million to a profit of $89.3 million while sales declined 1.7%.

However, does cutting expenses to the bone increase the competitive advantage of the business? I say “no.”  Here’s why. If you figure out how to shave ten percent off your shipping costs, today you have a competitive advantage. But how long does it last? Within a few months your competitors have figured out the same ways to shave costs and you are back to square one. In order to create a meaningful advantage you must do better than simply cutting costs.

Too much cost cutting?

Cost cutting does not provide competitive advantage or an improved business model. However, if you can find a method to strategically realign costs, you can create competitive advantage. What’s the difference between simply trimming costs and strategic cost realignment?

Here are some examples of strategic cost realignment:

Typically, these radical changes are disruptive innovations rather than simply improvements to an existing system. If you are looking to radically change your cost structure, don’t think about improving things; think of starting over with a clean whiteboard and redesigning everything. This type of radical disruption creates meaningful competitive advantage that is hard to match.

Here are some easy ways to know if your innovations are strategic or simply cost cutting:

In summary, most businesses need to cut costs now and again. However, do not let cost cutting substitute for the important work of innovating your business model.


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