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Why You Should Never Cut Costs Across The Board When Crisis Hits

Man cutting costs with scissor
This knee-jerk reaction approach can have the unintended consequence of diminishing the organization's ability to innovate and maintain market leadership.

When I meet with senior executives from corporations, they often give me a number of excuses for why they don’t innovate and cannot innovate. The most often repeated excuse is that there is simply not enough budget. So how do you deal with this challenge? Where should you be cutting costs and where should you be innovating?

An astonishing 80% of an organization’s processes are not even specific to an industry. It doesn’t matter if you think about HR, finance, forecasting or marketing; by far, most of the processes and capabilities within those functions are not even specific to your industry—they are the same from Costco to JPMorgan Chase to IBM. Even supposedly core areas such as production are most often not specific to an industry: it is after all the same types of robots and machines that fabricate your products as they fabricate the products of other industries.

These types of processes and capabilities are an organization’s non-core activities. And importantly, it is unlikely that further investments into those areas will create a competitive advantage since they are not even specific to your industry. Further investment will typically only increase efficiency or decrease costs – an incremental improvement.

Your organization also has core activities: these are industry-specific and are areas where you possess relative strength. However, here you are competing head-to-head with other firms and are not superior to them.

Now contrast these with your differentiating areas. These are the activities where you are different from other organizations, and thus they are the areas that provide competitive advantage. These differentiating activities (and thus assets and capabilities) generally represent a small percentage of your total activities (approximately 2%–5%).

The distinction between core and non-core is critical, and yet most firms do not bother to make it. But it is precisely that distinction that allows you to understand where to cut cost and where to invest, where to work on creating a competitive advantage and where to standardize.

Why you should never cut costs across the board when a crisis hits

A typical error that corporations make during a crisis is implementing blanket cost-cutting measures across the board. While this approach might provide immediate financial relief, it inadvertently undermines long-term strategic positioning. When costs are slashed indiscriminately, essential differentiating activities—those unique aspects that set the company apart from competitors and underpin its competitive advantage—are also impacted. Reducing investment in these areas diminishes the organization’s ability to innovate and maintain market leadership, ultimately eroding the competitive edge that is crucial for recovery and future growth. Thus, a more nuanced approach, which protects and even bolsters differentiating capabilities while optimizing or outsourcing non-core functions, is essential for sustainable success.

Developing macro business strategies for your organization’s non-core, core and differentiating areas

Now the non-core, core and differentiating areas can be mapped to distinctive business and IT strategies. The UNITE Strategy-Execution Framework uniquely categorizes an organization’s activities into non-core, core, and differentiating areas and helps organizations align their strategy, business objectives, and IT to those.

Understanding these categories is essential for making informed decisions about where to allocate resources and how to achieve defined strategic objectives.

The UNITE Strategy-Execution Framework
Source: Stefan F. Dieffenbacher, Digital Leadership Inc.

Cut Costs in Non-Core Activities

Non-core activities are areas of the business that, while necessary, do not contribute to differentiation or core business strengths. These activities often account for a significant portion of operational costs but do not directly enhance the organization’s competitive position.

Strategies for Cost-Cutting:

1. Standardization: Implement standardized processes to ensure consistency and reduce complexity. You standardize by implementing the so-called “best practices”. Whenever you hear the term “best practice” think about “standard practice”: since everybody is applying those “best practices”, they are in effect “standard practices”, since they have no chances of creating a competitive advantage.

2. Automation: Automate repetitive and routine tasks to improve efficiency and reduce labor costs.

3. Outsourcing: Outsource non-core functions to specialized third-party providers who can perform these tasks more cost-effectively.

4. Operational Excellence: Focus on continuous improvement techniques such as Lean and Six Sigma to streamline operations and eliminate waste. 

Innovate in Core Activities

Core activities are essential to the business and involve functions where the organization competes directly with other companies. They are tpyically about 15% of all activities a business is running. While these areas do not inherently provide a competitive advantage, maintaining and strengthening competitiveness is crucial.

Strategies for advancing the Core Activities:

1. Process Improvement: Continuously seek ways to enhance processes to improve efficiency and effectiveness.

2. Adjacent Opportunities: Explore opportunities in adjacent markets or segments that can leverage your existing core capabilities.

3. Technology Integration: Integrate new technologies to improve productivity and maintain a competitive edge.

Differentiating Activities

Differentiating activities are the unique aspects of the business that set it apart from competitors and provide a significant competitive advantage. These activities typically represent a small portion of the overall business (typically just 2-5% of an organization’s activities) but are critical for commanding premium prices and market leadership.

Strategies for Innovation in Differentiating Activities:

In the end you want to strengthen your organization’s differentation to build competitive advantage. You do so, by creating best-in class or best-in-world experiences: in essence, here you want to innovate with everything you got:

1. Business Model Innovation: Continuously explore and implement new business models that can create additional value and differentiation.

2. Customer Experience & service innovation: Invest in enhancing the customer experience and new services to build loyalty and differentiate the brand.

3. Product Innovation: Focus on developing new and innovative products that meet emerging customer needs and set the company apart in the market.

4. Research and Development: Allocate significant resources to R&D to drive breakthrough innovations that can redefine the market.

Practical Steps to Applying the Framework

1. Assessment: Evaluate all activities and categorize them into non-core, core, and differentiating.

2. Resource Allocation: Allocate resources based on categorization, ensuring cost-efficiency in non-core areas and robust investment in differentiating activities.

3. Continuous Review: Regularly review and adjust strategies to stay aligned with market changes and organizational goals.

In today’s competitive landscape, knowing where to cut costs and where to innovate is critical for long-term success. By leveraging the UNITE Strategy-Execution Framework, organizations can strategically allocate resources, streamline operations, and drive innovation in areas that provide the most significant competitive advantage. This balanced approach ensures sustainable growth and market leadership.


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