Sony has just introduced a new PlayStation3. This product comes in a new slim form factor. Its price is $299. This is a 25% reduction from the $399 price of the current model of the PlayStation3. The price cut comes as the PS3 has struggled against its competitors, whose products have carried lower prices. Sony was in a Leader’s Trap.
Not only is the PS3 struggling against lower-priced competitors, it is also facing the head winds of a badly depressed market. Industry sales of game hardware and software are down 29% from a year ago.
The problem? Even at the new price, the product is more expensive than the industry leader. Nintendo’s Wii console sells for $250. The wildly successful Wii sets the price bar for the heart of the market. Its total console sales have passed 20.7MM compared to just over 15.5MM for the Microsoft Xbox and about 7.9M for the PS3. A competing console price higher than $250 really focuses the customer’s attention on the value of the marginal benefits.
Sony justifies the fact that the PS3 will remain the more expensive console because it offers a Blu-Ray player. Customers may not see it that way (see the Perspective, “The Two Greatest Consultants in the World” on StrategyStreet.com). The new PS3 may end up as a high end, Performance Leader, product with limited market share.
Sony has climbed part way out of its Leader’s Trap (see Video #42: Leader’s Trap on StrategyStreet.com) but still has a way to go. You will see more of the same in our next blog.
Monday, August 31, 2009
Thursday, August 27, 2009
Couponing and Price Leaders
In the bleak economy in the first half of 2009, coupon redemption rose 19% compared to the same period in 2008. Even the largest Price Leaders (see Audio Tip #83: Price Leader Products and Companies on StrategyStreet.com) have had to go along with this development. The three largest discount clubs, Costco Warehouse, Sam’s Club and BJ’s Wholesale Club have increased their couponing to club members. (See Audio Tip #120: Using Low Price to Gain Share in Hostile Markets.)
Each of these three clubs carries a membership fee to join the retailer. These club membership payments entitle the retail shopper to take advantage of the large scale purchase economies each of these stores enjoys. The stores pass on these purchasing economies in the form of low prices for their members. Often these low prices alone are enough to provide these club-oriented retailers with attractive sales growth. However, even they have suffered in the bad economy of 2009 as consumers have spent less on discretionary items.
Now each chain is offering tailored coupons to selected members. Sam’s Club offers electronic coupons through kiosks at its stores. Today these coupons are offered to its highest paying membership categories, the Advantage and Business Plus cardholders. With the new coupon program, these selected members will receive three new coupons, good for about a month.
BJ’s has traditionally accepted manufacturers’ coupons which Sam’s does not accept. In the last few years, it has also provided members with coupons available at its web site for purchases in its stores.
Costco has been offering once-a-year coupon books, containing discounts with expiration dates staggered throughout the year. This keeps customers coming back to take advantage of the discounts. About a year ago, it began sending monthly coupon books with discounts expiring after four weeks.
In a tough market, even the lowest-priced of the Price Leaders have to offer something extra to keep the customers coming in.
A coupon is a form of discount (see Audio Tip #114: The Key Components of a Price on StrategyStreet.com), the method a company uses to convey a discount to a customer. Our research has determined that there are eight other forms of discount. Many of these forms reduce the cost of the discount to the company, while giving the full value of the discount to the customer.
Each of these three clubs carries a membership fee to join the retailer. These club membership payments entitle the retail shopper to take advantage of the large scale purchase economies each of these stores enjoys. The stores pass on these purchasing economies in the form of low prices for their members. Often these low prices alone are enough to provide these club-oriented retailers with attractive sales growth. However, even they have suffered in the bad economy of 2009 as consumers have spent less on discretionary items.
Now each chain is offering tailored coupons to selected members. Sam’s Club offers electronic coupons through kiosks at its stores. Today these coupons are offered to its highest paying membership categories, the Advantage and Business Plus cardholders. With the new coupon program, these selected members will receive three new coupons, good for about a month.
BJ’s has traditionally accepted manufacturers’ coupons which Sam’s does not accept. In the last few years, it has also provided members with coupons available at its web site for purchases in its stores.
Costco has been offering once-a-year coupon books, containing discounts with expiration dates staggered throughout the year. This keeps customers coming back to take advantage of the discounts. About a year ago, it began sending monthly coupon books with discounts expiring after four weeks.
In a tough market, even the lowest-priced of the Price Leaders have to offer something extra to keep the customers coming in.
A coupon is a form of discount (see Audio Tip #114: The Key Components of a Price on StrategyStreet.com), the method a company uses to convey a discount to a customer. Our research has determined that there are eight other forms of discount. Many of these forms reduce the cost of the discount to the company, while giving the full value of the discount to the customer.
Monday, August 24, 2009
Nokia Scores...and Fumbles
Nokia is an industry Standard Leader who struggles at the high end of the market.
Nokia demonstrates its grasp of the mass market with a recent pricing innovation in India. In that country, Nokia owns half the market. In order to encourage further growth in the market, Nokia plans to roll out new handsets in twelve rural Indian states. In these states, the company has allied itself with a microfinance organization that is buying the handsets from Nokia and selling them to women in rural areas on the installment plan for 100 rupees a week. 100 rupees is equivalent to about $2. These weekly installments continue for 25 weeks, for a total cost of $50 per phone. Nokia’s program makes phones more affordable to these new customers by providing them an extended payment option.
Nokia is not without its struggles, however. In the smart phone market, the company is beginning to lose share at a rapid rate. While still an industry leader, Nokia’s smart phone market share has fallen from 47.5% a year ago to 45% today. Apple and Research In Motion are the beneficiaries of Nokia’s share slippage.
This smart phone market is important to all industry participants. Smart phones are growing their share of the market. The Standard Leader phones are declining in sales, while smart phones continue to grow. They now account for 14% of the total handset market, up from 11% last year. These smart phones are Performance Leader products with substantial margins. They increase company profitability as well as growth.
One problem Nokia seems to be facing is that its applications don’t have the same ease of operation as do Apple’s offerings. Apple’s applications work better with one another than do Nokia’s. And Nokia has been slow to bring new functions to the market.
Nokia may be suffering from a phenomenon we call Price Point Bias. (See Audio Tip #89: Price Point Bias on StrategyStreet.com.) Price points, other than the Standard Leader price point, often cause Standard Leaders problems in an industry. Marketing oriented Standard Leaders dislike Price Leader products because they view them as trojan horses for lower market prices. Many also believe that low priced products depreciate the quality of the company’s brand name. At the opposite extreme, Standard Leaders dominated by an operations culture dislike Performance Leader products. They view these products as disruptive to the smooth flow of operations and to the low costs that smooth-running operations create.
For more information on this phenomenon, see StrategyStreet/Diagnose/Products and Services/Innovation for Customer Cost Reduction/Price Point Bias.
Thursday, August 20, 2009
Pricing Confusion and Its Aftermath
There were a number of articles regarding pricing over the last few days that caught my attention. Whenever a market gets difficult, many competitors, but especially the leaders, can become confused about what to do with their prices. Here are some examples of both effective and ineffective pricing decisions.
Delhaize is a Belgian-based supermarket operator. In the United States it operates Food Lion, Hannaford and the Sweet Bay chains. The company saw its sales grow and market share increase during the second quarter of 2009 because it offered comparatively low prices and pushed its own low-cost private labels. The company’s market share gains came at the expense of competitors who did not emphasize low prices. Among these were Supervalu and Safeway. Both of the latter competitors now pledge to cut prices aggressively.
Unilever has a new Chief Executive, that is, he was new as of January 2009. The previous CEO had held prices relatively high. The new CEO quickly reversed course. The company cut prices all across Europe and sales began to grow. Not by much, but they did grow. And the company gained market share. In contrast, Procter and Gamble saw sales fall in the same period. Part of Unilever’s new low price emphasis is to respond quickly to cheap local brands. For example, in South Africa, the company’s Standard Leader laundry detergent came under attack from a less-expensive local brand. In response, Unilever launched an inexpensive version of its Surf detergent with fewer features. This new Price Leader product effectively countered the inexpensive local brand.
Joseph A. Bank Clothiers has continued to see its revenues and margins increase despite the very tough detail economy. The company sells classic fashions and casual clothing for men. It has always been a promotions-driven company. It cleverly offers selected discounts to keep customers coming into its stores. In the spring, it offered a $199 suit sale and then, recognizing its customers’ fear of job losses, promised to refund the price of the suit, and let the customer keep the suit, if the customer lost his job before July. Suit sales bounded and same store sales grew by more than 4%. The company continues to gain share from department stores and other specialty stores whose pricing is not as sharp.
Note that in each of these three examples, the company gaining share because of its low price would not have been able to do so had the other competitors in the market not allowed them to get away with the lower prices. The competitors who lost share were in a Leader’s Trap. (See the Symptom and Implication “The industry leaders are losing share” on StrategyStreet.com.) There is no good ending for a company in a Leader’s Trap.
Here is an example of pricing acumen from the U.K. grocery industry. A few months ago, Asda, the British unit of Wal-Mart, and Tesco, the industry leader, began reducing prices and issuing new advertising messages stressing their low prices. Within a very short period of time, the other two leading grocery chains, Sainsbury’s and Morrison’s, followed suit. Each of these chains are now emphasizing low low prices and private label products. The result? All four chains are growing and picking up share. The losers are the smaller, independent retailers who simply can not afford to dive to the depths of the discounts offered by the bigger guys. (See the Symptom and Implication “As large competitors match low prices other competitors face difficulties” on StrategyStreet.com.) The U.K. industry’s customers have not defected to discounters. There was no Leader’s Trap in this market as each of the largest competitors matched competitive prices quickly.
For more explanation and examples of the Leader’s Trap, see the Diagnose/Pricing/Price Change Opportunities/Price Discount Opportunities section of StrategyStreet.com.
Delhaize is a Belgian-based supermarket operator. In the United States it operates Food Lion, Hannaford and the Sweet Bay chains. The company saw its sales grow and market share increase during the second quarter of 2009 because it offered comparatively low prices and pushed its own low-cost private labels. The company’s market share gains came at the expense of competitors who did not emphasize low prices. Among these were Supervalu and Safeway. Both of the latter competitors now pledge to cut prices aggressively.
Unilever has a new Chief Executive, that is, he was new as of January 2009. The previous CEO had held prices relatively high. The new CEO quickly reversed course. The company cut prices all across Europe and sales began to grow. Not by much, but they did grow. And the company gained market share. In contrast, Procter and Gamble saw sales fall in the same period. Part of Unilever’s new low price emphasis is to respond quickly to cheap local brands. For example, in South Africa, the company’s Standard Leader laundry detergent came under attack from a less-expensive local brand. In response, Unilever launched an inexpensive version of its Surf detergent with fewer features. This new Price Leader product effectively countered the inexpensive local brand.
Joseph A. Bank Clothiers has continued to see its revenues and margins increase despite the very tough detail economy. The company sells classic fashions and casual clothing for men. It has always been a promotions-driven company. It cleverly offers selected discounts to keep customers coming into its stores. In the spring, it offered a $199 suit sale and then, recognizing its customers’ fear of job losses, promised to refund the price of the suit, and let the customer keep the suit, if the customer lost his job before July. Suit sales bounded and same store sales grew by more than 4%. The company continues to gain share from department stores and other specialty stores whose pricing is not as sharp.
Note that in each of these three examples, the company gaining share because of its low price would not have been able to do so had the other competitors in the market not allowed them to get away with the lower prices. The competitors who lost share were in a Leader’s Trap. (See the Symptom and Implication “The industry leaders are losing share” on StrategyStreet.com.) There is no good ending for a company in a Leader’s Trap.
Here is an example of pricing acumen from the U.K. grocery industry. A few months ago, Asda, the British unit of Wal-Mart, and Tesco, the industry leader, began reducing prices and issuing new advertising messages stressing their low prices. Within a very short period of time, the other two leading grocery chains, Sainsbury’s and Morrison’s, followed suit. Each of these chains are now emphasizing low low prices and private label products. The result? All four chains are growing and picking up share. The losers are the smaller, independent retailers who simply can not afford to dive to the depths of the discounts offered by the bigger guys. (See the Symptom and Implication “As large competitors match low prices other competitors face difficulties” on StrategyStreet.com.) The U.K. industry’s customers have not defected to discounters. There was no Leader’s Trap in this market as each of the largest competitors matched competitive prices quickly.
For more explanation and examples of the Leader’s Trap, see the Diagnose/Pricing/Price Change Opportunities/Price Discount Opportunities section of StrategyStreet.com.
Monday, August 17, 2009
Spread Fixed Cost Activities Over More Sales Volume to Reduce Costs
Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Some activities of the company have a fixed cost. A product design, for example, is a fixed cost of producing the final product. If the company can increase the units of product sold using that design, it reduces its effective unit cost.
Google dominates the search business. Its market share is 65% of the market and its share is steady. Microsoft has recently introduced its new search product, called Bing. This product holds 8% of the market and is gaining a bit of share. Its share gains are coming largely at the expense of the second ranked company in the search business, Yahoo. Yahoo has about 20% of the market and its share is declining.
Recently, Microsoft announced that it had reached a deal with Yahoo that would combine the Microsoft and Yahoo search businesses. This deal involves revenue sharing from advertising sales. Neither company will exchange significant upfront payments. Microsoft’s Bing becomes the search engine for Yahoo. This deal allows Microsoft to create powerful new leverage for the fixed cost of its Bing search product. Yahoo has two and a half times its search volume and Microsoft will pick up new sales volume with no addition to its currently fixed costs. There are other revenue and cost benefits from this combination as well, but this is a good example of a company finding new customer volume over which to spread its fixed costs.
The cell phone business is slowing in its growth. The reason: market penetration. Cell phone competitors have penetrated more than 80% of the U.S. market, so most new users coming into the market do so by way of the prepaid plans offered by several companies.
In another recent example, Sprint Nextel announced it will buy Virgin Mobile USA. This acquisition will make Sprint Nextel the number two seller of prepaid cell phone services in the country. The acquisition of Virgin Mobile’s 5.2 million customers will bring Sprint’s total paid prepaid subscriber numbers to 9.5 million customers. The industry leader, TracPhone, has 12.5 million U.S. subscribers.
Over the years of studying various approaches to cost reduction, we have found that a company can increase the product Output over which it spreads its fixed cost of activities:
* Acquiring a similar organization to spread fixed costs. This is an acquisition of another organization with a similar business.
*Using fixed cost activities with more customers. This approach uses fixed costs with competitors who employ outsourcing as well as combining fixed costs with competitors into separate businesses.
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Some activities of the company have a fixed cost. A product design, for example, is a fixed cost of producing the final product. If the company can increase the units of product sold using that design, it reduces its effective unit cost.
Google dominates the search business. Its market share is 65% of the market and its share is steady. Microsoft has recently introduced its new search product, called Bing. This product holds 8% of the market and is gaining a bit of share. Its share gains are coming largely at the expense of the second ranked company in the search business, Yahoo. Yahoo has about 20% of the market and its share is declining.
Recently, Microsoft announced that it had reached a deal with Yahoo that would combine the Microsoft and Yahoo search businesses. This deal involves revenue sharing from advertising sales. Neither company will exchange significant upfront payments. Microsoft’s Bing becomes the search engine for Yahoo. This deal allows Microsoft to create powerful new leverage for the fixed cost of its Bing search product. Yahoo has two and a half times its search volume and Microsoft will pick up new sales volume with no addition to its currently fixed costs. There are other revenue and cost benefits from this combination as well, but this is a good example of a company finding new customer volume over which to spread its fixed costs.
The cell phone business is slowing in its growth. The reason: market penetration. Cell phone competitors have penetrated more than 80% of the U.S. market, so most new users coming into the market do so by way of the prepaid plans offered by several companies.
In another recent example, Sprint Nextel announced it will buy Virgin Mobile USA. This acquisition will make Sprint Nextel the number two seller of prepaid cell phone services in the country. The acquisition of Virgin Mobile’s 5.2 million customers will bring Sprint’s total paid prepaid subscriber numbers to 9.5 million customers. The industry leader, TracPhone, has 12.5 million U.S. subscribers.
Over the years of studying various approaches to cost reduction, we have found that a company can increase the product Output over which it spreads its fixed cost of activities:
* Acquiring a similar organization to spread fixed costs. This is an acquisition of another organization with a similar business.
*Using fixed cost activities with more customers. This approach uses fixed costs with competitors who employ outsourcing as well as combining fixed costs with competitors into separate businesses.
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
Thursday, August 13, 2009
Reducing Costs by Redesigning Products and Processes
Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Redesigning a product or process is a powerful approach to reducing costs by eliminating activities. A company may reduce an activity by reducing the number of times an activity is required to produce a product or by reducing the number of separate activities used to produce the product. If a company reduces its activities, it should reduce the total units of Inputs it uses in its cost structure.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
The government’s effort to reduce its operating costs notes several examples of redesign of products and processes to eliminate activities:
* The Coast Guard will reduce its maintenance schedules for its small boats. Its schedules had assumed that these boats were for recreational use. When the Coast Guard adjusted its maintenance schedule to reflect their actual usage, it found it could reduce its maintenance.
* The Department of Labor will disband the Employment Standards Administration and an Assistant Secretary of Labor, two deputy assistants and an administrative office that oversees this group. The work of this group will be done as it has been done, just with less administrative leadership and support.
* The Bureau of Reclamation will increase its use of video conferencing and computer monitoring. This change in activities will enable it to eliminate an aircraft and many trips by engineers to the group’s offices in Washington State.
Our studies of cost reduction techniques have concluded that a company may reduce the activities it uses to produce a final product by the following actions:
*Redesign the product to eliminate components
*Redesign the process to eliminate activities
*Eliminate customer activities with low value to the customer
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Redesigning a product or process is a powerful approach to reducing costs by eliminating activities. A company may reduce an activity by reducing the number of times an activity is required to produce a product or by reducing the number of separate activities used to produce the product. If a company reduces its activities, it should reduce the total units of Inputs it uses in its cost structure.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
The government’s effort to reduce its operating costs notes several examples of redesign of products and processes to eliminate activities:
* The Coast Guard will reduce its maintenance schedules for its small boats. Its schedules had assumed that these boats were for recreational use. When the Coast Guard adjusted its maintenance schedule to reflect their actual usage, it found it could reduce its maintenance.
* The Department of Labor will disband the Employment Standards Administration and an Assistant Secretary of Labor, two deputy assistants and an administrative office that oversees this group. The work of this group will be done as it has been done, just with less administrative leadership and support.
* The Bureau of Reclamation will increase its use of video conferencing and computer monitoring. This change in activities will enable it to eliminate an aircraft and many trips by engineers to the group’s offices in Washington State.
Our studies of cost reduction techniques have concluded that a company may reduce the activities it uses to produce a final product by the following actions:
*Redesign the product to eliminate components
*Redesign the process to eliminate activities
*Eliminate customer activities with low value to the customer
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
Tuesday, August 11, 2009
Reducing Costs by Eliminating Non-Productive Input
Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
A company may make the Inputs more directly variable with the Output of the product by reducing the amount of Input that is wasted or idle.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
There are several examples of savings the government will achieve by reducing the number of Inputs that are wasted or idle. Here are a few of them:
* The Office of Thrift Supervision eliminated unused phone lines.
* The Army will increase the number of soldiers traveling on each airplane chartered for rest and relaxation leave.
* The Navy will save money by deleting inactive internet accounts.
* The Justice Department will save money by setting up its printers and copiers to use both sides of the paper.
* The Department of Homeland Security will save money by emailing instead of printing some documents.
In our research into several thousand examples of cost reduction techniques, we have found that you can reduce the Inputs that are idle or wasted by using the following techniques:
*Assisting the Input in increasing Output
*Shifting demand to use unproductive resources
*Improving the accuracy of the demand forecast
*Using short term sources of Input to meet peak demand.
*Speeding the process.
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (the Output). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
A company may make the Inputs more directly variable with the Output of the product by reducing the amount of Input that is wasted or idle.
During the past week, the government announced that it had found the total of $100 million in operating savings by reviewing all of their current expenditures. They found a total of seventy-seven spending cuts to reach this $100 million in savings.
There are several examples of savings the government will achieve by reducing the number of Inputs that are wasted or idle. Here are a few of them:
* The Office of Thrift Supervision eliminated unused phone lines.
* The Army will increase the number of soldiers traveling on each airplane chartered for rest and relaxation leave.
* The Navy will save money by deleting inactive internet accounts.
* The Justice Department will save money by setting up its printers and copiers to use both sides of the paper.
* The Department of Homeland Security will save money by emailing instead of printing some documents.
In our research into several thousand examples of cost reduction techniques, we have found that you can reduce the Inputs that are idle or wasted by using the following techniques:
*Assisting the Input in increasing Output
*Shifting demand to use unproductive resources
*Improving the accuracy of the demand forecast
*Using short term sources of Input to meet peak demand.
*Speeding the process.
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
Thursday, August 6, 2009
Reducing Costs by Paying a Lower Rate for Your Inputs
Corporations have just completed the latest quarterly profit reports for publicly traded companies. Two-thirds of the publicly traded companies beat their forecast profits. Many of these companies failed to reach their forecast revenue numbers, but still reached their profit targets, or better, by reducing their costs. Since there is so much focus on the power of cost reduction in today’s margin environment, I thought it would be interesting to review the ways that a company can reduce its unit costs. To make it more interesting, I decided to use stories that I have seen over the last week in order to illustrate these techniques.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (theOutput). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Reducing the rate of cost that a company pays for an Input of people, purchases or capital reduces the effective number of units of Input required. A less expensive employee, one with a lower rate of cost per hour, is equivalent to a company’s only using a fraction of the original Input. For example, an employee earning $10 an hour is effectively half of the person earning $20 an hour.
As an alumnus of McKinsey and Company, I am fortunate to receive their fine McKinsey Quarterly. I always find something of interest in this periodical. The most recent issue contained an article entitled, “When to Divest Support Services.” In this article, McKinsey notes that many companies make strenuous efforts to reduce the costs of “support services” including commoditized corporate functions such as finance, human resources and purchasing, along with IT functions and some other industry-specific functions. McKinsey has done research that suggests another approach for some companies: selling the support services to larger, more established companies, who specialize in these support services. McKinsey conducted a study that looked at thirty transactions where corporations had sold their support services to other companies. On average, the selling companies received an immediate cash injection of two and a half times the book value of the assets transferred. Then, the companies realized cost savings on those functions that were as high as 40%.
This “sale and lease back” arrangement is a creative way for a company to reduce the rats it pays for these support functions. The sale and lease back reduces the combined rate for people, purchases and capital the company pays to complete the sold cost functions. This approach reduces the rate of cost by changing the source of the services to a less expensive supplier. The new supplier enjoys its lower cost because it has greater purchasing power and total focus on the support service functions.
Over the last twenty years, we have studied and categorized several thousand examples of cost reduction initiatives. In that study, we have found that you can reduce the rate of cost a company pays for an Input by using the following techniques:
* Purchase in larger quantities
* Reduce the quality of the Input used
* Change the components of the rate of costs
* Use subsidies offered by third parties
* Request the supplier to lower the price of the Input
* Change the source of supply to a less expensive supplier
* Expand in-house activities to reduce the rate
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
In our StrategyStreet system, there are four major approaches to reducing a product’s unit cost:
1. Reduce the rate of cost for an Input used to produce the product (theOutput). An Input is an employee, a purchase or a capital outlay.
2. Reduce the Inputs not producing Output.
3. Redesign products or processes to reduce activities, thereby reducing the Inputs the activities require.
4. Use fixed cost activities with more product Output.
Reducing the rate of cost that a company pays for an Input of people, purchases or capital reduces the effective number of units of Input required. A less expensive employee, one with a lower rate of cost per hour, is equivalent to a company’s only using a fraction of the original Input. For example, an employee earning $10 an hour is effectively half of the person earning $20 an hour.
As an alumnus of McKinsey and Company, I am fortunate to receive their fine McKinsey Quarterly. I always find something of interest in this periodical. The most recent issue contained an article entitled, “When to Divest Support Services.” In this article, McKinsey notes that many companies make strenuous efforts to reduce the costs of “support services” including commoditized corporate functions such as finance, human resources and purchasing, along with IT functions and some other industry-specific functions. McKinsey has done research that suggests another approach for some companies: selling the support services to larger, more established companies, who specialize in these support services. McKinsey conducted a study that looked at thirty transactions where corporations had sold their support services to other companies. On average, the selling companies received an immediate cash injection of two and a half times the book value of the assets transferred. Then, the companies realized cost savings on those functions that were as high as 40%.
This “sale and lease back” arrangement is a creative way for a company to reduce the rats it pays for these support functions. The sale and lease back reduces the combined rate for people, purchases and capital the company pays to complete the sold cost functions. This approach reduces the rate of cost by changing the source of the services to a less expensive supplier. The new supplier enjoys its lower cost because it has greater purchasing power and total focus on the support service functions.
Over the last twenty years, we have studied and categorized several thousand examples of cost reduction initiatives. In that study, we have found that you can reduce the rate of cost a company pays for an Input by using the following techniques:
* Purchase in larger quantities
* Reduce the quality of the Input used
* Change the components of the rate of costs
* Use subsidies offered by third parties
* Request the supplier to lower the price of the Input
* Change the source of supply to a less expensive supplier
* Expand in-house activities to reduce the rate
Over the years we have gathered these cost-saving techniques in order to use them in brainstorming examples. The examples help you cover all the bases. Over the course of many years of doing cost reduction work, I have failed to look at several techniques that might have been useful in the situation I was studying because I did not have these examples as thought starters and reminders. We have gathered these techniques help you be more comprehensive in your cost reduction efforts. You may see all these cost reduction concepts and their examples by visiting StrategyStreet.com/Improve/Cost/Brainstorming Ideas.
Monday, August 3, 2009
A Fast-Growing Market Under Attack from Below
There are a hundred thousand job sites in the U.S. and abroad. These sites charge employers to post jobs on their web sites in order to attract qualified employees. The big three in the market include Monster, CareerBuilder and Yahoo!HotJobs. With unemployment rising world-wide, these job sites are still growing. However, they are losing market share to emerging alternatives.
These alternatives are considerably less expensive than the big three. One of these alternatives, LinkedIn, has a professional orientation. This site offers a suite of services, called Talent Advantage, that has gained more than a thousand customers, double the number it had in 2008. This company is particularly good at finding, and offering up, what’s known as “passive” candidates. These are potential hires who are currently employed and not looking for a new job. The LinkedIn network has the capability of “pushing” candidates to employers who meet preset criteria. And LinkedIn is cheap in comparison with the big three.
Another inexpensive alternative is Twitter. Recruiters using Twitter can send messages to their followers who, in turn, copy the messages to blogs covering professional areas where potential candidates might be reading.
Monster, the largest and best known of the job sites, is responding by improving its services:
* It moved its call center from India to South Carolina
* It developed “contextual search” technology that improves the quality of the candidates developed on a search
* It reduced the number of steps required to upload a resume
* It created a feature that shows job-hunters how they can move from one field to another
We have studied several hundred low-end competitors (see Audio Tip #87: Potential Low-end Competitors in a Marketplace on StrategyStreet.com). There are four distinct types of low-end competitor. Most industries see at least one of these four types. To respond to them, an industry Standard Leader (see Audio Tip #81: Standard Leader Products and Companies on StrategyStreet.com) has the following choices:
* Ignore the low-end competitor, if it is unlikely to expand
* Block the competitor using one of the Standard Leader’s exploitable advantages
* Acquire the competitor, if it is available for a reasonable price
* Add a new price point to flank the low-end competitor
* Increase the company’s level of benefits at the Standard Leader price point
* Drop prices, where all else fails
In many cases, a good Standard Leader can respond to a low-end competitor in ways that maintain its growth and protect most, if not all, of its margins. (See Audio Tip #142: Defensive Pricing Guidelines on StrategyStreet.com.)
These alternatives are considerably less expensive than the big three. One of these alternatives, LinkedIn, has a professional orientation. This site offers a suite of services, called Talent Advantage, that has gained more than a thousand customers, double the number it had in 2008. This company is particularly good at finding, and offering up, what’s known as “passive” candidates. These are potential hires who are currently employed and not looking for a new job. The LinkedIn network has the capability of “pushing” candidates to employers who meet preset criteria. And LinkedIn is cheap in comparison with the big three.
Another inexpensive alternative is Twitter. Recruiters using Twitter can send messages to their followers who, in turn, copy the messages to blogs covering professional areas where potential candidates might be reading.
Monster, the largest and best known of the job sites, is responding by improving its services:
* It moved its call center from India to South Carolina
* It developed “contextual search” technology that improves the quality of the candidates developed on a search
* It reduced the number of steps required to upload a resume
* It created a feature that shows job-hunters how they can move from one field to another
We have studied several hundred low-end competitors (see Audio Tip #87: Potential Low-end Competitors in a Marketplace on StrategyStreet.com). There are four distinct types of low-end competitor. Most industries see at least one of these four types. To respond to them, an industry Standard Leader (see Audio Tip #81: Standard Leader Products and Companies on StrategyStreet.com) has the following choices:
* Ignore the low-end competitor, if it is unlikely to expand
* Block the competitor using one of the Standard Leader’s exploitable advantages
* Acquire the competitor, if it is available for a reasonable price
* Add a new price point to flank the low-end competitor
* Increase the company’s level of benefits at the Standard Leader price point
* Drop prices, where all else fails
In many cases, a good Standard Leader can respond to a low-end competitor in ways that maintain its growth and protect most, if not all, of its margins. (See Audio Tip #142: Defensive Pricing Guidelines on StrategyStreet.com.)
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