When a business is struggling financially, cost-cutting looks like a brilliant move.
But can you shrink your way to success?
From what I’ve seen, it’s easier – and healthier – to increase revenues than it is to cut costs.
Cost-cutting comes at a very high cost.
When I was 16 years old, General Motors was the bluest of the blue-chip stocks. Alfred Sloan was the Steve Jobs, the Jeff Bezos of GM and he sold 50% of all the cars in America. Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac were easily distinguished from one another and what you drove said a lot about you.
In the United States, those 5 GM brands outsold Toyota, Honda, Nissan, Ford, Mercury, Lincoln, Chrysler, Volvo, Volkswagen, Subaru, Mercedes, Dodge, Plymouth, American Motors, Jeep, Rambler, Alfa Romeo, Fiat, Renault, BMW, Audi, Citroën, Opel, Peugeot, Ferrari, Jaguar and Porsche combined.
During the years I’ve been old enough to drive, GM has fallen from 50% down to just 17% of sales in the U.S.
But don’t blame increased competition. Other than Tesla and Hyundai, every brand of car available in America today was available when I was 16.
What happened to GM? Cost-cutting.
After a long and successful history of choosing CEOs from its manufacturing and sales divisions – Sloan, Wilson, Curtice, Donner, and Roche – General Motors chose a money manager, Richard Gerstenberg, to become CEO in 1972. Two years later, they replaced him with an accountant, Thomas Murphy.
Money-manager Gerstenberg and accountant Murphy said, “Why are we spending all this money to design never-before-seen cars every 2 or 3 years? The cost of re-tooling our factories is astronomical. It would be more cost-effective to simply attach different grilles, headlights and tail lights along with a different interior and let each of our 5 brands sell essentially the same car.”
“By the 1980’s, Sloan’s design had faded away. General Motors had not only blurred its brands and divisions, it engaged in badge engineering, offering essentially the same vehicle under several model and brand names.” – Good Strategy/Bad Strategy, p. 221
On Oct. 11, 1988, the New York Times reported,
“Underscoring the need for a distinct image in the era of look-alike cars has been sales performance. Buick sales dropped to 557,491 last year from about 920,000 in 1984, and Oldsmobile sales fell to 714,394 last year after having topped one million in the preceding three years.”
Then, just before the end of 2018, we read,
“In a move that will save the company $6 billion by the end of 2020, General Motors announced a restructuring Monday that includes chopping its workforce by 15% and shuttering 5 plants next year.”
Some people never learn.
Rust in peace, GM.
I’ve watched this same movie, over and over, in every category of business in America. But no matter which actor is playing the lead, this movie always ends the same.
Are you planning to shrink your way to greater profitability?
I suggest you try to increase your sales revenues instead.
That’s the only movie that has a happy ending.
Roy H. Williams