The Broken cycle of growth: How hyperfocus on significant cost-cutting is causing systemic decline in growth and market leadership
The Broken cycle of growth: How hyperfocus on significant cost-cutting is causing systemic decline in growth and market leadership
We’ve all heard the adage that you have to “spend money to make money”, yet more and more we are seeing a troubling cycle come about in the corporate world today – one of significant cost-cutting, decreased investments, and little to no growth.
Many companies are so focused on reducing costs and increasing profits in the short term that they forget about what actually matters: sustained growth and market leadership for the long term.
This hyperfocus on significant cost-cutting has become so pervasive that it is causing a systemic decline in growth and market leadership for companies at every stage. By reducing spending on sales, marketing, research and development, product innovation, and customer service, companies are not only limiting their future potential for growth but inadvertently stifling the creativity and dynamism that helped them become leaders in the first place.
In the midst of the 2008 financial downturn, while other businesses were reducing their advertisement and marketing expenses, Amazon took an ambitious route by launching the Kindle e-reader as a more affordable alternative to physical books. Clearly, this decision paid off; in the years since Amazon has grown exponentially – from $19B in revenue in 2007 to over $281B in 2019.
Not convinced? Take the example of the cereal companies Post and Kellogg’s in the 1920s. Post had a significant lead over Kellogg’s when the Great Depression hit. Post then made the costly mistake of cutting its advertising budget significantly. This allowed Kellogg’s to seize the opportunity, double their advertising spend, and launch a major campaign for their new cereal – Rice Krispies. As a result, Kellogg’s profits grew by more than 30% during the Depression and they became the category leader ever since.
The takeaway from this is that cutting costs isn’t always the best move. Amazon, Post, and Kellogg’s stories show how useful it can be to continue investing in growth even when times are tough. Many companies today face a similar dilemma; cost-cutting by reducing investment in growth might seem attractive in the short term, but it ultimately leads to a broken cycle of growth and ultimately an erosion of market leadership.
Succeeding in today’s economic climate requires a delicate balance between managing costs and cultivating growth. With a strategic approach to cost-cutting, and investing in the right areas, companies can break their way out of the stagnant cycle and remain market leaders.
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