Competing on Cost

You can compete on cost - but don't expect it to be a differentiator for long. Michael Dell learned this when his business model (which blew the doors off the industry's standard distribution, product development and manufacturing costs) was soon imitated, especially by Hewlett-Packard. Sooner or later, competitors catch up.

As we enter recession, cost cutters will be on the rampage; in fact, they've already started. If you're cutting costs as a survival tactic, that's a whole other story. But if you believe cost is a competitive differentiator, keep these principles mind:

• If you're cutting costs to keep profits steady - great move. But try not and use cost as an excuse to not fund innovation. A slow innovation pipeline will kill you faster than an out-of-whack cost structure.

• Cost cutting can create new customers if it's used to make your price/performance ratio more attractive (vs. just adding more profit to the bottom line). But such moves must be accompanied by some good public relations efforts to get your story out there. You want customers to know your lower prices come from innovative, efficient operations, not compromises in product quality.

• Any technology sales rep will tell you that competing on price is never an enviable place to be. It drives you into commodity status and you'll always be looking for a new bottom. If you want to become the Wal-Mart of your particular IT segment, make sure it's a well-informed decision on your part with a good story to back it up.

• Cost cutting generates short term profits, but does not generate long term revenue (with the exception of the above bullet #2, but even that is short-lived). 

• Innovation generates revenue - as do investments in new segments or programs that reward loyalty.

If you're engaging in big cost cutting initiatives, be sure to simultaneously monitor customer satisfaction like a hawk. Make sure cost cutting isn't diluting the customer experience.

Customer satisfaction metrics signal customers' proclivity to buy from you in the future. If customer satisfaction metrics fall -- share, margin and revenue will soon follow.