Companies sometimes experience difficult financial times -often so drastic that bankruptcy is declared.
If a firm does not invest sufficient resources in its growth, then at some point it will experience diminishing revenues as its product revenues decline. Alternatively, if a firm invests too heavily in growth, costs can spiral out of control. Commonly, companies striving to maintain profitability vacillate between a focus on cost management or cost reduction and a focus on revenue growth. Often cost reduction is achieved by tactics such as across-the-board cost cutting. Seldom do companies maintain a balance of focus on cost management and revenue generation; however, one company, Alcoa, has taken a more strategic approach to both revenue growth and cost management. Even while in the middle of an effort to reduce costs by $1 billion per year, the company was focused on generating significant revenue growth. To achieve growth, the company breaks down its current revenue streams into five categories, including sales from existing customers and sales won from competitors' customers. By segmenting its revenue streams, the company can better evaluate the profitability of obtaining additional sales from different streams and focus on cost management and revenue growth simultaneously.
The underlying idea is that growth in costs should occur only where there is a significant opportunity to increase profitability. Further, the company believes that cost management and revenue generation must be managed jointly so that managers understand how cost cutting affects customer value and revenue growth.
a. When are across-the-board spending cuts a rational approach to cost management?
b. How can a cost management system help avoid adverse effects from cost cutting?
c. Why is it necessary for managers to focus attention on both generating new revenue and managing costs to be successful?