Why is it that the first instrument many executives reach out for when sales start slowing down is the scalpel? They cut long-term employees, critical operational workers, shutter production facilities, tamp down on capital expenditure, reduce R&D to some arbitrary percentage of the dwindling sales, and stomp on other product innovation programs. They sell so-called non-core assets to focus on bread and butter operations, but starve even these critical investments to lower operating costs.
Then they wait for sales to start growing when general demand starts coming back across all sectors of the market and the economy. Something is sorely missing here. What products will the cost-cutting company feed into the market to fuel its growth and capture market share? Who will drive the sales, support after-sales service, invent new devices, and provide critical mid-level leadership? I was reminded of these questions when Nokia Corp. (NYSE: NOK) announced its latest job cuts, which in some ways mirrored what has been happening at rival mobile handset manufacturer BlackBerry (Nasdaq: RIMM; Toronto: RIM) as I pointed out in an earlier blog. (See: Nokia Job Cuts Don't & Won't Impress Anyone.)
I'll make this short. Cost-cutting does not ignite growth, no matter what any management guru has published. Unfortunately, in the electronics industry as well as in other manufacturing sectors, this seems to be the only strategy many executives would rather wield as a defensive weapon against loss of profitability. They've got it wrong. Instead of going on the defense, perhaps they should instead go on the offense. My favorite example in this regard is Intel Corp. (Nasdaq: INTC), the world's No. 1 semiconductor company by revenue and one of the most successful enterprises in the electronics industry.
Intel plays in a highly cyclical market, but the company has learned never to forget the ups when it is going through the down cycle. During periods of recessions, Intel typically jacks up capital expenditure and R&D and conducts minimal layoffs. The senior executives insist that the extra spending would allow them to burst out faster than the competition when the market starts to accelerate. Most of the time, they've been right, and that has helped them beat microprocessor rival Advanced Micro Devices Inc. (AMD) (NYSE: AMD) into a pulp. It's in fact a joke today to call AMD and Intel rivals. How could they be truly considered competitors when the revenue gap is as much as $45 billion -- in favor of Intel?
Yet investors regularly applaud the company that -- facing a stiff sales headwind -- simply announces employee attrition through layoffs, buyouts, and asset disposal. Years later, the same company is in the same muck but this time may lack the employee resources to climb out because the best workers have flown the coop. There's a time to retrench workers, but overused, this strategy will cut both ways and sometimes deeper than management would like. For an industry dependent on super brainy and extraordinarily talented people, I am beginning to think electronic equipment manufacturers and their suppliers might have followed investors down the wrong hole.
@Bolaji: This is very interesting point of view and I totally agree with it. Many a time, top executives hands are tied and he gets wrong information from his subordinates. All top people wants to retain their own unproductive people and sacrifice highly productive staff like design engineers and others. In process, compnaa goes further down. Design engineer always gets better opportunity. This is folly on part of management. They know it very well, but they will never try to correct it. It may not be possible.
Owen, in addition to your view, I think cutting cost is not always futile, at one point or the other a company might be forced to reduce its operational cost in order to keep afloat. What I found amusing, particularly in recent job cuts incidences, is the draconian measure taken by these organizations. For example, in the case of Nokia's plan to lay off around 10.000 of its workforce, I doubt whether this is the only option opened. I'm aware that these plans may be executed in stages to reduce the impact on the organization. But the share thought of the number is unbearable. Might there be other option(s) as opposed to the draconian plan? I don't know. But what I think is that measure to cut costs should never come at the expense of the ability to execute a long term vision. Thus, will reducing a company's workforce bring about a long term vision? Will it increase the company's image and market position? Yes it might just stabilize the overall running cost. But at the expense of making redundant good and honest workforce that should help to reshape the organization. Ok agreed, the cuts are inevitable. So if a company decides to cut back on its payroll, how does the management arrive at this decision without damaging the prospect of a future growth? I strongly agree with your view Owen that when it becomes crucial for a company to reduce its operational cost, laying off might not be a viable option. When a company plans to cut back, why not evenly cut salary/benefits across the board as opposed to lay- off? Don't just target the tail end .
From my experience those companies, who resort to extreme measures of cost cutting and especially chopping off human resources, really suck. It is really hard to get new people as noone wants to work for them and those current employees are always in the unhappy and nervous mood. Sales of course is stagnent for long time.
What makes all of this worse is that the executives making these decisions rarely feel the impact on their pocketbooks. There have been a few examples of executives taking $1 salary when things were going badly for their company in the past. I haven't heard anything to indicate the pain is being shared across these organizations.
There are 2 reasons why I think businesses tend to cut jobs altogether rather than cut back hours. One is simply due the sort of in-the-box thinking the managers typically use. A job is defined as full-time, and they see it as an either/or situation. You either cut it out completely, or decide it is still needed and cut another instead. It is the same type of thinking that prevents employers from allowing workers to share jobs, so that each one works part-time (something many parents would prefer, though very few are given that option). The other reason they would prefer to cut out the job altogether is that each employee cost is not limited to salary but also benefits. Many companies pay into the group health insurance, pension, and even life insurance. If these amounts are cut, the employee may find that s/he can't float the cost on his/her own without the full employer contribution.
Owen, Cost-cutting isn't in itself futile, nor is it always stupid. There are elements of the two, though, when it is used indiscriminately and without a longer term vision for the enterprise. I see cost-cutting as more of a readjusting of resources to improve operational performance but it should not be carried out at the expense of the institution of a viable sales growth strategy.
I have twice in my career been laid off due to the wrenching changes occuring in the media market and won't deny the utility in the two situations. It might happen again to me and I am always conscious of this. You identified several things a company could do differently but very few executives do this nowadays. When sales fall, out comes the axe has been the typical action. It's a game of numbers. It should be a comprehensive game that also advances a growth strategy, though.
It seems to me that at any given time a Company may indeed face the prospect of having to reduce one of their highest expenses, namely payroll. Given no alternative it also seems obvious that cutting hours rather then jobs would be eminently preferable for several reasons. First, the need for re-hiring, and re-training would be eliminated. Second, moral throughout the Company would be less effected (it might even improve given the alternative). And third, the social stigma, not to mention the unemployment costs, would be minimized. There is also the Corporate fallout, be it in the stock market or the industry that would be mitigated. Cost cutting is never easy, nor is it always futile.
Cost-cutting should be the method of last resort. The focus should be on adding value and reducing waste in operations. Those initiatives can simply never be wrong.
If you implement wate reduction and value add, you will not be tempted to cut costs.
By moving to the core of the industry and offerings services that keep the system humming, a group within the electronics market has rendered irrelevant the question of ownership and control of the supply chain.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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