The gut reaction to a shifting market or a business experiencing changes is to “shrink the business” or cut down on costs. We have been taught that the answer to change is to cut down. While this may seem like a logical decision, can you shrink your way to growth? We can look to the example of General Motors. At the beginning of the 20th Century, GM ruled the roost and sold 50% of all vehicles owned in America, but by 1988 it was down to only 15%. So what happened to them? The short answer is cost-cutting. In 1974, their new CEO, accountant Thomas Murphy questioned the company’s strategy in selling cars with different features and suggested that they sell basically the same kind of vehicle, just with different external accessories such as bumpers, fenders, side mirrors, etc., in order to cut down on manufacturing costs. Obviously, consumers did not like this and started paying more attention to other manufacturers. Just before the end of 2018, General Motors released this statement: “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.”
In a recent conversation we had with Mike Michalowicz, author of Profit First, he said something that resonated with us and many of our listeners; he said: “Cut the fat and not the muscle.” General motors obviously cut too much muscle by “cost-cutting” and in the end, it cost them a lot of business affecting thousands of people and their livelihoods.
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