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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: Elroy who wrote (155343)	1/29/2011 10:14:36 PM
From: Mary Cluney	Read Replies (1) \| Respond to of 541925

<<<Cost cutting happens all the time when a business's addressable market, for whatever reason, shrinks. It's not a growth tool, it's a survival tool for a business which (for whatever reason) has an expense level above current requirements.>>> It is a business tool that every business has to use but you can't start a business, grow a business, or stay competitve in the business world using one tool exclusively. Your examples of Lucent and the Post office are great examples. They are situations where the organizaton is dying and cost cutting will help them stay alive a little longer. The United States is not in that situation. We are still growing and we are competitive. We can't act like we are dying.

To: Elroy who wrote (155343)	1/30/2011 1:50:08 AM
From: wonk	Read Replies (5) \| Respond to of 541925

Cost cutting happens all the time when a business's addressable market, for whatever reason, shrinks. It's not a growth tool, it's a survival tool for a business which (for whatever reason) has an expense level above current requirements. My father taught me when I was very young, … You can’t cut your way to profitability... and its held true throughout my career. He explained that to me with the example (at the time) of what a new President was doing at RCA (which many on the board will have never heard of or don’t remember). And sure enough, an iconic American company disappeared a number of years later. There are only 2 types of cost cutting. 1. Cost cutting which gets your operating margins in line with industry competitors; 2. Cost cutting which gets your margins below industry competitors. Only item 1 is good cost cutting, but also, by definition, it means the company was poorly run in the first place. Cost cutting as a survival tool only delays an inevitable death. Items 2 is negative cost cutting. This also comes in two flavors. The first flavor (a) is seemingly what you describe. The correct term is not addressable market though. If the addressable market is shrinking, that’s a dying industry. Better said would have been if the company’s market share has shrunk. Cost cutting in this instance (to get overheads below industry competitors to keep EBITDA and Operating margins in line, is a desperate and ultimately self destructive measure. Invariably management will say they are cutting fat, but rather (see item 1) more often they are cutting flesh. See the Merchant of Venice for the effect of the difference. The (b) flavor is the dress up for sale cuts. Yeah the Company looks good short term, and the CEO is treated as a genius, but typically he/she has cut flesh. It is only a matter of time before the vultures pick at the bones. Anytime one engages in Type 2 cost cutting, one has a revenue problem, not an expense problem. But almost invariably it’s seen in the markets as a good thing, when in actuality its one of those Sea of Red Flags at a May Day Parade indicators. A key here is to understand the distinction between Direct Cost and Overheads. Direct costs are required to supply the good or service. Overheads are necessary, but discretionary to Management. If I am building a car, the steel used is a direct cost. If I am paying $120 for the steel and my competitors on average pay $100, the Type 1 cut is indicated (unless there are other structural issues). However, if I cut my steel cost down to 90 (Type 2) then most often I’ve cheapened the quality and it will kill me in the end. Similar, but more slowing acting, regarding cuts to overheads. If they’re out of line with Industry norms, one can cut to the good. But more often they are out of line because of insufficient revenue. Trying to cut more to get the bottom line margins right and you’re cutting flesh. In other words you can cut marketing (brand maintenance ) sales promotions R&D, and pretty up the current P&L, but always always those tricks really hurt and most often severely wound if not kill the company long term. I would disagree that either of your examples – Lucent or the Post Office are examples of good cost cutting. Lucent had a revenue problem which was exposed for all to see in the telecom meltdown. Their major high margin product (big iron telephone switches) was dying, they were losing share in cellular to the Nokia’s, they were being attacked by the DWDM upstarts (Ciena, Juniper) and getting pounded in the Enterprise and IP market by Cisco and the like as that market took increasing dollars of total telecom capital spending. Again – a revenue problem – ultimately leading to the “no other option” merger with Alcatel. The Post office also has a revenue problem. So much of their fixed costs goes to handling bulk mail, but political and business pressure keeps bulk mail rates artificially low. On the cost side, the USPO is prevented from taking action to lower costs. Politics imposes the universal service obligation. Politics imposes the 6 day a week delivery schedule which increases fixed costs. Politics imposes the requirement to pre-fund retirement benefits – unheard of in the commercial world. The politics in part is driven by a Trojan Horse designed to keep the Postal Service in the red to eventually force the ideological outcome of privatization. Yes they could do some good cost cutting, but more revenue would help a lot more. The fact that a first class letter cost 44 cents(?) and bulk mails (catalogs etc) costs a lot less tells you something about the revenue model. Getting back to politics, the United States has a Revenue problem, not an expense problem. Since WWII expenditures have been around 19-21% of GDP. In worst deficit years, Revenue (Taxes) have been around 18% of GDP. Expenditures are now around 23% but that is due to 3 absurd wars (Iraq, Afghanistan and Terror) and an unprecedented Financial meltdown. Taxes are projected at 15% of GDP for the next two years. Taxes as a % of GDP are the lowest they've been on my lifetime I'm pretty sure. And the magnitude of the deficit is what ill-advised tax cuts for the well-off and 10% unemployment gets you.