Page 127 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

Although the obvious response to increased consumer price
sensitivity is to reduce prices, businesses should do so only if they
enjoy a cost advantage. Cutting prices without a cost advantage
undermines margins and potentially leads to a destructive price
war. Furthermore, just cutting prices without first taking the
necessary precautions to cut costs may simply encourage cus-
tomers to make their purchases earlier than planned—at a lower
margin. Take the example of the “cash for clunkers” programs in
the United States and Germany. These programs led to a sharp
increase in auto sales during the summer of 2009. Some analysts
estimate that as much as 50 percent of the sales increase came
from consumers who had planned to buy at a later time, which
presents the risk of a drop in demand further down the road.
As the case of Maytag in the 1970s demonstrates, making
hard choices when it comes to costs can make for easier and
better choices on pricing. Maytag—a leading home appliance
manufacturer—successfully reduced its product price point in
the inflationary environment of the 1970s. But before dropping
prices, it first launched an aggressive cost-reduction effort,
beginning in 1975.
Maytag adopted three sets of actions to achieve these cost
reductions. First, it reduced the number of parts required in its
products by using new manufacturing technologies. (Attention
to detail really matters; for example, shifting to a new heat-
application process eliminated the need for 13 bolts used to
attach a water filter, thereby saving $4.3 million a year.) Second,
the company launched a $60 million capital expenditure pro-
gram to improve manufacturing efficiency at its plants, which
included the adoption of computerized production-line tech-
nology and robotics. Third, it reduced its input costs by diversi-
fying its supplier base—notably by shifting to imported steel.

■ 106 ■