How Drastic Cost-Cutting Can Bring Clarity to a Business Strategy

Friday, January 09, 2009

I have some painful memories of the summer of 2008. Anticipating the credit crunch and impending slump, we decided to cut overheads by 50% overnight and try to ride out the storm. Those decisions, painful at the time, brought a clarity to our strategy since. I was reminded of the benefits such difficult action brings when i read about house-builder Bovis Homes today…

Back in the summer of 2008, Bovis Homes announced that it was reducing its entire workforce by 40%, anticipating a rapid decline in demand for new homes. Today the business has announced that a further 20% of employees will leave the business - thats 6 out of 10 gone.

We also learn that Bovis has cut its overheads substantially. Overheads will be around half of their level in 2007 - the peak of the housing boom. Shareholders will suffer too - the dividend has been scrapped to conserve cash.

Tough, decision action from Bovis, which says something very straightforward about their strategy. They have cut costs (direct + overheads) to the bone; they are conserving cash until some opportunities arise to start investing in house-building land and developments again. A safe and very sensible strategy. No wonder the bank has agreed to a renewal of its bank loan.

Sometimes it pays to simply bunker down and ride-out the storm…