Increase revenue or reduce costs?
"There are two competing strategic initiatives on the CEO's desk. The COO notes that Motorola, GE, DuPont and other high-profile companies have adopted a Six Sigma program that suggests that the route to higher profitability is through improving efficiencies and cutting costs. The VP of marketing would prefer to increase profits by building revenues through improvements to customer service, customer satisfaction, and customer retention."
So opens an interesting article in the Journal of Marketing (Volume 66, October 2002, pp. 7-24) by Professors Rust, Moorman and Dickson entitled "Getting Return on Quality: revenue expansion, cost reduction, or both?" They suggest that emphasising both policies simultaneously may not work, although it hasn't been tried all that often, and show, with an impressive use of statistical method, that businesses that aim to increase revenue do better than those that focus on reducing costs, as well as those that try to do both. Indeed, there was some down side associated with attempts to do both. Aiming to increase revenue had a positive impact on ROA and share price within 12 months.
The research method used in this study was impeccable, but it's a bit intimidating for those who aren't used to full-on academic papers. Contact us if you want to discuss this or see how we can help you improve your profitability!