Are your costs too low?

Jules Goddard

When Kraft announced it was taking over Cadbury, it wasn't long before a hefty round of cost-cutting started. But is this depressing and familiar scenario really the best way to grow a company? Jules Goddard examines the flawed assumptions inherent in efficiency drives, concluding that it is strategy, not costs, that determine competitiveness

Within A Day of acquiring Cadbury, before the ink was dry on the contract, Irene Rosenfeld, CEO at Kraft, was announcing $2 billion of cost-cutting. How utterly predictable. How depressing. How unimaginative. But more than anything, how puzzling.

You pay £11.4 billion for a thriving company and the very first thing that you choose to announce are cuts. How on earth can Kraft really know that Cadbury's costs are too high rather than too low? What evidence does Kraft have – that presumably the board of Cadbury either did not have or that it misinterpreted – to demonstrate that the company has for years been systematically overinvesting in, say, new brand development, or advertising, or product quality, or working capital or wages?