6. Rule Two: Cut Entire Value Chains

To derive the second rule of strategic cutbacks, consider how work actually gets done in companies.

Certain organizations within a company are tasked with delivering external products/services and corporate strategies.

They "buy" help from other organizations within the company -- subcontractors -- to produce a specific product/service or strategic initiative (i.e., direct costs).

Note: Internal teamwork is described as a "buy-sell" relationship whether or not money actually changes hands.

In other cases, they buy products/services that help their organizations operate effectively (support services, which are indirect costs).

Of course, their internal suppliers in turn buy products/services from other organizations within the company. And so on.

Ultimately, every organization contributes either to external products/services and corporate strategies, or to the indirect support of groups who work on external deliverables.

Thus, there is a "value chain" of organizations within companies to produce each product/service or strategy, just as there is an external value chain of companies that collaborate to convert raw materials into products/services for end consumers.

It does no good to cut one step in a value chain. Money spent on the rest of the steps will be wasted.

Thus, the second rule is: Cut all the deliverables in a value chain.

Value chains take two forms: Some result in products/services sold to external customers, and in corporate strategies. Others result in indirect support services sold throughout the company.

For direct value chains, this rule means eliminating entire products/services or corporate strategies.

For indirect (internal support) value chains, this means eliminating specific internal support products/services. For example, an entire marketing program may have to be postponed (trimming not just one Marketing department, but also all the support groups involved in that program).

In either case, when a cut is made, this rule suggests that you cut all the deliverables, from all involved organizations, in that specific value chain.

It generally does not mean eliminating entire groups, since any given group is likely to be involved in multiple value chains. Instead, cutting all the deliverables in a specific value chain drives all involved organizations to cut deliverables (and spending) specifically related to that product/service or strategy.