According to the sources, the answer to the question “Should production costs be reduced?” is nuanced. While cost control is a necessary condition for competitiveness, it is not a sufficient strategy and can even become value-destroying if pushed to excess.

Here are the different aspects of this problem:

1. Cost reduction as an operational necessity

It is undeniable that the reduction in unit costs mechanically contributes to the improvement of financial performance in the short term:

• EBITDA improvement: A productivity investment (e.g. replacing a machine) aims to reduce production costs, which directly increases EBITDA and cash flow, thus creating value.
• Competitiveness and recovery: Hunting for costs is often a necessary step in turning around a company in difficulty. 
• Economies of scale: Increasing volumes reduces unit costs by better amortizing fixed costs.

2. The dangers of excessive reduction (“Cost Cutting”)

However, experts warn against the illusion that a strategy can be summed up as cutting costs.

• Confusion between cost and investment: Some costs recorded as expenses (training, R&D, supplier relations) are actually investments. Reducing them boosts the immediate result (EBIT) but destroys the future potential of the company.
• Quality and safety risk (Boeing case): Cost pressure on subcontractors can have disastrous consequences. The case of Spirit Aerosystems (Boeing’s supplier) illustrates how the search for financial profitability through outsourcing and price pressure led to major quality defects (Alaska Airlines 737 MAX incident), ultimately transferring losses to Boeing shareholders.
• Long-term value destruction (Kraft Heinz case): Kraft Heinz’s 3G Capital management methodology, based on drastic budget cuts, initially boosted margins but eventually destroyed brand value and growth potential, leading to a $16 billion asset write-down.

3. The Competitive Paradox (Game Theory)

Cutting costs to lower prices and gain market share can backfire.

• If all competitors adopt the same cost-cutting strategy to lower their prices, market shares remain unchanged, but margins for the entire sector collapse. In this scenario, “the big winner is the customer, the big loser is the shareholder.”

4. The Value of Flexibility (Cost More to Earn More)

The Real Options  approach shows that it is sometimes better to have higher production costs to create more value.

• The cost of flexibility: Investing in flexible capacity or proceeding in stages is more expensive (higher cost) than building a plant optimized for a large volume right away. However, this flexibility (real option) allows to capture market opportunities or avoid massive losses in the event of a reversal, generating a higher Expanded Net Present Value (ENPV).
• The capacity example: Choosing a more expensive but flexible technical solution can be more cost-effective than looking for the lowest unit cost that makes the company rigid in the face of uncertainty.

In conclusion, while cost competitiveness is a constraint to survival, cost reduction is not a strategy in itself. Rather, sustainable value creation requires innovation, the quality of the relationship with suppliers and customers, and flexibility, even if it means accepting higher production costs to preserve these strategic assets.