Cut Costs, Grow Stronger : A Strategic Approach to What to Cut and What to Keep. Paul Leinwand
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enough. The capabilities of a company need to be seen for what they are: a defining factor in its productivity, a critical element of its success, and a major factor in determining its strategy. (We say more about this in chapter 2.) Some of the themes we’ll discuss and illustrate with examples are that your company’s key capabilities:
Drive most or all of your worthwhile discretionary costs
Can be counted on one hand (as opposed to reflecting the multitude of priorities within your business)
Should be among the expenses spared in a cost-cutting program (they may even be increased)
Work best when they are combined in sets to deliver a unique, hard-to-copy capability system
Are rarely if ever bounded by individual corporate functions
Can determine the composition of a high-performing portfolio of businesses—those that pull from similar capability systems
Lend themselves to scale advantages, but need not always be built or maintained in-house
Represent, in combination, the difference between what matters and what doesn’t
Being Strategic When the Clock Is Ticking
It’s one thing to suggest a surgical approach to cost cutting that keeps strategy in mind and leaves key capabilities intact. But is it realistic? After all, depending on your reserves and your cash flow, you may have to act very quickly. Perhaps you don’t have a clearly articulated strategy—and it’s very unlikely that you have a spreadsheet that organizes your costs by capabilities. You probably have your costs organized by function or by business unit, like everyone else. So what are you supposed to cut?
Fortunately, you probably already have a strong intuition about which capabilities set you apart. Your challenge is to translate that intuition into sound decisions and then put them into practice. For this, you may need a clearer sense of how your capabilities will be recognized and rewarded in the markets you are trying to reach. Indeed, a relatively simple diagnostic questionnaire, which we offer in chapter 3, will help you test your assumptions. And you can make still better decisions, even within a tight time frame, by bringing together your executives and key staff members and asking them to participate in this exercise.
In our experience, the most dramatic, significant, and successful cost reductions, either in the short term or the long run, aren’t those that are simply prompted by financial analyses. They have all occurred in situations when management realized that it had to truly transform. The process wasn’t expense reduction as usual; it involved real fear—a sense that, “If we don’t change, we may not survive.” These urgent situations provide exactly the right impetus to make critical strategic changes.
Case in point: years ago, there was an emergency cost-cutting program at the automobile and electronic components manufacturer Johnson Controls, Inc. The crisis began when retailer Sears, Roebuck and Co., which represented 20 percent of Johnson Control’s business in motor vehicle batteries, pulled its contract. Overnight, Johnson Controls faced huge overcapacity and steep losses.
Johnson Controls’ executives recognized the gravity and urgency of the situation. They had huge decisions to make and almost no time to make them. But they did make the time to look at their business from a higher level, and in less than a month they came to some realizations. Most important, they saw that the complexity of the company’s product line was hurting its long-term profitability and needed to be addressed. Johnson Controls’ huge volume of sales (in particular, to Sears) had covered up the fact that certain parts of the business were subscale; they required greater investment in capabilities than they earned back in profits. The capabilities (focused on manufacturing, sales, and certain types of R&D) required to produce and mass-market high-volume batteries turned out to be very different from those required to make the wide variety of batteries for more specialized or lower-volume vehicles.
In part by focusing on their high-volume customers, the managers at Johnson Controls were able to immediately identify 35 percent cuts in overhead, in areas ranging from accounting to human resources to information technology, without hurting the most profitable parts of their business. They understood that they might make some mistakes in doing this, but they knew that this strategy would let them act decisively, with the confidence that they could fix any errors later. From there, the management team went on to reconfigure the manufacturing footprint, closing certain plants and rethinking the roles of others. In the past, because auto batteries were so heavy, the company had been reluctant to transport them. It maintained plants around the United States that each produced a wide range of automobile batteries and shipped them within the region. But now, the company’s leaders realized they could save more by reducing in-plant complexity than they would spend transporting batteries longer distances to their customers. The production of lower-volume batteries was concentrated in a few plants. The total savings from all of these changes amounted to about $150 million annually.
This became a moment of transformation for Johnson Controls, an example that the company drew on in rationalizing the rest of its businesses. The executive team’s engagement in that high level of strategic analysis made it possible. The team members knew, individually, what had to be done, but together they needed to think through the implications to convert that knowledge into action. And by doing so, they developed a new capability that has been a foundation of the company’s success ever since: the ability to effectively manage complexity, making appropriate trade-offs in both the choices of products to make and the way they configure their supply chain.
Most management teams, when they have to, display a surprising amount of lucidity about which costs are important. They may not be 100 percent right, but they won’t be anywhere near 100 percent wrong.
Did Johnson Controls really need a crisis to figure out which costs were essential? Was the credit crisis of 2008 necessary to get virtually every company in the world thinking about its costs? Theoretically, of course, the answer is no. (And later you’ll meet some companies, like Tata Steel, that cut costs and grew stronger as a way to realize their aspirations, not just to deal with a crisis.) In reality, though, crises can provide powerful stimuli. To paraphrase Samuel Johnson, nothing focuses the mind quite like the prospect of your imminent removal from this world. Absent crises, companies often lose focus and habitually pay out expenses that don’t really serve their interests.
The challenge facing every company is to make the right choices while reducing costs. Especially during the most challenging global economic crisis in seventy years, many companies are trying to “just get by” as best they can. Others point to the “burning platform” of distress and put in draconian measures that may seem appropriate at the time, but will make them weaker in the long term.
Your opportunity—at all times, but especially during a crisis—is to grow stronger by building your critical capabilities, even as many of your competitors pursue a more incremental, across-the-board approach to cost cutting. Now is when you need to invest heavily in the capabilities that matter, be clear about how you will create a right to win, and make the really hard choices that great companies make. The most successful companies will be those whose top executives realize and leverage the idea that lower expense and higher growth are not necessarily opposed. They will be clear about their future and cut costs with an eye toward ultimately becoming stronger in the process.
About This Book
This short e-book, an electronic volume in the Harvard Business Press Memo to the CEO series, is based on years of experience. As partners at Booz & Company, our engagements have included many in which we have been asked to help remove costs while making clients fundamentally stronger. Achieving both ends simultaneously is not just a theoretical possibility; we have seen it happen in just about every industry and across all major geographies.
In the following chapters, we draw on these real-world experiences as we make the case for—and lay out the steps involved in—capability-driven cost cutting. In chapter 2, we explain what we mean by capabilities; the definition may not