Cut Costs, Grow Stronger : A Strategic Approach to What to Cut and What to Keep. Paul Leinwand

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      Instead, we say that cost itself is an outcome of the choices you make about where to invest. The right way to think about costs—whether or not your company is under huge pressure now—is to take a hard look at the capabilities you need most and to invest only in those that will give you a “right to win” in the marketplace. The resulting approach is unique for each company and results in greater and faster cost reduction, less risk to the business, less chance of costs returning, and a greater likelihood that you’ll have made the company stronger and positioned it to grow more quickly when good times return.

      This approach involves a new way of thinking about capabilities. We have found that previous research in the field—about skill sets, core competencies, and individual corporate functions—does not go far 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:

      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.

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