Question - Where should companies look to cut costs?
Jim Collins: One of the critical things to understand about cost is that truly great cost enterprises understand that cost is cultural. It is not structural. It’s not a matter of cutting out a little cost here and a little cost there. That’s a very undisciplined approach to cost. The true approach to cost is to basically when times are good, when times are robust, when time things are going well, you need to have the discipline to hold your cost in line such that when difficult times come, they’re already in line.
Take a great company like Southwest Airlines. And what’s very interesting about Southwest is they’re low cost in good times and bad times. And then that’s what gives them the advantage now. So here’s the key lesson. The question is not where do we cut cost today. That’s an easy question and financial people can figure that out.
The really question is, “How do we build a culture of discipline such that when we return to prosperity?” and we will return to prosperity that is what American business knows how to do. We will return to prosperity. When we do, will you have built a culture of discipline that is fanatic around cost when prosperity returns such that when the next calamity comes you’ve already done it, because it’s part of your DNA, not a function of circumstance?
Keep in mind, you cannot control prices except in very few circumstances. And you can control costs. So, therefore, in a world out of control you have to manage what you can control, which means that over time, cost discipline has to be an ongoing systematic discipline, not a reaction to the moment.
In Good to Great we did a systematic analysis of the question of lay offs and restructuring. And we looked at companies that had gone from good to great and we compared those to companies that failed to make that leap or who really went down the backside. And if you put a specific lens of the question of lay offs on, and cost cutting and restructuring, and we analyzed this over the course of 50 years of matched pair data. What you find is very, very interesting.
First of all, the good to great companies rarely did what we would call across the board cost cutting. That’s not what they did. The comparison companies tended to do across the board cost cutting. The mediocre companies, the companies that never became great did more across the board cost cutting and often reactionary to the times. The good to great companies looked at it and said, “No, no. We have a strategic question. Which activities should we be engaged in in the first place? And what should we not be engaged in at all?”
There’s a famous story from Good to Great about Darwin Smith who was the chief executive of Kimberly Clark. And there were issues of, they were a forest products company back then, they had trees and they all of these natural resources and they also had this consumer business. And one day Darwin Smith woke up and said, “The best way to get cost in line and most important, to build a great strategic future isn’t to do a 10 percent or 15 percent or 20 percent across the board cut, taking 20 percent from the consumer business and 20% from the forest products business.” That’s very un-strategic.
He looked at it and he said, “Now is the time to sell the mills. We’re going to get out of the traditional paper mills business all together. A strategic decision, take all the resources from that and build it into what is our future, which is the consumer business.” And the real key is to day, “What should be doing full force, and what should we be doing not at all.”
Peter Drucker had a great question that he always pushed people on. What businesses are you in today that if it were a decision anew to enter that business for the first time would you enter it today? And if the answer is no, then it might be time to sell the mills.
Recorded on: August 12, 2009