January 7, 2021
TPL Insights: Building Peak-Performance Cultures #49 – How Purpose Leads to Effective Cost Leadership
Cost containment has been defined as the practice of recording and controlling expenses to eliminate overspending. Companies like QuikTrip, UPS, Nordstrom, Wegmans, H-E-B, Waste Connections, and Southwest Airlines, all of whom consistently outperform their competitors, define cost leadership as driving costs out of the business that do not serve the company’s purpose or do not enhance stakeholder experience. There are healthy ways to cut costs and there are ways that do untold damage to customer and employee experience and destroy enterprise value. Bad cost-cutting is like cigarette smoking, an unhealthy diet, and a sedentary lifestyle. It won’t kill you quickly, but it will kill you. Good cost-cutting, or cost leadership, doesn’t cut into muscle. Cost leadership leads to delivering more value to customers and employees and supports the organization’s purpose. A couple of examples of each:
Safeway Stores Inc., once one of the finest retailers in the country, began an aggressive cost-cutting initiative in the seventies, that in many ways led to the most dramatic decline of a major retail brand in history. Previously, Safeway had been known for exceptional customer service, great perishable departments, great employees, and squeaky-clean stores. It was aggressive cost-cutting at the expense of the customer and employee experience that led to the long-term decline of its once-great brand. Safeway was one of the first retailers to implement industrial engineering, time studies, and labor scheduling programs. Every division had an industrial engineer whose job it was to find cost-cutting opportunities in every part of the business. The results were high prices, long checkout lines, substandard stores, unhappy employees, and declining revenues. To be clear, there is nothing wrong with cost-cutting initiatives unless they cut in a manner that detracts from the company’s purpose. When Safeway’s cost-cutting became more important than customer experience, the end of a great brand had begun. Between 1983 and 1988, Safeway sold thirteen divisions totaling 1,059 of its 2,500 stores. Safeway subsequently destroyed Genuardi’s, Dominick’s, and Randall’s, with the exact same playbook.
Safeway is not the enemy here. Rather, it is the notion that cost-cutting in and of itself is a sound tactic. It is not. Time and time again, I see great brands slowly self-destruct by losing sight of the purpose that once made them great. This is particularly true in acquisitions, where the acquirer does not understand the business they’ve bought and the customer to whom the business had made promises. Effective cost leadership means saying “No” to costs that do not support the organization’s purpose and enhance its customer and employee experience. The scenario described above plays out over and over, across the globe and it never seems to change. It’s like watching a Hallmark movie. The movie is always pretty much the same. The actors are different, but the storyline is almost identical. Don’t get me wrong, I like Hallmark movies, but they are exceedingly predictable. Unfortunately, we see this cost-cutting movie every day. It’s a horror movie actually. Once great brands, are routinely destroyed by well-intended cost-cutting measures at the expense of customer and employee experience and purpose.
In contrast, H-E-B, one of the foremost cost leaders in the business, has engineered costs out of their business by optimizing supply chain, retail facility, and restocking technologies, while delivering more value to their customers and employees than their competitors. As a customer, you would never know that H-E-B ever thinks about costs. There are always plenty of people on duty to assist customers. You never have to wait in long check-out lines. The stores are clean and attractive, even on Saturday nights after a very busy day. H-E-B has incredibly low prices, on par with Wal-Mart, and significantly below their traditional supermarket competitors. The stores are big, bright, clean, and fun to shop. They donate 5% of pre-tax profits to charitable organizations that focus on hunger relief, education, health, environmental and diversity initiatives. They do not cut costs or corners when it comes to taking care of their customers and communities.
Southwest Airlines is another stellar example of an organization whose purpose drives everything they do, including cost leadership. Southwest’s purpose is to connect people to what’s important in their lives through friendly, reliable, and low-cost air travel. They are dedicated to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit. Their vision is to be the world’s most loved, most efficient, and most profitable airline. I continue to be amazed at an airline that leads rather than follows. I’m not naïve enough to think that Gary Kelly and his team at Southwest is ignoring the rest of the airline industry, but they’re not following any of the industry’s contemporary practices. Most airlines have been charging extra for checked luggage for quite some time and several are even beginning to charge for carry-on items. Southwest provides two free checked bags, two free carry-on items, free snacks, and more legroom in its standard seats than United provides in its upgraded seats. As a customer, you might never know that Southwest is relentless about reducing costs by flying only one aircraft, flying point-to-point routes, optimizing equipment utilization, reducing employee turnover, utilizing flexible work rules, and having a workforce that is 45% more productive than most of its competitors.
There is much more to say about effective cost leadership, and we’ll continue to explore this issue in future posts. Cost leadership is one of the nine principles practiced in organizations we’ve studied that consistently and significantly outperform their competitors. It is one of the nine principles that contribute to a culture of peak performance, which is, in our view, the only sustainable competitive advantage.
I hope you’ve found this week’s post helpful. Allen Austin exists to fulfill its purpose, which is to enhance the lives and effectiveness of our associates, clients, and stakeholders. Our solutions are focused on assisting clients in building cultures of peak performance, through our retained search and leadership advisory practices. Please give us a call if we may assist in any way, or if you’d just like a thought partner.
Wishing You All the Best for 2021,