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"It's the economy, stupid," the Democrats' 1992 rallying cry, worked because it was true. In the end, the state of the economy trumped all other factors in deciding who won the American Presidential election that year.
In a similar way, one factor is rapidly becoming central to determining who wins and who loses in business: cost competitiveness.
PRUNING FOR GROWTH. This contradicts what business school taught us, that low-cost leadership serves as only one of many possible paths to success. Others, for example, might be developing desirable product features, focusing on a niche, or providing superior customer service.
While these alternatives may provide some short-term success for a company, evidence suggests that we will all eventually play the cost game, an effort that will largely determine our survival. Today's customers require us to have responsive customer service, unprecedented levels of customization for specific needs, reliable and easy-to-use products, and low costs.
My conversations with business owners all across the country have clearly revealed that companies unprepared to fight the long, hard battle to reduce costs simply won't survive. For example, a friend of mine who operates almost 200 fast-food establishments has seen his margins decline by two-thirds over the past five years. He's radically adapted his business to survive -- and to prosper. Most of his competitors haven't, and they face choppy waters because of it.
FAR HORIZONS. Likewise, one of my clients, who supplies components to the automotive industry, has reduced costs by more than 30%. Nonetheless, circumstances still regularly require him to generate givebacks of 5% to 7% of the value of contracts annually.
Another consideration that intensifies the need for cost competitiveness: Offshoring is picking up steam, going way beyond manufacturing, call centers, and software development -- hitting many functions we never dreamed appropriate.
In business after business, playing the game means slugging it out harder for small cost gains. And far too many companies in the U.S, Europe, and even Asia remain in a state of denial, believing they will manage to "value-add" their way out of trouble. For most of them, it's a pipe dream.
WHERE YOU STAND. Businesses that emerge as leaders in this tough new environment will bring major-league skills and tools to the business of cost reduction. They will serve as leaders in their industries in regard to exploding the myth that there are only limited possibilities for providing increased value for lower prices.
Want to know what cost-management league your company falls in? Check out the table below:
Will succeed only in the smallest and most-protected of niches for as long as protection exists
Double A (AA)
Formal benchmarking of costs of competitors, rudimentary but mostly anecdotal exploitation of cost management
Can achieve short-term success, provided other factors (price, service, quality) are superior. Margin erosion signals trouble
Triple A (AAA)
Systematic and sophisticated cost-management system that employs total quality management, continuous improvement, activity-based cost management, or other similar tools
Is positioned to be a player in most industries but is vulnerable as competitive pressure increases. Needs to constantly push for gains and must encourage the team to use creative thinking and find ways to reconfigure the value chain
Major League
Mastering tools described in AAA stage (above), enabling it to set aggressive annual cost-opportunity goals, which drive the business to reinvent the way it thinks of costs. Leads the industry segment in cost management
Can compete in the most competitive industries. Has technological and skill sophistication to tackle implementation of some of the most advanced and powerful cost-management techniques
Pennant Contender
Use of advanced cost/quality management tools, such as design for manufacturability, lean manufacturing, and Six Sigma, which are integrated seamlessly into company processes from design to delivery
Competitive globally if it is able to execute at top levels of performance. Needs to be careful that the powerful cost-management musculature it has built doesn't cause the tail to wag the dog, resulting in loss of ground in customer relationships and innovation
Leaders have to push their teams to master some fairly technical skills if they want to win the cost game. But, at the same time, they have to ensure their companies don't get mired in complexity and lose sight of the simple fact that reducing costs is imperative.
THE "TIN LIZZIE" LESSON. Perhaps the most brilliant cost-control guru in history, Henry Ford, encouraged managers to set the selling price of a product so low that the organization would have to go through a wrenching process to figure out a way to lower costs enough to meet that price. He once even specified the measurements he desired for the wooden boxes in which a supplier delivered its engines to the Ford (F) production line.
When the first boxed engines arrived on the factory floor, Ford picked up a crowbar, pried off the end of a box, walked over to the production line, and set the piece of wood into the base of a half-constructed car. It fit perfectly. Henry had figured out a way to get his engine supplier to pay for the construction of a car part, which we still know as a "floorboard" today.
McFarland, a two-time technology CEO, is the founder of McFarland Strategy Partners in Sandy, Utah. His clients include House of Blues, Vans, and other entrepreneurial companies. His upcoming book is Breakthrough: Secrets of America's Best Growth Companies (Random House/Crown).
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