In our experience, the most dramatic, significant, and successful cost reductions, in either 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 Sears, Roebuck and Company, which represented 20 percent of Johnson Controls’ business in motor vehicle batteries, pulled its contract. Overnight, Johnson Controls faced huge overcapacity and steep losses.
The executives of Johnson Controls recognized the gravity and urgency of the situation. They had huge decisions to make and almost no time to make them. But they made 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 an investment in capabilities that was greater than what they earned back in profits. The capabilities (which were focused on manufacturing, sales, and certain types of R&D) required to produce and market high-volume batteries turned out to be very different from those required to make and distribute the wide variety of batteries for more specialized or lower-volume vehicles.
In part by focusing on their mass-market, high-volume customers, the managers at Johnson Controls were able to immediately identify 35 percent cuts in overhead, in areas as diverse as accounting, human resources, and 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 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, the company had been reluctant to transport auto batteries because they were so heavy. 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 long distances to their customers. The production of lower-volume batteries was concentrated in a few plants. The total savings from all these changes amounted to about US$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 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 by making appropriate trade-offs in both the choice of products to manufacture and the way they configure their supply chain.
Most management teams display a surprising amount of lucidity about which costs are important when they have to. They may not be 100 percent right, but they won’t be anywhere near 100 percent wrong.