Are you concerned that your cost structure is too high to remain competitive? Are you constantly reminding employees to keep overhead expenses low? Did you have to reshuffle spending priorities in order to survive this recession?

People Who Think for Themselves
Two Case Studies
Strategy to Ensure Long-Term Profitability

To remain a global competitor, every company must manage its cost structure closely to ensure every product or service you sell produces a positive return and that employees are not wasting profits anywhere.

While it may appear balancing your budget has little to do with Corporate Culture, the reality is that it does. Your corporate culture has a tremendous impact on your financial fortune – including decisions that impact your spending.

People Who Think for Themselves

Every business leader wants employees who can think for themselves; yet, it is your employees who make decisions that waste money or incur unnecessary costs that add no value to your customer or products. Getting employees to make smarter spending decisions won’t happen through a memo or more training. And updating your spending policies is not the silver bullet to ensure your company is still around three years from now.

The answer to this dilemma of how to balance empowering employees to make smart decisions, yet ensuring they guard both profitability and viability starts with Activity-Based Costing. ABC is a methodology firms like General Motors and Caterpillar Tractor have long employed to lower their cost of doing business.

Experience in ABC creates this Culture Principle: Permanently reducing costs requires changing people’s behaviors (i.e. spending habits).

While this is self evident, it is important to realize people won’t change how they behave unless there is a good reason. And giving up the power, prestige and influence that come with having a big budget to control is more important to some decision-makers than saving money. Some leaders do not change their spending habits even when the unnecessary spending results in employee layoffs or loss of market share.

Connected to this Culture Principle is another: Peoples’ spending habits will not change until you change your culture.

Since every behavior – smart or unwise – that happens in an organization is reinforced by the corporate culture, this is where the transformation from wasteful to careful starts.

Two Case Studies

One company who has faced challenges in corporate culture and has experienced a strong impact on the bottom line is Volkswagen AG. They suffered “a big profit breakdown during 2003,” (WSJ 1/7/4). Their cost structure – what it costs to develop a new car – “far exceeds the industry average and represents one of the biggest items weighing on VW’s bottom line.”

VW has a cultural norm in which cost is no object so money is lavished on research and development and on capital expenses. VW’s capital costs in 2003 were “8.6 percent of sales while PSA Peugeot Citroen was less than five percent.”

Compare VW’s culture with a company closer to home, Costco Wholesale. Despite rapid growth and expansion with new products, services and stores, the leaders of Costco have designed a culture where every employee works hard to ensure every dollar is spent wisely.

Three things Costco does to reinforce this cultural norm are:

1) Maintain a relentless focus on the customer – Costco members. Employees are required to work inside a warehouse assisting members before branching out to other jobs. This ensures that even if the employee never deals with a member again, he or she knows what Costco is all about.

2) Just like their smart merchandise purchasing to save members money, they are smart about capital and operating expenditures. Walking through Costco’s world headquarters, you will see well-used mismatched chairs and desks, low-cost office machinery, efficient use of space, and usage of products they sell in their warehouses.

3) Every Costco employee is indoctrinated with the mantra of “SG & A” which stands for sales, general and administrative expenses. Employees are reminded in many ways their job is to keep SG & A as low as possible, which Costco has done consistently for the last eight years.

How many of your non-management employees even know what SG & A stands for, let alone know how to keep it under control?

Strategy to Ensure Long-Term Profitability

Finally, here are three specific things you can do to make your culture one where employees feel empowered to save money and spend it only on important things.

1) Each time you are about to spend significant funds on something, require decision makers stop before acting to ask themselves: “How does this expense further our purpose?” This question assumes you have a well-communicated mission and it contains the right things such as ‘focus on the customer’ and bottom-line awareness.

2) Before taking a path or employing a strategy, require each decision-maker to ask, “Is there a more cost effective way to get to where we want to go?” The more times you ask yourself this key question, the more you will discover there are numerous less expensive ways to achieve what you want.

3) Examine each element of your cultural mosaic to ensure it supports and reinforces smart and cost-effective spending. Chances are there will be several that are out of alignment with the rest. These are what you need to transform as quickly as possible.

Remember, there is no finish line. As soon as you think you have lowered your cost of doing business, someone else will come along and be able to do what you do for less money. So you must instill in your culture a norm that says: “We will not be satisfied until we can find a less costly way of doing this.”

To stay competitive today, you and your fellow leaders need to keep a relentless eye on finding specific ways of permanently lowering the cost of how you do business. If you fail to, you will fail, too.

About the Author

Corporate Culture Consultant Ron Rael, provides customized training and coaching to leading-edge companies, state CPA societies, the AICPA and IMA. Contact him at Ron@ronrael.com.

Corporate Finance articles brought to you by MACPA Corporate Sponsor, Great Lakes Business Credit.