Low Cost Operators, Strategy, Business Model, Operations

When you think of companies that are longtime, low-cost leaders, what reasons for their outsize performance spring to mind? Many people assume that their position stems mainly from advantages in efficiency or scale and maybe a fanatical devotion to penny-pinching measures. Few would say they are innovative, creative, or customer-centric. Yet that’s precisely what the low-cost exemplars are.

In fact, the lowest-cost companies are usually among the best places to work. They often pay more, and their employees tend to stay with them longer. They invest in people and technology (including AI) at higher rates than their counterparts do. Further, their customers tend to be loyal. That’s because achieving the lowest-cost position is mainly about people and creativity. It almost always stems from some powerful customer-centric ideas that are exceptionally well executed—and has little to do with familiar step-by-step management programs aimed at efficiency improvements and waste reduction. Being the lowest-cost competitor is a deep capability built over time.

A company that adopts a lower-cost business model may see a great payback, but that model can be copied by competitors over time. By contrast, a company with a culture centered on competing on costs (as well as quality and differentiation) will continually find more cost-effective ways to make customers happy. I’ve found that low-cost exemplars have three elements in common.

Unusual leaders. The founders and subsequent CEOs of exemplar companies share some notable characteristics: respect for people, a commitment to decentralized decision-making, and a zeal for making change happen.  Leaders of these companies share another distinguishing trait: They have ideas on how to run their business that were originally, and in many cases still are, well outside their industry’s norms.  Leaders of low-cost exemplars see risk differently: as something to be explored, not avoided. They view decisions as reversible and a source of learning.  Exemplar leaders see most decisions as experiments—and the more operations experiments that are undertaken and the more entrepreneurial ventures sponsored, the greater the chance they’ll spot a new possibility and reverse a suboptimal decision. To make the most of this mindset, they need talented and seasoned people in their organizations, and decision rights have to be widely distributed. So it’s not surprising that the lowest-cost companies, in general, recruit better, pay more, and retain their employees longer than higher-cost companies do. They also buy and sell businesses less often than their industry’s average. After all, it is easier for employees to love and commit to a business that is not for sale.

Foundational work disciplines and tools. Cost excellence rests on the deeply embedded properties of an organization, including rich knowledge of processes, obsessive attention to detail, a collection of reliable real-time operating data for decision-making, the in-house development of process specifications and the software that manages operations, continual short-cycle experimentation on every step of work, and rigorous hiring and training practices.

Operations.  Exemplars have different ways of achieving lower costs in operations, but all seem to share a few basic principles.  Eliminate long-standing industry barriers to lower costs. Every industry has legacies and norms that add cost without adding value.  Ensure that product design and process design reinforce each other. The more each is developed with the other in mind, the lower the costs of complexity and the greater the potential for a smooth flow of operations.  Develop original multipurpose technologies that connect the company to the customer and reduce cost. Low-cost companies’ desire to be different shows up in multipurpose innovations.  Use cycle time and variance as a management tool.

Three questions that can help executives assess their company’s prospects of becoming the lowest-cost business in an industry:  Do we have a powerful strategy or operations idea that can serve as a starting point?  Do we have the capability and the patience to become lowest-cost?  What can get in our way?

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