Cost Cutting or Quality?

[In one of my very first blog posts, I mulled over the idea of danger of prioritizing cost cutting over product quality.  Given the developing situation in Atlanta, I thought I’d revisit the post, and see if it still had value today.]

One of the recurring refrains of the recent labor disputes plaguing the classical music world has been the need for organizations to cut costs. The imperative to cut costs is widely regarded as self-evident, obvious and somehow immune to challenge. So when an orchestra or opera company runs into financial trouble, there has been a natural reaction among many in the community, to instinctively reach for the budget scissors as the first and only solution.

But although that’s a natural reaction, it may not be the best reaction. Why so? Just look at the instructive example of Howard Johnson. Lewis Carbone, a respected business consultant who was on hand during the HoJo’s tumultuous last days, has documented the fall of this once-mighty company and the lessons it provides about the dangers of prioritizing cost savings over a customer’s experience and satisfaction.

I suspect that Howard Johnson is a name—and a brand—you have not thought about for some time. But back the Mad Men world of the 1960s, HoJo was a juggernaut of the corporate world. It was a forward-thinking company, a first-adopter of many innovations that have become standard in the food service and hospitality industries. It recognized the business opportunities provided by the new interstate highway system, and developed a plan to strategically link restaurants and easy-access hotels at key points across the new travel grid. Along the way, HoJo became a pioneering force in such concepts as franchise development, “motels,” theme restaurants and commissary food distribution. It also emerged as an industry leader in the area of customer service, with Howard Johnson personally insisting on legendary, unified standards of customer care that ensured guests felt at home in any orange-roofed HoJo around the country. It was phenomenally successful—in the mid 1960s the chain’s profits exceeded McDonald’s, Burger King, and Kentucky Fried Chicken combined.

So what happened? Why did such a successful company go by the wayside?

Well, there was a change in leadership. The eponymous founder, with his devotion to customer service, exceptional quality, and the highest standards, gave way to a new generation of leadership under his son Howard B. Johnson that adopted a new cost-savings strategy as the guiding principal of the company. The new management also embraced a new way of thinking that suggested the customer wouldn’t be able to discern the difference between a great product and a pretty good product.

At a talk I attended a few years back, Carbone (who worked briefly with HoJo in the 1970s) recalled what happened next. He suggested that one specific change the new regime instituted—the change from a signature 4-ply napkin to a much more modest 2-ply napkin—encapsulated both the thinking behind the new strategy and its unfortunate consequences.

The idea behind this change seemed fairly straightforward: since the napkins were hardly central to the customers’ experiences, they offered a harmless way to save money by cutting corners where no one would notice.

This change, unfortunately, represented the tip of the iceberg. Satisfied at the money saved, the management fully embraced this new culture of cost-cutting, hunting down savings wherever possible. The length of drinking straws was shortened. The number of ice cream flavors was reduced. Cheaper ingredients were used in the restaurants and smaller portion were mandated. Cleaning schedules were reduced, employee training reduced, and building maintenance was reduced.

In short, the company instituted a drive to cut costs in an attempt to improve the bottom line for investors at the expense of the customer.

It is important to note that all of these changes—at first—were slight, and on an individual basis might not have made much of a difference. But as these “minor” cuts continued and pervaded the organization, the customers did notice the overall change in quality and reacted badly. Not openly at first, or with specific calls to, say, bring back the thicker napkin. It was clear, however, that customer perceptions of HoJo began a fundamental shift downwards. Guests felt like they were no longer at a restaurant, per se, but at an increasingly dingy, inexpensive fast food joint… while still being asked to pay the higher prices associated with a restaurant. Eating at HoJo no longer felt “special,” which impacted long-term customer identification and brand identity.

For a while, brand loyalty held firm, but there came a tipping point where loyalty fell away and people took their business to a competitor. Once that tipping point happened, the company entered a death spiral it could not escape. As more and more people abandoned the chain with its dirty facilities, indifferent service and mediocre food, the company redoubled its cuts in order to maintain its bottom line.  By the 1970s the former industry leader was a sad, decrepit mess. Carbone, who witnessed the destruction first hand, writes:

In my observations there was seldom a mention of what was happening to the organization’s most valuable asset as a result of this whittling-away process. The trust Howard Johnson had build up in the minds of its loyal customer over so many years was still significant, even bankable. But as financial difficulties mounted and the organization turned defensive, it didn’t figure into management discussion in any meaningful way.

Lewis P. Carbone, Clued in: How to Keep Customers Coming Back Again and Again. Upper Saddle River: Pearson Education, Inc., 2004.

Sound at all familiar?

Yes, obviously an orchestra is very different from Howard Johnson, and we now live in a different time than the 1970s. But there are many points of similarity—and orchestras are much closer to customer service organizations in the hospitality sector than they are to the manufacturing or financial sectors. Both an orchestra and a restaurant are selling an experience. Their “product” is a hard-to-describe, but very real feeling that is woven together from many different elements. And tampering with any one of these elements can lead to disruption of the whole. Much like music itself.

This is not to say that nothing can ever be cut, or that cost savings is inherently a bad idea, but it does serve as a cautionary tale that customers do notice, and do respond to changes in quality. And downgrading quality might buy short-term gains, but lead to long-term problems.  Just think of that the next time you pull into a Howard Johnson.

Oh.  Wait….

Xochipilli

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One thought on “Cost Cutting or Quality?

  1. I have deeply appreciated all your blogs the past several months, particularly concerning the Met Opera negotiations. And I’m very glad you have taken up the cause of the Atlanta symphony now. This HoJo piece is also very insightful and resonates with my own perception of the food and motel chain in spanning the 1960s and 70s.

    Like

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