Research

Corporate Frugality Isn’t Just about Cost-cutting

Media coverage of the frugality of companies like Southwest Airlines, Wal-Mart, Amazon.com and Ikea abound. But do they capture something enduring about how these companies really do business?

To find out, Professor Shannon Anderson and Professor Anne Lillis of the University of Melbourne conducted extensive interviews with managers of 14 large corporations and sent a mail survey to several hundred companies. They uncovered a complex interplay between frugality, organizational culture, business strategy and the ways that costs are managed.

“The news is full of stories that refer to companies that are slashing their budgets, laying off workers and cutting costs as ‘frugal’. We were skeptical that these heavy-handed, reactionary tactics exemplified frugality,” said Anderson.

“Frugality is demonstrated through a consistent stewardship of resources that positions a company to weather unpredictable events and to thrive in bad times as well as good.”

Anderson and Lillis extrapolated from marketing research on consumer frugality to develop a working definition of corporate frugality.

“We found that frugality involves a more holistic orientation to running a business and managing costs for the long term,” explained Anderson. “It is not short-run cost cutting, stinginess or over-zealous adherence to a budget. Rather, it is the ability to manage the business cautiously to preserve options for the future. It isn’t limited to companies that compete on the basis of cost. Innovative, entrepreneurial companies also benefit because being frugal allows them to fund organic growth.”

Anderson presented another research project, “Management Control and Residual Risk in Interfirm Transactions,” at Georgetown University’s McDonough School of Business in October and at the University of Melbourne in November.

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