Not Cutting Their Way to Greatness

CEO's cost cuts feared too steep

Radio Shack's best days are long behind them, apparently (that's not exactly breaking news). The most recent CEO, “turnaround” specialist Julian Day, has been there a year and the local paper (RS is HQ-ed in Fort Worth) is evaluating his performance. It's harsh. I don't envy the guy, it's a tough job, but he's going strictly by the “slash and burn” management book. Does that really require enough creativity and skill to merit the huge paycheck?

But one year into Julian Day's tenure as chief executive, skeptics on Wall Street and inside the company are wondering whether the turnaround veteran's drive to cut costs will hurt morale so much that it puts the Fort Worth-based electronics chain's biggest strength at risk.

Employees are stretched so thin at stores that service is suffering. Customers are walking out of stores because nobody is helping them and employees are so disgruntled about staffing and pay cuts that it sounds like they're not trying anymore. That's how stores should be run for customer satisfaction and growth? Probably not.

I've always joked that you can cut costs, no matter what it costs you! The same line pops up here:

Day “can maybe bring profit back to the company, but at what cost? And at whose cost?” the manager asked.

Even Wall Street doesn't like their cost-slashing strategy:

Visits to RadioShack stores helped convince Bank of America analyst David Strasser to slap a “sell” rating on RadioShack this month. In addition to having concerns about the continued deterioration of the cellphone business and the impact of advertising reductions, Strasser told clients that cuts in commissions and benefits “have hurt employee morale and decreased store employees' willingness to aggressively cross-sell products.”

Maybe that's progressive Wall Street thinking — actually going to the “gemba” (the stores) instead of just looking at how the financials “look good” on paper. You can only get so far by slashing costs — advertising and people being the main things RS has slashed.

It's better to have a strategy for being effective. As Goldratt always said, you can only cut costs to zero, while revenue has no upper boundary.

Another analyst sums it up even better:

“Running the company for cash and margin rather than retailing success does not seem like a viable long-term strategy,” wrote Carol Levenson, research director at Gimme Credit.

In other words, you can't cut your way to greatness. A “Lean Retailing” strategy would focus on effectiveness and customer satisfaction, while engaging and involving employees. An inventory strategy that keeps the right products on the shelves when needed and some semblance of strategy (RS's has been “high service,” not “low cost.”) They're not going to “out Best Buy” Best Buy or Circuit City. You've got to do more than just slash front-line expenses and create disgruntled employees!

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