Thrifty firms keep on an even keel

UC DAVIS (US) — Frugal companies succeed by controlling spending and being resourceful as a matter of course rather than as a reaction to events like recession.

“The research was motivated by all of the headlines that came out during the worst parts of the recession indicating that firms were becoming frugal, as evidenced by layoffs and other cuts,” says Shannon W. Anderson, professor of management at University of California, Davis.

“My own experience working with companies on cost management made me very skeptical of the validity of characterizing these actions as evidence of frugality.”

[sources]

The research confirms that “today’s reactive, heavy-handed cost cutting is the antithesis of true frugality,” and should not be mistaken for it, she says.

The paper uses a mix of field research and surveys from 2008 and 2009 to collect information from corporate executives on frugality as a company characteristic, a topic that has been largely absent from accounting and management literature.

“We find that frugal companies control labor costs through greater use of incentive pay; control material costs through supplier sourcing strategies; and focus capital expenditures on efficiency-enhancing investments,” the study, published in the journal Contemporary Accounting Research, reports.

Anderson and colleague Anne Lillis of the University of Melbourne in Victoria, Australia, looked at 10 large firms, existing literature on individual companies, and research on consumer frugality to assess corporate frugality. The research was conducted in the United States and in Australia.

The study, that identifies IKEA, Southwest Airlines, and Walmart as examples of frugal companies whose accomplishments are cited in the media and elsewhere, notes that top executives have a major influence on a company’s practices, and mergers or changes in management can affect a company’s culture.

While the research drew a distinction between frugality and reactive cost-cutting, it does not establish whether frugal management is superior or whether there are downsides to frugality, says Anderson.

“We’ve made a strong start in showing that frugality is an enduring feature of corporate culture and that frugal companies manage differently.”

More news from UC Davis: http://www.news.ucdavis.edu/