(FORTUNE Magazine) – Anthony J.F. O'Reilly, chief executive of Heinz since 1979, realizes that a company, much like a plastic bottle of ketchup, can be squeezed only so much. Even at Heinz, one of industry's most successful cost cutters, downsizing has its limits. In the Eighties, O'Reilly closed factories, laid off workers, and revved up production lines with enviable results. Gross profit margins swelled from 33% to 39% of sales, and Heinz posted average earnings increases of 15% per year in a decade when the processed-food industry was bedeviled by sluggish growth, merciless competition, and bitter takeover battles. But O'Reilly now realizes that his sharp pencil, while financially successful, alienated workers, interfered with the quality of the products, and left the company still wasting millions of dollars a year on unnecessary work. His solution: Stop squeezing and start changing. Concentrate on quality, not cost. Under the company's total quality management (TQM) effort, introduced two years ago, teams of workers are reexamining virtually everything Heinz does -- from the way it packages French fries to the way it conducts market research. O'Reilly figures that TQM can save the company $250 million over the next three years, mostly by eliminating waste and rework. The Dublin-born O'Reilly, 53, is a former star rugby player who owns six provincial newspapers in England, an outdoor advertising agency in France, and a recently acquired stake in Waterford Wedgwood, the crystal and china maker. He spoke about Heinz's cost and quality control with FORTUNE's Ronald Henkoff:

-- The cost-cutting imperative. We feel the spear of the marketplace in our back. We are extremely conscious of the vulnerability of even our greatest brands. All it takes is a modest shortfall in volume or a modest hiccup in cost control and we become exposed to earnings loss very quickly. We are in a business where, in most sectors, the volume increase is 1% per year. That's pretty chilling.

-- The emphasis on quality. We want to secure our cost reductions from something we never concentrated on before -- the price of nonconformance. That is, the need to get things right the first time. So we've begun to question our entire system, our entire manufacturing processes right across the spectrum. The thing I like about TQM is that it's more Socratic than surgical.

-- The removal of waste. There is an enormous amount of redundancy in every corporation. For example, we've reduced from five to one the number of market research services we use. Market research is an area of exotica, where everyone has a set of numbers that flatters his particular perceptions. We just said: One bible is called for in this case.

-- The focus on service. We've realized that Weight Watchers, which we own, is | not based on cost structures. It's based on service satisfaction. That's an enormous shift for us. When people decide to come to a Weight Watchers class, cost is not their primary concern. The question is how can we, for example, harness the power of the computer to provide them with a complete statement of their goals, their weight loss, and their caloric intake over the last week?

-- The bile factor. Over the years the relentless pressure of cost cutting had created within Heinz a mounting feeling of bile. The notion that when people on high exhort you to cut costs they're talking about cutting your costs, not theirs, bred distaste. There was an ever-increasing feeling of hostility among the employees. Fewer people do more work. Layoffs create a degree of insecurity because workers wonder if 50 people were cut last year and 100 this year, how many will go next year?

-- The empowering of workers. Working in teams creates a great sense of interdependence. Jobs are now substantially more sophisticated, interesting, and exciting. Instead of staring mindlessly at a moving belt of peas or carrots or bottles or whatever, workers are now able, for example, to work the computerized photo-imaging machinery that controls the labeling line. The advent of TQM has greatly elevated the dignity of the worker at Heinz. In the past there was very little consultation with employees. That led to a natural sense of human irritation, a sense that ''at least they could have bloody well asked me about that. After all, I've done this particular job for 20 years.''

-- The future. If we are going to make this company grow to match the expectations of the stock market -- that is 10% to 12% growth a year -- we have to do it by doing better what we do best. Henry J. Heinz, our founder, had a marvelous phrase that I think exactly describes TQM: ''doing common things uncommonly well.'' One hundred twenty years later, I couldn't put it any better myself.