Firms of endearment
How would you like to work for a company which:
- Pays its workers well above industry average salaries, and pays its CEO well below the industry average.
- Spends little or nothing on advertising and promotion because its customers love its products so much they do all the word of mouth promotion the company needs.
- Treats all its stakeholders as equally valuable, and yet produces outstanding financial returns.
Such companies really do exist.
A lot of research into organisations looks at companies which are financially successful and asks the question – how did they do it? Three American academics Raj Sisodia, Jag Sheth and David Wolfe recently took a different approach. They began by identifying companies which people just loved, whether as employees, customers, or partners. Then they asked the question, can such endearing companies also be profitable? The companies they considered, including retailers Costco and Whole Foods, airlines Southwest and JetBlue and outdoor gear suppliers Patagonia and New Balance, were all operating in very tough and competitive industries. Somewhat to their surprise, the researchers found that these companies not only survived, but did extremely well financially. They decided to call them Firms of Endearment.
How on earth could this be? How could paying attention to the needs of all stakeholders possibly result in better, not worse returns for investors? Here's why.
Firms of endearment spend relatively little on recruiting staff because staff turnover is so low. Wegman's Food Markets, regularly listed in the top three companies to work for in America, has a staff turnover of 6%, in an industry where 20% is the norm. This saves a lot of money in recruitment and induction costs. Well remunerated, happy staff really give of their best because they enjoy working for the company so much. By contrast, senior managers generally earn less than their peers in similar industries. But they don't mind, because they enjoy working for the company too.
Firms of endearment spend relatively little on advertising and promotion because they don't need to. Google, Starbucks and Harley Davidson are some of the most well known brands in the world, with little or no advertising. Customers – and employees – love them so much they do all the word of mouth promotion the company needs. This is not only cheap, but it's devastatingly effective. What's more likely to influence you – an expensive TV advertisement or a friend's recommendation?
Relationships based on liking, trust and respect tend to be less costly to maintain than relationships based on dislike and mistrust. If you want to open a store in a new community, it's a lot cheaper to do it if the community wants you there than if you have to fight the local campaigns that are trying to keep you away. When Wal-Mart tries to open a new store, it often finds a vigorous local campaign to keep it away. Wegman's Food Markets, by contrast, has a long list of local communities actively requesting it to open a store in their town.
These competitive advantages can be summed up in a single word – culture.
There is of course nothing new about companies placing the needs of stakeholders – especially employees – above the need for profit. The Co-operative Group and The John Lewis Partnership in the UK are two obvious examples. What is new is the current business environment. Organisations and individuals which are purely profit driven haven't had such a good press recently. Is the time now ripe for a new philosophy of business, where employees, customers, partners and community matter just as much as shareholders?