Chapter 3: The Corporation, The Real American Idol Part 9
In the previous post, I argued that companies that incorporate elements of people-first values into their culture have a competitive advantage. In his book The Loyalty Effect, Frederick Reichheld, head of Bain Consulting’s loyalty practice, and inventor of the Net Promoter Score, has built a career showing that businesses that put people first have better financial returns, at least in certain industries. Reishheld argues that often a loyalty culture, i.e. one that values long term relationships with employees, customers, and investors is a productive business strategy. For example, he shows that State Farm Insurance has an advantage over its competitors because it has found ways to retain agents longer, and these older agents bring in more business[i].
Ironically (given the current controversy), The Loyalty Effect paints a very favorable view of Chick-Fil-A for its people-first values, especially with regard to the way it compensates managers and employees in a way that encourages low-turnover. He goes so far as to say that Chick-Fil-A’s takes a “Golden Rule approach to business.” He calls the founding CEO Truett Cathy (father of current CEO Dan Cathy) “so earnest a Christian that all Chick Fil A stores are closed on Sundays which makes their financial success all the more impressive.[ii]” I agree with Reishheld’s further observation, that being closed may be an advantage for attracting talent that doesn’t want to work 7 days a week. I would add that because the Sunday closure is a global company rule, no one person can gain competitive advantage for putting in the extra hours on a Sunday.
Reishheld argues that the financial advantages of a loyalty culture are not universal – it depends very much on the type of industry. “Commodity suppliers like oil companies and certain high-tech businesses where technological breakthroughs can overwhelm customer relationships are examples of companies were loyalty economics can make a difference, but probably not a decisive difference.[iii]”
This resonates with me big time. In the genomics industry, where I worked, the dollars followed the latest technology, and seemed to be largely independent of how well those companies treated either their customers or employees. In fact, I think the technology superiority bred a certain arrogance, which came back to haunt the companies when the next technology came down the road.
[i] The Loyalty Effect: the Hidden Force Behind Growth, Profits, and Lasting Value. By Frederick Reichheld. Harvard business School Press (1996) p. 127-128.
[ii] The Loyalty Effect: the Hidden Force Behind Growth, Profits, and Lasting Value. By Frederick Reichheld. Harvard business School Press (1996) p. 111 It is unfortunate that Cathy’s people-first values have a common shortcoming. In his mind, they seem to apply only to certain people.
[iii] The Loyalty Effect: the Hidden Force Behind Growth, Profits, and Lasting Value. By Frederick Reichheld. Harvard business School Press (1996) p. 306