The Culture of Costco

I hate feeling like I am just on a bandwagon and I generally like to move in the opposite direction of the crowd but Costco is one company that isn't a fad, rather has consistently produced results year after year.  Yes, it may be a darling of wall street but there is a reason for its impressive performance and I would like to focus on the cultural aspects of this performance in this post.

Once again a BusinessWeek article is the focus of the content for this post and their recent article entitled "How Cheap is Craig Jelinek?" - focused on the CEO of Costco.  As you read through notice the following ways that the Costco culture is one of corporate bravery.

1. Employee culture - pay nearly 2 x industry average.  No massive downsizings during the recession has led to some of the most engaged employees in retail.  Result is employees have less employment anxiety.  Another example of this is the health benefits provided to their employees:

Costco workers with [health] coverage pay premiums that amount to less than 10 percent of the overall cost of their plans. It treats its employees well in the belief that a happier work environment will result in a more profitable company. “I just think people need to make a living wage with health benefits,” says Jelinek. “It also puts more money back into the economy and creates a healthier country. It’s really that simple.”  In February, Jelinek set Costco’s convictions in ink, writing a public letter at the behest of Nader, urging Congress to increase the federal minimum wage for the first time since 2009. “We know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty,” he wrote.

2. Costco doesn't have teams of public relations and corporate attorneys like many corporations do when they reflect their corporate fears of lawsuits, bad press, and the sometimes negative consequences of someone grinding an axe.

Costco has no public-relations staff. Jelinek conducts an interview with a journalist alone, an anomaly at major corporations, and afterward Costco Chief Financial Officer Richard Galanti calls to inquire whether the boss inadvertently said anything negative. Sinegal returns a reporter’s phone call on a Saturday morning, leaving his cell number.
In February, Tiffany (TIF) filed a multimillion-dollar trademark infringement suit against Costco alleging it improperly labeled merchandise as “Tiffany engagement rings.” Galanti calls it “an honest mistake” and says they should have been labeled “Tiffany-style.” The suit is pending.

labeling something an honest mistake would be a major no-no in a company driven by legal fear as it implies some level of culpability.

3. They are not overly driven by fear of their competition..... although the BW article include wariness towards Wal-Mart's overall size and Amazon's web capabilities but the focus of those comments were more around concerns about consumers' shifting habits.

“They are buying and selling more olive oil, more cranberry juice, more throw rugs than just about anybody,” says David Schick, an analyst at Stifel Nicolaus. And that allows Costco to get bulk discounts from its suppliers, often setting the industry’s lowest price. Even Amazon can’t beat Costco’s prices, which means that “showrooming,” or browsing in stores but buying online for the better price, isn’t much of a concern for Jelinek.

It is because they know who they are and how they best compete in the marketplace.  This extends to their vendor relationships as well.  Even though a product would be great for their customers - if the vendor places restrictions on the sale that do not match how they go to market they have a stern response:

Costco is sensitive to any perceived slights from its vendors. It canceled a relationship with Apple (AAPL) in 2010 because the company wouldn’t sell it anything other than the iPod, and wouldn’t allow it to sell any Apple products online. It has also at times curtailed its sale of products from Sony (SNE) andPanasonic (6752:JP) over such issues.

4. They are not driven by investor fears as demonstrated by this excerpt from the BW article regarding wage increases during the Great Recession and investor pressure to do otherwise.  They have a long-term perspective and are focused on doing the right thing for the employees even at a detriment in the short-term.

Costco went public in 1985, and over the years, Wall Street repeatedly asked it to reduce wages and health benefits. Sinegal instead boosted them every three years.
As the economic downturn worsened in the fall of 2009, Costco, like every other retailer, started seeing declines in same-store sales. Macy’s (M), Best Buy (BBY),Home Depot (HD), and Office Depot (ODP) were resorting to layoffs and wage cuts, but Sinegal approved a $1.50-an-hour wage increase for hourly employees, spread out over three years. “The first thing out of Jim’s mouth was, ‘This economy is bad. We should be figuring out how to give them more, not less,’ ” says CFO Galanti, who adds that Sinegal’s decision to parcel out the raise in three annual 50-cent increments, instead of more gradually, cost an extra $20 million. The founder’s stubborn resolve remains a point of pride. “Could Costco make more money if the average wage was two or three dollars lower?” asks Galanti. “The answer is yes. But we’re not going to do it.”

Why is culture so important?  Because all of these examples where decision making wasn't being done out of fear - rather out of conviction and knowing who they were as a corporation occurred during and after a CEO change from the original founder.  Organizations who do not have a full appreciation for who they are quickly change their behaviour once the previous leader has moved on and that has not occurred with Craig Jelinek (pictured below - right).

Tesla's Elon Musk

This week's profile in corporate bravery is Elon Musk of Tesla motors.  If you haven't heard of him by now you must be living under a rock.  He is an eccentric innovator - most recently making headlines for his hyperloop idea and also known for his space company and his intergalactic aspirations.  I know, it sounds a bit like Sheldon from the Big Bang Theory but instead he is a billionaire with a really good business strategy in the automotive space.

Tesla has been on a roll recently and the stock price and media coverage have followed.  Including the basis for this post - the recent BusinessWeek article on Tesla entitled "Why Everybody Loves Tesla".
I am not going to focus on why everybody loves them though and instead focus on all the 'brave' things they are doing as a business - led by Elon who dares to do things differently.  To underscore this philosophy the article includes this quote from Consumer Reports after giving their Model S a 99 out of 100 rating:

"It’s what Marty McFly might have brought back in place of his DeLorean in Back to the Future”

Tesla's business strategy has focused on all the things that prevent people from buying not only a new car but also an electric car including:

• Range of an electric charge and re-charging - by pushing the envelope on innovation of batteries and creating an entire network of refueling stations.

"Higher-end versions of the Model S can go up to 300 miles on a charge, which has helped separate Tesla from rival vehicles such as the Nissan Leaf, which run about 75 miles before needing more juice. Musk has hinted that Tesla has a 500-mile battery pack in the works. At the company’s solar-powered Supercharger stations, Tesla owners can replenish about 200 miles of range in 20 minutes for free. (Most electric cars take hours to recharge.) Or customers can opt for the battery swap, which will cost about what they’d pay for a tank of gas, and be back on the road in 90 seconds." 

• Integrating software and hardware for a seamless driver experience.

"Even the flaws of the Model S seem to resonate with geeks. Early versions of the outside handles malfunctioned—they sometimes wouldn’t extend out of the door—and the windshield wipers seemed to have a mind of their own. Tesla fixed those and other problems with a software upgrade delivered via the car’s high-speed wireless connection. An engineering leader at Ford says he’s envious of what Tesla has achieved by starting from scratch and interweaving software on the touchscreen with the vehicle’s internal systems. “The level of integration that the software has into the rest of the Model S is really impressive,” he says."

• Creating a direct to consumer strategy for car sales

"Unlike every other major car company, Tesla has also kept its retail business in-house. It’s trying the Apple model of placing its own stores in high-end malls and shopping centers instead of relying on dealer franchises. Salespeople, who don’t receive commissions, help buyers configure their cars on giant touch screens." 

• An innovative insurance program that guarantees the value of the vehicle over the long-term
• Maintenance program that includes pickup service and only minimal necessary maintenance

These are all ways that Tesla didn't listen to conventional wisdom; they weren't afraid of perceived advantages that the large, legacy car makers had and they weren't afraid of challenges they would encounter from various stakeholders that would have their very business models disrupted.  As the BusinessWeek article points out they will continue to see challenges but it isn't likely to stop them from continuing to push a business model that they believe is likely to be successful in the long-term.

There’s also the possibility that Tesla is overdoing it with the high-tech whiz-bang. The 17-inch touchscreen, for example, is equipped with a Web browser. Distracted driving laws vary by state, but obviously no one behind the wheel should type out Internet searches in a moving vehicle. There’s no stopping determined drivers from trying. Tesla’s in-car technology “is almost too good,” says Munley. “Detroit is leery about it, and would never go that way for fear of safety and lawsuits. We’re all waiting to see if there are accidents.” Meanwhile, car dealers around the country see Tesla’s direct-to-consumer sales as a violation of laws that separate car manufacturing from selling, and are engaged in a statehouse-by-statehouse lobbying effort to block the company from opening its own stores. 

Ursula Burns - Xerox CEO

Meet Ursula Burns, the current CEO at Xerox.  She was the first African American woman to head a Fortune 500 company and the first woman CEO to succeed a woman CEO.

While those accomplishments alone would be strong enough to qualify as a trailblazer, there are many other things about her ascension to Xerox that buttress that label.  I was introduced to her recently by the BusinessWeek issue on interviews.  During the interview she had a couple great quotes that hit at a couple of factors that influence the level of fear in an organization and influences the culture of corporate bravery among managers and leaders.

The first is individuality which she embraces and nurtures.  On that aspect she has this to say about how that aspect of corporate culture at Xerox helped her become the leader she is today,

Q: You’ve said Xerox (XRX) was a company where you could grow into yourself. What does that mean?A: They didn’t try to spend a lot of time trying to make me into something else—kind of fit into whatever would have been a normal hire. When I first entered the company, they just thought I was smart and said, “You go do some stuff.” And they kept giving me things to do. 

She continues in the interview with a great response to a question on failure,

Q: And you’ve said it takes a long time to recover from mistakes.A: We’re going to make mistakes. We just try to make mistakes where you can make them fast, so you’re not five years into the damn thing and realize, “Oh my God, that was a bad move. And we just threw billions of dollars after it.” Fail fast and make sure that you fail early. So the challenge is this whole balance.

While they may not embrace mistakes they understand that mistakes are a key part of the trial and error process that creates breakthrough products, services, and business models.  It appears to be a culture that doesn't punish mistakes and stifle creativity.

Blackrock's CEO on Fear in the Global Economy

Meet Larry Fink, CEO of Blackrock - one of the largest asset managers in the world.  While not exactly the bravest sounding name he drops a few quotes in the most recent issue of BusinessWeek that shows he knows bravery in the face of fear.

When asked about longer life expectancy and the impact of living an average extra ten years and its impact on public policy, public pensions, retirement saving, and working longer and how the public's perception of retirement in the face of the longer life expectancy he had this to say.

Q: Are fear and alarm the best way to fix this problem?

A: No. It’s talking about the blessing of longevity. I mean, I’m surprised at how much we spend and read about having better health, whether it’s more exercise, and whether it’s taking omega-3 pills, eating more healthy, having preventive health care.

Whereas the financial services community feeds off of personal fear, Fink runs the other direction with the question and challenges everyone to focus on the blessing of a longer life.  He follows it up with this Q and A:

What would you say is the biggest enemy of adequate retirement savings right now?
One of the key elements of human behavior is, humans have a greater fear of loss than enjoyment of success. All the academic studies will show you that the fear of loss of capital is far greater than the enjoyment of gains. You have seen most individual investors underinvest, because they’re so frightened of losing money.

He continues the theme by admonishing us to let go of fear and begin to embrace the possibility of success.  Blackrock isn't going to sell fear - they have a very long-term perspective as shown by his last comment.

You manage $4 trillion worth of assets, but you’re not Wall Street?
What Wall Street is, they’re market makers. Wall Street’s business model is making money on velocity of money. They’re a click industry. That’s what Wall Street is. They make a lot of money when there’s a lot of turnover. And they make a lot of money when that velocity is fast. The investment management business, we don’t make money on clicks. Actually, our returns degrade when we buy and sell a lot because we pay commissions to Wall Street. So our job is long periods of holding. 

TedX Talk on Fear by Karen Thompson

I ran across this TedX Talk by Karen Thompson recently and I wanted to share it with you.  Karen Thompson is the author of 2012 book The Age of Miracles, a young girl and her family awake one morning to discover that the rotation of the Earth has suddenly begun to slow, stretching the length of the 24-hour day and throwing the natural world into disarray.




Karen's talk focuses on a story of American sailors with a troubled boat that eventually became the basis for the story Moby Dick.  With a broken boat in a remote part of the Pacific Ocean they are faced with a choice between 3 options to survive.  The first is take the closest route to land and end-up somewhere near modern day Tahiti where they have heard stories of cannibals.  The second option is a more intermediate route to modern day Hawaii which in the current season will face certain storms and rough seas.  The third is the longest route towards South America where it is certain they will run out of food and face likely starvation.

Like any good story, her story of the men of the Essex can teach us some important lessons about the impact of fear in a corporate context - specifically its impact on decision making.  The basic premise of her talk boils down to three things:

1. Fear can be profound and imaginative and that some of the best minds in history were haunted by intense fears
2. We should think about fears as stories with characters and plots that make us think of the future
3. By thinking of fears in this way we can apply a filter of better reason to our fears and improve our decision making

While not necessarily wrong, Karen points out the benefits of fears but almost seems to glorify fears as a motivator above the negative realities of our fears.  She references a study of fears in entrepreneurs and glorifies how they study fears and put plans in place for the fears which they think are most likely to come true.  But how much time, effort, resources, and emotional energy go into this process?  These are resources that could have been used to move their business forward and in some cases could even be preventing them from being successful, much like the men of the Essex.

She mentions that sometimes fears do come true but they are statistical anomalies.  Take a look at the picture below that outlines the chances of dying in the following ways.  Notice the paradox that exists between the chances of dying in a horrific way that fuels our fears versus those that are the result of everyday habits.

Much like the men of the Essex, corporations must pay attention to the more subtle and realistic problems facing them and that starts with the components of culture that create a fear mentality so that when faced with a possibly life threatening problem (a manifestation of a fear) you are not distracted by all the other possibilities (that are oftentimes more remote in likelihood) and you stay focused on the task at hand for the best possible outcome.

The Cargill Approach to Fear

This Cargill article from Fortune magazine is an oldie but a goodie and focuses on a few elements of the Cargill culture that keeps them thinking about the long-term and away from fear-based decision making.

First about their organizational structure - they are still a family-controlled private company.  It is not led by a family member and they have nearly equal 1/3 representation on the board which keeps the family from running amok:

Cargill introduced a limited employee stock ownership plan in the '90s that allowed some family members to cash out. However, roughly 100 descendants of the founders still own around 90% of the stock, worth some $52 billion as of the last official tally. Generally, they've been content to plow profits back into the business and watch the value of their asset grow. Dividends are calculated on a rolling two-year cycle and paid at a rate that Page describes as de minimis. "The capital's not only private," he says, "it's patient and permanent."

I love the CEO's comment at the end of this quote about the capital being patient and permanent.  A common theme for those organizations that are brave in the face of fear.

So how does this patient capital have an impact on business strategy?

"As far as how our corporate strategy works," says Conway, "we don't say, 'We think the world's going to look like this, let's define our strategy for that world.' We say, 'We don't know what the world's going to look like. We need a strategy or a set of strategies that can be successful almost irrespective of what the world looks like.'"

The article goes on to describe how this has played out with a few examples including taking a leading role in converting Vietnam's agriculture economy and introducing new cash crops that can grow well in that environment.  This effort not only provided Vietnam with a new export option (a byproduct was taking them from a largely net importer to primarily net exporter) but solved a big issue for the world supply chain for cocoa.

How does the play out in the face of adversity?

As mighty as Cargill may be, it is not immune to setbacks. In fact, the company's fiscal 2012 is off to a dismal start. Revenues rose 34% in the quarter ended Aug. 31, but earnings were down 66%. That after earnings rose more than 60% in the first quarter of fiscal 2011.  Page blames a perfect storm of unforeseen events: spring flooding in the Midwest (Cargill spent $20 million to prevent the Missouri River from washing out its corn-milling plant in Blair, Neb.); the salmonella outbreak in its turkey plant, which led to a partial shutdown and layoffs ("instead of a business that was making money, we have one absorbing the costs of the recall"); a significant wrong bet on a single, unnamed commodity; a "risk-on, risk-off" market environment that otherwise neutralized Cargill's vaunted trading expertise; and, above all, the global recovery that wasn't. "We underestimated the degree to which the world was gonna back up," says Page.  Remarkably, though, Cargill didn't slow down. The company maintained what Page calls a "big acquisition agenda,"

Even with a culture that eschews fear it doesn't mean that their management team is immune from fear-based decision making or contributing other factors to a culture of fear:

Page may not be under pressure from the family shareholders, but that doesn't mean that he is unworried about the future. The real threat to Cargill's long-term prosperity, Page says, is that forces beyond the company's control will infringe on its freedom to operate across markets. Cargill is clearly concerned with the way the global conversation is bending on food security. "You don't want to end up with policies that are counterproductive to feeding everyone," says Page, "and we don't want to end up with a business model that doesn't have any freedom to operate."

Nancy Dubuc - A&E Networks

Our first business leader profile comes from the June 20th issue of BusinessWeek chronicling the amazing business success of A+E Networks.  It is a great read on a business that has had fantastic success the past few years but also profiles Nancy Dubuc, the CEO of A+E Networks, parent company of A&E, History Channel, and Lifetime.  The article gives us some great quotes about the place fear has in the corporate culture of A+E as well as the role fear has played in Nancy's success:

While on maternity leave in 2007, Dubuc got a call from her mentor, Abbe Raven, then-CEO of A+E Networks. Raven asked Dubuc to return to History to run the channel. Turning around a struggling cable brand takes a willingness to experiment and a capacity to survive public flops and inevitable criticism. “Nancy is willing to take chances,” Raven says. “You either have that or you don’t.”  Dubuc says her fearlessness is a result of the years she’d spent at A+E, where executives could take programming risks without worrying about losing their jobs if a new series tanked. It was timidity, she says, that was frowned upon. 

Additionally, there is a great quote about what makes A+E successful when compared to the industry and the role fear plays in that success:

When Vikings was in production, he says, Dubuc did what too few TV executives are willing to do—she left him alone. “Normally on a show, the networks send a lot of executives to try and control, spy on, and influence what’s being made,” Hirst says. “There was never a question about that with Nancy.” He adds, “The industry is driven by fear. People don’t want to fail. They have huge ambitions, but they’re afraid that the show won’t work. That’s why they start interfering. It’s their fear that starts screwing everything up. By not being afraid, by trusting people, you get the best work back. Nancy isn’t afraid of anything.”