by Matt Shlosberg
In the age of low cost airlines, price competitive retailers, and nearly free telecommunications, it seems like cost cutting is the game. In fact, cost cutting is the game in every industry. It plays an especially important role in commodity markets, where price is the main differentiator between competitive offerings. But to consumers price isn’t always as important as it seems. In fact, research shows that the majority of customers make buying decisions based on their feelings, not based on logic. Thus, customers are attracted to Apple’s eye-catching product design, a chic store design, passionate sales people, and an extremely charismatic Apple CEO Steve Jobs. When they buy Apple’s products, they believe they buy innovation, a piece of jewelry required by popular culture, and membership to an exclusive club. Customers are willing to pay a 30% price premium for Apple products, even if competitors are able to match Apple’s product functionality.
Similarly, while customers are attracted to low cost airlines, price isn’t the only consideration. Sure, the world of airlines is all about low prices. Customers would rather give up free drinks, peanuts, and extra luggage, as long as they can save money. But one airline manages to offer all these extras, play the low cost game and still be the market winner. This airline became the market leader based on features other than low price. It has an unmatchable level of customer service that created millions of loyal customers. It’s the only airline that delivered quarter after quarter profitability until the recession of 2009. It was the only airline profitable right after terrorist attacks on September 11th. This airline is, of course, Southwest. How did Southwest achieve this? A dozen or so competitors and researches from top universities visited Southwest to study its model. Dozens of articles were published. Each one talked about tremendous cost cutting and efficiency. Not a single one talked about the real answer – the culture of Southwest Airlines.
James Parker, a former CEO of Southwest Airlines, told me a secret of his employer’s success. He said: “We put the right people in the right positions. We take care of our employees first, customers second. We tell our employees to do the right thing. We give them the tools to execute. Then we get out of their way.” While Southwest does spend a lot of time on cost cutting, it spends even more time on building a culture of people wanting to deliver the best customer service in business. The real secret sauce of Southwest is its culture. The Southwest culture acts as a driving force behind the goodness this company brings to lives of its customers. It’s a magnet that creates and keeps customers. Our research shows that it’s often possible to find tickets at prices lower than that of Southwest. Yet, Southwest manages to keep those customers coming.
By focusing on culture, Southwest is able to use it as its competitive advantage. While it’s easy for competitors to duplicate some features, like low cost, free peanuts, and extra legroom, it’s almost impossible to duplicate the cultural aspect of the firm. But it’s culture that makes a real difference. It’s culture that drives employees to deliver exceptional customer service and create customers for life.
| The first time I flew Southwest, I was shocked to hear what the flight attendant said on the intercom. While making his usual FAA required announcement about not smoking on the airplane, he said: “Smoking in the lavatory is prohibited and carries a $5,000 fine. If you had an extra $5,000, you probably wouldn’t be flying Southwest.” While I found this comment funny, I was wondering what Southwest management thought about it. Later I found out that statements like this are encouraged. They create customers for life! |
There are many other examples of companies using culture as their competitive advantage. Google, 3M, GE, Enterprise Rent-A-Car, W.L. Gore, and Toyota are some of the well known examples.
Google and 3M deliver innovative solutions by encouraging people to experiment. Both companies allow employees to spend 20% of their time on projects of their choice. Most of these projects carry a high degree of risk and promise no financial returns. But some projects deliver a high return on investment, covering the cost of all the failed projects. This culture of innovation allows both firms to design more innovative products than any of their competitors. Of course both firms invest heavily in their workforce. Google was named one of the 100 best companies to work for by Fortune magazine several years in a row. While both Google and 3M have many competitive advantages that can be replicated, it’s their cultures that help them win against competitors.
Enterprise Rent-A-Car is another great example. Unlike other car rental firms, Enterprise delivers an unmatched level of customer service. While some consumers commoditize the car rental business, others are willing to pay a premium, just so that they can rent their cars from Enterprise. The secret sauce is in the culture of Enterprise. Enterprise cultivated a culture of leaders/owners that take care of customers the way they would take care of themselves and their families. While competitors deal with a high turnover of low skilled, hourly staff managed by a whip, Enterprise enjoys high performance delivered by extremely motivated college graduates empowered to run local branches as if they were running their own businesses. No matter the price or the features, Enterprise will continue on the path of success due to its highly competitive culture.
Toyota’s products are famous for quality. Customer service isn’t seen much when you buy a Toyota, other than communicating with a non-Toyota owned car dealership. But the level of quality delivered by Toyota beats that of most competitors. While competitors study Toyota and constantly duplicate its quality management principles, they can’t duplicate Toyota’s culture. But it’s the culture that really makes a difference. It’s “The Toyota Way”, as they call it internally, that gets customers to buy Toyota’s cars. But Toyota doesn’t just make quality cars. Its culture empowers employees, stretches them, inspires imagination, and communicates a great vision. The Tyotans know that some goals will take years to achieve, but the culture supports the process. For example, when talking about innovations in alternative energy, Akio Toyoda, the CEO of Toyota, famously stated his company’s clearly defined goal: To develop a car that can cross the US from east coast to west on just one tank of gas. Other examples include an improved level of energy efficiency, safety, and lower cost for each new car produced. These stretch goals would be impossible to achieve without a culture of innovation, performance, and quality. While competitors regard many of these goals as fairy tales, Toyota quietly meets each one of them. It encourages its people to experiment and come up with new ideas that challenge status quo. Toyota is famous for empowering each assembly worker push a button and stop the entire conveyor if he or she sees a problem with a car. Most competitors find this approach to quality to be expensive. But Toyota found this approach to pay off. First, it created many highly motivated and empowered employees that worked magic and created many quality products for Toyota. Second, Toyota found that each customer that got dissatisfied by getting a low quality car created a dozen or so other customers who will never buy a Toyota. And if you include the revenue Toyota will receive by selling additional cars over the customer’s lifetime, it almost can’t afford to stop a conveyor belt.
Unlike competitors, Toyota doesn’t fight for market share. It doesn’t want to be the biggest. It just wants to make high quality products. This customer focus is deeply embedded in the culture and cannot be duplicated by competition. No matter how much General Motors and Ford try, Toyota will continue taking their business away.
General Electric represents another great example of a company that uses culture as its competitive advantage. GE’s strategy is to be #1 or #2 in every business. To achieve this, it needs the best people. So, GE went out and built a state of the art leadership development program that builds exceptional leaders at all levels. This program is so effective that GE always promotes people from within and never hires managers from the outside. These managers live and breathe the GE culture, its values, knowledge, and goals. This culture allows for a high level of operating effectiveness, which is one of GE’s competitive advantages.
W.L. Gore represents a rather interesting illustration of the case in point. It’s fairly different culture allows the firm to create thousands of highly competitive but completely unrelated products. From guitar strings to pharmaceuticals, from sealants to fabrics, from batteries to outerwear, W.L. Gore is able to deliver products that are “of the highest quality and revolutionary in their effect”. Competitors find it hard to battle against W.L. Gore. In order to beat the competitor, you have to understand it first. But how do you understand a company whose employees have no titles, work in small teams, are allowed to work on anything they want, have no processes or procedures, no internal communications, and very few rules? How do you understand a competitor that advocates chaos, has no org charts, no chains of command, and has employees accountable to each other instead of their superiors? Competitors get confused by the total anarchy of W.L. Gore, but this anarchy is what makes it unique. This approach to management made W.L. Gore one of Fortune magazine’s top 100 companies to work for. It also made it one of the most aggressive enterprises in every space it competes in.
Clearly, culture can make an enormous difference in a highly competitive environment. While typical organizations lead with brains of their leaders, competitive firms empower all employees in the organization to use their heads. They don’t lead by fear and intimidation. They don’t assume that people are motivated by money. They don’t tell their employees what to do. Instead, they communicate a clear vision, define a mission, give employees tools to execute, coach them, and get out of their ways. These organizations turn into powerful machines that move at the speed of thought, while destroying their rivals.
So, how exactly does one create such a culture? There are several facets:
Sense of ownership. Employees can go out of their ways and do great things if they feel the sense of ownership. The key here is feeling it. Some employers try to force a false sense of ownership by demanding it from employees. But sense is a feeling. It can’t be forced. Instead of forcing it, employers at these competitive organizations communicate to their employees in a way that creates a real sense of ownership. This includes various motivation and empowerment techniques, coaching, rewards, and often real ownership in the company in the form of stock or profit distribution.
Awareness. Employees in highly competitive cultures are well aware of their surroundings. This includes awareness of themselves, awareness of their co-workers, subordinates, and superiors, awareness of the effect of their own actions on other people, awareness of customers and their needs, awareness of competition, and awareness of their mission and a path to success. While many firms believe that their employees already possess a great sense of awareness, companies with great cultures realize that the level of awareness has no limits and there are always opportunities for improvement. In fact, people with a great sense of awareness realize that their level of awareness is low and they constantly work to improve it.
Stretch. Employees in highly competitive cultures set stretch goals. They constantly want to be better but they always set goals higher than employees at competitive firms. These goals allow them to create products that competitors couldn’t come up with, keep costs low, and maintain happy customers.
Constant change. Employees in highly competitive cultures don’t resist change. They embrace it and use it as a way to improve. They know that change is a path to winning; it’s necessary but not evil.
Strong leadership and employee development. It doesn’t matter what managers think. What matters is what employees think. Just like in all other companies, employees in highly competitive cultures want to be treated fairly. The difference is that in highly competitive cultures employers go out of their ways to show their loyalty and commitment to employees. They are committed to their employees as much, if not more, as they are committed to their customers. Employees are encouraged to do what they think is right, to take risks, and to innovate. They aren’t punished for failures. They learn from failures and get energized even more by them. Employees believe that their company takes care of them, loves them, and treats them the way they deserve to be treated. Employers live up to these expectations. They build people, their careers, and their lives. They offer best in class benefits, such as free childcare, paid maternity leave, gourmet lunches, free gym memberships, etc. They have high degrees of integrity. They always deliver on every promise they make. Employees always know where they stand and what’s expected of them. They know their goals and how they can get there. They trust and believe in their leaders.
Effective communications. Employees in highly competitive cultures don’t communicate like normal human beings. That’s right! Normal humans are afraid of candor, arguments, or anything else that can create conflicts. But that’s not the case in highly competitive cultures. Candor is required; arguments are considered healthy when delivered with respect; conflict initiates innovation. Employees know how to communicate effectively, while stripping themselves of human sins.
Although not required, owners of highly competitive cultures often create employment brands. Potential candidates are attracted to these employers just like consumers are attracted to brands and seek jobs with these highly admired companies. People want to be associated with these firms. Employer brands are so strong that they create large potential candidate pools, helping employers hire better people. According to an HR leader from W.L. Gore, due to the high number of job applicants, it’s harder to get a job at W.L. Gore than it is to get to Harvard.
While using culture as a competitive advantage makes sense, most employers lack one key element required to implement it – awareness. Research shows that only 15% of employers are aware enough of their culture to make this transition. In fact, most employers believe they already posses most of the six facets of a highly competitive culture described above. If you are one of them, ask yourself this question – When your customer has a choice between buying your product and that of your competitor, do they pick you because of your culture? And do they pick you at all? Even if they do, remember that employers in highly competitive cultures realize that there’s always room for improvement. The key to success is becoming aware of your situation, settings stretch goals, mapping the plan, and executing. The road to success has no end. Just keep going…
About Matt Shlosberg
Matt Shlosberg is one of the most sought after management consultants. He has assisted dozens of multinational corporations and governments with solving complex business problems. Matt is the author of several books and is the leading authority on strategy and organization. His latest book is called “Firing and Laying Off”.