(In summary, this article is about the importance of corporate philosophy and an insight into "holacracy").
1.0 Definition
According to MIT Sloan, Corporate Philosophy, “refers to the act of defining the relationship between the firm and its stakeholders”. A corporate philosophy is a set of rational principles that govern a company’s relationship with its stakeholders (employees, suppliers, distributors, partners, shareholders and customers).
Contrary to the era of Agricultural revolution where the factors of production were land and labor, or the industrial revolution where the cutting edge factor of production was machinery, in today’s knowledge based economy, information is the cutting edge of production.
In mature markets, competition is stiff and innovation at the peak, however some companies succeed and others fail, despite offering similar services and products.
In order for companies to clearly position themselves in the market, they set up a succinct corporate philosophy. It is this information about their philosophy that spreads to its stakeholders and ends up shaping everything the company does.
“Six out of ten large U.S firms today have developed a specific statement of values, otherwise referred to as a philosophy, credo, vision, aspiration, mission or set of principles.” (Gerald E. Ledford)
Fantastic corporate philosophies are usually summarized in slogans or phrases of a 3 to 4 words. For example Canon Inc.'s “Kyosei” that refers to living and working together for the common good and Fujitsu Group's “Fujitsu Way” philosophies.
Guidelines of creating a corporate philosophy (Source: Ethical Leadership Group)
- Keep it in context; It should relate to mission and ethics
- Don’t focus only on profits; instead focus on “what do you stand for?”
- Practice what you preach
- Keep it simple; retention rate, “number of tenets should be less than 3 words”
- Hire people who match the culture
- Teach new hires about company history
Corporate philosophy of a company has importance and influence with regards to each of the stakeholders of a company;
Employees:
According to McKinsey, having a good corporate culture leads to better decision making, greater flexibility and high morale among employees (Mckinsey 2003).
Ability to attract high talented employees: A corporate philosophy usually entails a given company’s work rules and regulation like vacations and extra services offered to employees like gym, yoga or beer bashes. Most talented employees prefer companies with the best corporate philosophy that greatly values its employees’ life and the world. As a result, online job vacancy listings companies like Linkedin.com and Glassdoor.com, quickly reveal which companies that offers the best employee environment. Google continues to rank number one best work place culture on Forbes mostly due to its “You can be serious without a suit” and more philosophy.
Teamwork and Innovation: Companies with well-articulated and attractive corporate philosophies are able to create a sense of ownership, confidence and collaboration among the employees leading to teamwork and innovation. Companies with vitalized cultures have a stronger new product development and R&D organizations, project teams are more frequently used and small group activities are more popular (Toyohiro Kono and Stewart Clegg).
Ability to attract high talented employees: A corporate philosophy usually entails a given company’s work rules and regulation like vacations and extra services offered to employees like gym, yoga or beer bashes. Most talented employees prefer companies with the best corporate philosophy that greatly values its employees’ life and the world. As a result, online job vacancy listings companies like Linkedin.com and Glassdoor.com, quickly reveal which companies that offers the best employee environment. Google continues to rank number one best work place culture on Forbes mostly due to its “You can be serious without a suit” and more philosophy.
Teamwork and Innovation: Companies with well-articulated and attractive corporate philosophies are able to create a sense of ownership, confidence and collaboration among the employees leading to teamwork and innovation. Companies with vitalized cultures have a stronger new product development and R&D organizations, project teams are more frequently used and small group activities are more popular (Toyohiro Kono and Stewart Clegg).
Distributors and Suppliers:
A good corporate philosophy must succinctly demonstrate integrity to all its stakeholders. Given the availability of several similar services and products offered by different companies, distributors (resellers) and suppliers prefer partnering with companies whom they share values. In an increasingly competitive market, distributors and suppliers are looking for companies that hold on to a given set of values like environmental friendliness or social business enterprise oriented. (Philip Kotler).
Reduced marketing costs: Distributors also prefer companies that have a strong corporate philosophy because with it, comes a strong brand that drives the word of mouth. Thus distributors prefer to go with a company whose products or services need less marketing due to its consumers spreading the products through word of mouth. (Philip Kotler).
Government:
Companies that have well defined and practiced corporate philosophies are able to attract government’s incentives in forms of taxes and subsidies. For example, Tesla Inc received a total of 4.6Billion subsidies (Los Angeles Times, 2015) from the US government due to its corporate philosophy that open sources battery technology and believes in zero automobile and home emissions.
Consumers:
Sustainability: Due to the notion that the earth’s natural resources may come to an end. And the fact that emission of carbon depletes ozone layer, consumers are increasing being informed and prefer companies with corporate philosophy that has a strong sense of sustainability. (Philip Kotler).
Trust: According to MIT Sloan Management Review corporate culture fosters trust, innovation and capacity for transformational change. Today, there is a myriad of companies providing similar services, products or both, leading to stiff competitions. To lower prices, some companies have had a tendency to use non ethical means like child labor, forced labor, testing of products on animals and unhygienic processes. Given that consumers of the information age are more informed, consumers now prefer companies that have a strong commitment to a given corporate philosophy. For example, The Body Shop undoubtedly won a publicity case of a journalist who attempted to tarnish its brand, simply because Body Shop advocated for "no testing of products on to animals" way before the European countries made it a law. (Philip Kotler).
Shareholders:
Volatility of stock markets has gradually increased, partly due to the rise of conglomerates like chain stores that replaced small sole proprietor businesses. Restaurants, Clinics, Transport and Shops were once only owned by single individuals. For example McDonald and Starbuck have outcompeted sole proprietor run snacks and coffee shops respectively. Today, in the knowledge economy, capital is consolidated and wholesomely invested and managed by financial experts. The majority of middle income earners and people are at the bottom of the pyramid thus have "stock market" as their main and avid investment opportunity. The financial expertise institutions have engaged in malpractices for example the fall Lehman Brothers and AIG managers' claim of bonuses from a government bailout fund. The public is shifting focus not just to, financial institutions that earn returns, but to financial institutions that have a strong corporate philosophy. For example, Berkshire Hathaway's value investing philosophy has kept Warren Buffet and Charles Munger the most trusted investors for over 50years.
“Lose money for the firm, even a lot of money, and I will be understanding, lose reputation for the firm, even a shred of reputation, and I will be ruthless.” says Warren Buffett.
3.0 Case studY
At the core of human civilization lie fundamental concessions of how societies are governed, mainly through democracy and rule of law. All thriving big Economies have a constitution on to which its citizens follow and thus numerous autonomous private and public organizations are able to run efficiently without necessarily receiving orders from one another. For example, in the aviation, all pilots follow a certain code of conducts in space irrespective of which country they are flying over. Thus at any one time there are over 1 million flights in the space and all safely land and take off.
However in the corporate culture, the system of governance has always remained a hierarchical, undemocratic and bureaucratic. It is difficult for a junior employee to initiate an idea and implement it without going through a series of pitching and requisitions of permissions. To avoid this bureaucracy and hindrances to innovations, Brian Robertson and Tom Thomison invented a new corporate governance structure called Holacracy.
Holacracy is a social system of organizational governance in which authority and decision making are distributed through a holarchy of self-organizing teams rather than being vested in a management hierarchy. (holacracy.org)
Holacracy is a corporate philosophy of free will, it encourages self-leadership and self-management.
Under holacracy, a company is governed by a constitution that stipulates roles and every employee is assigned a number of roles not a job. The roles keep changing and any given employee is fully empowered to own, lead and do the role they are assigned as they want, without running through bureaucratic systems of approval.
Zappos Inc is one of the few companies that have adapted holacracy at its governance structure.
Zappos
Zappos is a company that sells shoes, clothes and cosmetics online. In 2009, Zappos was acquired by Amazon at $850million, but retained its brand, management and culture.
Zappos Gross Revenue (2000 - 2009)
There are several other online retailers of clothes, shoes and cosmetics on the internet; however only Zappos succeeded in having such an exponential increase in sales mainly due to its unique corporate philosophy.
Zappos CEO Tony Hsieh decided to differentiate his company from the rest by developing a unique corporate philosophy that is summed up in 10 phrases.
- Deliver WOW Through Service
- Embrace and Drive Change
- Create Fun and A Little Weirdness
- Be Adventurous, Creative, and Open-Minded
- Pursue Growth and Learning
- Build Open and Honest Relationships With Communication
- Build a Positive Team and Family Spirit
- Do More With Less
- Be Passionate and Determined
- Be Humble
Most companies usually have similar wording of what their philosophy is, but in most cases it remains just as words used for marketing. Rarely do most companies walk the talk, of what their stipulated corporate philosophy says. For examples, most companies will be willing to trade profit maximization for lesser employee benefits, bad behaved talents for their philosophies of integrity, employee.
Zappos walks the talk of its corporate philosophy mainly as seen in 2 of its stakeholders
(i) Employees:
Hiring: Zappos employee recruitment involves 2 separate interviews. One interview is about a technical-experience and is carried out by a department into which an employee is to work. The second interview is about "Zappos culture fit" carried out by the Zappos Human Resource department.A failure of either of the 2 interviews disqualifies the prospective employee.
$2000 offer: Zappos offers a 5 weeks training to its new recruits. After the first week of the training, trainees are given a $2000 offer to quit. An offer that began at $100, was gradually raised to $2000. But only about 1% of Zappos trainees have accepted the free $2000 despite the fact that after all, they (Call Centre Agents) only earn $11 per hour. By refusing the free offer, the trainees demonstrate their extreme commitment for the company and Zappos weeds out, the black sheep trainee (1% who take the offer) that would taint its culture.
Empowerment: Zappos chose to concentrate on brand building through offering a marvellous customer experience, especially through their call center customer service. Contrary to most call centers, Zappos call center does not have a defined script meant to begin a conversation between its call center agents and customers. Neither does Zappos measure the "Average Handle Time" as a measure of its Call Centre Agents' efficacy. Zappos encourages its call center agents to respond to customer calls as they see fit, thus allowing the agents to offer the "Deliver Wow Through Service" philosophy. "Zappos longest customer call center conversation lasted for 6hours", says Tony Hsieh, Zappos CEO.
(ii)Customers:
Best customer service: Zappos' 7th philosophy emphasizes a need for an employee to consider their co-workmates and customers as family. Zappos call center agents can also decide to offer an after sale service or assist their client depending on any given situation. For example, "When one of our reps found out that because of a death in the family, a loyal customer had forgotten to mail back a pair of shoes she’d planned to return, the rep sent her flowers; now she is a customer for life, "says Tony Hsieh, Zappos CEO.
Substitutes marketing budget for consumer experience: Zappos' 8th philosophy says "Do more with less" and hence Zappos invests more in providing a rich customer experience and less in main stream marketing and advertising. Zappos offers a 365day return period of any of their purchased products plus free shipping to and fro the customer's premises.
(iii) Governance:
Zappos' 10th philosophy says that "Be Humble". In the year 2012, Zappos adopted the holacracy mode of company management which emphasizes self-management and self-organization of its employees. Zappos has scrapped off the hierarchical mode of governance that has several managers, but rather each of its over 1500 employees is being assigned a given role, over which they are the leader and manager of that role. For example, Zappos drivers are empowered to contribute towards interviews of Zappos new recruits. Zappos drivers gauge the humbleness of Zappos Job applicants by monintoring their discipline while picking them from the airport to the Zappos offices for interview. The drivers’ observations are then considered by the HR department while evaluating the “culture interview”. Decision making is done through voting and everyone’s voice is heard, and leadership is through circle leaders.
Conclusion:
Just like Tim Collins in "Good to Great" book says, “The good-to-great companies built consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. They hired self-disciplined people who didn’t need to be managed and then managed the system not the people.” A company’s corporate culture is increasingly becoming one of the critical success factors of a company in today's century.
REFERENCES
- Marketing 3.0, Philip Kotler, Hermawan Kartajaya, Iwan Setiawan, 2010.
- MIT Sloan Management Review: How to become a Sustainable Company. Robert G. Eccles, Kathleen Miller Perkins and George Serafeim.2012.
- HBR: How I did It: Zappos' CEO on Going to Extremes with Customers by Tony Hsieh, 2010
- Good to Great – Why some companies make a leap and other don’t by Jim Collins Page 125. 2011
- Realizing a Corporate Philosophy. Gerald E. Ledford, Jr. Jon R.Wendenhof, James T.Strahley 1995
- Mckinsey 2013 http://www.mckinsey.com/insights/leading_in_the_21st_century/company_philosophy_the_way_we_do_things_around_here
- Transformations of Corporate Culture: Experiences of Japanese Enterprises By Toyohiro Kono, Stewart Clegg,1998
- Berkshire Beyond Buffett - The Enduring Value of Values by Lawrence A. Cunnningham, 2014
- Elon Musk's growing empire is fueled by $4.9 billion in government subsidies,
2015.
