Profit Is Not The Purpose Of A Business: SeaWorld and Marineland

I subscribe to Peter Drucker's adage that the purpose of a business is to create a customer in a manner that generates a profit. Drucker argued that this was accomplished through marketing and innovation. While a business must earn a profit to remain viable, profit is the reward for creating value, not the purpose of a business per se.

This is an important distinction, because within this specific context, those who set out to run a business and put a focus on earning a profit ahead of how they earn a profit, will have more difficulty succeeding. The reason they will find success more difficult is that a building and sustaining a successful business requires a longer-term perspective, while placing a primary focus on profit tends to drive a short-term perspective. How much did we earn this year? Can we do better next year? Or worse, how much did we earn this month? Can we do better next month?

A major reason for a short-term focus on profits is that investors and managers want to reward themselves too soon, based on an arbitrary temporal measurement. By doing so, they often place themselves in a direct conflict of interest with their managerial responsibilities. Too often short-term incentives create moral hazard because they encourage actions that result in a diminishing value proposition for customers relative to their many alternative choices in the market. Distribution of profits in the form of wages or dividends to serve the short-term desires of employees can strip the business of needed re-investment of capital required to create and retain customers for longer-term success.

I doing research for my soon to be completed book tentatively titled Thinking Like Disney: The 9 Principles of Walt Disney's Business Success (Theme Park Press, www.themeparkpress.com), I came across this story about two Southern California tourist attractions competing for essentially the same market: Marineland and SeaWorld, that drives this point home.

The story comes from Harrison "Buzz" Price, in his book Walt's Revolution! By The Numbers. Price was a research consultant who specialized in theme park feasibility studies, and who got his start in the business working for Walt Disney in the early 1950s. It is a story about what can happen when entrepreneurs and business executives confuse the purpose of a business, and focus on working for and rewarding themselves ahead of working for and rewarding customers.

The biggest lesson I took away from this exposure to the fearless foursome who managed SeaWorld, was its powerful message on the value of aggressive reinvestment. SeaWorld's true competitor is Southern California was Marineland, located on the Palos Verdes peninsula nearby Los Angeles Harbor. Marineland had opened earlier, shortly before Disneyland opened, and with direct access to the huge Los Angeles County market, much larger than the San Diego market, drew 1.6 million in its first year. Marineland's policy, however, was minimum reinvestment, essentially nothing. The investors, a New York syndicate formed by Henry Harris of Harris Upham, had taken a risk and succeeded. Now it was time to pay off the investors with maximum dividend distributions. To misquote an old hymn, "Yield Was The Temptation". Thereafter, without the benefit of new attractions, attendance went steadily down. It was a dumb policy. They had a great running start, a year ahead of Disneyland, and squandered the opportunity of an early lead in the Southern California attractions business.

And then came along George [Millay], Milt [Shedd], Dave [Demotte] and Frank [Powell], working the same extended market with more or less the same kind of project but located in San Diego, a long way from the heart of the rich Los Angeles market. They reinvested every cent available form cash flow: no dividends, no fancy amenities, and no fancy salaries. SeaWorld, which had started out at the 500,000 level in the mid-sixties had grown to over two million attendance by 1975 and it had hit 3.8 million by 1988.

Meanwhile, Marineland went steadily downward to the 800,000 level by 1971. It could not compete with rapidly expanding SeaWorld. Later on, three or four subsequent owners of Marineland could never find the key to turning the park around by investing in later years with "higher cost dollars" (new investment cost more after a decade and a half of inflation). Marineland closed in 1985. Playing catch up with current money after under investing in prior years is not easy. It was a clear demonstration about the importance of reinvestment that would have made a fine Stanford Business School case study (maybe even a Harvard one)....

Walt Disney understood the need to bring his own aspirations in line with those of customers. His ability to always measure his business decisions within the customer framework was one aspect of his entrepreneurial genius. I provide many examples throughout his career in my book.

My Recent Encounter With Complexity Worship

Call me simplistic if you have to, but I always was of the opinion that if someone really understands what they are talking about, they should be able to express it in ways that others can easily understand. I distrust people who make it a practice to speak in convoluted or technical language in order to make it a barrier to understanding.

When someone asks a fairly simple straightforward question that requires a fairly simple straightforward answer, and instead what comes back is something extremely convoluted or impossibly technical and purposefully theory-laden, you have to wonder if at root is the post-modernist technique of "bullshit baffles brains." This appears to be a popular defensive methodology used by some people as a cover-up to protect themselves against the discovery by others that they really don't know what they are talking about. It often is a companion for those who resort to argumentum ad hominem as a normal part of argumentation, often under the guise of demonstrating how witty, charming and urbane they really are. 

Recently on an online forum I asked a very simple question to an accomplished expert in his field, who, for whatever reason, chose to participate in a discussion but was unable to provide a clear and articulate answer to any of the questions he was asked, even when asked multiple times.

As part of the discussion, this expert indicated that he provided a training course for corporate executives in the area of managing complexity and indicated that it is linked with decision-making and organization design. 

Here's the question I asked, which begins with me quoting the expert to whom I'm addressing:

You wrote: "What CAS [complex adaptive systems] indicates (in my view) is the need for different organisation forms to handle complex and chaotic environments. That includes things like human sensor networks (or whole or workforce engagement), the use of Crews, self-organising cross silo teams etc. etc. " 

Can you tell us something about the types of people you recommend companies assign to these teams or networks? Are they a cross section from front-line to executive? Are they usually VPs or executives with considerable tenure and work experience? Are they chosen randomly?

I didn't think this was a difficult question. It amounts to: how do you select which employees you will ask to participate in “human sensor networks” or as “crews”?

Surely some people are going to be better suited than others? Or maybe not. Maybe the person with the responsibility for selecting respondents can just select randomly. I just assume that there are likely to be established or emergent criteria pointing to some personal characteristics that prove beneficial to the manager accountable for generating a solution being sought for which the "network" or "crew" is being established.

Here is the answer I received:

Barry, I promised you a response to you question on Crews and Human Sensor Networks. You specially asked "the types of people you recommend companies assign to these teams or networks? Are they a cross section from front-line to executive? Are they usually VPs or executives with considerable tenure and work experience? Are they chosen randomly?". 

The way a crew works is that people are trained in role and role expectation and entry into the role is normally highly ritualised. We know that the impact of ritual is to change the cognitive activation pattern on the brain and this for a period the identity of the participant. In military and emergency response environments the approach allows people from all levels to participate and interesting allows delegation of authority without loss of status. This, along with modern insights on brain plasticity is one reason why I and others challenge any framework based on progressive or hierarchical concepts. 

A human sensor network is whole of employee of citizen ship engagement in problem solving using technology to remove barriers of time and space. The goal is to support decision making and understanding. 

Both of these approaches rely on changing the connections between individuals not on individual capability (although that does come in to some extent). That difference is one of the key switches those of us approach organisations from a natural science perspective are taking. It means that we do criticise ideas of progressive capability to handle complexity (for example).... 

So I am not sure I can answer you question in such a way as to fit into the paradigm that its formulation implies, but I hope this has been useful.

Sheesh! I didn't think my question was that difficult! And more importantly, it wasn't answered. Rather, an answer was avoided. Imagine how difficult it must be to select members of a crew! 

In all fairness, I have no idea what a "crew" or a "human sensor network" is, even though the author thinks one was provided ("whole of employee or citizenship engagement in problem solving using technology to remove barriers of time and space"), so maybe my question really doesn't make any sense...er...”fit into the paradigm that its formulation implies.”

Actually, I think a “human sensor network” is akin to crowd-sourcing – aggregating information from individuals via electronic means – but saying that wouldn’t be appropriately opaque.

(I am reminded of an incident I observed when I was in grade eight, when a pretentious six-foot-plus science teacher brought two boys into the office, holding on to them by the collars of their winter jackets, and announced loudly for all to hear that "these two boys were caught catapulting ballistics in front of the school." The office staff had no idea what he was talking about, so he had to explain that he had caught them throwing snowballs.)

Anyway, I'm skeptical that the answer provided to me is a real answer. Perhaps I'm being played with in the manner that Alan Sokal scammed the journal Social Text with his parody of postmodern criticism of science! If the explanation provide to me is for real and an example of quality of training business leaders are receiving to manage complex business problems, I hope these managers are able to put this stuff to good use in creating value for customers and shareholders. Hopefully a positive ROI from investment in this training is just one of the many positive outcomes that will be derived through the removal of the barriers of time and space.

There are many other examples of this kind of thing - of highly educated technocrats creating proprietary terminology to stand for improperly or undefined concepts. Often these constructs are so abstract and impenetrable as to be rendered useless as valid tools of cognition in helping us understand and organize information and knowledge for human use.

A convoluted theory that was recently brought to my attention as being meaningful and helpful in gaining deeper insights into organizational design is an idea called “panarchy.”

Here’s how the usefulness of panarchy was explained to me:

Panarchy theory is useful to make object transitional patterning and discern this from transformation, translation, transmission and composition patterns. Seeing resilience and robustness as counterparts contributes to agility, and helps prevent category errors.

The person who posed panarchy as useful asked me what I thought of it. Here’s an edited version of my reply:

Concepts have to stand for something that exists. They serve as a way for humans to condense and process information. When concepts don't correspond to anything in reality, they are floating abstractions and therefore invalid concepts. When it comes to language, I don't subscribe to making things more difficult and abstract than they need to be, which is what appears to be happening here. 

For example, if you say, "It is useful to point to systems in a way that is relevant to a group and meaningful to those who are part of it," I can understand what that means. But when words that stand for concepts are inserted with undefined meaning, and those words only seem to be used to create a lack of clarity, then understanding is completely lost and nobody knows what is being talked about.

That may not be what is happening here, but I have no idea what it means when someone says to me: It is useful to use translation to direct composition to a group through transmission. If, to be understood, they have to say, "well, what I mean is that it is useful to point to systems in a way that is relevant to a group and meaningful to those who are part of the system," then why not just say that in the first place? And do those two sentences really mean the same thing? Nobody knows. 

The first explanation provides no meaning. There may be specialized meaning to these concepts, but unless the person you are having a conversation with knows what they are, the words you utter are just sounds, and no communication is taking place. 

I prefer simpler language that people can understand. I know technical language is sometimes needed to condense information into higher-level concepts, but for people to understand it, they have to understand all the links back to something that they can relate to -- to real objects. 

You indicate that these abstract concepts are non-objects. I'm not sure that one can work with non-objects, as you propose, even conceptually. All valid concepts are a condensation of knowledge about things that exist and can be validated by the evidence of our senses. 

Don't get get me wrong. I'm not saying whether or not "panarchy theory" is valid or invalid. I'm just saying in general that it appears to be making things more complicated by introducing specialized language that IMO makes things less clear rather than more clear, at least as you've tried to explain it. I'm not a systems theorist, so I'm in no position to pass judgment on the validity of Panarchy Theory and whether it is epistemologically sound.  

I challenge anyone with too much time on their hands to make sense of this explanation to which I was referred, and then explain in regular language how it provides practical help in contributing to or achieving any human goal, particularly one related to business organizations.

Elliott Jaques Reflects on Ethics For Management

Most readers of Elliott Jaques' work on managerial systems know that like Deming and Ackoff, he looked towards the incentives and disincentives built into systems as the primary determinant of the actions of individual operating within those systems, rather than immediately looking to place blame on the individuals themselves. He was of the opinion, based on his personal experience and observations, that systems, not people, were at the root of most business problems.

He reflected on how improvements to management systems could lead to more ethical outcomes in a paper titled "Ethics For Management," published in Management Communications Quarterly, Vol. 17, No. 1, Aug 2003.

In Ethics for Management, Jaques writes that the problems of rampant unethical behavior in organizations as seen at Enron or Arthur Anderson "are a direct reflection of deep-seated and chronic problems embedded in our governance and people-management systems and practices." Such systems, he says, often undermine the requisite practices needed to promote acceptable ethical behaviors. "Dysfunction-inducing systems like these cannot be repaired by teaching ethics," he writes. "The systems themselves need drastic changes to bring them into line with ethical requirements."

Jaques proposes solutions that are inherent to the system of management he developed which he called Requisite Organization, and which include the following elements.

1. Corporate Governance, which needs to adopt mechanisms that promote a longer-term outlook on business management.

2. Appropriate vertical structuring with optimal layers "determined by  the measured size of the top executive role" as objectively measured by time-span.

3. Define accountability for each role in which managers are "accountable for the results of the work and working behavior of their immediate subordinates," because it is managers who determine the work and guide the behavior of their direct reports. When subordinates are held accountable for their own work and bonuses are used as an additional incentive, the door is opened for the active manipulation of short-term results and "the expression of corrupt practices at the top that are driven by the same systems that drive corruption at the bottom."

4. Performance appraisal and compensation systems that pay fair differentials for differences in levels of work. Pay should be related to the difficulty of the work assigned to subordinates by their managers as measured in time span. The assumption is that when people are paid appropriately for the work they do, they do not require additional incentive systems that often unsuspectingly promote unethical, dysfunctional and corrupt behavior.

5. The selection process to fill roles is often inadequate to ensure that the person selected "is the right person of the right size for the size of the role." When people are over-promoted -- assigned to do work above their level of applied capability -- the inevitable result is an undermining of accountability in the system. People who are over promoted have a tendency to "manipulate results in order to look better than they are." Using tools discovered and developed by Jaques "to measure accurately both the size and complexity of roles, as well as the size and ability of individuals to handle complexity," will, says Jaques, "without any other changes, consistently [produce] shifts in behavior towards ethically sound practices."

The failure of CEOs and managers to properly address these aspects of their management systems, writes Jaques, contribute to corrupt behaviors in organizations by creating dysfunction and the erosion of trust.

Jaques' prognosis is that CEOs and executive leaders have a tremendous impact on the ethical behavior of their people based on the types of governance and people-management practices they have in place. Leaders need to take more seriously that impact that the systems under their direct control have on the effective functioning of their organizations to serve customers, employees, and other social and economic beneficiaries in an ethical manner.

Smart People Can Ask The Darndest Things

Someone with an acute sense of humour and perhaps scientific training once said that the two most common elements in the world are hydrogen and stupidity.

Here's a great story about stupidity from famous Beatles record producer Sir George Martin. It comes from the bonus material on the DVD documentary "Produced by George Martin."

Sometime early in his career as a young record producer at the famous Abbey Road Studios, following a board meeting, the directors of EMI came to the studio to see what was done there. Martin tells the story.

You had all these directors and non-exec directors wandering around saying "Well tell us about this now."

And of course, I being the  young Martin, was given the job of escorting them around. And I showed them all the studios and told them what we did. And one bloke said, "Look Martin, I want to get something from you because I'm puzzled by this."

I said, "Yes?"

"Well, last year, as a group, we issued six hundred and sixty singles."

"Yes," I said, "that's about right."

He said, "And only twenty-five of them made the charts."

"Yes."

And he said, "And those twenty-five were responsible for ninety percent of our profits." 

 "Yes," I said. "That sounds reasonable."

He said, "Why did you make the other six hundred and thirty-five?"

I was floored. I thought, "What a stupid thing to say." This was a man who earned about a hundred times more than I did and he had no concept of what we did in the studios."   

  

It's An Economic Fact: Free Markets Cure Poverty

I found this to be interesting information on the correlation between capitalism and the fight against poverty. It is from the transcript of the Freakonomics podcast of 12/19/2013, "Pontiff-icating on the Free Market System." The podcast guests include economist Jeffrey Sachs and Joe Kaboski, economics professor at the University of Notre Dame.

This quote is from Joe Kaboski:

"[W]e’ve never seen an example of any country that has escaped extreme poverty because of foreign aid or NGOs. And more people have escaped extreme poverty in the past 25 years in part through the growth of China and India than in any period of human history. And all of these miracle countries, miracle in the economic sense, China, South Korea, Taiwan, Hong Kong, Singapore, you know, Chile down in Latin America, they’ve all grown through high levels of trade, market economies. And that’s important. The importance of a market economy you can see no better than South Korea and North Korea. I mean, North Korea people are starving to death and dire poverty. And South Korea is basically a high income country at this point, and it’s because of 40 years of intense growth versus opposed to 40 years of stagnation or even going down."

More wealth is created when people are free to think, to choose, to act, i.e., to be free to exercise their minds, than when freedom is constrained by arbitrary restrictions against cooperation and economic liberty. Political coercion always creates economic chaos and is less optimal that economic freedom. This is a basic moral, political and economic principle. 

The State of Ebony - Taylor Guitars

I think this a great story about how consumers and business leaders should embrace long-term thinking to improve their lives. We can continue to make our lives better by embracing voluntary exchange instead of sanctioning government coercion by taking responsibility for the values we support. As consumers, we really do empower entrepreneurs to work for us. Let's support the one's that do work that we truly value, and not the one's that engage in irrational and destructive behavior. Morality and free markets go hand-in-hand.

Recent Mentions

My article on organizational design "Requisite Structure: A Guide to Aligning Strategy and Roles in Small and Medium-Sized Businesses" was prominently cited by Sandy Blunt and Joseph Paduda in the Health Strategy Associates, LLC, report "2012 Survey of Workers' Compensation."  The article describes my experience using Elliott Jaques' Systems Stratification Theory or Theory of Requisite Organization to effectively align organizational structure and roles to support business strategy.

My article "The Project Management Paradox: Achieving More by Doing Less," which was published by Ivey Business Journal and is available here, is one of just twelve reference articles cited by the California Department of Human Resources' Leadership Development Guide, part of the State's HR Modernization Project.  

 

You Should Be Subscribed To George Reisman's Blog on Economics, Politics, Society, and Culture

There is no better writer on economic issues from a moral perspective than George Reisman, Pepperdine University Professor Emeritus of Economics, Senior Fellow at the Goldwater Institute, and the author of the opus Capitalism: A Treatise on Economics. You'll want to pick up the Kindle edition for an incredibly low price.

Meanwhile, his blog, and his latest post on Hurricane Sandy can be found here.

George Reisman's Blog on Economics, Politics, Society, and Culture: Sandy: A Hurricane with Price Controls: Hurricane Sandy caused the closing of a majority of the gasoline stations in the New York City area, did major damage to petroleum terminals...

Paul McCartney: Paradigm Shifter

Joel Arthur Barker wrote a great book in the 1980s about paradigms and how paradigms shift when new evidence is developed to solve outstanding problems with the current perspective. He had some great lines, like "when the paradigm shifts, everything goes back to zero."

One thing I remember about his research is that very often the paradigm shifter comes from outside the accepted mainstream. The reason for this is that those who apply themselves from the outside come to the problem with a different perspective. Today we don't talk too much about paradigms. In the business world, the current language is about disruption. Clayton Christensen has written extensively about innovation and how it creates disruption in marketplaces. The message is the same: when disruption occurs, everything goes back to zero. Think of the rules being rewritten by many technology companies that derived business models that fundamentally changed the game through innovation in creating new solutions to problems that weren't being addressed by existing business leaders.

Remember upstart Dell demolishing IBM's market share in computers? Remember upstart Walt Disney inventing the feature length cartoon and turning out the highest grossing movie ever with Snow White and the Seven Dwarfs, when nobody in Hollywood would dare try to make a full length feature cartoon? He did the same with the reinvention of the amusement part and was laughed at when he said he was going to build Disneyland and charge admission. It was unheard of at the time. There is no shortage of stories about paradigm shifters, and I find them fascinating.

I recently came across a story about ex-Beatle Paul McCartney. The man who signed The Beatles to a recording contract after they were turned down by every major recording company in England was their eventual record producer, George Martin.

Writing in his 1979 memoirs "All You Need Is Ears," George Martin talks about how in his opinion, both John Lennon and Paul McCartney's lack of formal musical training played a major part in their success as a song writers and composers. With regards to Paul, he writes:

"I think that if Paul, for instance, had learned music 'properly' -- not just the piano, but correct notation for writing and reading music, all the harmony and counterpoint that I had to go through, and techniques of orchestration -- it might well have inhibited him. He thought so too. (And after all, why should he bother, when he had someone around who could do it for him?) Once you start being taught things, your mind is channelled in a particular way. Paul didn't have that channelling, so he had freedom, and could think of things that I would have considered outrageous. I could admire them, but my musical training would have prevented me from thinking of them myself. I think, too, that the ability to write good tunes often comes when someone is not fettered by the rules and regulations of harmony and counterpoint. A tune is a one-fingered thing, something that you can whistle in the street; it doesn't depend on great harmonies. The ability to create them is simply a gift." (All You Need Is Ears, P.p. 139-140)

 George Martin was a classically trained musician with all of the fixings. The Fab Four were self-trained but determined lads who George Martin didn't think were anything too special when he first listened to them, but liked them personally and was looking for a new band for his Parlophone record label. Somehow Paul and John were able to craft catchy pop songs combined with a particular cheeky and likable persona that appealed to the masses. To a great degree, says George Martin, they were able to succeed to the extent that they did because they were outsiders uninhibited by the existing rules of the music business. Whatever seemingly crazy musical idea they had, they would set producer George Martin about the task of figuring out how to achieve it. For example, the Sgt. Pepper's Lonely Hearts Club Band album was recorded by Mr. Martin on four-track tape, and was considered a monumental achievement of music recording at the time, and will always be admired as a breakthrough in recording innovation.

I used to think that producer George Martin was the secret to the Beatles success, but while he played a considerable role in bringing their audible visions to reality, he claims that almost all of the big ideas regarding the content of the music came from "the lads."

While reading about The Beatles recently online, I came across a reference to popular and successful classical composer of the 20th century (who's name I can't recall) who was once asked who the great arrangers of the 20th century were and his first choice was Paul McCartney for his compositional vision of the elements of those great and timeless Beatles songs. Both he and John Lennon, and I suppose all great composers, would compose in his head and play with arrangements until they sounded the way he wanted them to sound, then they would bring their ideas to Mr. Martin, who would help them achieve their vision in the recording studio.

Giving Up On Customer Loyalty Too Easily

The best business leaders go to work every day to focus their business on earning the loyalty of their customers. They understand that long-term sustainability and profitability requires earning and retaining customers. The goal is to get customers to love them, to need them, to get excited and emotional about them, and to want their companies to succeed and flourish. To do this, business leaders have to understand what their customer’s value in all aspects of the relationship, and deliver it. According to the business press, on-line shoe and clothing retailer Zappos is in this space today.

There are a number of legendary companies that have done this for their customers at one time or another, usually under the leadership and guidance of entrepreneurial visionaries. Some that come to mind are: Walt Disney and The Walt Disney Company; Akio Morita and Sony Corporation; Thomas J. Watson and IBM; Steve Jobs and Apple Computers; Jeff Bezos and amazon.com; Howard Schultz and Starbucks; Richard Branson and Virgin Group; Isadore Sharp and Four Seasons Hotels and Resorts; and Anita Roddick and The Body Shop. Of course, there are thousands of other private corporations and sole proprietors who have earned the loyalty and dedication of their customers because they have set customer loyalty as part of their guiding vision and business purpose. Bose Corporation and The Teaching Company are two that come immediately to mind.

Earning customer loyalty is among the most difficult of all business objectives and one of the highest achievements of any business. It requires relentless innovation, integration and coordination in the areas of: understanding the customer’s value-drivers; design of business strategies and processes; applied human knowledge and capabilities; financial management; and corporate culture. Managers must be ever vigilant and aware that as each of these components advance and change, the other components must be adjusted accordingly. A high degree of corporate vitality and operational flexibility within an overarching framework of well defined guiding aspirational and operational principles is required to ensure that fidelity to profitably fulfilling customer values remains the guiding purpose of corporate action. 

Certainly not all executives have the desire or ability to organize and operate in ways that achieve customer loyalty. For many I suspect the concept is too lofty and abstract. Instead they strive for a lesser and often contextually equally valid objective to run an effective business to maximize sales, serve customers in an appropriate and respectful manner through adequately trained and motivated staff, and earn a profit for owners to the best of their ability. But this is a lesser effort that will likely result in nothing better than competitive parity rather than competitive advantage. It is in these types of businesses that we most often find customer reward programs offered under the guise of “loyalty programs” being used as a marketing and behavioural modification tool to add some more value to the total business offering or ‘value proposition.’ 

There is nothing wrong with such programs. If run well, they can increase customer satisfaction and profits. But often the loyalty programs being offered to induce customer loyalty are zombie-like copycat programs that provide no additional loyalty, no competitive advantage, and no additional profit. When given the opportunity to join a program for free and earn a discount or future reward, many people will do so. They will join your program and they will join the competitor’s program. And in the end, customers will continue to shop across a spectrum of businesses and brands, their preferences based on a number of unknown and unmeasured variables. Usually such programs result in higher consumer prices or lower company profits, and customers who are indifferent with respect to the operation and value of the ‘loyalty’ programs to which they belong.

When the focus of management is on reward program participation – or worse yet, number of members – rather then earning customer loyalty, the business will never find out why customers prefer to shop across competing brands and participate in multiple loyalty/rewards programs. Management will focus on increasing the number of members and card usage because they are easily measured, and will speak in the boardroom as if their loyalty club members and cardholders are actually loyal customers.

Borders Books is reported to have had 40 million members in their loyalty program when they filed for bankruptcy in 2011, but they didn’t have 40 million loyal customers. Their “loyalty” members were buying most of their books elsewhere.

There is only one way to build a world-class business: focus on understanding the needs of customers to win their loyalty and build an integrated system that can deliver everything they desire in a manner better than any competitive alternative. Earning customer loyalty is amongst the highest moral achievements of a business because it requires the creation and delivery of human values through rational human action. This should be an aspirational goal of every executive and their staff. Yet too often marketing executives and managers continue to focus on signing up new loyalty program members, and offering them discounts and incentives for spending, and ignoring the really hard job of creating unique value for customers that results in increased loyalty.

Don't Confuse A Loyalty Program For Customer Loyalty

In its purest form, a Loyalty Program (LP) is a marketing tool used by companies to bond a small group of its most loyal customers through an exclusive reward or benefit. The concept is to identify one’s most loyal customers and offer them an incentive above and beyond excellent business processes and perceived value as a means of achieving a number of ends:

·      Personal recognition of a loyal customer’s value to the company through a reward

·      Increase sales to existing loyal customers

·      Reduce the risk of attrition of high value customers to competitors

·      Attract and convert high value customers from the competition through additional benefits to garner their loyalty to your brand.

The idea of rewarding loyalty is based on a number of research findings and general beliefs about loyal customers (which may or may not be true in any instance):

• Loyal customers are more profitable to a firm
• Loyal customers are less costly to service
• Loyal customers are less price sensitive
• Loyal customers spend more (80% of revenues come from 20% of customers)
• Loyal customers drive the majority of business profits
• Loyal customers act as consumer advocates to promote the business.

Originally, loyalty programs were developed to identify, personalize relations with, and reward, a small group of highly loyal and profitable customers. Over time, the scope of these programs has widened to influence the behaviour of consumers in general and reward their shopping behaviour. What started off with the requirement of first achieving customer loyalty followed by rewarding loyal customers, has now been transformed into a situation where customers who choose to participate in a rewards program are perceived by businesses as loyal customers.

For the majority of companies with rewards programs, the hard work of earning customer loyalty is no longer on their radar. Instead, the goal is to maximize card holders, which is much easier to measure. Executives often falsely believe and promote the idea that program members are loyal customers. They need to remember that loyalty denotes advocacy and commitment through emotional engagement, not a desire to earn points.

A focus on maximizing customers may in fact be a profit-inhibiting strategy, according to loyalty expert Frederick Reichheld. In his ground-breaking HBR article “Loyalty-Based Management” he argues the case that the road to maximizing profitability includes an understanding of the economics of customer loyalty and the strategy of identifying the benefits and costs of serving different customer segments.

Reichheld identifies and describes four components he sees as foundational to building a loyalty system.

1. Identify the right customers, the loyal customers, who are likely to have long tenure and will be profitable over the longer-term because of personal referrals or willingness to buy at standard prices.
2. Expand offerings to existing customer segments you know well by adding new products and services that anticipate and meet their evolving needs and ensure their retention.
3. Retain the right employees and partners through incentives because they know your customers the best and have build existing bonds of trust and expectations within their relationships.
4. Develop business systems to ensure and understand the long-term economic consequences of changing customer loyalty and the quality of feedback loops that are the foundation of organizational learning and adaptation.

He expounds on the logic of the system as follows:

"The primary mission of a loyalty-based company is to deliver superior value to customers. Success or failure in this mission can be clearly measured by customer loyalty (best quantified by retention rate or share of purchases or both). Customer loyalty has three second-order effects: (1) revenue grows as a result of repeat purchases and referrals, (2) costs decline as a result of lower acquisition expenses and from the efficiencies of serving experienced customers, and (3) employee retention increases because job pride and satisfaction increase, in turn creating a loop that reinforces customer loyalty and further reducing costs as hiring and training costs shrink and productivity rises.

"As costs go down and revenues go up, profits (the third-order effect) increase. Unless managers measure and monitor all of these economic relationships, they will default to their short-term, profit-oriented accounting systems, which tend to focus on only the second- and third-order effects. Focusing on these symptoms––instead of on the primary mission of delivering superior value to customers––often leads to decisions that will eventually reduce value and loyalty."

The loyalty research by Frederick Reichheld supports the old adage that businesses can't be all things to all people. Reichheld's insights into the economics of loyalty mechanisms is a further articulation of Peter Drucker's adage that "the purpose of a business is to create and keep a customer." This is still true,  but the most conscientious executives should focus on the idea that "the purpose of a business is to create a keep loyal customers."

Business Leaders Should Aspire to Create Loyal Customers

At its most basic level, it is the purpose of a business to create customers by offering them a solution that they want based on the values they hold. That's why the most successful businesses understand what their customers value and figure out how to fulfill those values.

In times of scarcity – usually early in the product life-cycle – consumers are willing to accept a basic product or service and are willing to bear numerous “costs” or inconveniences of doing business. These costs are often perceived as negatives, such as high price, limited availability, long waiting times, limited options, poor instructions, buggy software, design flaws, poor customer support, etc.

Over time, consumer expectations change, and through a combination of rising consumer expectations and producer innovation to win market share, the definition of what is an acceptable basic product changes. A lot of inconveniences or oversights that were tolerated at the initial product launch are no longer acceptable to consumers.

As product quality and prices from competing suppliers converge in relative terms over time, consumers bring secondary considerations into their decision-making process based on the degree to which businesses (or brands) can satisfy their emotional needs. Different segments value different things, but the components of service quality excellence rank high on the list after product quality and reliability.

Businesses succeed in earning customer loyalty to the degree that they incorporate the customer’s hierarchy of needs into the total business processes, and remove all manner of dissatisfiers to fully serve the materialistic and emotional needs of customers. As Jesper Kunde writes in his book “Unique: Now or Never,” the best companies have figured out how to stand out in the market by offering something so individually attractive and so valued that it transcends being merely a product. These brands have found a formula for offering customers a unique value experience in the market place that transcends the product and the brand, and through careful attention to multiple dimensions of value creation, earn customer loyalty. Such companies or brands become indispensable to their customer base by offering and delivering unique value. Kunde calls this ‘value positioning.’

True customer loyalty is earned when a business offers an integrated bundle of values that serve every aspect of the customer’s desires and for which the customer actively supports, contributes to, and perceives to be unique in the market place. This goes beyond product satisfaction and brand preference, to personal emotional engagement, commitment, enthusiasm, and advocacy.

Very few leading executives possess the commitment and drive to achieve this level of loyalty from their customers. These executives have to be committed to serving customers as if it was their religion. That is why real customer loyalty is so rare. Very few entrepreneurs and executives have the commitment, passion and drive to create such rare and monumental organizations. Walt Disney and Steve Jobs are two entrepreneurial geniuses that come to mind as examples to study and follow.

I encourage you to read Jesper Kunde's two books, Corporate Religion, and Unique Now... or Never. There is an interview with Mr. Kunde at Tom Peters' site: http://www.tompeters.com/cool_friends/content.php?note=005901.php

A Case For The Primacy of People, Values-Driven Leadership, And Increased Profits

© Barry L. Linetsky, 2010. All Rights Reserved

Professor Henry Mintzberg of McGill University noted in a recent July 2009 Harvard Business Review article “Rebuilding Companies as Communities” that it is important for corporate executives to ensure that they create and maintain a sense of community within their organizations. A corporate culture that embraces the idea of community, he says, can mitigate dysfunctional corporate behaviour.

The essence of what Mintzberg means by community is caring. Caring is a reflection of values, and is an essential part of a humanistic, positive, corporate culture. To create such positive cultures, executives leading organizations must define and align to pro-human values to attract the best employees and motivate them to profitably create and retain customers.

The values that are espoused by corporate executives and form the basis for guiding individual behaviour must be integrated with the corporate mission and purpose. Achieving an alignment of values is what creates community. It is within the context of the business purpose and values that executives have the task of creating a workplace that both organizes the factors of production to create value for customers and creates and sustains a sense of community for employees – a sense of shared culture to guide cooperation in the achievement of the corporate purpose. To follow Mintzberg’s logic, the extent to which executives pay lip service to purpose and fail in their responsibility to create a humanistic and ‘caring’ community, reflects the degree to which they have failed in fulfilling their obligation as corporate executives.

Mintzberg comes to the problem of corporate dysfunction from the perspective of sociology rather than ethics, and by doing so neglects to address individual responsibility and personal accountability for dysfunctional executive management. He writes, “Decades of short-term management, in the United States especially, have inflated the importance of CEOs and reduced others in the corporation to fungible commodities – human resources to be ‘downsized’ at the drop of a share price. The result: mindless, reckless behavior that has brought the global economy to its knees.”

I would argue that cause and effect run in the opposite direction: that mindless, reckless, and intellectually lazy behaviour results in short-term management thereby creating organizational dysfunction and the myriad of economic and social failures pervasive in our culture today. As the late organizational development expert Elliott Jaques argues and demonstrates persuasively in Social Power and the CEO, CEOs and business leaders have it within their power to organize and effectively lead for the good of their organizations and the people they serve. “Employment organizations have the potential to become great and satisfying places in which to work, places in which people work together with mutual trust and collaboration, and pervaded withal by a strong sense of fairness and justice” (P. 7).

One could, I suppose, argue that if executives that agree to take on the responsibility to manage and lead companies are operating from ignorance of their need to create “companies as communities,” then their personal context excuses them from moral culpability. But if those same executives accept that creating a healthy corporate culture that promotes the alignment of personal and corporate values creates and sustains motivated and engaged employees, and that motivated and engaged employees are critical to the longer-term health and success of their organization, then their culpability is proportionate to the degree that they evade the issue and fail to take appropriate action.

Mintzberg points to the recent sub-prime mortgage problem as a representative example of the failure of executives to manage and lead within the full context of their responsibilities. “How could [the sub-prime mortgage problem] come about in the first place, and how could it have spread to so many blue-chip financial institutions? The answers seem readily apparent. Those who promoted these mortgages were intent on driving up sales as quickly as possible to maximize their own bonuses, the ultimate consequences be damned. And the financial institutions that bought these mortgages were not being managed. Many of their executives adopted what has become a pervasive style of ‘leadership’ in America: They sat in their offices and announced the goals they wanted others to attain, instead of getting on the ground and helping improve performance. Executives didn’t know what was going on, and employees didn’t care what went on. What a monumental failure of management. To varying degrees, the same failure has occurred throughout the private and public sectors.”

The problem Mintzberg sees is the failure of executives to create and sustain a strong social system that encourages and supports community, which he describes as “the social glue that binds us together for the greater good.” “Community,” he writes, “means caring about our work, our colleagues, and our place in the world, geographic and otherwise, and in turn being inspired by this caring.” The creation of a community of shared interests requires a robust and compelling culture: “A company without a compelling culture is like a person without a personality – flesh and bones but no life force, no soul. Organizations function best when committed people work in cooperative relationships based on respect. Destroy this and the whole institution of business collapses – as is now evident in so many companies.”

If and when organizational leaders pursue values that are antithetical to the values of those doing the work, minds will disengage, resulting in “mindless, reckless behavior” where executives don’t know what is really going on, and sadly, where employees just don’t care.

Consider that a recent 2009 Conference Board poll on employee job satisfaction indicated that employees are increasingly less satisfied with their jobs and the companies they work for. Only 45% of workers in the U.S. were satisfied with their jobs, the lowest level in the 23-year history of the poll. Clearly something is terribly wrong with the fundamental philosophy of how businesses are being managed and lead. Mintzberg would say that the systemic problem is a lack of caring, community, and respect by managers for the people they employ, and by implication, I would add, for the customers they serve.

Not all executives behave mindlessly, of course, and certainly not all of the time! Mintzberg’s sub-prime example reminded me of a recent interview of John Allison, who at the time was Chairman and CEO of financial services organization BB&T Corporation. Allison noted that when companies like WorldCom and Enron find themselves in deep trouble, it’s almost always due to an ethical violation, not esoteric strategy.

BB&T takes its responsibilities towards its employees seriously, and provides corporate guidance and direction in both their mission and purpose statements. The mission statement in part says that BB&T will create a place where employees can learn, grow and be fulfilled in their work. It is through the service of outstanding employees that BB&T expects to develop and maintain excellent client relationships that result in making the world a better place to live by “helping our Clients achieve economic success and financial security.” BB&T also recognizes “communities” in its mission and purpose statements, with a commitment to make them better places to be through the services the bank provides. Allison is convinced that living the vision, mission, purpose and values has been integral to BB&T’s long-term success.

In talking about the practical implications of BB&T’s corporate philosophy and value system, Mr. Allison stressed that BB&T is a purpose-driven company that focuses on a bigger picture, longer-term perspective through the creation of win-win relationships and not taking advantage of their clients, even when that means giving up near-term profitability by providing customers with something they want.

“Part of our mission,” says Allison, in a 2007 Econtalk interview with George Mason University professor of economics, Russ Roberts, “is to help our clients achieve economic success and financial security. We expect to make a profit doing that. We’re very explicit about it, but we also expect to earn it. We expect to provide them with better quality advice that helps them have a better quality of life…. We’re trying to earn a superior reward through superior service. We talk about being more knowledgeable – being able to provide them with more quality advice. Of being more responsive – giving them an answer quicker. Being more reliable – we help people through tough times to the degree that we can. Being more empathetic – which means treating people as individuals. So we try to provide differentiated value-based service and earn a profit doing it. So the conflict about profit is how to make it without taking advantage of people. That’s not how we want to get there…. We’re not going to figure out how to outsmart people.”

Allison understands that creating more highly satisfied customers than the competition is how you retain them and earn higher profits, and that doing so successfully must be embedded in the corporate culture. He also believes that doing what is right for customers coupled with living one’s corporate philosophy may lead to passing up opportunities that might be profitable in the short-term.

By coincidence, Allison provided an apropos counter-example to Mintzberg’s sub-prime example: “We did not get into the negative amortization business,” he says. “A negative amortization mortgage is where the interest cost is more than the person pays every month. It sounds good when real-estate values are going up really fast, but we’ve been in the business long enough to know that real estate values don’t always go up fast, so that when people are paying less than the interest on their loans, at the end of five years, in most real estate markets, you’re going to have a lot of very unhappy people because they’re going to owe a lot more on their mortgage than their house is worth. That’s not a good thing. That got to be the fad last year and the year before. There was a huge market in that. We could have made a lot of money doing that. We said no, we’re just not going to do it because it’s not good for our clients. Hopefully we talked some of out clients into getting a fixed rate mortgage and they’re much better off today. Some of them just went somewhere else and got that mortgage. They aren’t our clients any more and they made that choice. But we don’t think profit is earned by doing the wrong stuff. We think profit is earned by doing the right stuff. So those kinds of things are connected together.”

If other bank CEOs acted on the same principles and values, Americans who bought homes they couldn’t afford would not be defaulting on their mortgage obligations at record-breaking levels. Perhaps some of the negative effects of the Fannie Mae and Freddie Mac bailouts that started in 2008 due to government created moral hazard in favour of sub-prime mortgage lending could have been prevented.

Mr. Allison’s example demonstrates that a culture built around clear values linked to moral principles is a key element in pre-empting mindless and reckless management decisions and behaviours Mintzberg is concerned about, and in creating a motivated, high-performance workforce.

While it is difficult to prove a causal relationship between corporate culture and business success, the evidence is overwhelming that satisfied and engaged employees are more productive. According to Stanford University professor of Organizational Behavior, Jeffrey Pfeffer, “Companies that manage people right will outperform companies that don’t by 30% to 40%.” Why? Because what separates one company from another are “the skills, knowledge, commitment, and abilities of the people who work for you.” Companies that treat people right have high rates of productivity and lower rates of turnover. Those that treat their people poorly experience the opposite and wind up with “toxic workplaces” that drive people away. Not surprisingly, people feel a disinclination to work for companies that create working conditions that people deplore.

Research by Texas A&M University’s Distinguished Professor of Marketing Leonard Berry presented in his 1999 book Discovering The Soul Of Service, supports Pfeffer’s observations. The companies that are most likely to succeed in energizing people at work and to achieve sustained business success are those that have a defined set of core values and apply what Berry calls “values-driven leadership” in a conscious effort to sustain and reinforce those values in support of delivering the brand promise to customers. “Humane values sustain human excellence,” says Berry. “It is both that simple and that complex.”

CEOs have to make a commitment to detoxify their workplaces by seriously understanding the need for, and committing to, the primacy of people. Jeffery Pfeffer says it this way: when it comes to the link between people and profits, companies get exactly what they deserve.

Charles M. Schwab's Ten Commandments of Success

Charles M. Schwab's name is legendary in American business history. According to Wikipedia, he began his career as a stake driver working in Andrew Carnegie's steelworks, and in 1897, at age 35, became president of the Carnegie Steel Company. He headed up the Bethlehem Steel Company in 1903, leading it to become the largest independent steel producer in the world.

A major part of Bethlehem Steel's success was the development of the H-beam, which would revolutionize building construction and make possible the age of the skyscraper. Schwab's vision required him to take a major risk in raising capital to build a large new plant to make a product for which market demand was yet unproven. "I've thought the whole thing over," Schwab told his secretary, "and if we are going bust, we will go bust big."

In 1908, Bethlehem Steel began producing the beam, which was fantastically successful, helping to make Bethlehem Steel the second-largest steel company in the world.

In 1924, while at the Carnegie Steel Company, Schwab penned his Ten Commandments of Success.

Charles M. Schwab's Ten Commandments of Success

1. Work Hard: Hard work is the best investment a man can make.

2. Study Hard: Knowledge enables a man to work more intelligently and effectively.

3. Have Initiative: Ruts often deepen into graves.

4. Love Your Work: Then you will find pleasure in mastering it.

5. Be Exact: Slipshod methods bring slipshod results.

6. Have The Spirit Of Conquest: Thus you can successfully battle and overcome difficulties.

7. Cultivate Personality: Personality is to a man what perfume is to the flower.

8. Help And Share With Others: The real test of business greatness lies in giving opportunity to others.

9. Be Democratic: Unless you feel right toward your fellow men, you can never be a successful leader of men.

10. In All Things Do Your Best: The man who has done his best had done everything. The man who has done less than his best has done nothing.

Professor A.G.N. Flew. R.I.P.

eSkeptic, the newsletter of the Skeptic Society wrote an interesting piece following the recent passing of one of my favorite philosophy professors, Antony Flew. Prof. Flew was a prolific writer and educator of philosophy, but was perhaps best known for two things: 1. his expertise on David Hume, and 2. his lifelong public defense of atheism and the lack of evidence for God, or coherence about the concept of God.

The eSkeptic article is available here: http://www.skeptic.com/eskeptic/10-04-21/#comment-1716.

I contributed my recollection and comments, which I reproduce here.

Thanks for the article on Professor Flew. I took three courses with Professor Flew at York University in the early to mid 1980s, including two undergraduate courses and a graduate seminar on David Hume Second Treatise, and loved every minute of it. Flew was always smart, witty, engaging, and best of all, given he was a philosopher, rational and intelligent. He had a real passion for his work and loved to share, inquire, argue, and educate. He didn't tolerate fools lightly, and wasn't afraid to strongly argue his opinions.

He also had his own peculiar eccentricities and quirks, both in mannerisms and speech. He spoke the way he wrote, and when I read Flew, I read him in his voice at times. I carried out a brief correspondence with him following my graduation, and he would always respond promptly and kindly in his distinctive scrawl. In the few times I met him in social situations, he was always gracious and gentlemanly.

His detail to epistemological and logical thinking is what I gained most by being a student. Like others who knew him, it is hard for me to accept his statements that had abandoned atheism. In the few online interviews I have read, there seemed to always have been a bit of a wink to these statements, as if he was having one on with everyone. He had previously dealt with all of the arguments he himself had put forth to justify his conversion. It is impossible to reconcile his personal admission that he had flipped with his prior body of work. To do so was for him to abandon his earlier commitment to logic and sound epistemology, to disregard his own earlier arguments. Your article helped to explain how this may have happened - how a statement or confusion may have been manipulated into a political coup by those who were powerless to oppose the blinding light of Flew's reasoned arguments opposing irrationalism and mysticism.

The best we can do to preserve the memory and work of Antony G.N. Flew is to continue to invoke his own arguments against theism with the passion and certitude that he himself brought to the challenge.

The Ethics Of Customer Service Excellence

© 2010, Barry L. Linetsky, All Rights Reserved

In a free market society, a business exists to serve its customers through voluntary trade. That’s why customer service is an ethical issue.

When a company fails to provide reasonable service, it fails its customers. When its failure is an intentional act, it commits an ethical indiscretion, a customer betrayal, perhaps even fraud.

Sometimes we come across a business that actually takes its customer service responsibilities seriously, as they properly should. Such companies should be commended for their ethical behaviour as an act of encouragement.

Within the context of today’s cultural ethos of corporate entitlement and lack of personal responsibility and respect of the individual, those businesses that make it their policy and put in place the methodology and culture to provide “wow” service should be acknowledged as heroic. They are usually rewarded with repeat business through customer loyalty and exuberant word-of-mouth praise, the most effective marketing communication methodology known to mankind.

We’ve all heard legendary service stories that are truly heroic, where an employee has gone to extraordinary lengths to serve a customer by driving a briefcase out to the airport, or making a special delivery on Christmas Eve, etc. These are wonderful and commendable events that exemplify a commitment on the part of individuals to deliver great service. But what is truly heroic from a business perspective are the achievements of staff at companies where “wow” service doesn’t appear to be heroic because it’s what they do every day. These are the companies that have recognized that their business exists to serve customers, and so they develop a culture of customer service that is integrated across the organization and through all of its systems and processes, and reflected in its policies, management, leadership, and treatment of its staff. Such an achievement is no easy task. If it were so, everyone would be doing it.

The Walt Disney Corporation is a company that exemplifies customer service excellence, at least as it relates to the management of their theme parks. Great Disney stories about “wow” service are readily abundant. They happen all the time. People return to Disney parks year-after-year because Disney creates and delivers great experiences.

Yet more than half a century after Disneyland opened in 1955, it is remarkable is that so few companies have been able to aspire to and successfully follow the Disney lead. That’s because Walt Disney came to quality and service as a basic personal value. He understood that a commitment to providing customers what they want is the only ethical way to earning profits.

In today’s nihilistic age, few executives perceive business fundamentals as an ethical imperative. Most eschew ethics in favour of pragmatism. In doing so, they put profits ahead of an integrated pursuit of business fundamentals and philosophic world outlook.

It is for this reason that as consumers we so rarely experience great service from any company, and when we do we are shocked out of our complacency of nil to low expectations to become company evangelists.

BOSE Corporation: Service Heroes

These musings about service excellence were induced by a recent experience of great service from Bose Corporation, service that made me feel that this company is as passionate about ensuring that it takes care of its customers as is Disney; that for Bose, service excellence is a matter of ethical principle, not pragmatic expedience. Bose makes high quality sound and speaker systems.

About a dozen years ago I purchased one of their LifeStyle stereo systems that included a 6 CD changer, very small cube speakers, and a big sub-woofer. I listened to it every day in my office and received great enjoyment from its high quality sound and elegant design.

One day this past November I hit the remote control to start the CD player and just like that, it wasn’t working. So I called up Bose support to see if there was a reset button or some other easy solution to my problem. Unfortunately there was not. The fellow I spoke to at their call-centre said I could send it in for repair - they have a fixed price repair policy - which would cost me about $220. Or, as an alternative, which he offered without prompting on my behalf, I could purchase any Bose system to replace it at 50% off, or I could buy their top of the line 3-2-1 Home Theater system for a price that was about one-third of the retail selling price of $1,799.

Wow, I thought, that’s some offer. That’s great service. They anticipated my needs and quickly provided some options that were of real value to me to ensure my needs were satisfied.

I decided that it was better to pay a few hundred dollars more to have a new system than to repair an old system, so I ordered the system right then on the phone, paid by credit card, and received an email containing an order confirmation and mailing label with a bar code. I was required to package up my old system, attach the mailing label, and send it back to Bose at my expense before they would send out the new one. (Too bad, I was hoping to keep those little speakers). This was a bit of a problem because I had to find a box that the oversized elongated sub-woofer would fit into. It took me a couple of weeks to find an appropriate box to package up the system. I couldn't get the speaker stands into the box, so I taped them to the side and shipped it overnight to Bose.

Three business days later my new system arrived at my office, which means they had shipped it within 24 hours of receiving my system. The paper work had all been done before hand, so I guess that when they scanned the bar code of the incoming system they released the outgoing replacement and processed my payment. I received an e-mail from the courier company with the shipping info and a tracking number so I could track the delivery online.

Where my old system played CDs, the new system also plays DVDs and includes a hard drive to store 200 hours of music, so I decided I could make better use of it at home attached to my TV than at the office.

A couple of weeks before Christmas I finally got the new system home and went to set it up. I popped open the box, and realized that I shouldn't have sent back the speaker stands because they were bought separately. Duh – Homer Simpson moment.

Now I'm thinking that I’ll have to go out to buy new speaker stands to mount the speakers on. But hold on. I began to think about how impressed I’ve been with Bose and the outstanding level of service they have provided to me already. Maybe they realized that I had sent in the stands in error and are holding them for me! Could they be that good? So I get back on the phone and call Bose.

I tell my story to the service rep – he’s in Massachusetts and I’m in Canada – and he tells me it’s unlikely that the warehouse still has the speaker stands, but he asks me to hold. About 30 seconds later he’s back on the line telling me that he's shipping new stands out to me today, gratis.

Wow, I say. That's really great.

He says Bose should have told me not to send the speaker stands.

I say, we'll you couldn't have known I had speaker stands.

He tells me it's their job to know.

The very next day the stands arrive, shipped overnight by courier! How awesome is that?

So now I'm a raving fan of Bose not only for their great products, but also for their customer service.

All through this process, from the failure of their equipment after more than ten years, to dealing with my stupidity for sending back my speaker stands, they took control of the situation, treated me with dignity, and made it impossible for me to have any reason to even consider taking my business elsewhere. They were reliable, responsible, empathetic, prompt, courteous, friendly, generous, and handled everything beyond the level I would have expected as my standard for excellent service.

As I told this story to people it was interesting to see how cynical many were. Yes, it would have cost them more to track down the old stands in some warehouse and package them up and hold them for pick-up or shipping, than it was to ship me new ones.

But they didn’t have any obligation to replace them at their expense. I was pleasantly surprised that they didn’t try to recover some of the cost by, for example, asking me to pay half, or pay for the shipping because it was my fault I sent them back in the first place. There was none of that. The service rep comes back on the phone and inquires: you have black speakers in the box, right?

Me: Affirmative.

Bose: I'm sending new stands out to you and they'll ship today.

Me: Could you send them to my home instead of my office?

Bose: Could I have your postal code.

I provide my postal code. He affirms my address. Done. Thanks for calling Bose.

That’s great customer service as service should be. That's how you win raving fans and lifelong customers!

Another person indicated that the reason Bose is able to provide such great service is because they sell a premium priced product with a significant profit margin; that they choose to use their revenue to support service.

This appears to be true. And that’s how it should be if you want to be a great company rather than a flash-in-the-pan has-been brand struggling to win new customers while being abandoned by existing customers.

All purchases come with both explicit and implied customer promises – and as a customer, you expect to receive what the company promises. But you can’t test a promise until it is time for redemption. The real test of a company’s integrity is when something goes wrong. When that happens too many companies won't even stand up for their basic promises. Too many would rather spend a lot of time, money and effort wearing you down rather than winning you over.

Consider this typical example. I once tried to exchange a garden flower box I bought to a smaller size at a very popular chain of local garden stores a number of years ago. They refused. They pointed to their posted return/exchange policy of six days! Six days – not seven days. That means if you shop on Saturday and wait until the following Saturday to return or exchange it, you have to create a scene. That’s an explicit anti-customer service policy and I’m happy to say that the company has since gone out of business. I can’t even conceive how they could have considered that to be a policy that was anything but harmful to their business and destructive to their brand. They committed customer service suicide.

It is true that you often get better service or more respect when you pay a premium price, and you should get what you pay for. But we all know that too often you still get treated poorly. It doesn’t take a degree in rocket science (and a degree in business management may be detrimental here) to recognize that if as a business you are going to aspire to brand excellence, then it has to be reflected in every policy, and show at every point of customer contact.

I assume that Bose call-center employee in Massachusetts who took a call from some foreigner who was dumb enough to send back his speaker stands with his stereo handles these kinds of calls everyday. He didn't ask for proof of purchase or even check with the Canadian distribution centre to verify that I was telling him the truth. He didn't have to open a file, collect all kinds of information from me, and get approval from his managing supervisor. The company already had a process in place to guarantee customer satisfaction before the customer called. They had a process in place so that the customer would perceive their ubiquitous service delivery as heroic.

Too few businesses understand that at the centre of brand is the customer experience. To be a great brand takes great effort – heroic effort – but when done right it wins customer loyalty and if other aspects of the business are managed appropriately, results in long-term business success. Bose did it right and made me feel good. Know that if you choose to buy Bose, great service is part of the package that you pay for.

Air Canada: Service Villains

In contrast to great service, here's what's more typical: the creation of policies and procedures by retrograde and anti-social executives that will make themselves and their employees look and feel like morons and sociopaths. Many such executives apparently have an attraction for working in the airline industry. A long time ago now, in what was likely the good old days of airline service compared to today, Air Canada bumped my wife and I off our honeymoon flight because, they said, we didn't call the airline 24 hours in advance to confirm our booking. But I have non-refundable, non-transferable tickets, I said, so choosing another flight wasn't an option. The service attendant then made a big stink about it, citing the company policy and how they have the right to bump people with non-refundable, non-transferable tickets without notifying said people, all the while holding up the rest of the customers, now anxious to find out if they too have been bumped from the flight. Finally, after conferring with higher powers, we were moved up to business class seats, and made sure that we clearly understood that these service reps were going out of their way to make an exception for us only because we were on our honeymoon, and that we ought to be grateful that they had gone the extra mile to be helpful. It’s twenty years later and I still haven’t forgiven them, and continue to look forward to reading about their ongoing troubles, even though their service may not be any worse than anyone else's in the industry. Nonetheless, their friendly and pleasant anti-customer attitude remains the same.

It is against these kinds of experiences and the low level of expectations they endeavour that I come to judge Bose, and Bose Corporation knows it and thus uses service as a lever of differentiation. Praise be to Bose, for their entertainment components and their commitment to high ethical standards of service excellence.