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.

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.

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

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.

Walt Disney: Iconoclast

My article Think Like An Iconoclast: The Principles of Walt Disney's Success has just been published in the Spring 2009 issue of Rotman Magazine, the widely acclaimed and award-winning magazine from the Rotman School of Management, University of Toronto. 

I have done extensive research on Walt Disney to identify some of the key traits that contributed to his success as one of the top 20 "Builders and Titans of the 20th Century" and innovator who changed the way the world works, according to Time Magazine. These traits are summarized in my article, which is a severe condensation of a longer essay "Walt Disney and His Business Philosophy in Action" available here.

Whatever the reason, Walt had an extraordinary mental capacity and collection of traits that allowed him to dream of, and create solutions that others valued. It was not uncommon for those who knew him to describe him as a visionary, a dreamer, a genius.

Taking all of that as a given, the key to his success, without which any of his achievements would have borne fruit, was his commitment to living life ethically through what he would have called a commitment to good ol' American common-sense. Having never completed high school, Walt was a curious, caring and learned man, but not a sophisticated or ostentatious man. While he is probably recognized as the world's most well-known dreamer, he was also very practical, with a deep commitment to an implicit philosophy rooted in reality and reason, and a sense of pro-life values linked to virtues that support man as a heroic being capable of achieving his proper goal: happiness. "Life should be a World's Fair of delights," Walt once said. "I know that life isn't, but I think it should be, I believe it could be, and hope it will be." 

It's not surprising that he traversed a road that started with drawing illustrations and simple pencil-sketch cartoons and ended up imagining, designing, and building Disneyland and Walt Disney World. More than 40 years after his death in 1966, at age 65, these immense and complex businesses and tourist destinations are still held up as the pinnacle of service excellence and described by visitors as "the happiest place on earth."

Walt Disney built his empire on the foundation of his personal values. Those values and principles hold the secret to what is known colloquially as 'The Disney Way'. His brother and business partner, Roy Disney, summed up his and Walt's perspective on taking moral values seriously: "When your values are clear to you, making decisions become easier. It is never really easy, but I think when your values are in order, the process is easier." As the Disney Brothers demonstrated, that's a quote you can take to the bank!

Walt dedicated his life to the creation of happiness, joy, and wish-fulfillment. His legacy is a monument to his success.

I extend my sincere thanks to Didier Ghez for his enthusiasm in posting a link to Think Like An Iconoclast on his Disney History blog. Didier is the editor of the excellent and historically important Walt's People series of books. The seven volumes published so far contain hundreds of rare interviews with former Disney artists about their reflections on Walt and the pioneering work that they were involved with. It is fascinating and required reading for all Disney history buffs.