OES - Organizational Effectiveness Solutions

Which key stakeholder should be prioritized in an organization?  Shareholders, customers, employees or executive leadership?

Traditional thinking, made famous by Milton Friedman would say that shareholder value is the top priority.  No doubt this is a key function for any firm, but shareholder value comes from sales (lots of customers), which is a result of strong service (good employees) and strong leadership (executive leadership).

So the number one priority for the leadership team should always be to take care of it’s employees, so they can take care of their customers, and the customers can take care of the shareholders.  It’s a beautiful value chain, but often times employees are forgotten in the mix.

The value chain is also important because of how it reflects a companies brand.  With the Internet and explosion of social media, people can share their experiences extremely quickly.  This goes for both employees and customers.  It’s almost impossible to control the conversations people are having about your business, but one way to help yourself is to at least make sure your employees reflect the firm positively.

Every time an employee goes home and talks about how bad his day at work was, it hurts the brand.  Conversely, employees that really care about the company can be strong brand advocates.  The same goes for loyal and satisfied customers.  It’s free and powerful marketing that will drive more sales and profits!

It all begins with strong leadership and a commitment to employees.  Richard Branson, CEO of Virgin believes this.

We know that customer satisfaction which generates all important… recommendations and fosters a repeat purchase depends on high standards of service from our people.  And we know that high standards of service depend upon having staff who are proud of the company.  This is why the interest of our people come first… in the end the long term-term interests of shareholders are actually damaged by giving them superficial short-term priority.

Another example is from Sam Walton.

The more you share profits with your associates - whether it’s in salaries or incentives or bonuses or stock options - the more profit will accrue to the company.  Why? Because the way management treats the associates is exactly how the associates will treat the customers.  And if the associates treat the customers well, the customers will return again and again, and that is where the real profit lies… not in trying to drag strangers to your stores for one-time purchases based on splashy sales or expensive advertising

It’s not just in service oriented industries where valuing the employees first matters.  Companies like Toyota are able to achieve extremely high quality and innovative manufacturing because they utilize their employees well.  Quality is very much a result of employees efforts.

A lot of this begins with values (I’ll be doing a blog on the importance of values in organizations soon) which are determined mainly by the executive team.  If they really believe in taking care of the employees then the strategies and policies of the firm will reflect that.  This sends a clear message to employees who respond by being highly engaged, providing great customer service and being strong brand advocates.  Great service and strong brands are key drivers for customers, who in turn provide even more marketing.  Customers also drive sales and profits which ultimately lead to shareholder value.  

It seems incredibly simple, but unfortunately, organizations still tend to to put the customer or the shareholders ahead of their own employees.  It is however a weak strategy in the long run.

I’ll close with a short discussion of Southwest Airlines, the most successful airline in North America over the past 30 or so years.  Their key competitive advantage lies in how productive and engaged it’s employees are.  It’s not incredibly scientific, but on Glassdoor.com Southwest Airlines is rated at 4.2/5 by employee reviews.  Compare that with it’s competitors and it becomes clear that Southwest is doing fantastic in terms of employee satisfaction.  They are also dominating in terms of profit per employees and net income (2010 numbers).  I find it interesting that the financial outcomes are directly correlated to the employee reviews.

• Southwest Airlines - 4.2/5 Employees Review; $13,151 Profit/Employee; $459 M Net Income 
• Continental Airlines - 3.8/5 Employees Review; $2,942 Profit/Employee; $253 M Net Income
• American Airlines - 2.8/5 Employee Review; $-6,019 Profit/Employee; $-471 M Net Income

Southwest demonstrates all key aspects of the engagement value chain from a CEO that is engaged and demonstrates strong values to amazing shareholder returns.  So what does Herb Kelleher, CEO of Southwest Airlines have to say regarding the value chain?

It used to be a business conondrum: “Who comes first? The employees, customers or shareholders?” That’s never been an issue to me.  The employees come first.  If they’re happy, satisfied, deidicated and energetic, they’ll take real good care of the customers.  When the customers are happy, they come back.  And that makes the shareholders happy.