http://management.fortune.cnn.com/2011/02/08/capitalism-is-for-lovers-too/I would not give a fig for the simplicity on this side of complexity, but I would give my life for the simplicity on the other side of complexity. --Oliver Wendell Holmes
When it comes to managing costs, most companies operate with a simple model. They start by trying to maximize their gross margins so that they have a high cushion for spending in areas where they feel they need to spend heavily in order to compete, such as advertising and promotions. But a growing number of high-performing companies are showing that there is a better way to manage spending and improve performance. These companies live and operate on the other side of complexity.
Over the past several years, we have studied a group of companies that defy conventional wisdom and, at first glance, seem to perform financial alchemy. These companies pay their rank-and-file employees much better than their peers, have suppliers who are profitable, invest heavily in their communities, pay taxes at a higher rate, provide terrific customer service, invest in making their operations more environmentally sustainable and do not foist costs onto society. With all this spending, it would seem that there would be less left over for investors.
On the contrary, we have found that these companies dramatically outperformed the market over a 10-year period, by an astounding 9-to-1 ratio (see our book Firms of Endearment: How World Class Companies Profit from Passion & Purpose). We refer to this business philosophy as "Conscious Capitalism."
We have been working to understand how conscious businesses are able to operate with superior financial results while creating many forms of wealth and well-being for all of their stakeholders, including society. It boils down to something quite simple: these companies knowingly operate with lower gross margins, but are still able to achieve higher overall margins than their traditional competitors.
Most companies try to maximize their gross margin by looking for the cheapest suppliers they can find, and then using whatever bargaining power they have to squeeze them as much as they can to get even lower prices. As a result, they end up with low-quality suppliers who struggle to stay profitable, and who can not afford to invest in new technologies or anything else that will improve their quality or make their products more innovative.
Most companies also try hard to keep their payrolls down, minimizing what they pay to their rank-and-file employees, and are stingy with critical benefits such as health insurance. They try to use part-time employees as much as possible, keeping them under the threshold where they would qualify for any kind of benefits. They provide minimal training to their employees, and accept high employee turnover as inevitable.
Conscious businesses are very selective about their suppliers, looking for innovative, quality-focused companies that also operate in a conscious manner. They enter into mutually beneficial long-term partnerships with their suppliers. Suppliers are well paid, and in turn pay their own suppliers and employees well. For example, Costco (COST) is very selective when it comes to picking suppliers, but once they select a supplier, the two parties work closely and are in it together for the long haul.
Conscious businesses also pay their employees above the industry norm and are generous with benefits. Since their direct costs are higher, the gross margin of a conscious business is typically lower than average.
The next item on a company's income statement is the "general and administrative" line, and this is where conscious businesses really shine. Traditional businesses squander their hard won but ill-gotten high gross margins by having to spend heavily on marketing, managerial overhead, legal fees and high levels of executive compensation. They incur high recruiting and training costs due to high employee turnover. Their employees are disengaged and unproductive. Their product quality is suspect, leading to low customer loyalty and high levels of product returns. I see a healthy mixture of social aspects with capitalism pays off
Conscious businesses typically have to spend very little on marketing. This is because they have legions of satisfied customers who are advocates for the company. We have found that many conscious businesses spend as little as 10 to 25% of the industry average on marketing. This represents an enormous savings, at a time when marketing costs have been growing rapidly for most companies.
Retailer Jordan's Furniture spends a quarter of the industry average on marketing (as a percentage of revenues) but achieves sales per square foot that are six times higher. Such companies receive the benefit of the best kind of marketing there is, free marketing, not only from their customers but from their employees, their suppliers, their communities and the media.
Good article on cnn.
Its good to see that the profit motive can be met (by a couple of companies) while still maintaining some semblance of humanity.