In 1982, seven people died in the Chicago area after ingesting cyanide-laced Tylenol, the over-the-counter painkiller that was Johnson & Johnson’s best-selling product. It was the type of devastating demand shock that should have sent the Tylenol brand spiraling into irrelevancy. However, not only is the Tylenol brand still a titan in the industry today, it nearly recovered its market share by the very next year. So, what happened?
The contaminated products were all found in Chicago, yet they were packaged in separate facilities – suggesting a culprit had tampered with them after they were out of the company’s hands. Despite the evidence in their favor, Johnson & Johnson took a then-unprecedented step – a recall of all Tylenol products, a financial hit to the tune of $100 million, implicitly establishing themselves as a consumer-first company. Looking through the "customer-first" lens is what made the difficult decision abundantly clear, and ultimately successful. They made the customer their focus of constituency.
Predating this incident by a decade, Nobel Prize-winning economist Milton Friedman wrote that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” If the CEO of Johnson & Johnson would have taken this “profit-first” mindset to its Tylenol decision, would it have recalled all its products? Had he been looking through a shareholder-focused lens, that $100 million hit might have appeared to be a rash and unwarranted decision. After all, the deaths weren’t even Tylenol’s fault!
So, what’s the right focus of constituency?
What’s the proper lens to look through? Is “shareholder-first” short-sighted, where “customer-first” is taking the long view? Shouldn't you be creating value for both of these constituencies? Is it all rhetoric? Is one simply the means to an end, while the other is an end in itself?
Let’s set the moral/ethical/meta-argument aside. The fact is decisions become simpler when your company has a defined focus of constituency. A certain clarity of focus permeates the organization – every individual has a distinct vantage point from which to make decisions. Jane from marketing and John from accounting understand that leadership has set the company on the customer-focused path and will act accordingly. The lens is clear.
But shareholders and customers aren’t the only constituencies affected by decisions. At Think Shift, we have defined our culture to be employee-driven. From top to bottom, decisions are made with the understanding that the company is driven by its employees. We consider ourselves stewards of the company and stewards of one another. We bring in new employees that share the desire to create value for their teammates, their clients, their company and themselves.
So, what’s your company’s focus of constituency? You’re the CEO. Maybe you know it implicitly, but is it clearly defined and communicated? Do your current employees understand it in the same way you do? How about your leadership team? Is HR communicating it to new employees? Are they using it to hire the right people? Is your culture living it, in the decisions made and the examples set?
It’s a simple yet profound notion. But the real power comes in tying this idea of “focus of constituency” back to your purpose – and intentionally building your company’s culture around it. Take it from John Mackey, CEO of Whole Foods, who recently wrote a critique of Milton Friedman’s 1970 article in the New York Times Magazine. He wrote:
“Making high profits is the means to the end of fulfilling Whole Foods' core business mission. We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can't fulfill this mission unless we are highly profitable. High profits are necessary to fuel our growth across the United States and the world. Just as people cannot live without eating, so a business cannot live without profits. But most people don't live to eat, and neither must a business live just to make profits.”
Mackey understood a very poignant point that perhaps Friedman (forgive him, he’s an economist) didn’t quite grasp. Connecting your focus of constituency back to your company’s purpose is what elevates your company. Build this into your culture and the profits will come. After all, Whole Foods started with $45K in capital – it currently has a market capitalization of $10.1 billion.
Remember that what's right for Mackey and Whole Foods isn't necessarily right for you and your company. The value is in choosing a focus of constituency (whether it be shareholders, customers, employees) that aligns with your company's purpose, and intentionally building your culture around it. It's a simple mechanism to bring alignment and clarity to decision-making in your company. So, what's right for you?
To learn more about how bringing definition to your culture can elevate your business, check out our whitepaper, "The Structure of Culture: Two Steps to Help CEOs Grow Their Business."