Chapter 69 - Rags To Riches: How Corporate Culture Spawned A Great Company
Today’s Chapter is based on the book “Rags to Riches: How Corporate Culture Spawned A Great Company” by Richard Farmer, the founder of Cintas.
Here’s what I have learned:
Exceeding Customers’ Satisfaction
“The goal as a company is to have customer service that is not just the best, but legendary.”
— Sam Walton
As we have learned previously from Jack Taylor who founded Enterprise, having “satisfied” customers isn’t enough, you need to exceed their expectations. This is because customers who are completely satisfied are 70 percent more likely to become repeat customers.
Why are repeat business so valuable? The reason is simple; studies shows that it costs 5x or 6x more to gain a new customer compared to keeping a current one. Over the years, Enterprise’s management team believes that there are six reasons why people stop doing business:
1 percent die
3 percent move away
5 percent develop other relationships
9 percent leave for competitive reasons
14 percent are dissatisfied with the product
68 percent go elsewhere because of the poor way they were treated by employees of the company
Similarly, according to a survey done by Enterprise, 70 percent of those in the “completely satisfied” category were willing to use Enterprise again the next time they need to rent a car. However, only 22 percent of “satisfied” customers mentioned they would come back.
“Repeat customers are the quickest way to build a solid business.”
— Jack Taylor
It is fair to say that this philosophy of Enterprise of exceeding customers’ expectations in order to gain repeat customers is largely a differentiation between the company and their competitors. While others may be concerned about getting renters in and out of cars as soon as possible in order to increase their bottom line, Enterprise are much more committed in making sure customers have a good experience and will come back.
Similarly, Richard Farmer, when building Cintas, realized that customer satisfaction was primordial for the company’s success. In fact, in 1979, Cintas adopted the following Principal Objective: “The principal objective of our company is to maximize the long term value of Cintas for our shareholders and our working partners (employees) by exceeding our customers' expectations."
However, Farmer knew that “customer satisfaction depended on the reliability of the workforce.” Considering that employees were the frontline of the company who were facing customers, Farmer believed it was important for great executive to know what it is like to be a great worker. He once said, “To lead, you must understand who you are leading and how we need to work together to "exceed our customers' expectations," which is more than just a motto.”
“My core conviction was, and remains, that employees and managers have a vested interest in each other and in satisfying the needs of the customer.”
— Richard Farmer
As such, Farmer was also aware that if he wanted to fix a problem, it would be a lot easier to go directly to the people on the front line in order to get their opinion on how to solve it. He understood that the workers would know more than their supervisors.
Finally, and more importantly, Farmer understood that to exceed customers satisfaction, it was primordial for the company to be consistently reflecting on ways to improve their services. As he once said, “the pursuit of better customer satisfaction is a never-ending quest.” This reminds me of this famous saying from David Ogilvy’s The Eternal Pursuit of Unhappiness: “Being very good is no good, you have to be very, very, very, very, very good.”
As such, having an R&D department in order to innovate in terms of machinery and product is not sufficient in the eyes of Farmer. The biggest innovation at Cintas should be to constantly raise the standards of performance and expectations. He explains that “We expect to sell more and to make more profit every year. Our general managers can't possibly meet expectations by doing the same thing the same way year after year. We set high expectations, and they must innovate to meet them.”
Motivation From Ownership
“When people are properly motivated, they will essentially manage themselves.”
— Paul Orfalea
Richard Farmer at Cintas mentions that his philosophy is to align employee’s interests with those of their shareholders. To do so, Farmer gave ownership to his employees. As he once said, “I've always believed there is nothing more motivating than ownership.”
Not only were employees shareholders in the company, they were treated like shareholders. As a matter of fact, Farmer had annual meeting with his employees in order to show and review the sales and profits for the year. While he was questioned about why he would share such confidential information to his employees, Farmer would respond with the following: “How can you win the game if you don’t know the score?”
For Farmer, he was always willing to share equity with people within the company. He felt a lot more comfortable treating them as partners rather than hired hands. As we have often learned with incentives, having a bonus and stock option plans in place is a certain way of building a motivated group of employees.
“What is important, I thought, is what your piece of the corporate pie is worth, not what percentage of the pie you own. I needed people who could make my piece of the pie more valuable.”
— Richard Farmer
Furthermore, it is obviously important to make sure that the incentive structure is in line with the company’s vision. Considering Cintas’ principal objective is "To maximize the long-term value of Cintas for our shareholders and working partners by exceeding our customers' expectations.", Farmer knew that the employees’ non-salary compensation would need to be based on three criteria — the growth of their sales, their profit margin and their Customer Satisfaction Index (CSI).
As a matter of fact, Farmer decided that each business unit would have be evaluated based on their separate profit-and-loss statement. Each department head would be running their own business and be evaluated on their growth sales and profit margin. Farmer came up with the Rule of 35. Here’s how it came along:
“We had debates about this, as usual. Some operations were growing very rapidly—say 30 percent—but their profit margins were lower than we would like. Others were making great profits—say a margin on sales of 25 percent—but growing more slowly.
Which was better? Some markets can't support 20 percent growth while others can support 30 percent. Finally, one day I asked a group of managers, "Wouldn't we be just as happy if a manager increased sales by 25 percent and had a profit margin of 10 percent as we would be if he increased sales by 10 percent and had a profit margin of 25 percent?"
We all looked at each other and said, that would be just fine. So if you added it up, it became known as Rule 35, the key guideline for how to balance increasing sales with profitability. If your sales are growing at 30 percent and you have profit margins of only 5 percent, that's fine. You're within Rule 35. Rule 35 became our mark of excellence."
— Richard Farmer
As we have learned previously from Peter Kiewit, having a great incentive structure is primordial for the success of a company. As, Peter Kiewit once said, “One of the reasons our results are better than our competitors is that all of our stock is owned by employees people who are actively engaged in our business. Each one is, in fact, a part owner of our company and is, in a sense, working for himself. Certainly this should, and I believe it does, provide a definite incentive to our employees and a corresponding benefit to the company.”
As such, Peter Kiewit, similarly to Richard Farmer, made sure to offer stock to valuable employees so that they can also have a share in the company’s success. However, he made sure that the stocks would have to be sold back to the company when they leave. Furthermore, the company made sure that each employee’s stock ownership reflected his or her level of responsibility and performance. This provided a meritocracy structure that promoted entrepreneurship thinking from all employees.
“There are two rules. First, my stock will be acquired by the company. Second, company stock will be owned by employees.”
— Peter Kiewit
Corporate Culture as a Competitive Advantage
“Teamwork is the fuel that allows common people to attain uncommon results.”
― Andrew Carnegie
As we have previously seen from Paul Orfalea at Kinko’s, corporate culture can be considered a competitive advantage. As a matter of fact, Orfalea understood that by being in the retail copy centers business, he had plenty of competitors since there are no barriers to entry in the industry. Therefore, if he wanted to beat his competitors, he would have to make Kinko’s a great place to work; he would have to create an incredible corporate culture and make it a competitive advantage.
Similarly, Richard Farmer believed that Cintas’ ultimate competitive advantage is their corporate culture. He explains that “Our culture is rare, invisible, and difficult—if not impossible—to replicate.Competitors can copy our sales material, our products and even some of our systems, but they cannot copy our culture.”
“I swore that I would do whatever it took to develop obvious and authentic competitive advantages. Today, we recognize that our most significant competitive advantage is very rare, intangible, and impossible to replicate. I'm talking—again—about our corporate culture.”
— Richard Farmer
However, in order to implement a great corporate culture at Cintas, it was primordial for Farmer to create a vision for the company to lead his employees. Cintas’s vision was the following:
1. To be known as a company that insists on absolute honesty and integrity in everything we do.
2. To have a highly talented and diverse workforce which is harmonious and compatible with our corporate culture.
3. To have a uniform rental presence in every city in the United States.
4. To leverage that field presence to provide our customers with additional products and services.
5. To expand our uniform business into segments of industry we don't normally service (such as hospitality, transportation, restaurants, and so forth).
Farmer explains that it is important for a company to have a vision and to share it to its employees. In fact, he explains that “employees are not just doing a job. They're sharing a vision. If they share a vision, a job is more than a job.”
He uses the following anecdote to explain the importance of having a common vision among a company:
“I used to tell the story about a man walking down the street in the middle of a big city and how he came upon a construction site. Bulldozers and earthmoving machines were busy on the site. People were working hard. He came across three men in a ditch. He asked the first man, "What are you doing?"
"I'm digging a ditch," the first man said.
Our protagonist asked the second man, "What are you doing?"
"We're digging a ditch for the water line for that building going up over there, the second man said.
Our protagonist asked the third man, "What are you doing?"
The man looked up and replied, “We're building a cathedral. It will be a big beautiful cathedral with five big tall spires and beautiful stained glass windows. It will seat 500 people. It will be the most beautiful church in this city. That's what we're doing."
Every time I'd tell that story, I'd ask my audience which of those men do you think is most motivated. Obviously the man building a beautiful church will be more committed than the others because he shares a vision. He may be in a ditch, but he is proud of what he is doing. That simple story demonstrates why it's important to have a vision and share it with everyone.”
— Richard Farmer
This reminds me of the importance of setting out goals both as a company and as an individual. As Joe Montana once said, “it is impossible to strive for something until we know what it is we are pursuing. You have to know what you want.”
If we do not know what are specific goals are, it is very difficult to have the drive, discipline or imagination to achieve them. As such, the first thing to do is to identify what we want to accomplish. Not only that, I believe it is primordial to choose which goals we need to focus on in order to manage our time better.
One way of doing this is by writing down the goals we want to achieve and to circle the top three we want to achieve. The rest should be eliminated.
“This first principle, knowing what we want, is the beginning of achieving performance excellence.”
— Joe Montana
Beyond the Book
Read "The Eternal Pursuit of Unhappiness" by Farnam Street
Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street