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In Hidden Value, Charles O'Reilly and Jeffrey Pfeffer show how a handful of companies in widely disparate industries—including Southwest Airlines, Cisco Systems, and The Men's Wearhouse—have succeeded "not by winning the war for talent but by fully using the talent and unlocking the motivation of the people they already have in their organizations."
In this excerpt, they talk about one factor all these companies have in common: a set of clear, well-articulated, widely shared values that provide a basis for competitive success.
The most visible characteristics that differentiate the companies we have described from others are their values and the fact that the values come first, even before stock price. But why should values be a source of sustained advantage? Most organizations purport to have values—often listed on a handy three-by-five-inch laminated card to be carried in a wallet, or expressed in a widely circulated corporate mission or vision statement. Given the prevalence of these statements, how can "values" offer any advantage? And besides, a cynic might ask, what business does management have in emphasizing values (other than shareholder value, of course)? These are important questions that need to be examined carefully, not dismissed as they often are. Superficially at least, the notion of corporate values seems like just another management fad. But look a little deeper and you'll see why the values in the companies we've described do offer them a competitive advantage.
First, let's be clear what a company value is. A value is typically defined as "a belief about what is worthwhile or important . . . principles or standards that are seen as important by a person or group." In this sense, all organizations define what is important for people to pay attention to (e.g., cost control, profit, customers). Organizations have values, whether formally articulated or not. For a person to succeed in any organization, he or she has to understand what is really important to that firm—its values. People do this by looking carefully at what's actually rewarded, observing how people get ahead and who gets promoted, and watching and listening to what senior managers do and where they spend their time. The policies and practices of the company signal clearly what is valued and important.
Unfortunately, too often what senior managers say and what they do are ambiguous at best and contradictory at worst.
Anyone who has spent any time at all in an organization understands this. The underlying values of the company will invariably become clear, even if senior managers aren't explicit about them or deny that "values" are important. Too often these implicit values take the form of "follow orders," "please your boss," "don't take risks," "don't fail," "results count, people don't," and "act in your own best interest because the organization won't." Of course, these aren't the values that are printed on the three-by-five-inch laminated cards, but they are often the unspoken but widely shared values that people understand. Thus, regardless of what the mission statement or senior management says, employees will inevitably come to understand how the company operates and what the real values are.
Lest you think this view is too cynical, consider the implicit values conveyed in the modern management practices adopted by many companies. Most firms today emphasize, among other things, the employee's responsibility for being career resilient, employment at will and no-fault dismissal, pay for performance, downsizing to cut costs, and maximizing shareholder value above all else. What is the message any sentient employee takes from these practices? Pursue what is best for you, not the firm or the customer, adopt a free-agent mentality, and do not invest any more in the firm than it is willing to invest in you. The underlying values are crystal clear, even if they are never expressed in a formal way. In this sense, arguments by managers that value statements are irrelevant or inappropriate miss the point: All organizations have values; the only question is how explicit they are about them.
And what happens when employees behave in accordance with these values? First, a rational employee is not likely to exert much effort in activities beyond what he or she is explicitly rewarded for. A "show me the money" mood prevails. Second, a smart employee will be constantly alert for new and better job opportunities in other organizations—loyalty is for fools. Third, unless cooperation is explicitly monitored and rewarded, teamwork is viewed as optional. Of course, this does not mean that people won't help their fellow group members. Reciprocity is too strongly ingrained for people not to help those with whom they work directly. However, teamwork across groups or divisions with others whom a person sees infrequently is not likely to be highly valued. In this world, status comes from getting more money and more promotions, not helping customers or fellow employees. The culture, or shared norms about what's important, emphasizes individual achievement and short-term success, not mutual obligation, trust, and loyalty. To resolve some of these problems, management's job is to design ever more sophisticated control and incentive systems to ensure that the necessary teamwork occurs and that the loss of intellectual capital is minimized. But this is difficult, since those charged with this responsibility are also playing according to the same rules and may themselves leave.
Compare these values and the cultures they imply with those of Southwest, Cisco, AES, The Men's Wearhouse, NUMMI, and SAS Institute. What is not different is the importance placed on performance. Each of these companies is notable for how fiercely it competes. Each has a culture in which there are clear performance norms and in which people who don't live up to those norms soon find themselves working elsewhere. What is different in these firms, however, is the emphasis they place on two dimensions frequently absent from their competitors: a sense of purpose—why what they are doing is important—and the importance and dignity of people. Whether it is the singular importance that NUMMI places on the team member on the line, AES's emphasis on using a person's gifts to the fullest, or The Men's Wearhouse's willingness to invest in people and give them second chances, each of these firms conveys the importance of people and the larger purpose of the organization through both management actions and practices.
Why are values so important? Although none of us would work for very long if we believed we were not fairly compensated, money by itself isn't sufficient for motivating really long-term high performance. As David Russo has noted, a raise is only a raise for thirty days; after that, it's just your salary. Most of us would like to believe that what we are doing makes a difference to others and that our work is important. No one can be very motivated if they genuinely believe that what they are doing is worthless or violates their fundamental values. Moreover, most of us also want to feel that we are valued as people, not simply as economic agents. We want to be respected for who we are, not simply what we do. And most of us also respond positively to being around others who share similar beliefs and with whom we can build relationships.
If you accept this characterization of people as being generally true, ask yourself how a leader or an organization can create an environment in which these motivations are unleashed. Possible examples are by setting high performance standards and expectations for people (recall The Men's Wearhouse's goal of helping people to be better than they ever thought possible), offering a sense of purpose for the organization with which people can identify (AES's goal of bringing energy to the world, even when there are financial risks involved), and creating a sense of belonging and trust among the employees.
These values also act as a gyroscope for the organization, keeping it focused on its core capabilities. Confronted with difficult questions about strategy or policies, such as whether to enter a particular business or institute a specific practice, the values provide a test that people in the organization can use to decide what is appropriate. The crucial question is, Is this consistent with our values? For instance, when Dave Russo at SAS is asked to consider new policies, he asks himself whether the proposed practice is consistent with the values and culture of the organization and whether it will have a positive effect on a significant number of employees and their families. If the answer is "yes," the practice is adopted.
Each of the organizations we have profiled uses their values as a litmus test for solving the inevitable perplexing problems that arise. In this sense, the values help keep the organization pointed in the right direction. Contrast this with organizations without such values, or with "values" that aren't deeply ingrained. Confronted with similar thorny issues, leaders may either vacillate or adopt contradictory policies that undermine their credibility. For example, in one large organization senior management talked incessantly about trusting their employees and then adopted a measurement system that signaled the opposite. In another firm, management encouraged teamwork and then, unwittingly, approved a powerful performance management system focused on individual performance metrics. How likely would it be that AES or Southwest would make the same mistakes? To us, it seems highly unlikely precisely because managers in those organizations would think first about the company's values and whether the proposed systems were inconsistent with those values.
Finally, these values provide a cornerstone for the design of a selection process that helps attract the right types of people. The management practices then convey to them that these values are real and important. The result is that these organizations are able to capture more of the skills and talents of their employees than their competitors. Their people are more in sync with the overarching goals of the organization, more energized, and more loyal; because of this, these firms are better able to invest in their employees and recapture their investment. Meanwhile, their competitors often end up paying more to attract people and to design elaborate control and coordination systems, and are more likely to lose those employees who don't fit or have better opportunities elsewhere.
Why can't competitors easily imitate the strategy of the successful firms we have described? The answer is almost too obvious to spend much time on. Can anyone be very successful for very long at imitating another person all the way down to his or her values? Even Robert DeNiro would have a hard time staying in role for as long as needed to convince thousands of employees of his sincerity—and most CEOs can't act with the skill of a DeNiro. People are good at ferreting out deception and insincerity, and managers aren't good at pretending to be something they are not. In the organizations we have described, the values and cultures reflect the strong beliefs of their leaders and the people in them. The only way a competitor could replicate these would be to truly believe in them and to consistently behave in accordance with them—not an easy task.
Unlike companies that follow the conventional strategic management model, the companies we have described do not begin with an intellectually driven exercise to define their strategy and then align the organization to reflect this choice, with management policies decided as an afterthought. Instead, they begin with a set of clearly articulated values that are reflected in how employees are to be treated. These values and philosophy drive the management practices of the firm and help define its strategy—almost the exact opposite of what conventional wisdom teaches.
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