The Personal MBA^TM

Check out this fantastic, in-depth interview with John Mackey, the CEO of Whole Foods. The interview is ostensibly about Mackey’s shift in political beliefs that resulted from growing his business from a small natural food market to a large corporation with a market capitalization of $5.45 billion, but there’s a lot of core business knowledge to be gained from the interview as well. (You know the interview is good when the CEO comments, “You’re asking me the most difficult and complex questions that I have ever been asked in any interview before.”)

Here is John’s perspective on the value of reading, particularly reading books whose premise you don’t currently understand or agree with:

I’m committed to understanding, realizing, and experiencing truth. It is essential that we read books that disagree with our own personal viewpoints — that challenge us, stretch us, upset us, and break us out of our comfortable world views, whatever they may be. I’m far less interested in being right or belonging to some school of thought than I am in personally learning and growing. Most people are afraid to open themselves to new ideas and new viewpoints because they are afraid it will require them to change. And they’re right — it will cause them to change. However, I enjoy this kind of change because I see it as personal growth.

During the course of the interview, Mackey brings up a fundamental issue that’s been a topic of spirited conversation among businesspeople all over the world: is the primary purpose of a business maximizing profits for shareholders (i.e. the Milton Friedman view), or is it appropriate for a for-profit business to prioritize other purposes over immediate shareholder returns? Mackey’s view is well-articulated and thought-provoking:

… There is a fundamental paradox that I call the “paradox of shareholder value”. The best way to maximize shareholder value is to not make maximizing shareholder value the primary purpose of the business. Why not? Because it is the business that satisfies customers best that has the most customers, the highest sales, and the most profits. The best way to satisfy customers best is to organize the entire business around satisfying the customer. Every communication the business makes towards its customers, its employees, and the media should be about putting the customer first. Ultimately the best way to satisfy customers’ needs best is to actually put those needs first. If profit is the articulated primary goal of the business then it is unlikely that the employees or management of the business will dedicate themselves to customer satisfaction to the same degree they would if customer happiness was seen as more important than investor profits. In the first case customer happiness is merely a means to an end — maximizing profits. In the customer-centered business, however, customer happiness is an end in itself and because it is it will be pursued with greater interest, passion, attention and empathy than the profit centered business is capable of.

Let me give you an analogy that may make this point better: What is the key to happy marriage? Is my wife’s happiness an end in itself for me or is her happiness merely a means to a different end — my own personal happiness? It has been my experience that I am happiest in my marriage when my love for my wife causes me to place her needs and desires first — ahead of my own. When my wife is happy then I am happy. When she isn’t happy, then I’m not happy. I achieve my personal happiness in marriage best by not focusing directly on it, but by focusing on her happiness as the primary goal for me in the marriage. That is the way love works, in my opinion. The beloved’s happiness is an end in itself — not a means to some other end. Paradoxically by seeking to maximize my wife’s happiness, I also maximize my own. However, that is a secondary by-product of my desire for her personal happiness. Fortunately for me my wife shares my philosophy of marriage and reciprocates my dedication to her happiness with an equal dedication to my own happiness as well.

Similarly to a happy marriage, the most successful businesses put the customer first — ahead of the shareholders. They really have to have this dedication to the customer to maximize customer happiness. Customers aren’t stupid. They know when they are being misled or merely being used. It is also difficult to impossible to truly inspire the creators of customer happiness, the employees, with the ethic of profit maximization. Maximizing profits may excite shareholders, but I assure you most employees don’t get very excited about it even if they accept the validity of the goal. It is my business experience that employees can get very excited and inspired by a business that has an important business purpose (such as selling the highest quality natural and organic foods) and teaches them to put the needs of the customers first. People enjoy serving others and helping them to be happy — when they know this is their primary goal and are also rewarded for successfully doing so.

The customer-centered business is usually the most successful and the most profitable, while the shareholder centered business usually underperforms over the long-term. I suggest reading Jim Collins’ two books Built to Last and Good to Great for empirical evidence to this viewpoint. The ultimate test of these two business theories, however, is in the marketplace — not in theoretical arguments. My company, Whole Foods Market, is a mission-driven business that puts the customer first, the team members second, and the shareholders third. We are winning competitive battle after competitive battle in the marketplace against businesses which adhere to the philosophy of maximizing profits and shareholder value as their primary goal. Whole Foods has never had a store we open ever fail in the marketplace. We have never lost a competitive battle in 27 years of business! Why not? Because the profit-centered businesses we compete against cannot beat us in the marketplace. Our customer and team member-centered business model beats them every single time.

I must confess that I’ve subscribed to Friedman’s view of business for quite a while now, but the more I learn, the more I’m finding that my views are rapidly shifting towards Mackey’s. Maximizing profits is certainly an appropriate goal for a business, but that doesn’t mean that it should always be the immediate primary goal.

By taking care of customers and employees first, Mackey is essentially prioritizing his primary source of revenue and primary means of operating his business, both of which are absolutely essential for the continued success of Whole Foods. This “indirect approach” may prove to be even more effective than Friedman’s “direct” shareholder profit maximization approach, and high profits enable Mackey to continue to deliver on Whole Food’s stated purpose of “improving the health and well-being of everyone on the planet through higher-quality foods and better nutrition” in a way that benefits everyone involved. (This is a good example of the value of keeping an open “beginner’s mind” and being willing to admit that your position is incorrect - if I had dismissed Mackey’s ideas out of hand, I’d be passing up a major opportunity for learning and personal growth.)

There are certainly some grey areas with this approach (i.e. “When, if ever, is it appropriate to lay off employees if overhead costs become a major issue?”), but by focusing on the needs of customers and employees first, Mackey is making an educated bet that shareholder returns will continue to follow for the foreseeable future.

For further consideration, here’s a debate between Friedman and Mackey that compares and contrasts their positions in additional detail.

What are your thoughts on the primary purpose of a business?

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