A presentation to the World Productivity Congress, Edinburgh, October 1999
by David Poirier, Chief Information Officer, Hudson Bay Company
The Hudson's Bay Company was formed 330 years ago - incorporated in 1670 - since when it has ventured into several different types of businesses. In essence, rather than being founded within Canada, it was the founder of Canada by doing much of the mapping and the routing of the Canadian Territories. If any of you ever get the chance to visit Winnipeg, there's a history of the Hudson's Bay Company there, complete with all of the trappers' reports from 1670 on, which were kept in duplicate in England. Since then, we have grown considerably: this year, we are about to hit eight billion dollars in sales, and we have 550 stores across Canada, under four banners. The major stores are general merchandise stores, and they tend to be large in nature at around 12 thousand square metres. We have a significant market share in Canada.
However, we are not without our problems and challenges.
Firstly, the Canadian economy has been under tremendous pressure in recent years. Although our friends to the south have gone through tremendous growth, Canada not kept pace. Canada has improved but not to the extent that the US economy has grown.
We have several challenges in the Canadian marketplace, both internally and externally.
The Canadian retail market - as with many of your own home markets - has a tremendous number of new entrants. Most of our competitors today didn't exist in our marketplace five years ago.
The challenges :
Competition and the growing development of ecommerce have moved us from being the largest general merchandise retailer in Canada to a medium to small size general merchandise retailer - in international terms! Our buying power within Canada remains strong but our buying power on the international marketplace against organisations like Walmart from Dentonville is certainly a challenge: Walmart is now about 20 times the size of our organisation.
We have also had challenges internally because in the Canadian economy there tends to be a shortage of labour skills at the lower end - the lower level clerical - it is a challenge for us to find the right kind of employees to meet the needs of our customers.
The growing regulatory 'weight' on large organisations such as ourselves tends to lend an advantage to start-up and smaller organisations.
Technology changes continuously and start-up organisations and e-commerce organisations tend to have some advantages over us in that they don't have the overhead of legacy systems - they jump right in with the new.
As a result of this changing landscape, we are the only remaining Canadian general merchandise retailer of any significant size. Our major competitors are both American, Sears and Walmart, and we are expecting a multitude of international retailers to also enter the Canadian marketplace both through e-commerce as well as with a physical presence.
Several years ago we recognised that there were basically four areas for improvement and if I'd like to take each of these and look at each one at a time.
From the shareholders' perspective or the top perspective of the organisation - we often call this the investment optimisation process - what we've found is that our organisation has traditionally been focused on selling products. We're now going through a shift within our organisation to understand that it's no longer about selling more towels or more bed sheets or more garbage bags or laundry detergent. It's far more about managing our relationship with the customer. We recognise that our investors and the investment community in general agree with this because they value our company, based on what they see future expected earnings to be.
We recognise that the value of our organisation is based on the lifetime value of our customer base.
The more customers that we have, the more that they spend with us - profitably - and the longer they stay with the more they increase the value of our organisation.
To address this, we've spent a tremendous amount of money on advertising and merchandising programmes and marketing programmes. And we've found that the results haven't been sustainable. For example, we'll go through a massive advertising campaign to improve sales or increase the number of customers but some three to six months later we wonder where all of those customers have gone to now that the programme has finished.
Likewise on the operational side, we have gone through a number of performance improvement programmes involving cost cutting to improve the operations of the business. Many of you have probably gone through similar exercises to identify 10 percent cost reductions in your division, departments or organisations. We've gone through those things and, lo and behold, six months later we identify that those costs have crept back into the business, we are no longer competitive, and we haven't captured those savings.
Similarly we have gone through many training and development programmes, and recruitment programmes and employee education programmes, and yet three to six months later we find that those programmes haven't created the kind of benefits that we envisaged.
I have visited New Zealand several times and I saw a procedure that I'll probably never forget, and I'm sure is prominent in Scotland too. It is called sheep dipping. They take sheep by the feet and dip them in this vat of chemicals to keep the bugs off of them. I think that that is quite often how we have treated employees in the past when it comes to training and development. We have taken our employees and dipped them very quickly in a one or two day session and then sent them on their way thinking that we have cured them of all the ills of the organisation for yet another year - or until we provide them with another day or two of training and development. Of course it doesn't work nearly as well as we hope. Fortunately, the fate of our staff is a little better than the fate of the sheep but the end result isn't substantially better.
I have taken part in the 'famous' management retreat or planning session of several companies, where we go off and develop strategic plans for the organisation, away from the rest of the business, usually, at a beautiful resort, somewhere where we can be more creative and thoughtful. We come up with these terrific plans for the organisation that are going to revolutionise the performance and value of the organisation. Then we come back and those plans sit on our desks or sit on bookshelves until the next year, when it's time to do it again and we review the results from the previous year. Quite often, we find that although we have a lot of great ideas around strategic incentives and around performance improvement for the organisation, we haven't been able to make that traction. We haven't been able to make sustainable performance improvements for the organisation in such a way that they last and create value for our customer in the end.
I believe the main reason behind this is because we have always managed each of these elements in isolation. When we go around creating cost reductions, we do it without keeping the value of the customer in mind. So, in the case of our organisation or other retail organisations, we often look to the back end of the business, to the distribution systems or logistic systems, to create cost reductions for us without keeping in mind the value of the consumer. Likewise, whether you're a financial institution or a service organisation, many of the cost reductions that occur and which are in areas that we say don't directly touch the consumer actually DO affect the consumer significantly.
When we advertise, we do so without understanding the kind of customer behaviours we want to create. With our performance improvement (actually cost reduction) programmes, tell part of the organisation to reduce costs by 10 per cent, only to find two months later, that they've cut the wrong costs, all the incremental research and development, or the performance improvement capabilities needed to sustain the base operations. We lose a lot in the translation!
I think the key to an organisation's success is to focus on those lines that connect each of these elements so that we have a more balanced approach to sustainable performance improvement. So that, when we create a strategy for the business, it's creating a strategy with respect to building the relationship of our customer base - building that lifetime value. And when we do it, every employee understands the value of a customer. So that we're not asking employees, on the one hand, to serve the customer but paying them, on the other hand, to reduce expenses because often those things are in conflict. For an organisation like ours, with just over 70,000 employees, getting every employee to understand those trade-offs, is virtually impossible.
In a typical store of our organisation we may have, say, a 30 per cent market share, of which approximately 24-25 per cent is actually created by our most loyal customers. Typically our most loyal customers make about 80-85 per cent of their purchases with us. Then we have the 'splits' or the multi-shoppers. They shop in multiple stores, tend to be more disciplined in nature, and to shop from two or three major stores. We appreciate that these customers contribute 5-8 per cent of our market share. We then have the customers we call the occasional customers, or the cherry pickers, who really focus on buying just the specials from our stores - just the loss leaders. These customers are very disciplined in their approach. They may shop four, five or six different types of stores in order to get the best deal, and it's very difficult to get those customers to buy more products from us. They are very much price driven and very disciplined in their approach.
Needless to say, if you look at the profitability of these customers, the loyal customer is the most profitable, while we actually lose money on the cherry picker or the occasional shopper.
I have spent almost 20 years in the grocery business in Canada and a number of things have surprised me. I found it fascinating that, in North America, much of the grocery business is driven from the weekly advertising that we put in the newspapers. If you think about who the grocery business is focused on, it tends to be on the occasional shoppers and non-shoppers. Let me take you through the process. Typically, for the occasional shopper and non-shoppers, we actually hand them the items that we want them to shop for in our stores, We use these loss leaders, the items that we actually lose money on, to lure them into our stores. We even make it convenient for them by actually giving them a list of items that we lose money on in their living rooms every Saturday so that they can make a list, so that they won't forget. Then they come into our stores, and to avoid having them actually walk past any items that are profitable for us, we even put the advertised items up at the front of the store so that they can select them from there. And then to make it even more convenient for them, we provide those cherry pickers with an express lane to get out of our stores so that they can get to our competition faster!
Imagine if this was an airline! Let's say, that I was a most valued customer and I was sitting up in first class or business class and one of the flight attendants came up to me and said:
"Excuse me, Mr Poirier, we recognise you as a valued customer, however, we have just brought on an occasional flyer who we know will probably never fly with us again - in fact they won their ticket through a raffle and they ended up paying just ten dollars for the ticket that you paid two thousand dollars for - but we'd like to give them your seat so that they can have a wonderful experience of flying with our airline. We have a convenient seat for you at the back of the plane, right beside the washroom. We'd like you to have it because we know that the next time you are going to enjoy your travel with us, and we'd like to give this one-time trip to an individual that hasn't been with us before. By the way, we don't have a meal for you back there as we have given your meal to this one-time flyer".
Well, you can imagine how long that airline would be in business. And yet as a grocery business and as a retail business that's what we've actually created in expectation for our customers. And so the value of our customers has been unrecognised and the whole focus on retail business has been about pushing products; the focus has been on products. Whether it's a credit card business, or financial services or service business or any other type of retail operation typically they are focused in on products and not customer relationships.
Since realising this, have found that by switching our focus to customers we can drive a market-share from 30 per cent to 80 per cent - by focusing on people who are already shopping in our stores.
Although we had this flash of realisation, we had little customer data to work with. We had lots of data within the business but little data about the value of our customer base. Our customers were unclear about the branding that we stood for and, unfortunately, about a year ago we did some surveys and found that the two things that 'the Bay' was best known for in Canada were our two sale events. We really didn't have a relationship with the customer but they had an understanding of what they should look for when we mentioned 'the Bay' - deep discount pricing.
So we didn't have a clear offering and we had disagreement on customer investment priorities!
If you were to go back to your organisations and say, if we had an extra 100 dollars or 1,000 dollars, where would we spend it - on building our business or building our relationship with our customer? You would get a fascinating response from people. I had 12 people in the room when I asked this question and I got 27 answers - which gives you an indication of the lack of clarity about customer investments. Do we spend the extra dollars on adding more service in the stores, or on lowering prices, or on advertising, or on new technology? Do we spend it on building better quality or improving the interior of the store? Do we spend it on advertising or building an e-commerce business? We had all of those answers so it was clear that people didn't understand the investment in the customer relationship.
Let's move to operations, where I spoke of the 10 per cent cost reduction. Our operations tended to be very compartmentalised, like silos, by design.
When we looked at the operations we saw that distribution ran very separately from finance, which ran very separately from the merchandising group, which ran very separately from store operations. There was little cross-functional process understanding, little knowledge of cross-functional processes, and little process management capability, so people didn't really understand process management. What they did understood was that success, in the absence of an overall driver for the business, was being able to hit their budget. If we create an environment where the sole measure of managing the organisation is to actually hit a budget, then that's what people will do, but if they can be moved around and shown how they can contribute towards the success of the organisation, you will end up with very different results.
Moving on to human resources, which really deals with training and development and recruitment of people, and reward & recognition, we found that many of these things were in conflict. We hired people we thought were right because they had superior technical skills, business acumen and a great understanding of the organisation but we didn't look for those leadership skills that we have been talking about for the last ten years. We thought that perhaps by training them for a day, or two days or five days a year, they'd gain these leadership skills when in fact, these weren't inherent in their nature. We had a shortcoming between the type of employee that we wanted to have to drive the business forward, and the type of employee that we were recruiting into the organisation.
We had independent silos all around the organisation, and so the whole focus was on hitting departmental or divisional results rather than contributing to the success of the overall business.
The measurement and reward systems were certainly askew. Management's view was that we had a lack of common understanding of what was important in the business, of how the business operated. We've had a complete management changeover the last two years so a lot of new people in and, as a result, we didn't really have executive team alignment. Our description of success was different depending on who was hearing it, so you can imagine how confusing this was for the masses of people within the organisation - with 70,000 people hearing three or four separate messages about what is important in the business we created conflict for them. We had significant positioning issues as well, and so we undertook a transformation!
In the first phase, we went through several different elements - and we are still going through some of these - leadership alignment, education and consensus building amongst people, research and modelling, getting people to understand the incremental value of customer behaviour changes.
The next phase moved us on to the assessment of core processes. What we found is that we didn't have a common understanding of these things, so we had a job to do - of building knowledge and awareness of our organisation and its potential. We then had to design and pilot change, because there were a lot of sceptics in this organisation who didn't believe that we really understood the changes needed in the business. We wanted to be able to test these things - to show that they made a difference.
The third phase is building the basic capability so that we can go onto a fourth and fifth stage of execution and reviewing execution. The third stage is really about creating a realignment of knowledge and application within the business, so that we end up with a connected approach to relationship optimisation with the customer, positioning, the value delivery process (so that operations understands how they add value to the customer relationship), and organisation capability building.
We are beginning to understand that this is all about behaviours. If we articulate how to add value to the business, it really comes down to changing customer behaviours - getting them to shop more at our stores, getting them to shop in more departments, getting them to shop not just for specials but for general merchandise as well. We need them to drive past the competition, and to tell their friends and family that we have a wonderful organisation.
How do we create those behaviours? We create them by creating a great offering, which comes down to valuing the customer through our employees. So we needed to think about how we get our employees to attract customers. We know about the employee behaviours that we want to create : we want our employees show up on time for work, to understand how they can contribute to the success of the organisation, to tell their friends that it's a great place to work, and to avoid negative behaviours such as stealing from us!
We also want shareholders to buy our stock, and to hang on to it for a long time. We want them to tell their friends that it's a great stock to buy and to pay more for it time after time.
And so our whole organisation has begun shifting around the lifetime value of our customer base. It all comes down to values and behaviours, and this is the part that I think is most critical going into the new millennium. I believe that the core value of our business is directly attributable to the core values of the people we have within it. We need to have core values within our business of learning, serving, excellence and integrity - but we aren't creating these within the business because I think they are the core values that we all share. Having spoken to over 4,000 people now, I have found that people all believe in those core values. What do I mean by these core values? Well for serving, it's about serving others versus serving ourselves, or being self-serving. It's about being creative versus being conventional and so on.
Think about your organisation and the people that you work with, and decide where they are on a scale of zero to ten on different behaviours. Think about where you would put your own department or work group, and also think where you are on a scale of zero to ten on a day-to-day basis in relationships with these same people. Keeping that in mind, ask where would you like to be on that scale from zero to ten. Virtually everyone that I have spoken to has said that they wanted to be on ten and they wanted to work in an environment that had a ten.
The second focus is on excellence or creating improvement in the business and, for our organisation, it's about getting courage versus fear, being decisive rather than indecisive, and focusing on results rather than having our heads down and acting busy. There's something that we do in an organisation that makes people feel that they have to come to work and be a different person from the one they are at home. Whether they become more autocratic or more sheltered, or more hidden in what they do, there's something that we've created within our organisation that creates those behaviours.
The third focus is on integrity. Again for each one of these behaviours, you can pick out where you are, where your department is, and where your organisation is. Integrity for me is more than just these behaviour points. It is about acting in accordance with one's core values. So just as we can get people to show up at work in exactly the same way that they would do naturally, it actually frees up a lot of energy because they don't have to worry about pretending to be someone else, they can just be themselves.
The last one is learning - learning versus defending, listening versus arguing.
The challenge is that if you think about what it would be like to be a ten, my guess is that you've experienced somebody out there who has been a ten in each one of those behaviours and, probably, you've also been a ten at least once in every one of those categories of behaviour at some point. The question is, if I were to stop this meeting right now and everybody went outside and met somebody, my guess is that for at least five minutes you would be able to be a ten on all of those behaviours with that individual.
So, if we know that being a ten produces better results for an organisation, we know that people would rather work in an organisation that is a ten rather than a zero, and we know how to be a ten because we have experienced it and we've also created that experience for others, then why do we choose to be anything but a ten?
That was the challenge that really drove me to Hudson's Bay Company. It all started several years ago when I was in charge of distribution operations for another company in Canada, and we sent out a survey to everybody about leadership and commitment to leadership. We asked them, not about their leadership role in the organisation but their leadership role outside the organisation. We got back this huge and very impressive list! Now, there was one individual in a distribution centre who was a unionised employee and considered the worst employee in the organisation. The reason for this was because he fought everything in the company. The second reason was that he was smarter than everyone else - so he fought very well. Management hated him because he was smarter than them and he would constantly fight them on any improvements to the operation. The union representatives hated him because he cost them so much money - he knew all the union rules and had to get them to support him in all the fights. And the employees hated him because he convinced them to do things that they didn't want to do.
When his name came back on this list, there was not just one thing, but for four things. He came back as a church elder, as a coach for a soccer team, as a Boy Scout leader and as a school trustee. We thought Bob was 'yanking our chain' again and playing tricks on us, and so we sent people out to check. Lo and behold : he wasn't only all of those things - but he was great at them all! And the reviews that came back was that he was fantastic! Well this didn't make any sense at all. How can you have an individual who is one thing all day long and then, when they leave work, they turn into something quite different.
I asked him: 'How can you be such a pain all day long and how can you be such a leader outside the organisation?'
He said: 'Because I like to work outside the organisation.'
I said: 'Do you know what people think of you?'
He said: 'Yeah, people hate me.'
I said: 'Well, how do you feel about that?'
He said: 'I hate them.'
And I said , 'How can you work seven hours and fifty six minutes being one person and leave work and be someone entirely different?'
And he said: 'Because I like to contribute after work and I don't like to contribute here.'
I said, 'Why do you work here?'
And do you know what his answer was? Job security! Because he knew all the rules.
I said: 'Why don't you work somewhere else?'
He said: 'The pay's pretty good, and I get to save my energy up.'
Well, of course he didn't, because he was spending it fighting the organisation all along.
We went back and forth until finally, he pointed his finger at me and said: 'I'll tell you why; it's because 17 years ago when I started here my supervisor told me that I would never amount to anything.'
Seventeen years! Can you imagine the cost to that individual?
So I said: 'What did you do about it?'
He said: 'Nothing'
I said: 'Why not?'
He said: 'Nobody cared.'
From that day on, I committed myself to never allowing an organisation to create another Bob.
Think about the cost to that individual. We know his leadership skills outside the organisation. Now think about the cost to the business. Think about the cost to all of those around him who were connected to him on a day-to-day basis. Now I don't know how many Bobs you have in your organisation but I know we have a few in ours.
In fact, at a round table where I meet with employees regularly to get their input, a woman at the other end of the table said: 'I'm Bob!'
So I said: 'Well, how do you do?'
And she said: 'No you don't get it. I'm Bob in your story.'
And I said: 'Oh, thanks for the input.'
And she said: 'No, I have a question.'
And I said: 'What's that?'
We had just gone through quite a bit of management training and got them to understand the value of this, and she said: 'What did you do to management?'
And I said: 'Well, we had a little training and development, why?'
She said: 'How long are they going to stay this way?'
I said: 'Why?'
And she said: 'Because I don't think it's going to last, but I want to know how long it's going to last.'
I said 'Well there are no guarantees, but it'll last as long as we create an environment in which it will last.'
'Okay,' she said: 'I want a commitment from you that it's going to last.'
And I said: 'Well let's turn it around, Bob - tell me a month from now whether it's lasting or not.'
And she said: 'All right, you're on!'
Now this was a woman with a very bad reputation in Hudson's Bay Company - people avoided her. All the workstations around her were empty because they wanted to avoid her. A month later she sent me a note. It was unbelievable. She said: 'Hi, it's Bob, remember me? I have to tell you that not only my boss, but my boss's boss invited me into his office and asked me 'how's it going?' And I just want to let you know that that is the first time in the history of this organisation that anybody has cared anything about me. So I want you to know that from this day forward I am absolutely committed to helping you with this transformation.'
Can you imagine the value of that little thing, that's one person out of 70,000. That's 69,999 to go - and what a tremendous opportunity we have as an organisation.
There's a challenge here for you as well, and the price you have to pay is about choice: you can choose which set of behaviours you adopt, and the kind of organisation you create.
The challenge for you and the price you have to pay for listening today is to make a conscious choice because, from this moment forward, you can choose to be anywhere you want to be on the scale of behaviours. I ask you to make that choice carefully, and guarantee that if you choose wisely, you'll have a more fulfilling and rewarding career, and will create sustainability in organisational transformation that will drive the company forward. It takes vision and courage to create, and faith and courage to prove.
Thank you very much for the opportunity of speaking with you today.
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