Creating a

New Business

Paradigm

Do We Need a New Business Paradigm?

• Corporations are the most influential institutions in the world, yet most people do not believe they are “good” or that they can be trusted.

• Corporations are widely perceived as greedy, selfish, exploitative, & uncaring—only interested in profits. Ethical lapses of Enron, Arthur Anderson, Tyco, NYSE, WorldCom, Mutual Funds, AIG

• The anti-globalization movement is primarily an anti-corporation movement. Many people are afraid that corporations want to “rule the world”.

• Corporations & capitalism both have serious “branding” problems in the larger world today.

Limitations of Current Business Models

• Economists developed their theories of business enterprise during the industrial revolution and these theories are badly outdated.

• Current business mentality still thinks in terms of machine, engineering, and industrial metaphors—labor, land, capital are “factors of production”—therefore merely means to the end of efficiency and profits.

• Current business mentality doesn’t grasp systems interdependencies and therefore largely lacks ecological consciousness or a sense of responsibility for other constituencies or stakeholders besides investors.

• Large corporations are solidly grounded in a model that does not consciously create value for all of their constituencies.

What is the Purpose of a Business?

• What is the purpose of a doctor or a hospital? A teacher or a school? A lawyer or a law court?

• All the professions put an emphasis on the public good. Why doesn’t business? Isn’t business also a profession which should be concerned about the public good?

• Who defines what the purpose of any business is? Economists? Lawyers? Investors?

The Answer Depends Upon Who is Asking the Question

• Customers want high quality, low prices, & good service

• Employees want fair wages and benefits, good working conditions, fulfilling work

• Investors want increasing sales, profits, & shareholder value

• Communities want jobs, taxes, donations, minimal environmental impacts

• Entrepreneurs who create & build the business are the ones who ultimately define its purpose

The Paradox of Profits

• In my life experience happiness is best achieved by not aiming directly for it.

• In my business experience profits are best achieved by not making them the primary goal.

• Deeper business purpose, great products, customer satisfaction, employee happiness, social and environmental responsibility—these are the keys to maximizing long-term profits.

Long-Term Profits are Maximized by not Making them the Primary Goal

• A business is best not thought of as a machine with various factors of production existing to maximize profits.

• A better model is to think of business as a complex system of interdependent constituencies.

• Management’s job should be to optimize the health & value of the entire system. All the constituencies are connected together and effect one another.

• Optimizing the health and value of the entire interdependent system and all of the major constituencies will also result in the highest long-term shareholder value.

Voluntary Cooperation in Business

• All constituencies voluntarily cooperate together to create value for others and themselves.

• No constituency is coerced to cooperate against their will—this is the ethical foundation of business.

• Optimizing value for all of the constituencies does not mean a loss of legal control for the investors.

• The owners/investors must legally control the business to prevent their exploitation by management & the other constituencies. They get paid last.

• Management has legal and fiduciary responsibilities to maximize shareholder value. However, the best way to maximize long-term shareholder value is to simultaneously optimize value for all of the major constituencies.

The Whole Foods Business Model:

Holistic Interdependence

Sales Growth

Innovation &Customer Service

Motivated Team Members

Community &EnvironmentalResponsibility

Satisfying &DelightingCustomers

Increased Financial Resources

‘Profit’ Growth

Team Member Happiness

Selling the highest quality natural & organic products available

Satisfying & delighting our customers

Supporting Team Member happiness & excellence

Creating wealth through profits & growth

Caring about our communities & our environment

Our Core Values

Selling the Highest Quality Natural & Organic Foods Available

• We are the leading retailer of natural & organic foods in the world with strict & explicit Quality Standards

• We have helped improve the health, well-being, & longevity of millions of people and proven that good health & pleasurable eating are compatible goals

• We are resisting the trend toward the degradation of our food through the industrialization of food production

• We are creating animal compassionate production standards

Satisfying & Delighting our Customers

• The customer is the most important stakeholder—no customers, no business

• Customers shop voluntarily

• We design the business around the customer

• Customers must be treated as “ends” not “means”

• Team Members must be empowered to satisfy & delight customers

• Happy customers create happy investors

Team Member Happiness & Excellence

• Team Members are the #2 constituency

• TMs are “ends” not “means”• Self-managing teams are the

organizational cells of the business• Trust the TMs through open

information• Importance of shared purpose &

empowerment—conscious rejection of command & control management

• Shared Fate as guiding principle• Happy TMs create happy customers

& happy customers create happy investors

Innovative Employment Practices

• Open salary information• Salary cap• Benefits vote• Gainsharing• Stock options for all Team

Members—93% to non-executives

• Personal Wellness Accounts & fully paid Health Insurance

• “100 Best Companies to Work For” 9 years in a row

Rich Bosses

0

100

200

300

400

500

1980 1990 1999

In 1999, U.S. CEOs received $486 for every $1 the average worker earned.

At Whole Foods Market, the CEOs’ pay is limited to $14 for every $1 the average full-time Team Member earns.

U.S. CEO pay as a multiple

of average worker’s

Creating Prosperity through Profits & Growth

• The investors are the #3 constituency

• We are stewards of the investors’ money--frugality is important

• Profits are created through voluntary exchange--not exploitation of people

• Profits create wealth, capital, and prosperity

• Capital is the fuel for all technological innovation and progress

• 200 years ago 95% of the world was poor

– Today 60% of the world is poor

– By the year 2050 only 25% of the world should be poor

• Business has the fundamental responsibility to create prosperity for our society & the world

Creating Prosperity through Profits & Growth

• Whole Foods is the fastest growing & most profitable public food retailer in the U.S. in terms of percentages

• Our same store sales have been in double digits for 10 consecutive quarters, averaging over 12%. We’ve averaged over 11% for the past 5 years.

• Our sales per sq. ft. are currently at $928

• Our store ROIC is over 46% for stores over one year of age & 38% overall

• Our stock price has increased 3000% since our IPO in 1992

Caring About our Communities

• Business is best thought of as a “citizen” existing in communities

• As citizens businesses have responsibilities to their communities

• Philanthropy is consistent with citizenship and should be managed prudently & efficiently

• Philanthropy can also contribute to shareholder value through increased good will with customers, Team Members, & communities

• Philanthropy is “win-win” and not “win-lose”

Caring About our Communities

• We donate 5% of our profits to non-profits

• On a local basis, we are actively involved in our communities by supporting food banks, sponsoring various local community events, & compensating our team members for community service work.

Our mission is to create economic

partnerships with the poor in developing-

world communities that supply our stores

with product. Through innovative

assistance for entrepreneurship —

including direct micro-credit loans and

tangible support for other community

partnership projects — we seek to

unleash the energy and creativity of

every human being we work with in order

to create wealth and prosperity in

emerging economies.

Whole Planet Foundation

Caring About our Environment

• We strongly support organic & sustainable agriculture

• Sustainable seafood—Marine Stewardship Council

• Commitment to recycling and alternative energy. 100% Wind Energy Credits.

• Green Building• Store Green Mission

Teams

Animal Compassion Foundation

The Animal Compassion Foundation seeks to improve the quality of life of farm animals through educational services and research aimed at assisting ranchers and meat producers around the world to achieve a higher standard of animal welfare excellence.

A New Business Paradigm is Necessary

• The old business paradigm of maximizing profits & shareholder value as the sole purpose of business has created negative unintended consequences

• Business needs to become holistic with a deeper & more comprehensive purpose. Corporations must rethink why they exist.

• Business is fundamentally a community of people working together to create value for other people--customers, employees, investors, & the greater society.

• There is truly a “Harmony of Interests” between all the major constituencies of a business.