Beyond Budgeting Case Study Whole Foods Market

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Information about Beyond Budgeting Case Study Whole Foods Market

Published on December 26, 2008

Author: beyondbudgetingnet



Beyond Budgeting Case Study Whole Foods Market, Version 1, Dec 2008

Whole Foods Market International Center for Page 1 Outperformance

Whole Foods Market “Whole Foods Market, Inc. is the largest natural-foods grocer in the United States. It is also one of the business world's most radical experiments in democratic capitalism. Plenty of companies talk the talk of empowerment, autonomy, and teamwork. This company has spent 16 years turning those (often empty) slogans into a powerful - and highly profitable - business model.” Charles Fishman quot;Whole Foods is a social systemquot; quot;It's not a hierarchy. We don't have lots of rules handed down from headquarters in Austin. We have lots of self-examination going on. Peer pressure substitutes for bureaucracy. Peer pressure enlists loyalty in ways that bureaucracy doesn't.quot; John Mackey, CEO and co-founder, Whole Foods Markets Table of Contents Short company overview..........................................................................................................................3 Management Practices listed by Beyond-Budgeting-Principles.....................................................................5 References............................................................................................................................................13 License................................................................................................................................................ 13 Version 1.1, May 2009 (Version 1, Dec 2008) Page 2

Short company overview Whole Foods CEO and co-founder John Mackey is known to be a business “anarchist”. One that substitutes fear with love. Being not an organization, but a “Community of Purpose”, Whole Foods Market reflects modern management views e.g. of Jeff Howe (“Crowdsourcing”) or Vineet Nayar (CEO HCL Technologies), that organizations are today more and more evolve into communities. Being a today a role model for Management 2.0, Whole Foods Market's radical management practices have long been known by the Beyond-Budgeting-Movement. Being a true Beyond-Budgeting-Pioneer, Whole Foods Markets has maintained the alternative model since its foundation in 1978. As John Mackey personally points out: quot;One of the keys to understanding this company is that the people who started it did not know how they were supposed to do it,quot; quot;This is the way our culture has developed.quot; Further Mackey adds: “I had no legacy to overcome,” “It also meant we had to reinvent the wheel.” John Mackey never attended any business school, nor received any academic degree despite studying several years philosophy. Whole Foods Market may mostly be influenced in the 1970s by Japanese business books Mackey studied, especially the empowered and principle based team-culture. Or maybe the Whole Foods Market culture may have its roots within “Starship Enterprise”: John Mackey is a keen fan of the TV series and esp. of the political organization of Star Trek's “United Federation of Planets” nearly looks similar as the Whole Foods Market's cell structure. Further Whole Foods Market is built upon Abraham Maslow's hierarchy of needs. quot;Humans' needs move up from food and safety, to community and a sense of belonging, to the need for beauty,quot; Mackey lectures. quot;The next levels are education, esteem, and self-actualization.quot; Whole Foods Market developed itself since its foundation in 1980 (opening of the first market in Austin, Texas) by John Mackey and Renee Lawson Hardy, owners of Safer Way Natural Foods, and Craig Weller and Mark Skiles, owners of Clarksville Natural Grocery, to nowadays largest organic- and natural foods grocery in the United Stated and even the world. Its retail network includes today more than 270 stores in North America (USA, Canada) and in the United Kingdom (about 80 new ones are currently in planning). With over 54.000 employees worldwide it generated a turnover of about 6,6 billion $ in 2007. Page 3

Whole foods generates about a turnover of about 7000 US $ per square meter and year, whereas the average food industry makes only a turnover of 3600 US $ per square meter and year. The profit margin at Whole Foods is also about 3,5 times higher than the industry: an average food seller in the US makes about one cent per US $ profit, whereas Whole Foods makes about 3,5 cent per US $ profit. According to Gregory Badishkanian, analyst at Citigroup Global Markets, „Whole Foods is the best managed food seller in the US”. And it is the onliest food grocery in the US that employs “line managers”, who are responsible to guiding customers to the check-out. When it comes to hiring, Whole Foods recruits individual and diverse people, which are not unionized. From the colored teenager, to an old grandfather, to a punk and even transvestites, Whole Foods' workforce presents a colorful and cultural mix. CEO John Mackey dislikes labor unions. From his point of view labor unions are “highly unethical and driven by self-esteem”. In 2002 the Whole Foods Market's branch in the highly unionized city of Madison,Wisconsin, US, voted for a worker's council. John Mackey was were at that time and wrote a memo to all branches and complained that this is a “sad chapter of the company history of Whole Foods” and stated that “Madison made a mistake. Finally the employees will recognize this. We all make mistakes in our lives, that the path of personal growth. When we face huge stress, we have two possibilities: 1. to hole up in fear. 2. to expand in love”. Mostly the unions criticize Whole Foods to be the “green Wal-Mart”, nevertheless Whole Foods pays about 8,5 US $ an hour for unqualified jobs like packers etc. In 1992 Whole Foods Market made its IPO and its share value rose within 15 years about 3,000 % dramatically outperforming its competitors. Also in other KPI's like e.g. profit by square food, Whole Food Markets is also the market leader. Within the last 11 years Whole Foods market has been listed each year by Fortune as one of the 100 best places to work for in the United States. Page 4

Management Practices listed by Beyond-Budgeting-Principles Customers, Organization, Autonomy, Responsibility The cell structure of Whole Foods Market exists of about eight to ten cells a branch and several central supporting cells, each representing autonomous and accountable profit centers. Usually new hires are hired within a branch to a specific functional cell e.g. the seafood cell, the produce cell, the bakery cell, the prepared-food cell, or the cashier/front-end cell. Central cells are e.g. the national leadership cell with 24 employees or the IT or finance cell. Further the team leaders of a branch form a cell, store leaders in each region are a cell, and the company's six regional presidents present a cell. As usual within cell structures, the cells closest to the customers in the branches have the most power. The customer is according to the Whole Foods market's value system the most important stakeholder and in accordance with the cell structure philosophy generates market-pull. These cell autonomous and fully responsible decide key operating decisions e.g. new hires, food placement, pricing, ordering, and in-store promotion. The team leaders do in consultation with the store leader decide about products stocked. Nor do food manufacturers pay for special placements, nor does the HQ in Austin, Texas or regional offices dictate top-down what to stock. At Whole Foods Market, maintains Mackey, quot;we're not going to turn down the best product if the vendor won't pay us $10,000.quot; Each branch is encouraged to buy and stock local produce, fish, or meat, so long as they met Whole Foods Market's quality standards (s. also Regional managers design their own new branches rather than taking top-down blueprints from the HQ in Austin, Texas. Very special are also the hiring practices at Whole Foods Market. Store employees are fully empowered to chose their peers. Firstly a new hire is only hired provisionally. After four weeks of work, the team the hire had joined votes whether to keep him/her or not to keep him/her. Two-thirds of yes votes by the peers are required to join the staff permanently. The peers are tough on new hires, because their team bonus is linked directly to actual performance based on relative targets. And choosing a wrong new team member means getting less bonus. Page 5

Very special at Whole Foods Market's usual periphery based decision-making are three specific cases entitled the “command-and-control decisions”, the “consultative decisions” and the “consensus decisions” (s. also the German concept of dialog-based leadership which is very similar): Command-and-control decisions Command-and-Control decisions are only made by John Mackey makes himself when timing doesn't permit wide consultation, or when John Mackey is convinced the stakes are so high that he feels that he has to decide. quot;I almost never make a command-and-control decision,” John Mackey says. Consultative decisions Consultative decisions are decisions that John Mackey, the senior leadership team, or the appropriate group of people make after a wide conversation and consultation with the people involved . Consultative decision- making is the most common form of decision making at Whole Foods. quot;I make a ton of decisions where I consult with people I trust, with the people involved,quot; Mackey states. Consensus decisions Consensus decisions are made when the team involved strives for general agreement. Each cell at each store meets monthly to provide a forum for this kind of decision making. Among these decisions reached by consensus are the already described hiring decisions. Even Mackey's National Leadership Team of 24 people routinely votes on consensus decisions. quot;I don't overrule the National Leadership Team,quot; says Mackey. quot;I've done it maybe once or twice in all these years.quot; Mackey adds. Page 6

Values Whole Foods Market's purpose and general values have evolved over time as times changed and new generations of employees brought their own distinctive passions and preoccupations to Whole Foods Markets, but the central principles remained constant – the “holistic interdependence” of all stakeholders, and managing according to a set of core values. John Mackey makes no contradiction between shareholder value and a purpose that explicitly includes and transcends it. For him profits are like happiness a by-product of other things – e.g. like higher purpose, developing employees, improving the wellbeing of the community, and service to customers. From Mackey's point of view business is a voluntary activity in which stakeholders co-operate to create value. So “the best way to maximise long-term shareholder value is by managing the interdependent system that all the stakeholders are linked together … This is the best strategy to create the most value for customers, the most value for your team members and the most value for the communities, but it is definitely the best strategy to maximise shareholder value as well”. (John Mackey). Whole Foods Market's timeless 6 core values that underpin everything, which are the soul of Whole Foods Market, are: Selling the Highest Quality Natural and Organic Products Available • Satisfying and Delighting Our Customers • Supporting Team Member Happiness and Excellence • Creating Wealth Through Profits & Growth • Caring about our Communities & Our Environment • Creating ongoing win-win partnerships with our suppliers • The detailed description of Whole Foods Market's core values can be accessed here: As also the “Declaration of Interdependence”, Whole Foods Market central document about inter- and intra- organizational cooperation can be accessed here: Page 7

Whole Foods Market's Mission comprises three parts (whole foods/whole people/whole planet): Whole Foods —“We search for the highest quality, least processed, most flavorful and natural • foods possible because we believe that food in its purest state — unadulterated by artificial additives, sweeteners, colorings and preservatives — is the best tasting and most nutritious food there is.” Whole People —“Our people are our company. They are passionate about healthy food and a • healthy planet. They take full advantage of our decentralized, self-directed team culture and create a respectful workplace where people are treated fairly and are highly motivated to succeed.” Whole Planet —“We are committed to helping take care of the world around us, and our active • support of organic farming and sustainable agriculture helps protect our planet. And while we assist our global neighbors through our Whole Planet Foundation’s micro-lending operations, we also step out the back door of each of our stores to support food banks, sponsor neighborhood events and donate to local non-profit groups.” Further no detailed rules or regulations except quality standards exist at Whole Foods Market. Page 8

Transparency CEO John Mackey calls Whole Foods Market's transparency philosophy the quot;no-secretsquot; management philosophy. quot;In most companies,quot; Mackey says, quot;management controls information and therefore controls people. By sharing information, we stay aligned to the vision of shared fate.quot; Whole Foods Market's “no secrets” management philosophy concerns both financial data as also salary information and the results of an annual morale survey. All operating and financial operating data e.g. store sales, ream sales, product costs, store profits is • released to all employees, whether on a daily, a weekly or a monthly basis. Once a month, the stores get detailed information on profitability with sales, product costs, wages and salaries, and operating profits for all 270 stores. Due to the fact, that the data is so sensitive, it is not posted publicly, but it is freely available to anyone who needs the data. Therefore like at AES Corp. the SEC has decided to list all 54,000 employees as insiders. CEO John Mackey initiated the open salary policy in 1986: quot;I kept hearing from people who thought I was making so much money. Finally, I just said, 'Here's what I'm making; here's what Craig Weller is making -- heck, here's what everybody's making.'quot; Each store has a book that can be accessed by anyone in the office that lists the pay of every • employee. As Fishman points out: “By most accounts, rank-and-file team members don't spend much time consulting the salary book. Once the novelty wears off, and people discover that the cashier in the next aisle (or city) makes roughly what they make, they focus on team goals and job satisfaction.” Store leaders tend to be more interested in the salary book, and look at their earnings potential if they relocate to another store. John Mackey himself leads a cell comprising headquarters employees and regional presidents. From his point of view the open salary philosophy generates disagreements, but disagreements with a purpose. quot;I'm challenged [on salaries] all the time,quot; he says. quot;'How come you are paying this regional president this much, and I'm making this much?' I have to say, 'Because that person is more valuable. If you accomplish what this person has accomplished, I'll pay you that too.' It leads to deeper conversations than you'd have otherwise.quot; Disclosed are also the results of the annual morale survey within the annual report to investigate • employee attitudes incl. rank-and-file confidence in team leaders, store leaders, and regional leaders, fears and frustrations, and the company's core values. Page 9

Does CEO John Mackey worry that Whole Foods Market discloses too much information to too many employees across the company? Hardly. quot;If you're trying to create a high-trust organization,quot; he says, quot;an organization where people are all-for-one and one-for-all, you can't have secrets.quot; Goals & Controls Single store cells, complete stores and even regions compete on own set goals vigorously to outdo each other in KPI's like e.g. sales, growth, quality, service, profitability, etc - and the results of those competitions translate directly into cell bonuses, recognition, and promotions. Single teams set their own ambitious goals and achieve them. But accountability does not imply bureaucratic and hierarchic oversight. At Whole Foods Market, pressure for performance comes from peers rather than top-down from headquarters, and it comes in the form of internal competition with relative targets. Strategic cascade Region to Region ROCE Store to Store Region D 31% Cost over income Region J 24% Store cell to store Region I 20% Store A 38% cell Region B 18% Store C 27% On-time-delivery etc. Region E 15% Store H 20% Region F 13% Store B 17% Store cell J 28% Region C 12% Store F 15% Store cell D 32% Region H 10% Store E 12% Store cell E 37% Region G 8% Store J 10% Store cell A 39% Region A 2% Store I 7% Store cell I 41% Store G 6% Store cell F 45% Store D 5% Store cell C 54% Store cell G 65% Store cell H 72% Store cell B 87% Contribution to value creation Page 10 Exemplary ranking league table for store team cells, stores and regions. Source: to lean on BBTN

Further control measures include the so-called “Store Tour” and quot;The Customer Snapshotquot;: The quot;Store Tourquot;: On a periodic schedule, each Whole Foods Market store is toured by a group of as • many as 40 peers from another region. The touring group includes regional leaders, store team leaders and associate store team leaders, and leaders from two operating store cells who work intensively with their colleagues in the store. The tour itself lasts two days and includes social interaction, reviews, performance audits, and structured peer feedback sessions. quot;The Customer Snapshotquot;: Ten times a year, each store is toured by a headquarters official or regional • leader and rated on 300 different KPI's. Compared to the store tours, the customer snapshot is a surprise inspection, that lasts a full day. Once a month, every store's results are disclosed publicly to every other store, and force more competition between the stores. Rewards Whole Foods markets pays besides a basic salary a team-based bonus based on the actual performance measured against own set goals or relative comparisons. The basic renumeration of executives is limited to 19 times the basic pay of a employee at the periphery. Stock options are granted to all employees, and about 93% of the stock options are held by non-executives. Page 11

Very interesting with reference to renumeration is an open and public letter by John Mackey from 2 nd November 2006: “To all team members, I want to announce a couple of significant changes regarding compensation at Whole Foods Market. First, as you know, we have a salary-cap policy, which limits the total cash compensation that can be paid to any team member. The board of directors has voted to raise the salary cap from 14 times the average pay to 19 times the average pay, effective immediately.... We are raising the salary cap for one reason only--to make the compensation to our executives more competitive in the marketplace.... Everyone on the Whole Foods leadership team (except for me) has been approached multiple times by quot;headhuntersquot; with job offers to leave Whole Foods and go to work for our competitors. Raising the salary cap has become necessary to help ensure the retention of our key leadership.... This increase to 19 times the average pay remains far, far below what the typical Fortune 500 company pays its executives.... The average CEO received 431 times as much as their average employee received in 2004, while Whole Foods' CEO (me) received only 14 times the average employee pay in cash compensation. Most large companies also pay their executives large amounts of stock options in addition to large salaries and cash bonuses. The average corporation in the United States distributes 75% of their total stock options to only 5 top executives.... At Whole Foods, the exact opposite is true: The top 16 executives have received 7% of all the options granted while the other 93% of the options have been distributed throughout the entire company. The second part of today's announcement has to do with my own compensation.... The tremendous success of Whole Foods Market has provided me with far more money than I ever dreamed I'd have and far more than is necessary for either my financial security or personal happiness.... I am now 53 years old and I have reached a place in my life where I no longer want to work for money, but simply for the joy of the work itself and to better answer the call to service that I feel so clearly in my own heart. Beginning on January 1, 2007, my salary will be reduced to $1, and I will no longer take any other cash compensation.... The intention of the board of directors is for Whole Foods Market to donate all of the future stock options I would be eligible to receive to our two company foundations. One other important item to communicate to you is, in light of my decision to forego any future, our board of directors has decided that Whole Foods Market will contribute $100,000 annually to a new Global Team Member Emergency Fund. This money will be distributed to team members throughout the company based on need.... The first $100,000 will be deposited on January 1, 2007, and requests will be considered after that date. With much love, John Mackey” Page 12

References Fishman, Charles: “The Anarchist's Cookbook”, in Fast Company, Issue 84, July 2004 • Fishman, Charles:”Whole Foods Is All Teams”, in Fast Company, Issue 2, 1996 • Mackey, John: “quot;I No Longer Want to Work for Moneyquot;, in Fast Company, Issue 112, February 2007 • Boorstin, Julia: “No Preservatives No Unions Lots of Dough”, in Forbes September 15 2003 • McGinn, Daniel: “The Green Machine“ in Newsweek Mar 21, 2005 • Gwynne, S.C. :”Thriving on Health Food” in Time, Feb. 23, 1998 • Pfleaging, Niels: “Fuehren mit flexiblen Zielen”, Campus, 2008 • Hamel, Gary: “The future of management”, HBP, 2007 • Hamel et al: “No half measures”, in LabNotes Issue 10 • Heuer , Steffan: “Das Öko Imperium”, in BrandEins 3/2004 • Howe, Jeff: “Crowdsourcing. Why the power of the crowd is driving the future of business”, Random • House Inc, 2008 Nayar, Vineet: “Challenging the Status Quo”, blog entry:, accessed • 26th December 2008 BBNET OpenCourseWare Program ( • Beyond Budgeting transformation Network (BBTN) ( accessed 26th December 2008 • Whole Foods Market Official Homepage (incl. all subpages and annual reports) • accessed 26th December 2008 Front cover picture: Creative Commons 2.0 NC ND by kalebdf: • 2635438430/ License This paper except the logos and the front cover picture is licensed under a Creative Commons BY-SA License. Credit: quot;International Center for Outperformance (; within the reference list Page 13

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