Flexible Leadership Theory (FLT)

The Flexible Leadership Theory helps to define the components and approaches by which a company such as Costco can be run, and implemented into a successful long term business. Solving the problems of leadership are important because the solutions may help other less successful companies, such as Costco’s competitors, to perhaps also succeed as well as Costco has done.

How can Flexible Leadership Theory be defined for Costco? Or how Costco can help to validate that theory? In the case of Costco, it is possible that the leadership never read the books on Flexible Leadership Theory and thus the theory was defined in practice (they figured it out themselves). Theories facilitate quantification and qualification of situations and environments, which allows for others to comprehend and attempt to emulate the things that successful leadership has done in the past – in short a theory can help to teach future leaders better and more appropriate leadership skills. A successful company like Costco uses an out of the box leadership style and has managed to make it work, and thus others can learn from it, and Flexible Leadership Theory can be used to help interpret and pass on Costco’s winning leadership methods.

It seems sensible to begin by defining Flexible Leadership Theory, followed by describing how Costco applies Flexible Leadership Theory to the creation of leadership strategies, regardless of whether the theory is applied consciously or not. The roadmap for this posting will therefore describe Flexible Leadership Theory and then attempt to apply theory to Costco, both generally and also as applied by the Costco CEO’s called Sinegal and Jelinek.

What is Flexible Leadership Theory (FLT)?

Flexible leadership theory describes a method of leadership that functions in two ways: (1) three behavioral attributes comprised of tasks, relationships and change; and (2) how decisions are made (Yukl, Leadership in organizations).

The Main Components of Flexible Leadership Theory

Flexible Leadership Theory can also be described as having two approaches where the first approach uses the behavior of leadership to apply influence, and the second approach is about making decisions, which is essentially identical to the definition shown above. The behavior of leaders can be subdivided into task oriented behaviors for efficiency and operational processes, relationship oriented behaviors that work on the human aspect (the employees), and finally change orientation that helps innovation and external adaptability (transformational change where transformation implies extensive and rapid change organizational change). Decision making concerns competitors, the structure of organizations and programs for management. What does all this mean? To a novice this is generally meaningless and a better way to explain is perhaps by example using Costco.

What is Costco Operations?

By definition, Costco operations is the efficiency and reliability of the processes that control the way in which the company does its day-to-day business – the way in which Costco makes money.

Costco Operations and Flexible Leadership Theory

In short, it appears that Flexible Leadership Theory allows for highly adaptive leadership that takes into account the factors that drive the business, which in Costco’s case is flexible enough to react rapidly to customer needs. For example, if customers were to decide to consume sugar-free candy on Halloween, Costco might have the flexibility to adapt rapidly and distribute and stock plenty of sugar-free candy, where competitors might not be quite so quick off the mark.

Applying Flexible Leadership Theory to Costco Operations

The one thing that does seem obvious is that Costco executive leadership does not appear to be consciously applying some form of the Flexible Leadership Theory; but it is clear from the SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis in DataMonitor  (Leadership in organizations) , that Flexible Leadership Theory can be used to describe Costco operations. Costco has built a brand, positioned pricing for loyalty, and applied a low costing model – all three of these are competitive strategies that appear to leave the competition sometimes wondering what Costco is doing right. Organizational structure and management programs are clearly targeting potential managers who can act independently, are naturally emotionally intelligent, as well as market savvy (Boyle, Why Costco is so damn addictive). The employees are treated to a better than average wage as well as given good medical benefits (Rockwood, Thinking outside the big box) – both of these are aspects of a relations oriented behavioral approach with respect to the employees as a humanized resource to Costco, as opposed to people being just a resource or dehumanized resource among other inanimate objects. Task orientation is addressed by lowering prices and distribution costs as much as possible in order to improve both efficiency and processing, which ultimately leads to better profits. Change orientation generally does not appear to be present at the leadership level in Costco as a whole, but rather allows for the store managers to independently rearrange displays at will, within certain standard boundaries.

So many if not all of the main components of Flexible Leadership Theory are applied by Costco, but the application of those components is not a systematic conscious effort on the part of the Costco leadership, more just being an act of good leadership and probably even systemic throughout the company as part of its culture.

How Have Costco CEO’s Implemented Flexible Leadership Theory?

Why Costco is so Damn Addictive mentions droves of loyal card-carrying legions, who push Costco to having $20 billion more in sales than Sam’s Club. Why use the word addictive? Addiction has negative connotations. What is the effect of Costco’s obviously out of the box leadership style? Costco is obviously very well led and this sort of leadership style can be misinterpreted by some as being too loose, decentralized, out of control, unmanageable and is often completely misinterpreted as being micromanaged by people who do not know how to run a traditional business; how much does tradition have to do with running a new age successful business in a hyper competitive global creative economy? The answer is, probably not very much. Is it possible also that the traditional approach is as a result of not being able to think out of the box, when it is required to understand how Costco is run as a company.

The CEO’s Role in Costco Flexible Leadership Theory

Costco is driven by charismatic, customer friendly and employee sympathetic leadership that understands that happy employees lead to better customer service, and thus a stronger business over the long term and thus higher and more last profitability – yes it is all about money in that the more that is put into a business, the more value that will created in that business over time, in that the long term investment in building a company lasts much longer and produces far more overall revenue than a short term approach of getting as much money out of a business as quickly as possible with the risk of its destruction.

How Sinegal and Other CEO’s Implemented Flexible Leadership Theory at Costco

What does Costco do to demonstrate the application of Flexible Leadership Theory from the various CEOs:

  • Using skylights in buildings helps to save money on costs; in my experience they leak and can cause expensive structural problems.
  • Suppliers are happy because Costco moves higher quantities of product with lower margins, but higher sales makes better profits for suppliers.
  • The CEO champions the fact that he is generous with employees because he feels that employees are an important part of the profitability of the business. Costco is a service industry and this makes perfect sense where happy employees with smiling helpful faces can help to make for happy customers who as a result spend more money! Costco is in business for the long term, where lack of attention to short-term gain can frustrate Wall Street investors; but Costco is in business to build a larger more profitable business, where growth supersedes short term shareholder gratification. These issues are all important to employee retention, which lowers costs and improves customer service, and does lead to bigger profits.
  • The CEO of Costco is very deeply involved in the operational details of the business, not because he is micromanaging, but because it helps him to keep customers in the fore-front of his mind – this CEO is practicing a style of leadership that helps him to respond to customer needs because with all his detailed close contact with employees and customers, he is constantly learning the how and what of decisions to make at the strategic level, ultimately helping to make the business more profitable.
  • Craig Jelinek is the new CEO of Costco and exhibits very similar leadership skills and traits demonstrated by Sinegal (Stone, CEO Craig Jelinek leads the cheapest, happiest company in the world); both CEO’s are far closer to and in touch with customers and employees than many of their competitors. One interesting point to note is that Jelinek’s compensation was one fifth that of Walmart CEO Mike Duke in 2012; this could be pictured as an unfair comparison given that Costco’s market cap is one fifth that of Walmart’s (see Figure 1 – click the image).

fltFigure 1. Costco & Walmart company analysis (Fidelity, 2014)

Also note that the Walmart fully owned subsidiary Sam’s Club is Costco’s competitor (not Walmart as a whole); however Costco has almost double the sales per square foot.

Jelinek and Costco CEO Compensation

Does the extreme disparity between CEO compensation of Costco and Walmart demonstrate better leadership? Does it appear that Costco employees are getting a fairer shake of the proceeds and is leadership sacrificing their own compensation for the sake of the company as a whole? Which is better for the company, the shareholders and long term investors? Walmart CEO compensation appears relatively greedy but the numbers for Walmart (a much larger company as a whole), look about twice as good as that of Costco – does twice as good justify CEO compensation of five times as much? The short answer to all of these questions is that Costco might be a better long-term investment rather than a short-term investment; but this answer is by no means definitive. Also Costco has found an exploitable niche where by comparison Walmart is a giant without equal.

Conclusion

The information presented here matters because it demonstrates how Costco inadvertently (not deliberately) applies the theory of Flexible Leadership Theory to its operations; thereby helping to justify and validate the theory. One can conclude that Costco implements many interesting ideas but do all those ideas originate from the CEO level? The answer is unclear but perhaps the CEO should also be asking questions of its very carefully selected innovative and emotionally intelligent managers. Are employees being utilized as a source of ideas as well? In fact, it is sensible to assume that flexibility in leadership would be assisted by utilizing all the resources it has available.