Well that’s that. Costco will no longer sell Apple products including iTunes gift cards. Why you ask? Great question, friend and let me answer that with a question. Who sells the iPad: Sam’s Club or Costco? Sam’s Club, right? That clearly didn’t sit very well with the Costco suits so they decided to cut Apple completely. Plus it probably didn’t help that Apple never allowed Costco to sell Apple products online even at their full retail price. Seeing how Costco is the third largest retailer in the States and the largest memership warehouse retailer, Sam’s Club comes in second, this is sort of a big deal.

When I came to the U.S. in 1980, I was young and naïve. I used to think that corruption and ethical lapses were just a third-world ill. Eventually, I became a tech CEO and learned the harsh realities of American business. Yes, standards are much higher, and breaches are punished, but the temptations are just the same here as they are in any other country. Ethical lapses (which are a form of corruption) are quite common.  You watch stories about these on TV every other day and read about them on TechCrunch.  It was the ethical lapses of our financial institutions that threw our economy into a tailspin, and for which we are paying the price, after all.

It is best to be aware of the temptations and to prevent the lapses from occurring. As Enron, Bernie Madoff, and Lehman Brothers have shown, it’s a slippery slope. Once you start compromising your values for short-term gains, there is no turning back. Business ethics are not something you need to start worrying about when your company reaches a certain size; they need to be sewn into the fabric of your startup from the get-go. The lessons are the same for tech businesses as they are for investment banks and for third-world economies.

Harvard Business School professor Michael Beer researched the difference between companies that perform at high levels for extended periods and those that implode when they reach a certain size. When analyzing the spectacular failures in the recent financial meltdown, he found that:

• Of the original Forbes 100 (named in 1917), 61 had ceased to exist by 1987.  Of the remaining 39, only 18 stayed in the top 100, and their return during the period 1917 to 1987 was 20% less than that of the overall market.

• Of companies in the original Standard & Poor’s 500-stock index of 1957, only 74 remained in 1997; of these, only 12 outperformed the S&P 500 in the period 1957 to 1998.

• The average CEO tenure in the U.S. is 4.2 years, less than half the 10.5-year average in 1990.

Beer posited three core reasons for the failure of so many Wall Street firms in the fall of 2008: the firms lacked a higher purpose (in other words, they were focused on short-term gains, profits, and bonuses); they lacked a clear strategy; and they mismanaged their risk. Companies like Charles Schwab and US Bancorp were able to avoid the fallout by having a laser-like focus on customer service and on honesty and transparency. Neither company touched the subprime mortgage securitization market, because they saw it as risky and simply not the kind of business that served the company’s long-term interests.

Even outside Wall Street, companies like Cisco Systems, Southwest Airlines, and Costco Wholesale, with the strongest sense of higher purpose, achieved the greatest success. Take Costco. Wall Street analysts have long chastised Costco’s management for paying high wages and keeping employees around for a long time, because this results in higher benefits costs. But the company’s CEO, Jim Sinegal, lives by his belief that keeping good employees is strategic for Costco’s long-term success and growth. The company’s per-employee sales are considerably higher than those of key rivals such as Target and Wal-Mart; customer service at the stores is phenomenal and fast; and Costco continues to expand, both in number of warehouses and in products and services for business and consumer customers. The culture of the company flows downward from Sinegal and his focus on employees and, by extension, to customers.

One of the problems that Beer found with the failed banks was that their employees lacked the ability to “speak truth to power”. Employees felt intimidated by superiors; the institutions’ internal voice of conscience and purpose was silenced by a maniacal focus on short-term profits and whatever scheme would bring them in. The silencing of employees who sought to challenge strategy and risk-management practices likely also undermined the banks’ moral authority and emboldened those who already felt inclined to do the wrong thing. With a muted internal voice, these organizations lacked a moral compass. As a result, they drove off a cliff with astonishing speed.

The same things happen in Silicon Valley companies.  I asked management guru — and head of the CEO Institute of Yale School of Management — Jeff Sonnenfeld for his advice on how startups can sow the seeds for building a Cisco or Costco. Here is Jeff’s advice:

1)  Create a culture of openness and welcome dissent – Internal constructive critics are your best friends — too often, founders are blinded by their own enthusiasm for their creative vision and then are surrounded by sycophants, kissing up. Founders who fall out of touch rapidly lose their ethical bearings. At Intel, founder Robert Noyce and Gordon Moore did not look for sycophantic followers in selecting the brilliant, contentious, but relentlessly honest Andy Grove as their colleague and successor. Similarly, Craig Barrett and Paul Otellini have consistently fought for different points of view internally — without undermining the enterprise, and always reinforcing Intel’s self-critical core ethic.

2)  Lead by example.  The authenticity of the leader’s character is essential — if colleagues don’t believe you, they will not take needed risks on your behalf — such as training subordinates to be able to do their own jobs.  Startups are often defined by the hip clichés of VC firms, adoring press, and HR consultants — but the startups don’t really practice what they preach.

3)  Learn from immediate peers or distant models. Too often, founders atrophy because they believe that the unique quality of their business or technological mission means that they too are truly unique in leadership values.  Steve Jobs has patterned himself after Polaroid founder Ed Land — and tried to learn from Land’s strengths and weaknesses.  Henry Ford regretfully once claimed “History is bunk” but in reality revered Thomas Edison.  Michael Dell put legendary tech entrepreneur (Teledyne) and educator Dr. George Kozmetsky on his board right from the start to learn from this brilliant then septuagenarian.

4)  Recognize your own fallibility as a leader, know your limits, and beware of the myth of immortality.  Entrepreneurs often are horrified at the thought of leadership succession. The founders of great firms such as Google, Cisco, Amgen, and Microsoft have known that they would need to prepare for a day when they no longer could be the lone day-to-day internal boss, primary external ambassador, and symbolic cultural icon. The founder of the original (pre-Starbucks) coffee house chain Chock-Full-o-Nuts started his first café on Broadway 43rd Street in 1923 and was a great national success.  Sadly, sixty years later, as a dying man who had been flat on his back for two years at Massachusetts General Hospital in Boston, he still clung to the job of leader of the enterprise, his full-time physician serving as acting president.

5)  Remember that institutional character — like a liquid cupped in your hand — is fragile; easily lost; and hard, if not impossible, to regain. Egomaniacal moves, personal grandiosity, greed, and deception create impressions that are hard to erase.  Whole Foods founder, John Mackey, sabotaged the integrity of his own exalted brand, damaging the company’s internal pride and customer admiration far more badly than any competitor could have, due to his self-inflating and his misleading “anonymous” blogging, hiding his identity through an anagram of his wife’s name, “rehodab.”

I’ll add another very important point: Establish an independent board. Venture firms often demand a majority of board seats as a condition for their investments. Conflicts invariably arise. The board begins to serve the needs of VCs and management, rather than of the company itself, which loses the independent voice to warn it not to do the wrong things. The inconvenient truth is that all board members have a fiduciary duty to act in the interests of the company, and not in their own interests. Board members must not engage in transactions in which they or their partners stand to gain. They are legally required to avoid these conflicts of interest.

Finally, remember that in business, you have to make tough choices at every juncture. Though business decisions usually have clear consequences and outcomes, ethical decisions are always hard. Making the right choice doesn’t always bring success, but ethical lapses almost always lead to failure. No matter what the consequence, doing what’s ethical and right is always the better long-term strategy.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

Can you spell “patent troll”?

Software developer SpeedTrack has filed suit against nearly two dozen major online retailers, including Amazon.com, Best Buy, Overstock.com, Nike, Costco and Dell, accusing the major online retailers of infringing some patent that supposedly covers a search mechanism customers can use to locate products on their websites.

The complaint, filed yesterday in the U.S. District Court for the Northern District of California, accuses the defendants of infringing U.S. Patent Number 5,544,360, titled “Method for accessing computer files and data, using linked categories assigned to each data file record on entry of the data file record”.

Dubbed GIA (Guided Information Access), originally developed and patented by SpeedTrack co-founder and CTO Jerzy Lewak, the system is designed to guide users to contextually relevant information when searching specific keywords, ensuring a result rather than a page that says “no result can be found” or whatever. According to its website, law enforcement agencies like police departments use SpeedTrack’s GIA software to sort through massive criminal records data, which supposedly helps them solve crimes faster.

Evidently, this type of software is important for Internet retailers’ conversion rates, because such technology enables users to discover related or similar products on their websites when specific items cannot be found. But I can hardly imagine that SpeedTrack’s technology is so unique that the e-commerce giants should have to pay as much as a penny to the software company. Of course, a jury may very well be persuaded otherwise.

Message to Lewak and the rest of the SpeedTrack team: how about you focus on sales to mark up your balance sheets rather than turning to courts in the hopes that Amazon and Co. will come fill your pockets for you.

Holy cow, people. Costco is currently offering three two-for-one bundles on Philips and Sharp LCD HDTVs. You can snag a 19-inch and 42-inch combo for $1200 on up to $1800 for a 52- and 32-inch LCD HDTV. That’s pure madness! What are you waiting for?

Costco

It looks like the iPhone 3G is going to America’s favorite neighborhood store and warehouse retailer. The only thing is that Wal-Mart and Sam’s Club minions will not be pimping the Jesusphone ’till after the holidays – like December 28th. It seems that select locations will get the phone first but eventually, the phone will be rolled out till the entire 2,500 store network. No word on pricing just yet, but perhaps it will drop $50 bucks which would coninside with the Costco reports.

Costco will have a three-day in-store sale from November 28-30 along with online-only deals from now until December 15th. These in-store deals look okay, but not great:

• SmartParts 10.4-inch digital picture frame for $99
• Olympus FE-370 8-megapixel digital camera with 1GB SD card and case for $119
• $100 to $300 off of various LCD TVs
• Magellan RoadMate 1212 GPS for $99
• iHome iH27 iPod speaker dock for $49
• SanDisk Sansa Fuze 8GB for $59

Here’s the full list of items and here are the scans of the ads.

A tech analyst is claiming that Costco is going to sell the Jesusphone for $149 starting in January. No other details were outlined so this statement is this will definitely be filed in the ‘Rumor’ category but even if the discount warehouse does drop the price by 50 bones, that alone would not justify cell phone end times.

The iPhone is already the best selling handset in the US, and while Costco is a major retailer, it’s not Best Buy large. If a retailer with as much market penetration as Best Buy starts selling the iPhone for $149 exclusively, other handset makers and cell phone providers better watch out as the Jesusphone will rule over all. 

January, eh? Maybe Steve-O will drop the MSRP at Macworld to complete his dominance over the domestic handheld market. That seems plausible.

Costco is offering a $50 discount on AppleTVs in stores until the 23rd or 26th of this month depending on who you ask. Considering the upcoming HD content coming to the little guy, you may want to invest in one now while it’s cheap.

$50 instant rebate on Apple TV at Costco [AppleTV Source]

We’ve been seeing rumors all over the Internets today that Costco, the national chain of discount warehouses, might be offering the Apple TV at a price lower than Apple itself sells the set-top box for. Using our superior investigative journalism skills (read: a telephone), CrunchGear can now confirm that Costco is selling the Apple TV for $289.99. That’s $10 less than Apple or Target offers the unit for.

Right now there are 20 in stock at all three Seattle-area Costcos, and most others nation-wide. If your neighborhood store doesn’t have them yet, just check back in a couple days, according to Sam from our own local branch. We’re not yet sure how Costco is going to show off the Apple TV, but hopefully better than Apple does in its own stores, where standard-definition content is played back pixelated on HDTVs. Seriously.

In response, CostCo is cutting its open-ended return policy back to 90 days—which is still pretty damn good. It will also be extending the warranties on TVs and PCs for total of two years. And it will start a technical support hotline in order to provide assistance to frustrated consumers.

While it sucks to see this go away, I really can’t complain. For starters, we don’t have CostCo in Louisiana, so it’s irrelevant to me. But, speaking reasonably, that return policy was shenanigans. A total money pit for the company and wholly unnecessary.

Costco tightens return policy on electronics [MSNBC]

Site