Which stock would you rather have owned for the ten years ending in June, 2013, Costco or Walmart? During those years, Costco stock outperformed Walmart stock by more than 200 percent. Why? I am not a stock expert, but a factor I am certain made a difference is Costco’s commitment and investment in its employees. Costco employees consistently outperform Walmart’s in critical factors, such as following operations requirements, customer service, and building customer loyalty. And, Costco still delivers low prices!
In The Good Jobs Strategy, MIT researcher Zeynep Ton provides data to support the above claim. Her research illustrates how companies in service industries with low margins can excel at critical business measures, such as operating margins, customer satisfaction, profitability, and shareholder equity by implementing “the good jobs strategy.” She justifies the good jobs strategy practiced by Costco, and demonstrates the ill effects of the jobs strategy practiced by Walmart.
Is there a tradeoff between low prices and good jobs?
Zeynep Ton maintains it’s a fallacy to believe there’s a trade-off between low prices and good jobs. A company can have both! The good jobs strategy combines investment in people—much more than normal—with a set of operational decisions related to 1) how many products and services a company will offer; 2) the balance of job standardization and employee empowerment; 3) the allocation of work among employees; 4) staffing levels and how employees will engage in continuous improvement.[i]
Zeynep Ton asserts that many retailers want to do right by their customers but believe “the good job strategy is too difficult to achieve.” But, it isn’t!
The first ingredient is to become really good at operations.
Zeynep Ton points to four companies who are masters of the good jobs strategy, her “model retailers.” They are Costco, Mercadona (the largest supermarket chain in Spain), QuickTrip and Trader Joes. Based on her research, other retailers can mirror their success by following these operational decisions:
- Offer less. While most retailers try to offer their customers a wide range of products, promotions, and hours, model retailers have fewer products and no promotions. Offering less reduces costs significantly, yet can increase customer satisfaction.
- Standardize and empower. Most retailers take decision rights away from store employees and direct them to execute plans decided higher up in the organization. Model retailers, however, combine standardization with empowerment. This combination allows employees to be highly efficient and, at the same time, adaptive to customers’ needs.
- Cross-train. Most retailers manage variability in customer traffic by changing the number of employees on hand and, hence, creating unpredictable work schedules. Model retailers, on the other hand, cross-train employees so that they can change what employees do, depending on customer traffic. Cross-training ensures that employees are continually busy and that customers get good service.
- Operate with Slack. Whereas most retailers try to cut costs by understaffing their stores, model retailers err on the side of overstaffing —they deliberately build slack into their staffing models. Operating with slack improves customer service and, believe it or not, reduces costs by allowing employees to be involved in continuous improvement.
The second ingredient is investment in employees.
Model retailers invest heavily in their employees and view their workforce as a valuable asset to be enhanced–not an expense to be kept under control. This investment usually involves higher pay, performance-based compensation, job cross-training and job rotation, and career advancement. These practices work best when they are implemented together and are used in combination with specific manufacturing principles, such as low inventory and repair buffers. Zeynep Ton adds that investment in employees includes setting and enforcing high standards for employee performance.
Zenyep Ton’s research also shows how the good jobs strategy has been effectively used in other industries, including airlines (Southwest) and automotive (Toyota). She reviews the findings of other researchers who have studied operational excellence, from steel mini-mills, freight haulers, banks and hospitals. Her conclusion is that human resources practices that improve employee skills and motivation (as discussed in the above paragraph) contribute to higher performance. Operational excellence requires good operational design, dynamic human resources practices and great people.
In addition to creating superior financial results, good jobs strategy companies are better at adapting quickly to changes in the marketplace and more able to differentiate themselves from their competitors. She cites several examples, including Southwest Airlines. After 9/11, air traffic dropped dramatically and most airlines laid off significant numbers of employees. Southwest was the exception. Instead of downsizing, it refocused its slack workforce on making process improvements. When the market improved, Southwest did not have to rehire its former workforce or hire new employees – it had a ready, trained, appreciative workforce with the ability to help the company quickly expand into new markets. Its competitors, on the other hand, struggled with staffing, training and operations issues.
Have you had experience using the good jobs strategy? Have you worked for a company that has implemented it? What are your observations?
Victor Assad is a strategic human resources consultant and executive coach who works with key decision makers and human resource leaders on global talent management, accelerating change, leadership development, and other strategic initiatives. Contact Victor for a free one-hour strategy session at victorassad6@gmail.com. Visit Victor’s website at www.victorhrconsultant.com to download his free HR whitepapers and read more of his blog posts.
[i] Zeynep Ton (2014) The Good Jobs Strategy. How the Smartest Companies Invest in Employees to Lower Costs and Boosts Profits. MIT Sloan School of Management. Amazon Publishing.