A pioneer of a more progressive approach was aWelshman, Robert Owen, who ran into !erce opposition. Born in 1771, Owen became a wildly successful entrepreneur before the age of 30 by exploiting the day’s hot technology—textile mills. Owen was heavily attacked because he was the only capitalist of his time who believed it was bad for business to work eight-year-olds in 13-hour factory shifts. At his New Lanark (Scotland) knitting mill, bought in 1799, Owen took a new approach:
Owen provided clean, decent housing for his workers and their families in a community free of contagious disease, crime, and gin shops. He took young children out of the factory and enrolled them in a school he founded. There he provided preschool, day care, and a brand of progressive education that stresses learning as a pleasurable experience (along with the !rst adult night school). The entire business world was shocked when he prohibited corporal punish- ment in his factory and dumbfounded when he retrained his supervisors in humane disciplinary practices. While offering his workers an extremely high standard of living compared to other workers of the era, Owen was making a fortune at New Lanark. This conundrum drew twenty thousand visitors between 1815 and 1820 (O’Toole, 1995, pp. 201, 206).
Owen tried to convince fellow capitalists that investing in people could produce a greater return than investments in machinery. But the business world dismissed him as a wild radical whose ideas would harm the people he wanted to help (O’Toole, 1995).
Owen was at least 100 years ahead of his time. A century later, when Henry Ford announced in 1914 that he was going to shorten the workday to 8 hours and double the wages of his blue-collar workers from $2.50 to $5.00 per day, he also came under heavy !re from the business community. The Wall Street Journal opined that he was “committing economic blunders, if not crimes” (Harnish et al., 2012). The Journal got it wrong. Ford’s pro!ts doubled over the next two years as productivity soared and employee turnover plunged. Ford later said the !ve dollars per day was the best cost-cutting move he ever made.
Only in the late twentieth century did more business leaders begin to believe that investing in people is a way to make money. In recent years, periodic waves of restructuring and downsizing have raised age-old questions about the relationship between the individual
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and the organization. A number of persuasive reports suggest Owen was right: An excellent route to long-term success is investing in employees and responding to their needs (Applebaum et al., 2000; Barrick et al., 2015; Collins and Porras, 1994; Deal and Jenkins, 1994; Farkas and De Backer, 1996; Becker and Huselid, 1998; Lawler, 1996; Levering and Moskowitz, 1993; Pfeffer, 1994, 1998, 2007; Schwartz and Porath, 2014; Waterman, 1994).
Changes in the business environment have made human resource management more critical than ever. “A skilled and motivated work force providing the speed and “exibility required by new market imperatives has increased the importance of human resource management issues at a time when traditional sources of competitive advantage (quality, technology, economies of scale, etc.) have become easier to imitate” (Becker and Huselid, 1998, p. 54). Yet many organizations still don’t believe it, and others only “irt with the idea:
Something very strange is occurring in organizational management. Over the past decade or so, numerous rigorous studies conducted both within speci!c industries and in samples across industries have demonstrated the enormous economic returns obtained through the execution of what are variously labeled as high involvement, high performance, or high commitment management practices . . . But even as positive results pile up, trends in actual management practice are often moving exactly opposite to what the evidence advocates (Pfeffer, 1998, p. xv).
Why would managers resist better ways of managing people? One reason is that Theory X managers fear losing control or indulging workers. A second is that investing in people requires time and persistence to yield a payoff. Faced with relentless pressure for immediate results, executives often conclude that slashing costs, changing strategy, or reorganizing is more likely to produce a quick hit. A third factor is the dominance of a “!nancial” perspective that sees the organization as simply a portfolio of !nancial assets (Pfeffer, 1998). In this view, human resources are subjective, soft, and suspect in comparison to hard !nancial numbers.
GETTING IT RIGHT Despite such barriers, many organizations get it right. They understand the need to develop an approach to people that “ows from the organization’s strategy and human capital needs (Barrick et al., 2015; Becker and Huselid, 1998). Their practices are not perfect but good
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Exhibit 7.1. Basic Human Resource Strategies.
Human Resource Principle Speci!c Practices
Build and implement an HR strategy.
Develop and share a clear philosophy for managing people. Build systems and practices to implement the philosophy.
Hire the right people. Know what you want. Be selective.
Keep them. Reward well. Protect jobs. Promote from within. Share the wealth.
Invest in them. Invest in learning. Create development opportunities.
Empower them. Provide information and support. Encourage autonomy and participation. Redesign work. Foster self-managing teams. Promote egalitarianism.
Promote diversity. Be explicit and consistent about the organization’s diversity philosophy. Hold managers accountable.
enough. The organization bene!ts from a talented, motivated, loyal, and free-spirited workforce. Employees in turn are more productive, innovative, and willing to go out of their way to get the job done. They are less likely to make costly blunders or to jump ship when someone offers them a better deal. That’s a potent edge—in sports, business, or elsewhere. Every organization with productive people management has its own distinct approach, but most include variations on strategies summarized in Exhibit 7.1 and examined in depth in the remainder of the chapter.
Develop and Implement an HR Philosophy “Systematic and interrelated human resource management practices” provide a sustainable competitive advantage. The key is a philosophy or credo that makes explicit an organization’s
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core beliefs about managing people (Becker and Huselid, 1998, p. 55). The credo then has to be translated into speci!c management practices. Most organizations lack a philosophy, or they ignore the one they claim to have. A philosophy provides direction; practices make it real.
Wegmans, a supermarket chain in the northeastern United States that consistently gets top marks for both customer satisfaction and employee well-being, has been on Fortune’s list of the 100 Best Companies to Work every year since 1998. It offers a succinct statement of “What We Believe:”
AtWegmans, we believe that good people, working toward a common goal, can accomplish anything they set out to do.
In this spirit, we set our goal to be the very best at serving the needs of our customers. Every action we take should be made with this in mind.
We also believe that we can achieve our goal only if we ful!ll the needs of our own people (Wegmans, 2016).
Hire the Right People Strong companies know the kinds of people they want and hire those who !t the mold. Southwest Airlines became the most successful carrier in the U.S. airline industry by hiring people with positive attitudes and well-honed interpersonal skills, including a sense of humor (Farkas and De Backer, 1996; Labich, 1994; Levering and Moskowitz, 1993). In one case, interviewers asked a group of pilots applying for jobs at Southwest to change into Bermuda shorts for the interviews. Two declined. They weren’t hired (Freiberg and Freiberg, 1998).
Even though Hertz had a 40-year head start, Enterprise overtook them in the 1990s to become the biggest !rm in the car rental business. Enterprise wooed its midmarket clientele by deliberately hiring “from the half of the class that makes the top half possible”—college graduates more successful in sports and socializing than the classroom. Recruiting for people skills more than “book smarts” helped Enterprise build exceptional levels of customer service (Pfeffer, 1998, p. 71). In contrast, Microsoft’s formidably bright CEO, Bill Gates, insisted on “intelligence or smartness over anything else, even, in many cases, experience” (Stross, 1996, p. 162). Google wants smarts, too, but believes teamwork is equally important—one reason that its hiring is team-based (Schmidt and Varian, 2005).
The principle seems to apply globally, as illustrated by a study of successful midsized companies in Germany (Simon, 1996). Turnover was rare in these !rms except among new hires: “Many new employees leave, or are terminated, shortly after joining the work force,
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both sides having learned that a worker does not !t into the !rm’s culture and cannot stand its pace” (p. 199). Zappos tries to accelerate the process by offering new hires a cash bonus to quit after they complete the company’s orientation program. Few take the money and run, but Zappos wants to keep only people who love the company’s idiosyncratic culture.
Keep Employees To get people they want, companies like Google, Southwest Airlines, and Wegmans offer attractive pay and bene!ts. To keep them, they protect jobs, promote from within, and give people a piece of the action. They recognize the high cost of turnover—which for some jobs and industries can run well over 100 percent a year. Beyond the cost of hiring and training replacements, turnover hurts performance because newcomers’ lack of experience, skills, and local knowledge increases errors and reduces ef!ciency (Kacmar et al., 2006). This is true even at the CEO level. CEOs who move from one organization to another perform less well on average than those who are hired from inside (Elson and Ferrere, 2012).
Reward Well In a cavernous, no-frills retail warehouse setting, where bulk sales determine stockholder pro!ts, knowledgeable, dependable service usually isn’t part of the low-cost package. Don’t try to tell that to CostcoWholesale Corp., where employee longevity and high morale are as commonplace as overloaded shopping carts. “We like to turn over our inventory faster than our people,” says Jim Sinegal, Costco founder and CEO until he retired in 2012. Costco, a membership warehouse store headquartered in Washington State, by 2016 had become the world’s second largest retailer (after Walmart) with more than 700 stores across the United States and beyond.
Costco has a counterintuitive success formula: Pay employees more and charge customers less than its biggest competitor, Sam’s Club (a Walmart subsidiary). A great way to lose money? Costco has been the industry’s most pro!table !rm in recent years. How? In Sinegal’s view, the answer is easy: “If you pay the best wages, you get the highest productivity. By our industry standards, we think we’ve got the best people and the best productivity when we do that.”Costcopaid its employees about 70percentmore than Sam’sClubbut generated twice as much pro!t per worker (Cascio, 2006). Compared with competitors, Costco achieved higher sales volumes, faster inventory turnover, lower shrinkage, and higher customer satisfaction (RetailSails 2012; American Customer Satisfaction Index, 2016). Costco illustrates a general principle: Pay should re”ect value added. Paying people more than they contribute is a losing proposition. But the reverse is also true: It makes sense to pay top dollar for exemplary contributions of skilled, motivated, and involved employees (Lawler, 1996).
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