The Good Jobs Strategy

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Zeynep Ton. The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits. Seattle: Lake Union Publishing, 2014.

Why is it so hard to find a good job? Part of the problem is matching the good jobs with workers who are qualified to do them. We hear about hi-tech companies that can’t find enough applicants with the right technical skills. But even more often these days, we hear about the disappearance of jobs with decent pay and benefits, and the proliferation of jobs with low pay, no benefits, and erratic work hours.

Globalization and technological change are often cited as factors contributing to high unemployment and low wages. Many American workers are in a poor bargaining position, vulnerable to being replaced by an industrial robot or a lower-paid foreign worker. Workers with low pay can’t afford to spend very much, giving a competitive edge to businesses that can cut costs and hold down prices. So the conventional wisdom is often that businesses cannot invest very much in their labor forces and still make a profit. Maybe this is the real “class warfare,” the attitude that regards workers as an unfortunate expense to be minimized as much as possible.

Zeynep Ton is an adjust associate professor at the Sloan School of Management. Her studies of business management have convinced her that even in today’s competitive environment, businesses have a choice. They can profit from what she calls a “bad jobs strategy,” at least in the short run. But a “good jobs strategy is also a viable option:

You can certainly succeed at the expense of your employees by offering bad jobs— jobs that pay low wages, provide scant benefits and erratic work schedules, and are designed in a way that makes it hard for employees to perform well or find meaning and dignity in their work. You can even succeed at the expense of your customers; for example, by offering shoddy service. People may not enjoy buying from you, but plenty of them will do it anyway if you keep prices low enough.

In service industries, succeeding at the expense of employees and at the expense of customers often go together. If employees can’t do their work properly, they can’t provide good customer service. That’s why our experiences with restaurants, airlines, hotels, hospitals, call centers, and retail stores are often disappointing, frustrating, and needlessly time-consuming.

Many people in the business world assume that bad jobs are necessary to keep costs down and prices low. But I give this approach a name— the bad jobs strategy— to emphasize that it is not a necessity, it is a choice.

There are companies in business today that have made a different choice, which I call the good jobs strategy. These companies provide jobs with decent pay, decent benefits, and stable work schedules. But more than that, these companies design jobs so that their employees can perform well and find meaning and dignity in their work. These companies— despite spending much more on labor than their competitors do in order to have a well-paid, well-trained, well-motivated workforce— enjoy great success. Some are even spending all that extra money on labor while competing to offer the lowest prices— and they pull it off with excellent profits and growth.

Ton’s research focuses on the retail industry, notorious for its millions of bad jobs. Its median hourly wage in 2011 was $10.88; 40% of the jobs are only part-time; and unpredictable work schedules often make it hard to care for a family, go to school, or take a second job. Ton reasons that if better jobs can be created in retail, they can be created just about anywhere.

Ton highlights four companies that are succeeding with a good jobs strategy: Costco, the wholesale buying club; Mercadona, the biggest chain of supermarkets in Spain; QuikTrip, a convenience store chain; and Trader Joes, an American supermarket chain. They manage to make good profits, offer good value in prices and service to customers, and also create good jobs. Costco pays its hourly workers 40% more than Sam’s Club. In addition to better pay, these model employers provide their workers greater “opportunity for success and growth” by giving them adequate training, time and resources to do the job well. They are places where people generally like to work.

Investing in employees

Ton describes two main ingredients for success using a good jobs strategy: investment in employees and operational choices. Both are essential. The strategy requires an adequate quantity and quality of labor, but it also requires an efficient operation to make that labor productive and justify its high cost.

One could say that the company puts itself in its employees’ hands, then does its best to make sure those hands are strong, skilled, and caring. This is not a matter of happy talk, PR, and employee-of-the-month awards. This is concrete policy, manifested not only in wages and benefits but also in recruitment, training, scheduling, equipment, in-store operations, head count, and promotion.

Ton points out that not all tasks are simple enough to be reduced to standardized routines that the least skilled and trained worker can complete. Retail operations have actually become more complex over the years, but the investment in workers has declined. (The ratio of retail wages to average U.S. wages declined from 91% to 65% between 1948 and 2011.)

Ton found that in many cases retail stores can increase profitability by adding workers rather than cutting them. The relationship between employees and profits can be described by an inverted-U-shaped curve (with employees on the horizontal axis and profits on the vertical axis). Profits are highest at a theoretical sweet spot where stores are neither understaffed nor overstaffed. But businesses often have a bias toward understaffing because they think of labor as an expense to be minimized. Whenever sales are lagging, managers may be under pressure to cut staff in order to hold payroll to a fixed percentage of sales. Businesses fail to weigh the short-term gain against the long-term harm to their operation. They have few models of companies that sustain a high commitment to their workforce.

Companies without that commitment easily fall into a “vicious downward cycle”: Low expenditure on labor leads to a low quality and/or quantity of labor, which leads to poor operational execution, which leads to low sales and profits, which leads back to low expenditure on labor.

There are many effects of failing to invest enough in one’s employees, including— but by no means limited to— phantom stockouts; promotions that are executed incorrectly or not executed at all; data corruption that undermines inventory and strategic planning; and loss of products due to theft, spoilage, and faulty paperwork. [Phantom stockouts are situations where what the customer wants is actually in stock, but nobody can find it.]

Investing in employees can create a more virtuous cycle in which higher expenditures on labor justify and sustain themselves by supporting better operational execution and higher sales and profits.

The operational choices that support the good jobs strategy will be the topic of the next post.

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