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  Pagina principale Competitive advantage through people: unleashing the power of the work force
  "Competitive Advantage Through People" explores why - despite long-standing evidence that a committed work force is essential for success - firms continue to attach little importance to their workers. The answer, argues Pfeffer, resides in a complex web of factors based on perception, history, legislation, and practice that continues to dominate management thought and action. Yet, some organizations have been able to overcome these obstacles. In fact, the five common stocks with the highest returns between 1972 and 1992 - Southwest Airlines, Wal-Mart, Tyson Foods, Circuit City, and Plenum Publishing - were in industries that shared virtually none of the characteristics traditionally associated with strategic success. What each of these firms did share is the ability to produce sustainable competitive advantage through its way of managing people. Pfeffer documents how they - and others - resisted traditional management pitfalls, and offers frameworks for implementing these changes in any industry.
  productivity167
  effects105
  costs101
  managing88
  employment relation86
  competitive advantage81
  consistent64
  airlines57
  nummi52
  title 		 : 		 Competitive Advantage Through People : Unleashing the Power of the Work Force
  author 		 : 		 Pfeffer, Jeffrey.
  isbn10 | asin 		 : 		 087584717X
  print isbn13 		 : 		 9780875847177
  ebook isbn13 		 : 		 9780585093123
  subject 		 		 Personnel management--United States, Organizational behavior--United States, Competition--United States.
  lcc 		 : 		 HF5549.2.U5P5 1994eb
  ddc 		 : 		 658.3/14
  subject 		 : 		 Personnel management--United States, Organizational behavior--United States, Competition--United States.
  First published in the United States by the Harvard Business School
  Press in hard cover, 1994; in paperback, 1995
  Copyright © 1994 by Jeffrey Pfeffer
  99 98543(pbk.)
  Competitive advantage through people: unleashing the power
  of the work force / Jeffrey Pfeffer.
  ISBN 0-87584-413-8 (hc)
  ISBN 0-87584-717-X (pbk)
  1. Personnel managementUnited States. 2. Organizational
  behaviorUnited States. 3. CompetitionUnited States.
  HF5549.2.U5P5 1994
  658.3'14dc2093-26599
  Part I Performance through People
  1. Sources of Sustained Success
  2. What Effective Firms Do with People
  3. The Evidence for Slow Learning and Unrealized Potential
  Part II Barr; iers to Doing the Right Thing
  4. Wrong Heroes, Wrong Theories, Wrong Language
  5. Overcoming History
  6. Labor Laws, Lawyers, and Litigation: Friends or Foes of Work Place Change?
  7. Employee Organizations: Their Effects and Role in Work Place Reform
  8. Resistance from Within
  Part III Prospects for Change
  9. The Promise of the Quality Movement
  10. Making the Change
  This book has only one author, but many people have provided tremendous encouragement and assistance in its development. When Jim Baron joined the Stanford faculty in 1982, in addition to teaching our core course in organizational behavior, he wanted to develop an elective. "Why not do something that incorporates your research in organizations and labor markets?" I said. The elective he first taught, which I subsequently taught and which he now teaches again, will soon be part of our core curriculum. The absence of a good text for the course prompted me to write this book. Over the years, he and I have spent numerous hours talking about issues in the management of a firm's human resources. Not only has he been a great colleague, but he took a first draft of this manuscript on a trip to Singapore and provided detailed comments on his return. He, and the students I have taught in the course, have helped me clarify my thinking enormously.
  A number of friends provided useful commentary on early drafts of the manuscript. Beth Benjamin once again took time away from her
  doctoral dissertation and Stan Winvick stole time from his busy schedule at Advanced Micro Devices to provide very important guidance.
  Much of what I know about achieving competitive advantage through the work force I have learned from some truly remarkable individuals in interesting firms. Dave Spence and Jay Duhon of Boise Cascade, Vit Eckersdorf of Bofors, and Peter Thigpen of Levi Strauss were kind enough to share their wisdom and experience with both me and my students. Robert Mountain, Bill Izabal, and numerous managers gave freely of their time to describe the process of changing human resource practices at ESL. Stan Winvick and his colleagues at AMD arranged opportunities to learn about what that firm was doing, how, and why.
  Special thanks go to two people. Rick Seaman, a student of mine at Stanford is now with the Solectron Corporation. He, Wait Wilson, manager of the Milpitas site, Ko Nishimura, the CEO, and many other Solectron employees provided important information and perspective. Rick read a first draft of the manuscript. Working in a Baldrige-award-winning company, he was used to measures. So he gave me a chart showing the proportion of each of those chapters he had highlighted. I hope I did better with this version. And Charles O'Reilly, who moved from Berkeley to Stanford as the book was being written, read the manuscript twice, providing examples, insights, and most of all, encouragement and enthusiasm. As I revised the manuscript, Rick's and Charles' questions and comments were foremost in my mind.
  This is my sixth book and the second with the Harvard Business School Press. My friends at the Press, particularly Carol Franco, my editor, and Natalie Greenberg, an editor who can both devastate your work and help it at the same time, as well as the people who market the books, have earned my undying gratitude. They all exemplify the idea of quality people and a quality organization. I appreciate all their efforts on my behalf.
  The Stanford Graduate School of Business supports me generously. I particularly appreciate our dean, Mike Spence, and my colleagues in organizational behavior who almost always understand that my primary job is research and teaching and give me the time and freedom to do
  itand don't complain about my missing meetings, when I do, too loudly.
  This book would never have been finished on time, or perhaps at all, without the gracious, friendly, and extraordinarily competent help of my assistant, Joni Podolsky. Joni provided comments, questions, and editing. Working with her on this project has been a pleasure.
  This book is dedicated to the amazing Kathleen, the keeper of my spirit, my best friend, and a person of beauty, grace, and above all, courage and determination.
  Sources of Sustained Success
  Suppose that in 1972, someone asked you to pick the five companies that would provide the greatest return to stockholders over the next 20 years. And suppose that you had access to books on competitive success that were not even written. How would you approach your assignment? In order to earn tremendous economic returns, the companies you picked should have some sustainable competitive advantage, something that 1) distinguishes them from their competitors, 2) provides positive economic benefits, and 3) is not readily duplicated.
  Conventional wisdom then (and even now) would have you begin by selecting the right industries. After all, "not all industries offer equal opportunity for sustained profitability, and the inherent profitability of its industry is one essential ingredient in determining the profitability of a firm." 1 According to Michael Porter's now famous framework, the five fundamental competitive forces that determine the ability of firms in an industry to earn above-normal returns are "the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the
  bargaining power of suppliers, and the rivalry among existing competitors.'' 2 You should find industries with barriers to entry, low supplier and buyer bargaining power, few ready substitutes, and a limited threat of new entrants to compete away economic returns. Within such industries, other conventional analyses would urge you to select firms with the largest market share, which can realize the cost benefits of economies of scale. In short, you would probably look to industries in which patent protection of important product or service technology could be achieved and select the dominant firms in those industries.
  You would have been very successful in selecting the five top-performing firms from 1972 to 1992 if you took this conventional wisdom and turned it on its head. The top five stocks, and their percentage returns, were (in reverse order): Plenum Publishing (with a return of 15,689%), Circuit City (a video and appliance retailer; 16,410% ), Tyson Foods (a poultry producer; 18,118%), Wal-Mart (a discount chain; 19,807%), and Southwest Airlines (21,775%).3 Yet during this period, these industries (retailing, airlines, publishing, and food processing) were characterized by massive competition and horrendous losses, widespread bankruptcy, virtually no barriers to entry (for airlines after 1978), little unique or proprietary technology, and many substitute products or services. And in 1972, none of these firms was (and some still are not) the market-share leader, enjoying economies of scale from moving down the learning curve.
  The point here is not to throw out conventional strategic analysis based on industrial economics but simply to note that the source of competitive advantage has always shifted over time. What these five successful firms tend to have in common is that for their sustained advantage, they rely not on technology, patents, or strategic position, but on how they manage their work force. Our first task is to explore how and why some sources of competitive success that were important in the past are less so now and why the work force, and how it is organized and managed, is an increasingly important source of competitive advantage. This is the topic of this chapter. The chapter also considers how achieving competitive advantage through the work force affects the development of some human resource policies and practices.
  Remember, to provide extraordinary returns over time, any source of competitive advantage must be difficult to imitate. So after Chapter 2 describes some of the critical elements of a system for effectively managing the work force, and Chapter 3 provides evidence for the success of these practices, it is time to consider in some detail the barriers, both internal and external, that make doing the right thing with respect to managing the work force so difficult. If we are, either as individual organizations or as a society, to move to more effective ways of managing the work force and to implementing what we know with a shorter time lag, it is imperative that we fully understand the factors that stand in our way. Chapter 4 argues that some of the barriers are the business heroes, the implicit theories of behavior, and the language used in managing people. Chapter 5 considers the legacy of a history of adversarial relations and how that history can and must be overcome to have much chance of becoming more effective. Chapter 6 treats the U.S. legal system and shows how it provides neither justice nor a framework for effective management practice. Chapter 7 considers the potentially positive role of labor organizations in overcoming some of these barriers as well as why this potential is so seldom exploited. Chapter 8 describes various sources of internal corporate resistance, and some ways of overcoming that resistance. Having considered the various barriers to doing the right thing, I treat the issue of change in the last section of the book. Chapters 9 and 10 provide some evidence for the positive effects of the quality movement in reforming the management of the work force and review a framework for considering work force practices that some companies have used with encouraging results.
  The very factors that made Southwest Airlines, Wal-Mart, Plenum, and other organizations such as Nordstrom, Lincoln Electric, and the New United Motor plant of the Toyota-GM joint venture so successful are things that are difficult to imitate. That is what provides such competitive leverage, the ability to almost literally make gold out of leadexceptional economic returns in highly competitive, almost mundane industries. The paradox of this book, and of courses and seminars in how to manage the work force, is that even if we succeed in changing what we do, the basis of sustained competitive success will alter again.
  At the moment, however, we are a. long way from having to worry about that problem.
  The Changing Basis of Competitive Success
  People and how we manage them are becoming more important because many other sources of competitive success are less powerful than they once were. Recognizing that the basis for competitive advantage has changed is essential to develop a different frame of reference for considering issues of management and strategy. Traditional sources of successproduct and process technology, protected or regulated markets, access to financial resources, and economies of scale can still provide competitive leverage, but to a lesser degree now than in the past, leaving organizational culture and capabilities, derived from how people are managed, as comparatively more vital.
  One important source of competitive advantage was product technology, protected by patents or other proprietary know-how. In 1959, Xerox developed and prepared to introduce its first plain-paper copier. Some 13 years later, in 1972, it enjoyed a market share of more than 90% with machines that, although improved, still relied, fundamentally, on the same technological foundation. How many companies, industries, or products today could retain more than 90% of the market on the basis of 13-year-old technology? A quote from the annual report of Sun Micro-systems, a computer workstation manufacturer, makes the point: ''Sun's avowed intention [is] doubling the performance of its high-end workstations about every 18 months, on average.'' 4
  Since product life cycles are shortening and new-product introductions are coming much more rapidly, relying on a static product technology for success is increasingly problematic:
  Research has shown that new product introductions are vital to most manufacturing firms' growth and prosperity. A Booz, Allen and Hamilton
  study of over 700 Fortune 1000 companies estimated that new products would provide over 30 percent of these firms' profits during a five-year period from 1981-1986. . . . The same study suggested that the number of new products introduced by these firms was expected to double compared to the previous five-year period. 5
  The rapid development of computer-aided design (CAD), computer-aided manufacture (CAM), the linking of design and manufacture in CAD/CAM systems, and a myriad of other innovations that facilitate product design and introduction all erode how long one can achieve competitive success solely through proprietary product or service technology. George Stalk and Thomas Hour argue that the growing rate of product obsolescence makes the ability to rapidly innovate increasingly important.6 They found that market share, profits, and costs are all related to the speed with which companies can accomplish things. Peter Thigpen, former senior vice president of manufacturing at Levi Strauss, noted that, assuming a 20% annual growth rate in the market, a 12% annual price erosion, and a five-year product life, a 50% development cost overrun results in a 3.5% reduction in after-tax profits; production costs that are 9% too high result in a 22% reduction in profits; but being just six months late in shipping the product costs a full one-third of the after-tax profit potential.7
  The increasing pace of product change means that a technical edge, even once achieved, will erode quickly and must be renewed. The need for continuous innovation and rapid response to market and technological changes virtually requires a work force that delivers superior performance.
  Not only is the length of product life cycles diminishing, there is an erosion in the protection provided by patents because of competitors' ability to imitate product innovations. One of the most comprehensive studies of this question examined 48 product innovations of firms in the chemical, drug, electronics, and machinery industries.8 The study found that, on average, the imitation cost to innovation cost ratio was approximately .65, and the ratio of imitation time to innovation time was about .70.9 Although patents provided some protection, particularly in pharmaceuticals, the protection was less than one might think. "Con-
  trary to popular opinion, patent protection does not make entry impossible, or even unlikely. Within 4 years of their introduction, 60% of the patented successful innovations . . . were imitated." 10
  Firms sought competitive advantage not only in their product technology but also in the process technology used to produce the product or service. General Motors was perhaps the archetype of this approach, investing heavily in technology to automate its factories in the 1980s. The company spent some $40 billion for modernization and new facilities, in the process substituting fixed costs for variable costs.11 In fact, GM spent enough money on capital equipment to have purchased both Honda and Nissan.12 Unfortunately, it did not get much for that investment.
  There are several problems with seeking competitive advantage through investments in process technology. First, little of that technology is proprietarythe people who sell you robots or point-of-sale terminals or software to analyze production or service delivery will sell the robots, terminals, and software to your competitors. Your ability to obtain the benefits of, let alone get any advantage from, this technology which is often widely available and readily understooddepends on your ability to implement it more rapidly and more effectively. This almost inevitably involves the skill and motivation of the work force.
  Second, investment in specialized technology is not a substitute for skill in managing the work force; it actually makes the work force even more crucial for success. This is because more skill may be required to operate the more sophisticated and advanced equipment, and with a higher level of investment per employee, interruptions in the process are increasingly expensive. This means that the ability to effectively operate, maintain, and repair equipmenttasks all done by first-line employeesbecomes even more critical.
  Paul Adler noted that "in banks, a fully on-line system integrating numerous branches meant that people at the extremities . . . would have to be absolutely reliable, since any data they entered . . . would be fed instantaneously into all the bank's accounts and corresponding funds transferred instantaneously."13 He also noted that in the case of numerically controlled machine tools, in spite of manufacturers' prom-
  ises, the skill requirements of machinists have remained constant or increased. They often required expanded training and higher levels of responsibility, even with the more technologically sophisticated machines.
  When the Shenandoah Life Insurance Company spent some $2 million to computerize its processing and claims operations in the early 1980s, it found that it got almost nothing for its expenditureit still required 27 working days and 32 clerks in three departments to handle a policy conversion. 14 Only after the company changed how it organized and managed its work forcerelying on semiautonomous teams of 5 to 7 people, upgrading training and skills, and paying more for the more responsible and more skilled workersdid case-handling time drop and service complaints virtually disappear. "By 1986, Shenandoah was processing 50% more applications and queries with 10% fewer employees than it did in 1980." 15
  Finally, investments in process technology provide only limited competitive advantage because, as the senior manufacturing executive in the paper-making division of a large forest products company said, "Machines don't make things, people do." Commenting on the tremendous investment in advanced computer technology to automate factory processes, one writer perceptively noted: "[I]t is rather ironic that the application of artificial intelligence to manufacturing is becoming a popular topic. If intelligence is so helpful to manufacturing in its artificial form, then why have the benefits of the real intelligence been overlooked so far." 16
  Another way in which firms achieved competitive success was by avoiding competition through protected or regulated domestic markets. Some years ago while visiting Italy, I noticed that there were many Fiats and almost no Japanese carsindeed, only about 2,000 Japanese cars per year were sold in Italy during the mid-1980s. This sales level did not reflect the relative prices and product qualities or consumer tastes, but resulted from a limit on the imports of Japanese cars. Fearful of the power and success of Fiat after World War II, Japan struck a bargain in
  which the Japanese automobile market would be protected from Fiat while the Italian market would be protected from Japanese automakers.
  With the growing importance of free-trade areas in Europe, North America, and elsewhere, and with the increasing investment in manufacturing facilities all over the world (e.g., the building of Japanese automobile plants in the United States and Europe), the ability to sustain competitive success by foreclosing markets is disappearing. The changing role of foreign trade in the United States and the World economies over the past few decades has been truly remarkableand the growth of both exports and imports means that firms are now competing not only domestically but globally: "In 1950 real exports and imports of goods and services were under 5 percent of real GNP. . . . [B]y 1980 real exports and imports were 12.2 percent and 10.4 percent of real GNP, respectively. In 1988 exports were 13.1 percent and imports 15 percent of GNP." 17 Thus, between 1950 and 1990, foreign trade grew from less than 5% to almost 30% of the U.S. gross national product.
  The automobile industry nicely illustrates the move toward the internationalization of markets and its consequences. The share of imports in the U.S. passenger car market soared from 7.3% in 1966 to 14.8% 10 years later and to 29.3% by 1982.18 Similar increases were occurring elsewhere as wellfrom 1966 to 1982, imports of passenger cars in France rose from 13.9% to 21.7%; in Germany from 13.7% to 24.9%; and in the United Kingdom from just 5% to 57.7%. As markets opened to foreign competition, production of motor vehicles shifted. In 1950, companies in the United States produced some 75.4% of the total world output of motor vehicles (trucks, buses, and automobiles), with Europe producing 19.8% and Japan essentially none.19 Thirty years later, motor vehicle production located in Europe was 37.6%, 28.6% in Japan, and only 20.8% in the United States. The globalization of competition has occurred in telecommunications equipment and financial services as well. For instance, 31% of the business loans, 21% of the assets, and 14% of the total deposits in the United States are now controlled by foreign or foreign-owned banks.20
  Regulation can limit competition by setting prices and by restricting entry.21 In the United States, for many years entry into transportation industries such as airlines and tracking was strictly controlled. MCI's
  success as a provider of long-distance telephone service came only after the company won a protracted struggle to even be permitted to operate. The wave of deregulation sweeping the United States and the rest of the world, however, has eliminated many protected markets. Moreover, there is some evidence that once deregulated and opened to competition, markets are difficult to close or reregulate. Thus, these trends seem to be irreversible.
  Another traditional source of competitive advantage was access to financial resources. With less efficient capital markets, a firm's ability to finance itself through substantial financial resources afforded protection from competitors less able to acquire the resources necessary to mount a serious challenge. This source of competitive advantage has eroded in the face of increasingly efficient financial markets in which capital moves worldwide on an unprecedented scale. The venture capital industry is now international, so that if U.S. investors, for instance, are unwilling to bear the risk of financing leading-edge technologies in pharmaceuticals, semiconductors, and equipment, foreign investors will pick up the slack. Table 1-1 is a partial listing of the extent of direct foreign investment in important California leading-edge companies and technologies in the 1980s.
  The growth of international direct investment by multinational corporations has outpaced the growth of the world economy and world trade in the 1980s. . . . Not only do United States multinational corporations face stronger competition from foreign multinationals in international markets, but affiliates of foreign firmsoften with new production technologies and different management techniqueshave become more active in the United States. 22
  Between 1967 and 1987, worldwide outward direct investment increased from $112 billion to $1.023 trillion, an average annual growth rate of 12.4%. The U.S. share of this outward direct investment declined from 50% to 31%. Meanwhile, direct foreign investment in the United States grew dramatically, from $9.9 billion in 1967 to $272 billion in
  Table 1-1 Selected Examples of Direct Foreign Investment in California, 1981-1990
  Cultor Oy/Kodak
  Finland/U.S.
  Varian's Tube Division
  Source: David J. Teece, "Foreign Investment and Technological Development in Silicon Valley," Copyright 1992 by The Regents of the University of Galifornia. Reprinted from the California Management Review, Vol. 34, No. 2. By permission of The Regents.
  1987, a growth rate of some 17.8% per year. 23 Capital is now less important as a source of competitive advantage because the money to finance a good idea, or strong management, is increasingly available to all attractive projects.
  Yet another source of competitive advantage that is now less significant than it used to be is economies of scale. The famous Boston Consulting
  Group experience curve postulated that a firm that entered a market early and achieved large production volumes would face significantly lower costs as it achieved the benefits of learning as well as more traditional scale economies. Although there is some evidence for the economic benefits of large market share, 24 there is much evidence that this source of competitive advantage is diminishing in importance. The trend toward more fragmented markets, with the need to cater to the specialized tastes of particular subsegments of the population, has been described in detail by Piore and Sabel in their book about flexible specialization.25 In general, the same computer-aided design and manufacturing technologies that make imitation easier also make it possible to more economically design and manufacture a more differentiated product line.
  Several examples help make the point. Consider first so-called natural monopolies, such as telecommunications and electric power generation. Even here, evolving technology makes it possible for smaller competitors to effectively exploit market segments. In downtown Chicago, an independent company laid its own fiber-optic cable and provides telephone service to a set of commercial clients in that densely populated area. Stanford University has its own telephone system to handle both data and voice communications on the campus. Electric utilities compete with industrial clients that now dispose of their wastes in cogeneration facilities, which produce power from the heat. In the steel industry, the so-called minimills are a well-known phenomenon, in many instances more profitable and cost-competitive than their larger competitors. The ability of the Japanese to make car models profitably, even when they sell fewer than 100,000 units per year, has given firms with that capability a tremendous competitive advantage. And finally, the textile industry, particularly suppliers of men's clothing, traditionally competed on the basis of price and did so by making large lots of standard products. With major retailers now wanting to stock leaner inventories and be more responsive to shifting customer tastes and what actually sells, the basis of success has shifted to the ability to deliver the product quickly. "Rather than allowing order response times of one month or more, the lean retailer currently requires 13 days for order fulfillment. In two years, the response time will decrease to 6 days."26
  Without debating whether scale economies and market share ever provided the advantages that some claimed, it is clear that whatever those advantages, they are smaller now than they once were and will probably be even smaller in the future.
  The Importance of the Work Force and How It Is Managed
  As other sources of competitive success have become less important, what remains as a crucial, differentiating factor is the organization, its employees, and how they work. Consider, for instance, Southwest Airlines, whose stock had the best return from 1972 to 1992. It certainly did not achieve that success from economies of scale. In 1992, Southwest had revenues of $1.31 billion and a mere 2.6% of the U.S. passenger market. 27 People Express, by contrast, achieved $1 billion in revenues after only 3 years of operation, not the almost 20 it took Southwest. Southwest exists not because of regulated or protected markets but in spite of them. ''During the first three years of its history, no Southwest planes were flown."28 Southwest waged a battle for its very existence with competitors that sought to keep it from flying at all and, failing that, made sure it did not fly out of the newly constructed Dallas-Fort Worth international airport. Instead, it was restricted to operating out of the close-in Love Field, and thus was born its first advertising slogan, "Make Love, Not War." Southwest became the "love'' airline out of necessity, not choice.
  In 1978, competitors sought to bar flights from Love Field to anywhere outside of Texas. The compromise Southwest wrangled permitted it to fly from Love to the four states contiguous to Texas.29 Its competitive strategy of short-haul, point-to-point flights to close-in airports (it now flies into Chicago's Midway and Houston's Hobby airports) was more a product of its need to adapt to what it was being permitted to do than a conscious, planned movealthough, in retrospect, the strategy has succeeded brilliantly. Nor has Southwest succeeded because it has had more access to lower-cost capitalindeed, it is one of the least leveraged airlines in the United States. Southwest's planes, Boeing
  737s, are obviously available to all its competitors. It isn't a member of any of the big computerized reservation systems; it uses no unique process technology and sells essentially a commodity productlow-cost, low-frills airline service at prices its competitors have difficulty matching.
  Much of its cost advantage comes from its very productive, very motivated, and by the way, unionized work force. Compared to the U.S. airline industry, according to 1991 statistics, Southwest has fewer employees per aircraft (79 versus 131), flies more passengers per employee (2,318 versus 848), and has more available seat miles per employee (1,891,082 versus 1,339,995). 30 It turns around some 80% of its flights in 15 minutes or less, while other airlines on average need 45 minutes, giving it an enormous productivity advantage in terms of equipment utilization31 It also provides an exceptional level of passenger service. Southwest has won the airlines' so-called triple crown (best on-time performance, fewest lost bags, and fewest passenger complaintsin the same month) nine times. No competitor has achieved that even once.32
  I will give numerous examples of achieving competitive success through people in this book. What is important to recognize now is why success, such as that achieved at Southwest, can be sustained and can not readily be imitated by competitors. There are two fundamental reasons. First, the success that comes from managing people effectively is often not as visible or transparent as to its source. We can see a computerized information system, a particular semiconductor, a numerically controlled machine tool. The culture and practices that enable Southwest to achieve its success are less obvious. Even when they are described, as they have been in numerous newspaper articles and even a segment on "60 Minutes," they are difficult to really understand. Culture, how people are managed, and the effects of this on their behavior and skills are sometimes seen as the "soft" side of business, occasionally dismissed. Even when they are not dismissed, it is often hard to comprehend the dynamics of a particular company and how it operates because the way people are managed often fits together in a system. It is easy to copy one thing but much more difficult to copy numerous things. This is because the change needs to be more comprehensive and also because
  the ability to understand the system of management practices is hindered by its very extensiveness.
  Thus, for example, Nordstrom, the department store chain, has enjoyed substantial success both in customer service and in sales and profitability growth over the years. Nordstrom compensates its employees in part with commissions. Not surprisingly, many of its competitors, after finally acknowledging Nordstrom's success, and the fact that it was attributable to the. behaviors of its employees, instituted commission systems. By itself, changing the compensation system did not fully capture what Nordstrom had done, nor did it provide many benefits to the competition. Indeed, in some eases, changing the compensation system produced employee grievances and attempts to unionize when the new system was viewed as unfair or arbitrary.
  Achieving competitive success through people involves fundamentally altering how we think about the work force and the employment relationship. It means achieving success by working with people, not by replacing them or limiting the scope of their activities. It entails seeing the work force as a source of strategic advantage, not just as a cost to be minimized or avoided. Firms that take this different perspective are often able to successfully outmaneuver and outperform their rivals. In the remainder of this chapter, I address two issuestraining and the use of contingent work forceto show how viewing people as a source of success changes the formulation of both public policy and managerial strategy.
  If competitive success is achieved through people, then the skills of those people are critical. Consequently, one of the most obvious implications of the changing basis of competitive success is the growing importance of having a work force with adequate skills. Historical studies show that between 1929 and 1982, education prior to work accounted for 26% of the growth in the productive capacity of the United States, with learning on the job contributing to an additional 55%. It
  seems clear that ''learning in school and learning on the job are by far the most important factors behind American economic growth and productivity in this century, and will determine the nation's economic prospects in the next." 33 The evidence, however, is that skill problems in the U.S. work force are widespread and growing. Moreover, there is little evidence that U.S. employers, for the most part, are doing what is required to address this problem.
  Regarding the first point, the skill problem, an overview of training and preparation for work concluded, "As we approach the end of this century, it becomes ever more apparent that the demand for more skilled workers is on a collision course with the quantity and quality of the labor supply."34 In an article reporting the declining position of the United States in world trade in telecommunications equipment, the New York Telephone Company reported that "it tested 57,000 job applicants in 1987 and found that 54,900, or 96.3%, lacked basic skills in math, reading, and reasoning."35 A human resource planning document prepared at the Bank of America in 1990 reported that "Chemical Bank in New York must interview 40 applicants to find one who can be successfully trained as a teller'';36 "at Pacific Bell in Los Angeles, 95% of the 3,500 people who recently took a competency test for entry-level jobs not requiring a high school education failed''; and "at Motorola, 80% of its applicants cannot pass a simple 7th grade English comprehension or 5th grade math test. At Bell South in Atlanta, fewer than 1 in 10 applicants meet all qualification standards."37
  A U.S. Department of Education report covering document, prose, and quantitative literacy summarized the findings of a study mandated by Congress because of its concern about skill deficiencies in the work place and came to equally grim conclusions.38 For instance, in 1986, only about 50% of all high school graduates achieved literacy at a level that would enable them to follow directions to travel from one location to another using a map, and only 10% of the graduates could use a bus schedule to select the appropriate bus for given departures and arrivals.39 Only 3% of high school graduates could orally interpret distinctions between types of employee benefits, and just 4.5% could estimate cost using grocery unit-price labels.40 Assessments of mathematical pro-
  ficiency are also distressing. 41 Almost one-quarter of high school seniors could not accurately determine the cost of a simple meal from a short menu of items and prices,42 and fewer than half "demonstrated a consistent grasp of decimals, percents, fractions, and simple algebra."43
  The response to the skills deficit, and to the growing recognition that competitive success will depend on a firm's employees, has been less than overwhelming. For instance, "though 73% of employers polled by placement consultant Right Associates expect a skilled-labor shortage, three fourths don't have a plan to keep most-needed workers."44 A follow-up to the famous Workforce 2000 report undertaken by the Hudson Institute and the consulting firm Towers Perrin
  reports pressing shortages of technical, professional and secretarial workers at many companies. . . . But managers aren't responding to the changes quickly enough, the study suggests. It cites a lack of "leading-edge" recruitment and training strategies. . . . Companies . . . have been slow to make a strong commitment to training the workers they do hire. Two-thirds of the surveyed firms spend less than $2,000 for classroom and other on-the-job education for first-year workers.45
  Training tends to go to those already fairly well trained, most often in the management or professional ranks. Much less is done to upgrade the skills of front-line employees. The Bank of America's human resource planning document noted that "nation-wide companies are three to four times more likely to offer workshops on stress-management or how to run meetings than to train laborers seeking to upgrade their positions."46 Another study reported that while 17% of executive, administrative, and managerial personnel received training provided by their employers in a given year, the comparable figure for machine operators was 4%.47
  There are several reasons why many organizations provide less training than is optimal. First, unlike many other countries, the United States presently has no specific public policy designed to encourage training. Although such expenditures are obviously tax-deductible, in many countries there is a requirement that 1% or so of payroll (wages) be spent on training. If less than the prescribed amount is spent, the
  difference goes to the government as a tax. Also, unlike many other countries, there is little coordination from the government, industry associations, or other collective organizations to formulate training policy and standards and to facilitate the training enterprise. For instance, in New Zealand, legislation has established coordinating bodies for training in various industries, and these bodies tend to be active in setting standards, developing curricula, implementing certification, and so forth.
  Second, the costs of training funded by the company are dear and immediate, but the benefits are often long term and may, in fact, accrue to other organizations. If I train someone and the person leaves to work for another employer, then the other organization obtains. the benefits of my organization's expenditures. Economic theory, consequently, suggests that general training, of use in numerous jobs, be funded by the trainee, who, after all, stands to reap the benefits. Firm-specific training, for skills that are of use primarily to a particular organization, should be funded by that organization. Of course, what .constitutes general or firm-specific training is likely to be very much open to question, and firms will therefore have a tendency to underinvest in skill development.
  Third, training's benefits are inherently long term. Under the pressure of short-term budget or profit pressure, training, particularly in the United States, is often the first thing to be cut. Every dollar saved on skill building this year flows immediately to pretax profit, and the loss of competitive position that may be caused is less clearly visible and, in any event, will probably occur only sometime in the future.
  This, however, does mean that organizations that choose to do so can use training, and the skills developed thereby, as a competitive weapon. As one example, consider the New United Motor automobile assembly plant in Fremont, California, a joint venture of Toyota and General Motors. Under the agreement establishing the joint venture, a certain proportion of the production was to go to Toyota and a portion to GM. When the Nova was being produced for GM at the plant, and sales weren't sufficient to keep the plant busy, rather than laying off workers, the company gave them other tasks such as painting and repair, and
  trained them extensively in statistical process control (SPC:), how to work in groups, how to analyze jobs and the work process, and so forth. The plant manager at the time remarked that in the 1990s, having a skilled and committed work force would be the key to success in the automobile industry and wanted to ensure that this facility would be competitive with the best in the world. Indeed, many of the Japanese transplant automobile assembly facilities surprised people with the extensive training they provided workers. Often, selected workers were sent to Japan prior to the start-up, and workers were routinely given as much as four times the amount of initial training that was customary in the U.S. automobile industry. This training obviously costs money, but the Japanese believed that it would produce a work force with the skills to provide a competitive advantage in an industry facing excess manufacturing capacity.
  Using training to gain a competitive edge is diffusing to U.S. auto-makers as well. When General Motors opened a new truck plant in Fort Wayne, Indiana, that relied not only on new technology but also on team-based production, both workers and management went through intensive training in group problem solving and interpersonal dynamics. 48 The 3,000 employees at the factory received 1.9 million hours of training, or about 633 hours per worker, to learn the new technology and develop skills in working in teams.
  At Advanced Micro Devices' submicron development center, a state-of-the-art development and manufacturing facility producing wafers with circuits of less than 1 micron in width, the company spends over 40,000 hours and $1 million per year on training for its approximately 400 employees in the facility. The firm believes that this training, and other innovative practices, are the only way to benefit from a capital investment in plant and advanced manufacturing equipment in excess of $300 million.
  In a world in which your competitors treat training as a luxury, don't know how to organize and deliver it, and don't link it tightly to the strategic objectives of the business, your organization's ability to maintain appropriate training can produce real competitive advantage.
  Moreover, public policies that facilitate, encourage, or enable training enhance the competitiveness of those who are subject to those policies.
  The "Externalization" of Employment
  If competitive success is achieved through peopleif the work force is, indeed, an increasingly important source of competitive advantagethen it is important to build a work force that has the ability to achieve competitive success and that cannot be readily duplicated by others. Somewhat ironically, the recent trend toward using temporary help, part-time employees, and contract workers, particularly when such people are used in core activities, flies in the face of the changing basis of competitive success. This raises the questions of why these practices seem to be growing, what effects they have on the ability to achieve advantage through people, and what the implications are for organizations that might follow a different strategy.
  At the most fundamental level, it is obvious that, at the limit, if all employees are temps or contract workers, or even if they are part-timers, they cannot serve as a basis of distinction. As is the case with technological equipment, the temporary agencies will furnish staff to all customers. Outside contractors will work for anyone, and part-timers, many of whom are in that status involuntarily, have insufficient attachment or commitment to a particular organization to provide it with some comparative advantage. Consider the case of professional services, such as law, accounting, or management consulting. Why use McKinsey, the consulting firm, or Jones, Day, the large law firm, or KPMG Peat Marwick, the accounting firm, and pay a premium price to do so, if these companies simply hired contract or temporary workers? The distinctive competence of a professional services firm is the skill of its staff and if those people can be obtained just as readily elsewhere, and if they have no attachment to a particular firm, then the competitive position of the organization is diminished. This is why many well-managed professional services firms emphasize recruitment, selection, and building strong
  cultures to retain the skilled employees who constitute the basis for their success. To the extent that people are a source of competitive success for firms other than those in professional services, the same logic applies.
  Nevertheless, taking employees out of the organization or diminishing their attachment to it is a growing trend. 49 For instance, between 1970 and 1984, the temp industry outgrew the GNP by almost 2 to 1 and grew 21% faster than even the computing equipment industry over that same time period. A study of flexible employment in California reported that the number of temps grew 800% from 1972 to 1985, more than seven times the rate of employment growth in nonagricultural industries.50 Contracting for services has made business services industry growth outstrip even the growth of services provided to consumers with employment doubling between 1974 and 1984.51 Part-time work has also increased in prominence. As the nonagricultural work force grew 54% between 1970 and 1990, the number of people involuntarily employed part time increased more than 120%,52 so that by 1985, part-time work constituted almost a quarter of total employment in the state of California.53
  The reasons behind this growth are many. It is often much quicker to staff using these sources of labor. Hiring a so-called permanent employee requires possibly posting the job, collecting applications, screening, and making a final selection. Getting a temporary requires a phone call, and the person can often be there within an hour. Speed in filling the position is a mixed blessing, however. On the one hand, you get someone quickly. On the other hand, the absence of the formal process may mean you have people who would not meet the regular requirements. In a study at Apple Computer, managers were asked whether they would be willing to hire the contingent employees on a regular basis. In about 80% of the cases, the response was that the person did not meet Apple's hiring standards. These same people, however, performed almost 25% of the corporation's jobs in the mid-1980s, working on everything from hardware to software development and quality control.
  A second reason for using contract or temporary workers is that the
  unit may not have authorization to hire. Many organizations manage head count much more stringently than they manage monetary budgets. This permits them to trumpet figures like sales per employee or, in the ease of government, for political leaders to announce that they have reduced the size of government. However, if all one has done is replace regular employees with outsiders or temporaries, the presumed savings may be illusory or worse. For example, during the Reagan administration's drive to cut the size of government, the Department of Energy went from 21,208 employees in 1980 to 16,103 in 1989. But outside contracts increased 56% just between 1986 and 1990, and a study by the General Accounting Office "found that most of the department's $522 million in support service contracts in the fiscal year 1990 were . . . signed because the agency 'lacked sufficient resources' to properly perform the activities." 54
  Third, the use of contingent employees is a buffer to absorb fluctuations in demand while avoiding the morale problems that layoffs engender. The traumatic 1985 layoffs at Apple, an organization with a strong culture, caused many managers to want to avoid a repeat of the situation. One way was to use very lean staffing levels and contingent workers to do the additional work. A study of 442 private firms observed that both the seasonality and cyclicality of demand affected the use of temporaries. However, neither factor affected the extent of contracting out.55 The use of contingent employment to buffer a set of critical, core employees is one that is compatible with achieving competitive advantage through the work force.
  Finally, one of the most important reasons why organizations use contingent employees is that they cost less. The issue of cost is complex, as there are many costs (and possibly offsetting benefits) that need to be accounted for. In many organizations, as at Apple, a facilities charge is levied for permanent employees, since they need work space, but not for contingent workers. Of course, this cost saving is illusory if one has temporary workers who actually occupy space continuously.
  Temporary and contract employees may also cost less because they are paid less and do not receive the benefitsparticularly health insurance, retirement, and vacationof regular employees. Katherine Abra-
  ham reported that "the average wages for less-skilled workers . . . employed in the business service sector are from 15 to 30% lower than average wages for workers holding similar jobs in manufacturing," 56 and a study of contract workers in petrochemical facilities found that such workers earned less even after numerous characteristics were statistically controlled.57 Wages, however, are often the same or even higher for contingent workers in high-skilled occupations. The evidence is that benefits are not offered on a pro rata basis to part-time employees58 and are less likely to be offered to low-skilled workers in business services compared to the same jobs in manufacturing.59 The desire to save on benefits costs is so strong that "Federal civil service regulations were changed in June 1985 to permit the federal Office of Personnel Management to hire temporary workers for up to 4 years without providing fringe benefits."60
  Many of the benefits of using contingent employees are immediate and measurable. The disadvantages or costs are more likely to accrue over time and occur in ways that make them less readily captured by traditional accounting systems. Consequently, there is a tendency for organizations, particularly those under immediate financial pressure, to overuse these arrangements and thereby lose the opportunity to achieve some market advantage through their work force.
  The biggest disadvantage of contingent employment arrangements is the difficulty in obtaining loyalty, dedication, or willingness to expend extra effort on behalf of the organization. One Hewlett-Packard executive commented, "They don't tend to be dedicated to the corporate ideal. . . . They're here to make money, not to fulfill the corporate vision."61 Sometimes it is even difficult to get them to do their jobs:
  Shortly after Cartoon & Black Corp. hired a temporary worker to stuff 80,000 insurance certificates into envelopes . . . the company found thousands of documents dumped in a freight elevator. The "temp" had become bored working alone and thought nobody would notice if she cut her work load.62
  The costs of reduced productivity, diminished motivation, and less commitment to the organization can be "large and sometimes subtle."63
  The use of contingent workers also affects the likelihood of the organization's obtaining strategic advantage through training and the development of a skilled work force. Contingent work arrangements preclude the organization's capturing the benefits of any firm-specific knowledge or capabilities that the employees may develop. More important, the work arrangements themselves discourage training and developmenthiring temporaries or outside contractors is, after all, sometimes done to enable the organization to change its skill set or avoid taking the time and incurring the cost to develop its own people.
  A contingent, poorly trained work force can be a dangerous one in the wrong setting. In the chemical industry, maintenance and repair tasks are often contracted out, with contract employees performing about a third of that work during regular operations and half of the work in upgrading. or repairing equipment. 64 These less educated, experienced, and trained workers are associated with the growing number of serious accidents in petrochemicals. From January to June 199l, "of the 11 work place accidents known to involve explosions, fires, and spills in the United States petrochemical industry . . . nine were reported to involve contract employees."65 In nursing, the use of temporary agencies to solve staffing shortages had two adverse effects. With a short-term palliative, the organizations seldom addressed their fundamental problems. Quality control was a major problem. Temp nurses were used in positions for which they were not qualified; they worked excessive hours for several different clients; and the poor performers were simply reassigned to a different hospital until the performance deficiencies were again noticed.66
  The appropriate use of a contingent work force involves first understanding the real sources of success in one's business and then ensuring that key activities are performed by people with enough connection to the organization that they are likely to do a good job and to receive the necessary training and skill development, either through on-the-job learning or through more formal programs. Wal-Mart, although a discount chain, uses fewer part-timers and temporary-help employees than virtually any of its competitors. Wal-Mart sees an important component of its success coming from customer service and from the ability to tap
  into localized knowledge of customer wants and needs. Seeking advantage in part through its work force, the company staffs itself to have the opportunity to obtain a more dedicated and skilled set of employees.
  By contrast, People Express, a low-cost airline begun in the first wave of deregulation, staffed its reservation agent positions with temporary workers. Travel agents tended not to sell People's tickets, so for most customers, the first point of contact was the reservation agent. Feeling left out of the company culture, with no career mobility prospects, these individuals did not provide an initial point of customer contact that was consistent with the service the airline sought to offer.
  The allure of the immediate cost and benefit savings may be seductive, but the costs of contingent employees can be high. The critical decision involves determining whether people will be a source of distinct competitive advantage and, if so, in what activities they are the most critical. Contingent employees should be used with great caution in such activities.
  Considering the issues of training and contracting out provides two concrete illustrations of how thinking about the extent to which sustainable competitive advantage originates from the work force helps us make sound decisions about policies and practices related to managing the work force. It is by making the right choices about managing people that firms such as Nordstrom, New United Motor, Wal-Mart, Lincoln Electric, and Southwest Airlines achieved their well-known success.
  Contrary to some academic writing and to popular belief, there is little evidence that effective management practices are 1) particularly faddish (although their implementation may well be), 2) difficult to understand or to comprehend why they work, or 3) necessarily contingent on an organization's particular competitive strategy. There are interrelated practicesI enumerate 16 in this chapter, but the exact number and how they are defined are somewhat arbitrarythat seem to characterize companies that are effective in achieving competitive success through how they manage people. This chapter describes these practices, explains how and why they are interrelated, and provides some evidence that these practices are neither as new or faddish, nor as contingent on a particular approach to the market, as some might think. The next chapter reviews some evidence regarding their effectiveness and their comparatively slow pace of adoption and diffusion. Combined, the two chapters obviously raise the question of why these practices aren't implemented more readily. Understanding this and some ways of remedying the problem are a major focus of this book.
  Before I enumerate these practices, some cautionary words are in order. It would be difficult to find a single organization that does all of these things or that does them all equally well. Some successful firms have tended to do a higher percentage, and it is useful to grade one's own organization against the overall list. Nevertheless, the reader should not expect to find many organizations that do everything. Which practice is most critical does depend in part on the organization's particular technology and market strategy.
  A second important caution is to recognize that it is possible for an organization to do all of these things and be unprofitable and unsuccessful, or to do few or none of them and be quite successful. How? These factors are almost certainly related to an organization's ability to achieve competitive success through its work force. But although that may be an important basis of success, and one that is even increasing in importance, it is clearly not the only basis of success. IBM, for instance, has done many of these things and has built a skilled and dedicated work force. That in and of itself, however, could not overcome a product strategy that overemphasized large, mainframe computers. People Express, now defunct, also built a strong culture, selectively recruited, and used innovative compensation and work organization strategies to build flexibility and productivity in its operations. Indeed, it was one of the lowest-cost providers of airline services. But this cost advantage could not overcome other problems, such as the founder's edifice complex, which resulted in too-rapid expansion, acquisition of Frontier Airlines and becoming seriously financially overleveraged, and a growth rate that was not sustainable given the firm's fundamental human resource policies. In focusing on managing the work force, I highlight only one dimension of the several that determine organizational performance.
  By the same token, it is possible to be successful, particularly for a while, doing none of these things or even their opposite. Frank Lorenzo took over Continental Airlines and put it into bankruptcy in 1983 to break its union contracts. To say he played hardball with his employees was an understatement. Lorenzo's strategy was founded on financial and negotiating skills, not on his work. force. For a while, these strategies workedalthough Continental lost $161 million in 1983, by 1985 it
  earned about $60 million, a very rapid turnaround. Similarly, Carl Icahn at Trans World Airlines made money, for a while, taking strikes and fighting with his work force, seeking success through financial strategies. Neither airline succeeded in the long run, but in the short run, cutting wages and benefits, cutting employment levels, and managing through fear can produce temporary results. Today these strategies are in use in a couple of the major California banks, whose key to success seems to have been to acquire other large banks; close down redundant branches; lay off employees, literally by the thousands; adjust work hours to make a higher proportion of the work force part-time and therefore not eligible for benefits; and use these cost reductions on a large asset and revenue base to increase profits.
  There are two problems with the strategy employed in airlines and banking. First, these are both service industries, and it is incredibly difficult to get high performance and give good service over a long period with disgruntled employees. Second, and perhaps more fundamental, cutting wages, benefits, and employment levels can scarcely be a basis for sustained success over time because there is nothing particularly innovative or unique about these strategiesthey can be readily imitated by others. It is important to keep in mind that this discussion focuses on long-term success, and clearly in the short term, one can do a number of other things to provide quick financial returns.
  Managing the work force effectively is not always equally essential to competitive success. Moreover, whether one needs the performance of all employees or only the contributions of a few, talented individuals also varies according to the nature of the technology involved. Masahiko Aoki noted:
  [T]here are industries in which wide differences in productivity across countries do not seem to be attributable to a mere difference in managerial abilities. For example . . . it appears indisputable that Japanese auto producers have a systematic productivity advantage over U.S. producers. . . . One possible explanation lies in the exceptional diligence of Japanese workers and their loyalty to the employing firm. . . . But if this is so, how can we explain the fact that Japanese labor productivities are considerably lower than American productivities in certain industries
  such as petrochemical, food processing, and pharmaceuticaldespite the lifetime employment of equally diligent workers? 1
  Aoki's answer is that the Japanese style of managing the work force stimulates a system of shop-floor entrepreneurship. Some industries and technologies require the effective performance of everyone in the organization in order to be successful and rely on incremental adjustments made at localized work sites, while other industries rely primarily on discontinuous, unique breakthroughs in products or processes by one or a few individuals. Seen in this light, it is understandable that the United States excels in pharmaceuticals, where product development (rather than manufacture or service) is critical; in petrochemicals and food processing, in which highly automated equipment is essential; and in entertainment, where the good script or musical score is the key. It is also not surprising that a system that does not produce the best results from everyone in the work place has difficulty in industries such as machine tools, assembly, or service, in which success is more a function of the insights and activities of many employees at all stages and levels.
  A third word of caution is that these practices have potential down-sides as well as benefits and are not necessarily easy to implement, particularly in a one-at-a-time fashion. One obvious problem is that they all necessarily entail more involvement and responsibility on the part of the work force. There are many employees who would rather work only with their bodies and check their minds at the doorparticularly if that is what they have become accustomed toand instituting work practices that entail more effort and involvement may force turnover. These practices may be resisted by others in the organization as well, for reasons I cover later.
  The reader is cautioned that implementation issues loom large, regardless of how sensible the practices may be.
  Sixteen Practices For Managing People
  The following policies and practices emerge from extensive reading of both the popular and academic literature, talking to numer-
  ous people in firms in a variety of industries, and the application of some simple common sense. The particular way of subdividing the terrain is less important than considering the entire landscape, so the reader should realize that the division into categories is somewhat arbitrary. The themes, however, recur repeatedly in studies of organizations. It is important to recognize that the practices are interrelatedit is difficult to do one thing by itself with much positive result. Although I illustrate some of the more prominent interconnections, some of the effects of the practices on each other I leave to the reader to assess.
  The Lincoln Electric Company ''is the largest manufacturer of arc welding products in the world, operating twenty plants in fifteen countries'' 2 with sales of close to $1 billion. During its history, it has driven a number of larger competitors (such as General Electric) out of the market, has consistently earned between 10% and 15% after-tax return on equity, and has been the leading U.S. manufacturer of arc welding equipment since World War II.3 One of its fundamental policies is that of employment security:
  Our guarantee of employment states that no employee with three years or more of service will be laid off for lack of work. . . . [N]ot once in more than thirty years has a Lincoln employee . . . been terminated for lack of work. . . . [T]he policy does not protect any employee who fails to perform his or her job properly, it does emphasize that management is responsible for maintaining a level of business that will keep every employee working productively. The institution of guaranteed employment sprang from our belief that fear is an ineffective motivator. If an employee lives in fear of being laid off, the natural tendency will be to make a job last as long as possible. Relief from such anxiety frees people to do their best work.4
  Security of employment signals a long-standing commitment by the organization to its work force. Norms of reciprocity tend to guarantee that this commitment is repaid, but conversely, an employer that signals through word and deed that its employees are dispensable is not likely to generate much loyalty, commitment, or willingness to expend extra
  effort for the organization's benefit. New United Motor Manufacturing (NUMMI), the Toyota-GM joint venture in California, guaranteed workers' jobs as part of the formal labor contract in return for a reduction in the number of job classifications and an agreement not to strike over work standards. This commitment was met even in the face of temporarily slow demand, and many observers believe that as a result, trust between employees and the organization increased substantially. Employment security is not only for larger organizations such as Lincoln and NUMMI. Digital Pictures, Inc., a young and small software company in the interactive video business, grants job security because the founder and president believes that it helps attract and keep talent. 5
  Taking on people not readily eliminated exerts pressure to be careful and selective in hiring. Moreover, ''employment security enhances employee involvement because employees are more willing to contribute to the work process when they need not fear losing their own or their coworkers' jobs. Employment security contributes to training as both employer and employee have greater incentives to invest in training,"6 because there is some assurance that the employment relationship will be of sufficient duration to earn a return on the time and resources expended in skill development.
  Although employment security is an exception in the United States, it is the norm in Western Europe and many industrialized countries. For instance, laws in Belgium, France, Germany, the Netherlands,' Luxembourg, and the United Kingdom all require some degree of advance notice to workers in the case of layoffs, some minimum level of severance pay, and in all instances require consultations with a local works council, employee representatives, and/or any union in the organization.7 Employers' ability to get around employment security protections by using contract or temporary workers is limited in Europe, as use of these employment arrangements is also regulated.8
  Employment security provisions, voluntarily adopted by individual firms, are presumptively rational responses designed to achieve a more effective work force. However, there is no evidence that even government-mandated employment security has had adverse effects on
  either firms or the labor market. In a comprehensive review of existing empirical evidence, as well as new data on the operation of the West German labor market, Christopher Buechtemann concluded:
  Judging by the available empirical evidence, the theoretically derived assumption that legal employment protection regulations have put a severe restraint on firms' manpower policies preventing them from carrying out necessary workforce adjustments seems to be largely unfounded. . . . Likewise the experience of the German Employment Promotion Act has so far disproved expectations that a relaxation or partial abolition of institutional lay-off and dismissal restraints would have a significant impact on firms' hiring decisions and thereby stimulate job creation. 9
  Another study comparing production employment and shipments in the United States and Germany for the period 1974-1984 reached the same conclusion.10
  One concern managers sometimes express is that guaranteed employment will foster a "civil service" mentality and a lack of emphasis on performance. This is probably less of a problem than is sometimes thought but, in any case, is not likely to be an issue if employment security is coupled with financial incentives for excellent performance and with work organization practices that motivate employee effort and capture the benefits of know-how and skill. Particularly if work is organized in teams so that there is a degree of peer monitoring and pressure, and there are rewards for performance, employment security will probably have more positive than adverse motivational consequences.
  Security in employment and reliance on the work force for competitive success mean that one must be careful to choose the right people, in the right way. Studies covering populations ranging from machine operators, typists, welders, and assembly workers to foundry workers, weavers, and lathe operatorsall in self-paced jobs so that individual differences matteredindicate that, on average, the standard deviation in performance is about 20% of the mean. Furthermore, the mean ratio of
  output for employees performing at the ninety-fifth percentile compared to those performing at the fifth percentile was 2; or the most productive employees were about twice as good as the least productive. 11 Southwest Airlines worries a lot about hiring the right people. In fact, it flies some of its best customers to Dallas and involves them in the flight attendant hiring process, believing that those who are in contact with the front-line employees probably know best what makes a good employee. At Lincoln Electric, hiring is done very carefully because employees are expected to make a lifetime commitment to the company. Lincoln selects for both the desire to succeed and the capacity for growth.12
  When General Mills set up a new cereal-manufacturing line at its Lodi, California, plant that intended to follow innovative management practices, existing workers volunteered for the assignment, and these volunteers were carefully screened. One of the practices of many of the Japanese automobile-manufacturing plants opened in the United States that proved especially newsworthy (at least judging by the number of articles generated) was their extensive screening of employees. Some of this was undoubtedly done to weed out those who were likely to be prounion, but much of the screening was to find those people who could work best in the new environment, could learn and develop, and needed less supervision. There was little screening for particular skills, under the assumption that these could be readily learned. At Nordstrom, the very effective specialty retailer whose sales per square foot are about double the industry average, salespeople are hired carefully. Often, they are recruited from competitors. The Nordstrom environment is competitive, fast-paced, and high-pressure, so Nordstrom tends to recruit sales clerks who are young and college-educated, seeking a career in retailing.13
  Besides getting the right people in the door, recruiting has an important symbolic aspect. If someone goes through a rigorous selection process, the person feels that he or she is joining an elite organization. High expectations for performance are created, and the message sent is that people matter.
  In labor markets, as in other markets, there is a tendency to get what you pay for. If you want to recruit outstanding people, and want them to stay with the organization, paying more is helpful, although not absolutely necessary. High wages tend to attract more applicants, permitting the organization to be more selective in its hiring. This selectivity is important in finding people who are going to be trainable and who will be committed to the organization. Paying more makes turnover less likely, as there is less chance that someone will be able to increase his or her income by moving. Perhaps most important, higher wages send a message that the organization values its people. Particularly if these wages are higher than required by the market, employees can perceive the extra income as a gift and work more diligently as a result. 14 Nordstrom typically pays its people an hourly wage higher than the prevailing rate for retail clerks at comparable stores. Coupled with incentive pay for outstanding work, Nordstrom salespeople often earn twice the average retail income.
  Organizations often try to economize by paying lower wages under the mistaken assumption that lower wages equal lower labor costs. However, this is not inevitably the case, for labor costs are importantly affected not only by what people are paid but also by how productive they are. New United Motor pays among the highest wages in the automobile industry, but its labor costs are substantially lower than average because it takes about half as many labor hours to assemble a car in the plant. People Express paid its front-line workers quite well compared to the industry average, yet had lower labor costs than its competitors. At Lincoln Electric, some pieceworkers earn more than $100,000 per year, and more than 100 earned in excess of $60,000 in 1991. Nevertheless, because of the tremendous productivity, Lincoln's costs are low, and indeed, the company regularly lowers the prices of its products to pass along these efficiency gains to its customers.
  David Levine found that workers whose wages were higher than might be predicted based on standard demographic and human capital
  factors expressed higher levels of job satisfaction, were less likely to quit, and indicated that they would work harder. 15 In another study of business units of major U.S. companies, he discovered a positive relation between changes in wages and changes in productivity. Moreover, "the increase in productivity from an increase in wages was approximately large enough to pay for itself."16 Thus, there is systematic evidence, as well as case examples, that support the efficiency effects of paying more.
  In addition to confusing labor costs with labor rates, companies sometimes believe that lowering labor costs is essential for competitive success. This is not invariably the case, even in cost-competitive businesses, because in many organizations, labor costs are a small fraction of the total costs. Furthermore, even if labor costs (let alone labor rates) are higher, it may be that enhanced service, skill, and innovation more than compensate by increasing the level of overall profit. For instance, the discount retail store industry is furiously competitive, and costs are an obsession. One of the more successful retailing chains has been Costco Wholesaling Corporation: "[D]espite its attention to expenses, Costco does not skimp on employee salaries, Mr. Sinegal [the president] maintains. 'We pay $1 more an hour to our employees than Sam's or Price. . . . We start our people at $8 an hour and boost them in three to four years to $14 an hour. It works for us. If you pay good wages, you get better productivity.'"17
  Another example of increasing wages as a way of increasing profits comes from Wendy's, a company in the highly competitive and cost-conscious fast-food industry. The CEO of Wendy's, facing declining company profitability, decided that the best way to become the customer's restaurant of choice was to become the employer of choice.18 This entailed improving both benefits and base compensation, instituting a quarterly bonus, and creating an employee stock option plan. The results were dramatic: "Our turnover rate for general managers fell to 20% in 1991 from 39% in 1989, while turnover among co- and assistant managers dropped to 37% from 60%among the lowest in the business. With a stableand ablework force, sales began to pick up as well."19
  People are motivated by more than moneythings like recognition, security, and fair treatment matter a great deal. It is certainly true that particularly in the United States, there has been a tendency to overuse money in an effort to solve myriad organizational problems. However, it is also true that fairness and justice virtually dictate that if people are responsible for enhanced levels of performance and profitability, they will want to share in the benefits. Consider the alternativeif all the gains from extra ingenuity and effort go just to top management or to shareholders (unless these are also employees), people will soon view the situation as unfair, become discouraged, and abandon their efforts. Thus, many organizations seek to reward performance with some form of contingent compensation.
  Lincoln Electric is deservedly famous for its piecework and incentive bonus plan. Contrary to first impressions, the plan does much more than merely reward individual productivity. Although the factory work force is paid on a piecework basis, it is paid only for good piecesworkers correct quality problems on their own time. Moreover, defects can be traced to the individual who produced them. Quality is emphasized as well as productivity. Additionally, piecework is only a part of the employee's compensation. Bonuses, which often constitute 100% of regular salary, are based on the company's profitabilityencouraging employees to identify with the whole firm. They are also based on the individual's merit rating, and that rating is; in turn, based on four equally important aspects of performance: dependability, quality, output, and ideas and cooperation. 20 This broader evaluation mitigates the pernicious tendencies of simplistic incentive systems to go awry.
  Merit pay made on an individual basis is controversial, with some people believing it actually harms performance. The former director of human resources at Mars candy company noted that "companies spend all this time and energy on merit programs and all they do is make employees angry."21 The quality expert W. E. Deming believes that "the merit rating nourishes short-term performance, annihilates long-term
  planning, builds fear, demolishes teamwork, and nourishes rivalry and politics." 22 However, regardless of one's position on merit pay for individuals, it is possible and indeed desirable to reward performance, if not on an individual level, then on the basis of performance by groups, subunits, or even the entire organization.
  Gain sharing, profit sharing, and similar plans reward organizational members for improvements in overall performance. One particular gain-sharing program, IMPROSHARE, "rewards all covered employees equally whenever the actual number of labor hours used to produce output in the current week or month is less than the estimated number it would have taken to produce the current level of output in the base period."23 Results from a survey sent to all known users of the program revealed a median productivity increase of 8% in the first year and a cumulative productivity gain of 17.5% after three years.24 A comprehensive review of the literature on profit sharing, which includes gain sharing, concluded that "profit sharing and productivity are positively related. . . . [M]ost case studies show improved performance when there is profit sharing or gain sharing."25 Sharing the gains of increased performance may motivate greater work effort, but at a minimum, it fulfills employees' expectations for deriving some benefits from outstanding work.
  Employee ownership offers two advantages. Employees who have ownership interests in the organizations for which they work have less conflict between capital and laborto some degree they are both capital and labor. Employee ownership, effectively implemented, can align the interests of employees with those of shareholders by making employees shareholders, too. Second, employee ownership puts stock in the hands of people, employees, who are more inclined to take a long-term view of the organization, its strategy, and its investment policies and less likely to support hostile takeovers, leveraged buyouts, and other financial maneuvers. Of course, to the extent that one believes this reduced risk of capital market discipline inhibits efficiency, significant employee
  shareholding is a disadvantage. However, the existing evidence largely contradicts this negative view.
  If one looks at a typical income statement for Lincoln Electric, for example, in 1974, one observes that the year-end incentive bonus amount is 72.2% of income before tax, or put another way, if the bonus were eliminated, pretax income available to shareholders would be some 72% larger. The company that yearand that year is quite typical paid out more than 40% of its pretax income as incentive bonuses to its employees. 26 How can Lincoln do that? Particularly as it pays line workers exceptionally high salaries, why don't shareholders demand a larger share of the firm's profits? It can do this, and other things that also take a very long-term view, largely because almost 50% of the employees at that time (now about 80%) owned stock in the company, and the company's shares are closely held by employees, the Lincoln family, and foundations.27 In the absence of such overlap between employees and shareholders, there certainly would be great temptation to capture more of the income for one group or the other, probably the shareholders. These bonuses are paid after piece-rate earnings, which are set so that Lincoln employees' base wages are at an already competitive level.
  It is probably no coincidence that all five of the companies mentioned in Chapter 1 as providing the best shareholder returns from 1972 to 1992 appear on The Employee Ownership 1000, a listing of "1000 companies in which employees own more than 4% of the stock of a corporation" traded on the New York or American stock exchanges or the over-the-counter market.28 Although employee ownership is no panacea, and its effects depend largely on how it is implemented, the existing evidence is consistent with the view that employee ownership has positive effects on various dimensions of firm performance.29 Nor are these positive effects confined to the United States. In 1988, of the firms listed on the eight Japanese stock exchange markets, 91% had employee stock ownership plans, and in firms with such plans, almost 50% of the work force participated.30 A study of the incidence and effects of employee stock ownership concluded that these plans "have favorable effects on employee incentives and enterprise productivity" and cited other studies showing that, in Japan, ESOPs reduced both
  employee quit rates and the cost of capital. 31 Employee share ownership is an important part of the Japanese employment relations system and, although de-emphasized compared to other arrangements, such as internal labor markets and lifetime employment, is apparently an important part of the reason for the persistent success of many Japanese firms.
  The adoption of some form of gain sharing requires information sharing. It also encourages more disclosure of information to people in the enterprise because, as owners, employees have more power and expect to be treated as owners. Bofors is a successful employee-owned printing company located in the San Francisco area. It has excellent productivity, modern capital equipment, and employees dedicated to avoiding waste in either materials or labor. One of its senior managers, explaining what it was like to manage in such a firm, noted that because the employees were also owners, they both demanded and received more consultation about operations and much more information about productivity and profitability. Such information sharing is essential to ensure the success of profit sharing and of efforts to achieve competitive advantage through the work force:
  [D]isclosure is integral to profit sharing because employees need at the very least to be informed as to what profit is. Moreover, if greater employee identification with the employing enterprise is to be elicited, then disclosure of information would seem essential to make clear the relationships between cost and profit, and between performance and prospects, and thus provide an informed basis for employees to appreciate how their own interests and those of the company are related.32
  Some have argued that the very fact that incentive programs require more information sharing, coupled with many managements' reluctance to disclose information because they fear the loss of control, are reasons why such schemes diffuse less than they might.
  At Lincoln Electric, "information is shared with all employees regarding the financial and market position of the organization," using both
  oral and written media. 33 Levi Strauss installed a quality enhancement program accompanied by gain sharing at its manufacturing plant in Blue Ridge, Georgia, with excellent results. In a six-month evaluation of the program, surveyed employees responded overwhelmingly that they understood the concept and the measures, and thought that they were fair and could affect them.34 This was essential for the program to work. Moreover, one of the obstacles to implementing the program, there and at other Levi plants, was the reluctance of some departments to share information as required.
  If people are to be a source of competitive advantage, clearly they must have the information necessary to do what is required to be successful. At the Advanced Micro Devices submicron development center, there are computer terminals throughout the plant that every employee has been trained to use in order to obtain information about product yields, development progress, production rates, or any other aspect of the operation. One reason sometimes given for not disclosing information to large numbers of employees is that it may leak to competitors. When Robert Beck was head of human resources for the Bank of America, he perceptively told the management committee, reluctant to disclose the bank's strategy and other information to its employees, that the competitors almost certainly knew the information already; typically, the only people in the dark are the firm's own employees.
  Sharing information is a necessary precondition to another important feature found in many successful work systems: encouraging the decentralization of decision making and broader worker participation and empowerment in controlling their own work process. At NUMMI, employees are taught how to break down jobs into their component parts, analyze them, and search for efficiencies. At Nordstrom, the written philosophy states:
  We also encourage you to present your own ideas. Your buyers have a great deal of autonomy, and are encouraged to seek out and promote new fashion directions at all times. . . . Nordstrom has a strong open-
  door policy and we encourage you to share your concerns, suggestions and ideas. . . .
  Rule #1: Use your good judgment in all situations. There will be no additional rules. 35
  At Lincoln Electric, ''every worker must be a manager, and every manager must be a worker. . . . In self-management is found the true meaning of efficiency, because nothing increases overhead as quickly and non-productively as extra layers of management.''36 The organization has a flat structure; for instance, the vice president of sales has more than 35 regional sales executives reporting to him. The company also has an advisory board composed of people elected by their fellow workers who meet with senior management biweekly. They have the right to question anything the company does. In one instance, the GEO and chairman was interrogated as to why he thought it necessary to fly to Europe on the Concorde. He was able to provide a satisfactory answer, and had he not done so, it is unlikely that he would have flown that way again. Although the board has no decision-making power, its questions and suggestions are, by company norms and culture, expected to receive prompt attention, with reports on the matter due back most often by the next meeting.
  The evidence is that participation increases both satisfaction and employee productivity.37 Autonomy is one of the most important dimensions of jobs and was the focus of many job-redesign efforts undertaken as part of the quality of working life movement in the 1960s and 1970s.38 The fundamental change involves moving from a system of hierarchical control and coordination of activity to one in which lower-level employees, who may have more or better information, are permitted to do things to enhance performance. At Levi Strauss's jeans factory, when it was time to purchase new forklift trucks, the drivers themselves got involved. They determined specifications, negotiated with suppliers, and made the final purchase decision, in the process saving the company money as well as obtaining equipment more appropriate for that
  plant. At Eaton, a unionized manufacturer, workers tired of fixing equipment that broke down and suggested that they build two new automated machines themselves. They did it for less than a third of what outside vendors would have charged and doubled the output of the department in the first year. 39
  Autonomy works best when it is coupledas it is in many, although not all, of these caseswith rewards for the increased performance that autonomy can bring as well as training in the skills necessary to take true responsibility for one's own work process. And assurance of job security helps ensure that the increased productivity doesn't result in job loss.
  The traditional organizational hierarchy serves at least two functions: it provides monitoring and supervision, to ensure that employees don't shirk their duties or otherwise take advantage of their employer, and it provides coordination across interdependent tasks. Even with more empowered workers, the need for coordination remains, as does the need for some discipline and monitoring. Organizations are, after all, interdependent systems, and autonomy cannot mean that people do whatever they decide to do whenever they decide to do it.
  Fortunately, there is an alternative to the traditional organizational hierarchy that preserves much of the sense of autonomy even as it provides some level of monitoring and the requisite coordination. This alternative is the use of teams. Because most people are inherently social creatures, deriving pleasure from social interaction, groups exert a powerful influence on individuals. Groups enforce conformity pressures, and these include norms about appropriate work quantity and quality. Also, groups provide social information and certainty about how to evaluate the conditions of the work setting and what the critical dimensions of work really are. Both conformity pressures and informational social influence mean that groups have enormous effects on individual behaviors.
  Management has typically seen these influences as perverse, leading
  to restrictions in output, formation of unions, and resistance to management control. Indeed, group pressures can at times have precisely these results. However, positive results from group influences are more likely when there are rewards for group efforts, when groups have some autonomy and control over the work environment, and when groups are taken seriously and become the fabric of the organization.
  Organizations that have tapped the power of teams have often experienced excellent results. Monsanto, a large chemical company, implemented work organization based on self-managed teams at its chemical and nylon complex near Pensacola, Florida. Teams of workers were responsible for hiring, purchasing, job assignments, and production. 40 Management was reduced from seven levels to four, and the plant experienced increases in both profitability and safety. At a 318-person submarine systems plant owned by AT&T, costs were reduced more than 30% through the use of teams.41 Federal Express uses teams in its back-office operation with great successservice problems fell 13% in 1989 after the company's 1,000 clerical workers were organized in teams and given additional training and authority.42 One of the more dramatic examples of the benefits of using teams occurred at Johnsonville Sausage. In 1986, a manufacturer asked Johnsonville to produce private-label sausage. The president was about to decline the new business, because he believed that the plant was already at capacity and could not handle the additional workload. However,
  before deciding, he assembled his 200 production workers, who are organized in teams of five to 20, and asked them to decide. . . . After . . . ten days, they came back with an answer: ''We can do it." . . . The teams decided how much new machinery they would need and how many new people; they also made a schedule of how much to produce per day. Since Johnsonville took on the new project, productivity has risen over 50% in the factory.43
  Much of the success of the NUMMI automobile assembly plant in California is attributed to teams, and indeed, there is some evidence that the entire plant functions as one superteam.
  Teams work because of the peer monitoring and expectations of coworkers that are brought to bear to both coordinate and monitor work.
  Indeed, even critics of the team concept often argue that the problem with teams as a substitute for hierarchy is not that this approach doesn't work but that it works too well. Thus, a dissident union leader in the NUMMI plant noted: "[W]hen the team's under pressure, people try to meet the team's expectations and under peer pressure, they end up pushing themselves too hard. . . . The team concept is a nice idea, but when you put the teams under pressure, it becomes a damn effective way to divide workers." 44
  Worker autonomy, self-managed teams, and even a high-wage strategy depend on having people who not only are empowered to make changes and improvements in products and processes but also have the necessary skills to do so. Consequently, an integral part of most new work systems is a greater commitment to training and skill development. Note, however, that this training will produce positive returns only if the trained workers are then permitted to employ their skills. One mistake many organizations make is to upgrade the skills of both managers and workers but not change the structure of work in ways that permit people to do anything different. Under such circumstances, it is little wonder that training has no apparent effect.
  At Advanced Micro Devices' submicron development facility, some 70% of the technicians came from older facilities at AMD. In keeping with AMD's emphasis on employment stability, as old facilities were closed, people were evaluated with respect to their basic skills. If accepted, they were put through a seven-month program at Mission Collegeat full pay and at company expenseand then went to work in the new facility. This training not only demonstrated the firm's commitment to its employees, which was then reciprocated, but also ensured that the facility would be staffed with highly qualified people who had been specifically trained for their new jobs.
  At a Collins and Aikman carpet plant in Georgia, more than a third of the employees were high school dropouts, and some could neither read nor write. When the firm introduced computers to increase pro-
  ductive efficiency, however, it chose not to replace its existing work force but to upgrade its skills. After spending about $1,200 per employee on training, including lost job time, the company found that the amount of carpet stitched increased 10%. Moreover, quality problems declined by half. The employees, with more skills and better morale, submitted some 1,230 suggestions, and absenteeism fell almost by half. 45 At Hampden Papers, a paper mill, the organization began spending 1.97% of the total payroll on education and training. Although productivity benefits were difficult to quantify, the president of the firm noted that "workers who take part in classes have lower rates of absenteeism and job turnover. They also tend to get higher performance ratings from their supervisors."46
  If people are to be given more information about operations, they need skills in employing that information to diagnose problems and sugges