by Kate Pavao, February 2014
There is a well-documented decades-long gap between rising American productivity and stagnating worker wages. In fact, in February, the U.S. Labor Department reported that while productivity grew in the fourth quarter grew at a 3.2 percent annual rate, wages for hourly workers grew just 1.5 percent during the same period, even before being adjusted down for inflation.
Employers often think that controlling costs and maximizing profits means employing workers for fewer hours and less pay. But this strategy can lead to unhappy employees who don’t have the time – or motivation – to treat your customers right.
Zeynep Ton, a professor of operations management at the MIT Sloan School of Management, wants to flip the standard formula around: She argues that companies – even low-cost retailers – can succeed by offering the right combination of good pay, technology, and operational excellence.
Here, learn more about how she developed The Good Jobs Strategy and why it may be the best bet for boosting your bottom line.
Profit: How did you develop The Good Jobs Strategy?
Ton: I was researching retail stores, examining pervasive operational problems that undermine a company’s performance by really reducing customer service, sales, and profits.
When I looked at these companies, I found that the pervasive problems were driven in part by poor labor practices. It was evident that bad jobs – jobs that pay poverty level wages and provide very unpredictable schedules – were not just hurting the employees, but they were actually hurting companies and the customers.
Profit: What did you do next?
The Good Jobs Strategy begins with a different philosophy of doing business. And that philosophy is not to see employees as costs to be minimized, but rather see them as engines as growth and profit.
Ton: I identified companies that offered low prices and good jobs – meaning companies that offered decent wages and good treatment, as well as providing employees opportunities for success and growth. The way they made it work was through following a different strategy, which was about operational excellence and specifically about the combination of four operational choices, as well as investment in employees.
Profit: What are those four operational choices?
Ton: They offered fewer products than their competitors. They also used a combination of standardization and empowerment in their approach to work design. They cross-trained their employees. And they also operated with slack, meaning they aired on the side of having too many employees rather than having too few employees, given that the workload in their stores is uncertain.
It’s the combination of these four choices that really creates a great return on the investment in employees by reducing costs, improving labor productivity, and really allowing employees to generate more than what companies invest in them.
Profit: How does “standardization and empowerment” work?
Ton: Companies need to standardize tasks that benefit most from efficiencies, accuracies, and consistencies. At the same time, they must empower their employees to improve those standards as well make decisions for their customers.
Some of the retailers I researched ordered products using a merchandising system that offered a recommended quantity based on their past history. But the employee doesn’t have to follow that. The employee can come up with his or her own estimate based on what’s happening around their stores and what they know about their customers. They use a combination of technology and human judgment.
Profit: What are some common mistakes to avoid when trying to implement your strategy?
Ton: I am not saying that if you pay your employees more you will make more money. It’s not just about treating employees well either. The Good Jobs Strategy is a lot more complicated than that. It’s about making smart operational choices that leverage your investment in people.
All of the elements have to be executed together. You can’t just offer less and expect things to work great. You can’t just operate with slack or pay your people more and expect things to work great.
The nice thing is all of these four operational elements work very well together, which allows companies to operate in what I call a virtuous cycle. Investment in employees – both in terms of quality and quantity – drives greater operational performance, which increases sales and profits, which then improves labor budgets. Then, this lets companies invest in their employees, and the virtuous cycle continues. But the virtuous cycle does not act on its own. It is supported by those four operational choices.
Profit: How can executives get started?
Ton: It begins with a different philosophy of doing business. And that philosophy is not to see employees as costs to be minimized, but rather see them as engines as growth and profit. It requires that mind shift , as well as a commitment.
Zeynep Ton, a professor of operations management at the MIT Sloan School of Management is the author of The Good Jobs Strategy.
Then executives need to make operational choices that bring out the best in employees, improve their productivity, and really put them in the center of the company’s success.
It’s not easy. It requires getting many things right and it really requires a long-term perspective, which could be hard for companies – especially those that are publicly owned. But it is a strategy that produces excellence in so many ways. It’s a strategy that produces low prices and great service for customers. It’s a strategy that offers good jobs to employees, and it’s a strategy that produces great returns to investors.
And it’s a strategy that allows companies to be able to act on strategic opportunities because they execute so well. It’s a strategy that will really allow companies to differentiate themselves from their competitors by having emotional bonds with their customers. So although it’s hard, it’s so worth the effort because the outcome is fantastic.
Kate Pavao is a frequent contributor to Profit.