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Lesson#45
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Seven Practices of Successful Organizations
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Seven Practices of Successful Organizations
Seven dimensions that seem to characterize most if not all of
the successful organizations are:
1. Employment security
Most research on the effects of management systems has
incorporated security as a critical element of
high-performance management systems. One of the most widely
accepted propositions is that
innovations in work practices or other forms of
worker-management cooperation or productivity
improvement are not likely to be sustained over time when
workers fear that they will be out of their
jobs.
This was recognized long ago by Lincoln Electric, the successful
arc welding and electric motor
manufacturer that has dominated its markets for decades. Years
ago, it began offering guaranteed
employment to workers after two (and now three) years on the
job. It has not had a layoff since 1948.
Nor is it the case that this is just because the company has
never faced hard times. In the early 1980’s, a
recession and high interest rates caused the company domestic
sales to fall about 40 percent over an
eighteen-month period. Nevertheless, it did not resort to
layoffs. One thing the company did to avoid
laying off people was to redeploy them. Factory workers who made
Lincoln’s products were put in the
field with the tasks of selling them, which increased its market
share and penetration Over the years,
Lincoln has enjoyed gains in productivity that are far above
those for manufacturing as a whole, and its
managers believe that the assurance workers have that
innovations in methods will not cost them or
their colleagues their jobs has significantly contributed to
these excellent results.
Many additional benefits follow from employment assurances
besides worker’s free contribution of
knowledge and other efforts to enhance productivity. One
advantage to firms is the decreased
likelihood that they will lay off employees during downturns.
How is this a benefit to the firm? In the
absence of some way of building commitment to retaining the work
force – either through pledges
about employment security or through employment obligations
contractually negotiated with a union -
firms may lay off employees too quickly and too readily at the
first sign of financial difficulty. This
constitutes a cost for the firm that has done a good selecting,
training and developing their work force.
Layoffs put important strategic assets on the streets for the
competitor to employ. The Vice President
for People at Southwest Airlines said that she had never had a
layoff. She views people as strategic
assets rather than as costs. “Why would we want to put our best
assets, our people, in the arms of the
competition?” she said. Southwest has pursued a careful growth
strategy that avoided overexpansion
and subsequent cuts in personnel.
Employee security policies will also lead to more careful and
leaner hiring because the firm knows that
it cannot simply let people go quickly if it has overestimated
its labor demand. Leaner staffing can
make the work force more productive, with fewer people doing
more work. The people are often
happy to be more productive because they know they are helping
to ensure a result that benefits them
– having a long-term job and a career. Furthermore, employment
security maintained overtimes helps
to build trust between people and their employer, which can lead
to more cooperation, forbearance in
pressing for wage increases, and better spirit in the company.
The CEO of Southwest has written:
“Our most important tools for building employee partnership are
job security and a stimulating
environment… This has helped to keep our labor force smaller and
more productive than our
competitors.”
When you look at the complaints from the executives of “finding
difficulty in recruiting qualified
personnel”, you find that these very same firms laid off
engineers, technicians, and other skilled
workers, years ago – before subsequently complaining about labor
scarcity.
By hiring when times are poor and developing a set of policies,
including assurance that people will be
retained, a firm can become an employer of choice, and the
organization will not have to enter the
labor market at its very peak to acquire the necessary work
force.
Employment security can confer yet another benefit, in that it
encourages people to take a longer-term
perspective on their jobs and organization performance. In a
study of the financial performance of 192
banks, it has been observed that “The greater the employment
security given to a loan officer, the
greater the returns to banks.” In a bank that hires and lays off
loan officers quickly to match economic
fluctuations, the typical loan officer will worry only about
booking loans. With employment security
and a longer-term perspective on the job, the bank officer may
be more inclined to worry about the
repayment prospects of the loan and about building customer
relationships by providing high level of
service.
The idea of employment security does not mean that the
organization retains people who don’t
perform or work effectively with others – that is, performance
does matter. Lincoln Electric has very
high turnover for employees in their first few months on the
job, as those who don’t fit the company
culture and work environment leave. Southwest will fire people
who don’t provide the level of
customer service the firm is well-known for delivering and don’t
want to improve. Employment
security means that employees are not quickly put on the streets
for things, such as economic
downtown or strategic mistakes of the senior management, over
which they have no control. The
policy focuses on maintaining total employment, not on
protecting individuals from the consequences
of their individual behavior on the job.
Employment security is fundamental to the implementation of most
other high performance
management practices such as selective hiring, extensive
training, information sharing and delegation.
Companies are unlikely to invest the resources in careful
screening and training of new people if these
are not expected to be with the firm long enough to recoup these
investments. Similarly, delegation of
operating authority and the sharing of sensitive performance and
strategic information requires trust,
and that trust is much more likely to emerge in a system of
mutual, long-term commitments.
2. Selective hiring
Good organizations ensure that they recruit the right people in
the first place. This requires several
things.
First, the organization needs to have a large applicant pool
from which to select
. For example,
in 1993, Southwest Airlines received about 98000 applications,
interviewed 16000 and hired 2700.
Some organizations see processing this many job inquiries as an
unnecessary expense. Southwest sees it
as the first step toward ensuring that it has a large applicant
pool from which to select its people.
Singapore Airlines is extremely careful and selective in its
recruiting practices. Flights attendants are an
important point of contact with the customer. Consequently,
senior management becomes personally
involved in the flight attendant selection. From an initial pool
of candidates, about 10% are short-listed
and only 2% (one out of 50) are selected.
Second, the organization needs to be clear about what are the
most critical skills and attributes
needed in its applicant pool
.
The notion of trying to find “good employees” is not very helpful -
organizations need to be as specific as possible about the
precise attributes they are seeking. At
Southwest Airlines, applicants for flight attendants are
evaluated on the basis of initiative, judgment,
adaptability and their ability to learn. These attributes are
assessed in part from interviews employing
questions evoking specific instances of these attributes. For
instance, to assess adaptability, interviewers
ask, “Give an example of working with a difficult coworker. How
would you handle it?” To measure
initiative, one question asked is, “Describe a time when a
co-worker failed to deliver and what you did
about it.”
Third, the skills and abilities hired needed to be carefully
considered and consistent with the
particular job requirements and the organization’s approach to
its market.
Simply hiring “the
best and the brightest” may not make sense in all circumstances.
Enterprise Rent-A-Car is today the
largest car rental company in the US. It has grown by pursuing a
high customer strategy and
emphasizing sales of rental car services to repair garage
customers. In a low wage, low employee skill
industry, virtually all of the Enterprise’s people are college
graduates. But these people are hired
primarily for their sales skills and personality and for their
willingness to provide good service, not their
performance.
Fourth, organization should screen primarily on important
attributes that are difficult to
change through training and should emphasize qualities that
actually differentiate among
those in the applicant pool.
An important insight on the selection process comes from those
organizations that tend to hire more
on the basis of basic ability and attitudes than on applicants’
specific technical skills, which are much
more easily acquired. This has been the practice of Japanese
organizations for some time. “Japanese
recruitment seeks to find the individual with the ‘proper
character whom it can train.’ Instead of
searching for the skills for the job, the focus is on social
background, temperament, and character
references.”
At Southwest Airlines, a top pilot working for another airline
who actually did stunt work for movie
studios was rejected because he was rude to a receptionist.
Southwest believes that technical skills are
easier to acquire than a teamwork and service attitude.
Ironically, many firms select for specific, jobrelevant
skills that, while important, are easily acquired. Meanwhile,
they fail to find people with the
right attitudes, values, and cultural fit – attributes that are
harder to train or change and that are quite
predictive of turnover and performance. To avoid having to
retrain or re-socialize people that have
acquired bad habits at their previous employers, some companies
prefer to hire individuals without
previous industry experience. Many prefer to hire individuals
who are eager to prove themselves and
who don’t know what can’t be done. (For them everything is
possible)
Stanford Business School has a class of about 370 MBAs, selected
from a pool of over 6,000
applicants. These are obviously talented, motivated, and very
intelligent individuals. Distinguishing
among them on those criteria would be difficult, if not
impossible. But many firms seek to do the
impossible – they try to get around the school’s policy of not
releasing grades in an effort to figure out
who are the smartest students and to assess differences in
ability among a set of applicants through
interviewing techniques such as giving them problems or cases to
solve.
One MBA job applicant reported that, in interviews with a
company, the company asked very little
about personal or background and focused on whether the
person is team oriented or an
individual achiever. Questions asked were: “Do you have a
personal mission statement. If you don’t,
what would it be if you were to write today?”
A great deal of research evidence shows that the degree of
cultural fit and value congruence between
job applicants and their organizations significantly predicts
both subsequent turnover and job
performance.
Firms serious about selection put applicants through several
rounds of interviews and a rigorous
selection procedure. A manufacturing company in the US could
take as long as six months or more.
Such a lengthy selection process has several outcomes. First, it
ensures that those who survive it have
been carefully scrutinized. Second, it ensures that those
eventually hired into the firm develop
commitment. Third, this type of process promotes the feeling on
the part of those who are finally
selected that they are part of an elite and special group, a
feeling that causes them to enter the
organization with a high level of motivation and spirit.
Rigorous selection requires a method, refined and developed over
time through feedback and learning,
to ensure that the firm can identify the skills it is seeking
from the applicant pool. At Southwest
Airlines, the company tracks who has interviewed job applicants.
When someone does especially
poorly, the organization can actually try to assess what the
interviewers saw or missed, and why. It is
puzzling that organizations will ensure the quality of their
manufacturing or service delivery process by
closing the loop on that process through feedback, while almost
no organizations attempt to do the
same thing with their recruiting process. Sources of applicants,
scores on tests or interview ratings, and
other selection mechanisms must be validated against the
subsequent performance of the people
selected if there is to be any hope of improving the
effectiveness of the process over time.
3.
Self-Managed
Teams and Decentralization as Basic Elements of Organizational Design
Organizing people into self-managed teams is a critical
component of virtually all high performance
management systems.
Workers in self-managed teams enjoy greater autonomy and
discretion, and this effect translates into
intrinsic rewards and job satisfaction;
Teams offer several advantages:
First, teams substitute peer-based for hierarchical control of
work
. “Instead of management
devoting time and energy to controlling the work force directly
workers control themselves.” Peer
control is frequently more effective than hierarchical
supervision. Someone may disappoint his or her
supervisor, but the individual is much less likely to let down
his or her mates.
As a consequence, “all the difficulties of one person’s absence
fall on those in daily contact with the
absentee – the co-workers and immediate supervisor – producing
enormous peer pressure against
absenteeism.” Team-based organizations also are largely
successful in having all of the people in the
firm feel accountable and responsible for the operation and
success of the enterprise, not just a few
people in senior management positions. This increased sense of
responsibility stimulates more initiative
and effort on the part of everyone involved.
World Food Markets, a food chain store in the US, has a
team-oriented philosophy, which works as
follows:
Each store is a profit center and has about ten self-managed
teams in it, with team leaders and clear
performance targets. Moreover, “the team leaders in each store
are a team, store leaders in each region
are a team, and the company’s six regional presidents are a
team.” Although store leaders recommend
new hires, teams must approve hires for full-time jobs, and it
takes a two-thirds vote of the team
members to do so, normally after a thirty-day trial period.
Through an elaborate system of peer store
reviews, Whole Foods encourages people to learn from each other.
By sharing performance
information widely, the company encourages peer competition. “At
Whole Foods, pressure for
performance comes from peers rather than from headquarters, and
it comes in the form of internal
competition.”
Second, teams permit employees to pool their ideas to come up
with better and more creative
solutions to problems.
The idea, similar to brain storming or group
problem solving, involves pooling
ideas and expertise to increase the likelihood of that at least
one member of the group will come up
with a way of addressing the problem. In the group setting, each
participant can build on the others’
ideas, particularly if the members are trained in effective
group process and problem solving.
Third, and perhaps most importantly, by substituting peer for
hierarchical control, teams
permit removal of layers of hierarchy
and absorption of administrative tasks previously
performed
by specialists, avoiding the enormous costs of having people
whose sole job is to watch people who
watch other people do the work. Administrative overhead is
costly because management is typically
well-paid. Eliminating layers of management by instituting
self-managing teams saves money.
The AES Corporation is a global power plant developer. The
company “has never formed corporate
departments or assigned officers to oversee project finance,
operations, purchasing, human resources,
or public relations. Instead, such functions are handled at the
plant level, where plant managers assign
them to volunteer teams.” Front-line people develop expertise in
these various task domains, including
finance, and receive responsibility and authority for carrying
them out. They do so effectively. Of
course mistakes get made, but learning follows. The AES
structure saves on the cost of management –
the organization has only five levels – and it economizes on
specialized staff. The company developed
a $400 million plant with a team of just ten people. Normally
project of this size requires hundreds of
workers.
4. High Compensation Contingent on Organizational Performance.
Although labor markets are far from perfectly efficient, it is
nonetheless the case that some relationship
exists between what a firm pays and the quality of the work
force it attracts. It is amusing to see firms
announce simultaneously that first, they compete on the basis of
their people and that their goal is to
have the very best work force in their industry, and second,
that they intend to pat at (or sometimes
slightly below) the median wage for comparable people in the
industry. The level of salaries sends a
message to the firm’s work force – they are truly valued or they
are not.
When John Whitney assumed the leadership of Pathmark, a large
grocery store chain in the US, the
company had 90 days to live according to the banks and was in
desperate final shape. He looked at the
situation and found out that 120 store mangers were paid
terribly. One of the first things he did was to
give them a substantial raise – about 40 to 50%. The subsequent
success of the chain was because the
store managers could now focus on improving performance instead
of worrying and complaining
about their pay. Furthermore, in a difficult financial
situation, the substantial raise ensured that talent
would not be leaving for better jobs elsewhere, thereby making a
turnaround more difficult.
Contingent compensation figures importantly in most high
performance work systems. Such
compensation can take a number of different forms, including
gainsharing, stock ownership, pay for
skill, or various forms of individual or team incentives.
Many successful companies encourage share ownership. When the
employees are owners, they act and
think like owners.
Paying for skill acquisition encourages people to learn
different jobs and thereby to become more
flexible. Gainsharing differs from profit sharing in that it is
based on incremental improvements in the
performance of a specific unit. If a plant becomes more
efficient in its use of labor and materials, the
people share in the economic gains, even if profits in the firm
as a whole are down. Why should
employees in a plant in which they have achieved efficiency
gains be penalized for problems in the
general economy that have adversely affected sales or, for that
matter, by the performance of other
parts of the organization over which they have no control.
Contingent compensation helps to motivate effort, because people
know they will share in the results
of their work. At Whole Foods, a gainsharing program “ties
bonuses directly to team performance –
specifically, sales per hour, the most important productivity
measurement.”
Managers sometimes ask how to prevent employment security into
something resembling the civil
service, with people just marking time. The answer is by
coupling employment security with some form
of group-based incentive, such as profit or gainsharing or share
ownership. The organization thus
unleashes the power of the team, whose economic interests are
aligned with the higher levels of
economic performance.
5. Training
Virtually all descriptions of high-performance management
practices emphasize training, and the
amount of training provided by commitment as opposed to
control-oriented management systems is
substantial. Training is an essential component of
high-performance work systems because these
systems rely on front-line employee skill and initiative to
identify and resolve problems, to initiate
changes in work methods, and to take responsibility for quality.
All of this requires a skilled and
motivated work force that has the knowledge and capability to
perform the requisite tasks.
The difference in training reflects the different views of
people held by different firms and their
corresponding production systems.
Japanese appear to train a lot because they rely heavily on
flexible production. The US owned plants
train very little because they follow traditional mass
production practices and philosophies.
The difference in training levels also reflects differences in
time horizon - the Japanese intend to keep
their people longer therefore it makes sense for them to invest
more in developing them.
Studies of firms in the US and the UK consistently provide
evidence of inadequate levels of training
and training focused on the wrong things: special skills rather
than generalist competence and
organizational culture.
Training can be a source of competitive advantage in numerous
industries for firms with the wisdom to
use it. Successful firms that emphasize training do so almost as
a matter of faith and because of their
belief in the connection between people and profits.
Taco Inc., for instance, a privately owned manufacturer of pumps
and valves, with annual sales of
under $100 millions, offers its employees “astonishing
educational opportunities – more than six dozen
courses in all.” In an on-site learning center. It cost the
company $ 250,000 to build the center and
annual direct expenses and lost production cost about $300,000.
When asked to put a monetary value
on the return from operating the centre, the CEO said. “It comes
back in the form of attitude”.
Reduction of Status Differences
High-performance management systems can perform only when they
are able to tap the ideas, skills,
and efforts of all of their people. One way to do this is to
organize people in team works. But neither
individuals nor teams will feel comfortable or encouraged to
contribute if they feel that they are neither
valuable nor valued. In order to help make all organizational
members feel important and committed,
one has to reduce the status distinctions that separate
individuals and groups and cause some to feel
less valued.
This is accomplished in two principal ways - symbolically,
through the use of language and labels,
physical space, and dress, and substantively, in the reduction
of the organization’s degree of wage
inequality, particularly across levels. Subaru-Isuzu, everyone
from the company president down was
called an Associate. The Company’s literature stated “SIA is not
hiring workers; it is hiring Associates
… who work as a team to accomplish a task.”
At Kingston technology, a private firm manufacturing add-on
memory modules for personal
computers, with 1994 sales of $2.7 million per each of its 300
people (a higher level of revenue per
employee than Exxon, Intel, or Microsoft), the two co-founders
sit in open cubicles and do no have
private secretaries.
The reduction of status differences encourages open
communication, necessary in an organization in
which learning and adaptation are encouraged. Status differences
are reduced and a sense of common
fate is developed by limiting the difference between senior
management and other employees.
The CEO of Southwest Airlines who has been on the cover of
Fortune earned about $500,000 per
year. When the company negotiated a five year wage freeze with
its pilots, he agreed to fix his basic
salary at $395000 a year for 4 years.
Practices that reduce status differences are consistent with
rewards contingent on performance - as
long as these contingent rewards are applied on a group or
organizational level so that the benefits of
the performance of the many are not awarded to the few. Reducing
wage inequality does limit the
organization’s ability to use individual incentives to the
extent that the application of individual rewards
increases the dispersion of wages. But this is not necessarily a
bad thing. Many managers and human
resource executives mistakenly believe that placing individual
pay at risk increases overall motivation
and performance, when it is actually the contingency of the
reward itself, not the level at which it is
applied (individual, group, or organizational) that has the
impact. Contingent rewards provided at the
group or organizational level are at least as effective, if not
more so, than individual incentives and,
moreover, they avoid many of the problems inherent in individual
merit or incentive pay.
6. Sharing Information
Information sharing is an essential component of
high-performance work systems for two reasons:
First, the sharing of information on things such as financial
performance, strategy, and operational
measures conveys to the organization’s people that they are
trusted.
The CEO of Whole Foods Markets has stated, “If you are trying to
create a high trust organization ….
an organization where people are all-for-one and one-for-all,
you can’t have secrets.” The company
shares detailed financial and performance information with every
employee.
Second, even motivated and trained people cannot contribute to
enhancing organizational performance
if they don’t have information on important dimensions of
performance and, in addition, training on
how to use and interpret that information.
The famous case is of a CEO who purchased an old harvester plant
worth $100000 and a debt of $8.9
million. He knew that if the plant was to succeed, every one had
to do their best and share all his
wisdom and ideas for enhance the plant performance. He came up
with a system called “open book
management”. The philosophy underlying this system states that:
“Don’t use information to control or manipulate people. Use it
to teach people how to work together
to achieve common goals and thereby gain control over their
lives. Cost control happens at the
individual level. The best way to control costs is to enlist
everyone in the list. This means provide
people with the tools that allow them to make the right
decisions.”
Implementing this system involved:
First, making sure that all of the people generated daily
numbers reflecting their work performance and
productions costs.
Second, it involved sharing this information with all the people
of the company. Third, it involved
extensive training how to use and interpret the numbers - how to
understand balance sheet, cash flow
and income statements. Understanding the financials came to be the part of
everyone’s job.
<<<<< THE END >>>>>
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