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Seven Practices of Successful Organizations

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.

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