Archive for the ‘Business’ Category

Overall, CEOs don’t earn their big paychecks

April 14, 2014

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The following is by Mark Symonds for Forbes

It isn’t every day that academic research comes along to tell you something you really wanted to hear and that you suspected was the truth all along.  In this case it’s about the long running debate around top executive pay.

A recent paper by J. Scott Armstrong of the Wharton School and Philippe Jacquart of France’s EMLYON, seem to have finally established that paying top dollar simply doesn’t get a better job done.  And, in fact, it might actually get a worse one done.

According to Armstrong and Jacquard, while there is plenty of evidence that financial incentives can be effective in motivating people to do mundane and boring tasks, individuals do the more interesting and challenging stuff…well, because it’s interesting and challenging.

Perversely, they say, very large financial incentives may actually hinder top performance. The paper argues there is strong evidence that individuals can become fixated on incentives and either become limited in their thinking, unable to digest and adopt new ideas or alternately become convinced that they will achieve the goal automatically so do not need to try as hard as they might otherwise.  Whatever the outcome, every other stakeholder from the more modestly earning employee to the corporate stockholder loses out.

And finally the research also suggests that we might not really be getting the brightest and best talent at the top because the tools and processes used to identify candidates are either limited or downright faulty

There is simply too much emphasis on past performance, personal recommendation, unstructured interviewing, an unwillingness to ask really difficult and searching questions and that more dangerous selection criterion of all – gut instinct. Worryingly, it seems that the headhunters and in-house recruiters charged with hiring occupants of the corner office may be relying too much on perception and too little on good, hard facts.

The paper points out that CEOs who win prestigious industry awards constantly out-earn those that don’t.  Yet the stocks of the companies the award winners head up consistently under-perform in comparison to those of their less publicity hungry peers.  Perhaps because the latter spend their time running their businesses well instead.  [snip]

Unlike many academics, who might shy away from coming up with a solution, EM Lyon’s Jacquart is one willing to give the obvious if uncomfortable answer – namely that current incentive models need to be abandoned and overall executive pay should be reduced.

And he’s also ready with a counter to those who will doubtless argue that this will make it impossible to recruit the right people and bring major banks and corporations crashing to the ground.

“Yes, of course this may make it more difficult to recruit very senior individuals from outside an organization, at least in the short term. However it would force businesses to focus more on the development of the talent it already has, the talent that is more likely to be more loyal to and understanding of its aims, goals and methodologies.”
[snip]

via Big Company CEOs Just Aren’t Worth What We Pay Them.

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Chipotle profits by investing in employees

April 12, 2014

The Chipotle Mexican-style restaurant chain enjoys good profits and good growth, while paying its employees generously and promoting from within.

220px-Chipotle_Brandon_Its current policy began about nine years ago when founder Steve Ells and then-COO Monty Moran visited the restaurants, and notice that the one that were best-run were all managed by employees who had started as restaurant crew members and worked their way up.

They decided to make that into a system, and reward restaurant managers, not for achieving set targets of holding wages and other costs down, but for mentoring employees and training them to be managers.

Click to enlarge.

Click to enlarge.

Why do so many managers ignore the examples of Chipotle, Costco and other companies and instead grind their employees down instead of building them up?  

I am reminding of a saying Bertrand Russell once made about human nature, When people are mistaken as to what is in their interest, the course they believe to be wise is more harmful to others than the course that really is wise.

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Costco: doing well by acting decently

June 12, 2013

CostcoLogo

Retail store chains face tough times because of the slow economy and competition from Amazon and other on-line sellers.  But Costco Wholesale’s sales are up, its profits are up and its stock price is up.

What’s noteworthy about Costco, according to Bloomberg Businessweek, is how well it treats its employees.   “If you treat customers with respect and employees with respect, good things will happen,” CEO Craig Jelinek told Bloomberg.

Costco is the second largest retail store chain in the United States, and is fast gaining on Wal-Mart, the largest.  Here are some facts and figures about the two chains.

  • Average hourly pay for Costco employees is $20.89 an hour, versus $12.67 for Wal-Mart.
  • 88 percent of Costco employees have company sponsored health insurance, in which they pay less than one-tenth of the cost of the premium.  Wal.Mart says “more than half” of its employees have health insurance.
  • CEO Craig Jeninek got a base salary of $650,000 a year, plus a $200,000 bonus, plus stock options worth $1.2 million.  Wal-Mart’s CEO got a base salary of $1.3 million , plus a $4.4 million cash bonus, plus $13.6 million in stock.
  • While Costco is doing well, Wal-Mart is in trouble
Costco's stores are no-frills

Costco’s stores are no-frills

Costco overall is a no-frills operation.  It has no public relations department, and Bloomberg reporters were able to talk to the CEO directly.  Costco does not hire managers out of business school.  Its managers are promoted from within.

Its prices, according to Bloomberg, are competitive with Amazon, which Costco managers see as its chief competitive threat.  Profit margins are thin.  About 80 percent of Costco’s gross profit comes from its annual membership fee.

Costco is not necessarily an exception, according to Bloomberg.  Nordstrom, The Container Store, Sephara, REI and Whole Foods Market, all know for treating employees well, are also doing well in the marketplace.  It is true that Amazon, which is not known for treating employees well, also is successful, but maybe they could still be profitable if they treated their warehouse workers better.

A lot of people assume that being callous toward people is always realistic and treating people decently is always naive, but Costco’s experience shows this isn’t so.  Treating employees as assets instead of costs can be good business price.  Bertrand Russell once wrote that if human beings all knew what was in their self-interest, most would be better people than they are and the world would be a better place.

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Why lobbying is a highly profitable investment

May 24, 2013
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Double click to enlarge

Hat tip to occasional links & commentary.

CEO pay and stockholder return: the disconnect

May 24, 2013

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I leave it to statisticians to tell me whether there is a relationship between the profitability of companies and CEO pay.  I just note that the CEO on this chart whose company was the most profitable, Jeff A. Stevens of Western Refining, got one of the smallest compensation packages, and the CEO with the biggest compensation package, Larry Ellison of Oracle, headed a company that lost money.

It is true, of course, that executive pay is related to the size of the company and other factors besides annual return on equity, so there may be other rankings in which these figures seem to make sense.  I’d be interested to know them.

Hat tip to occasional links and commentary.

The high cost of politics

May 23, 2013

ElectionBought

Hat tip for the infographic to United Republic.

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Why good people can’t find jobs

May 23, 2013

The U.S. Bureau of Labor Statistics finds in its surveys that there are about 10 people looking for work for every three jobs that are open—more than twice the proportion of job-seekers before the recession.  Yet many employers say there is a labor shortage.  They say they have jobs that they can’t find people to fill.

Peter Cappelli, director of the University of Pennsylvania’s Wharton Center for Human Resources, says that the problem is not unqualified job-seekers.  The problem is bad  hiring practices.

First, he says, when employers advertise for employees, they cast too wide a net.  They get a tidal wave of applications, more than anyone can possibly consider, and so they have to look for reasons to thin out the applications.

Some throw out all applications that use certain buzzwords, or omit certain buzzwords.   Some throw out all applications which indicate that the person is older than a certain cutoff point (even though this is illegal) or that are worded so as not to reveal the person’s age.   Many throw out all applications from people who don’t have the exact skills required, and many throw out all applications from people not currently employed.

Double click to enlarge.

Double click to enlarge.

So if the only person you are willing to hire is someone already doing that exact same job for some other employer, and you don’t want to pay that person a premium wage to lure them away, then, yes, you are going to have trouble filling that post.   I’m exaggerating to make a point, but what I hear from my friends who are looking for work confirms what Cappelli says.  Many employers have arbitrary filtering systems that reject job applications from good people.

Another problem, as Cappelli sees it, is that employers don’t want to hire people they would have to train.  They don’t want to spend the money to train people because they’re not confident that the trainee will stay with them long enough for them to get their investment back.  In fact, the better trained someone is, the better chance the person has of getting a better job elsewhere.

Job-seekers these days spend their own money trying to acquire qualifications they think employers want, but often those qualifications are a mismatch.

According to the theory of how a free-market economy is supposed to work, this isn’t supposed to happen.  According to economic theory, if there is a shortage of workers to fill a certain type of job, then wages for that job will rise until supply equals demand.  The fact that this isn’t happening suggests that theory doesn’t always apply to the real world.

Part of the reason employers are so slow to fill job openings is that the reason they advertise for new workers is merely to appease their over-worked existing staffs.  As long as they are going through the motions, they can tell their exhausted existing workers that they are doing the best they can.

Cappelli has ideas for making things better, including the following:

  • Have employers work with community colleges and vocational high schools to provide training to qualify employees to do specific jobs.  Most American cities and counties want to attract industry and jobs.  This would be a better way to do it than offering tax abatements and other special privileges.
  • Promote from within.   An employer’s best workers are more likely to stay with a company if they have hope of a future within that company.  Taleo Corp., a “talent management” company, reported that, in recent years, two-thirds of all job openings, even in large companies, were filled by hiring from without.  A generation ago, all but 10 percent of openings were filled by promotion or transfer from within.

Cappelli also suggests giving new hires a learner’s wage while they receive on-the-job training.  This could be good, but it offers possibilities for abuse.   Unscrupulous employers could hire cycle after cycle of learners and never give them full pay.  In this age of widespread wage theft, this is a realistic concern.

Click on Why Companies Can’t Find the Employees They Need for an article by Cappelli in the Wall Street Journal.   In fairness to him, his tone is less strident than mine is.

Click on Why Good People Can’t Get Jobs—What You’re Up Against for a review of Cappelli’s book, Why Good People Can’t Get Jobs:  The Skills Gap and What Companies Can Do About It.  I haven’t read the book.

The profit motive is not an ethical principle

May 15, 2013

Here are links to articles I found interesting about what happens when the profit motive overrides professionalism, social responsibility or obedience to law.

Coming Corporate Control of Medicine Throws Patients Under the Bus

Yves Smith describes the corporate model for medical care, which is to set a limit on how much time a physician can see an individual patient, so as to maximize the number of patients seen in a day.  This means weeding out patients with complicated problems or without good insurance.

Who’s Getting Rich Off Student Loans?  College Endowments

Daniel Luzer of the Washington Monthly tells how college endowment funds invest in student loan servicing and collection companies such as Sallie Mae.   The perverse incentives are that the higher the college tuition, the greater the interest payments and the more profitable the investment.   Sallie Mae is the nickname for a government lender that was privatized in 2004 and became SLM Corp.

When Your Boss Steals Your Wages: The Invisible Epidemic That’s Sweeping America.

Lynn Stuart Parramore of AlterNet reports on the practice of wage theft, which includes not paying for all hours worked, not paying overtime, not paying minimum wage and confiscation of tips.   A survey of 4,000 low-wage workers in New York, Chicago and Los Angeles found that 26 percent were paid below minimum wage and 76 percent were denied overtime pay for working more than 40 hours a week.

The Vicious New Bank Shakedown That Could Seriously Ruin Your Life.

Lynn Stuart Parramore reports on how banks such as Chase JP Morgan are committing the same kinds of abuses in collecting credit card debt that they used in collecting mortgage debt.  What they do is “robo-sign” lawsuit claims without checking records to make sure the information is correct, and give “sewer service” (throw the legal papers in the sewer)  of the claim to the debtor.  The result is that debtors’ wages are garnished even though, in some cases, they may be paid up, and lots of fees and charges are added to their debt without their knowledge.

A crazy idea from Walmart management

April 1, 2013

Sam Walton, the founder of Walmart, was a business genius.  But his heirs, to put it as kindly as possible, are not.

iflPt65OEETUWalmart has been foundering of late because it is so understaffed that its employees are not able to keep the shelves of its stores fully stocked.  This is wrongheaded.

Now Walmart management is seriously thinking about giving its customers discounts in return for delivering on-line orders within their ZIP codes.  This is deeply crazy.  No doubt their lawyers and insurance companies will talk them out of actually attempting this.

The Walton heirs are a good argument for keeping estate taxes high enough that important business enterprises do not fall into the hands of the idiot children of great entrepreneurs.  The operation of the free market will catch up with Walmart eventually, but not until a lot of good, hard-working people are hurt.

Click on Walmart faces the cost of cost-cutting: Empty shelves for a report from Bloomberg Business News about the company’s troubles.

Click on Wal-Mart may get customers to deliver packages to online buyers for a report from Reuters about management’s bogus solution.

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Newspaper revenue falling off a cliff

September 12, 2012

The chart and article below are from the American Enterprise Institute’s public policy blog.

The blue line in the chart above displays total annual print newspaper advertising revenue (for the categories national, retail and classified) based on actual annual data from 1950 to 2011, and estimated annual revenue for 2012 using quarterly data through the second quarter of this year, from the Newspaper Association of America (NAA).  The advertising revenues have been adjusted for inflation, and appear in the chart as millions of constant 2012 dollars.  Estimated print advertising revenues of $19.0 billion in 2012 will be the lowest annual amount spent on print newspaper advertising since the NAA started tracking ad revenue in 1950.

The decline in print newspaper advertising to a 62-year low is amazing by itself, but the sharp decline in recent years is pretty stunning.  This year’s ad revenues of $19 billion will be less than half of the $46 billion spent just five years ago in 2007, and a little more than one-third of the $56.5 billion spent in 2004.

Here’s another perspective: It took 50 years to go from about $20 billion in annual newspaper print ad revenue in 1950 (adjusted for inflation) to $63.5 billion in 2000, and then only 12 years to go from $63.5 billion back to less than $20 billion in 2012.

Even when online advertising is added to the print ads (see red line in chart), the combined total spending for print and online advertising this year will still only be about $22.4 billion, less than the $22.47 billion spent on print advertising in 1953.

via AEIdeas.

I was fortunate to be able to retire from newspaper reporting in 1998.  Otherwise I’d be in the same position as the auto workers or steel workers a few decades ago.  My local newspaper and former employer, the Democrat and Chronicle here in Rochester, N.Y., is gradually being hollowed out, as resources are shifted to the Internet and specialty publications.  Good reporting is being done, but by a staff that is being stretched thinner and thinner.   The problem is that you can get certain types of information over the Internet free and instantaneously that you would have to pay for and wait to get from newspapers—sports scores, stock prices, weather reports, movie schedules, classified advertising.

I still subscribe, though.  I recently suspended my subscription out of irritation with the D&C subscription service, but accepted their offer for renewal after a few weeks of trying to get along without a daily newspaper.  American print newspapers historically have been important to binding together geographic communities and giving them an identity.  I wonder if on-line publications can fill the same role.  I spend more time each day on-line than I do reading my local newspaper, but my information about Rochester comes mainly from the D&C and City newspaper, the city’s alternative weekly.

Hat tip to Rod Dreher.

Companies do better with women on board

August 10, 2012

Companies with women on their boards performed better in challenging markets than those with all-male boards in a study suggesting that mixing genders may temper risky investment moves and increase return on equity.

Shares of companies with a market capitalization of more than $10 billion and with women board members outperformed comparable businesses with all-male boards by 26 percent worldwide over a period of six years, according to a report by the Credit Suisse Research Institute, created in 2008 to analyze trends expected to affect global markets.

The number of women in boardrooms has increased since the end of 2005 as countries such as Norway instituted quotas and companies including Facebook Inc. added female directors after drawing criticism for a lack of gender diversity.  The research, which includes data from 2,360 companies, shows a greater correlation between stock performance and the presence of women on the board after the financial crisis started four years ago.

“Companies with women on boards really outperformed when the downturn came through in 2008,” Mary Curtis, director of thematic equity research at Credit Suisse in Johannesburg and an author of the report, said in a telephone interview.  “Stocks of companies with women on boards tend to be a little more risk averse and have on average a little less debt, which seems to be one of the key reasons why they’ve outperformed so strongly in this particular period.”

via Bloomberg.

I wouldn’t over-generalize about women being more risk-averse than men, but the Clinton, Bush and Obama administrations would all have been better off if they’d heeded the warnings of Brooksley Born, Sheila Bair and Elizabeth Warren about the dangers of giving Wall Street free rein, and then bailing them out unconditionally.   They were all up against a macho posturing that is more common among Washington officials and Wall Street speculators than it is among men whose jobs actually require physical strength and physical courage.

Where human affairs are concerned, the greater the diversity of viewpoints and life experiences within the decision-making group, the better the decisions are likely to be.  I imagine that a board of directors with a female majority and one or two men would make better decisions on average than an all-female board, but it will be many decades before there are enough examples to do that study.

Click on Companies perform better with women on board for the full Bloomberg article.  Hat tip to kottke.org.

Outsourcing local U.S. news coverage to Asia

July 26, 2012

When I was a newspaper reporter, I used to console myself with the thought that at least I had a job that could not be shipped overseas.  This is no longer true.  Some newspapers are outsourcing editing and even reporting of local news to countries such as India and the Philippines.

All this is made possible by the Internet.  A lot of information is available on-line.  You don’t have to walk to city hall or the county courthouse to get it.  You don’t have to be in the same city to interview a local official by phone.  Press releases are available on-line, and you can rewrite them as easily in one place as another.  Some public meetings are televised and even available on YouTube; you don’t have to be at the meeting to summarize what was said.

What is lost is the background knowledge that comes from living in a community, which enables you to understand the significance and context of what you report.  But this is not quantifiable.  For certain newspaper executives, particularly executives of newspaper chains who spend only a few years in each place, what counts is cutting and improving the next quarter’s financial results.  Longer-term consequences are somebody else’s problem.

Click on Now They’re Even Outsourcing “Local” Journalism for a report by Ryan Smith on Journatic and Blockshopper, two journalism outsourcing companies.  He told how he worked for Journatic as a copy editor of articles  written about local news in Chicago, Houston and other U.S. cities by far-distant reports in, among other places, the Philippines.

Click on Outsourcing Journalism for an older report on outsourcing local news editing and reporting to India.

Click on Journatic Blockshopper and Mindworks Global Media Services for the home pages of three news outsourcing companies.

Click on Media Outsourcing and Journatic: Hate the Player, Not the Game for a defense of news outsourcing.  The argument is that by giving up the low-end side of reporting, you free up reporters for higher-value activities..

Click on Clayton Christensen for the home page of the man who wrote the book on what happens when you give up on the basic “low-end” work.

How Microsoft lost its way

July 24, 2012

Microsoft is a once-dominant company in its industry—like Sears Roebuck, like General Motors, like IBM, like Kodak—that is resting on its laurels while competitors forge ahead, Kurt Eichenwald reports in the current issue of Vanity Fair.  Its stock price has barely budged in the past 10 years, while the price of Apple Computer’s stock has increased 10-fold.  Just one Apple product, the i-Phone, brings in more revenue than Windows, Office, Xbox, Bing, Windows Phone and every other Microsoft product put together.  Last week, after Vanity Fair went to press, Microsoft reported its first quarterly loss since it became a public company.

Eichenwald puts the responsibility on Bill Gates’ successor, Steve Ballmer.  He indicts Ballmer for all the usual sins—too much bureaucracy, too much caution, short-term thinking—but he sees the heart of the problem as a management practice called “stack ranking,” which was pioneered by CEO Jack Welch of General Electric.

Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees. … …

“If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review,” said a former software developer.  “It leads to employees focusing on competing with each other rather than competing with other companies.” … …

For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings.  And the reviews had real-world consequences: those at the top received bonuses and promotions, those at the bottom usually received no cash or were shown the door.

… … As a result, Microsoft employees not only had to do a good job, but also worked hard to make sure their colleagues did not. 

“The behavior this engenders, people do everything they can to stay out of the bottom bucket,” one Microsoft engineer said.  “People responsible for features will openly sabotage other people’s efforts.  One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to make sure they didn’t get ahead of me in the rankings.”

Worse, because the reviews came every six months, employees and their supervisors—who were also ranked—focused on their short-term performance, rather than on longer efforts to innovate.

“The six-month reviews led to a lot of bad decision-making,” one software designer said.  “People planned their days and their years around the reviews around the review, rather than around products.  You really had to focus on that six-month performance rather than what was right for the company.”

It is as if you had a football team, in which the two best players would get huge bonuses and the worst player would be dropped after the end of the season, regardless of the team’s won-lost record for the season.  How could they even function as a team?  Each individual would focus not on the score, but on making himself look good, and his teammates look bad.

W. Edwards Deming, the father of Total Quality Management, strongly opposed performance reviews and merit ratings.  Rank order is meaningless, he said, because, among any group of people, the differences are usually not statistically significant.  Usually the whole group is doing well, or doing poorly, and it is usually for reasons that group members don’t understand or don’t control.  The key to quality management, he said, is figure out what those reasons are.

It is true, Deming said, that sometimes there are people who are so outstandingly good at what they do that what they do is in a different category from all the rest, and there are other people who are completely unable to do their jobs.  But it always will be obvious who these people are.  It is not worth bothering about differences among people so minor that you have to do an evaluation process to determine what they are.

Deming thought most people have an innate desire to do work they can be proud of, and management’s desire is to show them how.   His ideas were fashionable 30 years ago, but they are in eclipse now.  The prevailing idea now is to sort people into winners and losers,  reward the winners and punish the losers. to be rewarded.  And anybody who, by some definition, is a loser is not worth bothering about or listening to.  The result is a kind of Hunger Games society in which people are too concerned with surviving high-stakes competition to be able to think of whether there is a better way.

Click on Microsoft’s Downfall: Inside the Executive E-mails and Cannibalistic Culture That Felled a Tech Giant for Vanity Fair’s sample of the article and an interesting comment thread.  You have to obtain the magazine to read the whole article.  The article is well worth reading in full.

Click on Stack ranking for an interesting analysis, interesting links and an interesting comment thread on Making Light.

Click on Microsoft reports first quarterly loss as a public company for a report from the Washington Post on Microsoft’s latest financial results.

Click on Deming and the rise and fall of quality for an alternative philosophy of management.

Business failure and the neglect of low-end skills

July 17, 2012

Here in Rochester, N.Y., we have as many theories about the bankruptcy of Eastman Kodak Co. as there are about the decline and fall of the Roman Empire.

What accounts for the failure of companies such as Kodak, U.S. Steel, or General Motors Corp. that, at their zenith, seemed invincible?  I found one good answer in a New Yorker article, profiling a business analyst named Clayton Christensen, which I read a couple of months ago and have been thinking about ever since.

Clayton Christensen

The New Yorker writer called Christensen “the most influential business thinker on earth.”  I’d never heard of him until I read the article, but after reading it, I would like to believe he is influential.

Christensen, who’s on the faculty of Harvard Business School, started to look into the question of business failure 20 years ago.  The reason once-dominant businesses failed wasn’t because their managers were complacent and stupid, he thought; most of them were pretty bright, and in any case were cut from the same mold as when their companies were doing well.  The reason wasn’t because dominant companies failed to keep up with the technology, he concluded; it was the big established companies that led the way in new technology.  An example (mine, not his) is the Xerox Palo Alto Research Center which created the basic technologies of the personal computer, but helped Xerox not one bit.

No, Christensen found, once-dominant companies were defeated by upstart competitors who offer inferior but cheaper technology.  The upstarts gained a foothold in the low end of the marketplace and gradually moved up until they also dominated the high end.  The transistor radio is an example.  The original transistor radios had terrible reception.  Nobody but teenagers would prefer them to the big RCA or Zenith console models.  But over time they became good enough to compete with the old vacuum tube models, and RCA and Zenith were too far behind on the transistor technology to catch up.

Why were companies such as RCA and Zenith caught off-guard?  It was because of a prevailing business philosophy, taught in all the business schools, which I heard a lot when I reported on business in the 1980s and 1990s, that a corporation should concentrate on those lines of business that generated the highest profit margins, and let the rest go.  Transistors weren’t profitable enough to interest RCA and Zenith, so they didn’t bother to compete in a market that didn’t seem worth bothering about.

Christensen traced similar patterns in the steel, disk drives and automobiles.  Rebar steel is his favorite example.  Rebar is steel used to reinforce concrete.  Steel mini-mills, which made steel from scrap, sold their steel as rebar because their original product was of such low quality.  The big integrated steel mills, which made sheet steel for use in automobiles and appliances, were willing to let this low-quality, low-profit segment of the market go.  But starting around 1979 or so, the mini-mills started improving their product and moving upmarket.  The integrated steel mills concentrated on higher-quality, higher-priced and higher-profit segment of the market.  Until one day the cheap product had been improved to the point where it could appeal to the big companies’ customers.

A similar dynamic explained how cheap compact cars came to dominate the U.S. auto market, and cheaper disk drives displaced higher-quality disk drives.  I suspect that when and if the electric car industry becomes profitable, it will be a result of the electric golf cart industry gradually moving up market.

The article doesn’t mention Kodak or Xerox, but similar stories could be told of them.  In the 1970s, Kodak decided that its profit margins came from manufacture of film, not cameras, so management decided to stop manufacturing cameras.  Their philosophy was:  Sell razor blades, not razors.  The problem with that was that makers of cameras controlled the film format.  Kodak by giving up this low-profit business gave up control of the film market.  In the same way Xerox neglected the market for cheap desktop copiers, preferring to concentrate on the xerographic printers.

I don’t think there is any one thing that is the key to business success.  If there was, everyone would come to understand it, everyone would do it and their efforts would cancel out, and some other thing or combination of things would become the key.  But I think Christensen has a lot to teach, and not just about business management.

Christensen studied health care costs, and concluded that part of the problem is that the health care industry concentrates on the high end and neglects the low end.  Hospitals spent money to have the best of equipment and the most highly-trained specialists, whose cost is covered by insurance, but neglect low-cost clinics that could handle many routine medical problems.  As medical science advances, he thinks, more and more problems can be handled routinely, with nurse practitioners playing a bigger role, with the high technology and specialist knowledge on call as needed.

In his personal life, Christensen concentrates on the basics rather than on what gives the biggest immediate payoff.  He is a devout Mormon.  He promised God he would not work on Sundays, and he promised his wife and family that he would spend Saturdays with them, and always be home in time for supper and to spend evenings with his five children.  Keeping this commitment sometimes required him to start work at 3 a.m.  He was a Scout leader for 25 years and his children’s basketball coach, but he participated with his children in low-end activities—painting, plastering, Sheetrocking and home canning—that most parents in his income bracket would outsource.  His philosophy was that practical skills and good work habits would stand them in better stead in the long run than the supposedly higher-return cultural activities.  His philosophy and example provides much food for thought.

Click on Clayton Christensen – Home for Clayton Christensen’s home page.

Click on Clayton Christensen’s Disruptive Innovations for a link to the New Yorker article.   If you’re a subscriber, you can read the whole article; if not, you only get an executive summary.  If you want to read the whole article and don’t want to subscribe, go to the periodical room of a public library and ask for the May 14 issue.

Click on How Will You Measure Your Life? for an excerpt from Clayton Christensen’s latest book.

Click on Clayton Christensen: the Survivor for a Forbes interview with Christensen and his family members about his personal philosophy, struggles with life-threatening illness and ideas about health care.

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A 40-hour work week improves productivity

April 24, 2012

Click to view.

Nowadays some professional people define a 40-hour work week as “part-time.”   In today’s job market, employees have little choice but to do whatever their employers demand.  But from a business efficiency standpoint, this may be a mistake.  Studies indicate that employee productivity is at its best when they work eight hours a day, five days a week.

That’s why Henry Ford implemented the eight-hour, five-day schedule in his factories.  He wanted his plants to operate 24 hours a day at maximum efficiency, and he found, by experimenting with different work schedules, that this was the best way to do it.

Sara Robinson, writing for AlterNet, cited a white paper by her husband, a software programmer named Evan Robinson, that made the case for the 40-hour week.

[The] paper he wrote for the International Game Developers’ Association in 2005 … contains a wealth of links to studies conducted by businesses, universities, industry associations, and the military that supported early-20th-century leaders as they embraced the short week.

“Throughout the ’30s, ’40s, and ’50s, these studies were apparently conducted by the hundreds,” writes Robinson; “and by the 1960s, the benefits of the 40-hour week were accepted almost beyond question in corporate America. In 1962, the Chamber of Commerce even published a pamphlet extolling the productivity gains of reduced hours.”

What these studies showed, over and over, was that industrial workers have eight good, reliable hours a day in them. On average, you get no more widgets out of a 10-hour day than you do out of an eight-hour day.  Likewise, the overall output for the work week will be exactly the same at the end of six days as it would be after five days. So paying hourly workers to stick around once they’ve put in their weekly 40 is basically nothing more than a stupid and abusive way to burn up profits.  Let ‘em go home, rest up and come back on Monday.  It’s better for everybody.

As time went on and the unions made disability compensation and workplace safety into bigger and bigger issues, another set of concerns further buttressed the wisdom of the short week.  A growing mountain of data was showing that catastrophic accidents — the kind that disable workers, damage capital equipment, shut down the lines, open the company to lawsuits, and upset shareholders — were far more likely to occur when workers were working overtime and overtired.

That sealed the deal: for most businesses, the potential human, capital, legal, and financial risks of going over 40 hours a week simply weren’t worth taking.  By World War II, the consensus was clear and widespread: even (or especially!) under the extreme demands of wartime, overworking employees is counterproductive and dangerous, and no competent workplace should ever attempt to push its people beyond that limit.

Sara Robinson wrote that the same is true of white-collar workers.

(more…)


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