Zeynep Ton on The Good Jobs Strategy: Investing in People for Profits and Performance

Labor Day is Monday, so maybe it's appropriate that my guest for episode #228 of the podcast is Zeynep Ton, an Adjunct Associate Professor of Operations Management at the MIT Sloan School of Management. You may have recently seen her being interviewed by Fareed Zakaria on CNN. Read her full bio here.

She is author of the 2014 book The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits.

I saw Ton give a lecture at an MIT alumni event back in June and immediately bought and read the book (read my blog post about the book and parallels to Lean and healthcare). I highly recommend it and I wish more hospitals and health systems would pursue this “good jobs strategy” instead of being so focused on cutting labor costs. As Ton explains in the book and our discussion, this strategy is not about being kind or nice — it's just good business that drives better long-term results for all.

Streaming Player (Run Time 32:02)

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In the podcast, we talk about:

• How she transitioned from industrial engineering and supply chain management to studying retail companies.
• In the vicious cycle of the “bad jobs strategy, ” why is this considered conventional wisdom that the way to maximize profits in a low-margin industry is to offer minimal pay, training, and hours?
• What are the components (and system) of “the good jobs strategy?”
• What connections do you draw between the good jobs strategy and Toyota or Lean?
• Do the companies or founders that have a good jobs strategy sort of naturally embrace it?
• Of the “good jobs” components, is it most difficult to help people see that 100% utilization is often very harmful and that “slack” is necessary?
• Is it easier for privately held companies to pursue the good jobs strategy having less quarterly financial pressure?
• Any thoughts on why society focuses so much on wages, while seemingly ignoring other aspects of workplace conditions that need to be improved?

For a link to this episode, refer people to www.leanblog.org/228.

For earlier episodes of my podcast, visit the main Podcast page, which includes information on how to subscribe via RSS, through Android apps, or via Apple Podcasts.  You can also subscribe and listen via Stitcher.

Key Quotes

Video of Zeynep Ton

TedX Cambridge:

Aspen Institute:

Transcript:

Of course. Here is the complete, corrected transcript with headers.

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Introduction

Mark Graban: Hi, this is Mark Graben. This is episode 228 of the podcast for September 9, 2015. My guest today is Zeynep Ton. She's an adjunct Associate professor of Operations Management at the MIT Sloan School of Management. You may have recently seen her being interviewed by Fareed Zakaria on CNN, and she was there talking about her 2014 book titled The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits. Now, I saw her give a lecture at an MIT alumni event back in June and I immediately bought and read the book and I blogged about the book, its parallels to Lean and healthcare. You can find a link to that, a link to the book, and other things by going to leanblog.org/228. I highly recommend the book. I wish more hospitals and health systems would pursue this good job strategy instead of being so focused on cutting labor costs. As Professor Ton explains in the book and in our discussion here, this strategy is not about being kind or being nice. It's just good business that drives better long-term results for all. Zeynep, hi. It's really a pleasure to have you joining us on the podcast today.

Zeynep Ton: Thank you for having me, Mark.

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From Engineering to Retail

Mark Graban: So I was wondering if you can start off by telling the listeners a little bit about your academic career and your work. And as an industrial engineer, I'm curious how you made the progression from industrial engineering to business and to studying and writing about retail.

Zeynep Ton: Yes. So after I finished industrial engineering at Penn State, I wanted to pursue my doctorate and I wanted to do something at the intersection of business and engineering, and operations management was the perfect match for that. So I applied to operations management departments across different schools and I got into the Harvard program and the entrance into retail, I wish, was part of one big grand plan that I had thought about, but it wasn't. It was just by the circumstances. I joined Harvard Business School. The operations management group there was very eclectic. They came from a bunch of different disciplines and were less quantitative than I was hoping for. So I wanted to work with the professor that was among the most quantitative of all the other professors. And he happened to have started a new project in the retail industry. And he asked me if I would join and I said yes, without knowing much about the industry or what I would study. I just wanted to go with the person. And it ended up being a pretty good choice.

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The “Bad Job Strategy” Vicious Cycle

Mark Graban: So as you started studying retail companies, you describe in the book kind of this vicious cycle of the bad job strategy. Can you sort of explain what you were finding to listeners? Was this surprising to you?

Zeynep Ton: Yes, so I was. So my background is, as I mentioned, operations management. And I started my career looking at retail supply. So I didn't start out looking at the bad jobs problem. I started looking at retail supply chains and how to make them better. But during our study, we–and when I say we, it's a group of researchers from Harvard Business School and from Wharton–we found that while a lot of retailers did a very nice job in the back end of their supply chain, they often dropped the ball in the last ten yards of the supply chain. For example, a product would make it all the way from China into the stores, and then it would be left in the back room, never making it to the selling floor to meet the customers. We found in-store logistics problems like this were pervasive in retail supply chains, and they were costing retailers a lot of money in terms of lost sales and lost profits. Then we looked at what drove these problems. Part of the answer was poor labor practices. Stores that had more employee turnover had more problems. Stores that had less training had more problems. Stores that were understaffed had more problems. And I found through this investigation that retailers were actually operating in what you just mentioned, the vicious cycle. And the vicious cycle starts with the mentality. And I think the mentality is where the big problem is, because the mentality is that labor is a cost. And a lot of companies try to minimize their cost because they have very low profit margins and cost minimization is very important. But when you see labor just as a cost, and as much as people say, executives say “people are our most important assets,” people don't show up in the balance sheet, they show up in the income statement in terms of cost. So that's how they end up being managed. And when the attitude is to see people as a cost, then they underinvest in their employees, underinvest both in terms of quality and in quantity. But I think the root of this is the philosophy of seeing people as just a cost.

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Discovering the “Good Jobs Strategy”

Mark Graban: And it almost seems like the conventional wisdom, especially in retailing, where margins are really thin, it seems like people think there's no other choice but to be cheap, I guess, on the labor side, until they discover there are retailers doing things a different way.

Zeynep Ton: Absolutely. And I was very frustrated during the first six, seven, eight years of my research because I saw this focus on seeing people as a cost, how expensive that was in terms of all the operational problems, all the negative consequences, lost sales, lost. And then of course, when your sales are lower, your labor budgets are lower, so you can't invest in your labor. So this vicious cycle continues. And it was frustrating to observe this as a researcher because it costs companies a lot of money, it costs customers bad service, and no one likes that. And it's just downright brutal for employees. So I saw a system that's not working for anyone, and the reaction was often, “This is the only way to get to the lowest prices.” And I thought that can't be the only way. So that was my. After that, I started looking for companies that on the one hand offered the lowest prices to their customers, but on the other hand excelled operationally to be able to deliver great service to their customers and good jobs to their employees.

Mark Graban: So as we kind of maybe transition into talking about the good job strategy, I guess first question, was it difficult to find retailers that were doing things a different way?

Zeynep Ton: It was not that challenging to find retailers that are doing things in a different way, but there just aren't enough of them. And some of them I met by coincidence. For example, Mercadona, Spain's largest supermarket chain. I would not have heard of them had it not been that I was studying Zara. Remember I said I was my research supply chain management? And anyone who studies supply chain management takes a look at Zara. So I went to Spain and I was writing a case about Zara and its supply chain and its in-store logistics. And I found out about Mercadona through Zara's chief HR officer, who said, “Look, there is a company here that we try to model after.” That's how I met Mercadona. QuikTrip, another company that's a convenience store chain with gas stations, is based in Tulsa, Oklahoma. I met them when I found out about them. One, from Fortune, some of the best companies to work for, but two, from IBM consultants that I was working with. I was writing a case about another company and we were in Dallas and they pointed at QuikTrip locations and said, “Look at that convenience store and look how many cars there are in their parking lot and look at their competitor and how few cars there are in their parking lot. That's because this company is excellent. They provide great service, they take care of their people.” So it was through word of mouth, through some research that I identified companies. But what was exciting to me was when I studied these two different retailers that couldn't be any different than each other in terms of location–one of them is in Spain, the other is in Tulsa, Oklahoma. One of them is a supermarket chain, the other is a convenience store chain. Their products are different, their customers are different. What was common was that they provided good jobs, low prices, good customer service, and great performance financially. And when I looked into how they were able to do that, I found the answer to be through operational excellence. These companies run a great operations. And that great operations has some common practices that I'm happy to tell you about. And your listeners would not be surprised to hear about any of the practices, I believe.

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Core Components of the Good Jobs Strategy

Mark Graban: Yeah. As we delve into those practices, one thing that jumps out at me is when you talk about the financial performance that these organizations aren't just being nice or kind, but I mean, I think there's a really compelling case to be made that this is just good business, right?

Zeynep Ton: Oh, absolutely. QuikTrip's, I mean, when I visited them, QuikTrip's per store profits per store profits were 89% higher than not the average in their industry, but the top quartile in their industry. Their labor productivity is higher, their sales per square foot is higher. Their shrink, which is a very common and important measure in the retail industry, is less than the industry average. Similarly, Mercadona's profit margins were higher than their competitor. And their competitor was like Carrefour, a much larger company, a global company. Their labor productivity is higher, sales square foot is higher. And these companies have been growing profitably and very well. So no, they're not doing this to be nice to people. They're doing this because they have found this to be the most sustainable way to create value over the long term.

Mark Graban: So how would you describe the system and the different components of the good job strategy? Especially, you know, we've got an audience here, maybe compared to, you know, operations management class that has experience with, or a better understanding with Lean and the Toyota production system, you know, within that context and realize, you know, it's not exactly Lean or TPS. But how would you summarize what this is about at these retailers?

Zeynep Ton: I think, I mean, if I were to make an analogy to auto manufacturing, especially to Toyota, it will be while most retailers run their operations like Henry Ford thought about running operations, which is using people as interchangeable parts and designing an operating system that does not require empowered, even capable employees because the tasks are so narrow. Training people on those tasks is very easy. Turnover doesn't, you know, it hurts, but it doesn't hurt that much because you know, anyone can perform any job because the job is so simple. So that's what most retailers do. And of course the outcome of that in the auto industry was low productivity, not great quality. And then Toyota came along and Toyota said, “Look, if we design work differently, if we involve our people in process improvements, have them identify problems when they happen and solve those problems, we empower them to pull the hand on cord. If we cross train them so that they perform a variety of functions rather than just one thing over and over, if we create a whole operating system, a human-centered system that really leverages capable, skilled, motivated employees, then we will do so much better.” And they showed us that they do do so much better, right? In terms of quality, in terms of costs, even in terms of lead times. So the companies that I looked at, Mercadona and QuikTrip, fundamentally what they do is they design the work in a way that really leverages a capable, motivated, competent workforce. And they have several practices, and I'll just mention a couple of them that are very similar to again, Toyota and Lean. One of them is that on the one hand they standardize all those common processes that would benefit from efficiencies and consistencies. There is one way to operate the cash register, there is one way to shelve merchandise. So they routinize, standardize all these activities. There are times you're supposed to do this in this amount of time and this is how you're supposed to do it. But at the same time, they empower their employees to continuously improve those standards and they empower their employees to make decisions for their local customers. For example, at a QuikTrip store, employees order merchandise, they know what their customers want and they can better react to what customers will need tomorrow or the day after much better than data can. Well, they use data to make these decisions, but it's the combination of data and judgment of employees. So standardization and empowerment is one of the things that I saw. Another one is that these companies cross train their employees to perform a wide range of tasks. Not everybody is cross trained to do everything, but they do enough to be able to react to changes in customer demand. This again we see as part of Lean. And then another principle related to work design is operate with slack. These companies deliberately have more people on the selling floor than the expected workload. That way people are not rushed to perform their tasks. That way they don't make errors or mistakes, and that way they have time to be part of process improvement. These are three practices relating to the design of the work. So operate with slack, standardize and empower and cross train. And then the fourth choice that I saw that was common among these retailers is what I call “offer less” in my book. But it's really a focused strategy. Understand what you're going to deliver to customers and what you're not going to deliver to customers. So these companies focus on the basis of low prices, competing on the basis of low prices. And for that there are certain things that they don't offer their customers. One of those is if you go to a Mercadona, you won't see 200 face, like you would see in a typical supermarket, because they don't believe that that's what will enable them to offer low prices. Of course, fewer products also helps their employees be extremely efficient and knowledgeable and play a bigger role in the company's success. So offer less, standardize and empower, cross train and operate with slack where the four principles, and of course underneath them there are lots of exciting things.

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Parallels in Healthcare

Mark Graban: Yeah. And the idea of offering less. I think one of the interesting ideas in healthcare is hospitals challenging the notion that they have to offer all types of care and every type of procedure to every type of patient. That there's benefits that come either from focus or the idea in healthcare that quality improves from repetition. So if you need a certain type of procedure, if you have a choice, if you're not in a community with just one hospital, you're better off going to the hospital that does lots and lots of that procedure as opposed to a hospital that does one of everything every day.

Zeynep Ton: Yes. And “if you have a choice” is a good thing that you mentioned, Mark. And one of the case, you know, in my course, one of the cases that I teach is Shouldice Hospital and Shouldice does hernia and only easy hernias, but they focus on that and they repeat it over and over. And that repetition, the standardization, the empowerment of people, I mean that whole system works beautifully together. And the result of that system is much better patient care. I mean their patients are so satisfied, they even have conferences, like get-togethers. And in addition to highly satisfied patients, their costs are much lower and their employees are very happy with what they do. They're not rushed to do their tasks like we see in other healthcare settings. They don't suffer from understaffing. They have enough time to take care of their patients and deliver great service. And of course when people are able to create good outcomes for their customers, then they themselves are more engaged in their jobs and they're happier as a result.

Mark Graban: Yeah, and you talk about not being understaffed and having slack. As an industrial engineer, when I started off, you know, in the auto industry, it's just good industrial engineering practice. You don't load people's jobs to being 100% busy. You need to account for variation, even though of course you're trying to reduce variation and, you know, you make sure that there's time for continuous improvement and time for training. One of the trends in healthcare over the past years or decades, some people might even describe this as lean, which I think is a bit wrong. You know, hospitals will pretty ruthlessly send people home early. You know, if patient volume is low, they'll send nurses home and completely get rid of any sort of slack that might have been there in the system. And it seems so counterintuitive. Or maybe they think it's irresponsible to have slack. I mean, it's challenging to get people to kind of change their minds and see how slack can be a really useful strategy, right?

Zeynep Ton: Absolutely. And I see the same practice in retail as well to send people home early or have on-call practices. Although I hear on-call you don't get paid for the on-call. And it's a mentality. I wish everybody took operations management and everybody learned queuing theory. And this is like 101 of queuing, right? That in systems with some variability, if you don't have slack then you pay. It's not a good thing to operate with 100% utilization. I think we need to change that mentality and research and the academics should play a role in changing our students' minds. And then in practice we need to do a much better job saying that 100% utilization is not a good thing. And right now we are seeing, even in industries, even if you go beyond frontline workers in other settings, we see how overwork is not being productive for a lot of people. I mean, there was a recent New York Times article, according to the most recent Gallup studies, almost 90% of the people are either actively disengaged or not engaged in their work. And part of the problem is the overworked culture.

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Culture Change and Corporate Structure

Mark Graban: Now, when you talk about culture, one other thing I wanted to ask was the retailers that you found, do these organizations just somehow naturally, have they always had this culture and this strategy, or have you seen cases, examples now of organizations changing their culture, changing from the bad jobs to the good job strategy?

Zeynep Ton: Yes. I talk about four model retailers in my book, and of the four, one of them actually transitioned from a bad job strategy into a good job strategy. And that is Mercadona, Spain's largest supermarket chain. When we first started out, they were just like any other supermarket. They offered tens of thousands of products. They offered their employees very unpredictable schedules, low wages. They didn't engage them in improvements. They didn't have a mentality of continuous improvement at all. But then when they hit around 100 stores, foreign international chains started coming into Spain. And these were, you know, they had better purchasing power, they had economies of scale in many things. And Mercadona needed to find a way to compete against these larger chains. And the president of the company at the time was a big believer that if you invest in people and if you invest in processes, you can get great results. So he did a 180 degree change in the organization. I mean, change everything from the number of products they offered, to stabilizing pricing so it's everyday low pricing as opposed to promotions all the time, to labor practices about investing in people, to standardizing practices, empowering people. So he made a bunch of these changes and the result was the Mercadona that we see today. And it took them a couple years to be able to implement all these changes and start getting the results. But the result now is a very healthy company in an economy that's not doing so well.

Mark Graban: Another thing I was curious about, and we talk about a strategy like this of investing in people and not just being so maybe short term today or this hour, focused. Is it easier, do you think, for a privately held company to pursue this type of strategy if they've got less quarterly financial pressure? Or do you see examples of publicly traded companies that have been able to embrace this approach?

Zeynep Ton: I mean, even private companies have their own pressures, sometimes from their investors or from their employees. But it is much easier for a private company to follow a good job strategy than a public company because they think they are more likely to think long term than public companies. And it's no surprise that three out of four companies I studied are private companies and only one is a public company, which is Costco.

Mark Graban: Well, hopefully that's one advantage healthcare organizations would have is that at least in the US many of them are nonprofit. They have a board that they're accountable to. They have really more internal goals that they can hopefully orient themselves around and be able to make some better decisions. I heard somebody, I'm reminded, just think of this idea of slack. There was somebody at an industrial engineering healthcare conference a couple years ago and she said the hospital's daily productivity number is the biggest impediment to actually improving productivity.

Zeynep Ton: Yes, Mark, as you were talking, I thought about some of my students who worked in nonprofit settings and you would think that these are easier settings in which to implement a longer term strategy like a good job strategy. But they kept talking about how the donors who gave the money, the one metric that they look at is labor productivity or how much they're getting out of each person. And I think as long as we over-focus on that one metric and from the investor side, from the donor side, whoever is giving the capital, we will end up that will be a big barrier to productivity improvements over time.

Mark Graban: And not to mention quality and customer service and satisfaction that people find in their own jobs as you describe.

Zeynep Ton: Absolutely. And in my setting I study retail and in my setting the consequence of understaffing, the consequence of lack of standardization or not following protocol or not empowering people is stock-outs or lost sales. But in the healthcare setting, the consequences are a lot more serious. And I wish more companies follow the good job strategy in that setting because it will be better not just for the health of hospitals in terms of their financial performance, but also for our own health. Literally.

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A Systemic Approach, Not Just a Wage Increase

Mark Graban: Yeah. One other kind of final question here. When we talk about investing in people, there's been a lot of debate in the news and political circles about wages in retail and an emphasis on pay. Do you hear maybe in parallel to that much discussion about workplace conditions of not just a high paying job that I mean pay is important, but not just having a better paying job that's demoralizing or perhaps a dysfunction where a higher minimum wage forces retailers to double down on the bad job strategy if they're still just focused on cost. I'm curious Some of your thoughts on how this could be related.

Zeynep Ton: I think there's too much attention to wage right now and too little attention to the design of the work in a way that creates great outcome for not just the worker, but also the customer and the investor. I think one of the reasons is that the median wages in this country have been pretty stagnant for a long time. The median household income in the United States was higher in 1989 than it was in 2013. And that's a big problem. And because wages are so low, because a lot of people are just not having enough money to be able to take care of themselves and their families, there's a lot of focus on wages. But if you want to create organizations that work for everyone, focusing only on wages is not… is not healthy.

Mark Graban: Well, and it's perhaps easier to talk about a number than it is to talk about the design of work, maybe, like you said.

Zeynep Ton: Absolutely. And, you know, the other thing is, Mark, it's much easier to think in terms of small practices, subcomponents of systems than the entire system together. I mean, since my book came out in 2014, a lot of organizations have reached out to me. And oftentimes the person who reaches out to me from these organizations is their chief HR officer. And they say, “We are determined to make life better for our employees because we are going to offer them better schedules and we are going to increase their wages.” And then I tell them, “My work is not about increasing wages. My work is about designing the work in a way that makes your people very important for your organization so that you can pay them more.” But it's about the work itself. It's not about paying. ¹But organizations think so much in silos that they see this and they say, “Okay, this is an HR problem. Let's have HR tackle this. What can we do? Well, we can increase wages or we can do this.” So I think one thing that gets in the way is the silo thinking and not thinking that these are systems that have to be implemented, not small practices that need to be copied. A few of the organizations, I said, “I'm willing to come and talk to you if the CEO is in the room.” Because if the CEO does not buy into this, if the CEO does not believe that this is the way to go forward, it's not going to work in your organization. Because it's not just operational practices, but it's a philosophy of seeing people as important as strategic assets rather than as cost. There's a whole mentality shift. It's a whole strategic shift and without the buy-in and support from the CEO, it's just not going to work.

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Conclusion

Mark Graban: Even though this is a recorded podcast, I hear my listeners all vigorously nodding their heads in recognition of the situation you described there. The parallels to people in manufacturing wanting to copy just one component of the Toyota production system, or a siloed leader within a healthcare organization just wanting to maybe take on one aspect of lean health care. You're right, these are interesting challenges and in the book you do such a good job of laying out the case that this is a system. You don't get to pick or choose two of these five ideas. It all works together. So thank you for articulating that really clearly and thank you for the book. I certainly encourage everyone listening to go and pick it up.

Zeynep Ton: Thank you. Thank you, Mark.

Mark Graban: So again, our guest today has been Zeynep Ton. She's an adjunct Associate professor of Operations Management at MIT and the author of the book The Good Jobs Strategy. It was such a pleasure to get to talk to you today.

Zeynep Ton: Thank you. Same here, Mark. Take care.

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