This article is the thirteenth in a series on what causes a firm’s value to increase
If you have followed this series of articles on the strategy and leadership drivers of firm valuation, I bet many of you are saying to yourselves, “Oh oh … here comes the soft and squishy one”. But I want to demonstrate to you that people can be a source of enduring, hard-for-a-competitor to copy competitive advantage for your firm or organization.
Many firms say that “people are their most important asset” but the bar has been set very high for an organization to claim they actually deliver on this statement. For instance, General Electric invests $1 billion a year in training for their people. Their world-renowned Crotonville GE University is at the cutting edge of developing training just-in-time for their people as new strategic initiatives demand it.
Here is a test if a resource in your organization is strategically valuable:
- It is hard to copy
- It depreciates slowly
- The value is controlled by your organization
- It is not easily substituted
- Is better than a competitor’s similar resource
A proper view of the role of your people in your organization’s success passes all five tests.
Jeff Pfeffer, a Stanford professor, wrote a landmark book in 1996 that is the title of this article, Competitive Advantage Through People. My assessment is the principles he provides still hold today. There he outlined sixteen principles high performing firms (as measured by increases in firm valuation) do with respect to their people. Some of these practices may surprise you – they sound “socialistic” if you read them one by one. But in totality they represent one model of competitive advantage through people that you can and should consider for your organization:
- Employment Security – Lincoln Electric, a long term wealth creator, says “Our guarantee of employment states that no employee with three years of more of service will be laid off for lack of work”.
- Selectivity in Recruiting – when General Mills set up a new cereal manufacturing plant that was to be at the forefront of innovation, it set up very stringent hiring criteria.
- Compensation Higher Than Market – this principle says you get what you pay for. Higher wages than market attract more applicants. Nordstrom’s salespeople often earn twice the average retail income.
- Incentive Pay – this controversial subject was covered in a previous article. But high performing firms hold that fairness and justice dictate that if people are responsible for enhanced levels of performance and profitability, they will want to share in the benefits. General Electric has written the book on this.
- Employee Ownership – another controversial principle. But some form of ownership earned by valuable employees ensures that a longer term perspective will prevail and that the dichotomy of labor and capital disappears.
- Information Sharing – if you adopt some form of gain sharing, people must have information. If people are to be a source of competitive advantage, they must have the information necessary to do what is required to be successful. Bank of America said their competitors knew this information already, why should not employees know this?
- Participation and Empowerment – encourage decentralization of decision making and empowering control to some degree of people’s own work processes. Nordstrom said this: Rule #1 – Use your good judgment in all situations. Rule #2 – There will be no additional rules.
- Self-Directed Teams – traditional top down command and control hierarchy is losing ground to self-directed teams. Here top management can exert control while having autonomous teams making a lot of their own decisions. Monsanto, Johnsonville Sausage and Fed Ex have used self-directed teams to great success.
- Training and Skill Development – if folks have employment security, then it makes sense they have should world class skills. GE, Advanced Micro Devices (AMD), and Danaher invest a lot of money here.
- Cross Utilization and Cross Training – having people do multiple jobs is great for two reasons. First, job variety is one of the core job dimensions of people liking work. Second, if people will have employment security, they need to be able to move to different jobs in a downturn. AMD uses skill based pay to encourage employees to learn as many jobs as possible.
- Symbolic Egalitarianism – A barrier to decentralized decision making, using self-managed teams and having employee commitment and cooperation is symbols that separate people from each other. Firms who practice competitive advantage through people eliminate these symbols. Southwest Airlines excels at this.
- Wage Fairness – Teamwork is fostered by common fate, and common fate is enhanced to the extent that people in an organization fare comparably in terms of the rewards received. Herman Miller, the successful office furniture manufacturer, practices this principle with strict discipline.
- Promotion From Within – This is a useful adjunct to many of the other principles. It encourages training and skill development and that those promoted to upper management really know the business. Everyone at Nordstrom start on the sales floor.
- Long Term Perspective – It takes time to develop all of these principles. But once achieved, it is very difficult for a competitor to copy. Headhunters try to raid GE all the time. But their voluntary attrition is very low because GE has been committed to these principles for 90 years.
- Measurement of the Practices – remember my comment about people being “soft and squishy” above? Firms who practice these disciplines measure a lot. To them “out of sight is out of mind” and what “you measure you get”.
- Overarching Philosophy – an overarching philosophy ties the first fifteen principles together so that they can be mutually reinforcing. Just copying several of these practices from a competitor will not provide the impact of having some version of the fifteen principles custom made for your organization.
How does your firm or organization stack up to these principles? I am not saying all organizations need to apply all fifteen all of the time, but this provides a scorecard for comparison and possible consideration for improvement.
Next Up: A Year In Review – What Causes Increases in Firm Valuation?
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at firstname.lastname@example.org