sustainable competitive advantage through people

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Academy of M ana gem ent Execu tive, 1995 Vol. 9 No. 1

Producing sustainablecompetitive advantagethrough the effectivemanagement of people'Jeffrey PfefferAchieving competitive success through people involves fundamentally alteringhow we think about the workforce and the employment relationship. It meansachieving success by working with people, not by replacing them or limiting thescope of their activities. It entails seeing the workforce as a source of strategicadvantage, not just as a cost to be minimized or avoided. Firms that take thisdifferent perspective are often able to successfully outmaneuver and outperformtheir rivals.

Suppose that in 1972, someone asked you to pick the five companies that wouldprovide the greatest return to stockholders over the next 20 years. And supposethat you had access to books on competitive success that were not even written.How would you approach your assignment? In order to earn tremendouseconomic returns, the companies you picked should have some sustainablecompetitive advantage, something that 1) distinguishes them from theircompetitors, 2) provides positive economic benefits, and 3) is not readilyduplicated.

Conventional wisdom then (and even now) would have you begin by selectingthe right industries. After all, "not all industries offer equal opportunity forsustained profitability, and the inherent profitability of its industry is oneessential ingredient in determining the profitability of a firm." According toMichael Porter's now famous framework, the five fundamental competitiveforces that determine the ability of firms in an industry to earn above-normalreturns are "the entry of new competitors, the threat of substitutes, thebargaining power of buyers, the bargaining power of suppliers, and the rivalryamong existing competitors."^ You should find industries with barriers to entry,low supplier and buyer bargaining power, few ready substitutes, and a limitedthreat of new entrants to compete away economic returns. Within suchindustries, other conventional analyses would urge you to select firms with thelargest market share, which can realize the cost benefits of economies of scale.In short you would probably look to industries in which patent protection ofimportant product or service technology could be achieved and select thedominant firms in those industries.

'Adapted from Jeffrey Pfeffer, Compe/ifive Advantage through People, Harvard Business SchoolPress, Boston, 1994.55


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What these fivesuccessiul firms tendto have in comm on isthat ior theirsustained advantage,they rely not ontechnology, patents,or strategic position,but on how theymanage theirworkforce.

You would have been very successful in selecting the five top performing firmsfrom 1972 to 1992 if you took this conventional wisdom and turned it on its headThe top five stocks, and their percentage returns, were (in reverse order):Plenum Publishing (with a return of 15,689%), Circuit City (a video andappliance retailer; 16,410%), Tyson Foods (a poultry producer; 18,118%),Wal-Mart (a discount chain; 19,807%), and Southwest Airlines (21,775%).^ Yetduring this period, these industr ies (retai l ing, air l ines, publishing, and foodprocessing) were characterized by massive competi t ion and horrendous losses,widespread bankruptcy, virtually no barriers to entry (for airlines after 1978),l i t t le unique or proprietary technology, and many substi tute products orservices. And in 1972, none of these firms was (and some still are not) themarket-share leader, enjoying economies of scale or moving down the learningcurve.The point here is not to throw out conventional strategic analysis based onindustrial economics but simply to note that the source of competitiveadvantage has always shif ted over t ime. What these f ive successful f irms tendto have in common is that for their sustained advantage, they rely not ontechnology, patents, or strategic posi t ion, but on how they manage theirworkforce.The Importance of the Workforce and How It is ManagedAs other sources of competi t ive success have become less important , whatremains as a crucial, differentiating factor is the organization, its employees,and how they work. Consider, for instance. Southwest Airl ines, whose stock hathe best return from 1972 to 1992. It certainly did not achieve that success fromeconomies of scale. In 1992, Southwest had revenues of $1.31 billion and a mer2.6% of the U.S. passenger market. '* People Express, by contrast, achieved $1billion in reven ues after only 3 ye ars of operation, not the alm ost 20 it tookSouthwest . Southwest exists not because of regulated or protected markets butin spite of them. "During the first three years of its history, no Southwest planewe re flown. "^ Southw est w ag ed a ba ttle for its very existe nce w ith com petitorswho sought to keep it from flying at all and, failing that, made sure it did not fout of the newly constructed Dallas-Fort Worth international airport. Instead, itwas restricted to operating out of the close-in Love Field, and thus was born itfirst advertising slogan, "Make Love, Not War." Southwest became the "love"airline out of necessity, not choice.In 1978, competitors sought to bar flights from Love Field to anywhere outsideTexas. The compromise Southwest wrangled permitted it to fly from Love to thefour states contiguous to Texas.^ Its competitive strategy of short-haul,point-to-point flights to close-in airports (it now flies into Chicago's Midway anHouston's Hobby airports) was more a product of its need to adapt to what itwas being permitted to do than a conscious, planned movealthough, inretrospect , the strategy has succeeded bri l l iantly . Nor has Southwest succeedebecause i t has had more access to lower-cost capitalindeed, i t is one of theleast leveraged air l ines in the United States. Southwest 's planes, Boeing 737s,are obviously available to all its competitors. It isn't a member of any of the bicomputerized reservation systems; i t uses no unique process technology andsells essentially a commodity productlow-cost, low-frills airline service atprices its competitors have difficulty matching.Much of its cost advantage comes from its very productive, very motivated, andby the way, unionized workforce. Compared to the U.S. airline industry,acco rding to 1991 statis tics. Sou thwest h as fewer e mp loye es per aircraft (79

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versus 131), flies more passengers per employee (2,318 versus 848), and hasmore available seat miles per employee (1,891,082 versus 1,339,995).' It turnsaround some 80% of its flights in 15 minutes or less, while other airlines onaverage need 45 minutes, giving it an enormous productivity advantage interms of equipment utilization.^ It also provides an exceptional level ofpassenger service. Southwest has won the airlines' so-called triple crown (beston-time performance, fewest lost bags, and fewest passenger complaintsinthe sam e m onth) nine times. No competitor has achieved that even once.^What is important to recognize is why success, such as that achieved atSouthwest, can be sustained and cannot readily be imitated by competitors.There are two fundamental reason s. First, the succe ss that com es frommanaging people effectively is often not as visible or transparent as to itssource. We can see a computerized information system, a particularsemiconductor, a numerically controlled m achine tool. The culture and practicethat enable Southwest to achieve its success are less obvious. Even when theyare described, as they have been in numerous newspaper articles and even asegment on "60 Minutes," they are difficult to really understand. Culture, howpeople are managed, and the effects of this on their behavior and skills aresometimes seen as the "soft" side of business, occasionally dismissed. Evenwhen they are not dismissed, it is often hard to comprehend the dynamics of aparticular company and how it operates because the way people are managedoften fits together in a system. It is easy to copy one thing but much moredifficult to copy numerous things. This is beca use the cha nge nee ds to be m orecomprehensive and also because the ability to understand the system ofmanagement practices is hindered by its very extensiveness.Thus, for example, Nordstrom, the department store chain, has enjoyedsubstantial success both in customer service and in sales and profitabilitygrowth over the years. Nordstrom compensates its employees in part withcommissions. Not surprisingly, many of its competitors, after finallyacknowledging Nordstrom's success, and the fact that it was attributable to thebehavior of its employees, instituted commission systems. By itself, changingthe compensation system did not fully capture what Nordstrom had done, nordid it provide many benefits to the competition. Indeed, in some cases,changing the compensation system produced employee grievances and attemptto unionize when the new system was viewed as unfair or arbitrary.Thirteen Practices for Managing PeopleContrary to some academic writing and to popular belief, there is little evidencthat effective management practices are 1) particularly faddish (although theirimplementation may well be), 2) difficult to understand or to comprehend whythey work, or 3) necessarily contingent on an organ ization's partic ularcompetitive strategy. There are interrelated practicesI enumerate 13, but theexact number and how they are defined are somewhat arbitrarythat seem tocharacterize companies that are effective in achieving competitive successthrough how they manage people.The following policies and practices emerge from extensive reading of both thepopular and academic literature, talking to numerous people in firms in avariety of industries, and the application of some simple common sense. Theparticular way of subdividing the terrain is less important than considering theentire landscape, so the reader should realize that the division into categories somewhat arbitrary. The themes, however, recur repeatedly in studies of


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Taking on people notreadily eliminatedexerts pressure to becareful and selectivem hiring.

organizations. It is important to recognize that the practices are interrelatediis difficult to do one thing by itself with much positive result.Empioymenf SecuritySecurity of employment signals a long-standing commitment by the organizatioto its workforce. Norms of reciprocity tend to guarantee that this commitment isrepaid. However, conversely, an employer that signals through word and deedthat its employees are dispensable is not likely to generate much loyalty,commitment, or willingness to expend extra effort for the organization's benefitNew United Motor Manufacturing (NUMMI), the Toyota-GM joint venture inCalifornia, guaranteed workers' jobs as part of the formal labor contract inreturn for a reduction in the number of job classifications and an agreement noto strike over work standards. This commitment was met even in the face oftemporarily slow demand, and many observers believe that as a result, trustbetween employees and the organization increased substantially.Taking on people not readily eliminated exerts pressu re to be careful andselective in hiring. Moreover, "employment security enhances employeeinvolvement bec ause employees a re m ore willing to contribute to the workprocess when they need not fear losing their own or their coworkers' jobs.Employment security contributes to training as both employer a nd employeehave greater incentives to invest in training,"^ because there is someassurance that the employment relationship will be of sufficient duration toearn a return on the time and resources expended in skill development.Selectivity in RecruitingSecurity in employment and reliance on the workforce for competitive successmean that one must be careful to choose the right people, in the right way.Studies covering populations ranging from machine operators, typists, andwelders to assembly workersall in self-paced jobs so that individualdifferences matteredindicate that the most productive employees were abouttwice as good as the least productive.^' Southwest Airlines worries a lot abouthiring the right people. In fact, it flies some of its best customers to Dallas andinvolves them in the flight attendant hiring process, believing that those whoare in contact with the front-line employees probably know best what makes agood employee. At Lincoln Electric, hiring is done very carefully based on thedesire to succeed and the capacity for growth.'^One of the practices of many of the Japanese automobile-manufacturing plan tsopened in the United States that proved especially newsworthy was theirextensive screening of employees. Some of this was undoubtedly done to weedout those who were likely to be pro-union, but much of the screening was to finthose people who could work best in the new environment, could learn anddevelop, and needed less supervision. There was little screening for particularskills, under the assumption that these could be readily learned. Nordstrom, thevery effective specialty retailer whose sales per square foot are about doublethe industry average, tends to recruit sales clerks who are young andcollege-educated, seeking a career in retailing. '

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Besides getting the right people in the door, recruiting has an importantsymbolic aspect. If someone goes through a rigorous selection process, theperson feels that he or she is joining an elite organization. High expectations foperformance are created, and the message sent is that people matter.


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High WagesIf you want to recruit outstanding people, and want them to stay with theorganization, paying more is helpful, although not absolutely necessary. Highwages tend to attract more applicants, permitting the organization to be moreselective in finding people who are going to be trainable and who will becommitted to the organization. Perhaps most important, higher wages send amessage that the organization values its people. Particularly if these wages arehigher than required by the market, employees can perceive the extra incomeas a gift and work more diligently as a result.^* Nordstrom typically pays itspeople an hourly wage higher than the prevailing rate for retail clerks atcomparable stores. Coupled with incentive pay for outstanding work, Nordstromsalespeople often earn twice the average retail income.

incentive pay foroutstanding work,Nordstrom salespeopleoften earn twice theaverage retail income.

Companies sometimes believe that lowering labor costs is essential forcompetitive success. This is not invariably the case, even in cost-competitivebusinesses, because in many organizations, labor costs are a small fraction ofthe total costs. Furthermore, even if labor costs (let alone labor rates) arehigher, it may be that enhanced service, skill, and innovation more thancompensate by increasing the level of overall profit. For instance, the CEO ofWendy's, facing declining company profitability, decided that the best way tobecome the customer's restauran t of choice wa s to become the employer ofchoice.'^ This entailed improving both benefits and base compensation,instituting a quarterly bonus, and creating an employee stock option plan. Theresults were dramatic: "Our turnover rate for general managers fell to 20% in1991 from 39% in 1989, while turnover am ong co- an d ass ista nt m an ag ersdropped to 37% from 60%among the lowest in the business. With astable and ableworkforce, sale s beg an to pick up as ^Incentive PayThere has been a tendency to overuse money in an effort to solve myriadorganizational problems. People are motivated by more than moneythingslike recognition, security, and fair treatment matter a great deal. Nevertheless,if people are responsible for enhanced levels of performance and profitability,they will want to share in the benefits. Consider the alternativeif all thegains from extra ingenuity and effort go just to top management or toshareholders (unless these are also employees), people will soon view thesituation as unfair, become discouraged, and abandon their efforts. Thus, manyorganizations seek to reward performance with some form of contingentcompensation.Lincoln Electric is deservedly famous for its piecework and incentive bonusplan. Contrary to first impressions, the plan does much more than merelyreward individual productivity. Although the factory workforce is paid on apiecework basis, it is paid only for good piecesworkers correct qualityproblems on their own time. Moreover, defects can be traced to the individualwho produced them. Quality is emphasized as well as productivity.Additionally, piecework is only a part of the employee's compensation. Bonuseswhich often co nstitute 100% of regular salary, a re b ase d on the com pany 'sprofitabilityencouraging employees to identify with the whole firm. They arealso based on the individual's merit rating, and that rating is, in turn, based onfour equally important aspects of performance: dependability, quality, output,and idea s and cooperation. ' This broader evaluation mitigates the pernicioustendencies of simplistic incentive systems to go awry.

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Employees who haveownership interests inthe organizations forwhich they work haveless conflict betweencapital and labortosome degree they areboth capital andlabor.

Employee O wnershipEmployee ownership offers two advantages. Employees who have ownershipinterests in the organizations for which they work have less conflict betweencapital and laborto some degree they are both capital and labor. Employeeownership, effectively implemented, can align the interests of employees withthose of shareholders by making employees shareholders, too. Second,employee ownership puts stock in the hands of people, employees, who aremore inclined to take a long-term view of the organization, its strategy, and itsinvestment policies and less likely to support hostile takeovers, leveragedbuyouts, and other financial maneuvers. Of course, to the extent that onebelieves this reduced risk of capital market discipline inhibits efficiency,significant employee shareholding is a disadvantage. However, the existingevidence largely contradicts this negative view.It is probably no coincidence that all five of the companies mentioned asproviding the best shareholde r returns from 1972 to 1992 ap pe ar on TheEmployee Ownership 1000, a listing of "1000 companies in which employeesown more than 4% of the stock of a corporation" traded on the New York orAmerican stock exchanges or the over-the-counter market. ^ Although employeownership is no panacea, and its effects depend largely on how it isimplemented, the existing evidence is consistent with the view that employeeownership has positive effects on firm performance. 'Inioimation SharingIf people are to be a source of competitive advantage, clearly they must havethe information necessary to do what is required to be successful. At theAdvanced Micro Devices submicron development center, there are computerterminals throughout the plant that every employee has been trained to use inorder to obtain information about product yields, development progress,production rates, or any other aspect of the operation. One reason sometimesgiven for not disclosing information to large numbers of employees is that itmay leak to competitors. When Robert Beck was head of human resources forthe Bank of America, he perceptively told the management committee, reluctanto disclose the bank's strategy and other information to its employees, that thecompetitors almost certainly knew the information already; typically, the onlypeople in the dark a re the firm's own employees.Participation and EmpowermentSharing information is a necessary precondition to another important featurefound in many successful work systems: encouraging the decentralization ofdecision making and broader worker participation and empowerment incontrolling their own work process. At Nordstrom, the written philosophy states:

We also encourage you to present your own ideas. Your buyers have a greatdeal of autonomy, and are encouraged to seek out and promote new fashiondirections at all times. . . . Nordstrom has a strong open-door policy and weencourage you to share your concerns, suggestions and ideas. . .Nordstrom Rules:Rule #1: Use your good judgment in all situations. There will be noadditional rules.^

The evidence is that participation increases both satisfaction and employee60


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product ivi ty.^ ' Autonomy is one of the most important dimensions of jobs andwas the focus of many job-redesign efforts undertaken as part of the quality ofwo rking life movem ent in the 1960s an d 1970s.^^ The fund am en tal ch an geinvolves moving from a system of hierarchical control and coordination ofact ivi ty to one in which lower-level employees, who may have more or bet terinformation, are permit ted to do things to enhance performance. At a LeviStrauss jeans factory, when it was time to purchase new forklift trucks, thedrivers themselves got involved. They determined specif icat ions, negotiatedwith suppliers , and made the f inal purchase decision, in the process saving thecompany money as wel l as obta ining equipment more appropr ia te for tha tplant . At Eaton, a unionized manufacturer , workers t i red of f ixing equipmentthat broke down and sugges ted that they bui ld two new automated machinesthemselves. They did i t for less than a third of what outside vendors would havcharged and doubled the output of the department in the f i rstSeU-Managed TeamsOrganizat ions tha t have tapped the power of t eams have of ten exper iencedexcel lent resul ts . Monsanto, a large chemical company, implemented workorganizat ion based on se l f -managed teams a t i t s chemical and nylon complexnear Pensacola, Florida. Teams of workers were responsible for hir ing,purcha s ing, job ass ign me nts , an d production.^* M anagem ent w as reduced fromseven levels to four, and the plant experienced increases in both profi tabi l i tyand safety. At a 318-person submarine systems plant owned by AT&T, costswe re reduced more than 30% through the us e of teams.^^ Fed eral Exp ress us esteams in i ts back-off ice operat ion with great successservice problems fel l 13%in 1989 after the com pan y's 1,000 clerical worke rs were org aniz ed in tea m s a ndgiven addit ional t raining and authori ty.^^ One of the more dramatic examples othe benefi ts of using teams occurred at Johnsonvil le Sausage. In 1986, amanufacturer asked Johnsonvi l le to produce pr ivate- label sausage. Thepres ident was about to decl ine the new bus iness , because he bel ieved that theplant was a l ready a t capaci ty and could not handle the addi t ional workload.However,

before deciding, he assem ble d his 200 product ion workers, who are organ izein teams of five to 20, and asked them to decide. . . . After . . . ten days, theycame back with an answer: "We can do i t ." . . . The teams decided how mucnew machinery they would need and how many new people ; they a l so madea schedule of how much to produce per day. Since Johnsonvil le took on thenew project, productivity h as rise n over 50% in the factory.^'Teams work because of the peer monitoring and expectat ions of coworkers thatare brought to bear to both coordinate and monitor work. Indeed, even cri t ics ofthe team concept often argue that the problem with teams as a subst i tute forhierarchy is not that this approach doesn't work but that i t works too well . Thusa d issiden t union le ade r in the NUMMI plan t noted: "[W]hen the team 's un derpressure , people t ry to meet the team's expecta t ions and under peer pressure ,they end up pushing themselves too hard. . . . The team concept is a nice idea,but when you put the teams under pressure, i t becomes a damn effect ive way todivide workers."^^Training an d Skill DevelopmentAn integral part of most new work systems is a greater commitment to t rainingand ski l l development . Note, however, that this t raining wil l produce posi t ivereturns only i f the t rained workers are then permit ted to employ their ski l ls . On

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mistake many organizations make is to upgrade the skil ls of both managers anworkers but not change the structure for work in ways that permit people to doanything different. Under such circumstances, it is little wonder that traininghas no apparent effect .. . . even critics oi theteam concept oitenargue that theproblem with teamsas a substitute iorhierarchy is not thatthis approach doesn'twork but that it workstoo welL

At Adv ance d Micro Dev ices' submicron deve lopm ent facility, so m e 70% of thetechnicians came from older facilities at AMD. In keeping with AMD's emphasison employment stabil i ty , as old faci l i t ies were closed, people were evaluatedwith respect to their basic skills. If accepted, they were put through aseven-month program at Mission Collegeat ful l pay and at companyexpenseand then went to work in the new facil i ty . This t raining not onlydemonstrated the f irm's commitment to i ts employees, which was thenreciprocated, but also ensured that the facility would be staffed with highlyqualif ied people who had been specifical ly trained for their new jobs.At a Collins and Aikman carpet plant in Georgia, more than a third of theemployees were high school dropouts, and some could neither read nor write.W hen the firm introduced com puters to inc rea se productive efficiency, how everit chose not to replace its existing workforce but to upgrade its skills. Afterspending about $1,200 per employee on training, including lost job time, thecompany found that the amount of carpet stitched increased 10%. Moreover,quali ty problems declined by half. The employees, with more skil ls and bettermorale, submitted some 1,230 suggestions, and absenteeism fel l by almost

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Cross-[/fiJizafion and Cross-TrainingHaving people do mult iple jobs has a number of potential benefi ts . The mostobvious is that doing more things can make work more interest ingvariety isone of the core job dimensions that affect how people respond to their work.Variety in jobs permits a change in pace, a change in act ivi ty , and potential lyeven a change in the people with whom one comes in contact , and each ofthese forms of variety can make work life more challenging. Beyond itsmotivational effects, having people do mult iple jobs has other importantbenefi ts . One is keeping the work process both transparent and as simple aspossible. If people are expected to shift to new tasks readily, the design of thostasks has to be straightforward enough so they can be learned quickly. Asecond, somewhat related benefit is the potential for newcomers to a job to seethings that can be improved that experienced people don 't see, simply becausethey have come to take the work process so much for granted.Multiskilling is also a useful adjunct to policies that promise employmentsecurity. After all, it is easier to keep people at work if they have multiple skilland ca n do different thin gs. By the sam e token, ma intain ing em ployment levelsometimes compels organizations to f ind new tasks for people, often withsurprising results . When Mazda, the Japanese automobile manufacturer ,suffered a decline in business in the 1980s, rather than laying off factoryworkers, it put them to work selling cars, which, in Japan, are often sold doorto door. At the end of the year, when awards were presented to the bestsalespeople, the company discovered that the top ten were al l former factoryworkers. They could explain the product effectively, and of course, whenbusiness picked up, the fact that factory workers had experience talking tocustomers yielded useful ideas about product characterist ics.At Lechmere, a retai l chain owned by Dayton-Hudson, the company

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wears ablue smock. There areno reserved places inlot.

experimented with cross-training and utilization of employees at a new store inSaras ota, Florida. The store offered the workers raises bas ed on the number ofjobs they learned to perform, a variant of a pay-for-skill plan. The workforce,composed of 60% full-time employ ees ra ther than the 30% typical for the chain,was substantially more productive than in other stores. "Cashiers areencouraged to sell records and tapes. Sporting goods salesmen get tutoring inforklifts. That way Lechmere can quickly adjust to changes in staffing needssimply by redeploying existing workers. The pay incentives, alon g w ith theprospect of a more varied and interesting workday, proved valuable lures inrecruiting . " Symbo lic EgalitarianismOne important barrier to decentralizing decision making, using self-managedteams, and eliciting employee commitment and cooperation is the symbols thatseparate people from each other. Consequently, it is not surprising that many othe firms that are known for achieving competitive advantage through peoplehave various forms of symbolic ega litarianism wa ys of signa ling to bothinsiders and outsiders that there is comparative equality and it is not the casethat some think and others do. At NUMMI, the executive dining room waseliminated, and everyone eats in the same cafeteria. Everyone wears a bluesmock. There are no reserved places in the employee parking lot.Communication across levels is greatly enhanced by the opportunity to interactand meet in less formal settings. This means that senior management is morelikely to know what is actually going on and be able to communicate its ideasmore directly to everyone in the facility. The reduction in the number of socialcategories tends to decrease the salience of various subdivisions in theorganization, diminishes "us" versus "them" thinking, and provides more of asense of everyone working toward a common goal. This egalitarianism makescross-movement easier because there are fewer status distinctions to beovercome. At NUMMI, there is only one classification for Division 1 personnelcompared to more than 80 previously. The number of skilled tradesclassifications shrank from 18 under the old General Motors systems to 2.^'Egalitarian symbols come in many forms. In some organizations, it isdressfew who have worked in a manufacturing facility have not heard thephrase "the suits are coming" when people from headquarters, typically moreformally dressed, arrive. Physical space is another way in which common fatecan be signaled, or not. The CEO of Solectron, a contract manufacturer that wonthe Malcolm Baldrige award, does not have a private office, and neither doesthe chairman. In contrast, John DeLorean's graphic description of thefourteenth-floor headquarters for General Motors is one of hushed, quiet officesreached by a private elevator that was securedin other words, executives cutoff from the rest of the organization.^^Although symbolic egalitarianism would seem easy to implement, theelimination of status symbols is often one of the most difficult things for acompany to do. A friend bemoan ed the fact that just as h e had reache d amanagerial level that entitled him to use a private dining room, havepreferential parking, and occupy a larger office, his employer embarked on atotal quality movement and eliminated all of these perquisites.Wage CompressionAlthough issues of wage compression are most often considered in terms of

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hierarchical compression, and particularly CEO pay relative to that of others,there is a horizontal aspect to wage compression as well. It can have a numberof efficiency-enhancing properties for organizations.It is important to remember that wage compression is distinct from incentivepay. Incentive pay simply means that people are rewarded, either individuallyor in groups, for their performance. These rewards can be large, producing widvariation in salaries, or small, producing substantially less variation. It is alsoimportant to recognize that incentive payparticularly when applied to largerunits such as work groups, departments, or the entire organizationcan eitherreduce or increase the wage dispersion that would otherwise exist. Mostgain-sharing and profit-sharing programs actually reduce pay dispersion,although they need not do so.When tasks are somewhat interdependent and cooperation is helpful foraccomplishing work, pay compression, by reducing interpersonal competitionand enhancing cooperation, can lead to efficiency gains.^^ Furthermore, largedifferences in the allocation of organizational rewards can motivate people toachieve these rewards. Although increased motivation can produce greaterefforts, large differences in rewards can as readily result in excessive time andenergy spent on ingratiating oneself with one's supervisor or trying to affect thcriteria for reward allocation.^'* By this reasoning, a more compresseddistribution of salarie s can actually produce higher overall performance, asthere is less incentive for individuals to waste their time on gaming the systemTo the extent that wages are compressed, pay is likely to be deemphasized inthe reward system and in the organization's culture. This has some obviouseconomic benefitspeople are not constantly worrying about whether they arecompensated appropriately and attempting to rebargain their salaries. Ade-emphasis on pay can also focus attention on the other advantages oforganizational membership such as good colleagues and work that isinteresting and meaningful. There is a literature in psychology that suggests wattempt to figure out why we are doing what we are by looking at ourselves asan outside observer would.^^ If we see we are very well paid, perhaps on acontingent basis, for what we do, we are likely to attribute our behavior to theeconomic rewards. If, however, we are not particularly well paid, or if pay isless salient, and if it is distributed on a less contingent basis (which will makeit less salient), then we are likely to attribute our behavior to other, moreintrinsic factors such as the inherent enjoyment of the work. In other words,being paid in a contingent fashion for what we do can actually undermine ourintrinsic interest in and satisfaction with that activity.^^ Thus, pay compressionby helping to de-emphasize pay, can enhance other bases of satisfaction withwork and build a culture that is less calculative in nature.Promotion from WithinPromotion from within is a useful adjunct to many of the practices described. Itencourages training and skill development because the availability ofpromotion opportunities within the firm binds workers to employers and viceversa. It facilitates decentralization, participation, and delegation because ithelps promote trust across hierarchical levels; promotion from within meansthat supervisors are responsible for coordinating the efforts of people whomthey probably know qu ite well. By the sam e token, those b eing coordinatedpersonally know managers in higher positions. This contact provides socialbases of influence so that formal position can loom less important. Promotion

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from within also offers an incentive for performing well, and although tied tomonetary rewards, promotion is a reward that also has a status-based,nonmonetary component. Perha ps most important, it provides a sen se offairness and justice in the workplace. If people do an outstanding job butoutsiders are being brought in over them, there will be a sense of alienationfrom the organization. One other advantage of promotion from within is that ittends to ensure that people in management positions actually know somethingabout the business, the technology, and the operations they are managing.There are numerous tales of firms managed by those with little understandingof the basic operations, often with miserable results. David Halberstam's historyof Ford Motor tells how finance took control of the company. Not only were thesepeople not "car men," they knew little about automobiles, technology,production processes, or the marketanything that could not be conveyed viastatisticsand had little interest in learning. ^ The problem with managingonly through statistics is that without some understanding of the underlyingprocesses that produce the measures, it is likely that managers will either focuson inappropriate measures or fail to fully comprehend what they mean.By contrast, at Lincoln Electric, almost everyone who joins the company learnsto weldLincoln's main product is, after all, arc welding equipment.Graduation from the welding program requires coming up with some innovationto the product. At Nordstrom, even those with advanced degrees start on thesales floor. Promotion is strictly from within, and when Nordstrom opens a newstore, its key people are recruited from other stores around the country. Thishelps perpetuate the Nordstrom culture and values but also provides assurancethat those running the store know what they are doing and have experiencedoing it the Nordstrom way.Taking the Long ViewThe bad news about achieving some competitive advantage through theworkforce is that it inevitably takes time to accomplish. By contrast, a newpiece of equipment can be quickly installed; a new product technology can beacquired through a licensing agreement in the time it takes to negotiate theagreem ent; and acquiring c apital only requires the successful conclusion ofnegotiations. The good news, however, is that once achieved, competitiveadvantage obtained through employment practices is likely to be substantiallymore enduring and more difficult to duplicate. Nevertheless, the time requiredto implement these practices and start seeing results means that a long-termperspective is needed. It also takes a long time horizon to execute many ofthese approaches. In the short term, laying off people is probably moreprofitable compared to trying to maintain employment security; cutting trainingis a quick way to maintain short-term profits; and cross-training andcross-utilization may provide insights and innovation in time, but initially, theorganization foregoes the advantages of more narrow specialization and theimmediate proficiency achieved thereby.What determines an organization's time horizon is an important issue, but oneoutside the scope of this article. In general, however, there is some evidencethat family ownership, employee ownership, or other forms of organization thatlessen the immediate pressures for quick earnings to please the securitiesmarket are probably helpful. Lincoln Electric is closely held, and the Nordstromfamily retains a substantial fraction of the ownership of that retailer. NUMMIhas Toyota as one of the joint venture partners, and Toyota's own plans for thefacility virtually dictate that it take a long-term view, which is consistent with

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its culture and tradition. Again, the Walton family's ownership position inWal-Mart helps ensure that the organization takes a long view of its businessprocesses.It is almost inconceivable that a firm facing immediate short-term pressurewould embark on activities that are apparently necessary to achieve somecompetitive advantage through people. This provides one explanation for thelimited diffusion of these practices. If the organization is doing well, it may feno need to worry about its competitive position. By the same token, if theorganization is in financial distress, the immediate pressures may be too seveto embark on activities that provide productivity and profit advantages, but onafter a longer, and unknown period of time.Measurement of the PracticesMeasurement is a critical component in any management process, and this istrue for the process of managing the organization's workforce. Measurementserves several functions. First, it provides feedback as to how well theorganization is implementing various policies. For example, many organizatioespouse a promotion from within policy but don't fulfill this objective. Often,this is because there is no systematic collection and reporting of informationsuch as what percentage of the positions at given levels have been filledinternally. A commitment to a high-wage policy obviously requires informatioas to where in the relevant labor market the organization's wages fall. Acommitment to training is more likely to be fulfilled if da ta ar e collected, notonly on the total amount spent on training but also on what types of employeehave received training and what sorts of training are being delivered.

It is no accident thatcompanies seriouslycommitted toachieving competitiveadvantage throughpeople makemeasurement of theireiforts a criticalcompon ent of theoverall process.

Second, measurement ensures that what is measured will be noticed. "Out ofsight, out of mind" is a principle that applies to organizational goals andpractices as well as to people. One of the most consistent findings in theorganizational literature is that measures affect behavior.^ Most people will trto succeed on the measures even if there are no direct, immediateconsequences. Things that are measured get talked about, and things that arenot don't.It is no accident that companies seriously committed to achieving competitiveadvantage through people make measurement of their efforts a criticalcomponent of the overall process. Thus, for example, at Advanced MicroDevices' submicron development facility, management made how people weremanaged a priority and measured employee attitudes regularly to see whethethey were "achieving the vision." One survey asked questions such as: Howmany teams are you on in your own department and with members of otherdepartments? How many hours per week do you spend receiving training andtraining others? The survey also asked the extent to which people agreed ordisagreed with statements such as: there is problem solving at all levels in mwork group; people in my work group are e ncouraged to take the initiative; aspirit of teamwork exists in our work group.In a world in which financial results are measured, a failure to measure humaresource policy and practice implementation dooms this to second-class statusoversight, neglect, and potential failure. The feedback from the measurementsis essential to refine and further develop implementation ideas as well as tolearn how well the practices are actually achieving their intended results.

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Overarching PhilosophyHaving an overarching philosophy or view of management is essential. Itprovides a way of connecting the various individual practices into a coherentwhole and also enables people in the organization to persist and experimentwhen things don't work out immediately. Moreover, such a philosophy makes iteasier to explain what the organization is doing, justify it, and mobilize supportfrom internal and external constituencies. Most simply put, it is hard to getsomewhere if you don't know where you are going. In a similar fashion,practices adopted without a deeper understanding of what they represent andwhy they are important to the organization may not add up to much, may beunable to survive interna l or external problems, and are likely to produce lessthan stellar results.Many companies that seek competitive success through their people andpractice a number of approaches really began with some underlying principlesor else developed them early in the process. Levi Strauss's quality enhancementprocess began with the understanding that "manufacturing for quality andspeed meant breaking the old paradigm s," turning the culture upside down andcompletely reorienting the parameters of the business.^^ The company and itsmanufacturing senior vice president explicitly articulated the underlyingassumptions of the old way of thinking and the new, as illustrated in Table 1.Some Words of CautionIt would be difficult to find a single company that does all of these things orthat does them all equally well. Some successful firms have tended to do ahigher percentage, and it is useful to grade one's own company against theoverall list. Nevertheless, there are few companies that doeverything. W hichpractice is most critical does depend in part on the company's particulartechnology and market strategy.A second important caution is to recognize that it is possible for a company todo all of these things and be unprofitable and unsuccessful, or to do few ornone of them and be quite successful. How? These factors are almost certainlyrelated to a company's ability to achieve competitive success through itsworkforce. But although that may be an important basis of success, and onethat is even increasing in importance, it is clearly not the onJy bas is of success.

Table 1New versus Old Parad igms at Levi StraussOld Paradigm New Paradigm

Economy of scale as basis for improvement Economy of time as basis for improvementlogic logicQuality involves trade-offs Quality is a "religion;" no compromiseDoers are separate from thinkers Doers must also be thinkersAssets are things Assets are peopleProfit is the primary business goal Customer satisfaction is the primary-

business goalHierarchical organization; goal is to please Problem-solving network organization; goalthe boss is to please the internal or externalcustomerMeasure to judge operational results Measure to help people make operationalimprovementsSource: Presentation by Peter Thigpen at the Stanford School of Business, February 26, 1991.

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IBM, for instance, has done many of these things and has built a skilled anddedicated workforce. That in and of itself, however, could not overcome aproduct strategy that overemphasized large, mainframe computers. PeopleExpress, now defunct, also built a strong culture, selectively recruited, and usinnovative compensation and work organization strategies to build f lexibil i tyand productivity in its operations. Indeed, it was one of the lowest-costproviders of airline services. But this cost advantage could not overcome otherproblems, such as the founder's edifice complex, which resulted in too-rapidexpansion, acquisi t ion of Frontier Airl ines and becoming seriously f inancial lyoverleveraged, and a growth rate that was not sustainable given the f irm'sfundamental human resource policies. In focusing on managing the workforcehighlight only one dimension of the several that determine corporateperformance.By the sa m e token, it is pos sible to be successful, parti cula rly for a wh ile, d oinone of these things or even their opposite. Frank Lorenzo took over ContinenAirlines an d put it into bank ruptcy in 1983 to brea k its union c ontr acts . To sayhe played hardball with his employees was an understatement. Lorenzo 'sstrategy was founded on financial and negotiating skills, not on his workforceFor a while, these stra tegies work ed although Contine ntal lost $161 mill ion 1983, by 1985 it ea rne d ab out $60 million, a very rapid turn aro und . Sim ilarly,Carl Icahn at Trans World Airlines made money, for a while, taking strikes anfighting with his workforce, seeking success through financial strategies.Neither airline succeeded in the long run, but in the short run, cutting wagesand benefi ts , cutt ing employment levels, and managing through fear canproduce temporary results .A third word of caution is that these pra ctices ha ve potential d ow nsid es a s weas benefi ts and are not necessari ly easy to implement, part icularly in aone-at-a-t ime fashion. One obvious problem is that they al l necessari ly entai lmore involvement and responsibility on the part of the workforce. There aremany employees who would rather work only with their bodies and check theminds at the doorparticularly if that is what they have become accustomedtoand instituting work practices that entail more effort and involvement maforce turnover. These practices may be resisted by others in the company aswell . The reader is cautioned that implementat ion issues loom large, regardleof how sensible the practices may be.

Endnotes ' Michael E. Porter, Compefifive Advanfage(New York, NY: Fr ee Pr ess , 1985), 1.2 Ibid., 4.* "Investment Winners and Losers," Money,October 1992, 133.* Bridget O'Brian, "S outhwe st Airlines is aRare Air Carrier: It Still Makes Money," Th eWall Street Journal, October 26, 1992, Al.^ James Ca mpb ell Quick, "Crafting anOrganizational Culture: Herb's Hand atSouthwest Airlines," Organizational Dynamics21, Autumn 1992, 47.^ O'Brian, op.cif., A7.' Ouick, op.cif., 50. O'Brian, op.cif., A l.^ Ibid., A7.' Clair Brown, Michael Reich, and DavidStern, "Becoming a High Performance Work

Organization: The Role of Security, EmployeInvolvement, and Training," Working Paper 4Institute of Industrial Relations (Berkeley, CAUn iversity of Califo rnia , 1992), 3." Frank L. Schmidt and John E. Hunter,"Individual Differences in Productivity: AnEmpirical Test of Estimates Derived fromStudies of Selection Procedure Utility," Journof Applied Psychology 68, 1983, 407-414.' Harry C. H andlin, "The Compa ny Builtupon the Golden Rule: Lincoln Electric," in BL. Hopkins and Thomas C. Mawhinney (eds.)Pay for Performance: History, Controversy, anEvidence (New York, NY: Haworth Press, 1992157.'^ "Nordstrom: Dissension in the Ranks?"Ca se 9-191-002 (Boston, MA: Ha rvard Bu sine sSchool, 1990), 7.

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" George Akerlof, "Gift Exchange andEfficiency Wage Theory," American EconomicReview 74, 1984, 79-83.'^ James W. Near, "Wendy's Successful 'MopBucket Attitude'," The Wall Street Journal, April27, 1992, A16.'^ Ibid." Handlin, op.cif., 159." Joseph R. Blasi and Douglas L. Kruse, Th eNew Owners (New York, NY: Harper Business,1991), 257.'^ Corey M. Rosen, Katherine J. Klein, andKaren M. Young, Employee Ownership inAmerica (Lexington, MA: Lexington Books,1986).^ Richard T. Pa sca le, "N ordstrom, Inc.,"unpublished case (San Francisco, CA: 1991),Exhibits 7 and 8.^' David I. Levine and Laura D'Andrea Tyson,"Participation, Productivity, and the Firm'sEnvironment," in Alan S. Blinder (ed.). Payingfor Productivity: A Look at the Evidence(Washington, DC: The Brookings Institution,1990), 183-243.^ J. Richard Hackman and Greg R. Oldham,Wort Redesign (Reading, MA: Addison-Wesley,1980).^ Tho ma s F. O 'Boyle, "W orking Togethe r: AManufacturer Grows Efficient by SolicitingIdeas from Employees," The Wall Street Journal,June 5, 1992, A4.^ Barn aby Fe der, "At Mo nsanto, Team workWorks," New York Times, June 25, 1991, Cl.^ Ba rbar a Pre sley Noble, "An Approach w ithStaying Power," New York Times, March 8,1992, 23.^ Brian Dumaine, "Who Needs a Boss?"Fortune, May 7, 1990, 54." Ibid., 55.^ Pau l S. Adler, "The 'Lea rning B ureauc racy':

New United Motor Manufacturing, Inc.," InBarry M. Staw and Larry L. Cummings (eds.).Research in Organizafionai Behavior(Greenwich, CT: JAI Press, in press), 32.^ ' Helene Cooper, "Carpet Firm Sets Up anIn-House School to Stay Competitive," The WallStreet Journal, October 5, 1992, Al, A6.^ Norm Alster, "What Flexible Workers CanDo," Fortune, Feb ruar y 13, 1989, 62.=' Adler, op.ciJ., 17.'^ J. Patrick Wright, On a CJear Day You CanSee General Motors (Grosse Pointe, MI: WrightEnterprises, 1979).^ Edward P. Lazear, "Play E quality andIndustrial Politics," Journal of Political Economy97, 1989, 581-580.^* Paul Milgrom and John Roberts, "AnEconomic Approach to Influence Activities inOrganizat ions ," American Journal of Sociology94, 1988, S154-S179.^ Daryl J. Bem, "Self-Perception Theory," inLeonard Berkowitz (ed.). Advances inExperimentaJ Sociai Psychoiogy, vol. 6 (NewYork, NY: Ac ade mic P res s, 1972), 1-62.^ Mark R. Lepper and David Greene,"Turning Play into Work: Effects of AdultSurveillance and Extrinsic Rewards onChildren's Intrinsic Motivation," Journal ofPersonality and Social Psychology 31, 1975,479-486.^' David Halb ersta m, The flecioning (NewYork, NY: William Morrow, 1986).^ See, for example, Peter M. Blau, Th eDynamics of Bureaucracy (Chicago, IL:University of Chicago Press, 1955); and V.F.Ridgway, "Dysfunctional Consequences ofPerformance Measurement," AdminisfrafiveScience Quarferiy 1, 1956, 240-247.^ Presentation by Peter Thigpen at StanfordGraduate School of Business, February 26, 1991.

Jeffrey Pfeffer is Thomas D. Dee II Professor of Organizational Behavior at the Graduate School ofBusiness, Stanford U niversity. He is the author of more than 90 articles a nd six books, inclu dingManaging with Power (Harvard Business School Press, 1992), Organizafions and Organization Theory(Pitman, 1982), is a winner of the Terry Award, and is co-author of The External Control ofOrganizations (Harper, 1978). He has won the Irwin Award for Scholarly contributions tomanagement , among other honors .

Executive CommentaryToru Hatano, Nomura Research InstituteThe author points to thir teen pract ices for managing people, some of which arecoincidenta l wi th Japanese management pract ices . These inc lude employmentsecuri ty, employee ownership, cross-ut i l izat ion and cross-training, t raining andski l l development , wage compression, and promotion from within. Theremaining pract ices are not widely accepted by Japanese companies but shouldnot be considered insignif icant . In my opinion, we need to consider twoque st ions w hen app lying Pfeffer's framework to Jap an ese co rporat ions. First,

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sustainable competitive advantage through people

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