 Hello, and welcome to the latest edition of the MIT Sloan Expert Series, which provides an inside look at some of the most exciting news and research coming out of MIT Sloan. Today my guest is Professor Zainab Tone, author of The Good Job Strategy, how the smartest companies invest in employees to lower cost and boost profits. Her book, which is based on research on the retail industry, shows how changes in workplace design, including raising employees' wages and giving them more control and responsibility over their work, translates into higher profits for companies and superior returns for investors. Welcome Professor Tone, thank you. Before we begin, I want to remind you, our viewers, that we'll be taking your questions live on social media during the second half of our program. Please use the hashtag MIT Sloan Expert to pose your questions to Professor Tone. Let's get started. Great. The premise of your book is that happy, productive, well-paid employees improve the bottom line for companies. The New York Times called it a radical and yet sensible idea. Yeah, so typically a lot of companies see their employees just as a cost, something that reduces profit. But what I have found in my research is that if a company is smart about how it deploys their employees, then employees could be a source of profit rather than a driver of cost. So let's back up for a second. How did you get interested in this topic? So my field is operations management, and I started my career looking at retail supply chains. I joined a group of researchers that looked at how they can optimize retail supply chains, help retailers make better, merchandise planning decisions so they can improve their profits. What we found in our research is that while retailers did a pretty decent job getting the right product to the right store at the right time, they dropped the wall in the last 10 years of their supply chain, and their stores were full of problems. So give me some examples of what these problems were. Yes. So oftentimes products will be in the back room and not on the selling floor and customers will experience a stock out. We thought retailers had great data, but their data were largely inaccurate or promotions were not carried out. So what we found in our research is that all these operational problems had a huge impact in store sales and their profits. And of course the obvious question then was, why do these problems happen all the time? Because it was so prevalent across so many different companies and so big. And what we found was that stores that had more employee turnover had more problems. Stores that were understaffed, they just didn't have enough people to get all the work done, had more problems. Stores that just didn't have enough training had more problems. And in fact we saw that retailers were operating in what I call a vicious cycle. But this is a very expensive problem. It's a pattern you saw over and over again. Yes, it's a pattern that you see over and over again and it gets worse because the vicious cycle starts with the mentality that people are just at cost. And then the companies try to minimize that cost. And that means having too few people, so hiring too few employees and not investing in their quality in terms of training, wages, etc. Those lead to operational problems. Operational problems lead to lower sales and profits. And of course when sales are lower, companies can't invest in their people because they were budget shrink and the vicious cycle continues. The thing is when you talk to executives, what you would hear from them was, this is the only way that we can offer the lowest prices to our customers. If we want to offer the lowest prices, we must offer bad jobs and we must offer bad service. But do they have a point in the sense of if they were to raise wages and make life better for their employees, that cost would have to go on to the customer? They absolutely do not have a point. Leaving employees behind with bad jobs is a choice, it's not a necessity. And the best proof of that is that there are a bunch of companies out there that are simultaneously offering the lowest prices to their customers, good jobs to their employees and great returns to their investors. So give me some examples from your book. So my first research site was Mercadona, Spain's largest supermarket chain. They have over 1,300 stores, more than 20 billion euros in sales, huge company, and they're the low-cost retailer. So they have very low prices for their customers, good service, but they also offer good jobs. So if you work at Mercadona as a full-timer, you start as a full-timer, you get almost double the minimum wage in Spain. And Mercadona offers their employees their schedules one month in advance. They work in predictable shifts. And Mercadona spends 5,000 euros for every new employee in training. So a huge investment in people, at the same time offering low prices and great returns to shareholders. And it's training, but you also describe it in the book as cross-training. Can you talk about that? Yes, absolutely, that is key to training. So if you think about retail or if you think about any service environment for that matter, there is a lot of variability in customer traffic. So customers come in different patterns. So if you have a cashier, for example, and all she or he knows how to do is to operate the cash register. When you have no customers, that person will be idle, not doing anything. So Mercadona, what they do is they make that cashier, shell merchandise when there are no customers, or order merchandise, or clean the stores, or do other tasks. And that way, even when there are no customers, they can always be very productive. In that way, they know the operations better, so they can better help the customer. So I see how it improves Mercadona's existence and its productivity. But what does that mean for the customer? Yeah, it means great service for the customer. But I will also identify that it's also great for the employee. So what I find in Mercadona is that they make a bunch of operating decisions that are good for the investors, good for the customer, and great for the employee. I'll give you the example of cross-training. So we talked about how it affects productivity and customer service. But one of the other things is that when you are cross-trained to perform a variety of tasks, your job is a lot more exciting than just operating cash register or just shelving merchandise. So a task variety is associated with higher motivation. The other thing is that when your schedule doesn't have to vary so much depending on the customer traffic, now you can have a much more predictable work schedule. And that makes your life so much better. To raise your family, to do all the other things. To go to school, to do whatever you want to do, absolutely. Another example you cite in your book is the Tulsa Oklahoma-based Quick Trip, which is a gas and convenience store chain. This is one of my favorite examples. First of all, this is like 7-Eleven. And convenience stores are not necessarily seen as excellence. But this company, just like Mercadona, offers low prices, great service, quick in and out. I mean, they don't have like a red carpet for you in a convenience store. The CEO said to my students, that will be kind of creepy if you did that. And great performance. Their per store profits the year that I studied them were 89% higher than the top quartile in their industry. Wow. And their shrink is half the industry average, very profitable company. Has been in the Fortune's 100 best places to work for 13 years in a row. And it pays employees well. Yes, it pays employees really well. If you are a store manager, you could make, if you're hired as an assistant manager, you could make as much as $40,000. But please make no mistake that this is not just about pay. And hopefully we'll get into this, but my theory is not just you pay your employees more and then the performance is so much better. If it was that easy, a lot more companies would be doing it. It's a lot more complicated than that. You also talk in your book about a human-centered operation strategy that both Mercadona and Quicktrip have. Can you talk about the characteristics of this? Yes, absolutely. So when I looked at both Mercadona and Quicktrip, they are so different from one another, right? One is in Spain, one is in Tulsa, Oklahoma, lots of other states obviously. The types of products they carry is different. Their employees are different. Their customers are different. So the question I asked was, how are they able to offer low prices, good jobs, and great returns at the same time? And I saw that these companies not only invested in their workers, which is one thing that they do, but also they created, they ran their entire operations in a way that made their employees extremely productive and that put their employees in the center of their success and allowed their employees to continuously improve. I'll give you one example. So, and the choices that these companies make are very different than their competitors. I'll give you this example. If you go to a typical supermarket, you won't see a lot of employees around. Because companies are trying to minimize their labor costs. So they want to have as few people as possible to get as much work done as possible. But if you go to a Mercadona store, Mercadona deliberately has more people than the expected workload at the store. Now you can say, how can this be good for them, right? Because when a store is understaffed, the earlier problems that I talked to you about, products not being on the shelves, data being inaccurate, those problems happen, or the checkout line is too long, or the stores are not clean and customers are frustrated. So Mercadona Quick Trip makes sure that those problems don't happen. But at the same time, by having enough people, they allow their employees to have time to be enrolled in improvement so that they can reduce costs everywhere else in the system. So they invest in their people, but they make these types of choices that allows their employees to contribute a lot more to both sales and reducing costs. And leadership is looking for ideas for improvement up and down the chain. Absolutely. There's a flow up and down the chain, and that is so important. And that's why I call it human-centered. Because this system only works if you have great people, right? You can empower your employees, you can give them time, but if you don't have great people, you won't be able to get those ideas, but the system requires those great people. In your book, you talk about Mercadona and Quick Trip, but you also talk about other companies that do this. And this is Southwest Airlines, UPS, Zappos, In-N-Out Burger, Trader Joe's, and Costco. The MIT Sloan Expert Series recently spoke to Jim Senegal, who is the founder and former CEO of Costco. Let's roll that clip and hear what he had to say. Part of the philosophy has been in our business, that if you go out and hire good people and provide good jobs and good careers and good opportunities to advance, good things will happen in your business. We always felt that we wanted to promote from within the company and to create careers for people. But it wasn't just a job, it was also, if they chose, an opportunity for them to advance in the business and to grow in the business. And you do that by teaching, you know? And in our view, once you become a manager, if you don't understand that teaching is 90% of your job, you just don't get it. If you do the right job of hiring and if you do the right job of teaching, they wind up doing it better than you would do it. And that's always been our philosophy. There is an enormous amount of pressure on a short-term basis. You're always judged by the last quarter. How well did you do and how are the numbers? And if you didn't do well the last quarter, everyone thinks the world's falling apart. Obviously, business is not like that. I mean, business doesn't just go on that angle. It's ups and downs in the course of conducting your business. And so you have to understand that. And you've got to recognize that, as I mentioned to you, we were trying to build a business that would be here 30 and 40 and 50 years from now. We thought we owed that to all the stakeholders of our business. Thought we owed it to our employees. We thought we owed it to our customers to be consistent. We thought we owed it to all of our suppliers so that they could count on this as well. It's a people business. Our business is a people business. If you buy the premise for a second that Costco is the low-cost provider of merchandise. And I hope you will buy that premise. And if we are also paying the best wages and have the best benefit plan and can be profitable, we must be getting better productivity as a result of what we're doing. And we think that's true. We think that when you hire good people, you're going to get better productivity and you get what you pay for. He makes it sound so easy. Yes, what is not so easy. So if a typical supermarket chain or a typical retailer took Costco's employees, a set of employees from Costco stores, paid them the same amount and transported them into their environment, those same employees won't be as productive. Those employees won't be able to contribute as much. They won't have the same performance results because Costco, just like Mercadona, just like QuickTrip, has designed an entire operating system that increases people's productivity. And also, Costco is able to create a high-performance system. Costco is able to keep an eye laser-focused on the customer and resist short-term temptations from Wall Street or from other investors. So doing all that, creating that culture of excellence is so hard. Paying people more is the easy part. This cultural transformation, are you seeing signs that it is happening elsewhere? Yeah, we have already, the cultural transformation is huge. We've already seen it happen in a large industry, which is the auto industry. That industry started using people as interchangeable parts, but then we found out that actually, if you invest in people, if you invest in processes, then you could create a much better system. I hope that we will see the same amount of transformation in the service industries and the economy is so ready for that. You see an election cycle right now. I don't want to get into the elections, but people are angry. And there's a reason for their anger because the median wages have not been increasing all that much for them. And we're seeing movement on the policy front. We're seeing movement on the policy front, but we desperately have to find a way to make the jobs and service jobs better jobs. Let me just give you a glance of how bad the jobs are and how big they are. So the number one employer in terms of size is retail in the United States. The number one occupation is retail salespeople. The number two occupation in terms of size is cashiers. And then the number three is food preparation and service workers. The median wage of a retail salesperson was $10.13 in 2014. The median wage for a cashier is a lot lower than that, $9.15 or so. And it's not just the very low hourly wages that these employees get. In addition to that, they have very few hours and their schedules are so unpredictable. Most retail employees get their schedules one or two weeks in advance and they change in the last minute with very little notice. Think about having a life. Think about going to school or taking care of your family when your schedule changes so much. And yes, on the policy front, we are seeing some changes, both on the schedules front and on minimum wage. To talk more about the policy front, the MIT expert series recently spoke with Secretary of Labor Tom Perez. Let's hear what Secretary Perez had to say about the good job strategy. Roll that clip. Take care of all your stakeholders and actually your shareholders are quite well served. When workers have a voice in the workplace, that's good for everyone. And voice can take many forms. Market basket is a remarkable example here in New England of it's a non-union shop. They've created a corporate culture that really had everybody feeling like they were one. What's really important, I think to understand is these actions are not actions of charity. It's not corporate social responsibility. This is enlightened self-interest. And when we talk about inclusive capitalism, we're really talking about the enlightened self-interest, understanding that the high road is indeed the smart road. I mean, the challenge here is to make sure that this is the norm. One of the best IPOs over the last couple of years has been Shake Shack. And they've debunked the notion, the myth, that the only way to run a burger joint is to mistreat your employees. The most important thing you need is customers. And when people have greater wages, they spend more. I mean, Henry Ford figured that went out a little over a century ago. And that led to shared prosperity. The stakeholder model of governance is smart governance. It's smart for your shareholders. It's smart for your workers. It's great for your community. It's great for your customers. And we've got to continue to really spread the gospel. And that's why I'm so appreciative of the work that Zaynep has done, because she's been the facilitator in meetings we've had at the White House. I see a movement building. And it's an exciting movement. And we've got to keep beating the drum. We've got to make sure the pipeline of students at places like Sloan, at every business school across this country, walks out with an understanding that they are at the forefront of the most important piece of unfinished business in America, which is building shared prosperity, making sure that wherever they go, they understand that the stakeholder model of governance is the smart model of governance. Secretary Perez talked about the importance of the next generation. What are some things that make you hopeful about the future? First of all, Secretary Perez's office, the Labor Department, has been doing some great work. And we're seeing some policy changes. We're seeing higher minimum wages in certain states. We are seeing that schedules at work that's introduced by Senator Warren. But I think policy aside, what we need is business leaders to change. It's going to be up to the business leaders to decide whether we're going to have an economy with good jobs or not. And I am so hopeful about the next generation of business leaders. I see them in my classrooms every time I step into the class. The millennials are excited to be part of something bigger than just making money. And they seem to want to create or lead businesses and change how we think about what it means to run a good business. On the other side, I'm seeing companies reach out to me, expressing an interest to change from very large companies to startups. I'll give you one example. Just last week in my classroom, we did a case about managed by Q. Secretary Perez mentioned them in his remarks as well. It's a startup that does office cleaning. And managed by Q tries to invest in their workers. They pay a lot higher than the minimum wage. They invest in training. They empower their employees so that they could be a driver of company sales and profits. So they're doing lots of great things. And it's a young startup. And so this on-demand office cleaning company managed by Q, they just recently raised a lot of money, too. They recently raised $25 million from Google Ventures and others. And before then, they raised over $50 million. So there is money out there from investors to investing companies like this. But actually, let's talk about investors for a moment. We've been talking about the good job strategy from the point of view of companies trying to initiate these changes. What about investors who are looking for opportunities to invest in companies that are doing this? Yeah, I will say investors are often shown as barriers to implementing a good job strategy. And if you asked me a year or two ago, I would have said, yes, they are big barriers to implementing the strategy. But now I've been talking to investors. I've been talking to a bunch of CEOs. And I think using investors' short-term expectations as an excuse not to follow the good job strategy is just an excuse. There are a group of investors who want to find companies that are creating great value. The good job strategy is not just good for workers. It's good for investors. You look at the performance of Costco versus their competitors. You see that the shareholders have done incredibly well. But one of the challenges from the investors' perspective is that there is no data. You can't identify which companies are following a good job strategy, which ones are able to reuse their employees very productively. And right now, actually, my next phase of research, part of it is to try to influence investors by providing them the kind of data that they need to make those decisions. So I just came up with a group of students with a good job score. We started with food retail, publicly listed food retailers. But it's the ranking of which food rate is goodjobscore.com for your viewers. And it looks like 14 publicly listed food retailers and ranks them on how well they're creating value for their customers, employees, and investors. And you hope to expand the good job score to other sectors? Absolutely. Absolutely. Another project that we're looking at right now is to see if there is an opportunity to create a good job certification to be able to certify companies that offers good jobs. All early stage projects, but hopefully, will make a difference both for investors and for executives to show which ones are changing and to celebrate the changes in the right directions. Thank you so much. Now we're going to turn to questions from you, our viewers. We've already had a lot of questions coming in fast and furiously on Twitter here. Again, if you have a question for Professor Ton, please use the hashtag MIT expert. But let me just go with some of the ones we've seen. When you research the good job strategy, did you find any employees at the model that didn't believe in the system? That is from Paul Critchley. So he says employees that didn't believe in the system, but I'm thinking it's also leaders who maybe didn't quite buy into it. Yeah, thank you, Paul, for your question. And it's a very important question because employee buying at all levels is incredibly important. And it's up to the leader of the organization to ensure that all their employees know what the ending goal is and everybody has both into the system. But I will give you one example. So two weeks ago, Jim Senegal, the founder of Costco, was in my class and one of the questions that we asked him was, if you had to convince one of your competitors that they should follow your approach, what would you tell them to do? What would be your advice? And first he said, I don't want to give them advice. But then he thought about it and he said, you have to really believe it. And that belief doesn't have to be just a gut feeling. There is a bunch of data out there to make a very compelling story. Right, right. Another question we got here, this is from BIFCXL. What role can government play in creating new pathways for low-skilled workers in the future workforce? So this is the legislative, you've already talked a little bit about schedules that work policies to raise the minimum wage, Obama administration yesterday, mandating overtime pay. And Secretary Hillary Clinton is talking about profit sharing, providing incentives for profit sharing. So all of these different things could act as constraints, get forced companies to change. But all the investment in the labor policy front, I think we need business leaders to change. Fundamentally, we need them to redesign their operations in a way that requires great people. And if we can't find those great people, we have to work in skills and all that type of training. But I think the problem we have right now is on the demand side, not on the supply side as much. Speaking of that, another good question that's coming in that says, it's possible that Quick Trip and Mercadona and Costco's success is due in part to hiring great people and best people then not available to the other company. So the question is, are they just getting all the good people in the labor pool and therefore they're not available to competitors? No, that's my short answer. But I'll give you, yes. And I will say I don't have data, empirical data to support this, but let me give you a couple of points, case points. So one of my favorite examples is a General Motors plant in Fremont, California that operated in 80s and it closed I think early 90s. And it was horrible for labor problems, production problems. They had very poor quality, very poor productivity and that plant ended up shutting down. A couple of years later, Toyota reopened that plant as a joint mentor with General Motors. It was called NUMIME. And together they hired the same workforce, kept the same union, transformed performance. Within two years, that plant became one of the most productive plants. So clearly it's not just about people, it's about how you manage the people, how you design your operations and how you think about continuous improvement. The other data point is that let's remember what these jobs are, right? So you don't have to go to college to thrive at Costco. You don't have to go to college to thrive at QuickTrip or Macadona. What we need is hardworking people and I would like to believe that there are a lot of hardworking people out there who can fill in these positions. And lastly, I have never heard any of the retail CEOs that are following this good job strategy say that, oh, we could not go into that city or we could not open a store in that location because there just weren't enough good people. I have never seen that. So let's not use excuse that there just aren't enough people and let's just change. And you know what? If you come to a point where there are so many good jobs that there just aren't enough people anymore, then we have a problem and then we'll work on the supply side. That's your next book, right? That's perhaps my next book, who knows. Another one is from Ascent of the Machines. What role, if any, has technology played in eroding the core American values of shared responsibility and prosperity? So my research hasn't focused as much on the role of technology on work or shared prosperity, but technology had played a critical role in the industry that I look at, retail industry. Because if you remember in late 90s there was a player called Amazon who entered this industry and kind of disrupted the industry. But now what we see is omnichannel retail as being very important and those companies that are able to thrive in omnichannel retailer as a retailer are gonna be the ones that will survive. And the omnichannel not only requires better technology and better processes, but it also requires better people. So it increases the demand on the stores and I think the more technology we have, the more we need better people to be able to use that technology productively. We have one more question and that is what are some future directions of your research? So I mentioned the good job certification and the good job score, but the other one that I'm working on is if a company is following the bad job strategy right now. The bad job strategy. The bad job strategy. So they're offering bad jobs right now. How do they get to good jobs? What does that transformation look like? What are the different steps that we could recommend to the CEO so the managers managing these companies to take? And that's what I'm working on right now. So it's quantifying the cost of offering bad jobs. So that whole transformation, the step one of the transformation is to get, as I think, Paul, the first question asked about the buy-in. So the first one is creating the buy-in in the organization. And one of the better ways to create that buy-in is to quantify how costly it is to follow the bad job strategy. And you can quantify costs in a bunch of different ways. You could look at the operational problems, quantify the cost of those operational problems, quantify how expensive it is to have low conversion rate and link all of these to bad jobs. And that is one thing that I am doing as we speak with a group of students. Thank you so much, Professor Tonnes. This has been a lot of fun talking to you. Thank you so much. And thank you for joining us. Her book, The Good Job Strategy, How the Smartest Companies Invest in Employees to Lower Costs and Boost Profit.