Wednesday, July 30, 2014

Market Basket and the Benefits of Low Employee Turnover

As the crisis at Massachusetts-based supermarket Market Basket rages on, it's worth noting that Consumer Reports just ranked the retailer as one of the top 10 supermarkets in the United States.  I also found an article this week on quite interesting, because it explored the question of how Market Basket could keep prices so low while offering employees compensation and benefits that exceeded those provided by rivals in the industry.  The article, by Adam Vaccaro, cites low employee turnover as one key to the firm's success.  I thought that I would do a bit of research on the economic cost of high turnover.  I went to the Hay Group's website, since that firm has done a great deal of research on issues related to employee compensation.   The Hay Group examined the economic benefit of having a highly engaged workforce coupled with low employee turnover (the two obviously are related... if you have high engagement, you are likely to have low turnover).  Here is what they found:

Similarly companies with high levels of engagement show turnover rates at 40 percent lower than companies with low levels of engagement. However, companies that both engage and enable employees demonstrate a total reduction in voluntary turnover of 54 percent... For an organization with 20,000 employees and an annual voluntary turnover rate of eight percent, the cost of turnover is approximately $56 million (assuming an average salary of $35,000). Reducing the voluntary turnover rate by 40 percent would yield annual savings of $22.4 million. But reductions in turnover through high levels of engagement and enablement would yield savings of over $30 million annually, a difference of more than $7.5 million.  

The Hay Group research also shows that highly engaged employees are likely to far more productive.  As a result, the firm achieves substantial additional economic benefits.  What can firms do with these economic gains from the combination of high engagement, low turnover, and high productivity?   Certainly, they can pile up healthy profits.  However, in the case of a firm such as Market Basket, it appears that they were able to share that economic value with customers and employees as well.  Employees received solid compensation and benefits, while customers enjoyed low prices.  Of course, all of these gains are at risk if the Board cannot move to resolve the leadership crisis at the firm.  As of now, the workers are standing strong in support of their former CEO.  The Board continues to examine a potential sale, either to that former CEO or to another party.  

Tuesday, July 29, 2014

Weird Al: How Many Buzzwords Can You Cite In Four Minutes?

Thanks to Bryant University mascot Tupper the Bulldog for sending me this video via Twitter.  Weird Al Yankovic (remember him) has a new album that is immensely popular right now.  In this song, he pokes fun at corporate life, with all of its jargon and cliches. 

Monday, July 28, 2014

Do Entrepreneurs Do Better In Their Second Attempt at a New Venture?

Francine Lafontaine and Kathryn Shaw have conducted an interesting new study regarding entrepreneurship.   They chose to study whether entrepreneurs who failed in their first new venture did better the second time around.   The scholars examined retail entrepreneurs in Texas from 1990 to 2011.  Here is a summary of their findings, from an article by Allison Schrager in Business Week:

Over the 21-year-period, 2.4 million retail businesses opened and 2.2 million closed. Three out of every four were founded by first-time business owners.  Lafontaine and Shaw found that the Texas retailers were less successful than the national average for small businesses: One in four closed after a year; half after two. What happened next was telling. Of the first-time entrepreneurs whose businesses closed quickly, the overwhelming majority—71 percent—didn’t bother to try again. But the tenacious 29 percent who did were more likely to be successful the second, third, and even tenth time around. Somewhat paradoxically, their success rate increased with their number of past failures.

Interestingly, the article points out that these findings stand in stark contrast to the findings of a study conducted in the UK by Deniz Ucbasaran, Paul Westhead, and Mike Wright.   They found that serial entrepreneurs have a hard time learning from failure, though they note that people working on several ventures at the same time appear to be more successful .  Here is their explanation:

Psychological research suggests that strong emotions often prompt people to blame others or external events rather than themselves so that they can maintain some semblance of self-esteem and a sense of control. This “attributional bias” appears to make serial entrepreneurs less capable of learning from failure than portfolio entrepreneurs, whose attachment is spread among multiple initiatives.

What do we make of these contrasting findings?  I'm not sure, though I would note that the new study on Texas entrepreneurs has a much larger sample size, and it does not rely on self-reported data from surveys.  The new study also controls for industry and type of entrepreneurs (mostly mom and pop retail stores).   Does the type of venture matter?   Perhaps that may be the reason, but more research will be needed in this area.

Wednesday, July 23, 2014

Irrationality in the Airline Business

This Wall Street Journal headline did not shock me today, even though it speaks to an incredibly irrational set of behaviors:  "New Startup Airlines Crowd the Skies."   The article describes how a number of new players ("a flock of startups") are entering the airline industry, including a firm that has brought the People's Express brand back to life.  

Why do I say that the headline describes irrational behavior?  Consider the following important fact: for over one hundred years, the airline industry has been one of the least profitable markets on earth.  Richard Branson once joked that it was actually quite easy to become a millionaire; all you had to do was begin as a billionaire and then enter the airline industry!   Look back at the leading players in the industry in the 1970s and 1980s.   Most of them either no longer exist, or they have experienced a Chapter 11 reorganization at one point or another.  For those familiar with Michael Porter's five forces framework, a quick analysis shows that the industry is terrible along each dimension.   In short, the industry structure is incredibly unattractive.   

Why, then, are firms continuing to enter this industry?  Yes, the barriers to entry are quite low, but why enter if the likelihood of success is so low?   I think it comes down to the fact flying has always had a special allure.  Succeed, even for just a brief time, and you can become a celebrity.  Think about the famous names throughout the industry's history:  Howard Hughes, Juan Trippe, Richard Branson, Herb Kelleher, Michael O'Leary, Freddie Lake, and Don Burr.  Just take a look at the quote that ends the Wall Street Journal article today: 

"It's a high-profile, sexy business," says Henry Harteveldt of Atmosphere Research Group, a travel research firm. "And if you keep a lid on costs, have the right strategy, aircraft and managers, you can make money." What's more, the U.S. needs more airline competition, he says. The problem is: "the best markets are spoken for." 

There you have it.  It's sexy.  It's high-profile.  You can become a celebrity CEO if you succeed, or you can hob nob with CEOs who already are celebrities.  Unfortunately, many entrepreneurs in this industry forget one key lesson that I always teach my students when we study industry structure:  sexy industries are not always very profitable. 

Tuesday, July 22, 2014

Effective Listening Skills

The Wall Street Journal has a very good article today about listening skills.  The article highlights factors that detract from effective listening and offers tips for becoming a better listener.  What are some traps to avoid?

1.  Don't begin formulating your response when the other party has just begun talking.
2.  Don't filter what you are hearing based on pre-existing  views you may have.
3.  Don't multi-task.

What can you to improve?  First, you can write down questions you would like to ask before a meeting takes place.  Second, offer subtle signs (non-verbals) to demonstrate that you appreciate what the other party is saying.  Third, repeat what you think you have heard and ask for confirmation that you have interpreted them correctly.  Fourth, take notes to keep yourself focused.  Fifth, maintain eye contact.  Finally, set a goal of what percentage of time you plan to listen vs talk during a meeting.

Monday, July 21, 2014

Employee Revolt at Market Basket

While I'm here in Tokyo this week, I've been intrigued by what's happening back home in Massaschusetts.  A massive employee revolt is occurring at a supermarket chain called Market Basket.  This family-owned regional chain competes as an effective low cost player and has a devoted customer following.  The CEO has just been fired by the Board.  Here's the interesting part.  He's been fired by his cousin, who took control of the Board last year, and with whom he has feuded for years.  The Board hired two non-family members to run the company.  What happened next is fascinating.  The employees (non-union by the way, and incredibly loyal) revolted!  They have protested publicly.  Store shelves are bare in some instances.  Politicians are supporting the workers.  The employees object for three reasons.  They know the company is profitable, and thus do not understand the firing.  In addition, the fired CEO treated them well in terms of pay and benefits.  Finally, they have great personal admiration for the fired CEO.  The company has responded by dismissing managers who have led the protests.  

What do I take away from this rare situation?   First, every CEO should wish that his or her employees would stand up so forcefully for them even at great personal risk.  What a statement about the leadership provided by the fired CEO, as well as his treatment of the employees!  Second, the Board has badly miscalculated by firing managers who objected to the CEO's dismissal.  It only added fuel to the fire.  Third, it really demonstrates the value of culture as a source of competitive advantage.  One of the greatest assets a firm can have is devoted and highly productive employees who share common values.  That culture has enabled Market Basket to outperform much larger players such as Shaw's in the marketplace.  The Board has failed to understand the true "gold" that they have here.  Fourth, employee loyalty is so rare in retail, yet these employees rarely left.  Turnover was quite low compared to other supermarkets.  The cost of turnover in retail can be incredibly high.  Again, the Board failed to see the key source of competitive advantage here.  Finally, this case shows how social media can fuel a raid and massive backlash.  It has enabled customers to show their support and to spread the employees' message.  The Board is losing the PR battle because it has no counter to this wave of support via social media.