People as a Competitive Advantage
Bosses at American companies — and the employees they manage on a daily basis — are in for some “very challenging times” in the years ahead as the U.S. economy undergoes dramatic change and fights to stay competitive on a global basis.
It doesn’t work if the CEO is trying to lead by saying, 'Do this because it will make me rich.' That doesn’t appeal to most people. It does appeal if they can say, 'Do this because it will make us rich, not just me.'
That’s the assessment of Edward E. Lawler, director of the Center for Effective Organizations at the University of Southern California and distinguished professor in the USC Marshall School of Business.
Named one of the country’s leading management experts by Business Week, Lawler is the author or co-author of more than 40 books; his writings have appeared in Harvard Business Review, Fortune, The Wall Street Journal, USA Today and The Financial Times, as well as many academic journals.
The emerging management-worker equation, says Lawler, is increasingly likely to be “a kind of serial monogamy relationship” where management says, “We love you as long as we’re together. You’re going to be loyal to us and we’ll be loyal to you, but realize that that relationship is not necessarily a lifetime commitment.”
In that context, Lawler argues that successful corporations in the 21st century need to address the critical issue of “human capital,” meaning not just selecting the right people but “their integration into the business model and how their talent, their skills, their knowledge and their motivation leads the organization to perform better than its competitors.”
In this modern business environment, company leaders who recognize the value of inspired employees aligned to the organizational mission bring competitive advantage to a business. Worker conduct and other intangible, “soft” assets drive company value by creating a culture of trust between customers and various stakeholders.
In the following interview with HOW, Lawler expands on those views and discusses his new book, “Talent: Making People Your Competitive Advantage” (Jossey-Bass, April 2008).
HOW: Your book focuses on the concept of human capital and its importance to business. What do you mean by the term “human capital”?
EDWARD LAWLER: When people think about human capital, they’re thinking of the individuals who work for an organization and the skills, knowledge and expertise they bring to the table in conducting business. I try to expand the definition beyond that to the working relationship among them and how it fits the business strategy.
All too often, I think, corporations just look at getting “the best talent” and don’t look enough at how they’re going to use that talent to gain a competitive advantage in business and in the marketplace. What I try to emphasize is that you really do want your talent to be a winner for you, and what differentiates you from your competitors is that it’s not enough to just attract good people. You have to attract the right people and organize them correctly - and that requires a substantial rethinking, in many cases, in the structure and design of corporations.
So human capital is about the processes that create, manage and organize talent?
Yes, I think good talent management requires that broader, more comprehensive look at an organization, not just a good “selecting the right people” type approach and even not just training them, developing them per se, but their integration into the business model and how their talent, their skills, their knowledge and their motivation leads the organization to perform better than its competitors.
Why are some of these seemingly softer, more intangible issues such as human capital increasingly important to business today?
Well, it starts with a pretty fundamental point, and that is that if you look at the market value of corporations, they are now widely divergent from their tangible assets. So the intangible assets of companies are the major driver today of the market value of corporations. Of course, human capital and its ability to work together and create products and services is only one of the intangibles. There are brand values and the reputation issues that go along with them, plus intellectual property.
But if you look at those other intangibles, they often are very much determined by the human capital of an organization. Particularly in the developed world, what corporations do requires more and more knowledgeable, intelligent, people working effectively to produce a product or a service. So, in contrast with a few decades ago, when the major assets of corporations often were their resources in the tangible areas - in oil companies their oil in the ground, and in manufacturing companies, the machine equipment - today those are not the businesses in the United States that dominate the way they used to; it’s the businesses with the intangible assets that are doing services in high value-added work that are critical. And when you start moving into that arena, it really is not just a few bright people, not just a good CEO, and not just a good technical person that you need. You need talent that performs at a superior level throughout an organization. We really are in a new era of organization design and management.
In recent years there has been a lot written and said about the importance of the CEO to the leadership of a company. But you’re critical of what you call the “imperial model” of leadership, and you point out that many studies show that the key determinant of most employee behavior is not the leadership of the CEO or the senior executives…
It’s dangerous, of course, to say that the CEO and senior executives don’t make a difference. I’m certainly not arguing that because they make many critical decisions in today’s environment. But the evidence is pretty clear that, particularly the “imperial CEO,” someone who is distant from the work force and doesn’t understand the work force, is not the kind of CEO you want in a people-centric or human capital-centric organization, because they don’t come across as effective leaders. They don’t understand the work force; therefore they don’t understand how to manage the highest value-added part of the organization.
That’s not to say, of course, that you don’t want a good CEO, a knowledgeable CEO and an intelligent and good-judgment-exercising CEO. You do. And so it’s a critical position, certainly, and the senior managers certainly are critical. But just to focus on the top few hundred people is a serious mistake if you’re in a human capital-centric business where talent throughout the organization is important.
I noticed a quote the other day by the CEO of InBev, which as you may know is in the process of acquiring Anheuser-Busch. He said, “In my business, only the top couple hundred people make a difference.” That’s a model that may be right for that industry - I don’t think it is - but my book is not about that kind of organization.
It’s about organizations where you need people throughout the organization who are talented and who can make a difference in the performance of the business. The most obvious kind of company, of course, is a professional service organization where the product really is the employee and their relationship to the customer. You don’t want second-rate or average talent in those positions if, in fact, they are what’s delivering your product. They are your product.
You write that “in an HC-centric organization the gap between the leaders and the led should never be large.” But that seems to be the case in many U.S. companies. How does that model get changed?
I think there are two kinds of difference. One kind of difference, of course, is total compensation level. Probably one of the more widely publicized companies in this regard is Whole Foods. I was talking to their CEO just last week. He takes great pride in the fact that his salary is only 17 or 20 times greater than the average pay of people in the stores. That’s in contrast to five or six hundred times in some other corporations. I don’t know that you have to go to the minimum of 17, but what I think you at least need is a common fate - a sense that there are people at the top, gaining and losing in terms of their total compensation, in concert with or in alignment with people throughout the healthy organization. Obviously, that means similar formulas for determining bonuses, stock allocations, etc. So there is a common fate that brings the organization together. It doesn’t work if the CEO is trying to lead by saying, “Do this because it will make me rich.” That doesn’t appeal to most people. It does appeal if they can say, “Do this because it will make us rich, not just me.”
How do you change that?
I think it’s a very complicated issue. I’ve done a lot of work on boards and executive compensation and so forth, and it’s not a pretty picture in the United States. We have much higher executive compensation and a much more out-of- control executive comp than anywhere else in the world, and I keep waiting for some great intervention that’s going to change that situation, and so far I don’t see it.
Boards dabble in change, but have not been very effective, really, in producing significant change. Regulations don’t seem to affect it. I think, ultimately, it will probably happen only if we get a combination, or sort of a perfect storm, of some kinds of regulations, some change in board memberships and increasing evidence that the kind of compensation packages - not just the amount but the kind of packages that CEOs get - are really dysfunctional from a shareholder point of view, so that we start getting even more effective shareholder activism on the part of large institutional investors and pension funds and so forth.
Let’s talk, if we can, a bit about the future. You say one of the things that managers need to do is look to the future. Why is that so important?
Because of the rate the change we’re experiencing today. An earlier book that I wrote, “Built to Change,” emphasizes that feature particularly strongly. The thinking of so many of our management books, for some reason, has been past best practices, which five years ago, 10 years ago, worked for a company. And that often, historically, has been a good way to decide how to manage a company, which practices to adopt.
The danger today is, first of all, you’re a latecomer if you use that approach. But, secondly, the environment is changing so quickly and so rapidly today with information technology and globalization and all the forces that we read about all the time, if you use what used to be best practices or what created a win in the past, you’re very much in danger of being a second-tier player or an underperforming company.
The challenge, really, is to understand where the market is going and adopt an approach to management and a business strategy that is in tune with that. Obviously, that’s not easy to do. It takes a certain kind of CEO, senior management and willingness on the part of the organization to change - and talent level throughout the organization - to try to stay ahead of where the environment’s going.
Interestingly enough, the world is changing these days in terms of whether being an old, established company is an advantage or a disadvantage. It’s increasingly turning out to be a disadvantage. Look at the newspapers, or look at most of the communications businesses today. Many of the winners there are relatively new start-ups besting traditional companies because they have been more in tune with where the technology and where the culture is going at the moment.
You say that if you had to pick one business model that would become dominant in the next decade, it would be that of a “global competitor.” What do you mean by global competitor and what might that trend mean to individuals and how they manage their careers?
Well, I contrast the “global competitor” with the “high involvement” approach - the latter one meaning a lot of participation, stability, long-term commitment to employee development, and I still think that fits. The issue is whether the high involvement approach can change quickly enough, rapidly enough, in terms of its technical expertise in particular, so it will stay up with the way they change in the environment. I think in many cases - not all, certainly - it can’t, and that’s where what I call the “global competitor” model comes in. It really thinks differently about the human capital side of the business and the old career model that we had with bureaucracies like AT&T and IBM in the past.
The global competitor model looks upon talent as something that it engages in a kind of serial monogamy relationship. That is, “We love you as long as we’re together. You’re going to be loyal to us and we’ll be loyal to you, but realize that that relationship is not necessarily a lifetime commitment. It’s a commitment from us as long as we need you, and we expect you to be committed as long as you’re here. But we both recognize that you may leave because you found a better opportunity, and we may no longer need you because your skills are no longer relevant to the way the business is going, or you’re not performing at a level that’s satisfactory.” It’s kind of a talent-on-demand model that organizations are increasingly going to because it allows rapid change.
The risk, of course, is that you need skills that are not available in the marketplace or that are so expensive to buy that it puts you at a competitive disadvantage, so you probably want to hedge your bet a little bit if you’re a global competitor organization by doing some internal development, some just-in-time training. But you’ve moved away from the “you’re here for life, you’ve got job security, don’t worry, we’ll take care of your development” approach.
Can you cite an example of that?
A company that’s actually made that change pretty dramatically is IBM. If you look at the old IBM, they were the model, if you will, for the career employment position. It got them good talent, people were loyal, etc. But they have really moved dramatically in the last 10 years toward the global competitor model. In essence they’re saying, “You’re responsible for your career, you’re responsible for your own development. We’ll help you some, we’ll give you some resources, but it’s up to you, and by no means do you have a career here for life.” More and more, people going into the job market really want to think about whether that’s a comfortable employment relationship for them, because it is different. The younger people, at least coming out of school, often say, “Yeah, that’s fine because I don’t want to make a lifetime commitment; I expect to move on, and if they don’t need me, I’m happy, I’ll move on to the next spot.”
That puts a lot more pressure on individuals to do a good job of managing their careers, to know what their skills are, to update their skills, and to make good choices about which company they join. It’s a very different environment for the worker and the work force, and, of course, it has social consequences for people who may need a safety net at times and may not be able to find one.
So, some challenging times ahead?
Very challenging times ahead, I think. Particularly in the U.S, as our economy keeps shifting and tries to keep competitive on a global basis.
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