Article 5.61


"Employees will be regarded as a company's most

valuable asset and be developed as such."

Facing The Forces of Change 2000

High-performance firms have been practicing the "new reality" above for years. For example, Taiichi Ohno, the Vice President of Engineering for Toyota in 1950, saw this practice as vital to making just-in-time manufacturing work as he and others invented the process between 1950 and 1962.

Most CEO's in America today agree with the concept. A strategic planning group for a wholesale trade association, for example, scored this reality's importance at 9.47 on a scale to 10. But, most companies don't put their pay policies and training budgets where their mouths are--why? Many excuses might be supported by the unspoken assumption that "hire them cheap and work them hard" still works as well as it did up through the late 1960's.


From 1946 to 1974, management "by the numbers" evolved into an important science. A key sub-element of this catechism was: "Hire them cheap and work them hard." This guideline worked, as long as most other businesses did the same thing, the best employees stayed and customers didn't expect distinctive service.

But, the environment has changed. The best employees are now constantly shopping for the best career opportunities. And, companies like Federal Express, L.L. Bean and UPS have taught the nation that near-perfect, on-time service is possible. As a result, customer expectations have risen, making customers much quicker to switch to other suppliers.

A new school of service management theory has developed since the late '70s. Many core ideas for running a high performance service business are summarized by the service economics chain below:

Let's look more closely at what this diagram is meant to convey?


The first requirement of the service economics chain is to make sure you have the right type of employees in the right jobs. And, you need to make sure that they are happy with the work environment that has consciously been created by you.


If your employees are happy, chances are they will stay, physically and psychologically, with the job and with your company longer than similar employees might be staying with the competition.


Happy employees who stay longer leads to improved service, as employees keep learning on the job about the details and personalized aspects of the business and the specific needs of customers. Service mistakes will decrease, if for no other reason than trail and error at complaining customer's expense.


If service keeps improving, then customers should become happier at some point. Happier customers will most likely remain loyal to your company longer than they would have otherwise. They will probably be inclined to buy more or all of what they can from you. If they're really happy, they may tell their friends to try your business as well, and give you last look plus a little more margin.


  • Your business should then grow faster than the industry average at a greater profitability rate for a number of reasons.
  • As employees stay longer; personnel turnover costs should drop to increase profits.
  • If you execute customer requests perfectly the first time, then you can reduce the overhead costs of inspection, mistake curing, customer pacification and psychological maintenance for those who must bear the wrath of irate customers and salespeople.
  • If customers are so pleased that they stay with your company, you won't have the additional marketing costs of finding replacement customers.
  • Research studies suggest that, if your service is distinctive in the minds of your customers, you might eventually charge an average of 5 to 10 percent more than your mediocre competition's value-added margin rate. This, however, is assuming that you can learn to sell better total value for a higher price.
  • If customers buy more of their total potential from your company, then your transactional, selling and service economies might improve.
  • If customers give you positive word-of-mouth advertising, this will either reduce your cost of marketing as a percentage of sales compared to the competition or your company will grow faster than the competition for the same marketing expense investment.
  • Finally, there are the virtuous, compounding cycle benefits within the feedback loops A through F in the diagram.


This chain suggests that profits and growth all start with finding and keeping the best employees, not churning cheap help. Perhaps Federal Express, UPS and L.L. Bean are onto something. They pay the highest wages around for warehouse people and drivers in order to get the best people and keep them. In turn, they expect the most by holding their employees to strict quality, quantity and timeliness standards all supported by training. High initial pay and education are investments these companies make in order to achieve long-term, high returns.

The trend toward seeing employees as the most important asset of a business is nothing new. It just has taken a long time for most service firms to articulate and challenge their outdated assumptions.

Big assumption changes on the part of management often require, however, a financial crisis to occur. And even then, in the face of a crisis, only a few firms will typically change for the better. Most don't and die as a result.

With all of this in mind, perhaps the risks we face today when we change our ways are less than the risks we will face if we keep fine tuning the past.

Merrifield Consulting Group, Inc. Article 5.61