Executives have a choice in how they run their operations. They can run them in a way that uses people as interchangeable parts. Or they can run them in a way that leverages a skilled, capable, motivated workforce. Both ways can be profitable. But the employee-centered way is a better way — even in low-cost retail.
In my research, I’ve found that retailers using an employee-centered operations strategy, which I call the good jobs strategy, have two strategic advantages. First, they differentiate themselves by offering low prices and good service at the same time. Second, they are better at adapting to changes in customer demand, technology, and regulation. The good jobs strategy is a strategy in which everyone — customers, employees, and investors — wins.
Since my book on this topic came out in 2014, one of the questions I’ve been asked the most is: “How can investors or customers identify which companies in a particular industry are following a good jobs strategy?” To answer this question, my MIT students and I set out to create a good jobs score. We started with food retail and plan to expand it to other settings once we get feedback on our methodology. (So please tell us what you think!) Focusing on the 14 U.S. food retailers that publicly file with the U.S. Securities and Exchange Commission (SEC), we scored them in a range of 1 to 10.
Costco had the top score of 9.2, followed by Whole Foods and Publix, at 7.5 and 6.9, respectively. All the other food retailers we scored came in under 6, so there is a lot of room for improvement.
The score is a combination of three components: customer satisfaction, employee satisfaction, and productivity. Companies that follow a good jobs strategy design and manage their operations in a way that allows them to achieve high employee satisfaction, high customer satisfaction, and high productivity simultaneously. A company that does not follow a good jobs strategy will often sacrifice employee satisfaction or customer satisfaction for lower costs, which is commonly thought to be the only way to keep the “low” in low-cost retail. For this reason, we calculate the score as the geometric mean of these components rather than the arithmetic mean, so that a low score on any one of the components brings down the overall score more. In effect, we penalize the sort of trade-offs that the good jobs strategy renders obsolete.
For the good jobs score, we decided to focus on these three outcomes, as opposed to the particular operational practices that drive them. The reason: Collecting data on operational practices such as staffing, level of standardization and empowerment, and extent of cross-training was not feasible without having access to a large number of companies. In our early conversations with some companies, we found that they would not provide such data if we used those data to rank them publicly.
Even collecting data on employee satisfaction, customer satisfaction, and productivity was challenging. Although employee satisfaction and customer satisfaction are both important drivers of success, most companies do not disclose such data to their investors. We therefore had to rely on secondary data sources, which are not standardized and may have biases.
To create a customer-satisfaction score, we collected data from the American Customer Satisfaction Index (ACSI), Consumer Reports, and Yelp. Although each of these sources takes a different approach to measuring satisfaction, the results were pretty consistent. For the 14 companies we scored, the correlation between Yelp and Consumer Reports is 0.79, between Yelp and ACSI is 0.93, and between Consumer Reports and ACSI is 0.76. (As a reminder, a perfect correlation would be 1.0.)
To create an employee-satisfaction score, we collected data from Glassdoor.com and Indeed.com. Neither site can affirm that the people who provide data about companies actually work there. In addition, respondents to both sites are self-selecting; thus the data cannot be considered to have been gathered from a random sample of employees. But again, we found that these data sources were pretty consistent. For the 14 companies we scored, the correlation between Glassdoor and Indeed is 0.96.
To create a productivity score, we collected data from 10-K filings with the SEC. We looked at three measures of productivity: sales per square foot, sales per employee, and inventory turnover. Even those data are imperfect at best. Let me give you an example. Inventory turnover is calculated as cost of goods sold (COGS) divided by average inventory level. But even within the same SIC code, there is inconsistency in how companies report COGS. Some include depreciation of inventory; some don’t. Some include promotional expenses; some don’t. Some include compensation and benefits for some of their employees; some don’t. There are also differences in the merchandise mix of different companies. Of course, all the food retailers sell food, but some, like Walmart and Costco, also sell products such as electronics and furniture that are expected to have lower turnover than grocery items.
Clearly, investors concerned with how a company earns its profits — and whether it’s doing the best it could do for customers, employees, and the investors themselves — need better data to assess how well a company manages its operations. I hope that the good jobs score will encourage more companies to report these data.
On goodjobscore.com, we report a lot of other information about each of the 14 companies. Please take a look and let me know how we can improve the score and the website.
This post first appeared on Harvard Business Review Blog Network.