Zeynep Ton

Author, Speaker & Adjunct Associate Professor at MIT Sloan School of Management

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What is the purpose of a firm?

January 14, 2011 by Zeynep Ton Leave a Comment

In today’s FT, Sebastian Mallaby wrote about conflicts of interest in the context of investment banking, especially the conflict between investment banks’ own trading and the trading of their clients.  He argues that one way to solve conflicts of interest in this industry is to break banks into functional units.  Many of Mallaby’s insights are probably not surprising to people who pay attention to investment banking.  But as someone whose primary interest is not investment banking, this article made me think about conflicts of interest and potential trade-offs in other industries and more importantly about what the primary objective of a firm should be. 

For too long companies and business academics have focused on narrowly defined objectives. In my field of operations, for example, we often use profit maximization as the objective for operational decisions.  My colleagues in other fields use shareholder value maximization as the sole objective.  But should these always come before the interests of customers, employees, the society, and the environment?  Should companies invest in their customers, employees, environment, or society only when doing so increases profits or shareholder value?  Where has that thinking taken us during the last few decades?

Some of the companies I admire, like Costco and Mercadona of Spain, do not have profit or shareholder maximization as their objective.  They put customers, employees, suppliers, and society ahead of profits and believe that by doing so they will create more value in the long term. A retailer I am working with right now states that its purpose is “to provide employees opportunities for growth and success.”  This purpose is way more important than maximizing profits (ironically, this retailer makes A LOT more money than their competitors).

I have always believed that well-run companies that emphasize the interests of customers, employees, suppliers, and society are exactly the types of companies the world needs more of.  But I am just a boring operations gal who is trained to solve small operational problems, not to provide answers to big questions like “what should be the purpose of a firm?”  But in the last issue of Harvard Business Review, Michael Porter and Mark Kramer have a wonderful piece on what they believe the purpose of a firm should be.  They argue that the purpose of a firm should be to “create economic value in a way that also creates value for society by addressing its needs and challenges.”  They urge companies to reconnect company success with social progress and start creating shared value.  What a breath of fresh air!  

Filed Under: Uncategorized Tagged With: beyond profit maximization

Kids and iPhones

January 4, 2011 by Zeynep Ton 1 Comment

Here we are on a flight from Miami to Boston and the only thing that keeps my children quiet is the iPhone. My five-year old has my husband’s phone and is playing ASTRONUT, an obscure game his dad downloaded for him.  My three and a half-year old has my phone and is watching a movie.  And I am wondering, where did we go wrong?  Why do our children love this device so much?

My husband and I are pretty strict when it comes to TV or computer game usage. We have only one TV at home and have a rule about not turning it on on weekdays.  We don’t give our children our iPhones at home and I’m pretty sure we won’t get them a computer until it’s necessary for school.  We play with our children all the time and try to stimulate them as much as possible.  Yet, that little phone is by far their favorite source of entertainment.  They would rather sit with an iPhone for two hours than play a game with us.

My little one, in particular, is obsessed with the iPhone.  He literally stops random people and asks them if they have an iPhone.  Yesterday, we were having lunch at a café.  A woman at a near table was talking on the phone.  After she finished her conversation he asked her “Is that your iPhone?”  When she said yes, he asked if he could play with it.  He gave such a cute smile that she couldn’t say “No, you can’t.”  Two minutes later, he was sitting on her lap and they were going through her photos and her movies until he discovered that she had Angry Birds.  When my older one heard Angry Birds, he joined them and all three started playing together.  They were talking and laughing and the older one was having a great time explaining what the birds were doing to his new friend.  She said she was having a great time and that she was fascinated that a 33-year old and a three-year old liked playing the same game.

I confess that my husband and I enjoyed the fifteen minutes of quiet time to finish our food.  I also like the fact that my children can interact with others so easily.  But I wish that the interaction was not around an iPhone. 

When we were kids our grandparents lived away from us and our dad coached basketball.  So we would regularly take long bus trips.  During those trips, my brother and I would talk to strangers for hours.  We would tell them about our family, what we liked, and why we were taking that particular trip.  We would talk about sports (especially basketball) and other random things. My brother was great at telling jokes, so he would often tell them his favorite jokes.  I liked singing so I would sing even though I did not have a great voice (at the time I thought I did).  People in the bus would clap and I would be happy.  

Our parents never worried about what they would do to entertain us during those long trips. As long as there were other people around, they knew we would be fine.  But now, before a long trip, I pack books, coloring books, games and of course still end up with the iPhone!

Is this the symptom of a bigger problem?  Are today’s kids (and adults) less able to connect with others? 

Filed Under: Uncategorized Tagged With: children and technology, parenting

Christmas shopping and understaffed stores

December 24, 2010 by Zeynep Ton Leave a Comment

“Not all retail messes are created equal” reported WSJ yesterday.  The article describes the messy shelves and tables at a retail store and comments that this is probably the result of the retailer’s staffing cuts.  Long lines at the cash register, messy or empty shelves, and expired products still lingering on the shelves are all problems that we have learned to live with as customers in this country.  And as WSJ predicts, one reason why we have these problems is understaffed stores.
 
Let me start by saying that having just the right amount of staffing levels at all times is often very challenging in retailing especially during Christmas season.  There is a lot of variability in the demand for labor (customer traffic, promotions, etc.) and there is a lot of variability in the supply of labor (employee availability, absenteeism, etc.).  And having too many or too few employees are both expensive.  But what I have found in my research is that when faced with this challenge of matching labor supply with variable workload, many retailers err on the side of having too few employees.  So retailers are systematically understaffed.  Here’s why this happens:

For most retailers, store payroll is the highest operating expense. So retailers watch this expense very carefully.  There is constant pressure for store managers to reduce their payroll expense.  Many retailers I’ve worked with put great emphasis on managing payroll expenses in their store manager evaluations.  In addition, the cost of having too many employees is quantifiable and felt immediately while the cost of having too few employees is difficult to quantify and not immediately felt.  Messy shelves, expired products on the shelves, or long lines might not affect profits immediately, but they do in the longer term.  So if you were a store manager operating in this environment, what would you do?

What is interesting about understaffing is that retailers lose a lot of money because of it!  In a recent article, using four years of data from stores of a large retailer I find that increasing staffing levels can substantially increase profit margins.  I’ll write more about this article in a future post. 

As the WSJ reports, understaffing is a problem now because we live in difficult times.  But I have seen this problem for more than ten years.  In fact, the data I use in my paper come from 1999-2002.

Filed Under: Uncategorized Tagged With: low wage/supply chain labor, retail, understaffing

The low wage problem and retail

December 21, 2010 by Zeynep Ton Leave a Comment

Alan Blinder wrote a wonderful opinion piece in the Wall Street Journal the other day.  Among other things, he mentions the discrepancy between productivity and wages.  Since 1978, productivity in the nonfarm business has risen by 86% while real compensation per hour is up just 37%.  Is that fair, Blinder asks? 

Retail, which employs about 15 million people, is an industry for which the hourly wage is way below the national average.  According to BLS, in 2006 the average retail cashier made $8.62 per hour, less than half of the average of all industries, which was $20.27.  So if you are a full-time cashier and lucky enough to get 40 hours a week (more on this in a later post), every week, you make about $17,900 per year.  In many states this would be below poverty threshold for a family of four.

When you talk to retail executives, they often mention that they can’t pay employees more if they want to keep their low prices.  So in their mind, there is a clear trade-off between how much employees earn and how much consumers pay for goods.  But my research shows that this is not the case.  I have recently researched a Spanish supermarket chain, Mercadona (my case about Mercadona is available through Harvard Business School Publishing).  Mercadona not only pays its employees more than its competitors, but also provides lots of other benefits including job stability and internal promotion opportunities.  And just today, there was new evidence that Mercadona is the Wal-Mart of Spain when it comes to prices.  They have the lowest prices in Spain.  Period. 

For those who believe that low wages is a problem for this country, I encourage them to look into industries like retail, where companies can pay their employees higher without having to increase prices or having to decrease profits.  I’ll write more about how companies do this in future posts.

Filed Under: Uncategorized Tagged With: low wage/supply chain labor, retail

FedEx versus UPS

December 15, 2010 by Zeynep Ton 1 Comment

FedEx’s drivers are classified as independent contractors so FedEx doesn’t need to pay them benefits.   But many drivers claim that they are treated like employees so should get full benefits.  Well, it seems that their claim didn’t go very far.  Today, Bloomberg reported that “FedEx drivers were found by a judge to be independent contractors...”

This seems like a great win for FedEx; having independent contractors gives the company a huge cost advantage over their rival UPS, which gives full employment benefits to their drivers (who, by the way, are unionized).  But while UPS has high labor costs, it has amazing operations. They constantly improve their processes to make sure that their employees are as productive and as safe as possible.  They also manage their trucks in a way that minimizes fuel costs and hence their carbon footprint.  They are also known for outstanding customer service.

I wonder if the fact that UPS has to live with high employee costs make them innovate in ways that FedEx would not even dream of.

Filed Under: Uncategorized Tagged With: constraints, low wage/supply chain labor

A Beginning

December 13, 2010 by Zeynep Ton 2 Comments

I am writing this blog to start a conversation around several themes.  

The first theme is around my research interests in operations and labor management.  I have written extensively about retail operations and just started working on a book that argues for a better way for managing retail stores. 

The second theme is around community impact.  Through this blog, I want to start a conversation about what young leaders can do to maximize their impact on the world.  I am very proud of a new initiative we started at HBS this year. Both HARBUS and Harvard Crimson wrote about the initiative. 

The third theme is teaching. It is something I do with absolute joy. I am hoping to connect with educators on how to improve teaching and connect with my former and current students.

The final, and most important theme is family.  With two young children, I have the same challenges that many other working moms have.  So I look forward to sharing these and learning about yours!

Filed Under: Uncategorized

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