So What Type of Firm Are You?

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Linking Profits and Long Term Skills GrowthEach nation state “depends for its livelihood on the wit, wisdom, agility and adaptability of its people”[1]. Such attributes have won wars and built great nations.

The fortunes of a nation state and the fortune of firm are inextricable linked. The nation state needs to grow its Gross Domestic Product to enhance social welfare.  The firm has a top line sales value, cost of goods sold, administration costs and profits and relies on its people to achieve its objectives and maximise these profits. But arguments rage about the best way to manage these human resources to achieve such objectives.

Paradox: Obvious but Unachievable

Within such arguments we see a paradox: something that is apparently obvious and yet almost unachievable[2]. Intuitively managers know that competitive advantage comes through the people in the firm (the obvious bit).  But the Anglo-Saxon method[3] of business management aims to always minimise cost and price and leaves no margin with which to develop the people (thereby creating the paradox). However, with the business environment changing around the firm, many in the USA and UK still argue that despite squeezes on available cash for staff development, investment in people is the only way.

So how then do we select an appropriate people management strategy, investing appropriately to match the chosen business management approach? This blog looks first at the flexibilities available to firms and contrasts the small family or ‘angels’-owned firm[4] with the larger firm owned by institutional investors. It then discusses possible people management strategies giving examples and it ends by asking “so what type of firm are you?”  This closing question challenges managers to determine their own business approach and with that, to select an appropriate HR management strategy.

The Race to the Bottom

Business schools that develop the next generation of managers teach that price competition alone can only lead to a race to the bottom. In this race firms continually reduced price in an effort to attract greater market share, placing ever greater demands on their suppliers to reduce their prices. We can see elements of this in the price wars between supermarkets.  The endpoint can only be bankruptcy and exit from the race by the weakest players.

Despite the obvious madness of this model, many aspects of it are embedded in the Anglo Saxon method. This approach seeks short-term profit maximisation to satisfy shareholders alone. Shareholders, often investment institutions such as pension funds, seek short-term returns and have little interest in building future strength. Cost minimisation, and with it low price, becomes the singular means of achieving competitive advantage. The Anglo-Saxon model is contrasted with the continental European model were firms are owned by banks who take a longer term approach. In this case skills are used as a means of achieving competitive advantage and the German high skill production capability is legendary.

Anglo-Saxon Versus Continental Europe

Right now the two approaches to business management, Anglo-Saxon and Continental European, are being argued about in Europe and both the OECD[5] and the European Commission suggest that the European model is most likely to succeed. They advocate the development of skills and the investment in skills as key development to secure future prosperity. In reality some hybrid is likely with Europe accepting the need for deregulation and flexibility in its labour market.

Let’s consider first the small firm. Many small firms are family owned or owned by business angels or other equity investors. Such ownership is able to take a long-term view on the prospects for the firm. The smaller firm therefore has a choice:

  • to truly drive competitive advantage through its people by investing in its people,
  • to standardise products and drive staff training to deliver consistent, quality product through that standardisation or
  • to truly minimise staff costs and treat staff as a variable cost, introducing flexibility into an adaptable and low-cost employment contract.

Despite this apparent advantage, the smaller firm must nonetheless be aware of the context of the market in which it choses to trade. Market price and potential inability to trade at a premium may still demand a low-cost approach.

Let’s move to the larger firm. We have argued above that because the larger firm is owned by shareholders with a short-term view, profit maximisation is the likely objective. If true, this limits the strategic choices available since staff training in all but day to day skills can take several years to yield benefit. In this instance it is obvious why the Anglo-Saxon business model has been adopted. In this case minimising staff costs is a key contributor.

Does the Market Price Yield Enough Net Margin

The market price for a firm’s goods sets the selling price achievable. This is of course modified by any added value that allows the firm to price at a premium. This may include higher quality product or higher specification product and both permits a higher price to be charged. The higher the quality and the higher the specification for given costs, the higher the net margin. Conversely, the more standard the product and the more it tends to an everyday commodity, the more the firm must compete on price alone. If the difference between cost and selling price really is small then the firm can do nothing but fix its people management strategy to minimise cost. If on the other hand there is opportunity for the firm to maximise its net margin, cash can be freed for investment in people. Since the smaller firm takes a longer term view, seeking to trade modest returns today for higher returns tomorrow, it can take an investment approach.   On the other hand, the larger firm must simply follow what has been billed in America as the “low-wage, low trust, low skill” business model[6].

Given that the smaller firm has strategic choice, what people management strategies might it adopt? There are three possible strategies. In the first, the firm needs to invest in people and in job design and work organisation such that as people develop there is appropriate work for them. In the second people management strategy the firm needs to put emphasis in product management, designing out variation but training staff in the interpersonal skills that maximise the product purchase experience. This is particularly relevant in service industries. In the third people management strategy the firm needs to minimise costs by reducing the skills needed by minimising complexity of product and service.

So What Type of Firm Are You?

So which type of firm are you? Do you seek to trade at a premium, maximising staff skills and building flexibility into product design and delivery? Do you standardise product and drive for quality of delivery? Or do you drive costs down in an effort to sustain profits in a price conscious market?

Whatever type of firm you are, you must develop your strategy for managing your people in parallel with your strategy for product and service and generally for the management of the firm.

TimelessTime consultants are skilled in this parallel development of product marketing strategy and human resource management strategy. Call us today to discuss what’s right for your firm.


[1] Armstrong, G. (2000) foreword: in Chartered Institute of Personnel and Development, Success through learning: the argument for strengthening workplace learning, London: CIPD

[2] Keep, B. E., & Mayhew, K. (2001). Globalisation, models of competitive advantage and skills, Business, (22).

[3] The ‘Anglo-Saxon business model’ prevails in UK and USA and centres on maximising profits and taking dividend out of the firm rather than re-investing profits.

[4] ‘Angels’ is a reference to the provision of funds by business angels – private investors or groups of investors who speculate on start-ups.  These business angels take a longer term view of investment, perhaps looking over a five year term.  They aim only to sell the firm after the period but with this aim, they aim to maximise the capital in the firm and that capital includes competence in staff.

[5] The mission of the Organisation for Economic Co-operation and Development (OECD) is “to promote policies that will improve the economic and social well-being of people around the world”.  See www.oecd.org.

 

[6] Milkman R (1998) The New American Workplace: High Road or Low Road, in Thompson T & Warhurst C (eds.) Workplaces of the future, London; McMillan, 25-39.

 

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