Wednesday, June 1, 2005

Untested Assumptions May Have a Big Effect

STANFORD GRADUATE SCHOOL OF BUSINESS—Offering incentive pay makes organizations perform better. Driving down product and wage costs is essential for success in low-margin businesses. Holding people accountable results in fewer screw-ups. All fundamental truths of business, right? Wrong, says Jeffrey Pfeffer. These are merely assumptions about what makes organizations competitive. Change your assumptions and you might find your company—and your profitability—improving, he says.

Pfeffer, the Thomas D. Dee II Professor at the Stanford Graduate School of Business, has observed that numerous, often hidden, assumptions underlie the mental models or mindsets of senior leaders. These assumptions inform the design of specific business practices—the particular compensation mechanisms, performance management systems, new measurement practices, and the like that define an organization. If such underlying assumptions are correct reflections of what truly produces employee and organizational effectiveness, you're golden. But if they turn out to be erroneous, you could be headed for trouble.

As Pfeffer notes in a recent article, the mental model driving Southwest Airlines puts employees first, customers second, and shareholders third. Company practices such as not serving meals or flying only 737s on short hauls are an outgrowth of this model, he argues. It's the philosophy, not the techniques, that has led to Southwest's growth and consistent profitability.

And it is why other airlines have not been able to replicate Southwest's success, despite having copied their practices, Pfeffer observes. "When managers want different results, they need to do things differently. But doing things differently on a consistent, systematic basis requires thinking differently—something managers often don't realize."

Helping senior leaders understand why mental models affect organizational performance is a high-leverage place for human resources to focus its organizational interventions, Pfeffer maintains. And the first step is to sit managers down and get them to bring their assumptions to light.

"I use an exercise, for example, where I ask participants to associate various pilots' wages with various airlines," Pfeffer says. "People generally assign the highest wages to the airlines that are having the most trouble. Their assumption is that lower wages lead to lower overall costs—and thus greater financial stability and profitability."

The next step is to evaluate whether or not the assumptions are correct. The equation "low wages equals lower costs," for instance, is false, Pfeffer argues. "If you're operating from that framework, you might decide that the only way to become competitive is to cut costs by reducing wages, as United Airlines has. But what's been the outcome? United has experienced turnover, disaffected employees looking to sabotage the organization, and problems with customers. People are abandoning the airline in droves and the company is in a death spiral."

Many beliefs taken for granted nowadays, such as the idea that incentive pay for teachers will improve educational outcomes and that creating strict accountability mechanisms improves performance, have turned out to be patently false. "The last 100 years' worth of research shows that incentive pay does not produce better results in education, even though this is a lesson that seems to be continually relearned," Pfeffer says. Similarly, systems designed to pin blame on individuals and departments for mistakes and problems only create a culture of fear and infighting. "Many managers are operating in ignorance," he says.

The third step in the process? "Sometimes you have to be a bit courageous and go your own way," Pfeffer advises. That's what the natural foods grocery store chain Whole Foods has done. It has given up on the conventional theory that driving product costs as low as possible is critical for profitability in the grocery industry. Instead, it has embraced the seemingly counterintuitive idea that people actually will pay more for high-quality food they want to eat. This strategic insight has led the company to customize prepared food and even packaged goods selections. As a result, the chain has (as of summer 2004) a price/earnings ratio on its stock of about 40 and a five-year return to shareholders of more than 330 percent.

"Clearly, what we do comes from what and how we think," says Pfeffer. "Intervening to uncover and affect mental models may be the most important activity HR can perform."

Related Information

Changing Mental Models: HR's Most Important Task
Jeffrey Pfeffer
Human Resource Management, Summer 2005, Vol. 44, No. 2.Details

The Future of Human Resource Management: 64 Thought Leaders Explore the Critical HR Issues of Today and Tomorrow. Mike Losey, David Ulrich, and Sue Meisinger, eds., Wiley, 2005

The Knowing–Doing Gap: How Smart Companies Turn Knowledge into Action. Jeffrey Pfeffer and Robert I. Sutton, Harvard Business School Press, 2000