So welcome to Managing Human and Social Capital. This is part of the management and leadership course, welcome to this program, my name is Michael Useem, I'm on the faculty here at the Wharton School and I'm with my colleague, Peter Capeli. >> Mike and I have both been here forever. For a very long time teaching this course, in particular, to MBA students, and there's a long history of this topic at the Wharton School, which isn't particularly well known. Begins back in about 1915, with the rise of scientific management, and Frederick Taylor who was a lecturer here at Wharton School. Elton Mayo was actually on the faculty here and created the human relations movement, which recognized that people mattered. And in the 1980s the Tavistock Institute was here, which was an institution that was devoted to the idea that how you structured work and the relationships between people at work effected the performance, as well. >> And here's why we've got this topic of human and social capital in the broader context of a course on management of leadership. Gotta know where we're going, let's call that strategy. We've gotta get there and to get there, we need a whole bunch of factors falling into place, including the right people who are incentivized to get the job done, understand where we're going. And, of course, part of this course as well is thinking about doing that across boundaries. And to put another sort of theme in front of us here. In Peter's view and my view, you've really gotta get this people factor right, and to get it right, it means that how we manage people, how we hire, how we promote, how we reward. All that has to be aligned with the other functions that any manager has to be concerned about, from finance and accounting to marketing and operations. On top of that, we've got to get all these pieces together and aligned in the same direction. >> So another reason to think about this as being important is this is where all the money is. So if you look in a typical business, two-thirds of the costs all go to labor. It's also where all the discretion is, particularly discretionary effort. So employees who are really bad, will completely sink an organization. That's not just fraud. Sometimes it's actually internal vandalism. And employees who are really committed and will work hard make organizations succeed even when a lot of things are going wrong. So it is the key factor for differentiating what makes organizations succeed and fail. >> In fact Peter, a colleague of ours at another institution wrote a book a couple years ago with the great title of People as the Ultimate Competitive Advantage. Gotta have a strategy, gotta make a sustainable advantage with that. But people separately managed, for better or for worse, do make a difference. Peter, I think to reference how we're going to approach these topics, let's take a brief dive into Walmart and my personal guess is most listeners, most viewers, have walked into at least one Walmart store. And just to review a couple facts about Walmart. It's an amazing organization that goes back to 1962. Today it's got over 11,000 stores. The market value, today's stock price times the number of shares out there is over $200 billion. The sales now this past year up very close to $500 billion. And in particular for our purposes what's notable is that Walmart, with over 2 million employees, is unequivocally the world's largest employer. >> And also, one of the most important companies in the United States, something like one in five pieces of clothing are sold through Walmart. They have a huge impact on the supply chain and have pioneered a lot of work and supply chains. So one of the reasons for thinking about them is they have, as we say, a big footprint. Not matter what they do, it has a lot of affect on a lot of people and a lot other businesses. >> And since we know a lot about it, since most of us have walked into at least one store and many people more than that, let's take a look at actually two companies here. We have Walmart in the center column and Costco on the right hand side. And my guess is, again, many people have been into a Costco warehouse along the way. And as we looked at some numbers there. For example the annual turnover the quit rate are close to 50% in Walmart below one and five at Costco. Both are very successful. Costco of course much smaller than Walmart. But Peter the point I like to make right here is that when it comes to managing people, there are many ways to skin a cat, there are good practices in many areas though, there's not a single best practice. And this course, this piece of this course, is going to be looking at some of the better practices on people management. >> So I think the other reason for thinking about these two is something we didn't mention yet and that is managing people matters a lot because it affects the lives of the people, right? So it's not just about whether organizations are going to make more money. It's what happens to the people who work there. And this particular comparison of Costco and Walmart, if you're outside the US you may not have seen a Costco. They're a big warehouse type retailer, but they sell the same sort of stuff, generally, as Walmart sells. The fact is, Mike says, that they choose difference directions, matters a lot, maybe to the way the companies compete. But also to the employees. So, Walmart has received a far amount of criticism partly because it is so big for not paying their employees more and high turnover etc. And Costco is often thought to be the opposite model. You can see here the differences in the rates of pay, that employees of Costco stay longer and get paid a whole lot more money, get employee benefits, more benefits, all those sorts of things. So, the point here is partly there are things that we know that absolutely work, there are some best practices but there are also choices among best practices based in part on what you want your business to do, how do you want it to compete in the product market. And that is as Mike was saying before, the fact that these things have to line up. >> So Peter, why don't we break our itinerary that we're going to getting out now to pursue more generally not just with Walmart and Costco, but with a number of enterprises. Lets divide it around four issues and we see those on a slide here in front of us. The first being, how do we motivate people to come to work and get the job done? How do we pay them? How do we promote them? And let me just throw that as actually a question to you. Viz a viz Walmart or Costco for that matter, or any company really What does it take, just in general, to [LAUGH] get people to perform individually when it comes to a reward system, a pay-for-performance kind of deal? >> Yeah, I think this is a really important issue around the topic of managing people, because it reflects some fundamental underpinnings that are important. Most people understand the idea of incentives in the back of their mind as John Maynard Keyne said, a lot of people are actually the slaves, though we think they're being practical, they're the slaves of dead philosophers, dead thinkers. They got in the back of their mind, a model of human behavior which is pretty simple model. People are completely rational. They're incentivized by money. We know from the field of psychology that a lot of that's not true. And a lot of things happen besides simply money. And if you want to be good at managing people you have to understand that. So this is a point where it's often hard for some people to get their hands around, if you haven't had a lot of psychology classes before. A lot of people interested in In business know a lot about finance and accounting. They think that way. But to get good at managing the people's part, thinking particularly about these issues of how we motivate people, we have to understand how people actually behave. They're not widgets, they're not pieces of machinery. And they respond in slightly quirky ways. And to design the right reward and incentive system and to motivate people you have to have pretty good understanding of the, you might think of it as the quirkyness or the fundamental attributes of humans. >> And Peter, I've often heard a phrase applied to reward systems and that is for any organization, it's a bit of a long march. We put out there a system to pay for people for getting a job done and it turns out, because people are not completely predictable. We incentivize here and then something untoward happens over here, so we revise. And I think it's, one way to think about reward system is just think about, we got to have something out there but what we have may not be a fully effective, completely aligning people on the right direction and of course people change over time as well so. >> And very nice analogy to the China there Mike with the long march and the, and Chairman Mao's long march. Mike and I have been working on a book about China and addressing some of these questions in China as well. >> And by the way, just a brief reference on that, the world's largest employer unequivocally is Walmart. The second largest employer is a company who's popular name is Foxconn, which is technically based in Taiwan. But it has over a million employees. Walmart is at 2.2 million but Foxconn has 1.1 million working for it in China today making our iPhones for example. So these are big enterprises. They've thought a lot about how to get the reward system right. So Peter let me go onto number two briefly here. Once we've got it kind of figured out at least for the moment, how to hire people, how to reward them for their individual job done, I think it's also true that the nature of the work can add additional motivating force, or rather discouraging unforce if it's not done right. >> So I think this is one of these topics where many people believe you just do it. I mean, the jobs just sort of somehow fall out in terms of what it is that people do. There is actually a lot of choices involved, and there's a lot of decisions, and some of them are objectively better than others in terms of how they motivate people, right? The way you design a job, what you actually have people do down at the level of the particular task. Whether they get to make decisions themselves for example. Or whether there's a supervisor standing over them. These are choices and they affect human behavior. And there are some best practices here but there again are also some choices that might fit into different kinds of organizations, depending what you want them to do. You don't want somebody running a nuclear power plant, for example, to have an awful lot of discretion, as to how they run things. But somebody who's out in the field dealing with a customer, you probably do, right? >> Peter, let's just take some of those ideas and think for a moment about how you would apply them if you are the manager of a Walmart store. You've got a lot of people coming in to work at 9 o'clock in the morning, you want them to serve customers, to restock shelves, to do an efficient checkout. And just thinking very briefly, since the compensation, the wages of Walmart employees not terribly high. What are some of the job, let's call it job design factors that might help people really want to do a better job on the work, say on the floor of Walmart. >> And for those of you who are wondering what it's like to be in business school this is what's known as a cold call in business school, and that means you were asked a question you weren't expecting to answer. But I think There's a pretty clear answer to that, right? And if you are an employee and you're not doing it for the money so much, because a place like Walmart, you're paid by the hour. You're going to get paid whether you do the job or not. Do you feel accountable for this? Do you feel that you are the person who are responsible for this particular part of the store? If for example people have a bad experience there, there's nothing on the shelves, are you the person who gets pointed to for not doing a good job with it? You have control over it, right? So there are decisions you can make that make people feel independent of the money, independent of a boss coming around and telling them to do it that they want to do these things. Now, there's some other sides to that, too, right? They may do it in their own way, which isn't perfectly the same as what somebody in another department might do, and that's something you gotta worry about as well. >> So, that's where we're going with topic number one and in topic number two, number one being motivating individual performance, number two working through job and work designs that lead to high performance. Our third topic, going to come back to it in a little bit, is helping people at Walmart, at a store maybe nationally or anywhere, make good and timely decisions. And we stress the and between good and timely. We can make a snap decision. We can shoot from the hip. That's timely, but not very good. Or we can wait a long time to get it to be perfect, but as we know the phrase goes, perfect is the enemy of timeliness. So we want good and timely decisions, and to think about that in the context of Walmart, an amazing statistic, at least for me, is that some 70% of Walmart store items are up at the cash register with money coming in from a customer. Before the company, the headquarters, has even paid the supplier of them. And of course, that means they're seeing a lot of money coming in without having to put a lot of money out, long in advance of a sale. And I'll turn the cold column myself in this case. And that is, if I'm a Walmart, and add to it, Peter, If I'm a Walmart store manager, what do I want around me or maybe below me to make good and timely decisions? And just to anticipate where we're going to go with that. I would say two factors are pretty important. One is, I as a store manager, have to unequivocally understand what the metrics of the performance are going to be. What the intent of Walmart, the parent, is sending in my direction and then I don't want to be told how to do it. It's got to be within the law, within the ethical principles of the firm. But you've got to give me, coming from headquarters now, a lot of discretion to get that job done. If I've got that, I can make good and timely decisions. Want to add to that? >> One of the things that we've learned at stores like Walmart is that one of the key issues, which can only be solved by the employees right up there up front is, do they keep the shelves stocked? >> Yeah. >> Because we know when customers go buy, and they don't see what they want they just leave, they don't buy it. Figuring out how to keep those shelves stocked is something you really can't do by computer and algorithm, at least not yet. Somebody's gotta walk by and see were out of this. If they have to go file a report [LAUGH] which then goes to somebody else, by the time they get around to doing it, it's too late. The customers are all gone. So figuring out how to get employees incentivized to make those kinds of decisions on their own is part of that story as well right. >> So Peter, good illustration thus of our third topic and that is bringing that issue of good and how many decisions down to the floor, the place we work. There are a number of very specific ideas that we're actually going to be going through as part of this course so stay tuned on that as well. A fourth and final topic, very important, equally important is to then put all the people, all the functions, all the floor space together in a broader, we tend to call an architecture, or organizational design to get more academic on that. And we also have to be good at changing that organizational scheme as customers change, as products change that are coming into the store. So, our fourth and final topic here is designing and changing an organization's architecture. And just by way of brief illustration here. Again, thinking about it say from the standpoint of a store and the store manager, a local location, I think while the people who are in the financial side of the operation here at the store, let's say outside of Philadelphia where we're located. They report up to the chief financial officer for the headquarters down in Arkansas, yes, that's true. But I also want, as part of the architecture, I want a direct line that goes from me to them. So when it comes to hiring to promoting them, evaluating their work, as part of the architecture, I want that person not only to report to the chief financial officer for the firm as a whole, but also to come by my office. And lets have a very tangible discussion which I can influence. >> As Mike's describing, matrix system of management. >> Yep. >> If you've heard about that one, we're going to talk about those sorts of systems as well. How do you organize the chart some people might say. It's also important on these to recognize that organizing the chart, the formal structures are also not the only thing that matters. So you probably, if you'd worked for a while in an organization, know that they have come in and changed reporting arrangements and yet you notice things still work the same way [LAUGH] they've always worked. And one of the reasons for that is because organization culture, which is something we'll talk about I think. Organization culture, which are the norms and values that tell people how to behave, have a lot of force. In some cases even independent of what the official Informal rules are and the reporting arrangements. So, organization architecture, and the structure really matters. Pretty easy for people at the top to change it as well. But we also don't want to overplay it. There's a bunch of other things that affect how organizations behave. >> So a quick recap as we go forward. This is on managing people at work, human and social capital. We've got these four topics. Motivating individual performance, designing jobs that people actually want to perform when they come to work, how do we help people make good decisions that are timely, and finally, how do we put all this together With a kind of a cultural mindset and an architecture to bring more than a few people together to get the job done on behalf of whatever it may be. Whether it's an organization, a hospital, a company you're running or maybe even a country. So, we're going to be doing a deep dive into these four topics. We've got a lot of research, a lot of examples, so stay tuned, stay with us. >> One more just final thought on this. If you think about how this material fits into other topics you might know there are best practices here but it's not like accounting. It's not like here are the ten things you have to do in this order. It's a bit more like strategy in that sense in that there are judgement calls. There are best practices. There are also judgement calls that have to be made. What you want your business to do determines in part how you're going to manage your employees, what choices you're going to make about design, about motivation, all those sorts of things fit together. So partly best practices, but we're trying to teach I think also judgement, about what to do where and why that makes sense. >> And here's what's going to be the kind of vital summing up. We're going to walk into companies like Walmart, we're going to draw upon research, going to offer up examples. Ultimately though, at the end of the day, we want to put in your hands some ideas on what some of the, again, as Peter put it, some of the judgement calls that are probably going to be better for the human and social capital that you want to draw most from. So at the end of each of our sessions we're going to provide, call it a template, five or maybe a few more ideas to hang on to. Not completely detailed and specific, we want them to be, guiding your judgement on how to take human and social capital forward.