Chapter 5

Why Is Positive Management Needed?

Positive management (PM) offers benefits to society in two separate but related ways. For organizations, it offers the potential to increase output without significantly increasing cost, otherwise known as increased productivity. For society as a whole, the benefit comes from organizations being more productive and therefore more sustainable. Sustainability is linked directly to aggregate employment, and aggregate employment loops back to expenditures that benefit organizations. The reason for the focus on increased productivity in the United States and other first-world countries is that we are entering a phase in which commercial competition between countries will intensify to levels not previously seen. Business models and competitive approaches that have worked well in the past will not work as well in future. Basically, we need to find a new source of productivity that does not rely on reductions in the cost of labor or increases in supply of raw materials.

First-World Competitiveness and Positive Management: Higher Productivity Is Needed

For countries that still have relatively low standards of living and the low wages to go with them, a more traditional concept of an industrial revolution can occur in this century. China is the best and most obvious example. It will move from a largely agrarian and poverty-driven economy to a first-world economy, creating never-before-seen amounts of wealth in the process. The map of world economic power will change. There is little question that, barring civil war that rises to the level of nuclear weapons, China and India will both emerge during the 21st century as global economic powers, likely on a larger scale than was enjoyed by the United States during the 20th century. This will create challenging strategic management tasks for businesses in developed countries, where the room for wage growth is smaller and the ability to employ low-wage labor is limited. Continuing an existing trend, first-world countries will need to take the following steps:

• Further shift the value-creation segment of their economies from mass production to the following:

° Creative industries

° High-tech industries

° “Problem-solving” industries such as environment, safety, and security

° Improvement of the service infrastructure

• Streamline and increase the efficiency of place-bound businesses such as services, utilities, food, education, and perishables.

Some mass production can profitably remain in industries that are place-bound by logistics (e.g., autos, heavy equipment, goods for which the weight to value ratio is very high) or national security needs (e.g., steel, electronic components, software, weapons).

Government and not-for-profit organizations are not left out of this equation. With increased productivity, they could help more people at existing cost levels or justify higher levels of expenditure because of good stewardship of past expenditures. While government will never seek profitability, PM techniques might allow it to reduce bureaucracy and communication barriers between agencies so that throughput to end users of services is increased. It is a popular pastime to grouse about the inefficiency of government, but we may have reached the point at which it is now absolutely necessary to do something about it. In the United States, tax burdens and governmental debt load impact the profitability and sustainability of businesses. Improving productivity would help to address both of these long-standing economic challenges.

In addition to the strategic squeeze created by limited room for wage growth and limited availability of low-wage labor, a third threat to maintenance of first-world status is declining international rankings in educational quality. This area may offer the greatest opportunity for short- to intermediate-term public-sector benefit. Positive approaches would contrast directly with the generally negative atmosphere that currently surrounds student and school performance at the K–12 level. In addition, a better balance between positive and negative approaches might encourage the creativity needed to revise our educational practice in ways that could reverse the decline in comparative standings.

Business Models

To facilitate a discussion of productivity and competitiveness between nations, we first need to define three levels of business models by the profitability that they typically generate: high-value-creation business models, normal-value-creation business models, and low-value-added business models.

High-Value-Creation Business Models

The simplest business model in terms of a productivity discussion is one that converts low-value inputs into high-value outputs. Good examples of this model include natural resource–based businesses such as steel and glass production. Companies in those industries take something that is of relatively low value to the consumer, such as iron ore or sand, and convert it into products that have high value to consumers. Proceeding further downstream toward the final consumer, other high-value-added businesses take the basic products from natural resource–based companies and convert them into products that are even more valuable in the next link in the supply chain (e.g., auto parts, tools, transistors). The final result of this progression is consumer products.

Several aspects of this model deserve emphasis. First, notice that these are not typically service industries. We cannot rule out all service-based industries from the high-value-added category, but their appearance there is uncommon. High-value-added businesses are frequently able to sustain that status via intellectual property (IP) protection such as patents. While it is true that the growing knowledge-management sector of first-world economies has led to the creation of service-based patents, they are uncommon. The bulk of wealth-generating patents are about “things.”

Second, high-value manufacturing business models are vulnerable to transfer to lower wage economies via turnkey operations if low-wage or low-skill labor is a significant component of the model. The steel industry is illustrative of this point. A century ago, the majority of steel used in America was made here. Now trade imbalances persist between the amount of steel imported to the United States versus the amount exported, despite attempts at controls by tariffs and substantial efficiency increases in manufacturing methods.

Third, the most sustainable first-world occupants of this category are businesses that convert intellectual capital into products, especially in highly scalable operations (e.g., pharmaceuticals, computer CPUs). First-world nations enjoy (at least for the next couple of decades) a larger and higher quality supply of educated workers than are available in second- or third-world economies.

“Normal” Value-Creation Business Models

This category contains the majority of businesses in most first-world economies, including retail, food, and service businesses. Leaving them out of the high-value-added category does not mean that they are less attractive as business opportunities. They are necessary components of the economy, employ tens of millions of people, and routinely produce profits. It is rare to find natural monopolies or high-value IP protection in this category, and this typically deprives participants of sustained extraordinary profits. Without industry-by-industry analysis, we can’t really say whether intensified competition lowers profits or if lower profits intensify competition. Profits are more dependent on efficiency or localized scarcity of products and services.

In normal-value-added models, inputs are usually not low in value (cost), so the special conditions in place for high-value-added models are not in place. Marketing differentiation, demand irregularities, and information inequalities allow for substantial profits. Retail is a good example of the normal category because, in the majority of cases, it is limited in how much value it can add to the product. Profits are heavily dependent on the accessibility of products by the consumer and on the retail transaction experience because the product purchased from a supplier is essentially the same as that delivered to customers. Retail is a very important part of a first-world economy but cannot be the foundation for it.

Low-Value-Added Business Models

Over the past decade, the United States and other first-world economies have sought high profits from two low-value-added business models, a tactic that is impossible to sustain beyond the short term. One of these was financial instruments, for which the risk side of the risk-return equation was concealed. The other was enormous amounts of low-cost items manufactured in the third world and purchased and sold at a markup in first-world economies.

In the case of financial instruments, it is true that some investors accrue extraordinary gains, but it is also true that the overall business model is dependent on either (a) value creation in nonfinancial sectors of the economy or (b) a zero-sum game if the underlying nonfinancial sector is not adding value, meaning that wealth shifts from one participant to another but little or no new net wealth is created.

Assessments of blame for the financial collapse and subsequent “decession” (a recession bordering on depression) during the first decade of this century are plentiful, but a significant part of the blame can be placed on the United States having too high a proportion of low-value-added services in the economy. Declining opportunities in domestic natural resources and high-value-added manufacturing left a lot of wealth with no place to go, which led to intolerable gyrations in both the equity and real estate markets. The real estate and lending debacle happened because persistently escalating real estate prices eventually “used up” all the borrowers with reasonable downside risk and loans were crafted for borrowers with unreasonable downside risk. The packaging and selling of those securities into equity markets without appropriate labeling of the risk eventually sent equities into free fall. Equities dropped 40% in value over a 10-month period.

The second low-value-added problem allowed the manufacturing base in many first-world countries to continue to erode even as the demand for manufactured products increased. Some wealth-sustaining effects were sustained by continued availability of goods at low prices, but serious damage was done to first-world economies by a shift to lower wage employment and a net loss of jobs in high-value-added industries.

Reengineering First-World Economies

If we wish to avoid further financial and economic shocks brought about by a rich economy with too little value creation to sustain it, we have clear priorities:

1. Develop new high-value-added industries, with emphasis on those that cannot easily be relocated to other countries. These include alternative energy and green technologies, high-tech (invention-based) industries, pharmaceuticals, entertainment production, and health improvement and maintenance. These are sustainable for the following reasons:

a. They are difficult to impossible to transport over the ocean.

b. They are based on intellectual properties that are difficult to imitate.

c. They are dependent on widespread availability of a highly educated workforce.

These industries could partially replace those that have been lost in recent decades by the flight of low-skill production to second- and third-world economies.

2. Improve the efficiency of existing companies and industries. This approach is necessary because, even if new industry creation is successful, it alone cannot invigorate an economy of the size found in most first-world nations. If we attempt to prevent outsourcing of manufacturing and service functions to lower wage economies via rule or tariff, it will result in higher prices in the domestic economy. The only way to keep production of normal goods and services within a first-world economy over time and without escalating taxes, prices, or both is to increase efficiency.

3. Maximize the value and benefit of traditional industries that must remain here because of high-transportation costs, national security, or logistical constraints.

The challenge of revising our national industrial strategies may be the most difficult in our economic history. A big part of that difficulty exists because we are not starting from scratch. Efficiency improvement and maintenance are enormous and successful industries in first-world countries. U.S. and European productivity is high.¹ There is some evidence that labor productivity growth over the past several decades has been higher than management productivity growth over the same period. But recent analyses of labor productivity hold sober warnings for first-world economies. Productivity levels in East Asia doubled during the past 10 years as productivity-increasing technology was implemented there.² It will not take nearly as long to export and implement high-productivity technology to less-developed economies as it did to invent, perfect, and implement it in first-world economies, thus making its competitive advantage less sustainable.

Searching for Productivity at New Points in the Value Chain

A new source of growth in productivity can be found on the human side of organizations and is dependent on motivation and commitment. Creating more positive organizational environments can increase efficiency by allowing less waste while using fewer capital-based controls. Another attractive aspect of PM is that it can be done without large up-front investments and can be phased in over time. Perhaps most important, PM is particularly attractive to highly educated workers and in countries with a high standard of living. That competitive advantage—access to highly educated populations—will likely be sustainable for most of the 21st century.

Leontief’s Paradox and the Production Cascade

The Heckscher-Ohlin model of international trade, based on Ricardian concepts of comparative advantage, argued that economies export whatever they are best at. In particular, it argued that capital-intensive economies would export capital-intensive goods and labor-intensive economies would export labor-intensive goods. In the late 1940s, Wassily Leontief began mathematical tests of the Heckscher-Ohlin model and, in doing so, discovered what became widely known as the Leontief paradox: the observation that the capital-intensive United States tended to export products that were relatively labor intensive.³

Without attempting further penetration into what can quickly become a thick econometric forest, we can extract interesting and important lessons for the future of first-world economies from Leontief’s and subsequent work. Specifically, in a contest between the most basic ideas underlying free-market economics, scarcity trumps returns to scale. The United States and many other first-world economies are highly capital intensive, and there is nothing innately wrong with that. We don’t need to change it, but it is not the best source of our comparative advantage in international trade. The best source of that advantage is in resources that we have that others don’t have and, more important, that other economies cannot get quickly or easily. In particular, our labor force is capable of being productive in ways that other economies’ labor forces cannot. Higher labor productivity is a key explanation of the paradox and a tantalizing idea when thinking about future economic positioning among nations because it offers a counterpoint to the incessant shift of mobile mass production to low-wage economies.

Based on these arguments, we can construct a simple view of the relationship among first-world, second-world, and third-world countries. Labor, despite the efforts of entities like the European Union to make it flow more freely among countries, remains a relatively immobile resource. For reasons of language, culture, and law, people do not (cannot) move with ease from labor market to labor market. That favors the country with the most “valuable” labor force, which is to say the one with the hardest-to-duplicate set of skills and abilities. Capital, on the other hand, has become increasingly mobile over the past few decades. Given the revolution in computer-aided design and computer-aided manufacturing, “turnkey” factories are relatively easy to implement in low-wage and low-skill economies. According to this reasoning, we should see an inexorable move of low-skilled production from economies with a higher labor cost to economies with a lower labor cost, and that expectation has largely been borne out by experience.

The implications for first-world economies are clear: barring significant changes in the operation of the relevant underlying business models, there is not much future in low-skill mass production of goods or services. On the other hand, value creation that is dependent on well-educated labor will persist in first-world economies and, because it supports higher wages, can sustain standards of living that were created using (now unsustainable) high-wage and low-skill employment.

By combining the following, first-world economies can be sustained indefinitely if managers and owners remain perpetually vigilant about efficiency and cost:

• High-skill (creativity- and IP-based) industries
• More efficient services sector (held in place largely because of logistical constraints)
• Manufacturing and food production for which logistical constraints preclude overseas production
• Manufacturing that must be sustained for national security reasons

First-world economic dependence on creativity will continue to increase, as it is the principal source of sustainable competitive advantage and not easily or efficiently outsourced. Four needs emerge from this analysis, all of which have relationships to the benefits that can be obtained from PM:

• First, we need better educated workers. The slide in relative rankings of educational preparedness⁴ must stop.
• Second, we need more skilled workers. This goes to on-the-job training and other investments in worker abilities.
• Third, we need quicker and better solutions to emergent problems and a higher proportion of viable ideas for new products and processes. This goes to the creation of opportunity-based, rather than fear-based, work environments.
• Fourth, we need to protect and leverage increased investments in workers by limiting turnover and reduced effort. This touches directly on workers’ needs for a high quality of life at work.

The Free Agency Problem

Twenty-first-century managers in first-world economies will deal with very different workforces than those that powered the 20th-century economy. A significant part of this challenge will come from an issue that we think about often in sports but rarely think of as applying to our daily lives: free agency.

Perhaps more sports journalism pages and airtime have been spent on free agency than on any other topic. As soon as a team develops a winning formula, the fretting begins over the effect that the departure of a star pitcher, running back, or center will have on future performance. In such cases, we can clearly see the value of a person who performs well with other employees and helps to achieve the organization’s strategy. Interestingly, we don’t often apply the same reasoning to our own organizations, even though similar issues affect them more profoundly than does the performance of our local sports franchise.

Like professional baseball pitchers, most employees are free agents. Management practices over the past few decades have caused loyalty to be a minor factor in decisions about future employment. Employee loyalty began to change in the late 1960s and has continued to decline ever since. It is difficult to attribute causation among an increasing focus on short-term results by managers, a disconnect between supervisors and supervisees, and demographic changes in attitudes about loyalty. We do have convincing evidence that relationships between supervisors and subordinates play an important role in voluntary turnover and other behaviors that are adverse to the interests of the organization.⁵ Whatever the cause, employees do not feel strong obligations to stay with employers (and vice versa). To the extent that one organization has lower employee loyalty than competitors, it becomes a weakness in SWOT (strengths, weaknesses, opportunities, and threats) analysis because it negatively interacts with external threats such as labor shortages. If, as I have predicted, shortages of educated workers arise, companies with better employee loyalty will be in stronger positions to deal with them. If an organization has not developed committed relationships with its workers, it will be more vulnerable to having them stolen away by competitors. To replace them, it will have to return again and again to a seller’s market for labor, and this could result in a very unfavorable interaction of an internal weakness with an external threat. Organizations frequently pay too little attention to free agency and its effects on performance. A better understanding of its full economic cost is needed, and turnover should be treated as a significant determinant of firm performance.

At the executive level, this problem has been recognized and reacted to. During the first decade of the 21st century, firms have gone too far in retaining executives by offering astronomical salaries and stock options. Meanwhile, both the salaries and nonmonetary compensation of middle-class employees has remained static or declined.⁶ Superstar executives doubtless have important impacts on organizational performance, but changing the productivity of thousands of nonexecutives would have far greater impact than retaining any one person or small group of people. We need to be more concerned about churning turnover or underutilized talent of employees at lower levels.

Sarah, the Free Agent

A typical example could look a lot like Sarah, who began postcollege employment 3 years ago. Sarah had recently graduated from Big State University and arrived for an interview green as grass with a freshly minted degree in marketing. She had the intelligence, spunk, and creativity to become a highly effective marketing manager, so the department manager took her on even though she had few of the job’s necessary skills at the beginning of her employment. She was placed with the firm’s better people, sent to seminars and professional meetings, and her boss spent substantial amounts of time showing her the ropes and potholes. He introduced her to colleagues at various levels in the organization. It worked. Sarah grew dramatically in competency. She became effective as a sales manager, was able to increase performance of her unit, and seems to be a rising star in the company. So far, Sarah’s story is a dream come true. Substantial effort has been expended by a large number of people, and great results have been achieved.

The potential downside in this story is that those efforts have increased Sarah’s value in the marketplace. She has more opportunities now than when she started with the company, and retaining her is becoming more challenging. In an employment context where loyalty matters, the company would have some protection because Sarah would feel an obligation to stay with the organization that enhanced her abilities and value. For most first-world economies, with the possible exception of the Japanese, it is unreasonable to expect this kind of loyalty without overt efforts on the part of management to create it.

Sarah’s experience thus far has been that of a rising star, and the question of her attractiveness to other employers has not been in play. However, unless she is on a trajectory to become the company CEO, she will not be able to continuously rise at the rate she has achieved so far. Now is when the management task gets interesting. She is a solid performer on a team of people that generally performs satisfactorily. What hold does the company have on her when ads appear on Monster.com or competitors let her know about openings? To simply buy her loyalty—pay her more than competitors are willing to pay—violates the premise being argued: that productivity must increase for first-world companies to remain competitive. If Sarah assesses her job in terms of how happy she is and how much she enjoys her day-to-day activities, then the importance of positivity and negativity suddenly go up. Creating a better, more supportive, more positive workplace is one of the few options left open to her employer that does not decrease productivity by raising costs.

Participation, Commitment, and Positivity

Participative work environments are positively associated with employee satisfaction,⁷ sometimes for empowerment reasons and sometimes for trust-building ones.⁸ Employees want to feel free to speak up about important issues.⁹ Yet fear is pervasive in organizations and can be magnified by managerial behaviors. Employees who don’t feel free to speak up are more likely to try their luck elsewhere. Even if they have gained valuable skills while working at an organization, it may be the day-to-day working environment that helps determine their willingness to leave.

A negative working environment is a petri dish for fear, and that limits the open exchange needed for participative practices. This is a one-two punch on productivity: the jab being the loss of ideas, solutions, and knowledge about work-related events and the uppercut being a perception that employee ideas are not valued. High-involvement work practices are positively associated with organizational commitment.¹⁰ We can construct a simple model:

Positive approaches and ↑ employee involvement/participation = ↑ commitment, ↓ turnover, and ↑ productivity

Positive approaches, via a couple of intermediate links, lower turnover and increase productivity. Of course, this model works in reverse as well. If high negativity (i.e., low positivity) exists, involvement and participation are less, and this leads to lower commitment and higher turnover.

What About Sarah?

If Sarah, the hypothetical rising star, goes out the door, the following are the costs to the organization:

• Loss of a good employee with no guarantee that her skill set or desire to succeed can be easily replaced
• Loss of all future returns on the investment of time and cash outlays for her training
• Potential harm to relationships among organizational members resulting from frustration or resentment at having invested in an unsuccessful effort
• Provision of her knowledge about the organization to a competitor

When the subject of key employees going to competitors comes up, a first thought might be “We have a noncompete agreement.” If your experience with such agreements is like mine, you know that judges typically interpret them quite narrowly. If an employee you want to keep leaves your organization, it is best to treat the event as a dead loss.

Happy Employees Have Better Relationships With Customers

With persistent escalation in the intensity of competition among organizations,¹¹ companies with significant customer relations operations are faced with conflicting obligations. On the one hand, intense competition makes cost cutting more necessary. On the other hand, customer service quality must be maintained. We have understood for some time that negative attitudes displayed by employees can lead to unhappy customers, but the reverse can also be true, as negative customer attitudes affect customer service personnel.

PM can help to deal with both effects. From the employee perspective, it is easier to sustain positive attitudes and behaviors with customers if the employee is embedded in a positive work environment. Cognitive dissonance, the feeling of discomfort when beliefs conflict with behavior, is less when those who are expected to treat others positively are treated positively themselves. Also, a positive work environment can serve as a reinforcing buffer for frontline employees who are receiving significant negativity from the external environment. Unfortunately, customer service operations often do not do this, preferring the approach of “Life is tough. Deal with it.”

I have covered the downsides of using the “life is tough” approach on employees who do not have external contacts. If effected employees have external contact, however, organizational costs may be higher, as the negative atmosphere inside the organization is projected outward by employees. Complaints about customer service performance are universal. Negative work environments may play a role.

Some recent research has found that some customer service workers are more adept at “making do” with available resources.¹² This can be connected to individual characteristics of self-image and commitment in the workplace. PM attempts to change supervisory practices to improve employee self-image and commitment to the organization and can help to prevent negativity from infecting the relationship between frontline people and customers.

Individual Differences

When psychologists and organizational behavior experts deal with the effects of people’s personal preferences and behaviors in the workplace, they typically use the term “individual differences.” This term is intended to highlight the fact that although some artifacts of psychology and sociology can be averaged across samples and populations, it is important to remember that people are not alike and that we should expect different reactions to the same stimuli.

Knowing that the innate desire for quality and pride in one’s work varies from person to person, how can we get a workforce with a higher percentage of quality-oriented employees? Selection, selection, selection. If we are successful in selecting the right people, they will bring with them a higher than normal pride in, and feeling of responsibility for, their work. But that is only part of the equation. For the most part, even those with significant internal desires need to be “activated,” meaning that external stimuli are needed to bring out the full effect of the internal trait. If we fail to trigger innate desires or, worse, engage in actions that limit their effects, we risk two undesirable outcomes:

• Undermining selection processes for which monetary and human resources have been expended
• Increasing requirements for external control processes, which are likely to result in lower quality output at a higher cost

If supervisors engage in cynical, overly critical, or angry behaviors, they are likely to find the “off switch” for employees’ intrinsic motivation. An organization-wide policy requiring PM helps to guard against the smothering of the desire to achieve that naturally occurs in many employees.