Continuous Improvement


This post is a commentary on a Harvard Business School Case Study about performance evaluations at Arrow Electronics.

On a quick, personal, third-degree-of-separation type of note: while I have no inside knowledge of Arrow Electronics, I have had the pleasure of designing their facility here in Reno, Nevada. The Case study indicates that, at the time of the study, Arrow had “no world class manufacturing facilities” but they do now have, among office and warehouse/distribution space, 60,000 sq ft of world class manufacturing space here in Reno.

Performance evaluations are a ubiquitous presence in nearly any business environment. We have probably all received and maybe even given them. Undoubtedly and, as the case study shows, oftentimes performance evals can have unintended effects and can be devoid of real, actionable information. They may actually be counter-productive to the all-important climate of continuous improvement and teamwork in an organization.

Arrow discovered that ‘evaluation inflation’ was at play in their evals. Consequently, the CEO sent the evals back to re-done and subsequently received back new and “improved” with an artificial, forced, normal-curve distribution. I the new evals there ended up still being no differentiation of the quality of employees (which was what the CEO was looking for, he just wanted the evals to contain some useful information and be a valid and reliable tool); there was just a lowered cluster of scores. The scores were now clustered around “average” but still mostly grouped in a cluster. This made the evals essentially a useless tool devoid of any real information.

Lessons:

  • Performance evals cannot be mandated to meet an artificial normal distribution, else all useful information contained in them shall evaporate.
  • Managers and employees can and will learn to manipulate the system and will begin to behave in a less then genuine manner which will impede learning, growth and teamwork; this will impede an atmosphere of continuous improvement, which is necessary for businesses to function and survive long term. Performance evals can lead to much energy being spent on “impression management” rather than the real business of the business, whatever it may be.

We have all probably experienced some of the dark side of performance evals: seen them used in negative-energy generating ways such a being a tool to engender and reinforce the power of the manager over the employee as well as a tool to justify little or no annual raise (justify labor cost goals of company). This approach totally misses the point and the opportunity of some positive-energy generation that can come from an effective performance eval.

Performance evaluations should effectively steer employees toward learning and growth, toward continuous improvement.

It might be a good idea to separate compensation and performance evaluations: compensation might better be based on market values. Performance evaluations might be reserved to help to foster honest discussion, teamwork and an atmosphere of continuous improvement. There would be more time for learning from mistakes and less energy spent managing perceptions and worrying about how one mistake might look on a review that affects one’s compensation.

A question for further thought: Is it really possible to institute a performance evaluation that is entirely objective, valid and reliable or is what the performance evaluation trying to accomplish necessarily subjective and subject to human relationships?

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From a Wall Street Journal article (Two Football Coaches Have a Lot to Teach Screaming Managers, January 29, 2007; Page B1), a Business Week article (Get Healthy—Or Else, Inside one company’s all-out attack on medical costs, Business Week, 2/26/2007) and a U.S. News and World Report article (Jesica’s Story: One mistake didn’t kill her–the organ donor system was fatally flawed, Avery Comarow, U.S. News and World Report, Washington: Jul 28, 2003. Vol. 135, Iss. 3, pp. 51-54).

In 2007’s super bowl, the two teams’ coaches were among the minority in the NFL: known for not screaming and yelling at players. They were also the first African-American coaches to lead Super Bowl teams. Whether this is correlated or not is another issue for discussion. While demanding of their players, they give directives calmly and treat them with respect. Ridiculing and screaming at team members can actually undermine productivity. “There’s a big difference between saying ‘you made a stupid mistake’ and screaming ‘you’re really stupid’.” This makes sense when viewed from the perspective of Jerald Greenberg’s concepts of procedural, distributive and interactional justice forms of fair treatment at work. A perceived lack of interactional justice is the most deadly form of injustice in terms of leading to stress reactions at work, which, in turn, are well-known to have negative impacts on motivation, performance and health. Even if screaming get ‘results’, they are likely short-term and higher employee turnover will result and the ends do not justify the means.

At Scotts Miracle-Gro Co. (SMG) an employee was fired for failing a drug test—the drug was nicotine! “How do executives looking to cut medical costs persuade employees to take better care of themselves without killing morale and spawning lawsuits?” Company-provided health insurance became prevalent during World War II and company-funded health insurance has been steadily becoming less prevalent since. Health insurance is a large part of most company’s budget and, historically, companies have used carrots such as lower premiums, free gym memberships, etc. to persuade employees to become more healthy thus decreasing company’s health costs. More recently, companies such as Scotts have instituted a sticks approach, such as higher premiums for not submitting to exhaustive health testing and not following personalized programs drawn up from the results of one’s health testing, to getting employees more healthy. The principal behind Scotts program is admirable but the means of telling people what to eat and when to exercise, etc. is downright Orwellian and probably a drag on morale (by taking away people’s control over their own lives) in most cases.

A young woman, Jesica Santillan, died an avoidable death because she was mistakenly received transplanted heart and lungs from a donor with a blood type that did not match. The surgeon, James Jaggers, admitted “I am ultimately responsible.” for not checking Jesica’s blood type. The hospital’s system of check failed as well for not catching the surgeon’s error in time. As well, U.S. News and World Report found that the entire national organ-transplant system played a role. Typos and errors were found to be common in match lists. Match list coordinators are instructed not to involve themselves in medical decisions; it may have helped catch the blood match error had these coordinators been able and encouraged to be more involved in the whole of the process. Along the chain of events that led to the error, there were also other people whose jobs appeared to be ‘compartmentalized’ which costed them the opportunity to catch the error. Sharing information (not just pieces and parts) and doing away with ‘not my job’ attitudes may have made for a different outcome in this case. The donor organs were clearly marked “Type A” but nobody in the operating room knew Jesica’s blood type of “O”. In the end, these grave errors, cost a young woman’s life but motivated the medical system to overhaul and put new safeguards, such as multiple checks and verifications, etc. into the organ transplant system. Errors and failures can certainly become strong motivation for improvement.

O’Reilly, C., & Pfeffer, C. (1995). Southwest Airlines: Using Human Resources for Competitive Advantage. Stanford, CA: Graduate School of Business, Stanford University.

This posting is about the Stanford University, Graduate School of Business Case study focusing on Southwest Airlines as an example of leveraging human resources into a distinct competitive advantage. Certainly, we’ve all hear lip service paid to the importance of people and probably, most of us, even view it as a cliché and just words without any substance. This is certainly the case more often than not but Southwest Airlines appears to be an example of a company that has done so and proved that a company’s personality and intellectual capital, its people, can indeed be leveraged into a distinct competitive advantage.

As anyone familiar with human resource departments can attest, human resource issues are very important to businesses and typically consume a large amount of a company’s time and energy. The question is: how to leverage a company’s intellectual assets (people)?

A little background from the case study

In 1994, a “Major Showdown in the airline industry” was shaping up involving Southwest, United and Continental Airlines. The other airlines (Southwest’s’ competitors) had been hurt by competition from Southwest and decided to try their hands at competing head-to-head with Southwest in the type of low fare, no frill, air service that Southwest had become known for. It didn’t work out as well for them as it had for Southwest. Continental Lite, could not match the efficiency of Southwest and their CEO was purportedly not particularly people-oriented. United’s “Shuttle” was plagued by unhappy employees and an abundance of intracompany rivalries and conflicts.

So where does Southwest’s completive advantage lie? Southwest believes their competitive advantage lies mainly with their people and how they are managed and not so much with their pricing structure. The leverage lies with the people! Among other things that were not so easy for the other airlines to imitate, Southwest encouraged their employees to deliver great customer service and have fun (which often go hand-on-hand).

Not to be underestimated is the fact that Southwest’s workforce is very productive. Their turnaround time (arrival at gate to next departure) is about 15 minutes, as compared to an industry average of about 35 minutes. Also Southwest accomplishes this with great efficiency; they use fewer people at gate and a smaller ground crew. Harold Sirkin, an airline specialist with BCG said, “Southwest works because people pull together to do what they need to get a plane turned around. That is part of the Southwest culture. And if it means the pilots need to load bags, they’ll do it.” Southwest averages nearly forty percent fewer employees dedicated to an aircraft than industry average (81 vs. 130), a testament to their productivity. This means they need a smaller load factor (about 55%) on their planes to break even.

A little evidence of Southwest’s success

When Southwest started, in 1971 with 198 people, Continental Airlines used every dirty trick in the book, including political, regulatory, litigious, etc. to make sure that Southwest did not get off the ground. An example is the Wright amendment (named after James Wright, then Speaker of the House). This amendment ostensibly was meant to encourage traffic through the new Dallas-Fort Worth hub (where Continental flew through) but effectively made the logistics of airline routes in and out of Love Field (where Southwest flew through) very difficult. This appeared to have backfired and made Southwest “mad” and even more motivated to compete and win; a culture which appears to continue into their competitive culture that persists today.

Before Southwest entered the Louisville-Chicago market, 8,000 people daily flew this route, after Southwest entered, 26,000 people flew this route daily. Most of the excess used to drive it. Southwest, with their strategy of low costs, low fares and frequent flights, was able to effectively create new customers that didn’t exist before.

For the period 1972-1992, Southwest stock earned the highest returns of any publicly-trade U.S. stock—a compounded return of over 21,000%.

Corporate Culture

Southwest’s “Work is important…don’t spoil it with seriousness” attitude may stem from CEO, Herb Kelleher’s, personality and relaxed management style. As well, he “…somehow managed to get union people to identify personally with his company.” He said “our essential difference is minds, hearts, spirits, and souls.” In a letter to employees he also quoted Winston Churchill: “Success is never final.” Kelleher said “Indeed success must be earned over and over again or it disappears. I am betting on your minds, your hearts, your souls, and your spirits to continue our success.”

Southwest’s human resources department is named the “people department” and stresses the two “C’s”” compassion and common sense. They tell people to “break the rules” if they need to.

The “Southwest Spirit” appears to be: creative, not too uptight (loose), strong on teamwork, positive, a bit non-conformist, a little outrageous and extroverted.

What lessons can be drawn?

  • The leverage that corporate culture and the human resource can provide for strategic advantage and change cannot and should not be underestimated. However, it must also be “articulated, practiced and reinforced.” The employees who are the face of the company must also be bought in heart and mind, and actually do and say what the company values.
  • It is good practice to put one’s energy in figuring out how to do better every day and how to achieve continuous improvement and not to waste too much energy worrying about the competition.
  • An intracompany family spirit and atmosphere of trust as well as meaningful interpersonal connections go a long way to fostering motivation and a sense of job satisfaction. And have no doubt, this is directly related to the bottom line.
  • Growing too fast can hurt the “family” feel of a company.


We, as human beings, are undoubtedly affected by both our cognition (the inner) and our behavior (the outer). As with most experiences in business, as in life, this can be good or bad depending on the way we use it. In the Harvard Business Review article “Teaching Smart People How to Learn” (Argyris, 1991), this relationship between our inner and outer experience is an extremely important component.

The article discusses how, in the author’s experience, “smart” people (well-educated, high-powered professionals) have more difficulty than would be expected in dealing with failure and turning it into a learning experience. Argyris submits that most professionals are almost always successful at what they do and have no real experience with failure and thus do not know how to handle it when it finally does occur (and it is always a matter of when not if). Furthermore, he indicates that, in his estimation, most professionals have been trained with too much emphasis on the outer and problem solving in the external environment when, in fact, the root of many problems may lie in the inner environment (our cognition).

The article outlines some cases which are good examples of disconnect between people’s behaviors and what they self-report as their inner beliefs. Recognizing this disconnect and that it is irreconcilable with the fact that it is virtually impossible, in a normal person, to have a disconnect between the inner and the outer states (cognitive dissonance results) is a first step in the right direction toward achieving concrete results in improving interpersonal (business or otherwise) relationships and learning from those that may have failed. This recognition of disconnect should lead us to look inward and perform some healthy scrutiny of our own inner belief systems and possible reflexive reactions. Maybe our self-reported beliefs and the inner states we report to the world are not accurate at all. Maybe if we could get to the point that we know our own inner experiences better we could understand and improve in our outer experiences and our interactions with others in both business settings and life in general.  If we improve the inner we improve the outer; if we improve the outer we improve the inner.