Case Study — Nordstrom: Dissension in the Ranks?

1 Mar

The anti-SAS

Harvard Business School Case Study 9-191-002 questions the compensation policies and practices of Nordstrom, which are inextricably linked with its high-touch customer-service culture. After rapid expansion in 1980s, this publicly traded retailer was lambasted by labor unions and the news media for its practices, which allegedly led to employees underreporting actual work hours in the interest of keeping both their commissions high and the best floor schedules, as well as currying favor with management.

Nordstrom, which started out as a family business in Seattle, grew rapidly in the 1980s. Its sales force grew by six times in less than 10 years as the company expanded geographically beyond its home base of Washington and Oregon.

Its reputation for “superior customer service” is considered a strong competitive advantage and source of its financial success, including sales per square foot double the industry average. However, that’s a strategy that can be copied readily. “Superior customer service” is only part of the equation in retail: No matter how good your service, if you don’t stock the clothes and shoes customers want to buy, they’ll shop elsewhere.

From the case study, there is little evidence of a strong management emphasis on creating a “great culture,” as at Southwest Airlines.  Although publicly held, the Nordstrom family owns half of the company. The family seems a little entitled, as witness this comment from Jim Nordstrom: “People don’t put in enough hours during the busy time.” What?

Nordstrom’s caliber of salesclerks seemed to withstand the pressures of rapid growth, but apparently it didn’t have a strong hiring screening program or training, as at Southwest. Most importantly, it didn’t seem to really care about treating employees well and backing it up with fair rewards.

Nordstrom’s policy was to “to pay employees for time,” but its practice was something different. The service behavior for Nordies is almost codified, such as the expectation that they make home deliveries. Compensation is driven by sales per hour, so if an employee does any work that’s not ringing up the register, he or she is effectively penalized. Why can’t they just put those activities against non-selling time? Or adjust the commission structure? Its culture made it clear what the “right” thing to do is, yet without breaking any laws.

A management memo defined tasks such as writing thank yous or attending a meeting “selling.” But writing a customer a thank you is no guarantee that customer will make next purchase from YOU! That should not be classified as a selling activity, but rather as a post-sale activity. The company should pay for that, not the employee, since the company overall is most likely to benefit from the next purchase. [Bruce Nordstrom compared this non-selling time to an advertising salesperson, or an insurance salesperson. But there’s a big difference in the business models: The next sale will probably go DIRECTLY to that person in those businesses.]

There’s no question that the United Food and Commercial Workers union, which represented about 5 percent of employees, was behind a lot of the complaints. It reported Nordstrom’s practices to the National Labor Relations Board and the Washington Department of Labor and Industries. It clearly wanted to grow its membership by representing a greater percentage of employees, and what better way to rally them by telling them their employer is a cheat?

Although not every employee is unhappy – in fact, a fair number seemed to have stood by the company, and they later ousted the union – at the root there is something inherently wrong with the company’s compensation structure. The old saw “Where there’s smoke, there’s fire” lends credence to this case study.

However, the union’s claims were not entirely true, and this is why Nordstrom in essence prevailed: Employees DO get compensated for selling work. It’s just that the underlying system discourages reporting the hours. The irony: If there were no union, would any of this have come to light?

When Denny Flanagan performs outrageously for United, he’s probably not being compensated. However, he’s an outlier within the company – no one is expecting him to do that, or marking him down if he doesn’t. At Nordstrom, however, everyone is expected to perform outrageously, but unlike Southwest, the environment seems punitive, rather than fun.

Nordstrom tells employees, “This is your business, treat it like your business.” No, it’s not their business – they don’t get the profits! The family and shareholders get the profits.

In the end, the Department of Labor and Industries order that Nordstrom compensate employees was rather silly, because it did not address the systemic and cultural issues at the company. What will change? Yeah, now employees have a written time sheet, but will they use it?

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