The Risk of the Lifetime Employment Model - Essay Example

MANAGEMENT PRINCIPLES: The risk of the lifetime employment model BY YOU YOUR ACADEMIC ORGANISATION HERE HERE HERE The risk of the lifetime employment model The lifetime employment model When the Sony Company first developed and offered its employees lifetime employment guarantees, it was operating in a much different business climate than today’s marketplace. During this time period, several decades ago, it was commonplace, especially in Japan, for employees to be given long-term employment guarantees in exchange for no-strike agreements, thus protecting the company’s interests in regards to disruptive labour organisations. Today, however, there are considerable risks to the lifetime employment guarantee from a legal perspective, a human resources perspective and in terms of maintaining competitive advantage in difficult economic conditions. This report identifies the advantages and disadvantages of the lifetime employment model and offers lessons for today’s managers who are still considering using this lifetime employment system. Responsibilities for lifetime employment When employees are given lifetime employment guarantees, the business must consider its responsibilities in terms of the law. Gibson and Piscitelli (1997) offer that business leaders must be careful about certain statements which are made which can be interpreted by employees to mean that their jobs will always be secure. In one large, multi-national business environment, a business manager, in passing workplace discussion, told his employee that “we will retire together”. This statement was made in an environment where no such lifetime employment guarantees were part of the business model, however the employee was able to convince the legal system that a lifetime employment contract was implied, thus imposing significant consequences for the business. Even though this was not a business where lifetime employment was being offered to employees, it tends to illustrate the importance of considering the legal responsibilities of these agreements. Repa and Stewart (1999) offer that the largest legal risk is when employees begin to perceive that contracts exist between themselves and the business entity, thus the creation of an implied contract becomes grounds for legal disputes. In a business where lifetime employment is part of the business model, companies must consider the risks of these types of agreements as employees have considerable legal resources available in the event that employees perceive breaches of these contracts, whether implied or based on written employee contracts. The business must also consider that, when offering lifetime employment guarantees, the current marketplace or economic conditions will not always, in the future, be favourable for business growth. Even though a company may be experiencing high trading share value or be experiencing significant sales success in a marketplace, these conditions will not always be dependable as market conditions or consumer behaviour changes. Michael Porter, a renowned business strategist, outlines his Five Forces Model which recognises the most significant risks to businesses from the external environment. One of these risks is the level of buyer power, which is relevant to companies like Sony which rely on sales from consumer and business buyers. The Five Forces model identifies that brand identity, product differentiation, and consumer price sensitivity can all impact successful business (Recklies, 2007; quickmba.com, 2007). From a marketing perspective, companies like Sony develop their own branding strategies or create promotional materials which position the company uniquely from competitors. Usually, this is accomplished to build a positive brand sentiment in certain consumer groups or simply to boost sales as a new strategy focus. In market environments where economic conditions are volatile and consumers have become more price sensitive, sales declines may result, thus leading to an overage of employees or the need to cut costs from the strategists’ level. In this situation, a company like Sony which provides lifetime employment guarantees would not be able, like many of their competitors, to cut costs by removing redundant employees from payroll. Instead, if sales are down to due declining consumer incomes, the business will have to look for other areas to make cost-cutting, putting significant strain on business strategy. Companies like Sony adjust their manufacturing efforts based on consumer demand and sales forecasts, thus production labour and payroll are considerable concerns for these businesses. When difficult market conditions create a great deal of threats from the external environment, such as changing consumer sentiment about a certain technology brand, excess manufacturing labour can be a large business risk. If the business cannot find other areas of the business to utilise these lifetime employees, payroll redundancy and costs becomes the paramount business issue. The company might also have cut costs in multiple areas already in an effort to reduce business expenses and have no other option to do so without cutting labour, which would be considered a breach of contract by disgruntled employees. When employees are present which have been guaranteed lifetime employment and the business is unable to cut costs effectively in other areas, significant business losses can occur. This could drive down per-share value from investors who are not confident about how the business will manage to reduce costs, as one example. As yet another consideration, today’s employees have become accustomed to performance management systems at most large workplaces in which their individual contribution to business success and performance are recognised through various reward schemes or annual pay increases. These are merit systems which make up two-thirds of all business models in relation to human resources (Kennett, 2004). The responsibility for companies like Sony which offer these lifetime employment guarantees is considering how employees will respond to a system which does not provide jobs based on merit and performance. Younger employees who are hired into these companies will be exposed to long-standing employees with seniority who have been part of the lifetime employment guarantee. If these new employees have been educated in a business culture which reinforces innovation and talent as key success attributes, but find that their career paths are blocked by the lifetime employee, it could lead to problems with turnover at the HR level as they look for new employment where their individual contributions are rewarded. In these situations where lifetime employees are met with a new generation of performance and merit-minded workers, it can “drain younger generations of spending power and hope” (Kennett, 2004, p.73). The current social attitude in younger generations, however, does pose an advantage to businesses who wish to consider offering lifetime employment guarantees. One business professional identifies that many younger workers have witnessed the slow erosion of the “job-for-life culture” and “people now realise they have to develop their own careers” (Turner, 2007, p.22). This is a cultural aspect, from the human resources viewpoint, which can be of benefit to companies who either work within lifetime employment environments or are considering phasing out these rather outdated policies. If younger generations, as a cultural belief, realise that lifetime employment will probably not be a viable opportunity for them, once older and more seasoned lifetime employees begin to be phased out, new performance-oriented or merit-based systems can be developed without necessarily angering the youth generation who believe in setting their own career paths and longevity within a firm. Also in terms of risk, when businesses hire employees, they have a considerable volume of responsibilities in terms of providing employees with stable job environments and also appealing to their emotional needs to create worthwhile and inclusive careers. For example, renowned psychologist Abraham Maslow identified his five-tiered Hierarchy of Needs, a model which highlights basic human needs and how they translate in the business environment. This model suggests that belonging and security are two of the most primary needs and must be met in the business environment in order to maximise motivation and performance (Mathis and Jackson, 2005). This human needs model is used as a template for HR professionals in many different companies and industries. Lifetime employment guarantees, not taking into consideration cost risks of this activity, seems to appeal security needs. This is noted as an advantage for companies like Sony as the basis of the employment agreement, by design, provides employees with increased motivation. However, from the HR viewpoint, belonging is something which is created through mutual relationship-building, performance evaluation, and positive feedback for positive performance (Mathis and Jackson). Job promotions or pay increases based on routine feedback and positive socialisation is another consideration of the business when considering whether to adopt or reject lifetime employment guarantees. The lifetime employment model does not appeal to all social needs, thus future motivation and performance can be affected negatively. Lifetime employment situations also provide limited flexibility to the business in terms of achieving innovation and maintaining a competitive advantage. Rowley and Hall (2007) describe the difficulties of the Japanese labour market (relevant to Sony) in which jobseekers in their 20s and 30s are being passed over for jobs in favour of new graduates. In the last decade, Japan has been plagued with difficult business and economic conditions, and many of these younger jobseekers were forced to take part-time work simply to earn a living (Rowley and Hall). However, as the country moves away from this economic turmoil, these jobseekers in their 20s and 30s are not viewed by companies as viable potential employees. For companies like Sony which would likely not hire additional employees due to a high volume of lifetime employees, flexibility in knowledge creation and modernisation through innovation would be limited. With new employees or recently-graduated employees, new technologies and business concepts are generated which gives companies better processes or competitive advantage. Lifetime employees would likely have more risk at becoming complacent in job tasks and learning and would not provide the pool of knowledge and innovation needed to make a company succeed. Being unable to diversify the employee population, then, becomes a significant business risk when offering lifetime employment opportunities. Picard and Groth (2001) further support the limitations provided by lifetime employment contracts by suggesting that some companies find such a difficult time trying to reinvent themselves and address certain social issues at the firm that businesses experience a time-to-market crisis. Companies like Sony are under considerable pressure to create new products and also provide them into the correct market in a method that outperforms competitor actions. Time-to-market delays caused by lack of employee innovation could mean both sales disaster and a loss of strategic, competitive edge in the process. Issues of minimal innovation and business delays caused by lifetime employment guarantees should be considered from the HR and profit perspectives before launching a similar employment model as that of Sony. The human resources manager is responsible for ensuring that employees are given worthwhile and meaningful work whilst also taking into consideration the needs of the business at the strategic level. Melville (1999) offers that when companies offer lifetime employment, it can actually make employees undesirable and severely limit their job potential for the future. In some cultures, it is considered an absolute embarrassment to have been involved with a company that has failed or gone bankrupt (Melville). Companies must consider their business life cycle, or how long the business can remain viable and competitive in certain market environments, as part of regular business strategy. In a failed business environment where many lifetime employees are now out of work due to business collapse or similar failures, the odds of them landing an equivalent position at a different firm are quite slim (Melville). Therefore, a business must consider the needs of employees and provide them with the tools and extended learning necessary to become multi-faceted and employable in the event that a business does not achieve success. If there are a great deal of employees who are unable to find lucrative career positions due to their lifetime employment status at a failed or struggling company, this lessens the labour pool of skilled and diversified employees and can be a risk to other companies which might be looking for more developed and innovative support or managerial staff. Lessons for managers The Sony Company case study provided several lessons to other managers, in many different industries, about how best to approach the lifetime employment contract. “Given today’s more volatile and unstable organisational environment, individuals can no longer expect lifetime employment within one’s organisation or a steady climb up the corporate ladder” (Shah, 2005, p.28). The first lesson is, again, to realise that younger job seekers who are not familiar or have experience with lifetime employment systems do not expect these kinds of contracts when looking for contemporary job positions. Thus, from the HR perspective, not offering lifetime employment will not create significant organisational culture issues or likely higher employee turnover simply because employees believe that self-driven efforts lead to better career positions. They will be entering the workforce with the idea in mind, as an engrained cultural belief, that individual merit will decide longevity at the firm and will not be entering with expectations of lifetime employment on the forefront of their career ambitions. It should, however, be considered that employees will likely desire some sort of motivational incentive or reward scheme system to ensure that their motivation and basic needs related to social belonging have been met in a work environment which does not offer lifetime employment contracts. Another lesson for other managers in adopting the lifetime employment model used by Sony is the level to which the business requires innovation and flexibility in order to be successful. Sony is a manufacturing and product-driven company and the majority of innovation would seem to be linked to product and marketing. However, another company in the service marketplace would rely on employees to be diverse in thinking and provide alternative solutions to existing internal processes in order to offer customers a better and more focused service. The lifetime employment model was recognised as limiting innovation and knowledge. A service-oriented business may find that through lifetime employment, employees become more rigid in their thinking and complacent due to concerns over job loss being replaced with high levels of job security. Thus, the lifetime employment model can serve to curb motivation and innovation and any company which relies on being able to routinely reinvent itself in order to compete should reject this model. Much to the advantage of today’s managers, the Sony lifetime employment model is being phased out by a group of modern workers who no longer expect a promise of the lifetime job. This is a cultural element of today’s workforce and it is a lesson about how best to recruit employees from the HR role. It is recommended that today’s managers, if they choose to reject the Sony model, create some form of performance-oriented or merit-based system to ensure that psychological needs are met and that there are perceptions of job security as well. The end result of these systems, in an environment where lifetime employment is not an option, is better motivation and less problems with internal culture. References Gibson, P. And Piscitelli, K. (1997). Basic Employment Law Manual for Managers and Supervisors. CCH Answer Series. Kennett, Patricia. (2004). A Handbook of Comparative Social Policy. Cheltenham: Edward Elgar Publishing, Inc. Mathis, M. and Jackson, J. (2005). Human Resource Management. 6th ed. United Kingdom: Thomson-South Western. Melville, Jan. (1999). Marketing in Japan. Oxford: Butter-worth-Heinemann, p.33. Picard, R. And Groth, J. (2001). Japan’s journey to the future. Management Decision, London. 39(4), pp.315-323. Quickmba.com. (2007). Porter’s Five Forces: A model for industry analysis. http://www.quickmba.com/strategy/porter.shtml. (accessed 5 Aug 2009). Reba, B. And Steward, M. (1999). Your Rights in the Workplace. Berkeley: Nolo Publications. Recklies, Dagmar. (2007). 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