Recently (Dec 5, 2022), Pepsico announced that it would lay off hundreds of workers “in headquarters roles”. The lay-offs memo was signed by the CEO of PepsiCo Foods North America and the chief human resources officer of Frito-Lay North America. These executives stated their purpose was to “take steps again to simplify the organization so we can operate more efficiently”. Why, one wonders, were they not operating more efficiently prior to this announcement? Presumably, more efficiency is a good thing, and should be sought at all times.
Pepsico is not alone. A December 4, 2022 entry on intellizence.com has a long list of layoffs at companies including H&M (1,500 layoffs), United Furniture (2,700 layoffs), Alphabet (10,000), Hewlett Packard (6,000), Cisco (4,000), Amazon (10,000), Meta (11,000), and Credit Suisse (9,000). The list goes on.
The purpose of a firm is to create value for customers. Bartley J. Madden, in his book Value Creation Principles, expands the idea of purpose to “communicate a vision that can inspire and motivate employees to work for a firm committed to behaving ethically and making the world a better place”. This concept of purpose includes knowledge-building to learn how to serve customers better, and sustaining win-win relationships with all the firm’s stakeholders – including employees, of course. If employees are to be inspired, they should expect to be treated fairly and with respect. They should be treated as individual value creators, empowered, trained, informed, and given the autonomy to make decisions that further value creation for customers. Fundamental to the Bartley J. Madden vision is long-term sustainability. Value creating firms ignore the demands of Wall Street for quarterly returns and the maximization of shareholder gains, and focus on building the real assets in the firm – through capital investment and innovation projects – that can continue to deliver customer satisfaction for decades and longer. Financial returns are an outcome of this commitment, but do not represent the purpose of the firm. Maximizing shareholder returns does not qualify as a vision in this worldview.
A value creating firm that aims at genuine sustainability adds to its assets when those assets are demonstrated to be value drivers. Madden points to the knowledge-building proficiency of the firm as the critical element in long-term success or failure. Knowledge-building is a learning process: learning what drives value for customers. Customer value is subjective – an experience, a feeling, something that can’t be measured via the standard quantitative metrics. But there is an indicator of customer value that can be relied upon, and that is cash flow. Cash flow is value created in the customer domain flowing back to the corporation as revenues. Customers advance through a value learning cycle that begins with evaluating whether or not any proposition has potential value for them, then comparing it with alternatives, and then arriving at the point of exchange which we can call “willingness to pay”. If willingness to pay is positive, the firm receives revenue, indicating that the customer has committed themselves to the experience of value in the expectation of satisfaction. If the customer repeats the cycle and buys again, it’s an indicator that the value experienced met their expectations. There’s a second flow of cash to the firm.
There’s a direct connection between cash flow and value creation. Therefore, through experimentation and analytics, a firm can identify its value drivers, those assets most positively and most directly generate customer value. These value drivers can include assets like brands, specialized expertise, technologies that generate desired customer experience (like speed and convenience and ease of use), and highly refined knowledge that defines the firm as the go-to reliable expert. Value drivers can also include human capital – the people who work at the firm, immerse themselves in the knowledge-building process, contribute to its further development, and become value creators in their own right.
So why would a firm lay off hundreds of such people “in headquarters roles”? Presumably, they wouldn’t fire value creators, for that would be depriving customers of value, which is the opposite of the firm’s purpose.
Or is it? In fact, what these layoffs reveal is that customer value was never these firms’ purpose in the first place. In this age of financialization, the purpose of the firm is maximizing its returns to shareholders (who include the CEO and the Board and the rest of the C-Suite, as well as Wall Street and institutional investors, but seldom customers). Those returns are assessed at minimum quarterly and often more frequently. If those returns, or pre-indicators of those returns such as revenues or margins, turn downwards, the stock price can easily decline, slamming the brakes on shareholder returns. An easy fix is to reduce costs, to restore margins and profits, and the easiest cost to reduce in the short term is labor – people.
Clearly, the people who have been laid off must not be in value creating jobs. They’re not driving trucks and stocking shelves. So why were they hired in the first place? The reason is that there’s a purpose of management other than creating value for customers. They want to increase their department size, and the number of people they supervise, because the incentive compensation system rewards them for that. It’s an increase in power for managers. They’re short-term thinkers, and they don’t anticipate the layoffs to come; they’ll take the power and compensation increase now, and worry about the layoffs when they come.
That’s why not only the purpose of the firm must be examined to make sure it’s truly oriented to customer value, but also management itself must be reimagined because it is too often not value creating, it’s value destroying. Middle management, especially, is value-destroying. Bart Madden points to the efficient value generation of firms like Nucor in the steel industry, with only 4 layers of management from CEO to the factory floor, and compares it with traditional steel industry competitors who might have as many as 12 layers of management.
When a firm is truly focused on customer value generation, they wouldn’t hire these bureaucratic “headquarters roles” in the first place, and then they wouldn’t resort to layoffs to solve the problem they created for themselves.