The Downside of Case Studies

29 July 2011 at 9:52 pm 16 comments

| Peter Klein |

As Herbert Simon once noted, while a case study is only a sample of one, a sample of one is infinitely more informative than a sample of none. This is surely true, but cases must be used with caution, particularly when more systematic evidence is available.

A couple months back I saw a Huffington Post piece claiming that, because Lincoln Electric retains workers even during recessions, and Lincoln Electric is a profitable company, firms should not fire workers when the demand for their products declines. QED. The author laments that business schools don’t teach the virtues of a “no-layoffs” policy more generally. As evidence that business schools are corrupt or incompetent, the author shows that management experts do not, in fact, believe that such a policy is desirable.

A more troubling reason is that many professors at Harvard and other MBA schools are deeply skeptical of offering workers such a bargain.

“It’s a terribly non-optimal and inefficient policy,” says George P. Baker, the co-chair of the HBS doctoral program. “Lincoln Electric is a special case. Unless there is some other reason for having it, as part of an incentive system, you would be wrong to recommend it.”

“I’m not unsympathetic to guaranteed employment and the long-term social strengths it builds,” says James Rebitzer, Chair of the Business Policy Department at Boston University’ School of Management, “But I think there are only a very few special circumstances where a commitment to no-layoffs actually improves operating efficiency.”

Harvard students such as Corey Crowell (MBA 2009), who read the [Lincoln Electric] case just days before we met, got the message: “I just worry that the sense of a guaranteed job would create complacency . . . look at the auto industry.”

There you have it. Despite a wealth of theory and evidence that guaranteed lifetime employment is generally harmful to firm performance, if one firm follows such a policy and prospers, then all firms should do so. That business schools don’t embrace the non sequitur is “troubling.” Okey dokey.

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16 Comments Add your own

  • 1. Jose Camoes Silva  |  29 July 2011 at 10:21 pm

    Three points:

    1. Business schools have embraced a lot of non sequiturs over their evolution. Part of the value of business research is to reduce the number and scope of these non-sequiturs. PK is completely right in criticizing the HP for this.

    2. As a reader of news and opinion sites, I’m now almost desensitized to logical fallacies, innumeracy, and psychological biases. Finding one in the HP in a post about business is about as surprising as finding a Red Sox fan in a sports bar in Boston.

    3. It’s probably better for the HP that it posts stuff with fairly obvious shortcomings, as those shortcomings attract fights, which lead to comments and page views.

    Cheers,
    JCS

    (Posted also on my blog here: http://josecamoessilva.tumblr.com/post/8242850367/ )

  • 2. Greg D  |  29 July 2011 at 10:47 pm

    The value of case study is to figure out why things work one way in some contexts and a different way in others. A case study tells us what happened in context; i.e., it is history, not theory. The interesting thing is then to apply (or modify, or build) theory to find the principles behind why things worked the way they did.

    People who use case studies to suggest generalities are actually applying poor theory, whether they know it or not. The theory is that what happens once happens always, regardless of context. It is a mistake every bit as bad as that of the theoretician who ignores disconfirming evidence. Fortunately, most business professors know better.

  • 3. Isaac  |  30 July 2011 at 12:17 am

    The problem with the example is not that the author uses a case study; the problem is that he does not know how to use it. He uses it as evidence to establish the conclusion that a “no layoffs” policy is universally valid. Of course he has no warrant for doing that. All a case study shows is that there is an instance of a “no layoffs” policy (for example) that seems to have worked. It might be interesting to understand why. The best case studies suggest the conditions under which certain policies will or will not work. Notice, by the way, that you are doing the same thing as the author: You are arguing, on the basis of a sample of one, that case studies have downsides. Of course even a sample of fewer than one (to paraphrase James G. March) might be enough for establishing that.

    You imply, moreover, that case studies are not as systematic as other methods, but being systematic is not necessarily related to the nature of the data. It has to do, I think, with the proper handling of evidence, the right use of words and numbers in reasoning, the organization of the material and its presentation, and so on. As an aside, the historian J. H. Plumb noted, somewhat ironically, that “almost instinctively there seems now to be a greater degree of truth in evidence expressed numerically than in any literary evidence, no matter how shaky the statistical evidence, or acute the observing eye. It is often not the numbers that speak the truth, rather there is a quicker acceptance of them in ourselves—almost an excitement.”

  • 4. Peter Klein  |  30 July 2011 at 12:26 am

    Isaac, the title of my post was meant to be tongue-in-cheek. Of course you are right that the post illustrates the misuse of a case study, and is not meant as a critique of case studies, or the case method, or qualitative research more generally.

  • 5. Anonymous  |  1 August 2011 at 12:15 am

    So, you use one case to show that case studies have a downside.
    “facepalm”

  • 6. Peter Klein  |  1 August 2011 at 6:44 am

    Turtles all the way down, baby!

  • 7. Yves  |  1 August 2011 at 3:54 pm

    Has anyone noticed the only comment left on the HuffPo piece before comments were closed? Classic!

    @Jose Camoes Silva – your third point is extremely insightful.

  • 8. Frank Koller  |  2 August 2011 at 11:58 am

    Hi

    An interesting exchange of comments about the HuffPost piece on Lincoln Electric’s no layoff policy and the HBS case study on the company.

    True confession: I wrote that blog and SPARK, the recent book on Lincoln Electric’s no-layoff policy. Self-serving as it is, SPARK was just cited today on Princeton University’s list of “2010 Notable Books in Industrial Relations and Labor Economics.”

    First of all, I most definitely do not argue that a no-layoff policy is appropriate for companies of all kinds. As I make clear in the book, citing many critics of Lincoln’s embrace of this policy, there are potential and real dangers here and I discuss them in detail.

    Second, I do indeed lament the fact that the very concept of a no-layoff policy is given short shrift in a great many MBA programs across North America .. i.e. that retaining workers (good workers as measured by a transparent, consistent and well-run performance measurement system) can be more than a rhetorical concept to discard whenever trouble looms due to a fall in external demand. (By the way, I never called anyone at a B-school “corrupt or incompetent.”)

    In extremely short form, here’s the genesis of my interest in this subject and how I hope the book contributes to the very important discussion on jobs.

    Until very recently, for nearly 30 years, I was a foreign correspondent and economics specialist for the Canadian Broadcasting Corporation (CBC). I was based in the US for many years and before that in Asia.

    During those years, in the US and Canada, I covered a lot of layoff announcements by CEO’s from firms in all sectors of the economy and of all sizes.

    Invariably, those CEOs ended their layoff announcement with the statement that “I simply had no other option.”

    The Lincoln Electric example .. with all the caveats that comments here have suggested and many more .. suggest that there ARE options. Not for that CEO, of course. It’s too late.

    Lincoln Electric does not operate in some weird anomalous economy where the rules of the marketplace don’t apply. It is a Fortune 1,000 firm which for a century has been the leader in developing the best technology in the world in an ever-evolving and highly competitive sector, it has remained the market leader for nearly 80 years, it has kept Wall Street and other investors exceedingly happy … AND YET, it has done all this while paying its workers exceedingly well through thick and thin, and avoided layoffs (for economic reasons) … making a profit every year since 1934.

    Surely there is something worthwhile to learn here which “might” be applicable elsewhere – rather than simply dismissing the company as an anachronism or an oddity? Or falsely arguing that I’m making the case for a easy cookie-cutter fix for other management environments?

    Lincoln Electric is not alone, either: Hypertherm in New Hampshire, Southwest Airlines, Southeastern Trucking (South Carolina) and others in a variety of industrial sectors have successfully embraced the idea of a no-layoff policy …. integrated into a sophisticated management system … as providing their firms with a powerful competitive edge.

    And yes, some have failed. I chronicle the depressing saga of Xilinx’s experience with a no-layoff policy. (Xilinx is a Fortune 300 chip designer/manufacturer.)

    This is not easy stuff and I know that you are not arguing that either.

    But with 14 million people still out of work, we do need to focus some of our admittedly-limited labor policy/management studies capital on fixing the “front-end” of the unemployment pipeline – and Lincoln Electric poses some very powerful questions.

    I’m happy to be part of a further conversation on this topic.

    Frank Koller frank@frankkoller.com http://www.frankkoller.com

  • 9. Peter Klein  |  2 August 2011 at 1:33 pm

    Frank, thanks for the comment. I can’t speak for other instructors, but I discuss career employment (or, more generally, use of internal labor markets) extensively in my own courses. I try to present a balanced, comparative view in which advantages of long-term employment and promotion by seniority (e.g., learning worker attributes, reducing influence costs) are compared to the drawbacks (weak performance incentives, inertia, inflexibility, etc.). The Brickley et al. text I use features this stuff prominently in the chapters on personnel management; the Lazear book on personnel economics even more so. In any case, I am not so convinced that this topic is neglected within the mainstream MBA conversation.

    As an aside, I don’t think a recession is the right time to be encouraging firms to retain workers. What the economy needs most is deleveraging and restructuring across sectors. The recession was brought about, in part, by a huge and unsustainable overinvestment in the construction, housing, and mortgage-banking industries (fueled by artificially low interest rates) and the last thing the economy needs is to keep capital and labor from flowing out to other sectors of the economy. More generally, in a dynamic, growing, innovative economy, we want entrepreneurs to be able to direct resources (including labor) to their highest-valued uses, in response to changes in consumer demands, technology, etc. Would we really have wanted the horse-and-buggy-whip industry to retain workers throughout the early twentieth century?

  • 10. Yves Dupuis  |  3 August 2011 at 9:48 am

    Frank – speaking as a corporate strategist, the main reason the Lincoln Electric case fails to inspire much confidence in the no-layoffs model amongst b-school students is that it is so particular. Lincoln Electric and its products differ from most enterprises in ways which specifically permit the kind of employment policy it has deployed:

    1) High value to mass ratios mean low relative shipping costs and allow a single specialist to have high relative market share worldwide. The impact of RMS on profitability is very well documented (the famous BCG banana…).

    2) Unlike many industrial segments where 1) is true, Lincoln has little Bullwhip effect. (http://en.wikipedia.org/wiki/Bullwhip_effect). This is because of the extremely broad range of application contexts which employ arc welding. Few, if any, sector-specific trends will have a dramatic impact on demand for Lincoln’s products. Such abnormally consistent demand is ideal for maintaining a stable workforce. Xilinx, BTW, thought they were in a similar situation re Bullwhip, because the use-cases for FPGAs are so broad. They were wrong.

    3) Most importantly, the procuction processes employed are exceedingly quantifiable, which is the pre-requisite to a “transparent, consistent and well-run performance measurement system”. This is very, very rare in practice, and most firms find themselves motivating their employees with the lottery carrot (flat pyramids with steeply escalating compensation) since they cannot reliably identify poorly performing employees with objective metrics. Egalitarian pay is only efficient in the presence of simple metrics (like, piece-throughput, which is what I believe Lincoln employs primarily).

    To me, the Lincoln Electric case reinforces my belief in the need for labour mobility by showing how particular the circumstances need to be in order to sustain such a no-layoffs policy. Instead of asking ourselves how we could persuade more to be like Lincoln (to their likely detriment) we should focus on policies that promote job creation most broadly. Simply put, job preservation is dangerous and, hence, job creation is paramount.

  • 11. Frank Koller  |  3 August 2011 at 11:16 am

    Yves – I would argue that dismissing Lincoln Electric ( I don’t mean that you’re “dismissing” the company, have no fear) as “so particular” just doesn’t hold water.

    I can only speak as a journalist with long experience covering economics, not an academic like yourself, but let me take a shot …..

    1. While Lincoln has long been the global leader in terms of market share and in terms of tech development, it does not “own” the global arc welding marketplace. It’s global share is roughly 16%, with the next closest competitor at around 10% – that’s a rough description of the past several decades as well. Lincoln has tough competitors in the US, other developed countries and increasingly, in China and developing countries.

    That means that external to the firm, no one cares how management achieves its goals of consistently great products and innovation. So the fact that Lincoln does it by a complex incentive system – which includes the no-layoff policy – says to me that there is more than one way to skin a cat. And the question then becomes:

    “if there are ways to operate a modern business which clearly meet and exceeds the metrics of success in the marketplace – customers and investors are loyal and committed, competitors are fearful/respectful – and yet also provide a degree of tremendous employee commitment and personal financial stability over the very long-term (with the attendant social importance of this stability as a side benefit) , what are the barriers to others seeing the advantages of examining this structure?”

    The answers are complex, no question, and much of the book details my analysis of this question.

    Here’s John Stropki, Lincoln’s current CEO and Chairman: “we believe that guaranteed employment is good for all of our stakeholders – shareholders, customers and employees. There are a lot of policies which you could implement, such as layoffs, terminations, etc. which are good for one or another of those constituencies but generally not good for all three at the same time.
    I do not think of this as a social responsibility. Our philosophy is that if we can perform in an economically challenging environment and spread the pain in a way that long-term will better represent our shareholders’ interests without crucifying our employee base – that is good business, not bad business, to do that.

    2. I confess the Bullwhip effect is new to me .. and I shall do some homework. But a quick read of the wikipedia citation leads to me to ask why you think (given my comments about a competitive environment in 1. above) you think Lincoln is immune from this potential challenge.

    re: Xilinx – after extensive conversations with the major participants inside the company at the highest levels (CEOs, VPs of strategy, tech development, HR, senior managers, etc. – present and former) , I am absolutely convinced that the reason the new CEO almost instantly abandoned the very successful and sophisticated no-layoff policy/goal of his predecessor which helped the firm weather the tremendous bubble and burst of the tech boom of the late 90s, early 2000s – was that (hired from the outside and unfamiliar with the firm’s culture) he simply didn’t think it played a significant role in the firm’s continuing success. It was NOT because the no-layoff policy had proven to be expensive or a potential brake on future strategic plans. No one spoke with me about that as a “cost.”
    He had no experience with it – and as we know, corporate culture is extremely powerful and yet extremely hard to nurture.

    3) No question, piecework is “easier” to measure.

    But the incentive system has been in place across Lincoln for many years – in administration, the RnD divisions, sales, etc. – and the measurement metrics have embraced all the recent advances in HR and OB theory. With those insights, every single employee is merit-rated on the job-appropriate scales for his/her place in the organization – and only about 1/2 the employees are now piecework rated.

    The really important problem here is the one you identified: most employers in America (far too many?) “cannot reliably identify poorly performing employees with objective metrics.” That’s the collective challenge, I’d say.

    4. No-layoff policies (widely defined, no question) have been successfully embraced – and are still – by a far wider range of businesses that most experts realize – manufacturing, of course but also transportation, services both primary and higher level.

    It is not just a technique for the world of widget-making.

    5) Finally, regarding the dangers of “job preservation” and stability …

    As you know, this was a huge issue in the immediate post-war years – the debate between the concept of “wage security” and “employment security” – and my reading led me to many fascinating excursions into this area. With the Treaty of Detroit, “wage security” essentially prevailed and until the late 80s, early 80s, essentially helped to drive a great increase in national well-being.

    Now, amidst other serious malfunctions of the economy as a whole, I’m not so sure about that “win” for age security – and Rick Trumka, the head of the AFLCIO, shared many of his concerns on this issue with me.

    I am suggesting only a better balance here.

    Yes – the major focus for public policy should be on job creation strategies. But I think it’s not enough to antiseptically argue for the primacy of “labor mobility” and “employer flexibility” in the face of first, the near-overwhelming research that the vast majority of CEOs are unable to argue with any precision exactly what the expected outcome of a layoff will be for the firm and second, seeing the human carnage of the past few years.

    As I stressed earlier, a no-layoff policy is NOT for everyone: there are real sectoral dangers and it can be a very difficult policy for management – and employees – to accept. (That sounds like an appropriate goal to fight for right there!)

    I’m simply saying that in these times, given that there are examples which I’d argue need not been seen as anomalies, a closer examination is warranted.

    6. For a quick look “inside” Lincoln, PBS TV’s NewsHour did a 10-minute feature on the company about two weeks ago.
    Grab a coffee and watch it at: http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_07-13.html

  • 12. Yves Dupuis  |  3 August 2011 at 12:18 pm

    Frank – just a few points.

    Re Xilinx, I’ll defer to your experience with the individuals, but, knowing what I do know about the order levels of a significant chunk of its customer base, I feel certain that any manager contrasting the volatility in their incoming orders to a no-layoffs policy must be concerned. Failure to be concerned would possibly constitute a breach of fiduciary duty.

    Re: Lincoln’s relative market share, 1.6X, is actually very large. List companies with >1.6X RMS and you will find a tiny minority of the corporate landscape. By definition, where there is competition, not every company can be a leader, much less a clear leader.

    Re: “other cases”. I would love for you to list examples from other sectors where no-layoffs policies are in place. I imagine public companies are excluded and think any implicit public support would also invalidate an example. In the end, if 1% of companies succeed doing something, that is just not a strong indicator of potential.

    Re: “The collective challenge of objective performance measurement”. Quite a challenge. I strongly suspect structural factors will make the costs of objective measurement higher than the benefits in many, many cases. Increasing attempts to harness the creativity of employees makes this worse and that trend is not going to end any time soon. We probably need to accept that certain corporate strategies will lead to organizational models that promote inequality. Other societal levers will have to be used if democratic constituencies wish to remedy this tenedency. Should objective performance evaluation be subsidized (sounds crazy…)?

    BTW, I am not an academic, I am just a strategist.

    Yves

  • 13. Desmond Lo  |  3 August 2011 at 1:36 pm

    The success of Lincoln Electric is probably because of its complementary management practices. Non-lay-off policy is just one of the factors. One could teach the case from perspective that what conditions would likely to give rise to such complementarity. Case studies are fine, it is the approach that matters.

  • 14. Frank Koller  |  3 August 2011 at 2:36 pm

    1. re: Yves’s request for other examples .. here are other firms in a variety of sectors which embrace some shape of no-layoff policy/goal/promise as part of their overall HR system ….

    FIRM / SECTOR / PRI.v. PUB. / EMPLOYEES / YEARS WITHOUT LAYOFFS (for economic reasons)

    Hypertherm / High tech plasma / Private / 1,000 / 44
    (Hanover, NH) ($ 500 million)

    Southwest Airlines / Transportation / Public / 30,000 / 40
    (Phoenix, AZ) ($12 billion)

    Southeastern Freight Lines / Transportation / Private / 6,500 / 60
    (Lexington, SC) ($500 million)

    SC Johnson / Consumer Products / Private / 12,000 / 124
    (Racine, WI) ($ 7-8 billion)

    PLUS

    XILINX – as stated, my view is that the no-layoff policy worked well but was killed for reasons involving corporate culture and leadership succession issues …

    SAS – the information / consulting firm in North Carolina …..

    and there are more ……

    2. re: Desmond’s comments about complimentarity ….

    I agree completely …. a no-layoff policy is not something that can be “cherry picked” with the expectation that it will either work as conceived or, more importantly, actually improve the operations of the firm.

    For a discussion of this issue, with specific reference to Lincoln Electric, see: Paul Milgrom and John Roberts, “Complimentarities and Fit: Strategy, Structure and Organizational Change in Manufacturing,” Journal of Accounting and Economics 19 (1995), 179-208 AND sections of Roberts’ book “The Modern Firm: Organizational Design for Performance and Growth (2004). In an interview with Prof. Roberts – documented in my book – I did find him suspicious that the no-layoff policy contributed much to the sense of trust inside the company which I found so striking – and so powerful to the process of innovation. He seemed to view it essentially as just one component of the overall incentive system. I think it produced a much more influential impact.

  • 15. David Hoopes  |  3 August 2011 at 3:07 pm

    Nice discussion. Thanks everyone.

  • [...] Finally, I was involved in a very interesting blog discussion this week about recent writing I've done about very successful American companies that promise [...]

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