Case Study Analysis: Engstrom Auto Mirror Plant
Summary
Engstrom Auto Mirror Plant is a privately owned business, operating since 1948, located in Richmond, Indiana. They are a relatively small production and distribution company within the mirror manufacturing industry supplying mirrors for trucks and automobiles. In May 2007, the plant faces a crisis due to many factors, a main one being that business and sales were declining for the second year in a row since 2005. In the following year, plant manager Ron Bent laid off 46 of his 255 employees. Bent encountered issues with the remaining employees as productivity was declining, concerns of product quality arose, employee morale was at its lowest in years and key customer business relationships were at risk.
This wasn’t the first downturn Engstrom dealt with; in 1998 they faced a similar situation where Bent implemented the Scanlon Plan, an organization-wide employee incentive program, which leads the plant to a turnaround. For 7 years, employees received the Scanlon Plan bonus, however in 2006 bonuses had stopped and associates hadn’t received one in 7 months. Bent is forced to reevaluate the plan and determine how to motivate employees, increase productivity, product quality and ultimately sales or Engstrom could shut down for good.
Organizational Issues
Engstrom Auto Mirror Plant had been successful for nearly 50 years until the late 1990s. During this time, the plant became unprofitable and was struggling to stay in business. Production lines were being redesigned to incorporate new technology, increasing production time which caused frustrated customers in addition to losing some. In 1998, the plant manager at that time decided to resign. He lacked the knowledge and expertise, of the new technology, needed in order to quickly solve problems. The union was changing, becoming more assertive and he wasn’t willing to adapt to or work with them. In addition, low employee morale and productivity spread throughout the organization. Ron Bent was then hired as the new plant manager assigned to turnaround Engstrom and save the company. In order to do so, Bent implemented the Scanlon Plan, an organization-wide incentive program, which was the main contributor for the plants improved morale, productivity and profitability, making the organization successful again.
Fast forward to May 2007, Bent is facing a similar company crisis. The numbers are decreasing again; sales are dropping because of slow productivity and product quality issues are occurring. He is nervous that he could lose one of the plant’s top accounts with Sam Martinez, manager of the assembly line at the Toyota plant, if his workforce couldn’t pick up the pace and ensure the quality of all products were on target. On the other hand, employees have been complaining for months, getting more and more hostile and fed up with the Scanlon Plan. Their enthusiasm and satisfaction decreased overtime. Suggestion rates dropped precipitously, down from hundreds to 50 a year. And two consistent themes were heard in worker complaints: distrust of bonus calculations and question of fairness (Beer et. al., 2008). Morale issues were retuning and Bent needed to do something fast before it was a downward spiral with no saving.
Looking back through the years, Bent tried to find a cause for all this mayhem. He focuses his attention on the Scanlon Plan. The reactions from the employees weren’t a surprise to Bent; he knew that the plan couldn’t maintain itself. It requires up keeping and a “shot in the arm” whenever the organization needs it. However, before he could do so the industry took a hit in 2005 negatively impacting sales and company culture. Layoffs occurred in mid-2006 decreasing 18% of the workforce. By January 2007, employee dissatisfaction was steadily increasing, suspicions of theft began and the remaining employees hadn’t received a bonus in 7 months. Bent internally struggles, going back and forth on how the plan could have failed if it worked for so many years and turned Engstrom around the first time. He had to reevaluate, giving himself 3 options to sustain productivity and product quality until the downturn was over: modify Scanlon, get rid of it, or look for alternative solutions.
Analysis
The only way to turn the company around long term doesn’t have as much to do with a bonus plan as you think it would, especially since Bent puts so much emphasis on it. Whether Engstrom keeps the Scanlon Plan, modifies it, or gets rid of it; it is a chunk of change to a business versus the impact of high performance, productivity, quality and profitability. Incentive plans, if implemented correctly, do influence employees. However, the more important aspect of the Engstrom crisis is employee morale and the Scanlon Plan doesn’t really solve this issue, instead, it acts as a bandage covering the issues up rather than fixing the root causes. Basically, the dissatisfaction, hostile environment and negative atmosphere are causing insufficient performance and product quality. As stated by Herb Kelleher in David Sirota’s and Douglas Klein’s (2013) book; “…there is only one key to profitability and stability during either a boom or bust economy: employee morale.”
Bent got lost in the numbers and the Scanlon Plan rather than focusing his attention on the employees which is the most important factor in a successful business, aside from the product(s) or service(s) a company is selling and the quality. Without people, a business couldn’t function or be profitable. The Scanlon Plan definitely has its concerns but the next turnaround and long term success of the plant lies within the Three-Factor Theory of Human Motivation. At Engstrom 3 critical elements of employees are missing: equity, achievement and camaraderie. The theory proposes that employees need these 3 elements in order to be satisfied which is the origin for an enthusiastic workforce. Understanding the three sets of goals, and establishing organizational policies and practices that are in tune with them, is the key to high workforce morale and firm performance (Sirota & Klein, 2013).
When Bent was hired, he used an incentive program, the Scanlon Plan, as the tactic to turnaround Engstrom instead of actually identifying any underlying organizational issues causing the plant to become unprofitable in the first place. He assumed it was due to the new technology implementation, increasing demands from the union, and poor leadership. This was the first mistake, thinking he could encourage and make employees produce more by rewarding them with bonuses for the long term which in turn will boost employee morale. A Scanlon Plan, Bent thought, was the best for Engstrom, given the challenges that the plant faced: “With Scanlon, workers are receptive to new methods and new machinery because they feel they are a part of the company-wide program. When you’ve established a Scanlon plan properly, you’ve also built a good communications network throughout your organization” (Beer et. al., 2008). Incentive programs do work to increase performance and Engstrom did have a turnaround but this was only a short term fix; it should not be used to solve the issues the plant was enduring, alone.
To establish the underlying organizational issues, let’s first take a look at equity, which is defined as being treated justly in relation to the basic conditions of employment (Sirota & Klein, 2013). The 3 needs in order to attain equity are physiological, economic and psychological. Sirota (2013) states that these basic conditions are not related to the position or performance of an employee, rather, they are expected by virtue of the employment relationship. Satisfaction with pay is lower on the list compared to other aspects of work; employees want to be fairly treated, they want to feel safe and secure in their positions, and they need to be able to trust management. Overtime, employees began to distrust management and the Scanlon Plan because they reduced the bonus ratio 4 times in 5 years becoming unreliable and untrustworthy despite the explanations provided. They didn’t understand the complex bonus calculation to begin with and accused the company of “playing with the numbers” to negatively impact them through decreased bonuses while the organization benefited. Some months employees received a low bonus even if they exceeded their production goals causing them to question it. Especially because they used to measure achievement by total units produced prior to Scanlon. When workers assume that the company is deliberately withholding information, the void is filled with paranoid thoughts about what is really going on. This is a sure way to poison the relationship between management and its workforce (Sirota & Klein, 2013). In addition, associates began to question the fairness of the plan and felt that supervisors should receive less because they don’t work as hard. As a result, associates became dissatisfied with particular characteristics of the plan and lost their enthusiasm. They stopped suggesting ideas which is why Bent saw the drop from hundreds to 50 a year. Enlisting the willing cooperation of a workforce in achieving the aims of an enterprise is impossible unless people have a sense of elemental fairness in the way they are treated (Sirota & Klein, 2013).
Job security came into question when the industry downturn occurred. Employees would immediately wonder if they would be laid off. This decreased morale even more. Bent did address possible layoffs, the decreased performance and the possibility of the plant shutting down. The communication style and how it was relayed to employees by Bent should have been carefully and strategically planned versus the way he describes telling associates of the news. People react strongly to a loss of security and the lost sense of fair treatment that comes with it in circumstances such as these. How companies deal with job security is one of its defining characteristics in its employees’ eyes. It is a defining characteristic because, in addition to its economic effects, a decision to lay off people sends a message to fundamental importance to the workforce about the way the company views its people: not as assets but merely costs (necessary evils) (Sirota & Klein, 2013). Layoffs took place in June 2006 reducing the workforce by 18%. Employees were emotional and divided the plant. The company’s approach to coping with current business difficulties and its vision for building a successful future are key elements of what needs to be communicated to the workforce. Bent didn’t create a plan or communication to remaining employees, which is critical. As Sirota & Klein state (2013) survivors’ morale is both a cause and an effect of business inefficiency. A downsizing that’s handled poorly in terms of employee treatment has a negative impact on employee morale and, therefore business performance. The remaining employees didn’t receive a bonus in 7 months and Bent assumed that the growing dissatisfaction, distant manager-associate relationships, and the onset of theft issues were due to this. Equity, would disagree. It is the lack of providing clear communication, a plan, a vision of where Engstrom is heading and the surviving employees’ role in it.
A sense of basic equity in the employment relationship serves as the foundation on which high employee morale can be built; the powerful need to feel proud of one’s accomplishments and the accomplishments of the organization is then freed to drive behavior toward high performance (Sirota & Klein, 2013). This leads right into the next element of the 3 factor theory, Achievement. It is described as being proud of organizational accomplishments, personal accomplishments that are important and well done, and receiving recognition for it. Sirota & Klein (2013) analyzed 6 primary sources of achievement: challenge of the work itself, acquisition of new skills, ability to perform, perceived importance of the employee’s job, recognition received for performance, and working for a company of which the employee can be proud. Engstrom hasn’t been performing, sales and profits are decreasing, employee productivity issues are increasing and product quality is low. Since the layoff, Bent hasn’t provided a future projection of the company and employees lack perceived importance of their job because they don’t know how their role fits in the bigger picture, especially because coworkers in the same position were recently let go. In addition, employees don’t feel that they are able to perform because of the workforce reduction, it created more work for them and with less people there is less productivity. Bent thinks the workers had become accustomed to the plan’s substantial bonuses, perceiving the additional hundreds of dollars as part of their regular compensation. Therefore, when the bonuses stopped, the workers responded with anger and suspicion, as if something that rightfully belonged to them had been taken away (Beer et. al., 2008). They are frustrated and fed up with the plan because management hasn’t reduced goals that were set prior to the layoffs since there are less workers now. Employees are not confident that productivity goals are attainable, losing interest and a sense of pride of their role and company. What mattered to them previously and being able to do good work, doesn’t matter to them now playing a part in the product quality issues Bent has been encountering as well as decreased performance.
Pride comes both from the employees’ own perceptions of accomplishment and from the recognition received from others (Sirota & Klein, 2013). Although the Scanlon Plan is a performance based incentive plan rewarding employees for meeting or exceeding production targets, Engstrom severely lacks individual or group employee recognition which is vital for the plans success. In general, for gainsharing plans to be successful, organizations need to have rewards for honoring individuals and groups under 4 conditions; they must be truly special, given infrequently, given publically, and signifies appreciation from both management and peers. The plan doesn’t recognize when employees or teams do great work outside from meeting productivity numbers. Therefore, this could lead employees to be under the impression that the company doesn’t care about anything else the employee/team does good work on except for when it generates profit for the organization and as a result, employees may feel underappreciated. Receiving recognition for one’s achievements is among the most fundamental of human needs. When managers do not bother to acknowledge high levels of employee performance, the effect is discouraging to most employees and devastating to some (Sirota & Klein, 2013).
The last factor to achieve satisfaction and an enthusiastic workforce is camaraderie; to have warm, interesting, and cooperative relations with others in the workplace (Sirota & Klein, 2013). When things are working properly, teamwork and knowledge sharing typically improve in Scanlon organizations: collaboration fosters innovation and creativity, which in turn drive improvements in productivity, thereby ensuring the payment of bonuses. The culture in a Scanlon plant also typically becomes more change-friendly, as workers have the opportunity to make more money by changing the status quo for the better (Beer et. al., 2008). However this was not the case, the atmosphere negatively changed at the plant, becoming a hostile environment at times and employees were unfriendly towards one another. During monthly meetings the energy was charged and the surroundings became anxiety driven. Inherent conflicts of interest exist where one party’s gain equates to the other party’s loss. Numerous issues in labor-management relations are of this kind. No one should expect workers to participate gladly and collaboratively in being downsized, outsourced, or offshored (Sirota & Klein, 2013). People naturally want to work together and camaraderie is achieved when social and emotional needs are satisfied. The quality of social relationships in the workplace-its “social capital”-is of great importance, not only because of the general need people have for camaraderie, but because cooperative relationships are critical for effective performance and, therefore, for a sense of achievement in one’s work (Sirota & Klein, 2013).
Alternatives & Solutions
Bent is open to ideas and suggestions. It would be easy to share thoughts with Bent and provide him with the research and a plan that that supports the solutions being proposed. Bent thinks that the fundamental issue at the plant is the lack of employee motivation. However, after analyzing the plant, the main issue is productivity and more recently product quality concerns. The 3 factor theory states that employees want to work. They want to achieve things that are important to them as well as the company they work for. Bent mainly believes that the Scanlon Plan is failing and that is why employees are not motivated, but he does visit the possibility of other organizational factors briefly. Bent asks: Could he revise Scanlon in some way that worked better during a downturn? Could he try to identify and change organizational factors that might be undermining Scanlon at the plant? The answer is that the Scanlon Plan doesn’t need to be changed. It is organizational factors and economic decreases stated previously, that is causing the crisis at Engstrom. Although the economic downturn can’t be controlled, there are certain strategies, techniques and organizational influences from top management that can ease the pain of the downturn by creating an environment that exhibits equity, achievement and camaraderie.
Bent and top management need to come up with a clear and direct communication strategy to address the question of fairness and management distrust that originated prior to the industry downturn of the Scanlon Plan. He needs to show employees how the bonus plan works rather than just sharing data on a piece of paper because many employees don’t understand it which is causing those issues. He should take the time to show that he cares about the wellbeing of his staff. For example, team building exercises would be great to help foster business relationships in a positive way. When employees consistently see and feel that the organization is investing time, energy and effort in addition to the organization acting on what they are saying, employees will begin to build that trust in management again. Further, the layoffs need to be addressed and Bent and management need to provide employees with a vision of the future state of the organization and acknowledge how important the employees are to the future success of the company, the management team and the role they play in it. This will help to increase and ease the negative feelings of job security that the employees are feeling. There is no way that the value of, say, informal recognition or greater job authority can be substantial or long-lasting if people feel mistreated on the basic equity issues (Sirota & Klein, 2013).
Also, employees want and need to feel appreciated for the jobs that they are doing and the good work that they are providing. Bent needs to ensure this is communicated but he also needs to implement it into the company culture which will build the lack of camaraderie back up. Bent feels strongly about not having an individual recognition system, however, it is vital to attain the need of achievement. The Scanlon Plan lacks in this aspect. Monetary rewards can’t substitute for other areas that are lacking in organizations or for uncontrollable events, such as the economic and industry downturn. The recognition system should recognize exceeding performance publically, should be for really outstanding work that doesn’t occur often, and signifies appreciation from coworkers, management and the company as a whole. Being able to achieve personal and organizational goals, taking pride in it and receiving recognition are needed to acquire the sense of achievement. Once these needs are met, camaraderie should come at ease. The hostile environment will decrease and become in time, an enjoyable place to work. Over time, cooperation and collaboration will increase because employees will be satisfied with their work, feel appreciated and their needs will be met. It is key to continue to revisit and evolve an action plan as the company grows, changes or evolves. These 3 needs should be met over time, which will increase satisfaction and ultimately create an enthusiastic workforce encouraging high performance and morale.
References
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