If Higher Pay Is Profitable, Why Is It So Rare? Modeling Competing Strategies in Mass Market Services

Abstract

Several case studies suggest that firms targeting mass market services can align profitability with jobs offering a living wage, stable schedules, and engaging work. Yet, few do. To understand this puzzle, we draw on theories of firms as systems of interdependent choices. Building on a few cases, we map the processes connecting managerial choice to performance and formalize the resulting performance landscape. In a strategy space defined by two dimensions-task richness and compensation-two local profitability peaks emerge: one with low compensation and low task richness and one with high compensation and high task richness. The bimodal landscape results from complementarity among choices and is robust when the strategy space is expanded from two to six dimensions and under many alternative parameterizations. Exploring how firms discover, move to, and remain at the high-compensation-high-task richness peak, we find three challenges to this strategy: (a) contextuality-adoption, imitation, and replication are harder for strategies that rely on interdependences among components and thus, require significant customization for each context; (b) temporal complexity-strategies depending on long-term and synergistic investments and slow-moving reinforcing feedbacks are hard to learn owing to misleading performance feedback; and (c) variable demand with no inventory buffers-efforts to adjust labor supply to highly variable demand in services often lead to unstable schedules given with short notice that drive quality employees away and compromise the strategy. These mechanisms can undermine promising strategies even if the actual performance landscape includes a small number of local peaks.