Conduct an Internet search to learn about an arrangement common in beauty salons (and some

real estate firms) whereby hair stylists lease space from the owner of the salon. That is, instead

of being employed by the owner of a salon, a hair stylist leases space in a salon and works as

an independent contractor. Then, respond to the following question:

If Harold Marteen, the owner of Woodhaven Service Station in the Woodhaven Case Study,

implements the lease approach rather than continuing with his current method of employing

mechanics, this would be a significant change in his business model. From Harold's perspective,

what are the potential advantages and disadvantages of this change in organizational

architecture? Explain.

Harold is managing a portfolio of related segments. It is worth taking time to notice that in the

Woodhaven Case Study Harold has arrived at the following diagnosis of his problem: profit from

gas sales is higher than average; profit from automotive repairs is below average; therefore,

something is wrong with the automotive repair segment. In a similar fashion a grocery store

might say: profit in our meat department is higher than average; profit in our prepared foods

department is higher than average; profit from our produce department is lower than average;

therefore, something is wrong with the produce department. These diagnoses may be correct.

Or, they may not be correct. Either way, it is always important to ask if you are solving the right

problem before you set off to seek a solution. Explain why pursuing higher profitability in one

area could "back-fire" and result in higher profits for that segment but lower profits overall for the

company.

Background Woodhaven Service is a small, independent gas station located in the Woodhaven section of Queens. The station has three gasoline pumps and two service bays. The repair facility specializes in automo- tive maintenance (oil changes, tune-ups, etc.) and minor repairs (mufflers, shock absorbers, etc.). Woodhaven generally refers customers who require major work such as transmission rebuilds and electronics to shops that are better equipped to handle such repairs. Major repairs are done in-house only when both the customer and mechanic agree that this is the best course of action. During the 20 years that he has owned Woodhaven Service, Horold Mateen's competence and fairness have built a loyal customer base of neighborhood residents. In fact, demand for his services has been more than he can reasonably meet, yet the repair end of his business is not especially profitable. Most of his competitors earn the lion's share of their profits through repairs, but Harold is making al- most all of his money by selling gasoline. If he could make more money on repairs, Woodhaven would be the most successful service station in the area. Harold believes that Woodhaven's weakness in repair profitability is due to the inefficiency of his mechanics, who are paid the industry average of $500 per week. While Harold does not think he overpays them, he feels he is not getting his money's worth. Harold's son, Andrew, is a student at the university, where he has learned the Socratic dictum. "To know the Good is to do the Good." Andrew provided his father with a classic text on employee morality, Dr. Weisbrotten's Work Hard and Follow the Righteous Way. Every morning for two months, Harold, Andrew, and the mechanics devoted one hour to studying this text. Despite many lively and fascinating discussions on the rights and responsibilities of the employee, productivity did not improve one bit. Harold figured he would just have to go out and hire harder-working mechanics. The failure of the Weisbrotten method did not surprise Lisa, Harold's daughter. She knew that Andrew's methods were bunk. As anyone serious about business knows, the true science of produc- livity and management of human resources resides in Professor von Drekken's masterful Modify- ing Organizational Behavior through Employee Commitment. Yes, employee commitrent was the answer to everything! Harold followed the scientific methods to the letter. Yet. despite giving out gold stars, blowing up balloons, and wearing a smiley face button, he found Lisa's approach no more successful than Andrew's. Compensation Plans Harold thinks that his neighbor Jack Myers, owner of Honest Jack's Pre-Enjoyed Autorama, might be helpful. After all, one does not become as successful as Jack without a lot of practical knowledge. Or maybe it is Jack's great radio jingle that does it. Jack tells Harold, It's not the jingle, you idiot! It's the way I pay my guys. Your mechanics make $500 a week no matter what. Why should they put out for you? Because of those stupid buttons? My guys-my guys get paid straight commission and nothing more. They do good by me and I do good by them. Otherwise, let 'em starve. Look, it's real simple. Pay 'em a percent of the sales for the work they do. If you need to be a nice guy about it. make that percent so that if sales are average, then they make their usual $500. But if sales are better, they get that percent extra. This way they don't get hurt but got real reason to help you out. This hurt Harold. He really liked those buttons. Still, Jack did have a point. Straight commission, however, seemed a little radical. What if sales were bad for a week? That would hurt the mechanics. Harold figured that it would be better to pay each mechanic a guaranteed $300 a week plus a commission rate that would, given an average volume of business, pay them the extra $200 that would bring their wage back to $500. Under this system, the mechanics would be insulated from a bad week, would not be penalized for an average week, and would still have the incentive to attempt to improve sales. Yes, this seemed more fair. On the other hand, maybe Jack knows only about the used car business, not about business in general. Harold figured that he should look for an incentive pay method more in line with the way things are done in the auto repair business. Perhaps he should pay his mechanics as he is paid by his customers-by the job. It is standard practice for service stations to charge customers a flat rate for the labor associated with any job. The number of labor hours for which the customer is charged is generally taken from a manual that outlines expected labor times for specific jobs on specific vehicles. The customer pays for these expected hours regardless of how many actual labor hours are expended on the job. Many shops also pay their mechanics by the job. Harold thinks that this ap- proach makes sense because it links the mechanic's pay to the labor charges paid by the customer