Greatness: The Key to Accelerating the Recovery, Part III
Greatness: The Key to Accelerating the Recovery
, Part III
Part III: Stimulating Job Growth Through Innovation
Great companies are contrarians by nature. They distinguish themselves by going against conventional wisdom. They do not succumb to external pressures. They hold to their values during good times and bad. That's what makes them great.
In this economy that means hiring people when others are laying them off. Yes, I realize that some downsizing was needed by virtually every company. We need look no further than the discussion in Part II where we discovered how easy it is to get tempted to take on second-tier customers (those with only a modest interest in what you offer) during good economic times - those times during which buyer have more discretionary income and are less value conscious.
Once that adjustment is made and you've narrowed your focus to those customers that value what you offer enough to pay your price, it's time to start hiring. Why?
There is a lot of pent up demand in the market.
There's great talent available.
Innovative companies will garner a huge lead.
Pent Up Demand
Take a moment and think of the things you'd buy if there was a little more certainty about the future. Now imagine how much demand exists for people who have been out of work for four months, six months or more.
To release this pent up demand we've got to put more people back to work - productively. I'm not talking about welfare programs, I'm talking about investing in innovation. But that requires money, doesn't it? Where's that money going to come from?
For those companies that have returned to profitability and added cash reserves, some of the innovation can be funded internally. These companies can increase the funds they have available through modest price increases. The number of jobs that could be created this way is amazing. Here's a simple example.
Assume that every company raises its prices by 3%. That's typically not enough to cause buyers who value what you offer to walk away customers. If they do, then, as we discussed in Part II of this series, they weren't really your ideal customers anyway. Indeed, this simple 3% increase can help you narrow your focus and adjust your operations to meet that focus.
Back to our example. When we apply a 3% price increase to the 2009 GDP (Gross Domestic Product) of $14.2 trillion dollars here's what we get:$427 billion in additional revenues.
$171 billion in tax revenues based on a combined 40% federal and state income tax rate.
$256 billion in profits available for further business investment.
Now let's assume that enlightened business leaders take half of that $256 billion of profit and hire workers to help them develop new offerings and provide more valuable service to their ideal customers going forward. We can expect 2. 5 million in new jobs from investing $128 billion of $256 billion in additional profits. This calculation assumes a modest $50,000 pay and benefit package.
There's one more factor to consider - the velocity of money. When the Federal Reserve is trying to figure out how much money to allow into the system they consider the fact that every dollar in the system typically creates $7.00 of revenues throughout the system. So when you hire me to coach you on how to get higher prices, I'll take that money and buy groceries. The grocery store buys their products from food distributors, who buy them from food producers, who buy seeds, fertilizer and equipment. You get the picture.
While the velocity of money does vary, it typically hovers around seven. Given the pent up demand that the recession created, I think it's reasonable to assume that we can expect the velocity of money to be seven in the near future.
With that in mind, the $128 billion invested in hiring people will generate $896 billion in new spending which means new revenues for companies. If we assume that a quarter of that $896 billion ($224 billion) gets invested in hiring, that would add 4.5 million in new jobs assuming the same $50,000 pay and benefit package.
Between the 2.5 million of jobs created with the 3% price increase and 4.5 million of new jobs created through the velocity of money we'd virtually eliminate our unemployment problem and generate billions in additional tax revenues instead of adding billions to the deficit in failed attempts to stimulate' the economy.
Even if only a third of those 7 million jobs were created, the demand for products and services would be huge. It's also a great example of a rising tide lifting all ships. The more pent up demand that is released, the greater the spending, the more money available for growth across all sectors, the greater the number of jobs that will be created. It's the beginning of an upward spiral that will benefit all of us.
There are obvious holes in my analysis. Not everyone is going to be comfortable raising prices. Not everyone will have the funds to hire more people; they'll need to replenish their capital base and rebuild their cash reserves. Not everyone will be creative enough to innovate. But for those that can, they'll reap huge benefits. One of those is access to talent.
Great Talent Available
In an economy like the one we're experiencing there are a lot of talented people with a lot of great ideas on how to improve your customers' experience. The companies that are the first to invest in these people and the ideas they bring will create a commanding lead over their competitors - a lead that could take a decade or more to overcome if you don't get succumb to the temptation to gain market share.'
This talent is not only available in the ranks of the unemployed. Many workers today are unhappy with their current employment. Their increased productivity has been rewarded with little, if any, pay increase. In many cases these people are even making less today even though they're significantly more productive. Use the profits you generate to go after the productive people and pay them according to their production. After all, does it really matter how much you pay someone as long as their production exceeds their pay rate?
If you doubt that paying more for productive employees is an effective strategy, I refer you to the McKinsey study, War for Talent, in which they discovered that "A" players typically earn 20% more than "B" players, but produce 2 to 3 times as much as "B" players. That's a huge ROI.
Innovate to Lead
The key is to invest these new employees' time and energies in innovation. For it's in innovation that the greatest ROI and the greatest sustainable advantage occur. Innovative companies enjoy gross margins that are 10% or more higher than their competitors. They're able to lower prices at the time competitor's begin to catch up, depriving them of the higher margins needed to fund future innovation. Finally, the higher margins innovative companies enjoy allow them to invest more in their brand - making them the companies buyers think of first when they need what these companies are offering.
For those of you who may be struggling to find ways to innovate, remember that hiring people from outside our industry is a great way to spark innovation. In his book, Chaos: Making a New Science, James Gleick said that the math that evolved from Chaos Theory should have come from the fields of math and physics; instead it came from meteorology and the behavioral sciences. Breakthroughs typically come from outside the organization.
If you're unwilling to hire that outside perspective or you're out of ideas on how to innovate, please do the rest of us a favor and distribute your earnings and excess cash to your shareholders so that they can invest in innovation. It'll help accelerate the recovery.
I always look for ways to accomplish more than one goal from the same effort. In this three-part series, Greatness: The Key to Accelerating the Recovery, my goal is to help you accelerate the economic recovery and gain recognition for your efforts.
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