- Company size is irrelevant to job creation
- New jobs are created by starting new businesses that create new demand
- Most leaders behave defensively, trying to preserve the old business
- But success comes from acting like a start-up and creating new opportunities
- Companies need to do more future-based planning that can change the competitive landscape and generate more growth, jobs and higher rates of return
A trio of economists just published "Who Creates Jobs? Small vs. Large vs. Young" at the National Bureau of Economic Research. For years businesspeople have said that the majority of jobs were created by small companies, therefore we should provide loans and other incentives for small business. At the same time, we all know that large companies employee millions of people, and therefore they have received benefits to keep their companies going even in tough times – like the recent bailouts of GM and Chrysler. But what these researchers discovered was that size was immaterial to job creation – and this ages-old debate is really irrelevant!
Digging deeper into the data, they discovered as reported in the New York Times, "To Create Jobs, Nurture Start-Ups." Regardless of size, most businesses over time get stuck defending their original success formula. What helped them initially grow becomes locked-in by behavioral norms, structural decision-making processes and a business model cost structure that may be tweaked, but rarely changed. Best practices serve to focus management on defending that business, even as market shifts lower the industry growth rate and profits. It doesn't take long before defensive tactics dominate, and as the leaders attempt to preserve historical practices there are no new jobs created. Usually quite the opposite happens as cost cutting dominates, leading to outsourcing and lay-offs reducing the workforce.
Look no further than most members of the Dow Jones Industrial Average to witness the lack of jobs created by older companies desperately trying to defend their historical business model. But what we've failed to realize is how the same management practices dominate small business as well! Most plumbing suppliers, window installers, insurance agencies, restaurants, car dealers, nurseries, tool rental shops, hair cutters and pet sitters spend all their time just trying to keep the business going. They look no further than what they did yesterday when making business decisions. Few think about growth, preferring instead to just keep the business the same – maybe by the owner/operator's father 3 decades ago! They don't create any new jobs, and are probably struggling to maintain existing employment as computers and other business aids reduce the need for labor – while competition keeps whacking away at historical margins.
So if you want to create jobs, throwing incentives at General Electric, General Motors or General Dynamics is not likely to get you very far. And asking the leaders of those companies what it takes to get them to create jobs is a wasted conversation. They don't know, and haven't really thought about the question. Leaders of almost all big organizations are just trying to make next quarter's profit projection any way they can – and that doesn't involve new hiring. After a lifetime of cutting costs and preservation behavior, how is Jeffrey Immelt of GE supposed to know anything about creating new businesses which leads to job creation?
Nor is offering loans or grants to the millions of existing small businesses who are just trying to keep the joint running going to make any difference. Their psychology is not about offering new products or services, and banks sure don't want to take the risk of investing in new experimental behaviors. They have little, if any, interest in figuring out how to grow when most of their attention is trying to preserve the storefront in the face of new competitors on-line, or from India, China or Vietnam!
To create jobs you have to focus on growth – not defense. And that takes an entirely different way of thinking. Instead of thinking about the past you have to be obsessive about the future, and how you can do things differently! Most of the time, business leaders don't think this way until their backs are up against the wall, looking at potential failure! For example, how Mr. Gerstner turned around IBM when he moved the company away from mainframe obsession and pointed the company toward services. Or when Steve Jobs redirected Apple away from its Mac obsession and pushed the company into new markets for music/entertainment and smartphones. Unfortunately, these stories are so rare that we tend to use them for a decade (or even 2 decades)!
For years Cisco said it would obsolete its own products, and by implementing that direction Cisco has grown year after year in the tech world, where flame-outs abound (just look at what happened to Sun Microsystems, Silicon Graphics, AOL and rapidly Yahoo!) Look at how Netflix has pushed Blockbuster aside by expanding its business from snail-mail to downloads. Or how Amazon.com has found explosive growth by changing the way we read books, now selling more Kindle products than printed. Rather than thinking about how each could do more of what they always did, fearing cannibalization of the "core business," they are aiding destruction of their historical business by implementing the newest technology and solution before some start-up beats them to the punch!
As you enter 2011 and prepare for 2012, is your planning based upon doing more of what your business has always done? A start up has no last year, so its planning is based entirely on views of the future. Are you fixated on improving your operations? A start up has no operations, so it is fixated on competitors to figure out how it can meet market needs better, and use "fringe" solutions in new ways that competitors have not yet adopted. Are you hoping that market shifts slow, or stop, so revenue, market share and profit slides abate? A start up is looking for ways to disrupt the marketplace to it can grab high growth from existing solutions while generating new demand by meeting unmet needs. Are you trying to preserve resources in order to defend your business from competitors? A start up is looking for places to experiment with new solutions and figure out how to change the competitive landscape while growing revenues and profits.
If you want to thrive you have to grow. To grow, you have to think young! Be willing to plan for the future, like Apple did when it moved into new markets for music downloads. Be willing to find competitive holes and fill them with new technology, like Netflix. Don't fear market changes – create them like Cisco does with new solutions that obsolete previous generations. And keep testing new ways to expand the market, even as you see intense competition in historical markets being attacked by new competitors. That is the only way to create value, and generate new jobs!