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A Generic View of “Business” Has No Place in Public Policy

The gulf between the interests of small entrepreneurs and global corporations is enormous.

(originally published by Booz & Company)

The term business is frequently used as shorthand to refer to the activities of those professionally engaged in providing society with the goods and services it needs and wants. In everyday speech, the term is useful and appropriate. But when it comes to establishing effective public policy, the concept of business is too vague and abstract to be of practical use. Indeed, it borders on nonsense to speak, as politicians are wont to do, of creating policies that meet the needs of the business community—a phrase meant to encompass a group of organizations with shared interests, beliefs, and values. If that monolithic group exists, I wonder who they are and what those commonalities might be.

It borders on nonsense to speak of creating policies that meet the needs of the business community.

For example, there’s an enormous gulf between the interests of small business—“Main Street” entrepreneurs and mom–and-pop shops—and those if of professionally managed, publicly traded corporations. (When Walmart announces it’s moving into a town, it’s not greeted as good news by members of the local chamber of commerce.) Indeed, the more one studies “the business world,” the more obvious it becomes that there are numerous business communities, each with its own characteristics, motivations, and needs. Understanding those differences can have tremendous consequences when crafting national economic policy.

For example, a prime policy concern is (or should be) creating effective incentives for getting America’s workforce back to full employment—and in well-paying jobs. Analysis I undertook with Edward Lawler shows that goal can’t be reached if policymakers insist on one-size-fits-all programs. Focusing on medium-to-large, publicly traded, nonfinancial companies based in the U.S., and setting aside the complexities of the many forms of ownership we found among those companies, we were able to identify three readily distinguishable organization types. Each offers markedly distinct conditions of employment and records of job creation, offshoring, security, training, and compensation.  

Type 1: Low-cost operators. Large grocery, discount, fast-food, and mall-store chains have made cost-conscious U.S. consumers “kings” in the fast-growing services sector. To keep prices low, managers of these largely domestic companies utilize business models designed to continuously reduce operating costs. In these stores and restaurants—and in the food processing, agriculture, and hospitality industries—frontline employees are paid close to minimum wage, get few benefits, have no job security or career paths, and receive little training for their simple tasks. The number of jobs in this sector is growing, and openings attract workers who are less educated, immigrant, retired, and young, as well as those needing second jobs because income from their primary employment is insufficient. Significantly, managers and skilled specialists at the top of these same companies tend to be paid well and enjoy good benefits and working conditions and attractive career paths. 

Type 2: Global competitors. These corporations, from the information, telecommunications, pharmaceutical, media, and entertainment industries, compete internationally in terms of products, technology, and skills—moving products, operations, and jobs quickly and frequently across borders. They offer little employment stability, increasingly employing contingent workers (contractors and part-timers) and frequently outsourcing and offshoring work. However, their permanent, full-time employees (typically executives and those with critical skills) enjoy both security and compensation that matches those atop low-cost operators. Yet, global competitors create few new “good” jobs; instead, they emphasize the “new employment contract”—the understanding that your job is secure only for as long as you are highly productive and have skills the company needs in the location where they’re needed (and you are responsible for your own skill and career development).

Type 3: High-involvement companies. Although their number is relatively small, these companies are found in most industries. Offering challenging jobs, a say in management, commitment to low turnover, and extensive training, they promote mostly from within and feature clear career paths. Employees typically are salaried, participate in company stock ownership, productivity gains, and profits, and enjoy top benefits. (See my earlier post about the Lincoln Electric Company.) The ratio between the highest and average compensation in these companies is much smaller than in the other company types. 

In sum, the three types of organizations manifest quite different employment outcomes. Type 3s are most likely to offer job security, but they don’t create jobs as quickly as 1s, nor do they grow as fast as 2s. Types 1 and 2 tend to produce impressive spikes in short-term profit; Type 3s are more likely to be “built to last.” Type 3 companies (such as Starbucks, Whole Foods, Trader Joe’s, and Costco) compete successfully against 1s, while, paradoxically, paying their employees more. The reason: Productivity is much higher in the former because of greater value that their employees add.

Thus, it is neither appropriate nor desirable to create public policies that treat business as a monolith. Instead, we need a diverse set of policies that encourage greater job creation among Types 2 and 3, provide incentives for Types 2s to increase domestic employment, and spur Types 1 and 2 to incorporate more employment characteristics of Type 3s (as Type 2s Southwest Airlines and Google currently do). It won’t be easy: When Lawler and I spoke with executives at the three types of companies, we discovered they frequently differed in terms of their personal motivations and didn’t share common views about the basic purpose of a “business” enterprise. Hence, little is likely to change until we all break the habit of overgeneralizing and adopt more nuanced, effective modes of analysis.

James O'Toole

James O’Toole is director of the Neely Center for Ethical Leadership at the University of Southern California’s Marshall School of Business.

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