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International Column

Businesses too small to let fail

What can be done to lower it?

HOWARD SCHULTZ 17 December 2011

 
4Ps Business & Marketing, in a strategic alliance with the new york times service, presents a column by howard Schultz, Chairman, President and CEO of Starbucks corporation

This is such an important question right now because so many struggling economies around the world desperately need their countries’ entrepreneurs and small businesses to succeed. The jobs that small companies provide and the high-quality goods and services their employees produce can give powerful boosts to a faltering economy.

Unfortunately, studies show that about half of small businesses fail in their first five years – for a variety of reasons. Insufficient capital. Inexperienced management. Lack of – or incorrect – focus. An irrelevant product or service that does not meet or inspire market needs.

But let’s assume a company gets all of the above right – even though capital is hard to come by these days. The company can still sink if it does not attract and engage the right people.

Let me take a step back to make my meaning more clear. The hardest part of building a company at the outset is recognising the need to invest ahead of the growth curve, and then having enough capital to do so. The kinds of investments I’m referring to are ones you’d expect: materials, inventory, technical infrastructure, marketing, real estate.

Generally, the largest investments are in pay and benefits. This is where many small businesses get into trouble: By trying to minimise “people”-related costs, a small-business owner can inadvertently stunt the company’s growth. That said, investing in people is not just about spending money. It’s also important to expend intellectual energy on ways to inspire great work.

So, to answer this question more directly, small businesses have such a high rate of failure because their leaders do not put enough money or time toward employing, retaining and maximising top talent.

When I speak to small-business owners, I encourage them to follow a few guideposts:

LOOK FOR CHARACTER AS WELL AS SKILLS WHEN HIRING

Even in a down economy with high unemployment, the pool of the most talented people in any given area is shallow. That pool gets even shallower when the bar for hiring is skills PLUS strong character. This is the pool you want to hire from, even if it takes a little longer to fill a role.

Interview people through the lens of building a culture of trust. Ask yourself: How will they lead – by instilling fear or by encouraging greatness? How will they treat their direct reports, suppliers or customers – with respect or with condescension? Over the years, I have seen that character is more important than experience. People can learn the nuances of a job, but passion for doing the right thing cannot be taught.

Remember, the first people in the door will hire the next generation as you grow, so layer the organisation with teams that are smart, respectful, collaborative and just plain nice.
 
TREAT COMPETITIVE COMPENSATION AS A STRATEGY, NOT AN EXPENSE

Back in the late 1980s, at the beginning of my management of Starbucks, I wanted to be the retail employer of choice. I felt that I could achieve this only if, after hiring bright, friendly people to work in our shops (and our offices), I paid them more than the going wage in other restaurants and stores. I also had to offer benefits that were not available elsewhere.

Doing so came with a price. Back then, health-care costs were soaring and most companies were cutting benefits – much like today. Some of my investors accused me of irresponsibly raising expenses when the company had yet to turn a profit. I explained my position with data, showing that competitive pay and benefits would increase retention for existing employees and thus cut recruiting and training costs. Ultimately, my argument to investors proved true.

That was a long time ago, but treating overall compensation as a strategy for success, and not just an expense, remains critical. Today’s pay and benefits mix should be a sustainable blend of things beyond merit pay – stock options, retirement-account-contribution matches, tuition reimbursement, health-care coverage – that each hold value and add up to a total package that addresses people’s well-being on several levels.

IDENTIFY AND ARTICULATE A PURPOSE BEYOND MAKING MONEY

People want to be part of something that is larger than themselves. This, I believe, is human nature. When employees recognise in their work a sense of meaning that goes beyond just making a profit or bringing home a paycheck, they are more likely to go the extra mile on the job.

Meaning can be found in a company’s authentic purpose. How do your products and services enhance customers’ lives, beyond the obvious? How can your organisation use its resources, as limited as they may be, to improve the lot of local communities and address larger societal issues?

Emphasizing meaning is not some nice-to-have tactic reserved for more established companies. Consider it a need-to-have for all small businesses, whose survival often depends on whether every person is playing at the top of his or her game, every day. Take the time to identify and routinely articulate why work matters.

High unemployment rates throughout the world are no excuse for small businesses to ignore the people variable. I understand that other areas can seem more pressing when budgets are tight, but you will not get the quality you need from the people you employ if you do not invest in them. This strategy, when combined with other wise investments, inevitably spurs the success of small businesses. And that is something the world desperately needs right now.

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