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Why High Performance Companies Important to Our Economy

By H. Randall Goldsmith

When posed with the question "Are you doing as well today as you were 5 years ago?" several quality of life measures are likely to cross your mind. However, the one universal measure that will come to mind is income. We all tend to use income as a measure of our personal status and rightfully so.

Income for us is the reward for work. We work for income to provide us with life's basic needs and the "needs" and "wants" beyond. Income determines the degree to which we can take full advantage of the choices offered by a capitalist society such as healthcare, education, good government, career opportunities, and quality of life. Thus, the amount of personal, community, state, or national income has a tremendous impact, not only on economic condition, but also social condition.

When I consider my economic condition with my father and his father, I am convinced we both worked equally hard during our lifetimes. However, if we were each doing exactly the same type of work, I am quite sure I would work less time today than my father and far less time than my grandfather to earn the same amount of money. Why? Innovation. Chose virtually any job description and compare the tools and technology we have available today compared to 25, 50, and 100 years ago. This concept is called "value-added per worker." If I can do the same amount of work in less time or generate more output in the same amount of time than my ancestors, I have a greater value-added factor on an individual comparison. This is, also, called PROGRESS.

From a different perspective, the value of the end product after a defined period of time is also a measure of "value-added." For instance, if I am a textile employee, I might make $50 worth of shirts per hour. This is far less than the $150 worth of computer chips made by semiconductor worker per hour. The added-value of the chip maker is three times as great as the textile worker.

Why is one product worth more than another? One reason is supply and demand. Innovation in the form of internet-based applications continues to drive demand for new computers and web devices with greater power and speed. Whether the product is a commodity or a high-value product, increased demand supports profits and wages.

Another reason a product is worth more is innovation. Core industries have many competitors that generally produce commodity products for a slow growing market. New innovations in core industries are typically incremental in nature in the form of new equipment to accomplish the same process or a new material for the same purpose. Core industries producing commodity products compete on the basis of being faster, better and cheaper. Profit margins are typically smaller and competition is everywhere. Core industries that continuously focus on new product development and adopt innovative process, material, managerial, and marketing strategies can dominate the competition and use competitive advantages to capture market share and support higher profit margins.

New economy industries compete on the proprietary competitive advantages created by intellectual capital. Intellectual capital can consist of intellectual property such as patents and copyrights; human capital in the form of talent; tangible assets such as devices and processes requiring unique knowledge for operation; and intangible assets such as social networks, strategic partnerships, knowledge databases, and a loyal customer base. These companies compete with a smaller pool of competitors and derive higher margins supported by proprietary products due to their high intellectual capital content.

This concept of value-added per employee contributes to the overall Gross Domestic Product (GDP) of a state or local economy. The objective of any economy is to increase its GDP; however, it is also possible to increase GDP simply as a function of population growth without increasing it on a per capita basis. The real objective is to increase the GDP per capita. If GDP is driven by population growth without increasing GDP per capita, it could result in amplifying and exacerbating negative economic conditions such as overcrowded schools, deteriorating infrastructure, increasing crime, and other social issues. Only communities that already have very high GDP, where increasing "more of the same" would be manageable, can benefit by more growth on a level per capita basis. These types of communities exist in theory but hardly in reality.

Research shows that an increase in GDP per capita results in higher income per capita and the number of jobs also grows. This suggests that it might be worthwhile to reconsider traditional ideas and concepts of economic development that focus only on jobs and growth. New jobs that don't actually reduce the overall unemployment rate could eventually result in undesirable outcomes if they are below average value-added per employee, in direct contrast to the objectives of proactive economic development efforts.

A new report from the Carey School of Economics at Arizona State University focusing on the keys to economic growth identifies adopting or developing new technology as the primary solution. Their study concludes growth eventually ends without technological progress. They also stipulate that inventing technology or being on the leading edge of technology development is not a prerequisite for growth. Just being in the early majority or even a regional pioneer in adopting innovation can have positive results.

The idea that innovation is more than a new product is gaining greater acceptability. A recent survey of CEOs by the Harvard Business School showed that 65 percent indicated they intended to implement significant innovation changes in the next 24 months. With increasing awareness that the global economy is bringing disruptive change resulting in the destabilization of companies, industries, and states, business CEO's are adapting by creating and adopting innovations in the form of new business models, strategic partners, marketing strategies as well as global strategies. Innovation is more than a product.