Monday, September 20, 2010

High Growth Stage II Firms: the Key to Job Growth

The Greater Owensboro Economic Development Corporation is embarking on a new strategy to focus on high growth Stage II companies. This blog by Dan Gundersen, Senior Advisor, published by the International Economic Development Council, offers a good overview as to why Stage II companies will be such an important focus in the new EDC Strategic Plan.

"What kinds of businesses create the most new jobs? Most likely, your answer is that small businesses create the most new jobs. Yes, they do – but historically, they also lose the most jobs.

The most important and overlooked concept in modern economic development is net new jobs – those jobs that remain once we subtract all the jobs lost when firms contract, migrate, and close. These net new jobs are overwhelmingly generated through the sustained profitable expansion of existing companies, also known as ‘high-growth' or Stage II firms.

You might respond that high-growth businesses are start-ups and small businesses, usually technology-based enterprises. They tend to be located in or near metropolitan areas to have access to transportation infrastructure, dense labor pools, and thick supplier and customer networks.

Question those assumptions

But here's a reality check: High-growth businesses are usually at least ten years old and have more than 50 employees; rarely are they start-ups or very small firms. Perhaps most surprising, they are much more likely to be found in traditional industries than in high-tech industry clusters.

Why? Nearly every industry segment has one or two dominant firms that provide the most competitive products and services, and thereby reap the lion's share of sales and profit growth, even during recessions. This success fuels extraordinary job creation.

These exceptional firms grow throughout the nation, regardless of local infrastructure or labor markets. They tend to hire new employees based more on drive and desire to grow with the firm than education level or current technical skill-sets. Many are owned and managed by minorities and women entrepreneurs. Their growth increases the equity of job creation because opportunities are widely shared across all demographic groups in our society.

The most comprehensive research of high-growth businesses in the nation was conducted recently in the Commonwealth of Pennsylvania. When I was COO at the Department of Community and Economic Development, we sponsored early research to drill down on the factors for regional prosperity. Dr. Gary Kunkle led this massive effort to analyze the growth of more than half a million firms by integrating proprietary and non-proprietary databases over a multi-year period. It was hard, complex work conducted over several years, and included personal visits and surveys of CEOs at 600 high-growth firms.

The results showed that one percent of firms in the economy generated over 90 percent of the state's net new jobs. Every county with at least 10,000 residents had one or more high-growth businesses.

What do high-growth firms need?

Dr. Kunkle's work for Pennsylvania also found that exceptional growth causes challenges that transcend industry and location. CEOs of high-growth firms routinely struggle with common problems – such as funding expansion, developing management talent, and overcoming delays due to permitting processes. These difficulties slow growth and reduce long-term job creation.

High-growth business owners are simply too busy to seek public notice or assistance. In fact, they have surprisingly few places to turn for help. They typically avoid standard chamber networking events and are much more concerned with managing rapid growth than dialing for incentive dollars or pushing political buttons to advocate for tax cuts and credits. They are effectively 'under the radar' of most economic development efforts.

In an era when performance matters and jobs are scarce, the economic development profession must include efforts that focus on what works – fostering the green shoots of success that already exist. To advance the agenda of job creation, we must learn from and replicate the secrets of those businesses that produce 90 percent of the net new jobs in every community.

Sure, scouring data sets to understand growth trends and find high-growth firms can require technical skills and expertise, not unlike industry cluster analyses and other market studies. But once you identify these exceptional firms, you will then be in an excellent position to engage them. In time, you might realize that you can improve your effectiveness by modifying your organization's services and introducing new approaches to better help these and other firms sustain profitable job growth."

COMING NEXT: Why Owensboro needs to focus on Stage II firms, a look at the data.

- Posted using BlogPress from my iPad

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