Who creates jobs in our economy, presidents and Congress? Not directly, unless they are fattening up the bureaucracy, but the awarding of Federal contracts can have an effect. How about big business? They do create some jobs, but not as many as you might think. What about the manufacturing sector? America has managed to purge most of its manufacturing capacity through what can only be described as mass insanity on the part of the government officials and business leaders who allowed it to happen. Our once-great steel industry lies in ashes and General Motors, that formerly unassailable bastion of the nation’s economy is now well behind Wal-Mart as the nation’s largest employer. That brings up the big-box retailers. Yes, they do create jobs as they chew their way through the American economy, leaving a trail of small businesses in ruins in their wake while shipping more and more of America ’s wealth overseas while importing cheap foreign goods that add further strain on those American manufacturers that do remain. These jobs, of course, are nothing you can raise a family on and what little pay that comes with them is eaten up by the impossible of the so-called health benefits.
Birch’s Gazelles
No, these areas of the economy have little hope to offer, especially for someone who actually needs to make a living and support a family. There is, however, hope. In 1981, David Birch, who was affiliated with M.I.T.’s Center for the Study of Neighborhood and Regional Change, conducted a study of the dynamics of business and employment in the United States from 1969 to 1976. Through that study, which used data from Dun and Bradstreet, Birch developed a powerful database that enabled him to pinpoint the birth, death, and growth of companies across a spectrum of sizes and longevity. This was a departure from the traditional use of aggregated government figures that tended to mask some of the more specific data. With this database, Birch made some interesting discoveries, including:
- Of the 5.6 million businesses active during the 1969-1976 study period, firms with fewer than 20 employees accounted for 66% of the new jobs created.
- Between 1976 and 1982 firms with fewer than 100 employees created 82% of the jobs.
- Approximately 80% of the replacement jobs are created by establishments four years old or younger.
Birch concluded from his study that the size of the firm was not the deciding factor in whether a firm would be a job-creator or not. It had more to do with the company’s business dynamic of innovation and growth. He referred to these businesses as gazelles.
Mice, Gazelles and Elephants
In the original study—as well as in later studies that date all the way up to 2006—businesses are referred to in one of three ways, as mice, gazelles and elephants. By definition, mice are small businesses that don’t create much in the way of jobs. There are lots of mice around. Gazelles are rare, only about 4% of firms can be classified as gazelles, but they create most—if not all—of the new jobs that come into our economy. Gazelles come in all sizes, but most of them are small businesses. Elephants are big businesses that are actively shedding jobs. There are quite a few of these around as well. The question is, are you a mouse, a gazelle or an elephant?
Traits of the Gazelle
One thing you can say about gazelles—known today as high-impact firms—that you cannot say with such certainty about mice and certainly not about elephants is that gazelles are healthy and robust businesses. That they also happen to be the place where jobs are created is really more of a great side-effect of that health. The question is, how do you tell the real gazelles from the rest of the pack? Here are some signs to look for:
- Age . For companies with 1-19 employees, the average age of the firm is about 17 years. In companies with 20-499 employees, this increases to about 25 years and to 34 years for large businesses. Almost 95% of gazelle firms are over five years old while start-ups, firms that are 0-4 years old, account for no more than 5.5%.
- Employment Growth . For companies with 1-19 employees, average employment grew from 3.4 in 1998 to 16.3 in 2002. The average firm size of low-impact firms—the mice and the elephants—was virtually unchanged over the four-year period. The results for the four-year periods before and after the primary study period were comparable. For companies with 20-499 employees, 1994-1998 saw increases in employment from an average of 67 to an average of 186 with similar results in the other two four-year time periods. Low-impact firms saw increased employment from 1994-2002 before it decreased over the 2002-2006 period.
- Efficiency . With efficiency defined as revenue per employee, efficiency was greater for high-impact gazelle firms in total for all time periods studied and firm-size categories. For example, for gazelle companies with 20-499 employees, revenue per employee rose from $156,440 for the 1994-1998 period to $224,786. That is a rise of $68,346. Over the same period, low-impact firms of the same size gained $2,401, going from $113,744 to 116,145.
- Industry . Generally speaking, these gazelle companies are found across all industries. However, they show the greatest concentration in the electrical equipment, rubber and plastics and manufacturing (not electric) industries.
- Location . You can find the rare gazelle firms spread fairly evenly throughout the United States . In fact, the range of the data (percentage of high-impact firms within the entire population of firms) between the nine census regions is 2.12% to 2.33%, a tiny difference. That said, the nine regions appear as follows:
- Mountain – 2.33%
- West North Central – 2.25%
- East North Central – 2.24%
- Pacific – 2.22%
- South Atlantic – 2.19%
- New England – 2.17%
- East South Central – 2.16%
- West South Central – 2.15%
- Mid-Atlantic – 2.12%
The Bottom Line
Does all this mean that if your business is not a gazelle, with all the attendant robust growth and high efficiency, you are doomed the next time a cheese-baited mousetrap beckons? If that is what you are thinking, you need to quit thinking like a mouse and start thinking like a gazelle or, better yet, a cheetah. You need to study the gazelles, learn from their success and apply it to your business. Remember, there are gazelles in every business (except for gardens and museums—what a shock!) and with a little study and effort, you can find out who the gazelles in your area are. If you are a small plastics firm and you find a gazelle in your industry, ask yourself what they are doing and you are not—and why. Remember, the success of these firms doesn’t rest on being “lean and mean.” They are not job cutters. In fact, these are the businesses that really drive the nation’s employment by doing what the politicians all promise but can never seem to deliver—create jobs. There is no reason why you cannot do that as well. There is no reason you can’t do it better.
After all, cheetahs eat gazelles.
