Now that the GOP tax bill is in the history books, the impact of such a significant change is starting to surface. We are reading about employee bonuses, stock buybacks, and even investment plans for repatriated profits. This tax cut goes much further than just a lower tax bill. In fact, a change of this magnitude will force change upon every business in every market in many different ways. Some of these forces will be favorable and some destructive if you have not prepared.
Three Powerful Forces
More money to work with.
The first and most obvious change resulting from tax reform is that businesses will have more money to work with. The result is that every business now needs a new set of financial assumptions because of the lighter tax burden on profits generated from operations. However, in many cases, a more significant force will be huge cash balances moving from the balance sheet into working capital primarily from the $2,6 trillion dollars of repatriated foreign earnings..
These new sources of funds mean every corporate executive team will have more money to invest, pay down debt, take profits, share profits or shift their equity positions. It also means every line manager is now in a position to go back to their executive management team and advocate for additional funding for those high potential opportunities that were cut out of the 2018 plan before the tax cut was approved. Now is the time to invest.
Why the sense of urgency? Because everyone is now recalibrating their financial assumptions and exploring new ways to grow. If you wait, your competitors might just scoop up all of the good opportunities before you get there.
More emphasis on employee retention.
If you have not heard the battle cry yet, perk up your ears. The wage war has begun! We hear about bonuses because those are great headline grabbers with no long-term impact on profitability. But what is real and what is noteworthy is that unemployment is at a 10-year low and wage and salary growth has not correlated with this trend. In fact, wage growth was lower at the end of 2017 than it was at the end of 2015. However, this trend is quickly coming to an end. It is ending not because corporate management is feeling magnanimous after the tax cuts provided them with more wiggle room in budgets (see #1) but because the economy is hot.
Wages and salaries will increase because the new infusion of capital will spur more growth and a strategy used in the past to mitigate wage growth may be less viable today: immigration. As a result, companies will have no choice but to increase wages and benefits in order to find and retain good employees.
How do you prepare to win the wage war? Step one, benchmark your compensation and keep a close eye on it in order to stay on par with wage demands. However, you cannot stop there. Step two, build a strong culture to retain current employees.
Gallup’s research tells us that although management believes 89% of people leave because of pay, the truth is this only 12% leave for that reason. So, even if you stay on par with your compensation program, you could still be at risk to loosing key talent. The highly competitive technology industry sets the best example of how to operate in a highly competitive talent market. They have very similar compensation programs, but they create real competitive advantage with a strong company culture where staff feel a tight bond and pride in affiliation.
If you have not already built a strong corporate culture, you need to invest in it now. If you are a team leader and feel that it is the HR departments job to do this, let me ask you a question. Who suffers if your strongest team member is plucked by the competition? The company, sure, but you feels it the most. So, start to build your team culture now. Read my blog post, “The wage war has begun. So, what can YOU do about it?” for ideas on how to get started now.
Changing markets and competitive sets.
I predict that everyone’s market will look significantly different in 12 to 18 months. The investment windfall created by the tax cut will accelerate in the first year. Many corporations were prepared for these changes because they have been engaging in scenario planning for years. That is why they were ready to announce big changes so soon after the new year. The question everyone should be asking though is what decisions are they not announcing?
I believer there are dramatic new shifts happening quietly in every market and these will reshape how your market is defined. There will be more mergers and acquisitions as well as new partnerships formed and unusual clusters emerging to consolidate market share and strengthen capabilities. There will also be big “players” seeking new markets to diversify their growth strategies. You may find a leader in complementary market jumping into your market if the growth potential looks promising. There will be ample funds to explore a wide range of new growth strategies and all of this activity will not only change how you define your market boundaries, but also your competitiors.
Scenario planning is one of the best ways to prepare for these changes. Schedule strategic planning retreats to openly share market intelligence and create possible future scenarios. Then, create response strategies or better yet, select the scenarios that favors your organization and set out to make them happen. If holding your space is the best option then the time you spend on scenario planning will prepare you for a quick response when needed.
How well does your plan stand up against these forces? If you are unsure, start preparing for changing competitive pressures now. Remember, it is always true: opportunity favors the prepared.
Cecilia Lynch, is a leading authority on strategic planning and development. After two decades developing highly successful strategic plans for corporations, from Fortune 500 to start-ups, and non-profits, she is now making the process of developing strategy available to everyone through her book, “Strategic Focus: The Art