Employer Success:
Resiliency and Strategies of Industrial Adaptation in Wyoming
by: Craig R. Henderson, One Stop
Program Supervisor
data compiled by: Tony Glover, Senior Analyst
"Many Wyoming employers demonstrated a three-year survival rate approximately 7.0 percent higher than firms whose diversification strategies did not reflect an actual shift in industrial classification."
I
ndividuals and firms constantly adapt
to change. Parents, teachers and social workers often yearn for knowledge of what makes one
child or client more resilient than another when faced with uncertainty. Insight into this
question can help to minimize the potentially negative effects of change, if not strengthen
the individual's capacity to adapt creatively to new situations. For similar reasons, employers
and economic developers want to know how businesses might diversify their products to redirect or
regain focus. Some new businesses may adapt to change by exploiting new market niches or
specializing.1 Even failed businesses can reform themselves
through their past experiences. By learning to adjust to changes in the Wyoming market place,
businesses may survive longer, expand and prosper.
Using Unemployment Insurance (UI) employer data, this article demonstrates some ways Wyoming
employers have adjusted to changing market conditions or other forces by shifting their primary
industrial focus. As a consequence, they have increased the probability of economic survival. By
making seasonal, temporary or long-term adjustments in the goods or services their firms produce,
many Wyoming employers demonstrated a three-year survival rate approximately 7.0 percent higher
than firms whose diversification strategies did not reflect an actual shift in industrial
classification.
Contrasting Survival Strategies of Employers and Employees
As a way of thinking about industrial shifts by employers, contrast this employer "survival"
strategy with the behaviors of Wyoming-attached employees. In prior Wyoming Labor Force
Trends features, Research & Planning (R&P) applied a useful classification system
for describing the labor supply's level of attachment to Wyoming.2
We have described how workers' strategies often include job changing, holding multiple jobs or
working seasonal jobs in order to stay employed.3 These
Wyoming-attached workers may have acquired transferable skills in order to move between different
employers. Just as employees may choose to change jobs, some employers may shift among
industries. Employer shifts to a different industry are measured through annual surveys.
If an employer changes his or her main type of business activity and reports it, the firm
is reclassified to a different industry. Some code changes occur in response to revisions
to the Standard Industrial Classification Manual rather than a change in product
supply or customer demand. Other times, a firm makes a conscious or unconscious choice to serve
a new kind of customer.
Employers registering their businesses often report ties to several industries which together
account for their total revenue [i.e., a retail business that sells fuel (40% of revenue),
groceries (25%) and operates a restaurant (35%) would be classified as a gas station].
Experiencing a change in its revenue distribution, the business might subsequently be
classified as a convenience store or a restaurant. This approach to business mirrors the
experiences of multiple job holders who require several sources of income in order to
sustain themselves or increase their wealth. Other employers alternate annually between
business activities (i.e., lawn care and snow removal) just as employees might pick up one
or two seasonal jobs (i.e., a public school social studies teacher might work as a historical
site interpreter during summer months).
Not only can personal strategies parallel employer strategies but they may have significant
impact on each other. National research has shown a link between employee turnover and
business survival. A study by researchers of The American University and the University
of Baltimore found that in "consider[ing] the consequences to the firm of such
turnover, . . . high turnover firms are less likely to survive."4
Last June, Trends reported that Wyoming had a large volume of turnover relative
to the level of employment (i.e., 12.1% for Retail Trade and 8.7% for Services in 1997),
especially among lower paying industries.5 More studies
are needed to establish how and when workforce instability threatens business survival or
inversely what business practices might result in workforce
instability.6 While our analysis acknowledges
alternative explanations for business survival, it illustrates how industrial sector
change may be one important factor in realizing business survival and success.
Industrial Shifts by Employers
When employers first register their firms for UI coverage, the Department of Employment
assigns them an industrial code reflecting the firm's main business activity. If an
automotive repair shop also operates a towing service, the employer is classified by
the industrial activity which generates the greater revenue. Approximately every
three years, employers review their industrial classifications through
refiling.7 To study the adaptation of employers,
we identified the shifts in Standard Industrial Code (SIC) classifications of all
private-sector, UI covered employers in Wyoming for an eight-year
period.8 We chose to focus on firm survival without
regard to a change in firm ownership, though a prior R&P study of new business
formation also tracked business survival rates and limited the analysis to a study
of continuously owned businesses.9 Our broader
approach to calculating business survival, then, focuses on the firm's continuous role as
an employer. We calculated a three-year survival rate by tracking the presence of a firm
in the UI database each quarter for three years following each industrial code registration
or change from 1989 through 1994. Because our analysis required a full three years
following a firm's industrial shift and our data set extended only through 1997, we
did not calculate survival rates for firms that registered or changed industries after 1995.
Patterns of Industrial Adaptation
Our analysis identified 2,435 firms that switched their industrial classifications at
least once during the eight-year reference period. Table 1 illustrates the frequency
of the 49 most common classification changes made by employers. Each pattern of
industrial shifting included in the Table represented the behavior of five or more
Wyoming firms during the eight-year period. Most often, both the old and new
classifications fell within the same major industry (i.e., Retail Trade,
Services or Mining). To help illustrate what this means, the SIC system consists
of ten major industrial divisions. Each of these ten major industries are categorized
in a hierarchy of related two- to four-digit codes. For example:
Major Industry -- Manufacturing | |
20 | Food and Kindred Products |
202 | -- Dairy products |
2021 | ---- Creamery Butter |
2022 | ---- Cheese |
2026 | ---- Fluid Milk |
205 | -- Bakery Products |
2051 | ---- Bread |
2052 | ---- Cookies and Crackers |
Shifts most commonly occurred
between related industrial categories at or below the two-digit SIC Code level (i.e., a
shift from 2051 Bread Manufacturing to 2052 Cookies and Crackers Manufacturing). To take
another example, in order to reduce labor costs or meet an unmet market demand a firm
categorized within Retail Trade as a caterer (SIC 5812) might shift its primary
classification to catalog and mail-order houses (SIC 5961), selling meats and cheeses
without a storefront. In 16 of the 49 most common patterns of industrial shifting,
however, the new SIC classification fell outside the major industrial division of the
prior classification (i.e., a shift from Wholesale Trade to Retail Trade; Agriculture
to Construction). In Table 1, which displays the full 4-digit SIC detail, shifts
between major industries are highlighted in bold.
The shift from Drinking Places (SIC 5813) to Eating [and drinking] Places (SIC 5812)
ranked as the most frequent pattern of industrial classification change (23 firms). The
classification, eating and drinking places, showed a recurring capacity to pair itself
with other industrial classifications: Hotels and Motels (SIC 7011); Liquor Stores (SIC 5921);
and Gasoline Service Stations (SIC 5541). These familiar industrial pairings may
reflect an ever-increasing market demand for customer service and convenience.
Industrial shifting occurs in both the service-producing and goods-producing sectors
of the economy. Table 1 shows that a combined total of 30 firms commonly shifted their
primary industrial focus to Oil and Gas Field Services, NEC10
(SIC 1389). These firms shifted from the following five industries: Drilling Oil and
Gas Wells (SIC 1381); Crude Petroleum and Natural Gas (SIC 1311); Industrial Machinery
and Equipment (SIC 5084); Equipment Rental and Leasing, NEC (SIC 7359); and Heavy
Construction, NEC (SIC 1629). Interestingly, this shift toward Oil and Gas Field
Services, NEC replaced the 22 firms that moved away from this classification to
Crude Petroleum and Natural Gas (SIC 1311), Heavy Construction, NEC (SIC 1629) and
Local Trucking Without Storage (SIC 4212). This point may illustrate the dynamic
competition for limited market demand for products and services by firms, a competition
that transforms the nature of many businesses in the process. Alternatively, these
coding changes may have involved noncompeting firms representing different regions of the state.
In contrast to these common industrial shifts, some employers opted to diversify or
refocus their businesses in less expected ways. Not listed in Table 1 but among the
1,698 industrial shift combinations identified by our 1989-1997 data, firms
classified as SIC 5812 Eating [and drinking] Places less commonly shifted to
Engineering Services (SIC 8711), Furniture Stores (SIC 5712) and Livestock Services,
Except Veterinary (SIC 0751). However dissimilar or unlikely these industry
shifts seem at first glance, we need to consider that these industrial shifts
probably reflect the diverse skills or interests of the small business owners
themselves, regardless of whether the ownership changed at the time the shift
occurred. After all, an entrepreneur might open a coffee bar in a store that
sells hand-crafted rocking chairs in order to attract more customers. Depending
on the season and economic circumstances, rocking chairs or coffee sales may
bring in a greater share of the firm's revenue and provide the majority of
employment for workers.
Table 2 shows the distribution of industrial shifters and
non shifters among major industries. An overwhelming majority of Wyoming firms
(26,971) did not shift between industrial designations. However, between 1989-1997
industry shifting among 2,435 firms accounted for limited gains in the number of
firms distributed among all but three major industries. Most firms who shifted
between major industries left Retail Trade, Services or Wholesale Trade.
Transportation, Communications, & Public Utilities (TCPU) gained the most,
a net of 38 firms, over the period.
Comparing Survival Rates for Industry-Shifting and Non Shifting Firms
To compare the rate of survival of industry shifting firms to non shifting
firms, we measured the three-year survival rate of all employers who reported
with UI for any quarter between the first quarter of 1989 and the fourth quarter
of 1994. Again, industry shifting firms were those that changed their initial
industrial designation through the refiling process during this five-year period.
The duration of firms' appearance among quarterly reports of UI during the period
of 1989-1997 represented their continuing "survival" as Wyoming employers.
Figure 1 shows those firms that did not shift industries
had an average survival rate of 96.6 percent after one quarter of business
operation which fell to 76.0 percent after three years. In other words,
about three-fourths of Wyoming businesses that maintained their initial
industry as their primary industry survived three years. Employers who
changed industrial designations between 1989-1994 had a higher survival
rate. Of industry shifting firms, 98.6 percent survived the quarter after they
changed their primary industrial designation and 83.8 percent were still in
business three years later. Figure 2 plots the
difference between the two groups, showing that industry shifting firms
gradually gained a survival advantage over non shifting firms during the
eight quarters following refiling. Employers from different size classes
had the same survival rates. After two years, the survival rate leveled off
having achieved more than a 7.0 percent gain.
Looking for other factors to explain industrial shifting, the researchers did not
find among the data a relationship between size of business and industrial shifting.
Given that one-third of the most common shifts involve changes between major
industries (see Table 2 for a list of the ten major industries), it appears likely
that a proportion of the firms that shifted did so as an adaptive strategy, whether
planned or by default.
Conclusions
The central finding of this analysis demonstrates that some employers, particularly
those in the Services and Trade industries, stayed in business longer not simply by
diversifying their product lines but rather by embracing (to the extent it was
formalized) a new industrial focus. Regardless of how closely related the
new industrial interest was to the former interest, the emphasis on different
products or services accounted for a majority of the employer's revenue,
thereby replacing the employer's primary industrial designation.
Having identified that industrial change may benefit some employers, we need to
make the point that changing industrial classification does not necessarily
require a business to transform its public image, largely a function of the
business's name and reputation. For example, absent a sign post change
or significant building renovation, the public will generally view a
motel that shifts its primary industrial classification to coin-operated
laundry facilities (based on revenue) as a motel. The prevalence with which
firms that shift industries also make changes in their corporate name could
be the subject of a future study.
This analysis does not offer a definitive snapshot of employer resiliency.
The components of business survival are too numerous and complex to take up in
this short report. Faced with market change, though, industrial shifting
offers employers another survival strategy that should not be feared and
might provide a substantial benefit. More detailed analysis of firm behavior
using industrial classification systems--additionally, employee adaptive
behaviors and career paths using occupational classifications--have the
potential to identify winning strategic models for employer (and individual)
success. Patterns of industrial shifting or occupational pairings may provide
economic developers, career counselors, employers and employees a better
understanding of how to weather changing economic winds and realize success.
1 Xiaohong (Sherry) Yu,
"Update: New Business Formation in Wyoming,"
Wyoming Labor Force Trends, January 1999.
2 Brett Judd, "The Wyoming Wage
Record Classification System," Wyoming Labor Force Trends,
March 1998.
3 Krista R. Shinkle,
"Wyoming-Attached Workers: Living and Working in Wyoming,"
Wyoming Labor Force Trends, April 1999.
4 Julia I. Lane, Alan G. Isaac, and David W. Stevens, "Firm
Heterogeneity and Worker Turnover,"
Journal of Economic Literature, February 1996, [Abstract].
5 Mike Evans, "Job Turnover and Hire
Rates in Wyoming," Wyoming Labor Force Trends, June 1999.
6 Tony Glover and Richard Peters,
"Instability Index as a Measure of Labor Market
Activity," Wyoming Labor Force Trends, March 2000.
7 Refiling: each year Research & Planning randomly surveys
one-third of all firms. Employers are asked whether or not their primary
business function has changed. If it has, they are coded into their new industrial classification.
8 More than half of the 2,435 industrial shifts recorded for
the period 1989-1997 occurred in three years, 1990-1992. The concentrated
reporting of industrial change during that period reflects a combination of factors.
First, the 1987 revised edition of the Standard Industrial Classification
Manual was implemented, reclassifying a significant number of industries.
Secondly, during this period the Department of Employment initiated new automated
systems for conducting employer refiling, boosting responses. Thirdly, the refiling
process moved from surveying one-third of the ten major industrial divisions
each year (i.e., Mining, Construction and Services one year; Government, Agriculture
and Manufacturing the next year) to surveying annually one-third of all Wyoming
employers (representing all major industries).
9 Xiaohong (Sherry) Yu,
"Update: New Business Formation in Wyoming,"
Wyoming Labor Force Trends, January 1999.
10 NEC = Not Elsewhere Classified within
Standard Industrial
Classification Manual. Full citation: Executive Office of the President.
Office of Management and Budget.
Standard Industrial Classification Manual, 1987.
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