What You Need To Create Wealth

AUCKLAND DOWNTOWN ROTARY: People In Business: What You Need To Create Wealth

DIANE FOREMAN VICE-CHAIR AUCKLAND NEW ZEALAND BUSINESS ROUNDTABLE 25 MARCH 2003 PEOPLE IN BUSINESS: WHAT YOU NEED TO CREATE WEALTH

This speech is unashamedly about how to create wealth.

It's about what people need to succeed in business and how business can help make New Zealand a more prosperous country.

Wealth is a relative term, of course, with a lot of different connotations. Some people find the very mention of it distasteful. Certainly everyone has a different idea about what constitutes enough of it.

There's also often debate about whether the way wealth is distributed around society is fair, and how we can go about creating it on a national scale.

The one thing everyone agrees on is that we'd like everyone to be better off and for New Zealand overall to be a wealthier country.

How do we achieve that?

Some would argue that the best way to make everyone better off is to share the money around more evenly. That sounds fair. Why not? But the truth is, even if we were able to redistribute all wealth equally, in a free society without heavy-handed state controls, inequality would immediately result. Look at it like this:

Imagine a society of complete equality of wealth but one where all people are free to make decisions regarding their own life. If everyone were given an equal amount of money at 8.00am it would be unequal by 8.01am. Some individuals would spend their money, while others would invest it. Some would gamble with it or maybe buy pastries. Others would purchase tools for work or buy education or training with it. Each choice would mean that the distribution of the wealth would immediately become unequal.

The only way to stop this from happening would be to stop individuals from making their own decisions. I don't think too many would advocate that.

As my story illustrates, people differ enormously in their ideas and attitudes and choices of actions, and that brings me to my central theme, which is about people.

I want to share with you the three most important factors I've identified in my business life – and they're all about people – that are the key to creating wealth. I'm going to illustrate each of these with case studies from my own business experiences.

1. Understanding human behaviour

My first point is the importance of understanding human behaviour and what drives it. Knowing why people behave the way they do of course helps us understand our customers and what they want, but it also helps us find and motivate the talented people we need to create and market our products and services.

The one common thread in the myriad ways in which people behave is that people do what they think is in their own best interests. We get out of bed and go to work or play or exercise or learn, or to do whatever we do, not as a rule for the greater good of society, but to improve our own lot or that of our family.

As the economist Adam Smith said “The desire of bettering our condition comes with us from the womb and never leaves till we go into the grave.”

This self interest is not selfishness or unnatural greed; it is a good and strongly positive force and the most fundamental human urge.

It follows that people respond to incentives and disincentives. The bigger the share we have in the fruits of our labour the harder we work.

Trigon Industries was a plastics and packaging business my husband Bill started in the late '60s with 10 staff in a tin shed in Hamilton. Bill had experimented with many businesses over the years, from canning fish to building caravans, from farming snails to selling trees to Saudi Arabia. He had many failures and setbacks along the way, but all of those experiences formed part of the huge success that Trigon became.

Bill grew Trigon to 750 staff, with six factories around the world and annual sales of $140 million. We worked in it together through the 1990s until we sold it to an American conglomerate in 1996.

Trigon is a classic story of entrepreneurship – success built on bright, bold ideas, risk-taking, guts and sheer hard work.

But for me it also illustrates an important point about what motivates people. In the course of building the business, we experimented with different means of motivating and rewarding staff, including an equity-sharing scheme whereby staff were given a 'piece' of the business, and a target-based risk-sharing scheme whereby they had the opportunity to receive a bonus each month. The latter worked because it was simple and clear and gave people a direct and immediate share in the fruits of their own efforts.

I think many bonus-based remuneration schemes fail because the reward is too remote from the effort, and payment – often at the end of the year – is too far away to be motivating.

Punitive tax rates work in the opposite direction from incentive-based pay. The higher the rate of tax taken from our earnings, the less inclined we are to work harder and longer. In the same way that putting up taxes on tobacco discourages people from smoking, so do steep rates of income tax discourage working, risk-taking, investing and all the other human effort that lies behind successful businesses.

Another example incentives and disincentives is prices. Every day, as consumers, we make decisions based on simple price signals. We don't need to know why prices go up or down, we simply need to know that they have, and act accordingly. That in a sense is how markets work.

Earlier this week I was looking into one of the best, if rather personal, examples of the market at work: the collection of items in my supermarket trolley. It reflects my taste and my family's peculiar needs, so it's different from the collection the man behind me assembled. But there's some standard stuff: dog food, bananas, a leg of lamb, cereal, bread, and so on. Like all of us I respond instinctively to price signals.

Dog food was on special so I bought up large. The lamb was quite expensive – I hesitated over that. The bananas were slightly down in price. I bought more than I might normally. In short, the prices are sending me a signal. Lamb is in short supply, export prices are up. Bananas are plentiful – maybe things are booming in Ecuador. Who knows? Who cares? It doesn't matter. But it works.

The mechanisms of the market are at play.

But what if a benevolent government decided that bananas were too important to leave to the market and decided to regulate the price so they couldn't go up? The price signal would be distorted. In the absence of an accurate signal about the demand, the supply could well dry up. What then?

There is another angle to the analogy. If health and education are so important that they cannot be left to the market to provide, why not hand the supply of all food over to the government as well? Surely food is the most fundamental necessity?

So just imagine what my supermarket trolley would look like then. Let's imagine the government provides a standard trolley full per week for each person or family. What would they put in it?

How would they know the only brand of cat food my cat will even consider? How would they know my kids prefer berry-flavoured Fast Break instead of cherry-flavoured Up and Go?

The idea is too stupid to think about, but it's not a bad way of explaining what happens when governments try to do things that people can do for themselves.

Sometimes governments seem to forget that people are smart and generally sensible, and given a level playing field and reasonable rules they will make good decisions in their own interests. They like to make their own choices. They don't want to be mollycoddled or patronised by governments second-guessing their needs, no matter how well intentioned they may be.

There is a lesson here for businesses too. Smart business people know their market and what they can and can't do well. They don't make assumptions about what's best for their customers, or try to make products that someone else can make better or at a lower price.

Another aspect of understanding human behaviour that is critical to business success is knowing where people are 'at' – getting inside the psyche of our customers and anticipating their needs.

My favourite examples of this from the Trigon story were three of Bill's 'inventions'. He was literally the first to think of making an envelope out of plastic – now the plastic courier envelope is used worldwide. Then there was the 'boil in bag' meal concept – the first ever 'heat and eat' packaging. And, from first hand experience in changing nappies, he came up with reusable tape for disposable diapers. Each of these was a world first, were worldwide successes and were products that were 'now', reflecting consumer preoccupations and priorities of the time.

2. Understanding what people need

My second critical people factor is about the importance of understanding what people actually want and need. Too often businesses make assumptions about what their customers might want, instead of really taking the trouble to conduct thorough market research.

Take hotels, for example. How often have you stayed in a hotel or motel that really didn't meet your expectations? You know the sort of thing: bath towels the size of face cloths; thin curtains that don't keep the light out; nowhere by the bed to plug in a cell phone; pilled polyester sheets; pillows like cement.

Of course individuals have different needs and wants, but those of us who are marketing products or services need to know who precisely we're targeting, what it is they need and what they are prepared to pay for it.

It's all part of determining whether or not a business is feasible. It will help define your product, how it's produced and at what price. It requires thorough research of the market and a strong and proven business plan.

A good business plan is essential. I have always said that in business you shouldn't cross the road if you haven't got a business plan to work out how you're going to get to the other side.

I really believe you have to live and breathe your product. This was very much our philosophy when we bought the Emerald Inn on Takapuna Beach.

Like many business people who travel frequently, I had had plenty of bad hotel experiences, and I'd often thought about what would constitute the perfect hotel room for me. So when the hotel on Takapuna beach came up for sale I was delighted. The location was great but the hotel itself was seriously lacking – stark and bare with no garden and no ambience.

I was convinced there was a market for a niche hotel with top quality business accommodation on the North Shore, but we had to be totally sure of that.

We asked 20 frequent business travellers to list the 20 things they most wanted to see in an upmarket hotel and we made sure each of our rooms had 10 of these items.

People wanted things like thick, large bath towels, feather pillows, top quality linen, a sharp fruit knife, windows that open, and, apparently, men prefer blankets to duvets.

We wanted to create the feeling of a Fijian-style holiday so we engaged a designer who'd designed some top resorts in Fiji. We gutted the building, fully redecorated and created a wonderful new garden. We wanted people to feel they were being transported to somewhere really special at the end of a hard business day.

We also made sure we knew our product inside out. There are 46 rooms in the hotel. We made a point of thoroughly testing everything in all 46 rooms – right to the extent of actually sleeping in the rooms. That's the only way you can find out that the remote in No 8 doesn't work properly, or the telephone doesn't stretch across the bed.

And it's worked. Before we took over the hotel the occupancy was 20%. Now, over the last five years, the occupancy has averaged 96%.

Why did we go to all this trouble? What was our incentive? It might surprise you to hear that we're not doing it out of affection for our customers. To put it plainly, it's self interest. We wanted to get the best out of our investment and create wealth. The best way to do this is to serve our customers.

And if we serve our customers well at the right price we both benefit. That's why when our guests check out both the staff and the guest say 'thank you'.

Just imagine if the incentives involved in serving customers in business were applied to government services.

Can you imagine what type of hotel service we'd receive if the government ran all the hotels? Can you imagine the Minister of Tourism testing the beds?

As I mentioned earlier, we'd think it was crazy if the government had control over the contents of my supermarket trolley. I'd love to see the day when the incentives and disciplines that successfully deliver quality and choice in supermarkets and hotels could be applied to services such as health and education that are currently delivered by the government.

I'm convinced it's possible with the help of the private sector to deliver major improvements in quality in many of the areas currently dominated by the government. But before that can happen we need to be open to imagining new ideas about the delivery of these services.

3. What kind of people do you need to create wealth?

The final 'people' factor I want to focus on concerns the types of people who are needed to create wealth.

Here I include both the entrepreneurs, the people who have the ideas, imagination and drive to start businesses, and the people who work in those enterprises.

It's not easy to define precisely the characteristics of an entrepreneur. In essence entrepreneurs are the people who have a business idea, and are prepared to take the risks and make the commitments necessary to turn that idea into a business.

So what makes an entrepreneur?

Is it brains? Maybe. Nerves of steel? Probably. Is it the willingness to take risks? Yes. Is it education? Apparently not, judging by some of New Zealand's most successful entrepreneurs.

Primarily I think entrepreneurship is about the nature and mindset of the individual; thinking innovatively, recognising opportunities that others don't see and having a tenacious optimism that delights in tackling tough challenges and smashing through barriers.

Unlike many people who can see all the possibilities of failure in a business situation, generally speaking entrepreneurs have trouble imagining failure, and don't care what other people think.

This reality is well demonstrated by a situation we faced at Trigon in 1988.

Two days after Bill and I were married, our CFO arrived to tell us that the bank in the United States was preparing to foreclose on our US company as a result of actions taken by our US CEO who, unbeknown to us, was an alcoholic with a gambling addiction. Our major concern was not only that the US operation would fail, but that the entire group would then implode. The main board of Trigon voted to immediately close the US operation in order to protect the rest of the business.

Fortunately we had control and Bill decided to ignore the board and took matters into his own hands. He left immediately for the States, instructing me to mortgage our home.

With the money raised he paid back some of the bank debt, buying us some breathing space to return the business to profitability. What he did took real guts. He risked everything including losing the support of his directors, our home and our business. He risked all because he knew the products were right, the market was right and - with one notable exception - the people were right. He knew he had a winner and he was right.

Unfortunately lots of people don't recognise their own entrepreneurial abilities and instead move into areas like the professions. I think this is because a career in business is not held in such high regard.

I'm reminded of a story told to me about Murray Thom. Murray is a well known entrepreneur who was highly successful with Personalised Plates and is now doing major international music deals with some of the biggest names in recording. At the end of last year his music collection based on the MILK photographic exhibition was promoted on Oprah Winfrey's Christmas show. This resulted in US$6m sales in one day.

Murray is an old school friend of Warwick Jaffe, a cardiologist at Mercy Ascot Hospitals (one of my investments.) The two were in the same class at school. Warwick was always at the top of the class, looking down somewhat on Murray who had what you might call a 'cruisy' attitude to school.

Warwick went to medical school, finished his degree in record time and was then invited to do post grad work in the States. He returned to New Zealand feeling justifiably proud of himself – he was now ready to make it.

On his first morning home Warwick picked up a copy of the National Business Review. They had just published the NZ Rich List and there was his old mate Murray - already a multimillionaire.

Warwick was gob smacked. While he had been busy carefully preparing for success, Murray had just gone out and done it.

We also need an environment where hardworking talented people like Murray can shine.

One of our businesses is an investment vehicle, the Emerald Group. At Emerald we annually receive between 75-100 requests for assistance but last year we only invested in one. We've only done two greenfield investments; most of the time we're buying into existing businesses.

With so many possibilities, we need a system to work through potential investments.

Above all I tend to look at the person we're considering going into partnership with. Other indicators – such as making sure the numbers stack up and that there's a sound business plan – are important, but the primary thing for me is the quality of the people.

I look for good people. People who are intellectually bright and have a good work ethic. I look for people who’ll put everything they have into a business; people who want to work hard and are prepared to work late to finish the job.

The world of investing in business and people is basically about picking winners. If you pick a 'winner' that turns out to be a loser, you suffer the financial consequences.

However if politicians pick a 'winner' that turns out to be a lemon, they don't suffer the same penalties. If, for example, the taxpayers' money the government has just handed over to the yachties is wasted, who suffers? Just you and me – the taxpayers. Why are politicians so casual with our money?

When it comes to understanding this question, I refer to the model of a famous economist who described the relative care taken when spending money.

When you think about it there are only four ways to spend money: – you spend your own money on yourself – you spend your own money on other people – you spend other people's money on yourself – you spend other people's money on other people

If you spend your own money on yourself, you look for the best value at the best price and you take great care with it.

If you spend your money on other people, you still worry about price, but you may not know – or care – what the other people want.

If you spend other people's money on yourself, then you don't need to worry about price or value. It's hard to resist buying expensive things that you'd never consider if you were spending your own money. Remember Tuku's underpants and the excesses of some New Zealand Post executives?

And finally, if you spend other people's money on other people, any thing will do and who cares what it costs? Almost all government spending falls into this final category.

If a government's so-called investment fails there's always the possibility of punishment at the ballot box but the losses involved in failed government investments are so dispersed that these cases don't tend to be issues that motivate voters.

The Government definitely has a role but I don't believe it extends to making what are effectively commercial 'investments' with taxpayers' money. Instead the government's role is about creating the right environment.

I've talked today about people and the creation of wealth and have focused on three factors: understanding human nature; knowing what people want; and the importance of finding the right people.

As business people you can exert a large degree of control over all these areas.

You can deepen your understanding of the things that motivate people and apply your insights to your business. You can study your market, focus on your customers' needs and become a passionate advocate for your product. You can work with the best people and help them develop their potential.

Doing all these things will help you create an environment in which you can maximise the ability of your business to generate the wealth you want to improve your life.

However there's more to it than that. The business environment is not created by business people alone.

In the same way that you try to create the best environment for your business, for the good of the entire country we need governments to create the best possible conditions for enterprise and wealth creation.

The overwhelming evidence is that an environment which provides the optimum conditions for wealth creation includes clear property rights, good general laws, a flexible employment market, modest regulations that don't discourage or impose undue costs on businesses large or small, and, importantly, low taxes. To put it in two words: small government.

Small government is entirely consistent with the 'people factors' I've discussed today. It allows peoples' natural self-interest to be a positive force for both individuals and the wider community. It fosters a market in which people can most effectively express their needs and preferences. And it allows people to be rewarded for their effort, and creates a culture that values efforts to get ahead.

Can we create this type of environment? I’m sure we can. But it requires a change in our attitudes to wealth and an openness to new thinking about the role of government in our lives.