Why do some employees earn massively more money than others? Does Leo Messi or Christiano Ronaldo work harder than Bob Smith or John Doe? More hours? Better formatted CV?
In this post I do a quick thought experiment – using a tool from MBA Business Strategy 101 to look at personal life strategy.
In Business strategy, Michael Porter’s Five forces model of competition allows companies to understand why certain industries consistently earn more, how they maintain margins of 60% whilst others are destined to margins of 2-3%.
There are some simple insights in applying Porter’s five forces model to any given employee.
- Threat of new entrants – how easy is it for somebody to learn to do your job as well as you do?
- Intensity of competitive rivalry – is there solidarity and a code of honour between employees, or will other employees be willing to do your job for less money?
- Threat of substitute products or services – Can the work you do be outsourced?
- Bargaining power of customers – If you do your job as you’re told, then you’re easy to replace. “Nobody Cares How Hard You Worked. It’s not an effort contest, it’s an art contest. As customers, we care about ourselves, about how we feel, about whether a product or service or play or interaction changed us for the better.” Seth Godin, The Linchpin.
- Bargaining power of suppliers – If all of your monthly income goes out in mortgage payments, tax, car payments, food and none go to savings – you have no cushion, no safety net – you are a slave to your monthly wage. If you have savings, other income streams, outside interests, hobbies, a network of friends who love you for who you are not what you do or the position you hold then you are not such a slave to the job.
If the threat of new entrants is high, competitive rivalry is high, substitutes are available, the company has many similar employees to choose from… then you will be earning minimum wage – either now, or soon.
What can you do to earn more money?
- Reduce threat of new entrants – Continually develop your skills, build your network of colleagues and seek harder jobs where it is hard for a new employee to do the same work to the same quality. Is what you can do valuable and scarce? Are you increasing this value and scarcity every day?
- Reduce competitive rivalry – Foster a profession-type attitude for your type of work – are there recognised accreditations and systems to manage reputution within your type of job? You want a clear way to distinguish quality workers from cheaper less professional work (for example look how lawyers, doctors, dentists do it with accreditations, certificates, formal recognition).
- Reduce “substitute-ability” – If your job could be described in a manual then you can be outsourced. If there is decision making, if there is variety… then your job is less easy to outsource. “There are no wonderful jobs left where somebody else tells you exactly what to do” Seth Godin.
- Reduce bargaining power of employer – build your own personal brand. Be known for you. Start a blog, start a movement, speak at conferences… begin to be known in your own right.
- Reduce bargaining power of suppliers – Have a cushion of savings. Don’t acquire too many things with monthly payments (house, car, boats, telephones, satellite TV, book club subscription, credit card payments etc). Have the flexibility to change jobs, to be able to survive a time with lower income.