By Richard K. Lester

W.W. Norton

(C) 1998 by Richard K. Lester
All rights reserved.
ISBN: 0-393-04574-9

CHAPTER ONE

Introduction

    It was a job the First Lady could hardly have savored. Moments earlier, her husband, George Herbert Walker Bush, had regurgitated the contents of his meal into the lap of the distinguished dinner companion to his left. The prime minister of Japan, President Bush's neighbor and host at the state banquet in Tokyo, moved swiftly to create some breathing space for the ashen American leader, but not before scores of cameras had captured the unfortunate scene. In the unkind words of one wag, it was "the barf heard around the world." Barbara Bush, standing in for the president, was left to salvage the occasion with a brief, gracious response to the welcoming toast.

    Though obviously unintended, the symbolism was lost on no one. The president had come to Tokyo on a mission to open Japanese markets to U.S. exporters. Flanked by the captains of American industry, among them the chief executives of Detroit's Big Three automobile manufacturers, Bush had sought concrete commitments from Japan's leaders to reduce the big trade imbalance between the two countries. It was not a successful visit. The president, attempting to play the role of cheerleader for American industry, found himself cast in a much less flattering role--part poodle of U.S. business interests, part neighborhood bully, and part supplicant pleading for handouts. The Japanese press made much of the enormous salaries commanded by Chrysler's chairman, Lee Iacocca, and the chiefs of other supposedly struggling American firms. Pundits in both countries had a field day. The president's illness seemed to be a metaphor for the entire trip, and indeed for the sick, wobbly state of the U.S. economy as a whole--a humiliating display of American weakness in the face of Japanese industrial might.

    The Bush visit, in early 1992, marked the nadir of a decade of growing despondency over the health of American industry. As evidence of America's competitive problems had accumulated during the 1980s, many had come to believe that the nation's industrial decline was irreversible. A best-selling book by the Yale historian Paul Kennedy ominously cataloged the parallels between present-day America and the twilight years of lost empires of the past. The collapse of the Soviet Union, far from raising America's spirits, had seemed only to magnify the country's preoccupation with its domestic weaknesses. Pessimism about the economy would later cost George Bush the 1992 presidential election.

    Yet already by the time of the president's trip to Tokyo some dissonant facts were beginning to intrude on the conventional wisdom. For much of the previous decade, American analysts had been drawing unfavorable comparisons with other countries--Japan especially, but also Germany--and arguing vigorously for the adoption of the management strategies, public policies, and institutional structures pioneered in those countries. The logic of Japanese "lean production" and German "flexible specialization" had begun to seem unassailable, even if it was not entirely clear whether these were distinct models or variants of the same thing.

    But by 1992 business confidence in both countries was not what it had been. And by the following year it was obvious to all that Japan, the economic juggernaut of the 1980s, was a diminished giant--its economy stumbling through the worst recession since World War II, its once all-conquering manufacturing firms grappling with falling profits, big layoffs, and a disastrously overextended banking system, and its biggest and long-dominant political party disintegrating amid political scandal and corruption. As firm after firm shifted production out of Japan to try to offset the rapid rise in the value of the yen, prominent business leaders began to worry publicly about the "hollowing out" of the Japanese industrial base, to American ears an ironically familiar echo of fears that had so often been voiced at home.

    In Germany, too, the loss of confidence was palpable. In 1991, with German reunification a fait accompli and the European Community striding toward full political and economic integration, the future had seemed extraordinarily bright. An American economist's prediction that the twenty-first century would be the Century of Europe, a new economic powerhouse with Germany at its heart, perfectly captured the mood of the moment. Yet within two years the mood had been transformed. Nineteen ninety-two, the Year of European Unity, turned out to be nothing of the sort. In country after country voters went to the polls to register their disquiet about the whole undertaking. A complete unraveling seemed unlikely, but with war raging in the Balkans, unemployment soaring, and social and ethnic tensions flaring up across the continent, the Century of Europe looked much further away than it had only a year or so earlier. In Germany itself, the euphoria of reunification rapidly gave way to despondency over the staggering costs of absorbing the failed East German economy, and rioting, anti-immigrant violence, and previously unimaginable levels of unemployment began tearing at the social fabric.

    Meanwhile, as their Japanese and German role models were looking increasingly shopworn, American manufacturers quietly began recouping some of their losses of the 1970s and 1980s. At first the gains were barely perceptible, but before long they became too obvious to ignore. The breadth of the recovery was striking. It encompassed traditional manufacturing industries like steel and automobiles, as well as high-technology industries like semiconductors, whose slide in the 1980s had been particularly shocking to many Americans. American firms were also competing successfully in the rapidly expanding global markets for banking, entertainment, and telecommunications services. And in important new industries like software, biotechnology, and Internet services, U.S. firms often seemed to have the field to themselves.

    "The American Economy, Back on Top," proclaimed the New York Times in early 1994, as the flood of good news about international competitiveness and profits buoyed hopes of a fundamental turnaround in the United States. Perceptions were also shifting overseas. Japanese commentators, long dismissive of America's industrial prowess, began making admiring references to the "Rising Sam in the West," while Japanese managers, reversing a familiar traffic pattern across the Pacific, were now to be seen flying east to study the techniques of leading U.S. corporations. American reengineering consultants, claiming credit for the U.S. turnaround, began to gain a worldwide following for their ideas. In 1993 the World Economic Forum, best known for its prestigious annual gatherings of world political and business leaders in Davos, Switzerland, named the United States the world's most competitive industrial nation in its annual rankings, the first time it had done so for nearly a decade.

    On the macroeconomic front, too, the good news was pouring in. Inflation and interest rates both remained at reassuringly low levels, even as millions of new jobs were being created. By mid-1997, inflation in the United States was at its lowest level in decades, unemployment was heading down below 5 percent, lower than at any time in the last quarter of a century, and more than 10 million new jobs had been added to the economy since the end of the 1990-91 recession. The federal budget deficit had fallen 75 percent from its peak, and as a share of economic output was now the lowest of all the major industrial economies. In the private sector, American corporations were reporting record profits. On Wall Street investors registered their approval by driving the stock market to unprecedented heights.

    Serious-minded economists and business leaders began speaking euphorically of a new golden age for the U.S. economy. Declared the well-known Wall Street economist Allen Sinai in 1997, "I think this may be the best economy in U.S. history and probably the world." More than a year earlier, deputy treasury secretary Lawrence Summers had already remarked that "the U.S. economy has perhaps the most solid macroeconomic foundation for growth that I've seen in my lifetime." Others predicted that large, well-capitalized U.S. corporations would lead the way to a new era of steady growth and productivity gains related to global integration and technological advance. Some even went so far as to suggest that the ability of information technology to link customers and suppliers more closely would cause the normal cycles of boom and bust in the economy to fade away.

    What happened? How can we explain all this good news, so close on the heels of predictions of irreversible decline? Were things never really as bad as they once seemed? Or did we only seem to be doing so much better because countries like Germany and Japan were looking so much worse? Or had American industry indeed staged a miraculous recovery? If so, what was responsible? Was it the cumulative effect of total quality management, reengineering, and the other new business management techniques of the last decade? Was it the entrepreneurial energies unleashed by America's dynamic capital markets, personified by the brash young multimillionaires of the Internet? Or was it rather the result of sound fiscal and monetary policies--a return to macroeconomic stability after nearly two decades of turbulence? Finally, what had happened to the economic malaise that had apparently been afflicting so many Americans just a short while earlier? For even as America's competitiveness problems receded after the early 1990s, commentators had begun to focus on other economic concerns, including the growing income gap between rich and poor, the widely shared belief that the living standards of many Americans were declining, and the epidemic of demoralizing corporate "downsizings." Each week seemed to bring new announcements of mass layoffs by blue-chip companies like IBM, AT&T, and General Motors. "We're Number 1. And It Hurts," ran a Time magazine cover story in 1994 highlighting the ambiguity in the nation's economic performance. A crescendo of similar reports appeared over the next year, culminating in a much-discussed special series in the New York Times during March 1996 analyzing in exhaustive detail the devastating impacts of corporate downsizing on laid-off workers and their families. (The Economist of London later reported that the Times had devoted more space to this issue than to any other since Watergate.) Opinion surveys revealed deep anxieties about the future, with many Americans seemingly increasingly unsure of their place in the new global economy. An NBC News/Wall Street Journal poll taken in January 1996 reported that only 41 percent of the respondents thought that their children's generation would enjoy a standard of living higher than theirs. By the spring of 1996, many political commentators were confidently predicting that "economic insecurity" would be the central issue in the coming presidential election campaign.

    But here, too, the real story was more complicated. The same NBC News/Wall Street Journal poll had also asked the following question: "Would you say that you and your family are better off or worse off than you were four years ago?" Nearly 75 percent answered either that they felt better off or that they were holding their own. Now, the fact that a quarter of the respondents felt their economic situation had clearly deteriorated was certainly no cause for celebration, but neither was it consistent with the more alarming accounts in the popular press of widespread economic hardship and disappointment.

    Nor were things quite as bad as they seemed on the employment front. Despite the intense preoccupation with downsizing, it remained a matter of debate among the experts as to whether the real risk of job loss had actually risen at all. Henry Farber, a labor economist at Princeton University, estimated that the job tenure of a typical male worker aged forty-five to fifty-four had fallen only slightly between 1983 and 1993, from about thirteen years to a little less than twelve. Other studies reported that the rate of job destruction during the recession of the early 1990s was no greater than it had been during previous recessions.

    Some things did seem to have changed. Unexpectedly, the rate of job displacement continued to rise even after the recession of the early 1990s had ended--a radical departure from the usual pattern. On the other hand, a preliminary analysis of the post-recession data indicated that people who had lost their jobs were taking less time to find a new one, and that although they typically had to accept a pay-cut in their new jobs, this was smaller than before. In other words, even though the probability of losing one's job had risen on average, the economic impact had declined.

    Why, then, did the issue of downsizing attract such an extraordinary amount of attention? A likely reason is that the feeling of vulnerability had become more widespread. As a 1996 report by the President's Council of Economic Advisors pointed out, although the overall probability of being laid off had not changed significantly over the past decade, middle-aged men, who had previously been relatively secure, now faced an above-average risk of being displaced. Moreover, what used primarily to be a blue-collar issue had now spread to the ranks of managerial and other white-collar employees. Of this period it was often said, with only a slight exaggeration, that almost everybody knew someone who had been laid off.

    Yet as the powerful economic expansion of the mid-1990s gained strength these anxieties also faded, and by the fall of 1996 the question of economic insecurity had largely disappeared from the presidential campaign. What happened? Was it a chimera all along, the media-amplified confection of a few ill-informed pessimists? Or were the concerns real--eclipsed temporarily in the euphoria of the expansion's later stages but sure to reappear with the next downturn? Or had there been a more fundamental change for the better in the economy's long-term prospects that had swept away the concern over economic insecurity once and for all?

    Looking at an economy as vast and complex as that of the United States is a bit like looking through a kaleidoscope. There is an almost limitless number of angles of view, each suggesting its own interpretation. So it is no surprise that the facts of America's industrial performance should be so hard to pin down. Even so, the industrial situation today is strangely out of focus. There is certainly no shortage of good news. But it is hard to say exactly how well we have been doing, or why we have been doing better, or what we must do to succeed in the future.

The End of Mass Production

    Ten years ago, such questions were easier to answer. The issue of performance was not in doubt. American industry was clearly ailing. And to find successful models one had only to look at the impressive achievements of leading foreign firms, especially the Japanese. In 1986, when a group of MIT researchers (the NUT Commission on Industrial Productivity) embarked on a major assessment of American industrial performance, there was little argument about the magnitude of the problem the United States was facing. The challenge was to sort out which of the many competing theories and interpretations was most important in explaining its origins.

    The findings of the MIT Commission serve as a useful point of reference against which to measure more recent progress. By studying the practices and performance of almost two hundred firms in eight large industries in the United States, Europe, and Asia, the commission constructed a picture, from the ground up, of the strengths and weaknesses of the U.S. industrial sector at that time. The differences among these industries and firms were great: there were aging steel and apparel makers and sleek young computer companies; huge airframe manufacturers and small, family-owned machine-tool shops; process-oriented businesses like chemicals as well as discrete parts manufacturers like auto assembly firms. Despite this diversity, the evidence from the case studies had much in common. Everywhere, the forces of international competition and technological change were transforming the industrial landscape. The rules of the game were changing in fundamental ways, and simply trying to do harder what had worked well in the past was no longer adequate. The commission's 1989 report, Made in America: Regaining the Productive Edge, concluded that American industry as a whole needed to accelerate its historic shift away from the system of mass production of low-cost, standard products--the system that had been developed early in the century, initially by Henry Ford and Alfred Sloan for automobile manufacturing, and later extended to a wide range of other industries.

    The mass production system had been enormously successful in serving--indeed, in a very real sense creating--the huge domestic consumer market, and had brought great prosperity to American firms and their employees. But the age of traditional mass production was ending, and a new system of production was emerging, capable of producing smaller volumes of high-quality products tailored to different segments of an increasingly demanding, sophisticated, and global market. In the new system, success would go to those who combined the traditional emphasis on keeping costs low with a new focus on product quality and design, customer service, and the ability to bring new products rapidly to market. More flexible and less bureaucratic organizations; cross-functional teams; closer ties to suppliers and customers; intelligent use of information technology; global reach: all of these practices took on greater significance in the new competitive environment.

    Most important, success in this new system of production hinged on the knowledge that people at each level of the organization were acquiring and bringing to bear in the course of their work. In the traditional mass production model, managerial control in the workplace was exercised through steeply hierarchical organizational structures. Most jobs were defined narrowly, and were relatively easy to learn. A sharp separation was made between "thinking" work, reserved for the higher echelons of the management hierarchy, and the remaining jobs, whose main purpose was the unthinking execution of someone else's instructions. Training for the second category of jobs--much the larger of the two--often could hardly be dignified by the name, amounting to little more than following a more experienced colleague around. Since the jobs required only limited skills, managers could adjust to fluctuations in demand by hiring and firing workers with little fear that the firm's stock of knowledge would be dissipated. In short, labor was seen essentially as a cost to be minimized.

    But in the new model, the workforce was perceived as an asset to be cultivated. Especially where markets were changing rapidly, where product quality commanded a premium, and where increasingly complex technologies were dominating the production process, the leading firms seemed to have recognized the need for motivated, skilled, engaged, and adaptable workers in every part and at every level of the organization. Made in America argued that these firms offered a model for the nation as a whole:

Under the new economic citizenship that we envision, workers, managers, and engineers will be continually and broadly trained, masters of their technology, in control of their work environment, and involved in shaping their firm's objectives. No longer will an employee be treated like a cog in a big and impersonal machine. From the company's point of view, the work force will be transformed from a cost factor to be minimized into a precious asset to be conserved and cultivated."

    Nor was it only individual firms and their workers that stood to gain from this scenario. The "new economic citizenship" seemed to offer a way out of one of the most feared consequences of globalization: the risk of low-wage competition from abroad driving down wages at home. In this view, highly skilled, adaptable, motivated American workers wouldn't be impoverished by the low-paid workers of the Third World because they wouldn't be competing with them. They would instead be engaged in an altogether different set of enterprises, producing and delivering high-quality products and services for markets lying beyond the reach of the huge pools of low-skilled labor in the Third World. They would be a source of sustainable competitive advantage for the nation. Beyond even this, a strategy of "putting people first" also seemed consonant with the core values of a democratic society. In the new world of work, participation, opportunity and commitment would replace control, regulation, and alienation.

    Thus, at the height of the concern over American competitiveness, Made in America offered an optimistic vision of the future. It was, moreover, a vision with precedents. The MIT researchers could point to American firms in a wide range of industries that had embraced these ideas and that were competing successfully against the best of their foreign rivals.

Puzzles, Not Paradigms

    Nearly ten years later, the world seems a great deal more complicated. Signs of progress abound. But how well is the American economy really doing? The competitiveness of its industries has improved. But, as we shall see in chapter 2, there has been no significant improvement in the rate of productivity growth--the single most important measure of any nation's economic performance. For the last quarter of a century labor productivity has edged up at an average rate of about 1 percent per year. No other advanced economy has done as poorly. (There would be no comfort even if this were not so; the American standard of living is not centrally affected by productivity trends in other countries, but to the degree that there is a dependency we tend on the whole to benefit from higher productivity growth overseas.) Nor has the picture changed during the 1990's: in spite of all the corporate restructuring and the wave of excitement about the possibilities of new technology, between 1990 and 1996 productivity continued to grow at an average rate of 1 percent each year. Even the latest flurry of attention to the difficulties of measuring productivity accurately (see chapter 2) doesn't fundamentally alter this conclusion. So how well are we really doing?

    Much of what we thought we knew about how to succeed in the new competitive environment also seems less certain. Some of America's most successful corporations over the past decade--firms like Hewlett Packard, Levi Strauss, and Motorola--exemplify the ideal of a "new economic citizenship" laid out in Made in America, albeit each in a somewhat different way. Yet many other American firms point to aggressive downsizing and restructuring as the main reason for their increased competitiveness--hardly an advertisement for the idea of the workforce as "a precious asset to be conserved and cultivated."

    The earlier ideas about the international division of labor have also been thrown into question. How sustainable is the advantage of a highly skilled American workforce at a time when tens of millions of well-educated workers from Eastern Europe and the former Soviet Union are entering the global labor market? And when Chinese garment workers can produce top-of-the-line Escada Fashion apparel, and U.S. computer firms can hire highly trained software engineers in Bangalore, India, at less than a fifth the cost of American programmers, the distinction between First World and Third World labor markets no longer seems so clear. According to one recent estimate, 1.2 billion Third World workers will enter the global labor market over the next twenty or thirty years, most of them earning only a tiny fraction of the average wage in the advanced economies. Many in the West are deeply apprehensive about the prospect.

    These vast armies of workers and their families will also present huge new opportunities for growth, of course--opportunities that large American corporations, well capitalized and sophisticated in the use of technology, seem well positioned to exploit. Yet the degree to which American workers will share in these benefits depends on the outcome of corporate location decisions that today can only be guessed at. At a time when advances in communications and transportation technologies are creating unprecedented opportunities for companies to distribute their operations around the world, remarkably little is known about how these choices will be exercised. Where will the jobs go? What will be the impact on the number and quality of jobs remaining at home? Ten years ago, an American auto worker could focus on his highly efficient counterpart in Toyota City or elsewhere in Japan as the primary threat to his job security. Today, the threats seem to come from all over--a Mexican auto worker in a Big Three plant across the border, an American worker in a Japanese-owned plant in Tennessee, a nonunion employee of one of his own company's subcontractors, and on and on.

    For managers, too, globalization presents extraordinary risks and uncertainties as well as opportunities. Is it possible to break up production systems and redistribute the functions of research, product conception and design, development, production, and marketing across the world without sacrificing efficiency and innovative capabilities? Which activities can be separated and moved and which need to be retained in close proximity to preserve the capacity for future innovation and growth?

    The implications of continuing innovation in information technologies are also profoundly uncertain. Change here has been particularly rapid. New computer and communications technologies are transforming relations between firms, and may eventually work even more profound changes in the relationships between consumers and producers. Already in many industries, information technologies are promoting a shift away from "selling what you can make" toward the demand-driven principle of "making what you can sell," and in the process creating the potential for enormous gains in value and productivity. In this sense, the earlier picture of a transition away from mass production seems very much on target. But other patterns are much more difficult to discern. Firms are confronting the prospect of radical changes in products, delivery systems, and competitors with no roadmap to guide them.

    There is certainly no shortage of candidates. Indeed, it is as though the uncertain climate draws them out. Just within the past few years the business literature has been swept by successive waves of prescriptions for improving corporate performance--total quality management, lean production, reengineering, the learning organization, the networked corporation, to name only a few. All of these prescriptions are notable for the breadth of their ambition. Each rejects incrementalist solutions and insists on the need for fundamental, systemic change. And each has gained a very sizable following in the ranks of American industry. It is surely no exaggeration to say that experimentation with new ways of organizing and managing business activity has reached a level not seen in decades. On the one hand, all this ferment points to a welcome openness to new ideas and change, a vigorous searching for new sources of competitive advantage. But the rapidity with which each new prescription has shouldered past its predecessors may also indicate a lack of conviction on the part of practitioners, a hasty and indiscriminate search for a quick fix. Beyond a certain point, enthusiastic experimentation risks curdling into protean irresolution. How many enterprises have crossed that line? And what has been the role of those on whom they rely for advice, the management consultants and the academic gurus? Do their articulate diagnoses and persuasive prescriptions perhaps mask a deeper failure to grasp the fundamental principles of production in the new economic environment? In any case, as each new management technique has flashed into view the effect has frequently been only to add to the general sense of instability and confusion.

    The scare over "economic insecurity" in the mid-1990s was no chimera. It was rooted in real and fundamental changes in the nature of the economy. To dispel it will take more than the expansion phase of one business cycle. Rather, our society must accept the inevitability of a significantly higher level of economic ambiguity and volatility than in even the recent past; we need to recognize that this will be a normal condition of our economic existence for the foreseeable future. The challenge is to find a way to grow and flourish in such an environment, rather than wishing it away. As I will try to show in this book, success will require a basic rethinking of many of our most cherished business practices and public policies--a formidable task that is only just beginning.

CONTENTS Acknowledgments......................................................9 Preface.............................................................11 Part IIntroduction 1. Introduction.................................................19 2. American Industrial Performance: A Top-Down View.............31 Part IIFive Routes to Renewal 3. Something Borrowed, Something New: The Regeneration of the U.S. Automobile Industry....................................55 4. Salvation from Outside: The Triumph of Electric Steel........85 5. Doom, Gloom, and Boom: The Comeback of the American Semiconductor Industry.........................................108 6. The Deregulation Solution: Competition Comes to the Power Industry.................................................144 7. Creating New Industries: Systems Competition and the Emerging Age of Wireless.......................................164 Part IIIBest Practice Revisited 8. Three Forces of Industrial Change: Innovation, Globalization, and Deregulation................................193 9. Fads and Fashions and Nuts and Bolts........................201 10. Putting People First.......................................213 11. Information Technology: Doing IT Right.....................228 12. Best Practice Revisited....................................244 Part IVLiving with Ambiguity: A Path to Faster Growth 13. Investment, Growth, and Uncertainty........................261 14. Redefining the Employment Relation.........................269 15. Investing in Science and Technology........................284 16. The Creative Organization..................................308 17. Toward a New Economic Citizenship..........................320 Appendices I. Measuring Productivity Growth...............................329 II. A Brief Guide to Wireless Services.........................333 III. "Best Practice": Lessons from Made in America's Leading Companies..............................................337 Notes..............................................................341 Index..............................................................359