Wednesday, April 09, 2008

What Happens to the American Economic and Technological Might?

This article below was first published in the 1980, and was republished almost a year ago.

With the dollar today hovering at almost $1.6 per € and at parity with CA$, AU$, and CHF (yes, it does hurt when you're paid in US$), American (investment grade) bonds are selling 90 cents to the dollar, and one of the world's most cultured symbol of capitalism sold for less than the price of the office building that it occupies ... one has to wonder ...

Is American capitalism, as we know it, dead?

Managing Our Way to Economic Decline

Harvard Business Review, July-August 2007

"During the past several years, American business has experienced a market deterioration of competitive vigor and a growing unease about its overall economic well being. This decline in both health and confidence has been attributed by economists and business leaders to such factors as the rapacity of OPEC, deficiencies in government tax and monetary policies, and the proliferation of regulation. We find these explanations inadequate ... Germany imports 95% of its oil (we import 50%), its government's share of gross domestic product is about 37% (ours is about 30%), and workers must be consulted on most major decisions. Yet Germany's rate of productivity growth has actually increased since 1970 and recently rose to more than four times ours. In France the situation is similar ...

(American) managers still earn generally high marks for their skill in improving short-term efficiency, but their counterparts in Europe and Japan have started to question America's entrepreneurial imagination and willingness to make risky long-term competitive investments ... 'It's much more difficult to come up with a synthetic meat product than a lemon-lime cake mix ... A synthetic steak is going to take a lot longer, require a much bigger investment, and the risk of failure will be greater.'

In the past 20 years, American companies have perhaps learned too well a lesson they had long been inclined to ignore: Businesses should be customer oriented rather than product oriented. Henry Ford's famous dictum that the public could have any color automobile it wished as long as the color was black has since given way to its philosophical opposite: 'We have got to stop marketing makeable products and learn to make marketable products.' At last, however, the dangers of too much reliance on this philosophy are becoming apparent. As two Canadian researchers have put it, 'inventors, scientists, engineers, and academics, in the normal pursuit of scientific knowledge, gave the world in recent times the laser, xerography, instant photography, and the transistor. In contrast, worshippers of the marketing concept has bestowed upon mankind such products as new-fangled potato chips, feminine hygiene deodorant, and the pet rock ...'

Gaining competitive success through technological superiority is a skill much valued by the seasoned European (and Japanese) managers ... European managers think themselves more pointedly concerned with how to survive over the long run under intensely competitive conditions. Few markets, of course, generate price competition as fierce as in the United States, but European companies face the remorseless necessity of exporting to other national markets or perishing. The figures here are startling. Manufactured product exports represent more than 35% of total manufacturing sales in France and Germany and nearly 60% in the Benelux country, as against not quite 10% in the United States ... Further, the kinds of pressures from European labor unions and national governments virtually force them to take a consistently long-term view in decision making ...": Robert H. Hayes, Process Emeritus, Harvard Business School, and William J. Abernathy, processor, Harvard Business School

Most of us can sense the striking déjà-vu between what was written in 1980 and what has been happening lately. Oil prices--even when adjusted for inflation--hit record prices. Companies and consumers default on loans and many file for bankruptcy. Unemployment rate climbs. American public blames its problems on oil producers, Chinese imports, and Mexican migrants, forgetting that if these external forces have truly been responsible for the world's problems, the Euro would not have traded at twice the value it had five years ago as the Euro-zone has experienced similar, if not stronger, headwinds.

Even George Soros himself has turned bearish on the greenback: he sees that the weakness in US$ as a sign of decline in American productivity (and therefore, export competitiveness) rather than as an opportunity that will improve American competitiveness in the world market. (In other words, Mr. Soros believes that cheaper US$ simply compensates for the higher cost of producing goods and services in the US that was caused by a decline in American productivity; thus, it will not make American export any more attractive than before.)

Seeing both American and European managerial styles first hand, I have to say that this is time for American leaders and managers to have a deep retrospect. While American managers are busy hiring expensive consultants to implement Lean and Kaizen quick-fix methodologies, our European counterparts are busy justifying and executing long-term technical and capital projects all the while keeping tab on their operational discipline (without spending the much-needed resources on overpaid consultants and calling them fancy names). While Americans are busy debating whether the threat global warming is real, pragmatic European leaders recognized that the world is in shortage of fossil fuels anyhow, and to survive in the longer term, Europe must reduce its dependency on foreign oils--through a combination of market forces and government interventions when necessary. While many American companies have to pay dearly to retain or poach away their best talents by treating them like some piece of commodity, many European companies enjoy enviable loyalties from their employees that keep their recruiting and training costs down, and keep their employees' invaluable knowledge in-house, simply by treating them like a piece of appreciable asset.

Productivity is Killing American Enterprise

Harvard Business Review, July - August 2007

"... Many of the claimed productivity gains in recent years have amounted to productivity losses. To appreciate this, imagine what would happen if you fired everyone in your company and shipped from stock: Working hours would disappear while output would continue. That would be extremely productive, and you'd make a lot of money in the bargain. Until, of course, you ran out of stock. In my opinion, many American companies are running out of stock. They're trading away their future health for short-term results. No CEO fires everyone, of course. But thanks to corporate subservience to shareholder value, which means driving up the price of a company's shares as quickly as possible, CEOs have been finding all kinds of other ways to cash in the goodwill that accountants and economists have trouble measuring. Trashing the brand is one easy way. Cutting R&D is another. Then there is managing by the numbers: The CEO decrees the desired results, and everyone else has to run around meeting them--no matter what the consequences ...": Henry Mintzberg

Don't get me wrong. I still believe in the American dreams. In the power of innovations, such as those that Google has shown possible. In Muhammad Yunus' social capitalism that has raised many out of poverties. In Warrent Buffet's laissez-faire approach to management and investing.

America's 1980s was followed by the technological renaissance in the 1990s. Let's just hope that the "lost decade" of our time would not last as long, and would soon be followed by yet another technological boom of the 2010s ...