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Tales of new America.

ROBERT REICH TAKES ON RAMBO

American managers have been besiegedfor almost a decade by an endless parade of "how-to" books. All share the basic assumptions that organizational structures and other managerial tools must be changed, probably drastically. Policymakers have likewise been inundated with proposals ranging from massive funds for worker training to huge tax breaks to support quicker automation of our plants. While many of these proposals have merit by themselves, they have fallen far short of addressing the deeper problems of our increasingly troubled economy.

In tales of a New America, Harvard politicaleconomy and management professor Robert Reich, who has the ear of many of the 1988 Democratic presidential hopefuls, argues that these problems all stem from an inappropriate set of guiding myths that shape the national psyche. In particular, we tend to couch all of our debates in an "us" versus "them" framework--management versus workers/unions, U.S. firms versus foreign competitors, and so on. To cope with new economic interdependencies, we need instead, says Reich, to move cooperation to the place of honor, encouraging, for example, more cooperative ventures with foreign firms and more profit-sharing with the workforce in return for more workforce commitment.

Reich has performed a major service in movingbeyond short-term policy choices and quarrels over competing management technologies. Quite simply, the debate as it is now posed obviously misses the mark--changes are not occuring fast enough to stave off serious economic deterioration in 75 percent of manufacturing industries, or in the service sector where, for instance, our recently formidable positive rade balance has disappeared.

Though the service Reich has rendered issubstantial, his book has serious flaws. It is unnecessarily shrill in its denunciation of entrepreneurs, it overemphasizes the role of old and very big manufacturing firms, and it embraces significantly increased cooperation between Big Business, Big Labor, and Big Government without examining the down side of such major interest group collusion. In the end, one is left with a troublesome question. Must we wholly reject the rough and tumble of the marketplace in order to embrace cooperation on the grand scale Reich proposes?

Needed: a national lobotomy

Readers of Reich's 1983 book, The Next NextAmerican Frontier, are familiar with his basic economic thesis, which is reiterated in Tales of a New America: "High wage economies can no longer depend on standardized mass production." To compete, says Reich, American factories must meet the demand of small market niches around the world for high-quality, complicated, specialized products. This means production systems flexible enough, and workers skilled enough, to change the product quikly to meet new consumer demands.

Reich further develops these themes in his newbook: "The older industrial economies have two options. They can try to match the wages [that is, reduce], for which workers elsewhere are willing to labor, or they can compete on the basis of how quickly and how well they can [utilize labor to] transform ideas into incrementally better products." His principal emphasis shifts from managerial shortcomings (he coined the term "paper entrepreneurs" in his 1983 work) to labor's requisite new role in the emerging scheme. America has a high-wage economy. To keep it, we must turn labor from a commodity that we constantly attempt to reduce, to the antithesis of that--the chief source of added value. Historically, however, we have focused on more specialization for labor (many old plants have 80 or so job categories) or its outright elimination through large-scale automation.

Japan, says Reich, has followed a far differentroute. Americans, the inventors, have made money from transferring our Big Ideas, as Reich calls them, to the Japanese. The Japanese have made money in turn by perfecting production methods and selling the technology back to us in the form of high-quality products: "Thus, the emerging Japanese-American corporation allocates to the Japanese the most important assets for the future [my emphasis]--experience in making complex parts cheaply and well.... They learn how to make...small, incremental improvements in production processes and products that can make all the difference in price, quality, and marketability."

Reich's survival formula requires nothing shortof a national lobotomy--a switch from adversarial to collaborative relationships in just about all business and industrial dealings. Over the years plenty of thinkers, and mot just Marxists, have criticized America's exaggerated individualism and extolled the virtues of cooperation. But Reich's analysis, driven by the specific sources of our competitive disadvantage relative to the Japanese, is quite original.

In the workplace, Reich says, the switch canbe accomplished if we adopt what he's labeled "collective entrepreneurialism." America's John Wayne/Rambo/Great Man/Big Idea entrepreneurs--e.g. Steve Jobs of Apple and Lee Iacocca--should be supplanted as our heroes by workers, every one of whom can demonstrate entrepreneurial behavior. Reich summarizes well: "Collective entrepreneurship involves increasing labor value. For managers, this task means continuously retraining employees for more complex tasks, automating in new ways to cut routine tasks and enhance worker flexibility and creativity, diffusing responsibility for innovation, taking seriously labor's concern for job security, and giving workers a stake in improved productivity via profit-linked bonuses and stock plans."

Technology addicts

Reich is not crying in the wilderness; a chorusof recent books and studies backs up most of what he says. First, traditional mass production is surely in its death throes. In The Bigness Complex, Walter Adams and James Brock conclude that "bigness has not delivered the goods." They support this conclusion with pages of analysis, summarizing a raft of empirical studies dealing with the relationship of scale to efficiency and innovativeness. Industry analysis also supports this argument. Maryann Keller, a leading auto industry analyst, says General Motors has been "nibbled to death, not chewed" by a number of smaller competitors. The auto market and most other markets have been "pulverized" by new technology that diminishes the role of scale and big competitors, say Michael Piore and Robert Sabel in The Second Industrial divide.

Second, there is unequivocal support forReich's analysis of the Japanese edge. Three other recent books come to similar conclusions. In Kaizen, Masaaki Imai asserts that "Kaiszen strategy is the single most important concept in Japanese management--the key to Japanese competitive success. Kaizen means [perpetual] improvement...involving everyone." James Abegglen and George Stalk Jr., in Kaisha: The Japanese Corporation, point out that the Japanese respond instantly to competitors' tiniest moves. The U.S. reacts naively, they argue. We do not worry about the host of small innovations in autos, for instance; we ignore them and assume that we can "leapfrog" with, per Reich, a Big Idea. This is the probably hopeless prayer of GM's Saturn project, which stands in such stark contrast to the successful incrementalist approach taken by GM in its joint venture with Toyota, the New United Motor Manufacturing Inc. (NUMMI) operation. Kaisha also shows how the Japanese achieve their edge through their labor practices: everyone is trained to do a number of jobs; twice-yearly bonuses based on profitibility amount to almost 50 percent of pay; it's standard procedure for managers' paychecks to get hit first and by far hardest when downturns occur.

Third, there is strong support for Reich'sanalysis of the power of wholesale workforce participation in the marketplace. The Ford Motor Company, short of capital in 1980 and therefore primarily dependant on employee involvement, has outdistanced its Big Three competitors, especially GM. In steel, Nucor Corporation, Chaparral Steel, and Worthington Industries are blending smaller scale, advanced technology, workforce participation, and high-variable compensation to produce remarkable results. The list of success stories brought about by worker involvement grows longer by the day.

But for all these anecdotes and analyses, theinvolvement of labor to make the difference is not widespread. Ross Perot observes that automation can readily become a "narcotic." At a Detroit Economic Club speech in January, following his firing by GM, he lambasted his former employer: "Despite spending $40 billion for robotics-equipped plants and other capital improvements, GM...went from being the low-cost producer to the high-cost producer among the Big Three." The Harvard Business Review reported a 1986 study of half the flexible manufacturing systems installed in American and Japan in which the American systems were described as a "desert of mediocrity."

The conclusion is bleak. The notion of profitsharing, gain sharing, and employee hare-ownership have been around for decades. Procter & Gamble, for instance, introduced profit sharing a century ago. President Cooper Procter stated at the time: "the chief problem of big business today is to shape its policy so that each worker will feel that he is a vital part of his company, with a personal responsibility for its success and a chance to share in the successes." In 1958, Louis Kelso and Mortimer Adler wrote The Capitalist Manifesto, providing the basis for employee share ownership plan legislation (ESOPs) enacted 16 years later. Yet today fewer than 20 percent of the workforce have salaries tied to productivity and profits, and fewer than 15 percent own share of stock in their company.

The American worker knows the score, as aYankelovich poll of Japanese and American workers reveals. Asked how many agreed with, "I have an inner need to be the best I can regardless of pay," American Workers, surprisingly, outscored the Japanese. However, when asked the much more practical question, "Who would benefit most from an increase in [worker] productivity," the tables were turned. Some 93 percent of Japanese workers thought that they would benefit while only 9 percent of American workers felt that way.

Mythbusters

Procter's imaginative incentive scheme didn'tstart a revolution. Senator Russell Long's ESOPs didn't either. And neither have the books to date by Reich or those by authors (and their thousands of emulators) I have cited. The reason for the slow diffusion of ideas with such demonstrated worth, Reich argues, is that our most deeply held assumptions are out of whack. In addressing these underlying, suicidally restraining forces, Reich makes his most original contribution. "Our morality takes," he says, "are increasinly at odds with the new challenges we confront... The prevailing versions do not speak of mutual obligation. They neither celebrate joint gain nor forebode reciprocal loss."

Reich identifies several predominant myths. Ininternational dealings, a Mobs at the Gates myth prevails in security and economic affairs. It's America as "beacon light" versus "barbarians that lurk 'out there.'" Isolation is a by-product. Next in line is the myth of the Triumphant Individual; we are "mavericks all," seeking via individual opportunism to climb over others to the top. Yet, Rot at the Top is the dominant mythic image of our leaders (business and government) that we carry with us; cooperation among them, we feel, only becomes collusion aimed at the accumulation of power. Through each of these myths we view life as combat.

Reich's imagery is frighteningly on the mark.

Carrying a combatant's mindset through aworld increasingly marked by interdependencies has perilous consequences. So, how big a change in our mythology is needed? If we are to have thenecessary revolution on the shop floor and in attitudes between suppliers and buyers and between companies involved in joint ventures overseas, etc., it must be based, says Reich, upon, a new core assumption that replaces opportunism with trust among owners and workers: "Collective entrepreneurialism requires mutual investment."

Reich provides a Chinese menu of prescriptions. Hiscall for massive training and retraining, the centerpiece of The Next American Frontier, is renewed, and he adds a hearty plea for substantially increased employee ownership and productivity-based incentive plans. But his main plea is for a change in the nature of the American dialogue and the creation of new myths: "To the extent our domestic economy is animated by this new vision, the central problem of economic policy becomes less how to discipline drones [his term for our disenfranchised workforce] or tease the last ounce of genius out of lone entrepreneurs.... The challenge is to create settings in which obligation and trust can take root, supported by stories that focus our attention on discovering possibilities for joint gain and avoiding the likelihood of mutual loss."

The best of both

I concur with the core of Reich's economicanalysis. I accept his specific suggestions. Above all, I applaud the depth of his new analysis since quick fixes have neither matched the gravity of our problems nor halted the acceleration of our decline. Nonetheless I have several major objections to Reich's latest work.

Emphasis on big manufacturing. I can't helpbut conclude that most Democrats, Reich included, think the American economy consists only of GM, Exxon, and midwestern manufacturing companies with $5 billion or more in revenues. Yet 75 percent of us now work in the service sector. And when it comes to size, a recent U.S. News & World Report story on the Los Angeles basin's economic vitality attributed it in part to the astounding fact that "some 90 percent of those employed...work in small firms with fewer than 50 people that can change course fast to stay competitive."

Miniaturation technology is making it possiblefor small and mid-sized manufacturers to achieve economies of scale at a tiny fraction of the former minimum viable size. For a quarter million dollars, "minilabs" can do photo finishing that only Kodak could do a dozen years ago. In steel, the integrated mill is dying, while the "mini-mill" surges, and now "micro-mills"--which may well be peppered along the highways every 25 miles--are setting the industry abuzz. In computers we are proceeding from "minis" to "micro-minis." Even on liquor store shelves the products of "micro-brewers," such as San Francisco's Anchor Steam, are showing venerable Budweiser toward the rear.

There is no question that the choices made byGM, the remnants of U.S. Steel (now USX), IBM, et al., are very important to our future. But they are, increasingly, not our future-whether the issue is manufacturing or service.

Disdain for entrepreneurial enterprise. BarryBluestone's and Bennett Harrison's The Deindustrialization of America dwells on the plight of some 30 million displaced workers. The authors, who are well to the left of Reich, conclude that nothing less than substantial public ownership of enterprise is required. Reich is a moderate by those standards but is light years to the left of George Gilder, who in his The Spirit of Enterprise, completely ignores, to his discredit, this wrenching dislocation in his flowery paean to entrepreneurs. But I surprise myself by being at least as sympathetic to Gilder's analysis as to Reich's.

Is it impossible to support unstintingly thespecifics of reich's conception of "collective entrepreneurialism," which he implicitly directs at large manufacturers, and still acknowledge the crucial role of the more entrepreneurial enterprise, from tiny start-ups (run by Gilder's Rambo-like mavericks) to the $50-500 million firms chronicled in Don Clifford's and Dick Cavanaugh's Winning PErformance: How America's High-Growth Mid-Sized Companies Succeed?

As Reich says, waiting for the Big Idea to Leap-frogcompetitors and save us is stupid, especially for the sizable firm. This approach has crippled former stalwarts from GM to National Semiconductor. On the other hand, both the small and mid-sized firms are making a contribution to the economy and are a principal force in hsaping up our sluggish big firms.

In order industries, upstart firms have "industryleaders" by the ear. Chrysler has pushed GM to "de-integrate" by beating it on cost by $500 a car. Even in Japan, Nissan and Toyota have been spurred by the smaller Honda.

IBM is faced with daunting problems. JapanInc. is not chief among them. Rather, Cray in the super computer business, Digital in the mini-computer and networking arena, and Apple and Compaq at the bottom of the line lead a lengthening parade of newcomers revolutionizing that industry. In semiconductors, National and most big firms have lost their way because of their reluctance to focus on manufacturing and, indeed, collective entrepreneurship. Yet, the American semiconductor industry is vital--led by a "third wave" of more than 125 start-ups since 1977.

This story is repeated in chemicals, textiles, biotechnology,chocolate chip cookies, convenience foods, health care, and financial services. The number of business starts and the jobs they've created is record-breaking. More important, in even t he hgihest of technology arenas, where substnatial capital investment is required, new and mid-sized firms are forcing Reich's giants to reform--although the pace is pathetically short of what's needed.

Reich's failure to address the role of the smallerfirms is particuarly surprising, since these firms are most often the ones on the leading edge of experimentation in employee share-ownership, gain sharing, profit sharing, and employee involvement in general--from failed People Express to stellar Apple to my favorite trio of steelmakers, Nucor, Chaparral, and Worthington Industries.

The average wage at Worthington, whereeveryone is on salary, is pegged at about 25 percent above the comparable geographic area manufacturing average; on top of that, a quarterly profit-sharing bonus (based upon a predetermined formula) usually amounts to 80 percent of the base wage. At Nucor, a 60 percent weekly bonus, based upon small group productivity, is the norm when times get tough, in good Kaisha style, managers get the first and severest pay cuts. Neither firm has had a layoff in decades.

While these mid-sized firms are hardly typical,they nonetheless represent the best models of "collective entrepreneurialism" that can be found anywhere. I worte a column last year about a small Wisconsin sausage maker who was successfully implementing novel participatory management schemes. I was delighted to learn that my column inspired visits by large groups from 3M and General Mills. Likewise, after a recent discussion of extraordinary service at a Dallas Cadillac dealership, I was heartened to hear that a group fo Procter & Gamble plant managers had visited the dealership. To write off, denigrate, or ignore these firms as a group or as a collection of exemplary role models is a major, continuing failing of Reich's.

The service sector ignored. Reich gives the appearanceof being among the ranks who imply that the service sector consists of only hair-care and pizza establishments, conveniently ignoring Federal Express, Citicorp, Humana, AMR (American Airlines), American Express, etc., in the process.

The service sector is not a dead end. BrianQuinn and Christopher Gagnon, in a recent Harvard Business Review article, show that in the service industries, value-added per employee and productivity improvements are as high or higher than in manufacturing; and especially su rprising, capital stock per employee is higher.

Thus Citicorp is as much a conputer companyas a bank, with a satellite- and electronic-based global trading and finance network at the heart of its operations. And while Federal Express is a paragon when it comes to pay, profit sharing, and employee involvement, an equal determinant of its competitive edge is its extraordinary use of technology. Thanks to its sophisticated COSMOS computer system, Fed Ex can offer a customer his money back if his package's precise location can't be pipointed in 30 minutes or less. In shaping new economic myths, the service sector must be considered.

Whither the manager? Reich savagely, and correctlyto my mind, attacks the prototypical, numbers-oriented, emotionless American manager, middle or top, in The Next American Frontier. But his new firm--even if it is based upon the principles of collective entrepreneuriaslim--will include managers. A new role for the manager, from supervisor to chief executive, is desperately needed. The manager as seeker of change, facilitator in the workforce, destroyer of functional barriers within the firm, and arrnager of partnerships outside it must replace the manager as cop and protector of a narrow functional fiefdom. Reich evades this entirely.

Competition stifled. Reich wants to replace theRot at the Top myth that says our leaders collude to gain power with one that stresses their ability to cooperate. The problem is that cooperation among big special interests almost invariably does degenerate into collusion. The product of renewed big union/big government/big business cooperation is already on ruesome display: the non-legislated protection for steel, textiles, autos, and now semiconductors that is hastening each industry's decline. The makeup of the new 100th Congress suggests that more such "cooperation" will be coming.

Whether the instigator is corporate raiders, theJapanese and Koreans, or the emerging small-and mid-sized firms, it seems clear that only competition is forcing change in our dinosaurs. Many side effects of competition are negative, and urgently needto be addressed. Yet competition remains a better purgative than the baleful progression of cooperation toward collusion. Surely somewhat bridled competition is preferable to unbridled cooperation among the three Bigs.

Either/or? Does embracing collective entrepreneurialismnecessarily mean slapping down entrepreneurs? Reich seems to think so. An insistent, almost vitriolic, tone pervades his demand for the replacement of opportunism and the myth of the Triumphant Individual with collective entrepreneurialism.

This is clearly wrongheaded. We have, andneed to accommodate, both myths. It's the Triumphant Individuals behind America's best mid-sized companies who have created the models of collective entrepreneurialism that Reich rightly admires. The Triumphant individual has always shared the stage with myths of collectives; the small-town, barn-raising, volunteer fire department spirit has roots as deep in the American psyche as those from which individualism springs. The trick is to tap the best of both.

Reich also seems to suggest that the Japanesefollow a pure model, closely akin to his vision of collective entreprenurialism. Here Reich badly misreads the Japanese situation. Yes, kaizen--constant refinement--may well be the principal management tool behind Japan's corporate success; it is a way of life that goes beyond business, in which cooperation and group spirit are prized above individual performance.

However, competition in Japan, especially inthe home market that we don't observe on a day-to-day basis, is much more intense than U.S. competition. Abegglen and Stalk focus on the consuming preoccupation that Japanese firms have with their competitors. Nakasone adviser and management expert Kenichi Ohmae recently told Time, "The Japanese [company] winners look more like survivors of a demolition derby than meticulous strategic planners." Yet antoher unsung part of the Japanese story is their new business start-up (and failure) rate, which has been hgiehr than ours since World War II, featuring, for instance, well over 100 small robotics start-up companies. The Japanese wholeheartedly embrace cooperation--and competition. I think this is also possible in the U.S.

What to do first? To even think about alternativegoverning myths for a nation is daunting. To ask Reich to specify precisely how to change the structure of myths is perhaps too much. But Reich presents us with a conundrum and then does little to help us. He asks us, correctly I think, to consider a new intellectual and emotional framework for everything from interpersonal to economic to security dealings. Such a shift would surely take decades. In almost the same breath, he repeatedly reminds us that time is not just running out, but essentially has run out. If the problem is as pressing as he says, and I believe it is, then what are we to do in the next 12-60 months? Reich is maddeningly vague, beyond suggesting that we all sign the praises of models of collective entrepreneurialism when we come across them. Having raised such a challenge and then underscored its urgency, he would seem to owe us at least the outline of an agenda to deal with it.

Reich has laid down a monumental challenge. Hisanalysis of the problem is brilliant. His suggested specific changes within the firm and regarding its dealings with others are sound. His shift of the debate beyond quick-fix management devices and annual policy choices is pathbreaking.

Yet in the end, one feels cheated. Reich has posedhis vision of collective entrepreneuriaslim in opposition to more vital and contentious models of competition. He has thus snared himself in the "us" versus "them" thinking that he has asked us to reject.
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Author:Peters, Thomas J.
Publication:Washington Monthly
Article Type:Book Review
Date:Mar 1, 1987
Words:3924
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