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The business economist at work: Inland Steel Industries.

As in most steel companies, the economist originally was a part Of commercial research and responsible for forecasting demand by product line. Later, economic research provided the backdrop for sales forecasting and budgeting, as well as capital spending. At present, market research and sales forecasting are done elsewhere. The Chief Economist, now a part of corporate planning, is part of the staff of the CEO. He forecasts the economic environment for the company, especially near term, brought down to the demand for industrial materials and services. Information is communicated to aU levels within the corporation by both written and verbal presentations. The economist also serves a public relations function and assists other staff members as a resource person with economic expertise.

ORAL HISTORY at Inland Steel has it that the steel industry and Inland Steel Company were among the first to use the discipline of business economics. Back in the 1920s, when business staffs were being formed, a name had to be selected for the function. It wasn't manufacturing and it wasn't technological. It was essentially "commercial", so the function was called "commercial research".

Actually, the function included elements of market analysis, which later came to be known as market * Bernard Lashinsky is Chief Economist, Inland Steel Industries, Chicago, IL. research, as well as economic analysis and economic research. The emphasis was on market analysis and was aimed at estimating the demand for steel. This is no mean task, inasmuch as demand for steel is wholly derived. No one buys it for its own sake. Analysis has traditionally covered activity in some two dozen major markets for steel in order to develop information on the nature and extent of the derived demand. Further, the analysis presupposes a working knowledge of each market's dynamics and its relationship to the rest of the economy. Within each market, demand is very narrowly focused on products that meet the material requirements of specific manufacturing or construction applications. Therefore, the analysis must consider unique product characteristics and applications.

Economic Research enters the picture as a means of providing an economic backdrop for the workings of the steel market. The lion's share of steel demand is tied to investment. And if expenditures for consumer durables were taken out of the spending column and placed in the investment column, a practice that is common in many countries of the world, about 95 percent of steel demand would be tied to one form or another of investment. That makes the steel industry extremely susceptible to the vagaries of investment cycles within the business cycle.

The steel industry's joint line of inquiry into the workings of the economy and steel markets became institutionalized under the auspices of the American Iron and Steel Institute. It formed a Committee on Commercial Research, and each member company named a representative. To this day, the AISI has a Committee on Commercial Research with the same set of functional responsibilities. Traditionally, the function was lodged in the sales department of a steel company and reported to the Vice President or the General Manager of Sales. MEZZO HISTORY

At Inland, the Commercial Research Department always bad administrative responsibility for preparing the forecast and participated in the process by providing evaluations of the outside environment. Its views were combined with those of line salesmen (who were closest to the customer) and those of product managers (who had responsibility for product lines and were closest to the markets) in order to generate a consensus forecast that then became an input to operating plans and to the budgeting process generally. In this context, economic research provided the backdrop for sales forecasting and for the budgeting process. Commercial Research had the further responsibility of evaluating supply and demand conditions within the steel industry and, similarly, supply and demand situations by market and product line.

At times when the company was investing in new facilities, the Commercial Research staff would combine its market research and economic research disciplines to provide the information needed to support a facility proposal. Typically, steel industry facilities have very specific capabilities. They are very large job shops designed to make a large number of different products, but are constrained dimensionally or metallurgically from making all products. They also have very high capital costs and are very long-lived. These requirements place a premium on the market study to be right, so that the facilities are designed to make the right product for the right market over an extended period of time. Typically, the Commercial Research people developed information by working with sales personnel, production engineers, research metallurgists, design engineers, and a number of different trade associations and customer companies. They even got a mini-metallurgical education and enough product knowledge to communicate with all of the people involved.

In each of the major functions, the commercial researcher was trying to measure or estimate market potential. He needed to know the potential market facing the industry and his company, and he needed that information in both product and market terms. Looking back, this provided a great apprenticeship for the industrial business economist. Somehow, contact work and estimation work breathes life into economics. It supplies the immediacy and the dynamism needed to enliven the numbers and bring them into the real world. MODERN TIMES

The world changed in many ways with the onset of the Great Recession in 1982. The world of steel changed more dramatically than most. From top to bottom, demand of the American steel industry dropped by 40 percent. With that drop, Inland's way of dealing with the external environment changed, too.

The economist, who was then the Manager of Commercial Research, was pulled out of the traditionally combined functions of market research and economic research, given the title of Chief Economist plus a secretary and an assistant, and then given a number of tasks. He was asked to try to determine what had happened to the economy to shake the world of steel so violently. If that were possible, he was to describe the adjustment mechanism, if any, that would bring the steel industry down to size and back in synch with the economy. He then was given the assignment of trying to envision the nature of the future economic environment in which the industry was likely to be operating. In passing, he was asked to expand the economic research function to make it more complete, comprehendible, and useful.

Successive reorganizations of the sales function fragmented the old market information organization further, pushing market research, market analysis and sales forecasting into the product offices, marketing offices and direct sales offices. Information needs and information programs were not downgraded. The intention was to sharpen their focus and increase their intensity. But the process of change and the final structure did create communication and coordination problems among all the participants.

Shortly after the original split, the Chief Economist was moved from the Sales Department to the Corporate Planning Department, and when the company was restructured into a holding company, Corporate Planning was moved to the holding company. Under the new structure, still in existence, the Chief Economist works in a group that serves as the staff of the Chief Executive Officer, the Chief Operating Officer, and the Corporate Vice Presidents. He is detached from the day-to-day workings of the operating companies but is now responsible for describing the economic environment for the steel company, now the fifth largest in size in the United States, and for a number of distribution companies, which as a group now constitute the nation's largest distribution network for steel, nonferrous metals and industrial plastics. He reports for function to the Vice President, Corporate Planning, but has dotted lines to practically everyone else in the holding company acting in a resource capacity whenever and wherever the economics function is needed.

Major Assignments

Coming out of the reorganization, the Chief Economist's major assignments had a long-term ring to them. As it happens, the answers to the questions they posed involved changes in the economy that were market-oriented. The entire economy had not changed, but certain markets had changed and had changed drastically enough to alter the demand for steel in very fundamental ways. Familiarity with steel markets was the key to performing this important work.

By the time the steel industry supply/demand adjustment had taken place, steel capacity had been reduced by 30 percent. As might be expected, the reductions followed product lines dictated by changes in the markets. Again product-market knowledge clarified the transformation.

Visualizing the future called for unconventional approaches and led ultimately to the adoption of scenario analysis at Inland Steel. The approach follows from the observation that the future really cannot be forecast. But with some diligence, the driving forces leading to the future can be isolated and reasonable alternative scenarios can be written. It is then possible to describe the alternate possibilities in terms that are meaningful for planning and conducting operations in the context of one's own industry and company.

During this great leap forward in time, it also became clear that the company's economic horizon would have to be broadened to encompass an increasingly global economy at a time when the world economy began to undergo very dramatic changes far removed from the patterns that had been accepted as norms before the great crash of 1982.

After the great leap forward and the great leap outward, the Chief Economist's job settled into a more stable pattern and has taken an interesting turn. His work continues to focus on the driving forces shaping the economy, but now more attention is given to the near-term economy. Information developed in connection with analysis of economic driving forces is mined for clues to near-term developments and for hints as to the validity of the alternative longer-term scenarios.

Increasingly, the Chief Economist has been asked to bring the economic forecast down to the business level. This, in effect, is a throwback to the earlier link between economic research and market analysis. It requires that analysis proceed from the outlook for the economy to the implications for investment markets, to demand for industrial materials and services that are of interest to Inland Steel Industries, and finally to implications for Inland operations. He is also being asked to increase the sensitivity of the forecast to business cycle variations. In this, the longest of the post-war business expansions, the assignment goes beyond simple cycle analysis to isolate phenomena that might selectively disrupt inland's operations.

Outside Contacts

In trying to meet his assignments, the Chief Economist supplements normal forecasting techniques by establishing and maintaining contact with such diverse people as design engineers, investment bankers, commercial bankers, representatives of customer companies, and fellow business economists involved in all areas of the economy. In the latter category, of course, are members of NABE. He also uses membership in the Conference of Business Economists and in the National Business Economic Issues Council to widen his exposure to views and analysis of the economy.

The goal of outside contact work is to obtain information that will be helpful in putting together a picture of our increasingly complicated economy. It proceeds on the assumption that everyone knows something about the economy but nobody knows everything about the economy. The idea is to get as many pieces of information as possible from people who are involved in the formative stages of business planning and investment. This amounts to anticipating and understanding developments that are not yet public knowledge. The very worst possible procedure from this point of view is to wait until the government publishes the numbers, by which time, at best, they represent history and, at worst, they represent complicated statistical constructs that may or may not reflect economic reality. THE ECONOMIST AS COMMUNICATOR

Communicating results of studies and analyses is a major part of the Chief Economist's work. Twice a year the Chief Economist prepares a fairly complete review of the economic environment and presents his views to the top management group of the holding company in a personal setting. These sessions are normally followed by presentations to the managements of the operating companies and to the planning staffs at all levels of the corporation. He also prepares quarterly economic reviews in newsletter form for distribution to all officers and planning staffs. He then works with the Corporate Communications team to turn the quarterly review into a journalistic report for even wider distribution through the company's own newspaper, magazine, and newsletter publications.

Wherever possible, forecasts are made with the express intention of explaining what is going on in the great external world so that management and people preparing business plans can think of ways of coping with or taking advantage of the emerging environment. The program, of course, calls for publishing numbers. Typically, all major entries of the national income account series are forecast, along with the index of industrial production, inflation and steel industry parameters. But the numbers are intended to illustrate the forecast rather than the other way around. The numbers provide discipline, in that they take notions of change in economic activity from generalities down to specifics. Still, the intention is to explain what is happening in the outside world, not to predict the values of a set of numbers in advance of their publication within a specified range of accuracy. Even the Department of Commerce can't get the numbers right the first time, and the Chief Economist asks audiences who intend to judge him by the numbers rather than the content of his forecasts at least to wait until the third revisions before passing judgment. Once a year, the Chief Economist recruits speakers and prepares an internal symposium for senior management personnel that is billed as "The Day of the Environment". It is really the day of the economic environment and has several goals in mind. It is intended to expand coverage of the economy beyond the capabilities of the Chief Economist, to provide contrast to his views and, in effect, keep him honest." And it provides a mechanism for obtaining in-depth exposure to specialized areas of interest that might vary from the formation of American trade policy to economic and political developments in Eastern Europe. HAVE SPEECH, WILL TRAVEL

At all times, the Chief Economist has an economic outlook speech prepared and is ready to travel, on request, usually to appear before customer management groups and customer trade associations. His road show is an extension of the internal economic research program, tailored to the special needs of customer groups. It is also used unabashedly as a form of sales promotion. But because it invariably involves knowledgeable customer groups, it provides the reciprocal benefit of contact with people in the market, people who may not know a great deal about the economy but who do know a great deal about the current dynamics of their own businesses. THE ECONOMIST AS A RESOURCE Within the Corporate Planning Department, the Chief Economist works with staff members who are involved in the preparation of the strategic and operating programs of the operating companies. He is involved in the planning efforts of the corporation that transcend activities of operating companies. And he works on special assignments from senior management. For the most part, he serves as a resource person with expertise in the field of economics. The Chief Economist's work tends to be highly focused when he is asked to participate in the company's efforts related to public policy debates. He may, for example, be asked to assist the Legal staff and the Public Affairs staff in influencing legislation and administrative Policy in such a way as to be as favorable as possible, or least damaging, to the conduct of the company's business. Topics change from time to time but there always seems to be one big burning issue. At one time it was tax law. Then it was trade policy. More recently, it has been environmental standards. In each case, the need for economic information and analysis bas been significant.

A modern corporation bas many publics, and the Chief Economist may be asked to help in maintaining contact with them. He may be asked to meet with the press, with security analysts, or with bankers or civic groups, usually providing information on the economic outlook and steel industry prospects.

No mention has been made of the need to sift through the mountains of journals, publications, newspapers, newsletters, etc. that now characterize the business economist's in-basket. Business economists appear to be doomed to this endless task, always expecting or hoping to find the one piece of information that will make their forecasts verge on clairvoyance. Of course, that never happens, but it is yet another illustration of the nature of the job and the need for intellectual curiosity that drives it and makes it so rewarding.
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Author:Lashinsky, Bernard
Publication:Business Economics
Date:Jul 1, 1990
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