SME-Ch10-ImpactonFirms

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Chapter 10

THE IMPACT ON BUSINESS FIRMS

Given the hurricane winds of global competition, cutting work forces is a major butnotthe only part of what businesses do to increase productivity. Everything is looked at,including management styles and manufacturing processes.

Business Week told how at Nynex "four teams compiled more than 300 specificchanges, from consolidating work centers to simplifying procedures for approving customerservice."1 As long ago as 1982, Bluestone and Harrison said the same had been going on inthe economy since the early 1970s.2 Certain buzzwords are used to describe this in thebusiness community.Business Weekmentions "Mobility. Empowerment. Teams. Cross-training. Virtual offices. Telecommuting. Reengineering. Restructuring. Delayering.Outsourcing. Contingency."3

Higher profits come about through cost-cutting (by the firms that survive). BusinessWeekhas said that a survey of 362 of the United States' largest firms showed that between1990 and 1995 worker layoffs increased 39 percent, corporate profits 75 percent, workerpay 16 percent and CEO pay 92 percent.4

Taken by itself, this meant that stock prices (and stockholders' equity) soared, atleast so long as systemic problems in the economy stayed out of the way. It has beenpossible for a company to cut tens of thousands of jobs in a given year and still see its stockprice appreciate considerably during that same year.

The consolidation of companies into larger units has also been long underway. Theleveraged buyout5(LBO) became a hallmark in the corporate world. Mergers have been

continuous, and the consequent restructurings have led to plant closings and employeelayoffs. The value of U.S. mergers runs in the trillions of dollars.

The consolidation involves not just large companies, but also countless small firms.Business Weekspeaks of "the consolidation of dozens of... mom-and-pop industries," andillustrates it by saying that "these mostly service-sector industries range from funeral homes,golf resorts, and health clubs to landfill sites, medical practices, and antenna towers." In theautomotive industry, the number of dealers was sharply cut. Most industries are dominatedby large companies, as can be seen with bookstores, newspapers and hardware stores. Costsare cut by managing from a single location. Small businesses in many areas are undersuffocating competitive pressure when the market comes to be structured around units ofvast size.

A fact that creates a tendency in the opposite direction, we are told, is that "investorshave found that consolidation simply doesn't work in some industries" such as dry cleaning,service stations and restaurants.6

Earlier we noted the consolidation in agriculture as farming and ranching havebecome industrialized, with a sharp decline in family farms. An article announcing themerger of the United States' two largest hog producers quoted an agricultural economist assaying that "the trend throughout agriculture is vertical integration." 7 In testimony before aSenate committee, the director of the Center for the Study of Rural America gave additional


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detail: "The consolidation now under way in U.S. agriculture is of two distinct types cost-savings and supply-chain. The cost-cutting variety is driven by one simple principle thelow-cost player survives... The supply-chain variety... is driven by a different principle building innovative alliances to deliver new and better food products to consumers." Hegives an example of vertical integration: "The broiler industry provides an example of fully

developed supply chains. A handful of firms now dominate broiler production, processing,and marketing, and they coordinate everything up and down the chain from chicks tochicken strips." This drastically affects America's small towns: "With fewer farms comes acorresponding decline in agriculture's impact on many rural communities... [The growth ofsupply chains] diminishes what had traditionally been a strong link between agriculture andlocal suppliers... [Now,] profits do not stay in the local area... Communities still tied tocommodities will have fewer farms, fewer banks, and fewer businesses to keep their localeconomy vibrant. Consolidation simply means that far fewer farm communities will beviable in the future."8

Firms and industries have adopted a wide range of additional strategies in the cost-

cutting struggle to survive: "Just in time" inventory management. Companies eliminate a number of costs

by not maintaining a substantial inventory, simply manufacturing products as needed in theshortest possible time. (Many consumers experience this as inconvenience, since it oftendoesn't work as smoothly as management seminars say it should. Many times, goods are"back-ordered" and really don't arrive "on time" at least from the consumer's perspective.This contradicts the literature's optimism that firms are scrambling to satisfy the consumerand to fit everything to individual customers' needs. The explanation probably lies in thedifference between an imperfect real world and more streamlined conceptual models.)

"Just in time" workers and suppliers. As we saw in the preceding chapter,underemployment often results when firms treat human services as transitory and

contingent. This is part of the tendency toward virtual organizations. The concept isillustrated well by a company that one of my law clients hoped to form (a plan that endedwhen a patent search revealed that a Japanese company already had a patent on a device hethought he had just invented). He planned to subcontract out the manufacture of the deviceand also the marketing, so that there was nothing for him to do himself and he couldcontinue with his inventing. He would have no employees. The subcontracts could begiven to the lowest-cost providers, and he could have as his profit the difference between theitems sales price and what he had to pay them.

As we saw in the last chapter, such a firm is called a shamrock organization, sonamed because leaves spread out from a small central core. (With the shift of the Americaneconomy so heavily into finance, it makes sense to see much of that economy as itself sort

of a shamrock organization, with the center being in the United States, but with extensionsthroughout the world.) Otto Scott quotes Charles Handy: "Essentially it is a form oforganization based around a core of essential executives and workers supported by outsidecontractors and part-time help." Handy explains that "this is not a new way of organizingthings builders large and small have operated this way for generations, as have... farmerswith contract harvesting and holiday labor." He predicts that "all organizations will soon beshamrock organizations... because it will be cheaper." The key is "to buy their serviceswhen you need them," rather than to have a permanent staff on the payroll. The connections


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are intermittent, which is to say, "just in time."9 Business Weekconfirms Handy'sobservations when it says that "while outsourcing started in manufacturing in the early1980s, it has expanded through virtually every industry as companies rush to shedstaffs...."10

"Delayering." Organizations are flattening, eliminating layers of management.

Economist Dennis J. Snower says that "the pyramid structure of the command-and-controlstyle of management... is being replaced by a much flatter, more rectangular organizationalstructure... organized around customer-oriented teams... [which] report to seniormanagement with few, if any, intermediaries. This helps explain the often observeddelayering' of middle management."11

"Delocalization." Weve seen that this refers to the mobility of capital, whichinstead of becoming rooted in a certain locality (with a workforce there) is free to seek outthe lowest-cost supplier or manufacturing location anywhere in the world. Schwab andSmadja in the Harvard Business Review say "the delocalization option is one that nocorporation can resist in view of the intense competition all companies are facing."12

Severe cost-cutting regardless of impact on customers. Management literature

speaks glowingly of individuated service to customers, while experience shows thatconsumers are increasingly frustrated by the depersonalized inattention they receive. Thelatter has led to a drastic fall in the quality of customer service in many things as the cost-cutting pressure drives everything in its path.

It is hard to imagine that it is more profitable not to serve customers than to sell tothem, but many businesses think so, probably for good reason. We all know of stores thatuse only as many cashiers as are needed to keep the check-out lines eight to ten people deep,so there is always a line, no matter how many cash registers are unmanned. Often there isno clerk in a department to help a customer with the purchase of even an expensive item.Sometimes we enter a computer store with a large and expensive inventory, only to find oneor two employees there, often teenagers. Examples from everyday experience are endless,

mixed of course with examples of excellent service, which are delightful precisely becausethey come as a surprise.

Whip-sawing governments into competition for incentives. Even as the loyaltyof firms to individual locations and to employees has greatly diminished, many firms, as wenoted in Chapter 7 again seeking to survive, to increase the return on investment, and tocut costs play city against city, region against region and country against country for every possible incentive and tax break. Sometimes firms obtain additional subsidies and taxpreferences from governments where they are already situated, playing even their home cityagainst others by threatening to move.

This has several effects. Taken as a system, it reallocates resources from publicagencies (and taxpayers) to private firms, leading to a sort of "industrial policy" in which all

levels of government are eager to participate in order not to lose their existing andprospective firms. Since those public agencies have important functions to perform, manyof which aren't being carried out as well as they might be, this tends to impoverish thecommunities themselves, even though each is thankful when its inducements attract or holda firm with its employment of local residents.

Accounting ploys. Much the same comes into play with tax avoidance bymultinationals. Barlett and Steele say "corporations constantly shift their costs to countrieswith high tax rates, in order to maximize their deductions, while they shift their profits to


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low-tax havens to keep tax payments down."13

Trade-offs for market access. Sometimes the bargaining power is greater on theside of a government, which controls a large market that business firms want access to.Tonelson and Fuhrmans reported how "Boeing has recently spent $100 million to build anaircraft parts plant in Xian, China, and shifted construction of 737 tail sections to this factory

from Wichita." They say "the Chinese government made this co-production arrangement acondition of the 737 sale... Beijing is forcing the company to teach it how to set up a rivalindustry and eventually seize market share in China and around the world." 14 Greiderreports that "AT&T agreed to manufacture its advanced switching equipment [in China] inorder to wire up Chinese cities for modern telephone service. China signed similar dealswith both Intel and IBM as the two companies sought entry...." He says that General Motorssold an Opel radiator-cap manufacturing subsidiary to a company in India as the price ofentry into the Indian market in 1994.15

Tapping into "over-funded" defined-benefit pension plans. While the stockmarket was rising, the stock funds behind many defined-benefit pension plans came to havea higher value than the benefits the company had contracted to pay. Some raiders took

advantage of this by buying a company and taking the excess pension-fund money to recoupwhat they paid for the business

Mutual loyalties areweakened, if not totally broken, between employer and employee. Inits discussion of the Nynex downsizing, Business Weekquotes a middle-manager who saysthat "corporate values that not long ago focused on caring for employees have beenrewritten so that now employees come last after shareholders and customers."16 This lack ofcaring cuts both ways. Robert Kuttner points out that "firms hesitate to train their workers because there is no assurance that they won't move across the street and work for acompetitor. The low level of reciprocity and loyalty between firm and employee in the U.S.industrial culture is compounded at the management level, where executives often rise in

their own careers by moving to rival firms."17

(With many organizations such moves maybe the only way for an employee to obtain a competitive salary; universities, for example,often build up faculty "salary inversion" because they pay new people much better thanthose who have been there for several years. This puts a premium on mobility.)

Alvin Toffler saw this as long ago as 1970. In Future Shockhe wrote "the oldloyalty felt by the organization man appears to be going up in smoke. In its place we arewatching the rise of professional loyalty. In all of the techno-societies there is a relentlessincrease in the number of professional, technical and other specialists."18 Toffler's pointabout loyalty to a vocation rather than a job is echoed by Anthony Carnevale: "Perhaps thereis employment security for workers at the very core of institutional networks, yet thevolatility of the new economy suggests that even these workers, as well as those at the

periphery of institutions, are best advised to become more loyal to their skills and less loyalto individual employers."19 Even loyalty-to-skills will become increasingly tenuous as skillsbecome increasingly subject to rapid obsolescence.

We are witnessing a final stage in the movement that Sir Henry Maine noted morethan a century ago "from status to contract." It may be the last stage; as things becomeintolerably insecure or unacceptable, a move back toward "status" (an assured or at leastsemi-assured place that people can count on) will be irresistible. "Contract" and "mobility"have been two of the central values of a market economy, but cultural conservatives have


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always known them to come at considerable social cost. Those costs are going up.

ENDNOTES


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11. Business Week, May 9, 1994, p. 63.2. Barry Bluestone and Bennett Harrison, The Deindustrialization of America (New York: Basic Books,

Inc., Publishers, 1982), pp. 34-5.3. Business Week, October 17, 1994, p. 76.4. Business Week, April 22, 1996, pp. 100-101.5 A leveraged buyout is the purchase of a company primarily through the use of credit, usually

supplied by the very company being purchased.6. Business Week, May 8, 1995, p. 84.7. The Wichita Eagle, September 3, 1999,Associated Press report by Emery P. Dalesio.8. Testimony by Mark Drabenstott, vice president and director of the Center for the Study of Rural

America, before the Senate Committee on Agriculture, Nutrition, and Forestry, January 26, 1999;published in theFederal Reserve's Economic Review, First Quarter 1999, pp. 63-71.9. Scott quotes from Handy's The Age of Unreason (London: Arrow Books, Ltd., 1991) in Otto Scott's

Compass, December 1, 1996, p. 9.10. Business Week, July 17, 1994, p. 60.11. Dennis J. Snower, "Causes of Changing Earnings Inequality," Federal Reserve Bank of Kansas City

Symposium on Income Inequality: Issues and Policy Options, Jackson Hole, Wyoming, August 27-29,

1998, p. 108.12. Schwab and Smadja,Harvard Business Review, November-December 1994, p. 41.13. Barlett and Steele,America: What Went Wrong?, p. 95.14. Alan Tonelson and Vanessa Fuhrmans, "How Trade Affects Kansas," The Wichita Eagle, May 26,

1996.15. Greider, One World, Ready or Not, p. 135.16. Business Week, May 9, 1994, p. 68.17. Robert Kuttner, The End of Laissez-Faire (New York: Alfred A. Knopf, 1991), p. 269.18. Alvin Toffler,Future Shock(New York: Random House, 1970), p. 131.19. Anthony Patrick Carnevale,America and the New Economy (Alexandria, VA: American Society for

Training and Development, 1991), p. 91.

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