Sample text for American business, a two-minute warning : ten changes managers must make to survive into the 21st century / C. Jackson Grayson, Jr., Carla O'Dell.


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Chapter 1

The Two-Minute Warning

In 1896, a book was published in England entitled Made in Germany. Its author, E. E. Williams, a journalist, delivered a strong warning to English citizens:

The industrial glory of England is departing, and England does not know it. There are spasmodic outcries against foreign competition, but the impression they leave is fleeting and vague...the nation at large is yet as little alive to the impending danger as to the evil already wrought.

Williams gave example after example of increasing foreign competition, especially from Germany. He urged British managers and union leaders to wake up, be more competitive, and "lock their stables while there is still something inside them."

England did not respond.

In 1901 -- six years later -- another alarm was sounded by the British author F. A. McKenzie in his book The American Invaders. McKenzie warned Britons of the strong competitive thrust coming from America, the erosion of British competitiveness, and the need for British managers to take action before it was too late:

The future still lies before England if England will but have it. And it is in the hope of arousing her to a slight sense of the real need of immediate action that this is written.

England still did not respond.

From its nineteenth-century position as number 1, the world's economic leader by far, Britain fell to where it is today: number 11 in GDP/capita, at the bottom of the league of developed nations with a standard of living about equal to that of East Germany.

A Warning

It is now 1988, almost a century later. Paraphrasing Williams and McKenzie, we are delivering a similar warning to American citizens:

The industrial glory of America is departing, and it is in the hope of arousing her to a sense of the real need for immediate action that this is written.

Ours is certainly not the first warning.

There have been newspaper and magazine articles on America's eroding competitiveness, speeches, reports, surveys, even a Presidential Commission on Competitiveness. Yet, the response to date is inadequate. "Americans are awake," said one Japanese, "but they are not yet out of bed."

We will show that (1) U.S. competitiveness has seriously eroded, (2) the international competitive challenges are far stronger than most people yet realize, (3) the U.S. response to date is inadequate to meet the challenges, and (4) not only can the United States lose its world economic leadership, but at the moment it is losing.

Note carefully that this is not an obituary or a prediction. We do not say that the United States has lost, nor do we say that the United States will lose. But we do say most strongly that whether we like it or not, the United States is losing. If trends of the last twenty years continue, the U.S. standard of living will shrink relative to other nations, and eventually it will lose its world economic leadership.

The single, most fundamental determinant of the U.S. economic future will be productivity. Productivity, more than any other factor, determines a nation's standard of living and is the best single indicator of its economic performance over the long run. In the end, it determines the rank of nations. History shows that the nation that is the productivity leader eventually becomes the dominant world leader -- economically, militarily, and politically.

The United States has been the world productivity leader for almost a hundred years. But in recent years U.S. productivity growth has been dismal, both relative to its earlier years, and even worse relative to international competitors.

Other nations are catching up. For the past thirteen years, 1973-86, Japan grew almost six times faster, France and Germany over four times faster, and even England three times faster than the United States. If those trends continue, five nations -- Canada, Germany, France, Norway, and Belgium -- will pass the United States in productivity level by the turn of the century, and Japan will pass the United States level in the year 2003 -- fifteen years from now.

Of these competitors, Japan is the most formidable. Japan is now the second largest economy in the Free World and is the world's largest creditor nation. It has seven of the ten largest banks in the world and manufactures half of the world's ships, two-fifths of its TVs, and over one-third of its semiconductors. For many nations, Japanese, not American, management has now become the model for the world. Japanese workers are well educated, technologically sophisticated, and very determined. Japan is building a formidable high-technology infrastructure, the quality of its products is world-renowned, and Japan's productivity gains in the postwar period have outstripped the rest of the world.

Some mistakenly assume that Japan's productivity growth is "finished" because of the higher-valued yen, increasing world protectionism, and rising competitiveness of the Asian NICs (newly industrializing countries). Japan does face those and other problems, which we discuss in Part VI, but it also has some fundamental strengths to draw on and historically has shown remarkable ability to adjust to adverse circumstances. The United States underestimated the Japanese in the past. It would be unwise to do so again.

If present trends continue, Japan will emerge in the first decade of the twenty-first century as the productivity leader of the world, and the United States will drop to a number 2, number 3, or a lower position in productivity rank.

For a long time, however, U.S. total GNP will still be larger than that of other nations, for the United States still has great wealth and a large population. It will also continue to exert world influence for many decades because of its size, military power, and past history. But in productivity level, GNP/capita, financial power, and overall dynamism, a continued lack of productivity growth will eventually take its toll, as it did in England. U.S. economic leadership and world influence will slowly weaken, and Japan will assume its place as the economic leader of the twenty-first century.

The twenty-first century begins in thirteen years.

Consequences

Some of the consequences of the U.S. productivity slowdown are already being felt by Americans.

Real compensation per hour at the end of 1986 was no higher than it had been in 1969. Median household incomes in real terms were 8 percent less at the end of 1986 than they were in 1973. Families that used to double their incomes in their lifetime now have no hope of that. A young man leaving home in the 1950s and 1960s could expect by age thirty to be making 33 percent more than his father did when he left home. No longer.

The prospect of a steady job, promotion, pay increases -- a rising standard of living -- is the heart of the American Dream. That prospect is fading, forcing Americans to confront dramatic changes in standard of living, expectations, values, and the future of their children.

To try to sustain their standard of living, American families are sending more people to work, and they are also going deeper and deeper into debt. As a result, the United States has moved in just four years from being the world's largest creditor nation to being the world's largest debtor nation, the largest ever recorded in the history of mankind. Americans are borrowing, not earning, their standard of living. They are living beyond their means, and they can't keep it up forever. To put it plainly, the jig is up. The nation must grow faster or live on less.

All this happened not because of foreign competition or supposedly "unfair" foreign trade barriers, but because of the U.S. productivity slowdown.

At the same time, however, strong international competitors are adding to the economic pressures: tough, determined global competitors the likes of which the United States has seldom, if ever, faced. It is not just "more" competition; it is different competition.

Those competitors are technologically sophisticated, well educated, and willing to work hard and put in long hours with lower pay. They have absorbed much of American scientific knowledge and equaled, even bettered, some of U.S. technological capability. They work with their governments on a cooperative basis and share a national consensus around the importance of productivity and growth. Those competitors cannot be stopped by protectionist barriers or currency devaluations at the national level, or by business as usual at the firm level.

Warning Signals

All this has not happened overnight. Contrary to popular belief, U.S. productivity growth and competitiveness did not drop suddenly in the late 1970s or early 1980s. The decline has been under way for almost twenty years.

Look at Exhibit A.

U.S. productivity growth is dead last. The U.S. standard of living growth has all but halted. The U.S. share of world exports has declined in industry after industry. Imports of manufactured goods, often of higher quality, have invaded most U.S. markets. Debt has climbed steadily upward to unprecedented and alarming proportions. Personal savings rates have hit all-time lows. The vaunted lead in high technology is diminishing. The U.S. educational system has deteriorated.

These warning signals are not all symptoms of declining U.S. competitiveness. Some occurred because of the U.S. productivity slowdown and would have occurred whether the United States traded internationally or not. Some reflect predictable comebacks by other nations from wartorn conditions.

But collectively, they portray a growth slowdown in a nation that has become addicted to growth, has an expectation of rising standards of living, and is accustomed to being number 1 in the world. Being "number 1" is not important because of any American ego trip. It is important because of what happens when a leader slips to number 2 or number 3 or lower: degenerative impacts on social goals, national security, and education and rising inflation, protectionism, and divisiveness.

In that sense, these data are a warning. The implications for Americans will be staggering. Only war could have a comparable impact on the lives of present Americans and their children. To use Thomas Wolfe's words at the front of the book, "America has come to the end of something, and to the beginning of something else." The components of American world economic dominance and the American Dream are disappearing, one by one, like the fading grin of the Cheshire Cat.

The United States must act or decline.

Inconeivable?

America lose the leadership? The initial reaction of many today is the same as it was in England in the latter part of the nineteenth century when, after almost a century of unprecedented economic power, the British were warned by people like Williams and McKenzie that England could lose the leadership. Williams wrote:

Now to tell a strong man, conscious of his strength to an over-weening degree, that he is in danger from a half grown youngster, is to invite his derision. He goes on vocalizing Rule Britannia in his best commercial prose.

The United States has known almost total economic, military, and political world domination since the end of World War II. It has been a model to the world of dynamism, management, and economic strength. Most Americans alive today have never lived in a world in which they were not number 1.

Because the decline has been so gradual, and the problems not yet a full-blown crisis, Americans find it difficult to come to grips with the thought there really is a serious challenge. While some can intellectually accept the possibility, they have a hard time imagining what it would be like to be a second- or third-rate power. But we point out (only half facetiously) that, like the test-tube baby, the possibility may be incredible, but it is not inconceivable. Throughout history, other nations as powerful in their day as the United States have lost.

The question is not whether the United States can restore the unquestioned, unchallenged economic dominance it had in the 1950s and 1960s. It cannot. That era is over. Finished. It is unlikely to return, at least not in our lifetimes.

The real question is whether the United States can revive its stagnant domestic productivity growth, restore a rising standard of living, respond to the rising global competition, and keep world economic leadership.

It can. But will it -- like England in the late 1800s -- fail to respond, in which case "the industrial glory of America will depart."

Challenge and Response

This is not the first time in history that a leading nation has been challenged by pursuers. Arnold Toynbee, the historian, characterized the struggle as a series of "challenges and responses."

A young nation grows and prospers when it successfully finds responses to the challenges that face it, as did the United States when it was challenging England and the rest of the world for economic leadership.

As time passes, the challenges change. But the leader doesn't. The leader sticks to the old responses and suffers decline and eventual failure.

Why did declining nations in the past not adjust? Did they know at the time of the danger? Did they try to prevent their fall? And, most important, is it America's turn now to decline?

To gain some insight into these questions, we turned to history to see if there might not be some "lessons" that might be helpful in looking at the U.S. competitive position today and how American business and government are responding. We found ten such lessons, which we share in Part III. We are well aware that the world has changed drastically and that history does not have to repeat itself, but we believe there are enough similarities to make these lessons worth heeding even today in the global economy.

One overarching message throughout the history of the rise and fall of nations is that the downfall of leaders is due mostly to internal, not external, causes. The leader, however, tends to look outside itself to find the reasons for its problems and avoids internal adjustment.

Blaming others is much easier than adjusting one's habits, institutions, attitudes, or traditions. Looking inside often means admitting errors and faults, and acknowledging that others might be as good as yourself, that they may have come up with better ideas, and that you can learn from them.

For those reasons, down through history nations have postponed or avoided adjusting internally and have declined. England was no exception: "There was," as Williams said, "a tendency to look for external causes of difficulties rather than to their own possible inadequacies."

We see some of those symptoms in the United States, both in the private sector and in government.

Konosuke Matsushita, executive adviser at Matsushita Electric, said in 1979:

We are going to win and the industrial West is going to lose out; there's not much you can do about it, because the reasons for failure are within yourselves.

Is he right? Can the United States adjust?

Firm-Level Responses

Some American firms are responding vigorously to the new competitive challenges, as we shall show in our "Agenda for Adjustment" in Part IV. These firms are developing a continuous improvement mind-set, automating, simplifying their structures, increasing employee involvement in real business issues, tying pay to performance, and improving quality. Some have always operated that way; others are rapidly adjusting to the new world of competition.

That's the good news.

The bad news is that as yet only a relatively small number of firms are making the kinds of changes required. The majority of American firms are not responding at all, doing very little, or engaging in a flurry of activity, much of it short-term cost-reduction, layoffs, slam-bang automation, and closings of inefficient operations. They will secure some short-term improvement but little lasting productivity growth. Such efforts give the appearance of adjustment but have not changed the core way firms do business.

American quality in products and services still suffers by comparison with leading competitors. A comprehensive study of "flexible manufacturing systems" in both the United States and Japan described the U.S. efforts as a "desert of mediocrity." Many management layers have been peeled away, but many of the surviving layers still do not function as a team. Human resources get a little more notice from senior management now, but compared to attention given to financial, legal, and marketing strategies, people strategies -- involvement, man-machine operating systems, rewards -- are still hind dog.

While some union leaders are working hard to find ways to work with managers and still be reelected, too many are trying to go back to the days of the power struggles, adversarial tactics, and confrontations that they know so well.

In short, not enough managers or union leaders have fully realized what they are up against, nor are they yet making the fundamental adjustments inside their organizations. We see neither in the data nor in the actions of most firms or unions across the nation sufficient change to alter the basic trend toward economic decline.

That is why this book's "Agenda for Adjustment" for firms and unions, Part IV, is principally about internal adjustment issues -- not strategic planning, market segmentation, investment criteria, asset management, automation techniques, or bargaining strategies. Those are all important. But none of them will work well if managers, employees, and union leaders do not face the really "tough" issues of internal adjustment inside their organizations.

These internal adjustments are where the battle will be won or lost. As Business Week said in its April 1987 Special Report "Can America Compete?," the "gods of growth dwell in the details."

Government Responses

At the governmental level, the problem is not a lack of response, but too much response and response of the wrong kind.

Politicians have suddenly discovered "competitiveness."

They now feel they must "do something" about it, and in line with historical precedent, they focus mostly on external factors and avoid tough internal adjustments. That means calling foreign competition "unfair," drafting protectionist legislation labeled as trade policy, and blaming others "for the mess we're in." They are turning competitiveness into a buzzword and using it as a flag in which to wrap everything they've always wanted to do, and more. At the same time, they are avoiding other actions, like reducing the federal budget deficit, and neglecting some badly needed changes, like altering the educational system.

Of course, unfair trading practices and overvalued currencies need attention. We agree. But those are not the main reasons the nation faces a standard of living decline and eroding competitiveness. Most of the actions to date -- protectionism, bashing, retaliatory bilateral actions -- do not work on fundamental causes. They build walls, delay adjustments, protect inefficiency, and alienate trading partners. Devaluation of the dollar as a competitiveness strategy only makes the United States progressively poorer; it also does not work on the fundamental matter of productivity improvement. Exchange rates in the end only ratify underlying economic conditions.

Unfortunately, all of this activity is reported daily in the press, feeding an exaggerated belief that the causes are external and that government can enhance economic welfare and competitiveness.

It isn't that we believe the government has no role. It has a role, but it is a limited one, as we spell out in Part V.

Our Recommendations

Our recommendations throughout the book are based on (1) ten years of work with firms, unions, and government in the American Productivity Center; (2) analysis of productivity data and trends; (3) our combined personal experience in consulting, academia, business, and government; (4) our personal visits to Japan and Europe; and (5) the lessons we have learned from our reading of history.

They center on productivity. The United States must revive its productivity growth so that it reaches a rate equal to or better than other nations'. Our view also is that the bulk of the change -- with the exception of education -- must come from the private sector, not from the government. There is no other lasting way.

Americans should not let the stockmarket, currency values, or recent manufacturing productivity gains delude them into thinking the battle is over. Far from it. It's just beginning.

Doomsday?

This is no Doomsday book.

The United States is still the world's largest economy. It is a huge nation full of natural resources and possessing tremendous wealth, military power, entrepreneurship, innovation, and world influence. In consumption per capita, the U.S. standard is the highest in the industrial world. It has low inflation, a low degree of public ownership of industry, and a tax burden -- federal, state, and local -- lower than that of other advanced nations, with the exception of Japan.

The United States is still the largest homogeneous market in the world, and the nation is politically stable. Mergers and acquisitions help keep the U.S. economy more dynamic than many other nations. It is a nation with heart and spirit, with a reservoir of free and imaginative people who are energetic, creative, and resourceful, especially when they are aroused.

Although we project trends that show a diminishing leadership for the United States, we are well aware of the folly of mechanically extrapolating trends. Trends do not have to continue. They can change.

That is why we are writing this book, to change the direction in which the United States is headed before it is too late to do anything about it, and to make the point forcefully to Americans: Grow or decline.

The Two-Minute Warning

In football, when the end of the game is two minutes away, the referee signals the "two-minute warning," a time-out to give each team a chance to assess its own and its competitor's strengths and weaknesses, review its game plan, adjust its offense or defense, and renew its spirit of teamwork, drive, and will to win.

This book is written as a two-minute warning to the United States. Americans have less than two decades to turn around the direction of the current game. Every day Americans postpone action is a day lost.

Competitors are not going away, and the competition is going to get tougher. H. Ross Perot, founder of EDS, warned, "We've got some first class teams on the field, and they're tearing our heads off." A semiconductor equipment executive, D. Paul Petach, Velco Instruments, expressed it even more dramatically, "Grab your socks, your pants are lost!" And George Butts, vice president of Chrysler, has said, "I'm convinced what we've seen up to now wasn't really a battle at all. It was just a skirmish: The real battle is still to come. Scary? You bet!"

Almost exactly a century ago, when E. E. Williams issued his warning, England was still the wealthiest and strongest nation in the world in almost any way you wanted to measure it -- militarily, scientifically, economically, culturally -- with the possible exception of educationally. England did not pay much attention at first to the challenges from the United States and Germany. And when it finally did, it was too late to respond.

We don't want that to happen to the United States.

Our book, like Williams's, is written as a warning, in the belief that, as Williams put it, "a warning is better than an obituary notice."

Can the United States adjust and respond? We think so.

We think things can change. But we had better hurry.

When we used the analogy of the two-minute warning in one meeting with some business executives, one excited CEO jumped to his feet and shouted, "And there are no time outs left!"

Copyright © 1998 by The Free Press


Library of Congress subject headings for this publication:
Industrial management -- United States.
Industrial management -- Japan.
Industrial productivity -- United States.
Industrial productivity -- Japan.
Economic forecasting -- United States.
United States -- Economic conditions -- 1981-