The Economist â€ëœanalyse Thisã¢â‚¬â„¢ Harvard Business Review Managing for the Long Term
Reprint: R0707L This article was controversial when first published in 1980. At the time, American business was suffering from marked deterioration in competitive vigor and economic well-beingness, which nearly economists and concern leaders attributed to factors such equally the virus of inflation, the limitations imposed past authorities regulation and tax policy, and the feverish price escalation past OPEC. Not quite correct, say the authors. In their judgment, responsibility rests non with full general economic forces lone but likewise with the failure of American managers to keep their companies technologically competitive over the long run. Drawing on their extensive piece of work in the manufacturing sector, as well as their association with Harvard'due south International Senior Managers Program in Vevey, Switzerland, the authors prescribe some strong medicine for American business. They compare the U.Southward. arrangement of management with those of Europe and Japan and call for fundamental shifts in direction attitudes and practices. In advocating change, they also reaffirm the importance of following concern basics: to invest, innovate, pb, and create value where none existed previously. The original article at present includes a sidebar past Hayes, who summarizes what has—and what has not—inverse in American management over the by 27 years. He encourages managers to go across the traditional fundamentals to implement a new fix of essentials for today's networked, virtual world.
Editor's Note: This 1980 article, with its scathing and richly documented criticism of U.S. managers' focus on short-term financial gain at the expense of long-term competitiveness, sent shock waves through American business organisation when it was first published. The inroads that European and Japanese companies take fabricated into traditional U.Due south. industrial strongholds since then bear witness its prescience.
Many of the problems raised by the authors take been addressed over the years, equally Harvard Business organization School'south Robert H. Hayes notes in a sidebar written for this issue. But the original article'due south call for cocky-examination and action is still relevant today, as U.Due south. companies face similar incertitude and emerging competition—this fourth dimension from China, Republic of india, and other developing economies.
During the past several years, American business organization has experienced a marked deterioration of competitive vigor and a growing unease nearly its overall economical well-being. This turn down in both health and confidence has been attributed by economists and business leaders to such factors as the rapacity of OPEC, deficiencies in authorities tax and monetary policies, and the proliferation of regulation. We find these explanations inadequate.
They do not explain, for case, why the rate of productivity growth in America has declined both absolutely and relative to that in Europe and Japan. Nor practice they explain why in many loftier-technology likewise as mature industries America has lost its leadership position. Although a host of readily named forces—regime regulation, aggrandizement, budgetary policy, tax laws, labor costs and constraints, fright of a capital shortage, the price of imported oil—have taken their price on American business organisation, pressures of this sort affect the economic climate abroad just as they do here.
A German executive, for example, will non be convinced by these explanations. Federal republic of germany imports 95% of its oil (we import l%), its authorities's share of gross domestic product is about 37% (ours is almost 30%), and workers must be consulted on about 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, even so today that state'southward productivity growth in manufacturing (despite current crises in steel and textiles) more triples ours. No modern industrial nation is immune to the problems and pressures besetting U.Southward. business organization. Why then do we find a disproportionate loss of competitive vigor past U.S. companies?
Our experience suggests that, to an unprecedented degree, success in about industries today requires an organizational commitment to compete in the marketplace on technological grounds—that is, to compete over the long run by offer superior products. Yet, guided past what they took to be the newest and best principles of management, American managers have increasingly directed their attention elsewhere. These new principles, despite their sophistication and widespread usefulness, encourage a preference for (1) analytic detachment rather than the insight that comes from hands-on experience and (2) short-term cost reduction rather than long-term development of technological competitiveness. Information technology is this new managerial gospel, we feel, that has played a major part in undermining the vigor of American industry.
American management, especially in the two decades after World War II, was universally admired for its strikingly effective performance. But times change. An approach shaped and refined during stable decades may be ill suited to a globe characterized by rapid and unpredictable change, scarce free energy, global contest for markets, and a constant need for innovation. This is the earth of the 1980s and, probably, the rest of this century.
The time is long overdue for earnest, objective self-analysis. What exactly have American managers been doing wrong?
The fourth dimension is long overdue for hostage, objective cocky-analysis. What exactly take American managers been doing wrong? What are the critical weaknesses in the ways that they have managed the technological functioning of their companies? What is the matter with the long-unquestioned assumptions on which they accept based their managerial policies and practices?
A Failure of Management
In the by, American managers earned worldwide respect for their advisedly planned yet highly aggressive action across iii unlike time frames:
- Short term—using existing avails as efficiently as possible.
- Midterm—replacing labor and other scarce resources with majuscule equipment.
- Long term—developing new products and processes that open new markets or restructure old ones.
The first of these fourth dimension frames demanded toughness, decision, and close attention to detail; the 2d, capital and the willingness to take sizable financial risks; the third, imagination and a sure corporeality of technological daring.
Our managers still earn generally loftier marks for their skill in improving curt-term efficiency, but their counterparts in Europe and Japan have started to question America'southward entrepreneurial imagination and willingness to make risky long-term competitive investments. As one such observer remarked to us, "The U.S. companies in my industry human action like banks. All they are interested in is return on investment and getting their coin back. Sometimes they human activity as though they are more interested in buying other companies than they are in selling products to customers."
In fact, this curt diagnosis represents a growing body of opinion that openly charges American managers with competitive myopia: "Somehow or other, American concern is losing conviction in itself and specially confidence in its future. Instead of meeting the challenge of the changing world, American business organisation today is making small, short-term adjustments by cutting costs and by turning to the regime for temporary relief….Success in trade is the result of patient and meticulous preparations, with a long period of market place preparation earlier the rewards are available….To undertake such commitments is hardly in the interest of a manager who is concerned with his or her next quarterly earnings reports." 1
More than troubling still, American managers themselves oft admit the charge with, at most, a rhetorical shrug of their shoulders. In established businesses, notes one senior vice president of inquiry, "We understand how to market, we know the applied science, and production problems are not farthermost. Why risk money on new businesses when good, assisting, low-risk opportunities are on every side?" Says some other: "It's much more difficult to come up up with a synthetic meat production than a lemon-lime cake mix. Simply y'all work on the lemon-lime block mix because you know exactly what that render is going to be. A constructed steak is going to take a lot longer, require a much bigger investment, and the hazard of failure volition be greater."2
These managers are non lone; they speak for many. Why, they ask, should they invest dollars that are hard to earn back when it is then easy—and and so much less risky—to make money in other ways? Why ignore a ready-fabricated situation in cake mixes for the deferred and far less certain prospects in constructed steaks? Why shoulder the competitive risks of making better, more innovative products?
In our judgment, the assumptions underlying these questions are prime number evidence of a broad managerial failure—a failure of both vision and leadership—that over fourth dimension has eroded both the inclination and the capacity of U.S. companies to innovate.
Familiar Excuses
About the facts themselves there can exist footling dispute. Exhibits I–IV document our pitiful reject. But the explanations and excuses commonly offered invite a good deal of comment.
Exhibit I: Growth in Labor Productivity Since 1960, U.s.a. and Away
Exhibit II: Growth of Labor Productivity by Sector, 1948–1978
Exhibit III: National Expenditures for Performance of R&D as a Percent of GNP by State, 1961–1978*
Showroom Iv: Industrial R&D Expenditures for Basic Inquiry, Applied Enquiry, and Development, 1960–1978 (in $ millions)
Information technology is of import to recognize, first of all, that the problem is not new. Information technology has been going on for at least 15 years. The charge per unit of productivity growth in the private sector peaked in the mid-1960s. Nor is the problem bars to a few sectors of our economic system; with a few exceptions, information technology permeates our unabridged economy. Expenditures on R&D by both business concern and government, as measured in constant (noninflated) dollars, also peaked in the mid-1960s—both in accented terms and as a per centum of GNP. During the same period, the expenditures on R&D by West Germany and Japan have been rise. More than important, American spending on R&D every bit a percentage of sales in such disquisitional research-intensive industries as machinery, professional and scientific instruments, chemicals, and aircraft had dropped past the mid-1970s to about half its level in the early 1960s. These are the very industries on which we now depend for the majority of our manufactured exports.
Investment in plant and equipment in the United States displays the same disturbing trends. As economist Burton Chiliad. Malkiel has pointed out, "From 1948 to 1973 the [net book value of majuscule equipment] per unit of labor grew at an annual rate of well-nigh 3%. Since 1973, however, lower rates of private investment have led to a decline in that growth rate to ane.75%. Moreover, the recent limerick of investment [in 1978] has been skewed toward equipment and relatively short-term projects and away from structures and relatively long-lived investments. Thus our industrial plant has tended to age…." 3
Other studies have shown that growth in the incremental upper-case letter equipment-to-labor ratio has fallen to about one-third of its value in the early on 1960s. By contrast, between 1966 and 1976 capital investment as a pct of GNP in France and West Germany was more 20% greater than that in the U.s.; in Japan the percentage was virtually double ours.
To aspect this relative loss of technological vigor to such things as a shortage of capital letter in the United States is not justified. As Malkiel and others accept shown, the return on equity of American business (out of which comes the majuscule necessary for investment) is nearly the same today as 20 years ago, fifty-fifty after adjusting for inflation. However, investment in both new equipment and R&D, as a percentage of GNP, was significantly college 20 years ago than today.
The conclusion is painful but must be faced. Responsibleness for this competitive listlessness belongs not just to a set up of external weather condition just also to the attitudes, preoccupations, and practices of American managers. By their preference for servicing existing markets rather than creating new ones and past their devotion to brusk-term returns and "management by the numbers," many of them have effectively forsworn long-term technological superiority every bit a competitive weapon. In issue, they have abdicated their strategic responsibilities.
The New Direction Orthodoxy
Nosotros pass up to believe that this managerial failure is the result of a sudden psychological shift among American managers toward a "super-prophylactic, no-take a chance" mind-fix. No profound ocean change in the character of thousands of individuals could accept occurred in so organized a manner or take produced so consistent a design of behavior. Instead nosotros believe that during the past two decades American managers take increasingly relied on principles that prize analytical detachment and methodological elegance over insight, based on feel, into the subtleties and complexities of strategic decisions. Every bit a result, maximum brusk-term financial returns have get the overriding criteria for many companies.
For purposes of discussion, we may split up this new management orthodoxy into three general categories: financial control, corporate portfolio management, and marketplace-driven behavior.
Fiscal control.
As more companies decentralize their organizational structures, they tend to set on turn a profit centers equally the primary unit of managerial responsibleness. This development necessitates, in plow, greater dependence on brusk-term financial measurements like return on investment (ROI) for evaluating the functioning of individual managers and direction groups. Increasing the structural distance between those entrusted with exploiting bodily competitive opportunities and those who must approximate the quality of their work most guarantees reliance on objectively quantifiable brusque-term criteria.
Although innovation, the lifeblood of whatever vital enterprise, is best encouraged past an environs that does not unduly penalize failure, the predictable effect of relying too heavily on short-term financial measures—a sort of managerial remote command—is an surround in which no one feels he or she tin afford a failure or fifty-fifty a momentary dip in the bottom line.
Corporate portfolio management.
This preoccupation with control draws support from mod theories of financial portfolio management. Originally developed to aid balance the overall risk and return of stock and bond portfolios, these principles have been practical increasingly to the cosmos and management of corporate portfolios—that is, a cluster of companies and product lines assembled through various modes of diversification nether a single corporate umbrella. When applied by a remote group of dispassionate experts primarily concerned with finance and control and lacking easily-on experience, the analytic formulas of portfolio theory push managers even farther toward an extreme of caution in allocating resources.
"Specially in large organizations," reports one manager, "we are observing an increase in management behavior which I would regard as excessively cautious, even passive; certainly overanalytical; and, in general, characterized past a studied unwillingness to presume responsibility and even reasonable take a chance."
Market place-driven behavior.
In the by twenty years, American companies take perhaps learned too well a lesson they had long been inclined to ignore: Businesses should be customer oriented rather than production oriented. Henry Ford'due south famous dictum that the public could have whatever color motorcar information technology wished every bit long every bit the color was blackness has since given way to its philosophical opposite: "We have got to stop marketing makeable products and learn to make marketable products."
At concluding, yet, the dangers of too much reliance on this philosophy are becoming apparent. As ii Canadian researchers have put it, "Inventors, scientists, engineers, and academics, in the normal pursuit of scientific cognition, gave the world in recent times the light amplification by stimulated emission of radiation, xerography, instant photography, and the transistor. In contrast, worshippers of the marketing concept have bestowed upon flesh such products as new-fangled tater chips, feminine hygiene deodorant, and the pet rock…."4
The statement that no new production ought to be introduced without managers undertaking a marketplace analysis is common sense. But the statement that consumer analyses and formal market surveys should boss other considerations when allocating resources to product evolution is untenable. It may be useful to remember that the initial market guess for computers in 1945 projected total worldwide sales of only ten units. Similarly, even the near advisedly researched assay of consumer preferences for gas-guzzling cars in an era of gasoline affluence offers little useful guidance to today'due south automobile manufacturers in making wise product investment decisions. Customers may know what their needs are, only they often define those needs in terms of existing products, processes, markets, and prices.
Deferring to a market-driven strategy without paying attention to its limitations is, quite possibly, opting for customer satisfaction and lower run a risk in the curt run at the expense of superior products in the future. Satisfied customers are critically important, of course, only not if the strategy for creating them is responsible also for unnecessary product proliferation, inflated costs, unfocused diversification, and a lagging commitment to new technology and new capital equipment.
Iii Managerial Decisions
These are serious charges to make. Merely the unpleasant fact of the thing is that, however useful these new principles may have been initially, if carried too far they are bad for U.S. business. Consider, for example, their consequence on three major kinds of choices regularly faced by corporate managers: the conclusion between imitative and innovative production design, the decision to integrate astern, and the determination to invest in procedure evolution.
Imitative versus innovative product pattern.
A market-driven strategy requires new production ideas to menstruum from detailed market analysis or, at to the lowest degree, to exist extensively tested for consumer reaction earlier actual introduction. It is no secret that these requirements add together significant delays and costs to the introduction of new products. It is less well known that they too predispose managers toward developing products for existing markets and toward product designs of an imitative rather than an innovative nature. There is increasing prove that market-driven strategies tend, over time, to dampen the general level of innovation in new product decisions.
Confronted with the choice between innovation and imitation, managers typically inquire whether the marketplace shows whatever consistent preference for innovative products. If and then, the additional funding they require may exist economically justified; if not, those funds tin more properly go to advert, promoting, or reducing the prices of less-avant-garde products. Though the temptation to allocate resources so as to strengthen performance in existing products and markets is oftentimes irresistible, recent studies by J. Hugh Davidson and others confirm the strong market place attractiveness of innovative products.5
Even so, managers having to make up one's mind between innovative and imitative product design face up a difficult series of marketing-related trade-offs. Exhibit V summarizes these trade-offs.
Exhibit 5: Trade-Offs Between Imitative and Innovative Design for an Established Product Line Imitative design#Innovative designMarket need is relatively well known and predictable.#Potentially large but unpredictable need; the risk of a flop is also large.Market recognition and acceptance are rapid.#Market acceptance may be slow initially, but the imitative response of competitors may also be slowed.Readily adaptable to existing market, sales, and distribution policies.#May require unique, tailored marketing distribution and sales policies to educate customers or because of special repair and warranty problems.Fits with existing marketplace segmentation and product policies.#Demand may cut across traditional marketing segments, disrupting divisional responsibilities and cannibalizing other products.
Past its very nature, innovative design is, every bit Joseph Schumpeter observed a long time agone, initially destructive of capital letter—whether in the grade of labor skills, management systems, technological processes, or capital equipment. It tends to make obsolete existing investments in both marketing and manufacturing organizations. For the managers concerned it represents the choice of incertitude (about economic returns, timing, and then on) over relative predictability, exchanging the reasonable expectation of current income against the promise of high future value. It is the option of the gambler, the person willing to risk much to gain fifty-fifty more.
Conditioned by a market place-driven strategy and held closely to account by a "results now" ROI-oriented control system, American managers have increasingly refused to accept the chance on innovative product-market development. As one of them confesses, "In the last year, on the basis of high capital risk, I turned down new products at a rate at least twice what I did a year ago. But in every case I tell my people to go back and bring me some new production ideas."6 In truth, they accept learned caution so well that many are in danger of forgetting that market place-driven, follow-the-leader companies normally cease up post-obit the rest of the pack equally well.
Market-driven, follow-the-leader companies commonly end up following the residual of the pack as well.
Backward integration.
Sometimes the trouble for managers is not their reluctance to take activeness and brand investments but that, when they practise so, their activeness has the unintended result of reinforcing the condition quo. In deciding to integrate backward considering of apparent short-term rewards, managers frequently restrict their power to strike out in innovative directions in the futurity.
Consider, for example, the case of a manufacturer who purchases a major component from an outside company. Static assay of product economies may very well show that backward integration offers rather substantial toll benefits. Eliminating certain purchasing and marketing functions, centralizing overhead, pooling R&D efforts and resources, analogous design and production of both production and component, reducing doubtfulness over design changes, assuasive for the employ of more than specialized equipment and labor skills—in all these means and more, astern integration holds out to management the promise of significant brusk-term increases in ROI.
These efficiencies may exist achieved by companies with article-like products. In such industries equally ferrous and nonferrous metals or petroleum, backward integration toward raw materials and supplies tends to take a strong, positive effect on profits. Notwithstanding, the situation is markedly unlike for companies in more technologically active industries. Where there is considerable exposure to rapid technological advances, the promised value of backward integration becomes problematic. It may provide a quick, short-term heave to ROI figures in the next annual report, just it may also paralyze the long-term ability of a company to keep on top of technological change.
The real competitive threats to technologically active companies ascend less from changes in ultimate consumer preference than from sharp shifts in component technologies, raw materials, or production processes. Hence those managers whose attention is likewise firmly directed toward the market place and almost-term profits may suddenly discover that their decision to brand rather than buy important parts has locked their companies into an outdated technology.
Further, as supply channels and manufacturing operations become more systematized, the benefits from attempts to "rationalize" production may well be accompanied by unanticipated side effects. For instance, a company may find itself shut off from the R&D efforts of various contained suppliers by becoming their competitor. Similarly, the commitment of time and resources needed to master engineering science back up the aqueduct of supply may distract a company from doing its own job well. Such was the fate of Bowmar, the pocket reckoner pioneer, whose attempt to integrate backward into semiconductor production so consumed direction attention that final assembly of the calculators, its core business, did not get the required resources.
Long-term contracts and long-term relationships with suppliers can achieve many of the aforementioned cost benefits equally astern integration without calling into question a company'due south power to innovate or respond to innovation. European automobile manufacturers, for instance, have typically called to rely on their suppliers in this way; American companies have followed the path of backward integration. The resulting trade-offs between product efficiencies and innovative flexibility should offer a stern warning to those American managers too easily beguiled by the lure of curt-term ROI improvement. A case in point: The U.Southward. automobile industry'south huge investment in automating the manufacture of bandage-iron brake drums probably delayed by more than five years its transition to disc brakes.
Process development.
In an era of management by the numbers, many American managers—especially in mature industries—are reluctant to invest heavily in the evolution of new manufacturing processes. When asked to explain their reluctance, they tend to respond in fairly predictable ways. "We can't afford to design new capital equipment for just our own manufacturing needs" is 1 frequent answer. And so is, "The capital equipment producers do a much amend chore, and they can amortize their development costs over sales to many companies." Perhaps most common is, "Permit the others experiment in manufacturing; we can learn from their mistakes and practice it better."
Each of these comments rests on the supposition that essential advances in process engineering tin can be appropriated more easily through equipment purchase than through in-house equipment blueprint and development. Our all-encompassing conversations with the managers of European (primarily German) technology-based companies have convinced us that this assumption is not as widely shared abroad as in the United states of america. Virtually across the board, the European managers impressed us with their stiff delivery to increasing marketplace share through internal development of advanced procedure technology—even when their suppliers were highly responsive to technological advances.
By contrast, American managers tend to restrict investments in process development to only those items likely to reduce costs in the short run. Non all are happy with this. As one disgruntled executive told us, "For as well long, U.S. managers have been taught to fix low priorities on mechanization projects, then that eventually divestment appears to exist the best fashion out of manufacturing difficulties. Why?
"The bulldoze for short-term success has prevented managers from looking thoroughly into the affair of special manufacturing equipment, which has to be invented, developed, tested, redesigned, reproduced, improved, so on. That's a long procedure, which needs experienced, knowledgeable, and defended people who stick to their jobs over a considerable period of time. Merely buying new equipment (even if it is possible) does non often give the company whatever advantage over competitors."
We concur. Almost American managers seem to forget that, even if they produce new products with their existing procedure technology (the same "cookie cutter" anybody else can buy), their competitors volition face a relatively curt lead time for introducing similar products. And as Eric von Hippel'southward studies of industrial innovation prove, the innovations on which new industrial equipment is based normally originate with the user of the equipment and not with the equipment producer.7 In other words, companies tin can make products more assisting by investing in the development of their ain process technology. Proprietary processes are every flake as formidable competitive weapons every bit proprietary products.
The American Managerial Ideal
Two very important questions remain to be asked: (ane) Why should so many American managers have shifted and so strongly to this new managerial orthodoxy? and (2) Why are they not more deeply bothered by the ill effects of those principles on the long-term technological competitiveness of their companies? To reply the first question, we must accept a look at the changing career patterns of American managers during the past quarter century; to reply the second, we must understand the fashion in which they accept come to regard their professional roles and responsibilities as managers.
The road to the top.
During the past 25 years, the American managing director's road to the top has inverse significantly. No longer does the typical career, threading sinuously up and through a corporation with stops in several functional areas, provide future meridian executives with intimate hands-on knowledge of the company's technologies, customers, and suppliers.
Exhibit VI summarizes the currently available data on the shift in functional background of newly appointed presidents of the 100 largest U.S. corporations. The immediate significance of these figures is clear. Since the mid-1950s there has been a rather substantial increase in the pct of new visitor presidents whose master interests and expertise lie in the fiscal and legal areas and not in product. In the view of C. Jackson Grayson, president of the American Productivity Center, American management has for 20 years "coasted off the great R&D gains fabricated during World War Ii and constantly rewarded executives from the marketing, financial, and legal sides of the business while information technology ignored the production men. Today [in business schools] courses in the product area are almost nonexistent."eight
Exhibit VI: Changes in the Professional Origins of Corporate Presidents Percent Changes from Baseline Years (1948–1952) for 100 Top U.South. Companies
In add-on, companies are increasingly choosing to make full new top management posts from outside their own ranks. In the opinion of strange observers, who are still accepted to long-term careers in the same company or partition, "High-level American executives…seem to come and go and switch around as if playing a game of musical chairs at an Alice in Wonderland tea political party."
Far more important, even so, than whatsoever absolute change in numbers is the shift in the general sense of what an aspiring director has to exist "smart about" to make it to the top. More important still is the broad change in attitude such trends both encourage and express. What has developed, in the concern community as in academia, is a preoccupation with a false and shallow concept of the professional person director, a "pseudoprofessional" actually—an individual having no special expertise in any particular industry or engineering science who nevertheless can step into an unfamiliar company and run it successfully through strict awarding of financial controls, portfolio concepts, and a market place-driven strategy.
The gospel of pseudoprofessionalism.
In contempo years, this idealization of pseudoprofessionalism has taken on something of the quality of a corporate religion. Its first doctrine, accordingly enough, is that neither industry feel nor hands-on technological expertise counts for very much. At one level, of grade, this doctrine helps to salve the conscience of those who lack them. At some other, more than agonizing, level it encourages the true-blue to make decisions well-nigh technological matters but as if they were adjuncts to finance or marketing decisions. We do not believe that the technological issues facing managers today tin exist meaningfully addressed without taking into account marketing or financial considerations; on the other mitt, neither can they exist resolved with the same methodologies applied to these other fields.
Circuitous modernistic technology has its ain inner logic and developmental imperatives. To care for it as if it were something else—no matter how comfortable one is with that other kind of data—is to base a competitive concern on a two-legged stool, which must, no matter how splendid the balancing deed, inevitably fall to the ground.
More agonizing still, true believers proceed the faith on a day-to-solar day basis by insisting that as issues ascension up the managerial hierarchy for decision they be progressively distilled into hands quantifiable terms. One European manager, in recounting to united states his experiences in a joint venture with an American company, recalled with exasperation that "U.Southward. managers want everything to be simple. But sometimes business concern situations are not simple, and they cannot be divided up or looked at in such a manner that they become unproblematic. They are messy, and one must endeavour to understand all the facets. This appears to be alien to the American mentality."
The purpose of skilful organizational design, of course, is to divide responsibilities in such a way that individuals have relatively easy tasks to perform. But then these differentiated responsibilities must exist pulled together by sophisticated, broadly gauged integrators at the acme of the managerial pyramid. If these individuals are interested in but 1 or 2 aspects of the total competitive picture, if their training includes a very narrow exposure to the range of functional specialties, if—worst of all—they are devoted simplifiers themselves, who will do the necessary integration? Who will attempt to resolve complicated issues rather than try to uncomplicate them artificially? At the strategic level there are no such things as pure production problems, pure financial problems, or pure marketing problems.
Merger mania.
When executive suites are dominated by people with financial and legal skills, it is not surprising that top direction should increasingly classify time and energy to such concerns as cash management and the whole process of corporate acquisitions and mergers. This is indeed what has happened. In 1978 alone there were some 80 mergers involving companies with avails in backlog of $100 million each; in 1979 there were almost 100. This represents roughly $20 billion in transfers of large companies from i owner to another—two-thirds of the total amount spent on R&D past American manufacture.
In 1978, Business Week ran a cover story on cash management in which it stated that "the 400 largest U.Due south. companies together have more than $sixty billion in cash—almost triple the amount they had at the beginning of the 1970s." The commodity also described the increasing attention devoted to—and the sophisticated and exotic techniques used for—managing this cash hoard.
There are perfectly good reasons for this flurry of activeness. It is entirely natural for financially (or legally) trained managers to concentrate on substantially fiscal (or legal) activities. It is also natural for managers who subscribe to the portfolio "police of big numbers" to seek to reduce total corporate hazard past parceling it out among a sufficiently large number of separate product lines, businesses, or technologies. Under certain conditions it may very well make skillful economical sense to buy rather than build new plants or modernize existing ones. Mergers are evidently an heady game; they tend to produce fairly quick and decisive results, and they offering the kind of public recognition that helps careers forth. Who can doubt the appeal of the titles awarded by the financial customs; being called a "gunslinger," "white knight," or "raider" tin can quicken anyone'southward blood.
Unfortunately, the general American penchant for separating and simplifying has tended to encourage a diversification away from core technologies and markets to a much greater degree than is true in Europe or Japan. U.S. managers appear to accept an inordinate religion in the portfolio police of large numbers—that is, by amassing enough product lines, technologies, and businesses, ane will be cushioned against the random setbacks that occur in life. This might exist truthful for portfolios of stocks and bonds, where there is considerable show that setbacks are random. Businesses, however, are subject field non only to random setbacks such as strikes and shortages just also to carefully orchestrated attacks by competitors, who focus all their resources and energies on 1 set up of activities.
Worse, the slap-up bulk of this merger activity appears to accept been absolutely wasted in terms of generating economic benefits for stockholders. Acquisition experts do not necessarily make skillful managers. Nor tin can they increase the value of their shares by merging two companies whatsoever improve than their shareholders could do individually by buying shares of the acquired company on the open up market (at a price usually below that required for a takeover attempt).
There appears to be a growing recognition of this fact. A number of U.Due south. companies are now divesting themselves of previously acquired companies; others (for example, Due west.R. Grace) are proposing to pause themselves upwards into relatively independent entities. The establishment of a potent competitive position through in-house technological superiority is past nature a long, arduous, and often unglamorous job. Only it is what keeps a business concern vigorous and competitive.
The European Example
Gaining competitive success through technological superiority is a skill much valued by the seasoned European (and Japanese) managers with whom we talked. Although we were able to locate few hard statistics on their actual practice, our extensive investigations of more than 20 companies convinced us that European managers practice indeed tend to differ significantly from their American counterparts. In fact, we found that many of them were able to articulate these differences quite clearly.
In the showtime place, European managers think themselves more pointedly concerned with how to survive over the long run nether intensely competitive atmospheric condition. Few markets, of grade, generate cost competition as vehement as in the United states, only European companies face the remorseless necessity of exporting to other national markets or perishing.
The figures here are startling: Manufactured production exports correspond more 35% of total manufacturing sales in French republic and Federal republic of germany and nearly threescore% in the Benelux countries, as against not quite 10% in the United States. In these export markets, moreover, European products must hold their own against "earth-grade" competitors, lower-priced products from developing countries, and American products selling at attractive devalued dollar prices. To survive this competitive clasp, European managers feel they must identify central emphasis on producing technologically superior products.
Further, the kinds of pressures from European labor unions and national governments near force them to take a consistently long-term view in determination making. German managers, for example, must negotiate major decisions at the plant level with worker-dominated works councils; in turn, these decisions are subject to review by supervisory boards (roughly equivalent to American boards of directors), half of whose membership is worker elected. Together with strict national legislation, the pervasive influence of labor unions makes information technology extremely difficult to modify employment levels or product locations. Not surprisingly, labor costs in Northern Europe take more than doubled in the past decade and are now the highest in the world.
To be successful in this environment of strictly constrained options, European managers experience they must employ a decision-making apparatus that grinds very fine—and very deliberately. They must simply outthink and outmanage their competitors. Now, American managers also have their strategic options hedged near by all kinds of restrictions. But those restrictions have not notwithstanding fabricated them as conscious every bit their European counterparts of the long-term implications of their day-to-day decisions.
As a upshot, the Europeans come across themselves as investing more heavily in cutting-border engineering than the Americans. More often than not, this investment is made to create new product opportunities in advance of consumer need and not only in response to market place-driven strategy. In case afterward case, we found the Europeans striving to develop the products and process capabilities with which to lead markets and not but responding to the electric current demands of the marketplace. Moreover, in doing this they seem less inclined to integrate backward and more probable to seek maximum leverage from stable, long-term relationships with suppliers.
Having never lost sight of the need to be technologically competitive over the long run, European and Japanese managers are extremely careful to brand the necessary arrangements and investments today. And their daily business organisation with the rather basic upshot of long-term survival adds perspective to such matters as short-term ROI or rate of growth. The fourth dimension line by which they manage is long, and it has made them painstakingly attentive to the means for keeping their companies technologically competitive. Of class they pay attending to the numbers. Their profit margins are usually lower than ours, their debt ratios higher. Every tenth of a percent is critical to them. Just they are also aware that tomorrow will exist no amend unless they constantly endeavor to develop new processes, enter new markets, and offer superior—fifty-fifty unique—products. As one senior German language executive phrased it recently, "Nosotros await at rates of render, also, but only afterward we ask 'Is information technology a skillful product?'"ix
Creating Economic Value
Americans traveling in Europe and Asia before long learn they must often bargain with criticism of our state. Existence forced to respond to such criticism can be salubrious, for it requires rethinking some bones issues of principle and practice.
We have much to be proud about and little to be aback of relative to virtually other countries. But sometimes the criticism of others is uncomfortably close to the marker. The comments of our overseas competitors on American business practices contain enough truth to require our thoughtful consideration. What is behind the decline in competitiveness of U.Due south. business? Why practise U.Due south. companies have such apparent difficulties competing with foreign producers of established products, many of which originated in the United States?
For example, Japanese televisions dominate some market segments, even though many U.Southward. producers at present savour the same low labor toll advantages of offshore product. The High german machine tool and automotive producers go on their inroads into U.S. domestic markets, fifty-fifty though their labor rates are now higher than those in the Usa, and the famed German worker in German factories is almost as likely to be Turkish or Italian equally German.
The responsibility for these problems may residual in part on authorities policies that either overconstrain or undersupport U.S. producers. Merely if our foreign critics are right, the long-term solution to America's problems may not be correctable but past changing our government'south tax laws, budgetary policies, and regulatory practices. It volition besides crave some key changes in management attitudes and practices.
It would be an oversimplification to assert that the merely reason for the turn down in competitiveness of U.Southward. companies is that our managers devote too much attention and energy to using existing resources more than efficiently. It would besides oversimplify the issue, although peradventure to a bottom extent, to say that it is due purely and simply to their tendency to neglect applied science every bit a competitive weapon.
Companies cannot go more innovative just past increasing R&D investments or by conducting more bones enquiry. Each of the decisions we accept described straight affects several functional areas of management, and major conflicts can only be reconciled at senior executive levels. The benefits favoring the more than innovative, aggressive option in each case depend more on intangible factors than exercise their efficiency-oriented alternatives.
Senior managers who are less informed about their manufacture and its confederation of parts suppliers, equipment suppliers, workers, and customers or who have less time to consider the long-term implications of their interactions are probable to exhibit a noninnovative bias in their choices. Tight financial controls with a brusque-term emphasis will besides bias choices toward the less innovative, less technologically aggressive alternatives.
The cardinal to long-term success—even survival—in concern is what it has e'er been: to invest, to introduce, to lead, to create value where none existed before. Such determination, such striving to excel, requires leaders—not just controllers, market analysts, and portfolio managers. In our preoccupation with the braking systems and exterior trim, we may accept neglected the drivetrains of our corporations.
1. Ryohei Suzuki, "Worldwide Expansion of U.S. Exports—A Japanese View," Sloan Management Review, Spring 1979.
two. Business organisation Week, February sixteen, 1976, p. 57.
iii. Burton One thousand. Malkiel, "Productivity—The Problem Backside the Headlines," HBR May–June 1979.
4. Roger Bennett and Robert Cooper, "Across the Marketing Concept," Concern Horizons, June 1979.
5. J. Hugh Davidson, "Why About New Consumer Brands Fail," HBR March–April 1976.
half-dozen. Business Calendar week, February 16, 1976, p. 57.
7. Eric von Hippel, "The Ascendant Function of Users in the Scientific Musical instrument Innovation Process," MIT Sloan School of Management Working Paper 75-764 (January 1975).
8. Dun'southward Review, July 1978, p. 39.
9. Business Week, March 3, 1980, p. 76.
A version of this article appeared in the July–August 2007 issue of Harvard Business Review.
Source: https://hbr.org/2007/07/managing-our-way-to-economic-decline
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