Chapter 10

 

THE IMPACT ON BUSINESS FIRMS

         

         

Given the hurricane winds of global competition, cutting work forces is a major but not the 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 specific changes, from consolidating work centers to simplifying procedures for approving customer service."[1]  As long ago as 1982, Bluestone and Harrison said the same had been going on in the economy since the early 1970s.[2] Certain buzzwords are used to describe this in the business community. Business Week mentions "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). Business Week has said that a survey of 362 of the United States' largest firms showed that between 1990 and 1995 worker layoffs increased 39 percent, corporate profits 75 percent, worker pay 16 percent and CEO pay 92 percent.[4]

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

         

The consolidation of companies into larger units has also been long underway.  The “leveraged buyout”[5] (LBO) became a hallmark in the corporate world.  Mergers have been continuous, and the consequent restructurings have led to plant closings and employee layoffs. 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 Week speaks of "the consolidation of dozens of... mom-and-pop industries," and illustrates 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 the automotive industry, the number of dealers was sharply cut.           Most industries are dominated by large companies, as can be seen with bookstores, newspapers and hardware stores.  Costs are cut by managing from a single location.  Small businesses in many areas are under suffocating competitive pressure when the market comes to be structured around units of vast size.  

          A fact that creates a tendency in the opposite direction, we are told, is that "investors have 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 have become industrialized, with a sharp decline in family farms.  An article announcing the merger of the United States' two largest hog producers quoted an agricultural economist as saying that "the trend throughout agriculture is vertical integration."[7]  In testimony before a Senate committee, the director of the Center for the Study of Rural America gave additional 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 – the low-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."  He gives 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 to chicken strips."  This drastically affects America's small towns: "With fewer farms comes a corresponding decline in agriculture's impact on many rural communities... [The growth of supply chains] diminishes what had traditionally been a strong link between agriculture and local suppliers... [Now,] profits do not stay in the local area... Communities still tied to commodities will have fewer farms, fewer banks, and fewer businesses to keep their local economy vibrant.  Consolidation simply means that far fewer farm communities will be viable 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 the shortest possible time.  (Many consumers experience this as inconvenience, since it often doesn'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 consumer and to fit everything to individual customers' needs.  The explanation probably lies in the difference 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 is illustrated well by a company that one of my law clients hoped to form (a plan that ended when a patent search revealed that a Japanese company already had a patent on a device he thought he had just invented).  He planned to subcontract out the manufacture of the device and also the marketing, so that there was nothing for him to do himself and he could continue with his inventing.  He would have no employees.  The subcontracts could be given to the lowest-cost providers, and he could have as his profit the difference between the item’s sales price and what he had to pay them. 

          As we saw in the last chapter, such a firm is called a shamrock organization, so named because leaves spread out from a small central core. (With the shift of the American economy 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 extensions throughout the world.)  Otto Scott quotes Charles Handy: "Essentially it is a form of organization based around a core of essential executives and workers supported by outside contractors and part-time help."  Handy explains that "this is not a new way of organizing things – builders large and small have operated this way for generations, as have... farmers with contract harvesting and holiday labor."  He predicts that "all organizations will soon be shamrock organizations... because it will be cheaper."  The key is "to buy their services when you need them," rather than to have a permanent staff on the payroll.  The connections are intermittent, which is to say, "just in time."[9]  Business Week confirms Handy's observations when it says that "while outsourcing started in manufacturing in the early 1980s, it has expanded through virtually every industry as companies rush to shed staffs...."[10]

          ·  "Delayering."  Organizations are flattening, eliminating layers of management.  Economist Dennis J. Snower says that "the pyramid structure of the command-and-control style of management... is being replaced by a much flatter, more rectangular organizational structure... organized around customer-oriented teams... [which] report to senior management with few, if any, intermediaries.  This helps explain the often observed ‘delayering' of middle management."[11]

          ·  "Delocalization."  We’ve seen that this refers to the mobility of capital, which instead of becoming rooted in a certain locality (with a workforce there) is free to seek out the lowest-cost supplier or manufacturing location anywhere in the world.  Schwab and Smadja in the Harvard Business Review say "the delocalization option is one that no corporation 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 that consumers are increasingly frustrated by the depersonalized inattention they receive.  The latter 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 to them, but many businesses think so, probably for good reason.  We all know of stores that use 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 is no 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 one or two employees there, often teenagers. Examples from everyday experience are endless, mixed of course with examples of excellent service, which are delightful precisely because they come as a surprise.

          ·  Whip-sawing governments into competition for incentives.  Even as the loyalty of firms to individual locations and to employees has greatly diminished, many firms, as we noted in Chapter 7 – again seeking to survive, to increase the return on investment, and to cut 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 tax preferences from governments where they are already situated, playing even their home city against others by threatening to move.

          This has several effects.  Taken as a system, it reallocates resources from public agencies (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 and prospective firms.  Since those public agencies have important functions to perform, many of which aren't being carried out as well as they might be, this tends to impoverish the communities themselves, even though each is thankful when its inducements attract or hold a firm with its employment of local residents.  

          ·  Accounting ploys.  Much the same comes into play with tax avoidance by multinationals.  Barlett and Steele say "corporations constantly shift their costs to countries with high tax rates, in order to maximize their deductions, while they shift their profits to low-tax havens to keep tax payments down."[13]

          ·  Trade-offs for market access.  Sometimes the bargaining power is greater on the side 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 an aircraft 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 a condition of the 737 sale... Beijing is forcing the company to teach it how to set up a rival industry – and eventually seize market share in China and around the world."[14]  Greider reports that "AT&T agreed to manufacture its advanced switching equipment [in China] in order to wire up Chinese cities for modern telephone service.  China signed similar deals with both Intel and IBM as the two companies sought entry...."  He says that General Motors sold an Opel radiator-cap manufacturing subsidiary to a company in India as the price of entry into the Indian market in 1994.[15]

          ·  Tapping into "over-funded" defined-benefit pension plans.  While the stock market was rising, the stock funds behind many defined-benefit pension plans came to have a 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 recoup what they paid for the business

 

Mutual loyalties are weakened, if not totally broken, between employer and employee.  In its discussion of the Nynex downsizing, Business Week quotes a middle-manager who says that "corporate values that not long ago focused on caring for employees have been rewritten so that now employees come last after shareholders and customers."[16]  This lack of caring 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 a competitor.  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 may be 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 than those who have been there for several years.  This puts a premium on mobility.)

          Alvin Toffler saw this as long ago as 1970.  In Future Shock he wrote "the old loyalty felt by the organization man appears to be going up in smoke.  In its place we are watching the rise of professional loyalty.  In all of the techno-societies there is a relentless increase in the number of professional, technical and other specialists."[18]  Toffler's point about loyalty to a vocation rather than a job is echoed by Anthony Carnevale: "Perhaps there is employment security for workers at the very core of institutional networks, yet the volatility 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 loyal to individual employers."[19]  Even loyalty-to-skills will become increasingly tenuous as skills become increasingly subject to rapid obsolescence.

          We are witnessing a final stage in the movement that Sir Henry Maine noted more than a century ago "from status to contract."  It may be the last stage; as things become intolerably insecure or unacceptable, a move back toward "status" (an assured or at least semi-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 always known them to come at considerable social cost.  Those costs are going up.

 

ENDNOTES



1.  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 the Federal 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.