Posted by: dstieglitz | January 20, 2011

KEEPING UP

During the last 40 years, everything has changed……several times. Capitalism has been a roller-coaster of thrilling climbs and frightening falls. In the 1970s, for example, the U.S. economy was seen as lethargic and widely expected to fall behind Germany and Japan’s superior quality and business culture. It never happened. By the 1990s, the U.S. economy aided by pro-business national policies left Germany and Japan in the dust, Communism died, and the U.S. was leading a technology boom that seemed like it would last forever. It was a dizzying comeback! 

Falling Behind Again.  But even as we high-fived ourselves for producing government budget surpluses, things began to slow. Over-expansion in the telcom industry pricked the dot-com bubble, terrorists destroyed the World Trade Centers, manufacturing and service jobs moved offshore by the millions, and oil prices skyrocketed. The U.S. economy was falling behind. People argue that Congress, free trade, bankers, Exxon-Mobil, General Motors, or trade unions were the cause. But it wasn’t so much that our economy faltered as it was that the world moved ahead faster than the U.S.  China and other emerging economies implemented national economic strategies that produced double-digit growth. 

Change is Relentless.  Everything has changed again! Unfortunately, the changes are painful for many. In the 2008 and 2010 elections, voters made it clear they wanted change – but there is little consensus on what should change. Citizens in rust-belt cities passionately believe that repealing the North American Free Trade Agreement (NAFTA) would bring back their old jobs. At the same time, high-tech companies lobby for new trade agreements and high immigration quotas. Others feel if we could just slow the pace of change, the U.S. would regain its familiar leadership position.

 Change Won’t Slow Down.  Unfortunately, the pace of change won’t slow down – the global economy isn’t waiting for the U.S. to set aside political differences and develop a growth strategy. Consumer consumption was enough to grow GDP in the industrial age – we didn’t need other countries. But our appetite for foreign oil and cheap products fueled growth in emerging countries and produced a $500 billion annual trade deficit. They were well rewarded for producing more of what the U.S. wanted than the U.S. produced of what they needed. The consequences were dire: our high-priced labor moved offshore to India or China or was replaced by computers.

 Changing Jobs.  Between 1980 and 2000, 50 million private sector jobs in the U.S. were abolished and 80 million new jobs were created – a net gain of 30 million jobs. When you examine the churn, you find companies disappeared because they couldn’t compete in a global market. But you also find a cornucopia of companies that were born based on new concepts and technologies – they produced more new jobs than were lost. Unfortunately, in the last decade the U.S. has lost and created another 20 million jobs – with most of the losses coming in the last three years. Workers suffered a succession of unexpected and unwanted job changes – and some didn’t have the skills needed for the new jobs. This widely resisted change moved the U.S. from a manufacturing economy to an economy fueled by innovative ideas and relationships. That new economy has given success and wealth to organizations and people who made it happen. Those who couldn’t or wouldn’t change have become unemployed – or unemployable.

Volatility – The New Normal. In the business world, how can companies cope with oil prices that jump from $50-a-barrel to $150 and fall back to $50; consumer demands that change over night (e.g., the auto industry); economic disruptions from terrorism, violent weather and pandemics; and sweeping new regulations imposed by Congress? The answer: executives who understand that volatility is the new normal change their organizations to anticipate change. They instill strategic clarity, resilience and agility into their culture. It may seem paradoxical, but organizations with a firm strategy are best equipped to handle extreme change – the strategy is a framework for scaling up/down and redeploying assets. Companies (and countries) that lack a strategy must react to what happened and try to catch up to those who have a clear strategy.

 Emerging Countries Take the Lead.  In the 1970s, U.S. auto executives were angry when Japan became the world’s largest car exporter. They blamed it on cheap labor and government subsidies. But when they looked closer, they found a hotbed of innovative manufacturing. So Detroit copied the Japanese. The same thing is happening today. Most cell phones and computers that Americans buy are manufactured in China. Again we blame their success on low-cost labor. But China and other emerging countries are far more than just cheap hands: they’ve become fountains of innovative thinking. They are designing business processes that produce products not only cheaper, but in many cases better and faster than the U.S. can produce them.

U.S. Loses Monopoly.  We’d like to believe that losing jobs to emerging countries isn’t a problem because the U.S. has a near monopoly on innovation – the creative jobs will stay here. But the truth is the U.S. is not the sole source of  breakthroughs that transform industries. Emerging countries hold their own in that regard – they send as many ideas to us as they copy from us. Fortunately, innovation feeds on itself:  the U.S. learned lean manufacturing from the Japanese, who earlier had copied our mass production methods. Similarly, innovation in the emerging world will stimulate, rather than replace innovation in the U.S. and global growth will continue, albeit on a more equal basis.

 What We Need From Government.  One reason we’re losing our innovative edge is national policies haven’t kept up. The world is passing us by while Congress is mired in policy gridlock. Optimism prevailed when Obama was elected: his Blackberry addiction and outspoken support for math-science education implied he would be the most tech-friendly president ever. Today, however, business leaders are frustrated by the lack of a national growth strategy. For example, clean-tech start-ups expected Obama to push an energy bill that encouraged Americans to use alternative energy. Instead, he demonized companies for offshoring (common practice in tech industries) and greed. Congress refuses to reduce taxes on foreign earnings, which puts U.S. firms at a competitive disadvantage when a growing share of profits come from emerging countries. Furthermore, Congress hasn’t passed trade agreements that would boost U.S. exports or to loosened visa quotas so companies can hire highly qualified immigrants. Clearly, Congress must stop rehashing health care and develop a national growth strategy that nurtures new businesses and helps workers move from dying industries to growth industries.

A Dying Industry. One needs only to look at the U.S. Postal Service (USPS) to see Congress’ paralysis – their debates are like rearranging the deck chairs on the Titanic. Saturday deliveries and postage rates are deck chairs. The USPS already hit the iceberg – it’s sinking! First-class mail, USPS’ bread-and-butter product, dropped over 20% from 2005 to 2009 and fell another 13%  last year. Despite cutting costs by $40 billion and reducing employment by 100,000 people since 2007, the USPS says it will lose another $200 billion through 2020. Meanwhile, its largest competitors, FedEX and UPS, thrive.

Answering the Hard Questions.  In USPS’ case, the hard question is: Should government stay in the delivery business? The Internet is easier, cheaper and faster for senders and receivers than first-class mail. FedEx and UPS prosper by delivering clothing, electronics and other products, many of which are purchased via the Internet. General Motors (GM) claimed it was cutting costs too – but the market didn’t care. GM didn’t change fast enough and the result was bankruptcy and bailout. USPS will need a similar bailout unless Congress answers the hard question. Germany’s postal service is privatized and Great Britain plans to privatize theirs – we probably should follow the same path. In making such a change Congress would face fierce opposition from unions, customers who enjoy low bulk-mail rates, and constituents who like their nearby post office. And safeguards would be required to protect jobs and preserve service levels. Congress must answer comparable hard questions about energy, foreign oil, education, unemployment, immigration, and other aspects of our economy to promote economic growth.

A National Strategy and a Personal Strategy.  The U.S. is still has the most innovative and resilient economy on earth. It has the world’s deepest pockets, world-class research facilities and universities, and a talented workforce. Hopefully, the President and new Congress will set aside partisan politics to implement a national growth strategy that capitalizes on these valuable assets. But as a business leader, you must do your part by anticipating change in your industry. Give your organization the strategy and flexibility it needs to prosper despite extreme change. Your alternative is to wait until change happens, adjust to whatever it might be, and chase the organizations that are leading change. But the consequence of that alternative may that you’ll need a bailout like there was for General Motors, Chrysler, AIG, banks and possibly will be for the USPS – if the government can afford it.

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