The Upside of Downsizing
The decline of the paternalistic corporation means that good old American-style capitalism is working.
Marina Whitman was a vice president at General Motors Corp. in Detroit from 1979 to 1992, a period when GM and every other American blue chip corporation was struggling to adapt to a newly competitive global environment. Drawing on her experiences at GM, Whitman has written New World, New Rules: The Changing Role of the American Corporation (Harvard Business School Press, 1999).
Whitman details how corporate layoffs have, in her words, "put us at war with ourselves." While short-sighted corporate executives, welfare recipients, the government, unions, foreigners, Wall Street, the greedy rich and the lazy poor have all been blamed at one time or another for the changes that have rocked American businesses, Whitman sees these changes as a natural evolution in our economy and admonishes us to adapt rather than to continue looking for scapegoats.
Now a professor of business administration and public policy at the University of Michigan, Ann Arbor, she spoke to freelance writer Claire Tristram from her home.
CIO: You ran the public relations department at General Motors during the time that Michael Moore filmed and released the documentary Roger and Me, which portrayed CEO Roger Smith and GM management in a pretty harsh light for closing plants and laying off workers. What was that like? Whitman: It was obviously not pleasant. Michael Moore had a strong story to tell. On the other hand, the way he told that story was terribly manipulative and full of inaccuracies. He'd hit a nerve in terms of a phenomenon that was upsetting to American society. It was the first time there were large layoffs in an American industry where it was clear that people were not going to be called back. I thought a lot about that -- how Roger and Me was so misleading and yet so resonant with people. It led me to think about why the layoffs were occurring. Obviously it wasn't because Roger Smith liked putting people out of work. You could say Michael Moore led to my writing the book.
CIO: If downsizing wasn't caused by overzealous corporate executives and greedy stockholders, as Michael Moore insists, then what was behind it? Essentially from the immediate post-World War II period until 1973, when the first oil crisis hit, American industrial corporations had no competition whatsoever from other countries. Europe and Japan were laid flat and the rest of the world was in an earlier stage of economic development. So these companies had a tremendous amount of market power. There wasn't anyone out there to challenge them. They were in a position to earn a higher level of profit than what they needed to keep the business going and to keep shareholders happy. That excess profit was shared in a lot of ways. For example, it was shared in the form of high pay to nonexecutives and blue-collar workers. Pay in auto and steel corporations was substantially higher than in [other industries] for people with the same education. These companies were in such a dominant position that they were able to support things like high wages and lifetime employment. [The post-World War II to early 1970s period] was a time when U.S. productivity was twice that of Europe and four times that of Japan.
Gradually other companies in the world caught up, though. From the 1970s to the 1990s, a lot of companies that had never felt the hot breath of competition on their backs suddenly did. A worldwide competitive race combined with a slowdown in economic growth everywhere started to squeeze out those excess profits. Only when they started to disappear could you see just how widely those profits had been distributed, not just to the bottom line but to employees and to the community. Michael Moore showed the bad things that were caused by these changes. But there's a good side too.
CIO: What's the good side?
I don't want to say that these changes haven't been painful to many people.
It's absolutely true that you have less job security, greater inequality of incomes and a meritocracy that tracks very closely with people's education levels. The so-called skill premium has significantly increased.
But the upside is significant. The relationship between the company and the employee today is much less paternalistic and less autocratic. There's less security, yes, but there's also more [worker] autonomy and more opportunity to help define your own job. Looking at models they found in Japan and elsewhere, more and more American firms have worked to develop a high-performance workplace, where workers are encouraged to develop broader skills and where the supervisor becomes more coach and facilitator and less the boss. And the workforce as a whole is more diverse. While the skill-level premium has increased, there's actually much less inequality in terms of gender or race. I think one of the things going on today is that you really can't afford to discriminate.
CIO: You make it sound as if corporate executives responded appropriately and logically to market forces when they began downsizing. What about Al Dunlap, the cost-cutting czar who eventually was forced out at Sunbeam? It seems in many cases executives decimate a company in exchange for a quick spike in a company's stock price.
You have to admit that in the end Al Dunlap seems to have got his. Sure, there are plenty of examples where complacency and short-sightedness on the part of the decision makers led to huge mistakes. But large structural changes were taking place, in terms of increased global competition, deregulation and technological innovation, that no one corporation could control. You do have the Al Dunlaps of the world, people who create the perception that you've got a Wall Street versus Main Street battle out there. Most of the time that's just not true. It's not true, for example, that layoffs necessarily make a stock's price go up. Credible studies have shown that it's just the opposite -- when you're just cutting people's jobs without a real plan for restructuring the business, Wall Street reacts badly. Most of the time when Wall Street does well, Main Street does well too.
CIO: How so?
I've already talked about the positive aspects of the changes in corporations on the micro side, where individuals have greater autonomy and greater career opportunities. But then there's the macro side to what happened as American corporations changed. There used to be a lot more inertia in the system. Now companies have more ability to change in response to the way the world is changing around them. Not only are American firms competitive again, but it's also clear that this form of market economy, what we have in this country, does seem to be the best form of job creation and wealth creation around.
If you look at the fact that through this decade we've had low inflation and low unemployment like we hadn't seen since the 1960s, you can attribute much of it to our flexible, adaptive market economy. Alan Greenspan [wondered] 10 years ago just how low unemployment could go without speeding up inflation.
Most economists of the time would have guessed about 6 per cent. Now it's clear it can go lower. Unemployment is about 4.5 per cent now and there's no sign of inflation accelerating. A lot of the reason for that is the way companies and employees interact with each other and the way both have become more flexible and more adaptable.
Meanwhile, Europe can't solve its problems with double-digit inflation, and Japan can't seem to pull itself out of recession. So our more flexible, open market economy seems to be doing a lot better. It doesn't mean we'll never have a downturn, but we have found a way to have a long period of growth. A lot of other countries would love to have our 4.5 per cent unemployment rate with no inflation.
Nevertheless it's hard to have change without having some suffer in the process. Even if there is a benefit as a whole, it's likely to create winners and losers. Winners and losers aren't always in the same town, industry or even the same country. The key question is, in a world where the pace of change has increased, how do you reduce the pain without getting in the way of change? CIO: And how do you answer that question? You need to re-examine the structures that are in place to help people cope with the changes. Any time you want to encourage something, the first thing to do is get rid of the things that work against it.
Take unemployment insurance. It was designed at a time when layoffs were assumed to be cyclical. When a company laid off its workers, it was assumed that when the economy picked up again they would be rehired. Unemployment insurance was an interim measure. There was nothing built into the unemployment system to encourage people to go out and find a new job in a new industry. Now it's clear that many of these layoffs were structural, not cyclical, yet we're still using a system designed for a different set of circumstances. One would like to have a system that not only tides people over but also helps them find jobs in the growing parts of the economy.
Combining unemployment insurance with job-search assistance is something that's beginning to be done already. There are other, more radical things that can be done. New jobs often pay less than old, at least in the beginning. Why not use unemployment insurance as a subsidy, so that people will be less reluctant to move into a new line of work [because of low pay]? It's just one example of some notions that, without expanding the total scope of socialisation, can still help people adapt to the new world.
Labour unions would often serve their constituencies better by redefining their role as well. Rather than strictly focusing on job security, they could focus on employment security. Their goal would be to ensure that their members are employed, not necessarily with the same company, but somewhere. In some industries there have been partnerships [between labour and management] to try some of these things. The United Auto Workers formed training alliances with each of the Big Three U.S. automobile companies in the 1980s, and the 1994 union agreement with Nynex Corp., whose payroll was slated to drop from 100,000 to 60,000 employees by 1996, provided for a company-funded two-year associate degree in telecommunications technology. It's hard for unions. If they try to make employment rather than job security the goal, they might find members moving out of the area or out of the union altogether. Like any other institution, unions are interested in survival.
CIO: The title of your book, New World, New Rules, suggests the phrase du jour -- "the new economy" -- which in the popular press usually refers to the Internet economy. Your book doesn't even contain the word Internet, though.
You're focusing on multinational corporations at a time when many people seem captivated by online start-ups. Do you think the Internet has been overrated as a force that levels the playing field between large and small companies? I was interested in what happened to the large American corporation. To do that, I looked at [the corporation] from the 1950s to the 1990s. The Internet was not [a force] then. It's a very new development.
But I do think the Internet is an important phenomenon. With the Internet, again you see the gap widening between skilled and unskilled people, between the winners and the losers. The Internet is part of the trend where increasingly the winner takes all. You see the top people in every field making more and the gap between the best people and those who are almost as good getting much greater, whether you're talking about business executives, athletes, entertainers, doctors or lawyers. Technology, including the Internet, gives a business a much wider market for its services, where it can compete not only with businesses in the same town but from all over the world. It gives the very best players, large or small, the chance to completely dominate the market.
CIO: You've written a profoundly positive book about the virtues of an open market economy at a time when the world economy seems teetering on the brink of disaster and when some foreign governments are moving away from free market capitalism rather than embracing it. Will the trend away from capitalism continue? That's the question on everyone's mind. I can give you an answer as good as any: Countries that are in the worst trouble are those that have depended too heavily on government intervention and therefore have made inefficient use of capital. That's why you now have firms going bankrupt and banks going broke on loans they never should have made. On the other hand, [it's] a world economy.
Countries will be affected that didn't have the original problem.
I predict you will have some individual instances of turning away from the market model, as we've seen already in Russia and Malaysia. But you won't see wholesale back-pedalling.
How the United States reacts and what we do will make a tremendous difference. We must remain the buyer of last resort. Our trade deficit will be much greater than before. Asian countries are desperate to export their goods because their domestic economies have gone to hell in a handbasket. So we'll see upward of a $US200 billion trade deficit [in 1998] and an even greater deficit next year. If we react by closing our doors, that could make the problem much worse.
I think that American-style capitalism, where the government protects the market economy rather than interferes with it, is in ascendance. We need to show some leadership now and not back away from international obligations. If anything is clear, it's that the world needs a leader, someone to take control.
We don't really want to take the lead, but we have to.
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