Correcting Management and Economic Misconceptions

Tom Peters

It’s been hot as blazes in Vermont, where I’m spending the summer writing. Maybe that’s put me in a testy mood. Whatever the reason, I’ve had it up to my eyebrows with a bunch of managerial and economic falsehoods that are floating around. These misconceptions are harmful. And so, in this column and next, I plan to get them off my chest.

• The service sector consists of minimum wage jobs in beauty parlors. Baloney! Such nonsense has been proclaimed by Lee Iacocca and a lot of protectionist-leaning politicians, who are willing to pay any price to protect any manufacturing job. If you’re interested in the facts about the service sector, read “Exploiting the Manufacturing-Services Interface,” by James Brian Quinn, Jordan Baruch and Penny Paquette, in the Summer 1988 issue of the Sloan Management Review.

For starters, want to win a bet with friends? Test them on this: Is value-added per employee higher in retailing or in manufacturing? If they pick manufacturing, you win. (P.S. It isn’t even close.)

Value-added per employee is equal, overall, in the two sectors. The same is true of capital goods intensity. The authors also demonstrate the fallacy of the common conception that service sector growth depends on how full our factories are. To the contrary, the service sector creates more manufacturing jobs than the manufacturing sector creates service jobs. For instance, service sector “pulled” the manufacturing sector by buying 85 percent of all sophisticated communications goods in 1985. Finally, the service sector is less cyclical and more recession-proof than manufacturing. (And there is a bigger share of high-paying service jobs—in healthcare, accounting, law, software engineering, and airline piloting, for example—than high-paying manufacturing jobs.

Moreover, “service-added” (for instance, software and electronic aids to distribution) is increasingly the key to keeping a manufacturer’s products competitive—and to keeping manufacturing jobs on shore. Just ask Levi Strauss, for instance, about how important electronic data interchange is to retaining home-based textile and garment-making jobs. Close to 75 percent of any manufacturer’s payroll consists of service jobs, such as R&D, marketing, and distribution—and that proportion is growing.

• Junk bonds are dangerous. Again, baloney! Until “junk,” or “high yield,” bonds were invented, the only companies that had ready access to the bond markets were the blue chips, the largest 750 or so firms in the country. Today, less-than-giant outfits are avid players in the high-yield bond market. And as the blue color of our biggest chips continues to fade, the junk bond-financed outfits, by contrast, glow.

A study of junk bond-financed firms’ performance, between 1980 and 1986, conducted at the State University of New York at Stony Brook (and reported in the Wall Street Journal this summer) reveals the inaccuracy of the conventional wisdom about junk bond fragility. The junk bond-financed companies are creating jobs at four times the average rate for the economy as a whole (and the economy as a whole is in the midst of a job boom). They also have a third greater growth in productivity, 50 percent greater growth in sales and about three times faster growth in capital spending.

Add to this such revelations as the one from the May 17, 1988, Financial World magazine: The second 1000 stocks (ranked by market value) are substantially outperforming the first 1000. We have a lot of relearning to do about who’s who in the face of today’s unprecedented turbulence. The names of the new “who’s who” are barely familiar; the names of the “who’s no longer who” are all too familiar (i.e., pick your favorite Fortune 500 firm).

• Quality is about statistics and probabilities. And again—baloney! Not long ago, I attended a meeting of the prestigious International Academy of Management, at which the keynote speaker was an octogenarian West German chief executive, Erich Scheid. He is a precise, no-nonsense, disciplined engineer who successfully led a major capital goods firm for decades. Scheid delivered his speech on quality so forcefully that the words still ring in my ears: “Quality is not technical. … It is an attitude. … It is about common purpose. … We never analyzed the topic of quality.”

He has an analytic bent—and so do I. And he (and I) believe in measurement, to a fault. But quality is not about statistics or probability, nor is it about quality circles or any other devices or programs. Junior manager or senior executive, you believe in quality and stand for quality absolutely—or you don’t. And that’s as true in consulting or banking as it is in the design and production of aircraft.

In its devastating August 1988 cover story, titled “America’s Quality Crisis,” the magazine Business Tokyo reported on Boeing’s nagging problems with its biggest customer, Japan Air Lines. A Boeing division president was quoted as saying that the firm intends to redouble its efforts to address JAL’s concerns. Nonetheless, he allowed as how Murphy’s Law seems to somehow catch up with complex devices. Not good enough!

Yes, Murphy lives. But I’m sick and tired of American excuses for a lack of perfectionism in quality couched in statistical terms. The fact is that the world-class quality attitude and American economic survival permits no middle ground, no statistical doublespeak, no resort to Murphy’s devilish ways, no compromise at all.

I will continue this lament next week. Right now, humor me: Go tack this on the office door of a manager who’s a sniveling compromiser of quality.