Forget the Past
Today’s executives have learned the wrong lessons. After all, our formative business training occurred during the Great Anomaly years, from 1946 through 1973, the booming post-World War II era that lasted until OPEC tripled the price of oil. One economist claims that during those years businesspeople “lost the habit of competing.”
When I spoke at a recent meeting of construction equipment dealers, I realized that if we don’t quickly learn how to compete, our economy will be doomed to continual decline. At the conference, one successful dealer gave a speech about global pricing of equipment, an issue of great concern to dealers today. The speaker noted that prices used to be uniform around the world, but now, for the first time, they are market driven. This observation shocked the audience. What shocked me, however, was that this observation was such a revelation to them.
The United States is taking a long time to adjust to post-oil crisis realities. We are still dreaming of America’s post-World War II economic dominance, when we enjoyed a 50 percent share of world GNP. With no competitors, with huge consumer demands pent-up since the Great Depression, and with leftover post-war capacity, the odds were stacked in our favor. We were the only game in town, with Japan and Europe devastated by the war. As that fantasy world crumbled in the seventies, we blamed our economic policy makers’ inability to fine-tune the economy with the widely accepted Keynesian levers.
Then a barrage of threats emerged at once: OPEC; competition from developed countries such as Japan and Germany and developing countries such as Korea, Singapore, and Brazil; and a technological revolution.
That’s when our price-setting mentality became obsolete. Yet we continued to build capacity, not based on a realistic assessment of worldwide competitive conditions, but on projections of maximum demand in the next upswing. Big steel did this again and again, refusing to face reality. Because steel capacity was increased to accommodate anticipated peak demand, break-even volume was outrageously high. Two World Bank analysts call this the “price-maker behavior of an oligopoly.” When steel companies set prices, automakers paid list price willingly, ever ready to pass along increases to consumers who were equally complacent with the certainty of increasing wages.
So the price was whatever the catalog said it was—the world according to U.S. Steel, General Motors, and Caterpillar Tractor. At Kodak, years ago, all pricing was done by a fellow in a small executive office in the Rochester, New York headquarters. He found out the costs from manufacturing and marked them up according to an old, set formula. That was that—until Fuji film came along.
Levi Strauss also got intoxicated by the blue-jean craze in the late seventies. Capacity led demand. Retailers were given limited allocations and treated rudely.
The story was the same in the semiconductor industry. The manufacturing barons of Silicon Valley learned the wrong lessons from Detroit, Pittsburgh, and Peoria: Capacity was king; quality and service were secondary. And Apple repeated these mistakes in the home computer market.
Now U.S. Steel, Chrysler, Caterpillar, Levi Strauss, and Apple have lowered their break-even points by 50 percent or more, albeit at a terrible human cost—layoffs. But they have not yet learned their lessons. This became clear to me at the construction equipment dealers conference. One attendee, a reporter for a big steel company’s in-house magazine, listened to my speech. I began with an analysis of Worthington Industries, a wildly profitable, 750-million-dollar firm that is a uniquely effective competitor in the battered steel industry. After my talk, this reporter spoke with one of his company’s 25-year veteran executives. Neither had ever heard of Worthington, which is a Fortune 500 company. I think it is significant that an executive at a less profitable company in the same industry has not heard of one of his principal competitors.
Despite our monumental progress, we apparently are still out of touch with the dynamic forces in our competitive environment. We still look over our shoulders too often, yearning for the good old days of the Great Anomaly. We are still dreaming of giant plants that will be able to maximize market share in the next market boom. And we are still envisioning customers who buy at list price and won’t complain about delayed deliveries or questionable quality. But businesspeople cannot afford to be complacent anymore. A recent report notes that real wages for 25- to 34-year-old males dropped 26 percent from 1973 to 1983. We better wake up, forget the Great Anomaly, implement a market-driven mentality, and welcome the present and future scenario of world-class competition.
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