In the time it takes you to read this column, about $250 million in foreign exchange dealings will take place. In part, that has fueled political unrest in Mexico. It has helped little-known Dart Group Corp. raise $4 billion to make an unfriendly takeover bid for giant Safeway ($20 billion in revenues); it has contributed to our $40 billion trade deficit with Japan; and it has something to do with why relatively small Chaparral Steel of Dallas is outperforming USX Corp. (the former U.S. Steel).
The volume of foreign exchange transactions also explains why most management theories over the first seven decades of this century are proving to be millstones around our necks, rather than bedrock upon which to build.
Our theories are built upon the assumption of continuity and predictability. So are our factory and organization structures, our labor practices, our pension plans, our trade associations, and our regulatory bodies.
Predictability of demand, competitive structures and exchange rates probably are gone for good. And without predictability, we are without anchors. We are left to grope for solutions and to race about in search of the perfect business portfolio—to little avail.
That $250 million being traded while you read this is part of an estimated $60 trillion to $70 trillion in exchange dealings. The exchange dealings are largely transacted by the world’s major banks, a group of “supranational” institutions, as Howard Wachtel calls them in his readable and thoughtful The Money Mandarins. Supranational banks and supranational corporations are part of the largely unseen, but powerful, supranational economy. They have evolved free of regulation since the U.S.-engineered Bretton Woods monetary agreement flew apart when President Nixon decided in 1971 to let the dollar float free of gold.
By supranational, Wachtel means beyond any nation’s reach. The financial spiders, crawling around the all-encompassing electronic network web, created a supply of Eurodollars that has grown to a trillion dollars. In fact, there are now three times as many Eurodollars flying about as the entire U.S. money supply.
Eurodollars can be moved and lent with ease. For instance, there are no reserve requirements associated with their lending, as there are with domestic banking. The Federal Reserve requires banks to hold 20 cents of every dollar you deposit, leaving banks to lend only four fifths of what you give them.
Unanchored Eurodollars are always in search of a home. In the 1970s, bankers lent to developing countries with what proved to be reckless abandon. The world’s bankers and government borrowers in Mexico were counting on a future of $35 per barrel oil to insure payback. As I write this, oil’s spot price is $8.75 a barrel.
When developing countries proved to be a poor home for this “stateless currency,” as some call it, the search was on for another lending outlet. Though there are many reasons for merger boom in the U.S. and abroad, a prime spur was the sheer availability of lendable dollars pulled out of the developing countries. Thus the Dart Groups of the world can line up billions of dollars overnight.
Likewise, there are many reasons for the trade deficit we run with Japan, not the least of which are lousy American product quality and our pitiful skills as exporters. This in part is because American management’s response to unstable world financial forces has reinforced their preference for financial gamesmanship over product enhancement. Chieftains are rewarded who ceaselessly shuffle portfolios and create instant paper wealth for shareholders, rather than those who patiently improve their factories and their international trade relationships.
Mr. Wachtel speaks eloquently to the instability: “Instantaneous electronic communication … fuels speculative movements of money and raises the stakes in international finance. Rumors … run through the financial trading rooms without the intervals of time needed to quiet them. … This is what occurred in the case of Continental Illinois National Bank … when rumors about its inability to collect on defaulted loans ran through the international financial community like a prairie fire. In a matter of hours, billions of dollars were withdrawn … and the nation’s eighth largest bank was near bankruptcy.”
The world of commerce, in short, has been set on its ear. Only uncertainty is certain. The former U.S. Steel’s performance in its basic business is so problematic that it has unloaded most of its steel operations and has become active in the merger game. Yet Chaparral Steel is typical of the new breed in finding new ways to compete. For instance, its boss, Gordon Forward, has been studying McDonald’s franchising system, in search of creative ways to possibly implant a string of so-called “micromills” across the U.S. landscape. Micro-mills are a product of both technology and uncertainty, as giant slugs of demand for commodity products fade—in steel as well as retailing, accounting services, and health care.
The new management skills are speed, adaptation, responsiveness, flexibility. Uncertainty and change are the core upon which every successful business organization must be built. The problem is that we are short of tried-and-true management prescriptions to implement these new skills.
(c) 1986 TPG Communications
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