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Abstract
The Bush
Administration has been aggravating the jobless GDP growth
and the widening income and social gaps between the top 3%
of income brackets and the rest. These problems are
damaging the global competitiveness of the U.S. economy.
They have been shaped by flawed theories of business,
economics, and law in the self-centered culture of market
fundamentalism. It produces business and public services
mindset that embraces the robber baron culture and Social
Darwinism of market and Christian fundamentalism. It is
destroying the manufacturing culture that had produced the
“golden age” of the post-World War II era. Fundamental
remedies require alternative management theories and
practices. Such alternative business models can be gleaned
from the comparisons of Detroit’s demises and the rising
competitiveness of Toyota and Honda transplant firms in the
U.S.
Dysfunctional MBAs and Jobless Economic Recovery of America
Thirty-two years ago, George W. Bush was my student at
Harvard Business School. In my class, he called President
Franklin D. Roosevelt’s New Deal “socialism and bad for
business.” He opposed the Social Security, the Securities
and Exchange Commission, the unemployment insurance, and
other New Deal innovations. In reality, the U.S. and the
world benefited from the New Deal innovations and the
federal government’s positive roles in managing the economy
and fostering the civic-value based rules of fair and open
market competition. This bailed the U.S. out of the Great
Depression, won World War II, produced the Golden Age of the
post-World War II era. American democracy and capitalism
were repaired and solidified.
In those
days, however, Bush belonged to a minority of MBA students
who were seriously disconnected from accepting the moral and
social responsibility for their actions. Today, he would
fit in comfortably with an overwhelming majority of business
students and teachers. President George W. Bush epitomizes
the dysfunctional business mindset – anti-intellectualism,
ignorant of science, flawed integrity, greed, and lack of
civic values and compassion for the unfortunate.
President
Bush has modeled his presidency on the Gilded Age of the
McKinley Presidency of 1897-1901 (Bill Moyers, 2003: 10).
President McKinley saw to it that Washington was ruled by
big business. Corrupt crony capitalism and rampant Wall
Street’s money games finally brought about the Great
Depression. Under the Bush Administration, Wall Street’s
money games are dominating the economy, and the jobless
economic recovery is hurting the global competitiveness of
the U.S. economy. As it was during the McKinley-Gilded Age,
America is beset by a widening income gap between the haves
and have-nots. It is rapidly resembling a divisive,
undemocratic Latin American country.
During
the economic recovery of March 1991 to April 1993, a 10
percent increase in the real GDP expanded manufacturing jobs
and service jobs 3 percent and 5.9 percent respectively.
Ten years later, under the Bush Administration, the economic
recovery from November 2001 through August 2003 showed that
a 10 percent increase in the real GDP expanded manufacturing
and service jobs only 0.7 percent and 0.9 percent
respectively. Since 2001, over 5 million people have lost
their health benefits while about 3 million quality
manufacturing jobs disappeared. In his State of the Union
speech of 2006, President Bush boasted his records of job
creation and low unemployment rate. In reality, a bulk of
new jobs that President Bush’s economic policies created are
low paying service jobs and part-time jobs. The working
poor have swelled in number and are toiling in the minimum
wage and dead-end jobs with no health and pension benefits.
The middle class is rapidly thinning out.
The loss
in manufacturing jobs causes compounding losses in suppliers
and related quality service jobs. Since August 2003,
President Bush’s economic policies have not created 300,000
jobs monthly barely enough to absorb those who were thrown
out of work under him and to keep up with population
growth. America is burdened by four colossal debts –
federal budget deficits, foreign debts, trade deficits, and
household debts, which are dragging the national economy.
Meanwhile, encouraged by President Bush’s large tax cuts to
big business and the wealthy, many chief executive officers
(CEOs) of corporate America give themselves large bonuses
and salaries that have little to do with their performance
(Nicholas Kristof, 2005: A21). Throughout the post World
War II era before the Reagan-Bush I Administration
(1981-1993), CEOs’ median annual compensations remained at
about 30 times their average employees’ pay. However, since
1981, social, political and economic restraints of CEOs
compensations have been increasingly eliminated (Eric Dash,
2006, C1). Under the Bush Administration, comparable CEOs,
many of whom had business education, have given themselves
600 to 1,000 times larger annual compensations than their
ordinary employees whose incomes have stagnated.
To pay
for such self-dealt compensations, CEOs lay off their
workers, cut ordinary employees’ health benefits, raid
employees’ pension funds, destroy their labor unions, and
outsource jobs abroad. During the deep Reagan recession of
1981-83, the CEOs of American large corporations doubled
their compensations and perks. Meanwhile, their firms’
profits fell and the national unemployment passed the 12
percent mark, the highest since the Great Depression. Even
after the Reagan recession ended, one CEO after another have
continued with their relentless shedding of their American
employees and suppliers in the name of restructuring,
leveraged buyouts, global competition, outsourcing,
downsizing, and relocations. They have chased ever more
relentlessly short-term and financial profits and have
become manipulated by the speculative casino called the Wall
Street. Meanwhile, the CEOs of Japanese competitors have
kept their compensations no more than 30 to 50 times larger
than their rank-and-filers’.
In
addition to President Bush, business education has also
produced former Enron CEO Jeff Skilling (Harvard MBA) and
other MBA masterminds behind stock frauds and other serious
corporate malfeasances at Tyco, HealthSouth, Haliburton,
AIG, Arthur Anderson, WorldCom, Wal-Mart, and GlobalCrossing,
to mention a few. The Bush Administration has condoned the
lack of oversight by the Securities and Exchange Commission
and other watch-dogs winking at dysfunctional CEOs.
The Global Competitiveness of the U.S. Economy and Firms
In the
global age, the three main ingredients of the growth of a
nation’s GDP and its corporations – capital, technology, and
information – move globally at the speed of light through
the internet networks. The global competitiveness of the
U.S. economy is defined as the continuing growth of its
real national income, enabling its households to keep
improving their living standards. The global
competitiveness of a firm is defined as the continuous
adaptation to changing business environment. The adaptive
economy needs adaptive private corporations that contribute
to expanding the U.S. bases of employment, technological
innovations, and business opportunities.
Market
fundamentalists defend America’s harmful and premature
outsourcing of quality and higher-paying manufacturing and
service jobs abroad. They justify their self-serving action
by the obsolete 19th Century theory of
international trade – comparative advantage theory. Each
trading nation exports those products in which it commands
comparatively the most absolute advantage and imports those
goods which it cannot produce more cheaply than its trading
partner. This theory is now also applied to those packets
of digitalized information “services trade” in which India
has come to command comparatively most absolute advantage
vis-à-vis the U.S. This theory forgives greedy American
CEOs for destroying American jobs to pad their pockets and
stock prices. However, this theory is wrong and is damaging
the global competitiveness of the U.S. economy. Job and
income losses of America are aggravated by the premature
abandonment of American suppliers and labor by short-term
stock price maximizers like Wal-Mart and Levi that continue
shedding even American skilled labor.
Today, as
in the case of U.S.-China merchandise trade and U.S.-India
services trade, there is no market equilibrium point between
them. China and India will persistently combine their
endless supply of trained but low cost labor with inflows of
capital and technology from the U.S. and Japan. American
importers like Wal-Mart and financial firms provide Chinese
and Indian exporters with ready accesses to the U.S.
market. China and India will continue to improve their
absolute cost and quality advantage to run up colossal trade
surpluses with the U.S. at the expense of America’s quality
manufacturing and services jobs (Paul Samuelson, 2004:
135-146). For a comparative advantage theory of
international trade to explain the trade benefits for the
U.S., the U.S. would have to shift persistently to producing
innovative and exportable products and services to China and
India. However, the U.S. has long ceased to produce many
exportable products, say, a high technology machinery with
which China produces exports to the U.S. Instead of the
U.S., Japan or other nation exports it to China. American
brands of computers and internet servers that India uses to
produce “digitized packets of information” exports to the
U.S. are now made in Malaysia and China with American
capital and technologies.
Widening
Income Gaps and America’s Shrinking Middle Class
A
nation’s inequality of income distribution is measured by
the Gini coefficients derived from the Lorenz Curve. The
Gini coefficient falls between 0 (total equality) and 1
(total inequality). For most developed nations, the Gini
coefficient ranges from 0.3 to 0.4 which are considered
conducive to a democracy. The larger is the Gini
coefficient, the greater is the inequality of income
distributions. Gini coefficients of the U.S. have increased
from 0.394 in 1970, 0.403 in 1980, 0.428 in 1990, 0.462 in
2000 and to 0.496 in 2004.
The
widening income gaps of the U.S. began about 30 years ago
(after the First Oil Crisis of 1973-75). However, the
income gap widening was accelerated during the Reagan-Bush I
Era. At least, President Bill Clinton (1993-2001) mitigated
the harmful effects of widening income gaps upon America’s
democracy and economic growth. Under President George W.
Bush (2001-), however, not only the income gaps between
haves and middle classes have been accelerated, but the
income volatility of the middle and working classes have
become hightened. In 2004, the Gini coefficient of the U.S.
was breaking through 0.5 level and began to approach those
of Mexico, Brazil, and Russia. To identify the causes of
widening income gaps of the U.S., I conducted the following
regression analysis.
(1)
Log (Gini) = - 1.221 + 0.0323D – 0.261 Log (Ratio)
(0.0168) (0.0041) (0.0163)
Where
D=Dummy Variable (0 for l968-1998, 1.0 for 1999 – 2001) and
Ratio = Manufacturing Sector Employment/Total Employment.
Regression Analysis (1) shows that for 10% point decrease in
the manufacturing employment ratio, the U.S. shows 2% point
increase in the Gini coefficient. From this, we can infer
that the Gini coefficient of the U.S. has increased by ever
shrinking manufacturing employment. And the manufacturing
employment has continued to shrink after 1981 and
particularly since 2001 due to the outsourcing of
manufacturing and services jobs abroad.
The
American phenomenon of “growing GDP and shrinking middle
class” is vividly captured by Gini coefficients of
household disposable income from 1980’s to the present.
Australia, France, Canada, Japan, Belgium, Germany and
Sweden have kept their Gini coefficients of comparable
household disposable income steady within a range of 0.215
(Sweden) and 0.315 (Australia). Meanwhile, in the U.S.,
comparable Gini coefficients have continued to increase from
0.335 in 1986 to 0.420 in 2004. The Bush tax cuts have
widened the income gaps and shrunken America’s middle class.
Dysfunctional Management and Economics Theories of Market
Fundamentalism
The
business culture of hubris and cronyism is encouraged by
dysfunctional management and economics theories of market
fundamentalism. Sumantra Ghosahl, a leading management
scholar, noted (2005: 75-91): “Combine agency theory with
transaction costs economics, add in standard versions of
game theory and negotiation analysis, and the picture of the
manager that emerges is one that is now very familiar in
practice: the ruthlessly hard-driving, strictly top-down,
command-and-control focused, shareholder-value obsessed,
win-at-any-cost business leader of which Scott Paper’s
“Chainsaw” Al Dunlap and Tyco’s Dennis Kozlowski are only
the most extreme examples. This is what Isaiah Berlin
implied when he wrote about absurdities in theory leading to
dehumanization of practice.”
For the
last thirty years, American business and economics studies
have increasingly become the pseudo-sciences of financial
economists’ mathematical formula manipulation which is
devoid of humanity. These market fundamentalists build
their theories and policy paradigms on their illusionary
assumptions about market efficiency, individuals, firms,
governments, and society. Individuals are assumed to
maximize their economic self-interest. Corporations are
told to maximize short-term profits and stock prices at all
costs to reward abstract stockholders. Laissez-faire
capitalism is assumed to need no ethical and democratic
constraints. It is assumed that Wall Street stock markets
properly measure the fair market value of the listed
corporations and prevent selfish excesses of CEOs and board
members (“shareholder value mantra”). Financial institutions
are assumed to prevent corporate executives’ raiding their
corporate treasuries. It is assumed that government
institution cannot administer effectively any public service
from Social Security and health care to air- and sea-port
security. Even cursory observations of the real world would
tell us that the assumptions of market fundamentalists do
not hold true.
Market
fundamentalists ignore that Adam Smith’s market efficiency
requires the democratic context of fair and honest
competition (no monopoly and business-government
collusion). They ignore that there are many important
failures and limits of the market mechanism (Kelvin
Lancaster and Richard Lipsey, 1956: 11-32; Francis Bator,
1958: 351-379). When, as in the case s of labor, education,
and health markets, there are multiple and systemic
distortions in the price and demand/supply discipline of a
given market, a piecemeal removal of price mechanism
distortions to bring the market closer to a pure market will
worsen the overall outcome. This dictum refutes market
fundamentalists who advocate substituting “market incentive
vouchers” or “privatization” for government regulations of
clean water and air, public safety, public education, labor,
energy supply, and health care, and racial-gender
discrimination.
Market
fundamentalists assert the futility of government
intervention in the market mechanism. They incorrectly
extrapolate the social choice theory of Kenneth Arrow
(1951), a Nobel Prize winner, who warned us not to twist
his mathematical proof of the “impossibility theorem” into
the imagined futility of civic and democratic efforts at
social betterment or into manipulating consumer behavior.
Arrow merely showed that the equilibrium outcome of the
group choice is indeterminate when there is a circular
conflict situation like the kids’ game of
rock-paper-scissors among different groups of people. It is
the democratic political processes of coalition forming and
public education that break the log-jam of conflicting
interests among different groups of people to attain their
civic goals. We have only to review how the Civil Rights
Movement made many corporations, civic groups, and
individuals change their attitude toward the race and gender
discrimination in America. Similarly, market
fundamentalists have twisted the game theory of von Neumann
and Oskar Morgenstern into collusion and deception games of
business negotiations that unethical CEOs’ abuse.
Milton
Friedman is a guru of market fundamentalism, although he
admitted that his theories are not based on reality (Milton
Friedman, 1953). This is an illusion-based pseudo-science
according to Friedrich von Hayek (1989: 3-7), Friedman’s
colleague and a recipient of Nobel Prize in Economics
Science. Undaunted by such criticism, Friedman promoted the
“survival of the fittest” ideology of crude Social
Darwinism. Such Social Darwinism was very popular with the
robber barons of the McKinley-Gilded Age. John D.
Rockefeller declared in 1900 that “the growth of a large
business is merely a survival of the fittest. It is merely
the working of a law of nature and a law of God.” Little
did they care how the strong survive at the expense of the
weak. Charles Darwin (The Origins of Species,1859),
warned us not to use the biological evolution theory as an
ethical justification of the right of the strong to trample
on society’s weak (Peter Singer, 1999: 70).
Today,
market fundamentalists have revived the Social Darwinism of
the McKinley-Gilded Age. Milton Friedman himself sanctified
business executives’ hubris of greed supremacy and absolved
them of any civic and social responsibilities for their
actions. He declared (2002: 133): “Few trends could so
thoroughly undermine the very foundation of our free society
as the acceptance by corporate officials of a social
responsibility other than to make as much money for their
stockholders as possible.” To pass their ideology as
economics and business theories, market fundamentalists cite
Adam Smith, the laissez-faire economist of the 18th
century. However, nowhere in his 900-page book, The
Wealth of Nations (1776), does Smith even imply
that those who harm others in pursuit of personal greed also
benefit society. Today, Adam Smith would castigate
government-business collusions, monopolies, corporate
executives’ excessive self-compensation and stock frauds,
unfair taxes and WAL-MART like exploitation of employees and
communities (Anthony Bianco and Wendy Zellen, 2003:
100-110).
The Oil
Crisis of 1973-75 abruptly ended the Golden Age of the
post-World War II era that was characterized by low
inflation, low unemployment and high income growth.
American economic and political systems that had already
been damaged by the Vietnam War fiasco could not adapt to
the sudden four-fold rise in energy costs. A stubborn
stagflation ensued. Many Americans suddenly lost their
positive views of government and were lured into the
illusionary power of the “efficient market.” Milton
Friedman’s economics that had until then been treated merely
as a curiosity suddenly came to dominate not only economics
and business studies but also studies of law (R.A. Posner,
2003), sociology (J.S. Coleman, 1992: 1-15), political
science (Mancur Olson, 1965), and social psychology (J.
Thibaut, 1959). In particular, business students are taught
the mistaken idea that corporate management is a financial
game. Few business schools teach even rudimentary course on
manufacturing operations and management-labor relations.
Students are taught to treat ordinary employees as
disposable costs and to swallow, as the truth, the
ideological assumption that corporations should exist only
to reward abstract stockholders.
A case in
point is the agency theory (M. Jensen and W. Mckling, 1976:
305-360). It is based on the illusionary assumption of
perfectly efficient stock and labor markets and
stockholders’ control of their firms. As early as in 1932,
Berle and Means conclusively showed that stockholders do not
own or control the corporations whose shares they buy and
sell in the stock markets (Adolf Berle and Gardiner Means,
1932). Stock markets have become the money-game casinos of
extremely shortsighted speculators (Paul Krugman, 2003:
426). Labor cannot move as freely as assumed by the
efficient market hypothesis. The agency theory and its
theoretical cousin, the capital asset pricing model (CAPM)
of stock price determination, have reduced the complex
behavior of firms into mechanistic, simple and
mathematically presentable models.
At best,
CAPM measures the average risk-return trade off trends of an
industry group of stocks, but cannot tell what investors
really want to know – that is unique risk-return trade offs
of a specific stock. Both agency theory and CAPM have been
empirically disproved in the real world (Robert Kuttner,
1996: 410). At best, stock markets may measure a firm’s
price, but not its long-term value to society. Warren
Buffett, a billionaire investor, does not believe in agency
theory and CAPM and is successfully picking growth stocks
ignored by Wall Street. His three criteria are: management,
management, and management of no robber baron CEOs.
The
agency theory treats professional managers merely as
unethical agents who are hired by shareholders. Wall Street
loves the agency theory because it encourages corporations
to attempt hostile takeovers of other corporations and CEOs
to become obsessed with their stock prices. The agency
theory states that agents cannot be trusted to maximize
shareholder value and that corporate raiders of the
“undervalued” firms increase the fair market values of the
acquired firms. In reality, as shown by Hewlett-Packard’s
acquisition of Compaq, the stocks of the merged firms have
mostly fallen after Wall Street’s speculative feeding
subsided. The threats of hostile raiders drive insecure
CEOs to pad their stock prices by forgoing investments in
research and development (R&D), market development,
manufacturing, and human resources, all of which are
necessary for the firms’ long-term growth and global
competitiveness.
Meanwhile, the agency theory has encouraged CEOs to align
their self-compensations with those of their speculative
shareholders by making stock options and bonuses a
significant portion of their compensation. President Bush
has been steadfastly refusing to treat corporate executives’
stock options as taxable compensations in kind. Hence, we
have witnessed CEOs’ excessive self-compensations and stock
frauds at the expense of their employees, suppliers,
customers, communities and even shareholders – namely, the
long-term growth of their firm (Thomas Kochan, 2002:
139-141).
Transaction costs economics (O.E. Williamson, 1975) is
another misleading theory. This theory encourages managers
to monitor and control their subordinates to discourage
their “opportunistic and entrepreneurial behavior” and to
treat them as disposable costs. In reality, the 21st
century is characterized by the fact that capital,
technology, and information – the three vital ingredients of
economic and corporate growth – are globally moving through
cyberspace at the speed of light. Globally competitive
firms have rejected the business models based on the agency
theory and the transaction costs theory. Instead, they have
built their adaptive corporate structure and culture by
empowering their managers and employees to cooperate with
one another for “opportunistic” and “innovative”
initiatives. A case in point, today, is
As shown
by Enron and General Electric, the managers’ financial
contributions to their firm’s earnings per share are often
monthly ranked and the bottom ten percent performers are
yanked out of the firm. Fears of job loss, mistakes,
initiatives and bosses paralyze corporation. Transaction
costs paradigms ignore Adam Smith’s warning about the
division of labor and controlled employees: “the man whose
whole life is spent in performing a few simple operations
generally becomes as stupid and ignorant as it is possible
for a human creature to become ”(The Wealth of Nations,
Book V. Ch.1).
Michael
Porter’s theory of “five forces framework” has influenced
management and marketing courses (Michael Porter, 1980).
Porter argues that companies must compete not only with
their competitors but also with their suppliers, customers,
employees, and regulators. Porter’s paradigms of
“intrapreneurship” and “Darwinian revolution” internally
pit one division or group against the others and play one
manager against the other. The resultant turf wars
discourage sharing vital information, products, and
technology across different business units and functions and
even among different individuals of the same business unit
and function. Internally divided American firms are being
soundly beaten in the U.S. and abroad by their internally
cooperative competitors from Japan, South Korea and Europe.
From the
1980’s through today, following the dictum of agency,
transaction costs and Porter theories, one American company
after another slashed and burned (“downsized”) their
employees and suppliers to cut costs and pad their earnings
per share. But downsizing reduced profits, lost customers
and suppliers and demoralized the remaining employees. The
firms lost valuable capital of human resources that are
vital for maintaining customers and suppliers and for
utilizing technological and marketing innovations (The
Wall Street Journal, “Call It Dumbsizing,” May 14,
1996).
In the
information age of the 21st century, technology
and information, rather than capital, have become most
important capital that can only be utilized, improved, and
accumulated by human beings. If you shed or demoralize
them, you destroy your technology and information capital.
The competitive edge of a firm is determined by its
ability to link worldwide product development,
manufacturing, supply procurement, R&D and marketing. Such
links can only be maintained and refined by mutually
supportive and trusting people. “Dumbsizing” destroy such
vital personal networks of human and social capital.
Two Models of Corporation: Model J vs. Model A
General
Motors, Ford, and Daimler-Chrysler have continued to lose
their market shares in their home market of the U.S.
Meanwhile, Toyota, Honda, and Nissan have expanded their
market shares and profits in America. For some years,
Toyota’s annual profits have been larger than the profits of
Detroit Big Three combined. General Motors and other profit
and stock price maximizers are annually beaten by Toyota and
other long-term “value-added maximizers” from Japan (Yoshi
Tsurumi and Hiroki Tsurumi, 1985: 29-35). Toyota’s share
value has persistently outperformed that of General Motors.
Toyota’s business model is making better “dollars and cents”
sense than Detroit’s “shareholder value mantra.”
Repeatedly in recent years, American executives have watched
sheepishly as their Japanese competitors took America’s
failing plants and unproductive and uncooperative workers
and turned them around into rousing successes. In these
increasingly common examples of what I call the “Japanese
Paradox,” all the excuses American executives use to
explain their failures – the overvalued dollar, high labor
costs, restrictive union work rules and government
regulations—are irrelevant. The Japanese Paradox appeared
first in the 1970’s as Zenith, RCA, General Electric, and
Motorola abandoned their manufacturing operations in the
U.S. and ceded their color television markets to Sony and
other Japanese manufacturers (Hiroki Tsurumi and Yoshi
Tsurumi, 1980: 583-597).
In the
most celebrated case of the Japanese Paradox in the
mid-1980’s, Toyota revived a unionized auto plant in
California, MUMMI, that had been virtually abandoned by
General Motors as “unworkable.” Toyota pledged that
management would cut its own salaries first before
rank-and-file employees would be asked to accept temporary
concessions during economic downturns. Because of this
pledge, the United Auto Workers (UAW) allowed Toyota to
reduce over 26 rigid job categories from the former GM days
to four broad classifications, enabling Toyota to empower
the workers and install its famed flexible, quick-response
and quality-first manufacturing system. The UAW workers
used to resent their former GM executives asking sacrifices
of workers that they had no intention of making themselves.
The workers used to respond with absenteeism and shoddy
workmanship.
Early in
the 1990’s, Kodak saw its market dominance outside Japan
increasingly eroded by Japan’s Fujifilm. Kodak charged that
Fujifilm was engaged in unfair marketing practices with the
help of the Japanese government. In 1997, the World Trade
Organization unanimously absolved Fujifilm of the Kodak
charges. Fujifilm’s business strategy and corporate
structure were found more adaptive to the dynamically
changing market and technological environment worldwide
(Claudia Deutsch, 1997: D 10; Yoshi Tsurumi and Hiroki
Tsurumi, 1999: 813-830).
For
Toyota, Honda, Sony, Canon, Fujifilm and other Japanese
firms, their strategic goals are not to maximize their stock
prices, but to become the world’s most efficient and
innovative provider of whatever products and services they
offer. They bring their corporate goals in line with the
national interest of their home and foreign host countries.
They refuse to be swayed by the speculative stock traders.
They continue to invest in technological innovations, market
development, human resources, and in international trade and
investment. In 2005, Toyota reported a visible dip in
earnings because it was investing heavily in international
market and product developments. The Toyota executives
calmly accepted the stock price fall. Once they become the
world leader, profit follows (Akio Morita (Sony), 1986: 309;
Robert Shook (Honda), 1988: 238; Steven Spear (Toyota),
2004: 78-86). Their private goals are made consistent with
their social responsibilities for expanding their host
nations’ bases of technological innovations, employment and
international business. Their marketing strategy is built
on ever more closely linking R&D, supply and distribution
chains, manufacturing and marketing on site of the targeted
markets to service ever changing their customers’ needs.
There are
two distinctly different types of corporations (Douglas
McGregor, 1960; Abraham Maslow, 1971; Yoshi Tsurumi, 1976:
333). Model A firms are represented by General Motors,
Enron, General Electric and many American firms that have
adopted the management paradigms of Milton Friedman-led
market fundamentalists. Model J firms are epitomized by
Toyota, Sony, Honda, Canon, Fujifilm and other world class
firms like Starbucks, Google, and Microsoft. They have the
corporate structure and culture envisaged by McGregor and
Maslow.
Outwardly
both Model J and Model A firms show a triangle pyramid
hierarchy structure of any formal corporate organization,
from the CEO down to rank-and-file employees. However,
Model A corporate culture and management control systems are
designed in such a way that an inverted triangle depicts the
individual’s paid commitment to the firm’s strategic goal
and his paid time horizon for his daily work guide.
The very
top echelon of management in both Models A and J is expected
to maintain the broadest and longest commitment to the
long-range future of the firm. However, in Model A
corporation, as the individual’s hierarchical position in
the firm declines, his expected commitment to the firm’s
strategic goal and future tapers off markedly. At the very
bottom of Model A firm, the rank-and-file employees are
expected to perform pre-designed jobs from one hour to the
next. Corporate executives shift the blame for their
management mistakes like misreading market trends to the
rank-and-file employees who are laid off. In contrast,
Model J firms cultivate their corporate culture and
concomitant management-employee relations so that even the
lowest ranked employees maintain the broadest commitment to
their firm’s strategic goal and long-term growth. Model J
firms treat all employees as “knowledge and brain” workers.
They are repeatedly trained to improve the quality and
productivity of their operations. Model J CEOs know that
their employees’ loyalty and team work matter. Fujio
Mitarai, the CEO of Canon, Japan’s world class manufacturer,
has continued to advocate that the mutual loyalty and
respect between management and employees is the key to his
firm’s continued successes. Being a transplant manufacturer
from Japan in the U.S., Mitarai has put into practice his
belief that a world class manufacturer must help expand
employment, export, and technological bases of any host
country it enters.
American
executives’ obsession with short-term profits and their
cavalier treatment of employees weaken their firm’s global
competitiveness. When a recession befalls GM and other
Model A firms, their executives’ primary goal is to protect
their cherished profit number and their compensation by
cutting their employees, R&D, and investment in
manufacturing and market developments. During the deep
recession of 1974-76 triggered by the Oil Crisis, American
semiconductor firms protected their budgeted profits by
reducing planned investment in employee training, R&D,
production facilities, and market development. When the
recession was over, they suddenly noticed that their
Japanese competitors had used the downturn to improve their
manufacturing, technological and marketing capabilities and
were positioned to overtake them. Similarly, America’s once
venerable machine tools manufacturing firms lost out to
their Japanese competitors.
Their
Japanese competitors absorbed the shocks of revenue
shortfall, not by cutting employment and supplies, but by
reducing dividends, executives’ compensation and perks,
managers’ salaries, and eventually an across-the-board cut
in the salaries of the rank-and-file. Recessions are used
to retrain surplus people and suppliers so that they will be
prepared to produce new products and market them more
efficiently once their markets bounce back (The New York
Times, “Back to School for Honda Workers,” March 23,
1993). When Japanese firms need to permanently downsize,
they freeze new hiring and downsize through natural
employee attrition. When they need to further downsize,
they buy out employees with a sizable lump-sum severance pay
and help outplace them. At a well-run Model J firms,
top-ranked executives and the rank-and-file remain alert to
the changing technological and market environment because
they all have a stake in their quick adjustment to new
competitive situations.
Not all
Japanese firms are Model J. After collapsing in 1992, the
paralysis of Japanese banks for more than a decade was due
to their bureaucratic inertia of Model A. Their collusion
with the ruling political party and the central bureaucracy
produced Japan’s crony capitalism. There are also Model J
firms among American and European firms such as Gore
Associates in Newark, Delaware (Malcom Gladwell, 2000: 301),
Malden Mills in Lawrence, Massachusetts (The New York
Times Magazine, 1996), and Scannia AB of Sweden (H.
Thomas Johnson and Anders Broms, 2000: 225). Starbucks’
founder and CEO, Howard Schultz, has built his organization
and culture into a Model J firm (Howard Schultz, 1997: 351).
All these firms view their employees as long-term human
capital even in an intensely competitive economy. For
example, Harman International still has a deliberate policy
of no lay off. Sidney Harman, the founder, advocates worker
empowerment for good morale, quality, and productivity.
Model J organizations are not bound by Japanese culture but
by a universally-appreciated culture which treats its
managers and employees as most renewable capital and
assets. Japanese and American Model J firms have built
their adapting and globally competitive strategy upon the
external and internal team works based on the social capital
networks of loyal employees, executives, and suppliers.
Rather
than obsessed with their short-term “bottom line,”
executives of Model J firms keep track of balanced
performance measurements of financial goals, R&D goals,
manufacturing goals, and goals of market competitiveness.
Japanese Model J firms also track the performance goals of
their human resources development. Their financial goals
are to improve their 5-year moving average of the
value-added of the firms. Unlike Model A firms’ central
command-and-control through explicit rules and management by
financial objectives, Model J firms cultivate the shared
strategic goals from the top to rank-and-filers and
corporate culture of mutual cooperation.
Model J
organizations and culture (implicit rules of conduct)
encourage an adaptive, cooperative, innovative and
experimental behavior and mindset. Model J firms prefer
training and promoting their managers from within rather
than bringing them in from outside. Model J firms often
provide profit-sharing rewards for their rank-and-file as
well. Cooperative and mutually supportive culture nurtures
social capital network of human interactions. Thus, vitally
important technology and information capital are readily
shared and improved throughout Model J firms’ stakeholders
including their external alliance members. Model J firms
are learning organizations that reward dynamic economies of
scale of learning by doing among their eco-system members.
The Origins of Japanese Model J Firms – They were “Made in
America.”
The
so-called “Japanese Management” is not characterized by such
obsolete facades as “lifetime employment,”
“seniority-supremacy promotion and staffing,” and “docile
company-based labor unions.” Instead, regardless of their
size, the three true traits of Japanese management are: (1)
executives’ hands-on management of people, market, and
technology to prevent financial tails from wagging corporate
dogs; (2) internal and external team works and strategic
alliances; and (3) ethical executives who honor a
psychological contract of investing in employee and respect
their job security and welfare.
Until
Japan’s defeat in World War II (August 1945), Japanese
corporations were dominated by Model A types and by robber
baron CEOs. At home and abroad “things made in Japan” meant
shoddy products. Many CEOs agreed with Shitago Noguchi, the
founder of Nippon Nitrogen (established in 1908) and the
infamous polluter of natural environment, who told his
managers to treat the workers as “cows and horses.” In the
days of Japan’s robber baron capitalism, many CEOs
mercilessly exploited their workers (E. Patricia Tsurumi,
1990: 213).
However,
throughout the 1950’s and 1960’s, one Japanese firm after
another consciously restructured their prewar Model A
organization and culture to Model J. One firm after another
gave every employee a “salaried” status and bonuses and
benefits. Both management and labor unions lobbied
successfully the government to enact a universal
government-administered health care, unemployment insurance,
workplace safety, and minimum wages. Just as Akio Morita of
Sony realized, the human resource-based and internally
cooperative organization is necessary for rapid growth at
home and abroad. This is why Model J firms are found in
Japan and elsewhere among companies striving toward
international competition, technological innovation and
growth.
Japanese
executives first learned about quality- and people-first
management from America’s “arsenal of democracy” of the
World War II era. Management and employees were united in
their goals of winning the war to preserve America’s
democracy. Management and labor unions developed their
cooperative accommodation. They mass-produced quality
products and deliver them promptly to where they were
needed. CEOs were not obsessed with their compensation
packages and stock prices. The Roosevelt Administration
prevented private companies from war profiteering which
Haliburton and the Carlyle Group – well connected with
President Bush – are now exploiting in the Iraq War.
In the
fall of 1945, two hands-on engineers of the “arsenal of
democracy,” Homer Sarasohn and Charles Protzman, were
invited to Japan. Their mission was to revive and
restructure Japan’s manufacturing sectors of telephone,
telecommunications, and broadcast equipment. Sarasohn
discovered the sorry state of Japan’s manufacturing
industries, which were plagued by a lack of quality
consciousness, low employee morale, and incompetent
management. When the start-up problems were brought under
control, Sarasohn teamed up with Protzman in 1948 to design
and teach intensive management training seminars, the Civil
Communication Section (CCS) Management Seminar (Toshio Goto,
1999: 499).
From 1949
to 1950, Sarasohn and Protzman gave a series of intensive
eight-week courses for top executives, engineers, and
academics on management and product quality control. They
wrote a 600-page text book for their seminar. Afterward,
CCS seminar graduates took turns conducting seminars for
others over the next 25 years. By 1974, over 5,200 had
attended the seminar. The graduates taught CCS lessons to
their colleagues who further disseminated the CCS lessons
widely inside and outside their firms and schools.
Meanwhile, CCS seminar attendants were eagerly embracing
many institutional reforms of “democratizing Japan,” ranging
from the dissolution of the prewar Zaibatsu combines, and
the general purge of wartime business executives, government
officials, and politicians, to the legalization of labor
unions. The dissolution of Zaibatsu destroyed the
centralized control of each Zaibatsu headquarters over its
membership firms. The general purge swept away those
executives who had come from the legal, financial, and
government relations fields. For each corporation, Sarasohn
made sure that people well versed in manufacturing
operations, technologies and sales would fill CEO and other
top management ranks. This was the beginning of the postwar
“Japanese management system” characterized by hands-on
executives, team works, and management-employee joint moral
ownership of their corporation. Management would not shift
the blame for management mistakes and sudden economic shocks
to summary layoffs of the rank-and-file. This psychological
contract between management and employees became the
foundation of emerging Model J firms.
Sarasohn
defined leadership as an act of self-sacrifice and the
ability to secure the faith and respect of his workers. He
taught that a leader must himself be the finest example of
what he would like to see in his followers. The goals of
contributing to the national interest as well as to
democracy are taught as necessary leadership qualities. A
leader could gain his workers’ support simply by being loyal
to them. Sarasohn stressed the importance of consultation
between management and employees. Building employee morale
and making effective policies require a constant process of
education. He also taught the social responsibility of a
firm and its executives. He recalled in 1989: “I asked CCS
seminar participants what the raison d’etre of their firm
was. Nobody was able to answer this question. I told them
that profits or sales could not possibly be their raison
d’etre. Chasing greedily profits is a low level goal and
does not permit them to stay with a changing world. Such
greed would merely invite the general public’s wrath” (The
Pacific Basin Quarterly, No. 16, 1990: 1-5).
Sarasohn’s views of management leadership and the raison
d’etre of private corporations struck a responsive chord in
his Japanese students, who were reminded of Japanese
“Bushido” – noblesse oblige and the ethical codes (public
accountability) of conduct of feudal samurai (warriors) –
that guided business and government leaders of the Meiji
Era, 1868 – 1911. They propelled Japan from a weak, feudal
country into an industrial and modern power in Asia.
After
World War II, Japan’s “captains of industry” fortified
Sarasohn’s management values with Japanese Bushido values of
public services. They reshaped their business structures
and strategies on Model J models. This way, they rebuilt
Japan’s war-torn economy and produced the postwar “miracle”
of building up a world class power center of manufacturing
and technological innovations. They contributed to
transforming the past Imperial Japan into political,
economic, and social democracy. At present, the Japanese
economy is finally showing a solid rebirth by cleaning up 12
year debris of financial bubbles and their bursting
aftermath. The excesses of financial bubbles of the 1980’s
seem to have taught the Japanese bitter lesson that the
financial game economy of crony capitalism breeds the
culture of corruption and wrecks the nation.
Conclusions: Restoring True Business Ethics and
Manufacturing Culture of America
Business
students and executives must be taught that management is
not a pseudo-science of financial games devoid of humanity.
They must be taught that real business ethics is a truly
effective business and civic leadership. It is
characterized by high purpose, honesty, compassion (noblesse
oblige), honor, sincerity, self-sacrifice, and moral
courage. The true business ethics is not a mere compliance
with laws. It is not the governance mechanics of
corporations. Its true leadership is defined by Japanese
and American Model J firms in America. Model J firms’
raison d’etre is not to maximize their short-term profits at
the expenses of their employees and communities. As shown
by Toyota vs. General Motors competition in America, profits
follow Toyota and shuns General Motors. This is because
their customers value more highly Model J Toyota’s products
and customer services than General Motors (Model A).
Contrary to market fundamentalists’ misguided teaching, the
financial successes of Model J firms in America teach us
that it makes “dollars and cents” sense for private
businesses to embrace Model J business strategies and
structures.
To regain
the global competitiveness of the economy, the U.S. needs to
stop shedding its manufacturing activities and employment.
This requires the U.S. government and business to abandon
the three prevalent myths about America’s unemployment
situations (Louis Uchitelle, 2006: 283). First, people who
are ejected by one firm/industry will be absorbed by another
growing firms/industries. Second, job training and
education will solve the unemployment problems. Third, job
losers’ trauma and their social costs are temporary and do
not affect adversely the global competitiveness of the U.S.
economy.
It is not
a coincidence that Japanese and American Model J firms are
globally competitive manufacturing firms and high-tech
information technology firms. This is because their success
of relentless product, technological and marketing
innovations require internal and external team works and
alliances that can only be sustained by mutually supporting
networks of human and social capital. For example,
Toyota’s famed flexible total quality system of
manufacturing and marketing can only be anchored on Model J
corporate structures and culture.
America’s
market fundamentalism has been gutting her high-skill
manufacturing and services activities at home. This has
caused the jobless recovery, the chronic and bulging trade
deficits and foreign debts, households’ rising debits, and
the resultant widening income and wealth gaps (a
Latinization of America). These American problems are
hurting the global competitiveness of the U.S. economy.
The
global competitiveness of a nation can only be sustained by
a nation’s expansion of physical capital, technological
capital, human capital and by social capital of the growing
interconnected civic society (Robert D. Putnam, 2000: 541).
Sam Walton, the founder of Wal-Mart, at lease maintained the
public relations appearance of supporting things made in
America. After his death, his sons and daughters and
successors have transformed Wal-Mart into today’s
monopsonistic behemoth that is maximizing its own short-term
profits at the expenses of jobs and social costs of the
communities it operates in. It is CEOs’ personal values,
not market fundamentalist theories, that determine a
nation’s democracy and economic wealth.
The
global competitiveness requires the U.S. to restore her
manufacturing culture and activities. The manufacturing
operations and scientific and technological innovations have
disappeared from American business education that is
dominated by market fundamentalists’ harmful dogma. The
misguided economic and taxation policies of the Bush
Administration are pushing even world class firms to
outsource prematurely their manufacturing operations. Once
lost, manufacturing culture and operations are difficult to
be restored. Hewlett-Packard, a leading high technology
innovator, often shuns making their innovative products and
instead has them made by Japanese manufacturers.
Hewlett-Packard that is swayed by the Wall Street casino
helps Japanese create high technology employment through
increased exports to the U.S. and elsewhere. No wonder that
the U.S. has become the net importer of even the high
technology products that she invents. The U.S. continues to
suffer rising trade deficits that drag the economy and
eliminate quality jobs.
In July
2006, Toyota decided to build its new plant of mini-SUVs in
Ontario, Canada and passed up hundreds of millions of
dollars of incentives offered by America’s southern states.
Toyota chose Canada for its superior quality of public
education (worker quality) and a national health insurance
system. The latter eliminates private firms’ burdens of the
health benefits of executives and workers alike. And the
national health insurance has made Canada less divisive
socially and economically. This permits Toyota to install
its famed flexible and total quality manufacturing system
(Just-in-Time) on a Model J cooperative business model.
Meanwhile, General Motors has many retirees in America and
is saddled with $1,500 per car costs of its private health
benefits for its employees as opposed to $200 per car health
benefit costs for Toyota. In 2005, seniors in American
high schools scored below the average of 21 industrialized
countries in general knowledge of mathematics and science.
In advanced mathematics and science, American high school
seniors were on the bottom. Meanwhile, obsessed
ideologically to reject the stem cell research and to ignore
the global warming, the Bush Administration has been
severely restricting a wide range of basic scientific
researches (Michael Spectre, 2006: 58-69). In 2004, China
and India graduated 600,000 and 350,000 engineers
respectively. America only graduated 70,000 engineers.
From
macro economy to taxation, science, education, international
trade and health care, the policies of the Bush
Administration are tantamount to the “unilateral economic
disarmament.” America needs to reject the “New Gilded Age”
dogma of the Bush Administration and market fundamentalism.
Otherwise, America’s political, technological, economic, and
even military leadership in the world will be increasingly
lost.
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