A photograph in Sunday's Business & Finance section of John E. Robson, G.D. Searle & Co.'s chief planning officer, was identified incorrectly as being of James M. Denny, the company's senior vice president.
In the early 1960s, Ronald Reagan was host of the General Electric Theater, the General Electric Company was concentrating mainly on refrigerator sales and the G.E. slogan was "Progress is Our Most Important Product."
Today Reagan is president of the United States, appliance sales account for a far smaller proportion of G.E.'s business and the most important thing to G.E. executives -- and their counterparts in other firms -- is how to keep ahead of inflation.
Over the past two years, the advent of prolonged, seemingly permanent double-digit inflation has forced General Electric -- and most other U.S. firms -- to make fundamental changes in the way they operate their businesses.
The shift began in earnest in 1979 after a second round of sharp oil-price increases -- and forecasts of continued high inflation -- convinced business executives that this time the surge would not be just another temporary "bubble."
Since then, inflation has altered almost every aspect of corporate behavior here in the United States -- from pricing policies and product-marketing decisions to financing tactics and long-range investment strategy.
"What it marks is a profound change in the very nature and operation of American business," says D. Quinn Mills, a Harvard Business School professor who has studied the trend. "And it's apt to be with us for some years to come."
To many analysts, the shift is much like the one that inflation has forced on American families in recent years, resulting in a fundamental turnabout in the way consumers think -- and react -- on pocketbook issues.
In the face of the price spiral, individuals have abandoned their traditional pattern of saving in favor of a buy-now mentality, dipped into their bankrolls and gone heavily into credit-card debt. Many families now have two earners.
Businesses also have had to adjust to the new reality.
Perhaps the most sweeping response by any U.S. corporation has come here at G.E.'s sprawling corporate headquarters, where the company has undergone a virtual overhaul to gear itself for operating in inflationary times.
At the insistence of outgoing chairman Reginald H. Jones, G.E. corporate managers now measure everything they do in terms of what it would mean after adjustment for inflation -- pricing, profits, investments and performance.
G.E. decided to get out of the industrial heating business, for instance, largely because that component doesn't do well in the face of persistent inflation. And it pushed into plastics much for the same reason.
G.E. planners now routinely consider all moves according to what they're likely to produce in "real" terms. And the company has begun a series of intensive training sessions to teach managers how to cope with inflation.
Moreover, talks with top corporate managers in other companies show that although few firms have moved as dramatically as G.E. to equip themselves to deal with permanent inflation, almost all have undergone some substantial changes.
James M. Denny, senior vice president of G.D. Searle & Co., divides the new anti-inflation strategy into two stages: "First you take a look at where you're hurt the most by inflation and how you can minimize that exposure," he says.
"Secondly, you take a look at where you can gain because of inflation."
To Brookings Institution economist Barry P. Bosworth, former director of the Cost of Living Council, the name of the game today is to "remain flexible" by avoiding any involvement in long-term commitments.
"By gearing yourself to the short term, you're effectively indexing for inflation," Bosworth declares. Agrees John E. Robson, Searle's chief planning officer: "You don't want a lot of commitments that make you immobile."
At the same time, both Bosworth and Alan Greenspan, the former Ford administration economic policymaker who has been a key adviser to President Reagan, worry that the result ultimately may be inhibiting good management:
"More and more, resources are being directed into beating the inflation game" instead of boosting profitability, Greenspan says. "What does that add to real wealth?" he asks. "Not much."
The shifts have come in these areas:
Pricing practices. Businesses increasingly are raising their prices more sharply -- and more often -- than in past years, mainly to keep up with skyrocketing production costs.
Marketing mix. Also because of mounting cost pressures, many manufacturers and retailers have begun to move away from middle-priced goods and toward the bargain-basement and luxury ends of the range, where profits are higher.
Contracts. Almost all of the contracts most companies now sign either as suppliers or purchasers of goods or materials routinely contain some form of inflation protection, either direct pass-throughs or escalator clauses.
Compensation. The push to provide cost-of-living increases for their employes has left some companies with little remaining for merit raises, resulting in fewer of them, although they help spur productivity.
Financing. Faced with soaring interest rates, many companies are turning to shorter-term bank loans to finance their operating expenses and rebuild their cash reserves -- a trend that has crowded out some would-be consumer borrowers.
Acquisitions. Both large and small companies are rushing to get out of those businesses that do not do well during times of inflation and into industries that do. G.E. is only one example.
Accounting. Under a new accounting requirement, all U.S. businesses this year are switching to "inflation-adjusted accounting," a new system that shows how companies are faring after inflation is considered.
Asset management. In the face of high inflation, most firms have cut back their inventories. They're also demanding more prompt payment from suppliers. And they're trimming dividends to stockholders.
Investment. Business is in a quandary about investment in new plant and equipment: With interest rates so high, many firms are paring investment to only the most critical projects. But they need to modernize more than ever.
The difficulty is, these shifts may themselves by inflationary: Larger and more frequent price hikes, escalator clauses in contracts or cutbacks in merit raises all tend to protect against inflation, but also help build it in.
"What you get is an economy that is geared to adapt to and deal with high inflation, but you also perpetuate it," says Harvard's professor Mills. "It's going to make it more difficult to get inflation down over the long haul."
Bosworth agrees. "When people think inflation's going to be here to stay and begin to act on that basis in the forming of long-term contracts, then the cost of reducing inflation is about the same as continuing inflation," he says.
"Then what do you do?"
Moreover, the former Carter administration anti-inflation chief worries that a growing business stake in high inflation eventually may undercut business backing for stern government measures to slow the price surge.
"The more businesses plan on a high rate of inflation, the more they stand to lose if inflation comes down," he says. "Therefore, you get a collapse of support for government efforts to control inflation."
To many analysts, the accommodation of U.S. business to inflation over the past two years has amounted to nothing short of a major shift in corporate psychology.
Even through the mid-1970s, most U.S. business executives still regarded double-digit inflation as a temporary phenomenon -- and acted accordingly. There was no need to change. A year or two later, inflation would die down.
But in 1979, "That stopped abruptly," Mills says.Most executives now see inflation in the 9 percent to 12 percent range for the bulk of the coming decade. The thought of returning to a 6 percent "underlying" rate isn't in the cards.
What finally brought reality home was a series of factors:
The 1979 oil price hikes showed that the 1974 oil "shock" easily could be repeated. Forecasters who previously had predicted double-digit inflation only for a year or so now began projecting high inflation for the longer term.
Finally, the shift by the Financial Standards Accounting Board last year to new accounting procedures that adjust company figures to reflect inflation ended the ability of firms to shrug off the price surge's effects.
"Anyone who looks at these figures cannot go away without an awareness that something very fundamental is happening in society here," says Searle's president, Donald H. Rumsfeld.
"What it does is tell you the emperor's got no clothes," Robson agrees. "Particularly in the capital-intensive businesses, people are paying out more than they're earning. They're just cannibalizing themselves."
The sharply revamped numbers have sparked a rethinking of entire business strategies for many companies -- often leading to a quick round of backing and filling to adjust to the new realities.
At G.E., the preoccupation with inflation is carried well beyond mere changes in bookkeeping -- into the company's basic planning, day-to-day behavior, and the evaluation and promotion of its corporate managers.
While most other companies have switched to inflation-accounting only for reporting purposes, G.E. uses inflation-adjusted figures all through its corporate structure -- even in its day-to-day operations.
"When a manager comes in and says, 'Hey, look at this, we posted a 12 percent gain this year,' we say, 'Yes, but after inflation you've actually lost 1 percent,'" says Terence E. McClary, a G.E. vice president.
Warns Thomas O. Thorsen, the company's senior vice president for finance: "Executive compensation now is going to rest on 'real' results -- adjusted for inflation."
Although G.E. clearly has gone further than most firms in altering its approach, it's hardly alone in making inflation the major consideration in corporate planning.
George J. Prendergast, Du Pont's corporate planner, says his firm's internal reporting "has all been in constant dollars for years" -- though it's still strictly "on a supplemental basis." And Searle is moving in that direction.
Perhaps the most striking change has come in pricing policies, where the new, constantly mounting cost pressures have forced companies to raise prices more frequently -- and more sharply each time.
The most visible evidence may be in the auto industry. Until recent years, automakers used to increase prices only with the once-a-year change in models. Now the price hikes come several times a year -- and they're often quite steep.
"There's no more talk about companies getting caught with their prices down," says Harvard's professor Mills. "Cost increases now find their way into price boosts far more quickly. Some firms even raise prices in anticipation."
Even so, however, competition usually restrains most firms from raising prices enough to cover their cost fully -- forcing such companies to rely on further belt-tightening, or possible new products, to make up the difference.
"What you do then," says Ted C. Doty, another G.E. planner, "is put in value-appeal" -- add on a new feature, such as electronic controls, that may attract buyers who are willing to pay a higher price for the overall item.
Searle also sees some relief in developmenet of new products, where the formula is proprietary. In such cases the company essentially "can call the shots" on what prices to charge, Denny says.
The resulting cost squeeze also has forced companies to alter their product mixes toward the more costly and least costly ends of the price spectrum and away from the traditional broad middle lines.
"We're just not able to get enough capital to be all things to all people," says Du Pont's Prendergast. "That middle line may not have any push. You're not quite sure what you're competing on -- quality, or what."
There's also been an impact on corporate wage policies. Before the recent change, unions traditionally negotiated uniform wage hikes for their members, and companies took care of exempt workers -- and any merit raises -- separately.
Today, however, the demand for companywide cost-of-living increases -- combined with government-mandated cost hikes such as higher payroll taxes and pensions -- has strained corporate payrolls and left little for anything else.
As a result, some firms have cut back on merit increases, a move that some fear could prove counter-productive because merit raises are often a major incentive for workers to boost their productivity.
Warns Brookings' Bosworth: "The more that wage increases are perceived as just a general result of inflation rather than for merit, the less productive work will be."
Ironically the squeeze also has prompted many corporate managers to pare their payrolls, a step they successfully avoided in the inflation surges of the early and late 1970s. "You need to control your head count," says Denny.
The impact of inflation has resulted in a wholesale reshuffling within some big conglomerates and a push by all firms to get rid of businesses that don't do well in inflationary times and to acquire more of those that do.
G.E.'s McClary says the premium now is away from capital-intensive businesses and those that depend heavily on petroleum, and into high-technology industries that offer promise of an early payback.
"Inflation has changed the pecking order of our businesses," he says.
The shift has resulted in a few ironies:
G.E., for example, which got out of the inflation-vulnerable industrial heating and restaurant equipment businesses, is moving into raw materials, equipment repair and financing -- which survive better in high-inflation times.
The electrical business, once the major staple of the big conglomerate, today accounts for a shrinking portion of G.E.'s total output, company officials concede.
At G.E. the realities brought on by the new approach also have prompted a fit of new cost-cutting and consolidation of help squeeze more profit out of every dollar.
After inflation-accounting revealed the firm's financial shortcomings, for example, G.E. managers completely reorganized the ailing housewares division, consolidated its components and built new warehouse facilities.
Faced with mounting labor costs, the company turned to a lightweight single-sole design for its household irons, which now are manufactured in Singapore. Other products also are being sent back to the drawing boards.
Searle recently divested itself of 24 businesses that its managers concluded didn't perform well during inflationary periods. Among them was the previously profitable manufacture of CAT scanners for hospitals and clinics.
A recent survey of inflation-adjusted earning of almost 700 big U.S. companies conducted by the Cleveland-based Ernst & Whitney accounting firm may provide some hint of which industries will prosper in coming years:
The study showed inflation took its biggest toll on the apparel, leather goods, rubber and plastics industries, but did relatively little damage to publishing and broadcasting firms. However, the list was far from complete.
Where will it all stop?
G.E.'s McClary, in an assessment that seems to be shared by many other business leaders today, is not optimistic. "We are convinced inflation will stay high at least through the 1980s," he says. "For the forseeable future."
Agrees Morris Cohen, a Wall Street economist: "This new world that we are struggling with is pushing financial executives into new paths. Tomorrow's world will look more like the past 12 months than the previous 25 years."