One of the most respected business leaders in the United States over the past decade was Reginald H. Jones, who ran General Electric for nine years until his retirement last April.
For years, he spoke for business in Washington as head of its primary lobbying group, the Business Council, but now his words are directed more toward business. His departing message in a series of speeches and interviews contains a stiff criticism of executives for their part in the battering American business has taken in the past decade.
Hundreds of companies are in serious trouble, and many basic industries are in decline because of competition from overseas. Their plight has exposed a basic weakness in the way these companies were run over the past few decades, according to Jones and other business leaders and analysts. The critics say American management has been short-sighted, going for short-term benefits instead of long-term gains.
Too many corporate managers let their companies get "fat and sloppy" in the glow of the business boom during the 1950s and early 1960s, hanging on to old products and manufacturing processes that crumbled before an invasion of foreign competition in the 1970s, Jones says.
There were many reasons for the decline, he adds, such as the world's economic turmoil and tax policies and governmental regulations that seemed to place firms at a disadvantage against foreign competitors. But the leaders of America's business and financial communities must shoulder part of the blame, he says.
"Any businessman looking for alibis for his company's failings has not had any trouble finding them," Jones says. "But that is cold comfort for a company that finds its markets taken over by more imaginative and aggressive competitors.
"The evidence is that our foreign competitors are moving quickly to adopt the new technologies that will dominate the factories and offices of tomorrow," Jones said in a speech shortly before his retirement. And he warned that companies that try to make do with old ways "are in for big trouble in the 1980s."
The driving force throughout most of business in the past two decades was a push for immediate profits, an allegiance to short-term success that too often obscured the necessity of building for the future, these critics say.
The battle plan in much of business during the '60s and '70s was play it safe; take the shortest, surest route to instant profits; avoid risks and sacrifice investments in uncertain technology or unproven new products if they threaten achievement of the goals at hand.
Before he joined the Reagan administration as Commerce Department secretary, Malcolm Baldrige ran Scovill Inc., a Connecticut-based manufacturer of household and automotive products that has had its own battles with foreign competition. "While we were resting on our laurels, companies abroad were taking the long-term risks" and making commitments for the future, Baldrige said. "We were beginning to believe we would never lose. We did not develop new management techniques and got off on this ridiculous kick of trying to increase earnings each quarter.
"We played it safe," Baldrige said.
"Most large companies create a corporate bureaucracy that avoids risks wherever possible," William C. Norris, chairman of Control Data Corp., told a House subcommittee hearing in 1979. "The emphasis today is on immediate payoffs [and] in this environment, development of new products and services takes a back seat," he said. Innovation by small, technology-oriented firms--which traditionally work on the frontiers of change--slowed significantly during this period, he added.
"One of the problems in the United States, with government and business, is the very short-term, expedient approach to problems--this quarter's earnings, this year's budget: 'Get me through the next election or the next board meeting,' " said Bendix Corp. Chairman William Agee in an interview.
"We need a much greater concern for the future," he said.
"The fingers need to be pointed inward," said William J. Abernathy, professor of business administration at the Harvard Business School. "We got complacent, lazy and went to sleep" in the '60s and '70s, he said.
"By their preference for serving existing markets rather than creating new ones and by their devotion to short-term returns and 'management by the numbers,' many American business managers have effectively forsworn long-term technological superiority as a competitive weapon," Abernathy and Robert Hayes, a colleague at Harvard Business School, said. That was a fatal mistake at a time when overnight changes in electronics was revolutionizing production processes and consumer products, they add.
"There was more attention given to short-run than longer-term strategies," and that put pressure on company managers to produce profits and sustain them, said William Bowen, head of the management search firm Heidrick and Struggles in Chicago.
This criticism has become widely accepted by the business community. Of nearly 1,000 top executives surveyed this year by Bowen's firm, 76 percent said there has been a damaging overemphasis on immediate financial goals.
There is also general agreement about the damage that this short-term philosophy has done to industrial research and technology, to creativity and innovation, to risk-taking and competitiveness, and to basic industrial processes that determine the quality of the things business makes:
The growth rate of U.S. productivity--a basic measure of the efficiency of manufacturers--has fallen sharply since 1973 and lags far behind levels in Europe and Japan.
Research investments by both government and industry grew rapidly in the '50s and early '60s, but remained essentially unchanged after 1966 when inflation is taken into account.
The nature of industrial research changed as companies moved away from basic research on scientific frontiers toward applied research and development work on immediate problems. A survey of 100 leading firms in 1979 by economist Edwin Mansfield showed that the proportion of company-financed basic research dropped by one-fourth between 1967 and 1977, together with a shift away from relative risky projects.
The United States has dropped to dead last among industrialized nations in the rate of investment in new, productivity-improving machinery, compared with the gross national product.
"There can be little doubt that the creative pulse of the country is slowing down," Burton Malkiel, chairman of Princeton University's economics department, concluded as the 1970s drew to a close.
The slowdown has been a key factor in the decline of many basic industries. Autos, steel, textile machinery, electronics, footwear and tire industries all suffered tremendously from a surge of imports since the '60s. Imports take an estimated 2.6 million jobs a year from U.S. producers, according to the congressional Joint Economic Committee.
The list of targets in the sights of foreign competitors continues to grow, among them computers for businesses and homes, semiconductors, telecommunications equipment, household appliances, jet engines, commercial aircraft, electric motors, lawnmowers, chain saws, industrial robots, air compressors and the barely imaginable products of genetic research.
"The Japanese have in many cases simply taken our products and processed them more efficiently than we," said Agee. "But 80 percent of the electronics patents in the last five years have been issued to Japanese companies, so they're getting ready to compete with products as well as processes. We should be very worried," he added.
The debate is not over the problem, but over its roots. And the issue is whether this short-term drive for profits and the cautious, close-to-the-vest strategies of the past decade were unavoidable.
One who thinks so is Alan Greenspan, chairman of President Ford's Council of Economic Advisers and a member of several corporate boards of directors. When inflation broke loose in the late '60s, triggered by the costs of the Vietnam war, everything changed for American business, said Greenspan. Inflation created a tremendous pressure on corporate executives to concentrate on short-lived investments with quick cash payoffs because that was the best insurance against future surges of unexpected inflation that could ruin the value of long-range investments.
"Who's to blame? Should American managers have behaved as if there was no risk?" Greenspan asked. Some companies did, he added, and went belly-up in the process.
"I agree there has been timidity and a lack of foresight. That reflects on all of us. Foresight is available in relatively small doses. Timidity? It might not have been a bad idea," said Greenspan.
Some other observers, though, contend that these outside pressures coincided with a fundamental shift in the behavior of top management in the United States, a change in the "attitudes, preoccupations and practices of American managers," according to Abernathy and Hayes at the Harvard Business School.
They have become leading prophets of the "American business malaise," contending in articles that basic flaws in the training and performance of American managers are to blame for much of the erosion of the nation's competitive edge. Their July, 1980, article in the Harvard Business Review entitled "Managing Our Way to Economic Decline" has gone through more than 23,000 reprints.
As they see it, the industrial boom that began with the end of World War II created a sudden shortage of experienced managers, and the business schools filled the vacuum. The model for success became the hard-charging business-school whiz who could apply management theory to any situation as he climbed the ladder through a succession of short-term stints in different positions. Abernathy and Hayes call this manager a "pseudo-professional"--who lacked expertise in specific manufacturing or technological skills, but who seemed to have an all-purpose background in management.
These managers reached the top rungs in the '60s, and by mid-decade the economy was feeling the twin shocks of escalating inflation and a surge of import competition from the rebuilt industries of Japan and Europe. The new, uncertain environment that followed seemed to demand the new breed of financial and administrative experts over those with "hands-on" experience in production or technology, Abernathy and Hayes said.
A study by Golightly & Co. in 1980 reported that company chairmen and presidents with financial and legal backgrounds increased 50 percent over the past 25 years, and, according to Hayes and Abernathy, this shift in training created a managerial outlook ill-suited to bold ventures with new products or costly modernization of plants to gain a leg up on competitors.
In many large companies, the competitive juices flowed in another direction, giving rise to the free-wheeling acquisition of smaller companies in unrelated businesses, in the hope that losses in one area would be offset by gains in another. Business schools encouraged this approach to risk management and the merger trend helped the rise of executives with legal and financial backgrounds, rather than engineering or research, for example. "Those with financial training found it a lot easier to move along the acquisition route," said Jones.
The merger trend, which has grown virtually unchecked since the end of World War II, also fit in with a common sociological view of postwar Americans--an impatient people on the move, dismissing their roots and eager for instant success.
"Mergers are obviously an exciting game; they tend to produce fairly quick and decisive results, and they offer the kind of public recognition that helps careers along," Abernathy and Hayes said.
Critics of the merger wave say, however, that it has distracted attention of top business leaders from both long-term challenges and the daily struggle for quality. Norris of Control Data concludes that "many forced takeovers originate in managerial ambitions, and few serve the long-run interests of the stockholders of the acquiring company."
In many established industries, mergers became a substitute to long-term commitments to technological progress--the approach that foreign competitors would follow in catching and surpassing U.S. firms, Hayes and Abernathy said. Too many business managers failed to see that success in the '70s and '80s would depend on the ability to find new products, create new markets and provide superior quality, the two Harvard professors said. "Guided by what they took to be the newest and best principles of management, American managers have increasingly directed their attention elsewhere."
"It is this new managerial gospel," they add, "that has played a major role in undermining the vigor of American industry."
There were many other new pressures on corporate leaders in the past two decades that distracted them from attention to long-range needs--pressures that most managers hadn't been trained to handle, said Jones. "We had to learn to grasp the significance of new social responsibilities," Jones said. Civil rights and equal opportunity hiring, lobbying, public relations and corporate ethics were new, troubling issues for business in that period.
But the greatest error was in ignoring foreign competition in the '50s and '60s, Jones said. The American market was so large and so strong that many managers never looked beyond it. And when that economy got into trouble, companies didn't look hard enough for new business outside the United States.
"We were pretty cocky . . . we assumed that American producers were the best and the others were imitators, and poor ones at that.
"We found out that wasn't true," Jones said. That insight has come too late for some companies challenged by foreign competitors. For most others, he said, it can be the shock that wakes up American business management.
The second article in this four-part series will appear Tuesday in the Business & Finance section. CAPTION: Picture, REGINALD H. JONES. . ."we were pretty cocky."; Graph 1, ANNUAL U.S. PRODUCTIVITY INCREASE/DECREASE, SOURCE: AMERICAN PRODUCTIVITY CENTER, McKINSEY ANALYSIS; Graph 2, MERGERS AND ACQUISITIONS OVER $200 MILLION, COMPLETED TRANSACTIONS, SOURCE: MERGERS AND ACQUISITIONS: THE JOURNAL OF CORPORATE VENTURE