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It used to be simpler. Your company had a mainframe. Now every desk has a PC,with over 10,000

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Abstract

It used to be simpler. Your company had a mainframe. Now every desk has a PC,with over 10,000 different kinds of software to choose from.

Fields

Named Organization
Abbott Laboratories
Acme
Advanced Micro Devices Inc.
Alcoholics Anonymous
American Airlines
American Cyanamid
American Stock Exchange
American Telephone and Telegraph Company (AT&T)
Analog Devices Inc.
Apple Computer Inc.
Applied Materials Inc.
Army
Backer, Spielvogel & Bates
Baker & McKenzie
Baxter (national foodservice distribution program directed to needs)
national foodservice distribution program directed to needs of hospital market, created an alliance with Kraft Foodservice in 1989
Benton & Bowles (Advertising agency)
Boeing (Aircraft manufacturer)
Boston University
Bureau of Economic Analysis (BEA)
Bureau of Labor Statistics
Cable News Network (C.N.N.)
Campbell Soup
CBS (Columbia Broadcasting System)
Census Bureau
Chamber of Commerce
Chevrolet (Automobile Manufacturer)
CIBA-GEIGY Corporation (Parent co. of Habitrol mfg)
The parent company of Basel Pharmaceuticals in Summit, NJ. the distributor of Habitrol (TM) nicotine transdermal system ("the patch").
Coca-Cola Company
Commerce Department
Conagra
Council of Economic Advisers
Court of Appeals for the Federal Circuit
Data Resources Inc. (Atlanta based research business)
Dell
Deloitte & Touche (Accounting Company working with Lorillard Tobacco Company)
*Department of Labor (use United States Department of Labor)
Diamond (Leaf buyer)
Duke University
Eastman Kodak Co. (Kodak) (Cigarette filter mfg from 1950s to 1994.)
Manufacturers of quality control equipment for cigarette packaging
European Commission
European Community
Exxon
Federal Reserve Board
Fortune
General Motors Corporation
Grey Advertising (Ad agency for KOOL cigarettes 3/94 to present)
Ad agency for B&W's Kool cigarettes from March 1994 to present
Harley Davidson
Harvard Business School
Harvard College (Harvard Collge is the undergraduate branch of Harvard Univer)
Harvard Law School
Harvard University
Herman Miller Inc.
Hewlett Packard
Hitachi
Honeywell
Houghton-Mifflin (publishing house)
Information Center
Intel
J. Walter Thompson (Advertising agency)
John F. Kennedy School of Government
Johnson & Johnson
Kellogg (Cereal Company)
Labor Department (DOL)
Leo Burnett (Advertising/PR)
Defense
Lever Brothers (a company with many consumer products)
Levi Strauss
LSI Logic Corp.
McCann-Erickson, Inc. (Advertising firm used by RJR)
McDonald's Corp.
McGraw-Hill
Merck (pharmaceutical company)
Merrill Lynch
Miami University
Microsoft
Mitsui (JTI personnel assigned to deal with the Yakuza)
JTI personnel assigned to deal with the Yakuza
Monsanto
Motorola
National Association of Manufacturers
National Football League
Nike
Northeastern University (in Boston)
Orrick, Herrington & Sutcliffe (Firm representing plaintiffs in Falise case)
Phelps Dodge Corp.
Philip Morris & Co. Ltd. (Cigarette manufacturer, incorporated in U.S. in 1902)
Philip Morris & Co. Ltd.., was incorporated in New York in April of 1902; half the shares were held by the parent company in London, and the balance by its U.S. distributor and his American associate. Its overall sales in 1903, its first full year of U.S. operation, were a modest seven million cigarettes. Among the brand offered, besides Philip Morris, were Blues, Cambridge, Derby, and a ladies favorite name for the London street where the home companies factory was located - Marlborough.
Procter & Gamble
Defense
Ralston Purina
Random House (publishers)
RJR Nabisco Inc. (Delaware corporation, subsidiary of RJR Nabisco Holdings)
Subsidiary of RJR Nabisco Holdings Corp.
Saatchi and Saatchi (Advertising Firm)
Created smoke-free flight ads for Northwest Airlines
Scientific American (periodical)
Sears Roebuck
Securities and Exchange Commission (SEC)
Shell Oil
Sports Illustrated
Stanford University
Statistics Canada (Federal Statistics Canada)
Steelcase
Sun Microsystems
Ted Bates & Company (Advertising agency for BW)
Advertising agency for Brown & Williamson and other tobacco companies.
Texas Instruments
Time Warner Inc.
Toys R Us Inc.
U. S. Patent Office
Unilever
United Nations
United States Army
University of Arizona
University of Chicago
University of Michigan
University of Pennsylvania
Upjohn
US Army
USA Today
Wake Forest University
Wall Street Journal
Washington Post (Newspaper)
Westinghouse
Whirlpool
Wilson, Sonsini, Goodrich & Rosati
Xerox
Yale University
Young & Rubicam (New York-based advertising agency.)
Was awarded the assignment for advertising Philip Morris' Dave's low-priced cigarette brand. Y&R lost RJR Reynolds' Camel cigarette brand account in 1991 when two Y&R Executives resigned to form Mezzina/Brown, which remains Camel's ad agency (1994) (WSJ 9/13/94).
Named Person
Ann, Lea
Ann, Mary
Ascher, William
Barton, Bruce
Beard, Christopher
Beatty, Warren
Beck, Jeff
Bendel, Mary Ann
Better, Nancy Marx
Bianco, Anthony
Blake, Marry
Bloom, David
Bosak, Betsy
Bostock, Roy
Brack, Reginald
Broadbent, Simon
Brooks, Penny
Brownstein, Ronald
Burke, Sharon
Burns, Anthony
Bush, George Walker (U.S. President (R) (2001-2009), TX Governor (1995-00))
Son of George Herbert Walker Bush.
Busse, Keith
Butler, Rhett
Byrne, John A.
Cabe, Jennifer
Calloway, Wayne
Carey, John
Carter, Jim
Chanin, Jeff
Citron, Shelley
Cole, Diane
Connolly, Walter J., Jr.
Cooke, Jack Kent
Creed, Kenneth T.
Cunningham, Brenda
Dane, Doyle
Danforth, Douglas D.
Davis, Martin S.
Depree, Max O.
Dixon, Jeanne
Dove, Arlene
Eckstein, Otto
Edwards, Lynda
Einhorn, Steven
Elder, Sara
Enrico, Roger
Entin, Bruce
Even, William
Fair, Ray
Fan, Joe
Fischetti, Mark
Freeman, Julie
Gallese, Liz Roman
Geno, Diane
Gilder, George
Graham, Katharine
Greenberg, Alan
Greenleaf, Robert K.
Hammer, Armand
Harbor, Benton
Harper, Charles M. "Mike" (Chairman, CEO of RJR Nabisco)
Defense
Harrington, Paul
Harris, Louis
Hart, Gary (U.S. Senator)
Hartman, David G.
Hearst, William Randolph
Herald, Evelyn
Hilmer, James L.
Ho, Gerald F.
Hochschild, Arlie
Hogan, Gerald F.
Hoover, Herbert
Hyatt, Gilbert
Hyman, Len
Icahn, Carl
Iverson, Kenneth
Jaffe, Marc
Johnson, F. Ross
Johnson, Ross
Johnson, Samuel
Kennedy, John Fitzgerald (U. S. President, 1961-1963)
Kennedy, John H.
Kilby, Jack
Kim, Peter
Klein, Lawrence
Knight, Frank
Larsen, Judith
Larsen, Ralph S.
Leming, Lea Ann
Leonhard, Sharon
Letterman, David (tv host)
Levin, Carl
Levinson, Harry
Light, Larry, Ph.D. (Ted Bates & Co. Executive VP)
Lorenzo, Frank A.
Macdonald, Michele
Malone, Michael S.
Mare, Rick North
Marshall, George Preston
Martin, Jeanne
Mayer, Louis B.
Mayer, Martin
Maynard, John
McGovern, George
Mcnees, Stephen K.
Menn, Becky
Meyer, Ed
Meyer, Steve
Milken, Michael
Miller, Karen Lowry
Miller, Michael
Model, F. Peter
Moran, Bill
Morgan, J. Jeffrey
Morgan, James C.
Murphy, Audie
Newman, Donald A.
Nixon, Richard Milhous (U.S. President, 1969-1974)
North, Oliver
Nycum, Susan
Nycum, Susan H.
Ockenfels, Frank W.
Ogilvy, David (Advertising agent)
Owen, Judith
Paley, William S.
Palmieri, Victor
Patterson, James (Pulitzer Prize winner)
Wrote a book on the History of Cancer and gave talks about the dangers of tobacco being wide-spread knowledge
Pedersen, Laura
Perkins, Donald
Peters, Tom
Petersen, Donald E.
Phillips, J. Douglas
Phillips, Kevin
Phillips, William
Preston, Richard
Pursell, Donald
Putnam, George
Quails, John A.
Quinn, Linda
Ramey, Timothy
Reeves, Rosser (Ted Bates & Co. Chair, Famous ad exec)
Reich, Robert B.
Reinhard, Keith
Reisman, Barbara
Riney, Hal
Roman, Liz
Rose, Karol
Rossi, George
Russell, Tom
Sachs, Jeffrey
Schul, Dave
Schwartz, Felice N.
Sculley, John
Shaffer, Dick
Sharkey, Phil
Simmons, Richard
Simon, Sharon
Sinatra, Frank (Singer)
Smith, Vernon
Soder, Dee A.
Spielvogel, Carl
Steen, Todd
Stevens, Mark
Stewart, James E.
Stone, Galen L.
Stone, Oliver
Symonds, William C.
Tavenner, Mary
Trotter, Nan Daley
Trump, Donald
Valone, Anne
Victor, Stan
Walesa, Lech (President of Poland)
Walker, Norman
Walsh, Lawrence
Waterman, Robert H., Jr.
Whitney, John O.
Williams, Edward Bennett
Willms, Russ
Wilson, Joseph
Winter, Edward H.
Zamora, Jaime Paz
Zell, Sam
Zigler, Edward
Date Loaded
18 Jul 2005
Box
8673

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It used to be simpler. Your company had a mainframe. Now every desk has a PC,with over 10,000 different kinds of software to choose from. Once, only a few key people had access to vital information. Now it needs to besharedacross time zones, borders, even languages. Suddenly, there is more knowledge at our disposal, more technology in our offices than we could have ever dreamed. The challenge is to make it work.To put it together. To give it purpose.To make it productive. At Xerox, we believe that nothing unifies people and their contr-ib utionslike4heDo cumem~ The Document gives a xvork group a common goal. It leads to richer collaboration, stronger communication, a sense of purpose. T It P A T106511143
Page 3: TI06511144
XEROX lrhe Document is the glue that holds a work group together. It is the charter of its vision, the source of its communal pride. At Xerox,we build equipment to help people work together -the~loer-s anddreamers, accountants anderrginee~s,, managers and assistants. The output of Xerox equipment is a better Document. A Document that communicates ~vith clarity and precision, disseminating knowledge and ideas, understanding and progress. Xerox technology takes the best of what we all have to offer and puts it together. For,when we put it together, -is there anythingwe-can~ aeeomplish? XEROX ~4~w~o~'- The Document Company T106511144
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C 0 N T DEPARTMENTS Editors' Page 5 Book and Video Briefs 94 FEATURES BEST OF BUSINESS INTERVIEW Poland's Mr. Fix-It By MartI-A~.~ Bendel 8 He sa~ed Bolivia. Can Harvard ecortomist Jeffrey Sachs also repair Poland's devastated economy? We tailed him to Warsaw to find out how well capitalist shock treatment has worked. UPSIDE The Death of Invention B!! Mict~ael S. Malone 16 Armed with valuable patent port./blios, the gianls of the elect'ronics industry are zapping their rivals with lawsuits in a.free-for-all that threatens to short-circuit innovation. BOSTON MAGAZINE The Hea(Ihunter Who Can't Say No By Margaret Pantridge 26 Every day, George Rossi finds a huddled mass q/'laid-off e;recutives waiting to see hint. He phvns to start turning them away sometime soon. Maybe even tomorrow. Or next week. BOOK EXCERPT Bringing Up Baby B!/ Richard Louv 34 American business is J'eeling labor pai~v as working pare~ts push harder./br help witi~ day-care proble,ms. Some companies have./b'und unusual sohdio-ns. Excerpled .from Childhood's Future. M INC. Reversal of Fortune B!I Nmw!t M(+rx Better 60 After a spate of popularity d~ring the 1980-81 recession., turnarot, nd experts have rece~tly reemerged a.~" the new .[blk heroes oJ" business. Welco~te to the Workout Decade. BOOK EXCERPT Madison Avenue: At a Dead End? Bg Martiu Mager 68 The glory days o.f"hidden persuasion" have given way to a host qf new marketing tech.niq~tes, but ad agencies have bezn slow to get the message. Excerpted J~'om W'hatever Happened to Madison Avenue? WORLD MONITOR Is There Safety in Numbers? 76 By Liz R.mo~ Gallese Forecasters make billion-dollar predictions for corporate clients, yet they sometimes rely on out-of-date figures, misleading statistics, and unscientific research,. HARVARD BUSINESS REVIEW The Stateless Manager By Rubert 13. Reich 84 Today's managers know no national allegiance--lhey site operations wherever costs are lenv and profits high. Here's o strategy for keeping U.S. businesses from moving offshore. 2 IZF-.ST O~ ~.tSINE~$ QUaRTE]~I • FALL 1991 T!06511145
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E N T S The Seduction of the Americat CEO With att it~trodm:liot~ o~ p(~.qe 43 BUSINESS WEEK 44 CEOs ha~e s.('cnmbed to lhe perks and power, losi~g all sight q/" what's best.Ibr their co,)pa)Hes and .Ibr their she rch ohle)',~. THE WASHINGTON MONTHLY Taking Stock Of the Company By Mark Fisrhetti 54 htste~d ~d*fi~elq4~.tdo good.tbr th eir corn pa)t ies, .~(m~ e chi~f exec~dives (~re ,si~ffl a ph>g known as stock b~yback to reward tl~emsel vcs with ('omp(~n y About This Magazine What is this magazine's purpose? Best qf B,usi,ess Quarterly strives to give executives new insight into ma- jor business topics• Each issue con- tains analyses of important trends that affect American business; prac- tical articles that will help readers im- prove their leadership abilities; and profiles of individuals, industries, or regions that have had a profound im- pact on the business community. How are the best articles selected? The editors of Best qfBusiness scan 450 periodicals fi~)m around the world to select m%icles, and we also excerpt out- standing recently published and forth- coming business books. In addition, each issue contains an exclusive inter- view with a major business personality. How are the articles edited? Articles in Best q/'Busfltess are reprinted in their entirety whenever possible. When space limitations make editorial changes necessary, we strive to retain a complete understanding of the author's ideas. We also enhance the articles we choose with originally written articles as well as new illustra- tions, charts, and layout designs. Who publishes Best of Business? Whittle Communications L.P. edits and publishes the magazine, which is mailed to 350,000 senior corporate ex- ecutives. V~rhittle Communications is an independent publishing company based in Knoxville, Tennessee, and it is solely responsible for selecting and presenting each article in this issue. Why are there only Xerox ads in the magazine? Xerox Corporation is the exclusive advertiser in Best qfB'usi- .~ess an(I sponsors your subscription. If you have questions or comments about this magazine, contact Rea(~er Information, Best qf Business Quar- terly, Whittle C~mmunications L.P., 505 Market St., Knoxx'ille, Tenn. 37902, or call 800-25L5002. ~ Of BUStI~S QUAIQ'I]~.Y - FALL 1991 3 T106511146
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Documents speak louder than words. You're looking at an important document right now. From your daily newspaper, to reports, presentations, memos or the data on your computer screens, documents are the focus of everyone's business da.v. Documents are where people share ideas and clarify think- ing. Documents help you spread the word. Documents initiate projects. And cancel them. Documents are where people make commitments. And get released from them. In fact. 95% of all business information is contained in documents. And companies know that whatever business they are in, they are really in the business of turning information into knowledge. That's why connecting people to an inlbi'mation processing system is often not as productive as connecting pr.opl¢ to each other l]l~agh dosalmctlt pro£~sing~ At Xerox, years of experience have taught us that when you improve the way you process documents, you can increase the productivity of ~knowledge workers;' and actually improve products and services, not to mention morale, immoasurab .ly. We know because we've done it for our customers, as well as for ourselves. And we can do it for you. It means examining all the ways people communicate with each other in your company, and analyzing how effectively they use their workstations, copiers, printers and fax machines to help them put together documents that make more effective communication possible. Because producing more effective documents can make your company" more productive. And that's something that speaks Ioudb' to everyone. USA The Document Company T106511147
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Chris Whrttte Will=am Connell Chairmen, Whiffie Ye~tures Gerald F. Ho£an Maeag|n¢ Par f~er James L Hilmer Best o/ Business A PI,BLICATION OF WHITTLE COMMUNICATIONS Puldisher Ilro(~ F,~itor Rick North Mare Covell De~t Di~dor Bet! McLean Edit¢~. Nan Daley Trotter /~rt Biretta; Tom Russell ~l=te ~ Julie Freeman ~e ~ ~ Michael Miller ~ ~ff~ Lea Ann Lcming ~ ~ ~ Mau~een Boneta ¢~ Ed~= Carolyn Margcnau. Ma~ Weaver ~e ~duR Edl~ Sara Elder ~ ~ ~ David ~drews ~=~ ~ Penny Brooks. La~ Hood I~ Jennifer Cabe. D=na p~ ~ Mehssa H.M. McCoy ~ Bil Mp~ ~k~: Evelyn Herald ~ ~ ~i~ 9ecky Reynolds C~ Ed~ Becky Menn.Hambhn M~n=¢~, Co~ R~=~h: Michele MacDonald ~ R~a~h~ Jeannette Gilbe~ ~ P~ Ma~e~ Sharon Burke-Monett ~aW~ P~di~: Laura }ohnson ~a~ ¢=~ ~: Halle Musgravo ~ 0~ Kenna He~ ~ ~1~ Elizabeth Brakebdl ~ Mana~, ~ Mana~: Jeanette Nel~n Man~ ~ P~u~: Brenda Cunningham M~n~ ~: Mmhelle Baldwin M=~ ~min~m Arlene Dove Pub~l~ S~bli~ Jacquel~ Bedwell R~h ~ Sharon Simon Toedte Vk'~hakme~: Laura E~lbaugh. Alan Greenberg. Gerald F. Hogan. Edward H. Winter Whittle Cammu~cations LR ehle~ Financial Officer:. Kenneth T. Creed Execut~ Vice-PR~de~ Finance:. Sharon Leonhard Draper Exc~-ut~ Yk;~P~-t~ O~er~Jens: John H. Kennedy Execu~'~ Vice-Pre~iden~, Infocmatio~ Service~: Stcvcn L. Hicks ~dmlni,~'~do~ Shelley Citron, W~stal Easley-Shlpe, Anne Valone ~e Copynght~,'t991 Whittle Communica- ..,.~..~.:,.:,#,,., tides L P.. 505 Market $I.. Knoxville. Tenn. 37902 (615-595-5000). All rights reserved. Best of Business (ISSN 1047-3882) ~s a registered trademark of Whittle Communicatzons. NO portion of th~s magazine may be reproduced in whole or in part without written consent Best of Business Ouarte~*ly. a cont~olled-ci,culation magazine sent free to se- lected business people, is published quarterly by Whittle Communicahons Optmons expressed }n the magazine by the pubhsher or the writers are the=r own and are not to be considered those of Xerox £~(~r~3.,~J.b~s~le advertiser. Ed~toE.i~l ~r_e- spondence should be d=rected to Nan Daley Trotter. Editor. To be added to ~he ma=l=ng hst, wr~te to Cir- culation Department. Best o! Busrrtess. Include a corrected mailing label with e change of adoress Esl'baugh. Secretar~ EDITORS' PAGE The nigh Life Of Honeho s American businesses must face many challenges in the years head: Western Europe's 12-country huddle, increasingly rident environmental activism, a shrinki,n_g pool of ade- quately educated workers, and the nation s need to divert federal tax revenues to financial-institution bailouts while Japan con- tinues to pump cash into R&D. At a time when companies need internal strengths to survive external jolts to their fiscal health, a disturbing number are wrestling an enemy within: a self-serving CE O. The CEO post is a tough job that somebody's gotta do, and no one questions the jobholder's right to a just reward. Trouble is, some CEOs are pampered, perked, empowered, and emboldened beyond any reasonable clout. They strut their stuff as no-fatflt decision- makers, keynote speakers, and directors of other companies. While their companies are going through hell, they are rolling around in hog heaven. Our Special Report, "The Seduction of the American CEO," examines the practice of corporate gold mining and names its main perpetrators. Imagine, if you can, such CEO-enrichment shenanigans happening in a country in Eastern Europe: a Polish Ross Johnson, say. It could someday happen. Just ask Harvard economist Jeffi'ey Sachs, whom the United Nations has anointed as Poland's turnaround specialist. In an exclusive Best qf Business interview starting on page 8, Sachs dis- cusses his efforts to assist Poland's transition to a full-market econo- my-warts and all--and see the country successfully emerge from centuries of hard-luck stories. Unfortunately, hard luck knows no boundaries. Today's empire is tomorrow's third-world nation. Yesterday's VIP is today's topped out, laid-off manager. Boston executive recruiter George Rossi has seen how bad luck can devastate a career. As a result, he's become "The Headhunter Who Can't Say No"to scores of unemployed managers, or "executive boat people," as he calls them. Day in and day out, he tries to summon enough indifference to shoo away drep-ins. They crowd his ~taitAng room and take up his time, better spent on finding~inners far his corporate clients. But Rossi's a nice guy. Rossi's a mensch. Okay, he's a sweetheart. He can't say no, and he didn't say it to us either when we asked him to sit through two photo shoots for his story, which unfolds on page 26. --The Editors B~T OF BUSINESS QOI~RI~LY • F~M.L19~ ¢; Ti06511148
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Now getting a document published can either be a maze... / Xerox puts it together a better way. The Xerox DocuTech Production Publisher. It used to be that to achieve high-quality, high- volume document production, business had one choice: the costly, time-consuming offset process. But now you can get metal-plate, offset-like quality documents faster--with fewer steps than ever before. With the newXerox DoeuTeeh Production Publisher. Its the first tn a sertes of pubhsh~ng products that put together three distinct technologies--digital scanning, laser imaging and xerography--into one simplified publishing solution. Moreover, the Production Publisher uniquely fulfills your need for high quality, low cost and quick turnaround. The DocuTech Production Publisher offers significant advantages over the traditional offset process by eliminating complicated pre-press operations. It begins with the Production Publisher's built-in scanner that quickly captures text, line art and photos, and converts them to digital masters.The user interface then puts these digital masters at your command. No more fime-consumingAcdious - preparations.You can easily perform complicated cut-an.d-paste right at the user interface. Resizing, cropptng, scaling and merging text with photos. are all easily executed. And with the image enhancement capabilities, copies of photographs, halftones and line art can actually surpass the original in quality. T!06511149
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XEROX Oramazing. Now, program the job for simplexed or duplexed finished documents. Even booklet making becomes easier. With DocuTech's signature booklet feature, the Production Publisher will automatically turn out I lx17 or digest size (8.5x 11) collated sets ready to be stitched, folded and trimmed. The most amazing thing is that the DocuTech Production Publisher does all this and prints at an unparalleled 135 pages per minute at 600-dots-per- inch quality. And the system's concurrent input/ output means that while you're publishing one job, you'll be scanning, revising and readying others-- a major productivity boost. Furthermore, because DocuTech uses a single digital master to produce multiple sets of output, you eliminate ~vear and tear on valuable originals. In the future, you will be able to upgrade the DocuTech Production Publisher to a networked version, enabling it to function seamlessly with your existing networks, PCs and publishing software. Eliminate extra steps. Eliminate overtime. And eliminate extra costs by adding the DocuTech Production Publisher to your operation. Call~ at 1-800-DDCUTECH (1-800-362-8832) Ext. 960C and ~_~at~w~7' request a demonstration of this remarkable new machine. XEROX The Document Company T106511150
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Best of Business INTERVIEW Poland's Mr. Fix-It U.S. economist Jeffrey Sachs mends nations' broken economies. Poland may prove his toughest challenge yet. BY MARY-ANN BENDEL Photograph by Nina Ba~n, ett Jey Sachs is a man with an urgent mission. This young Harvard economist, the Galen L. Stone Profes- sor of International Trade, has traveled to Poland more than 35 times in the past two years. He still has an infectious, almost boyish enthusiasm for the tough job he faces--the continued restructur- ing of the Polish economy. To interview Sachs ibr Best of Busi- ~ess, I flew to Warsaw. "Look!" he ex- claimed as we walked near the Palace of Culture. "All these people are selling things on the street that weren't avail- able two years ago." His excitement is genuine, but so are Poland's problems. The count~" is still reeling li-om 40 years of communism; its people are uncertain of their future; there is renewed labor unrest; and demonstrators' signs com- plain now 0f WESTERN PRICE.EASTERN WA~ES. Euphoria and pessimism seem to run hand in hand as this nation strug- "It's terribly fi~straii~g to see the same mistakes being made owr and over again around the world, "' says Sac]~s. 8 ~ M" BUSINI~S I~ - F~LL 1991 T106511151
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gles to make up for all the lost time_ Sachs knows it won't be easy to keep Poland's reform plan on course. But he's con- vinced that the ke.v to free enterprise in Eastern Europe lies in its most populated country. "Stabilize Poland and you sta- bilize the region," he says. Sachs believes that to complete the transformation, Poland and all the other countries of Eastern Europe must become members of the European Community. "That." he says, '% the great prize." Western assistance and the reduction of the nation's debt are important to the achievement of his aims. "Sixty per- cent of the assistance should come from Western Europe," says Sachs. "The United States too needs to help Eastern Europe. We surely could muster $1 billion for Poland out of a $160 billion national-defense budget." In 1990, the U.S. appropriated $200 million to aid Poland. In 1992, we ear- marked $369 million for aid to Eastern Europe in general. As I walked around Warsaw, it became clear to me how much the Polish people desire the material goods that are now available yet are still out of reach financially. Groups of young men stood for a long time eyeing a new car displayed inside the central railway station. Young women gazed wist- fully at bridal dresses in shop windows. Couples browsed in the shops, looking at home furnishings. But to see the real Poland, one has to leave its cities and venture into the countryside. In many ways Poland still has a farm economy: 30 percent of the people live on farms of just five or six acres, and farmers still work their land with horse- drawn plows. The modernization of these farms will mean that, for many Poles, a way of life will disappear. Sachs is regarded as an economic wunderkind. Now 36, he x~s only 29 when he became a tenured professor at Harvard. As an adviser to President Jaime Paz Zamora of Bolix4a, he was one of the architects of that nation's debt-buyback plan; and after Bolivia implemented his stabilization program in 1985, its annual inflation rate dropped from 40,000 percent to 15 percent. Now, says The Economist, Sachs is "Poland's top Western adviser." He has appeared on Polish television so of- ten that he has become a media personality there, and at times he even worries about overexposure, "In Poland I get attacked for any number of things, even by people that I'm working with," he observes. "Being public creates jealousies among other advisers." Part academician and part economic evangelist, Sachs says he'll push on because "my life's work is to try to help desper- ately hurt countries get out of very serious economic crises." • What is your philosophy of the market economy? I take an empirical view and look at what actually works in the world. In countries like Poland, which is escaping from socialism, or Argentina, which is escaping ~om an unstable morass of policies, my philosophy is to take working econo- mies as role models. Then I try to integrate the institutions of those economies into the basic strategy for reform. • What determines whether your strategies will work? Most economic reforms in most places don't work. The differ- ence between failure and success lies not only in the state of the particular economy and its proximity to successful econo- mies but also in the quality of its leadership. My suggestions look good only when there is a government in place that has the foresight, political astuteness, and x~isdom to carry out a tough policy_ W~thout a capable government, l could stamp up and do~n and have absolutely no effec~ on anything. • Do you think that what worked in Latin America can be transferred to Poland? What has worked and what has failed in Latin America has real lessons for Poland that must be translated into local ex- perience. Each place is special. • Do you like being referred to as "an economic mission- arT" or "an economic evangelist"? I am a technically trained mathematical economist, and what I do is based on economic history. I'm not just a preacher. My main role is to say, "You can't do that. When the Brazilians did that, X happened," or, "When the Peruvians did that, Y happened." In a sense that/.~ preaching because I try to say it with fervor. And I say, "Gee, please learn." It's terribly frus- trating to see the same mistakes being made over and over again around the world. We ought to be able to transmit in- formation across national borders about what does and does not work. • in the summer of 1989 you said that Poland would endure six months of suffering and then things would improve. Do you see any concrete results of your policy so far? Let me stress that it's Poland's policy, not mine, but it's a poli- cy that I subscribe to very much. I think that the bottom has been reached and that the country has started to emerge fi-om a deep crisis. When this government came into office, inflation was running at about 40 percent per month, or several thou- sand percent per year. Now it's about 4 to 5 percent per month, or 60 to 80 percent per year. So prices have pretty much stabilized. • What did you find on your first trip here? For 40 years Poland ~-as a shortage economy. When I first came here and went to the shops, I was shocked. I saw exact- ly the phenomenon that we know about in Moscow today: ab- solutely empty stores, long lines, people spending their entire day to find some meat, cheese, sugar, or milk for their children. Now the shops of Poland are filled. And not just filled with necessities but also with all kinds of goods fi~m Western Europe because the borders are open and anything is available. • What's the advantage of having full stores when the aver- age worker makes $100 a month? They have ahvays made $100 a month. People anywhere in the world don't have enough money to buy everything that they want. But the Poles used to feel that when they were able to find something in a store, they could afford it because it was being given away virtually for free. Their only problem ~vas finding something. Now it's a shock for them ~o be unable to afford everything they see. • But do they have real purchasing power? That's a little hard to know. The economy is just beginning to change. What I am sure of is that if Poland is patient and al- lows the industrial restructuring to be guided by market forces and by integration ~'ith Western Europe, then living standards will rise sharply because Poland's cheap labor will encourage foreign companies to produce here. T106511153
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"The Poles are ve~T. proud, and they are obviously tough," Jeffrey Sachs observes. "People say that socialism deadened the entrepreneurial spirit. I think the. opposite is t.mte," • Entrepreneurs are selling things all over the streets. Yes, and now one out of every two shops on the major streets of Warsaw is privately owned. There's an incredible range of services, fl~om travel to real estate. It's a stunning change. • Official statistics say that exports are up but imports are down. Are they accurate? In the official statistics, banana imports are down by 75 per- cent this year. But thero are more bananas in Poland than there have been tbr 50 years--the place is flooded with them. What's going on? Thousands of private importers, unregis- tered and unreported, are buying bananas in Berlin and ship- ping them here in their cars. The official statistics tell all sorts of myths because the state trading company doesn't im- port the bananas arab-more. Thousands of individuals and private businesses are now in import-export trading. Exports are up probably even more than is registered, and private imports are booming. A lot of this goes unmeasured, so the official statistics have to be taken with a grain of salt. • Hasn't there been a 30 percent decline in industrial production, a drop in real income, and an increase in unemployment? Almost none of this is accurately recorded by the statistics. They ate a hall of mirrors in terms of really understanding what's going on--just baloney. • Is there still a black market? It's almost over. Black markets come for two reasons, price controls and tax evasion. The kind of black market we see in the Soviet Union has been eliminated in Poland. • How is tax reform taking shape? The systems that are going forward, namely a value-added tax and an income tax, are basically modeled on European Community standards. • The intellectuals think your plan is wonderful, but the farmers would probably disagree. You're right. In an economic change like this. there are real T!06511154
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¢ It's absolutely essential that Poland become a member of the European Community. That's the great prize." losers as well as real winners. Many farmers will do much better, but some will go out of business. One goal is to re- structure the land into bigger, more modern farms and elimi- nate farm subsidies. The children of a lot of farmers will work as stockbrokers or real estate agents or in shops or industry. That is the inex4table way of economic development. Farmers are not thrilled about this; they are confused. • Farming is the soul of Poland. Is a way of life going to disappear? Yes. This is a transition that every country in Western Eu- rope has gone through. Poland is about 30 years behind in this transition, and one should not overromanticize farming here. IL is a life of poverty and misery because farmers are eking out an existence on very small plots of land, using very primitive technologies. • Are people afraid of the change? In achieving a market economy, there are natural uncertain- ties. Wilt these people have their jobs? Will they be able to surx4ve? The anxieties are often greater than the reality. There's a terrible anguish, though, in the sense of"My God, we've thrown off communism; we made our market econo- my, and now we live in poverty." Many people thought that as soon as communism ended, conditions wouId suddenly be as they are in the West. Wha~ they are coming to terms ~-ith is that transformation of a market economy does not erase the legacy of communism overnight. ~ I've heard about"the Polish ambivalence," meaning that nobody seems to be able to make up their mind on almost anything. Why is that? Life here has been hard and bad, with great suffering, for al- most 200 years. There's an attitude that one must be wary of gains because they get taken away. One can't depend on the future or be too optimistic. The Poles don't feel confident that they'll be able to achieve prosperity, and, in general, they don't truly understand all the benefits that will come from this transition. One has to have some perspective of history and some knowledge of economics to be able to see that out of what is clearly a mess can come substantial improvement. [] But is the Polish spirit still alive? I think so. The Poles are very proud, and having survived living between Germany and Russia during two world wars: they are obviously tough. There's enormous energy here. People say that socialism deadened the entrepreneurial spir- it. I think the opposite is true. Thousands of new businesses have opened here this year. [] Only 13 percent of the workers in Poland are in favor of privatization. Why are so many against it? Put in the worst fight, privatization means unemployment to people. They think an efficient manager will come in and fire two-thirds of the work force. The issue of privatization leads to fears and doubts, and people want to see the specifics. [] How would you explain privatization to workers? I would tell them that the reason Poland has been in such a tremendous mess is that when the state owns everything, nothing gets taken care of properly. The property just gets ripped off or mismanaged. And that if they want to work in a prosperous environment, there have to be real owners with real incentives to run the companies efficiently and produc- tively. I would try to explain that this is the way to create a normal market economy with efficient enterprises--that it is the way back to Europe. I would also say that privatization does not mean mass job losses. For the time being, with wages so low and capital so scarce, it pays companies in Poland to use labor-intensive processes. [] Last June, Poland announced its plans to transfer a fourth of all state industry into private hands by December, and to give a stake to all Polish citizens. Was this part of your plan? Are you happy about this? This is an announcement, it's not yet guaranteed to be imple- mented. I'm sweating it out. There are points I disagree with, points I'm delighted with, but overall I think it's a breakthrough, tremendously creative, and I just hope they do it. • What does the plan do? It creates mutual and pension funds. [] Are the Polish people for this? There's a mixed reaction; most of them don't understand it. T106511155
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• ls the plan a model for other nations in Eastern Europe? Damn right! • Let's talk about Lech Walesa. He led Solidarity, hut he doesn't have a lot of experience in a free-market economy. "Solidarity" was the encompassing name given to the anti- co~nmunist revolt in Poland. It was led by Walesa, not to put in trade unions but to rid the country of communism. It found expression in the ~ctories. So Lech Walesa should be under- stood first and foremost as the anti-communist leader ~ith a vision of returning Poland to the mainstream of Europe. • Does he have what it takes to be presidenff [ think that Walesa is the most skilled politician in Poland. He has become a champion of economic restructuring. When he was elected, he confirmed that he strongly backed Leszek Balcerowicz, the finance minister, who is responsible for the reforms. Walesa is absolutely behind the restructuring. He's appointed an extremely radical government. He has a clear sense of the direction he wants to go in, and it's the right one. [] You have said that lack of support from the West could prove the greatest danger to Polish economic progress. How much does the United States owe Poland? [ don't think it's a question of the U.S. owing Poland support. It's more a matter of support being enormously in America's self-interest. The United States spends $160 billion a year to defend Western Europe. Against what? Well, against Po- land, Hungary, Czechoslovakia--all these struggling de- mocracies-and against the Soviet Union, which is now fi'agmenting. If one could consolidate the democratic and market gains in these countries, the savings for the U.S. in terms of living in a stable world with a stable Europe would justify the returns manyfold. • Officials from Western Europe, the United States, and Japan recently agreed to forgive 50 percent or more of Po- land's debt--one of the largest write-offs that creditor gov- ernments have allowed a debtor nation. Was it enough? Poland really can't pay anything. Nobody seriously expects to collect that money--when we do budget revenue esti- mates internally in the U.S. government, we put in no pay- ments fi~om Poland. So let's cancel the debt so that the private sector can lend Poland money. Debt-reduction for Poland is a monumentally important step in its getting fresh lending fi'om private business. What the Poles asked for was to have 80 percent of the debt canceled. The difference be- tween 50 percent and 80 percent is about $10 billion. It's no small amount of money. • Should Poland become a member of the European Community? It's absolutely essential. All of the countries of Eastern Eu- rope are promised that when their reforms are complete, they will be accepted as members of the European Communi- ty. That's the great prize. • How about the So~det Union? The Soviet Union is not a European country; it's a Eurasian counLi~. It is so i~ar from meeting the political and economic requirements of full integn'ation that it would be decades be- fore its membel~hip could be considered. • What's Poland's banking system like? It hardly existed two years ago, and until fairly recently there ~as still no mechanism for state banks to lend to the private sector. After that was put in place, though, there was an explosion of bank lending. Private companies can nowget credit from the banking system, and that's a grea£ advance. But new technology is needed--there's not even a check- clearance system yet--and the financial services are in an absolutely primitive state. The banking system is the key to the whole financial sys- tem here. So getting it to work properly is uppermost in my mind, because the other markets are not going to fill the role of providing financial services and a flow of capital. But the Anglo-Saxon system of capitalism also relies on a stock mar- ket and bond and commercial-paper markets--and Poland will not have most of that apparatus for a while yet. • What role will foreign investors play in Poland? The part they play will be significant, but it must be carefully defined because of the real possibility of hanky-panky. Some of the fears here of sellouts to foreigners are not just xenopho- bia but the result of hard experience in the last couple of years. Until a year or so ago, state managers at the end of the communist regime were just taking over their own factories. They were signing contracts with foreigners to sell off facto- ries, undeterred by any constraint. They would make a side deal with somebody and say, "Okay, you get the profits now, just give me a good management contract." Well, that led to atremendous fear that all the good proper- ty in Poland, which people depend" on for their livelihoods, was going to disappear, because some uncontrolled bureau- crat or manager was going to make a side deal. You need rules of the game, clear titles, auctions, and transparent sys- tems. Until those rules are in place, foreign investment in Poland will be limited. • Won't the presence of Soviet troops in Poland deter for- eign investors? The withdrawal of these troops is important for Poland, Hun- gary, and Czechoslovakia. It is necessary for the whole re- gion, to gain a sense of political stability. • Could Eastern Europe's whole economic transformation derail and spur violence? Violence is very unlikely. There's more potential for popu- lism or for governments to get off track and try to take the easy way out. That's a very real possibility. On the other hand, the potential gains are phenomenal. And I believe that there will be major progress. • So you're optimistic? It's what keeps me going. T H E W R I T E R ~Mary-Ann Bendei is a contributing correspondent of USA Today, Gannett Radio, and Gannett News Service. She has worked in broadcasting for many years and has filed stories from 35 countries on six continents. In 1989 she spent three months with Greenpeace in Antarctica, covering stories on the environ- ment. She lives in Los Angeles. T106511156
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There's Only One Word For How Fast You Can Edit With The New Xerox 5080 Engineering Cop~r Ford Station-Wagon There's never been anything like this copier option for designers and reprographics people. No other copier lets you create and edit and then make big copies. You edit by remote control. An int'rared frequency beams your pre-set coordinates into the copier--and Zap--you can edit up to eight sections on a plan. Its electronic cutting and pasting eliminates much experimentation time. And the 5080 is equally talented as a straightforward engineering copier. It delivers five E-size prints per minute, seven D-size or ten C-size. It accepts documents from 8 l f2" x 11" up to 36" x 192" or any manageable length-- and makes prints in that same size. It will produce up to 99 prints at a time from one original. It prints onto plain and transparent bonds, velh, ms, and drafting film. The 5080 feects media from three rolls, an adjustable cassette, and a single-sheet bypass tbr prints on stock not already loaded in the 5080. This single-sheet bypass feature also permits copies of special Ti06511157
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ZAP!! Ford StaZion-Wagon originals like paste-ups or composites. A zoom lens allows reproduction ratios to be varied in .1% increments froth 45 to 200 percent of original size. If your plans are constantly changing, the Xerox 5080 is a change for the better. For more information on the Xerox 5080 or any other Engineering and Graphic Products, call 800-TEAM XRX ext. 9500A. ~',~'National ,~,d~,Quali~v ,~t'~l~Av~a rd X'~'ROX ~/~r,~1989 The Document Oompany ~IrW~r r T106511158
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The Death Of Invention Angry courtroom battles over intellectual property have pulled the rug out from under the U.S. electronics industry. BY MICHAEL S. MALONE Illustratian by Steve Meyer T cavernous banquet reom at the Red Lion Inn in San Jose is empty of all but a handful of sleepy busi- ness and technology reporters half-doz- ing in the front rows of a sea of folding chairs. All of them believe they have better things to do, but their editors have read the photocopy of a handwrit- ten letter that promised "The Biggest Announcement in the History of Elec- tricity!" So they wait, thinking the event might make an amusing novelty story for the back pages. Suddenly the main door to the hall bangs shut with a sound that is like a shot in this empty hall. The reporters turn to look--and then sit bolt upright in shock. Few of these men and women have ever seen a ll2-year-old man, and stand- ing there tottering in the threshold he makes for an awesome sight: a halo of thin,,~white hair, spider legs that seem barely capable of supporting him, and a face like a powdered skull. The man shuffles and coughs his way to the podium, yet during that time none of the reporters moves. They are Ti06511160
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"All's well that ends well," says inventor Gilbert Hyatt, surrounded by the conventional semiconductors that may make him rich on royalties. filled with fear, sensing something mo- mentous is about to occur and that they will have to announce it to the world. ~l~e old man pulls a piece of paper out of his waistcoat with spindly, palsied fin- gers and unfolds it. Then, in a dusty, strangled voice he says very slowly, "My name is Arnold Wambgnass. In the year of our Lord 1893, as a brakeman on the Great Northern Railroad"--he pauses to lick dry lips--"I invented a switch to be used with Mr. Edison's electricity." The roporters sit wide-eyed. Switch! The old man continues: "In October of that year, right before the big snow, [ filed for a patent. Nobody believed me, but I've been refiling and sending amendments ever since. Hell, I've been working lately with the great-grandson of my original lawyer." He holds up the sheet of paper. "Welt, yesterday I got this here letter that says I finally got my patent on the first electrical switch." "Oh my God!" shouts one of the re- porters. "You mean... !" "That's right, sonny," says the cente- narian. "Everybody in the whole world that builds cars. computers, TVs, clocks, lamps--everything electrical there is--owes me a pile of money. I fig- ure it r~as ~o ~omethi_ng like"--he licks his lips again, this time lasciviously-- "$200 billion from U.S. companies alone. And ifI don't start seeing some of it real soon, I'm gonna sue me some cor- porate hides." Not too long ago that story would have seemed fantastic. Then in July 1990 along came Gilbert Hyatt, an inventor from La Palma, California, to turn the entire semiconductor industry on its ear. Hyatt, who after a 22-year fight with the U.S. Patent Office, had finally succeeded in winning a patent for his design of a microprocessor--the logic chip used in everyday items from per- sonal computers and pocket calculators to microwave ovens. The myth of the old man with the core patent had come hor- ribly true. And like the old man, Hyatt, who contends that he invented the com- puter-on-a-chip in 1968, wants the semi- conductor industry to start paying him royalty fees. Who's suing whom HYatt is just the latest and biggest stunner in what, in the last few years, has become for the electronics industry an explosion of surprise announcements, angry litigation, and hurried filings for patents and copy- rights. Each day, the papers carry, if not the story of some new lawsuit over the infringement of some obscure patent, t_h~n a worried appraisa! of the ~lden bta'st of U.S. patent filings by Japanese corporations. Consider just the major suits of the last two years: • Lotus Development Co~'poration sues Paperback Software International and Mosaic Software Inc. for imitating the copyrighted appearance of its 1-2-3 spreadsheet. Lotus wins, provoking p~)test throughout the industry. • In a much-publicized case, Apple sues Microsoft (the company that arguably saved Apple in 1985 by rushing to bring out Mac software) and Hewlett-Packard for infringing on the look-and-feel of the iconic Macintosh interface. Both compa- nies countersue. • Not to be outdone in the software-pat- ent fight, Ashton-Tate sues Fox Soft- ware Inc. and the Santa Cruz Operation Inc. over copyright infringement of its dBase spreadsheet product. (To com- plete the circle, Lotus sues the Santa Cruz Operation as well.) • Meanwhile, over in the semiconduc- tor industry, Advanced Micro Devices (AMD) and Intel are throwing lawyers at one another over AMD's claim that it has the right to sell its own version of an Intel chip. Intel has eountersued, claim- ing AMD infringes upon the copyright for another of its chips. • Proving that things in Texas really are bigger, if not better, Texas Instruments (TI) proceeds to sue everyone in sight. until the patent department starts mak- ing a bigger contribution to the compa- ny's profits than most of TI's product lines--to the point whe~e TI's spokes- man, Stan Victor, can proudly claim that "over the past four years we've col- lected more than $600 million in royal- ties." In a rebuttal of traditional Texas hospitality, TI whacks neighbors Tandy and Dell. Tandy countersues. • Then, in a move perhaps most em- blematic of the straining-on-a-gnat nature of its aggressive patent protec- tion strategy, TI sues a host of young chip companies, including Cypress, tegrated, LS[ Logic, Analog Devices, and VLSI for infringing on a patent cov- ering the way chips are glued into their plastic packages. This move provokes VLSI's spokesman, Bruce Entin, to claim in a Wall Street J(mntal article, 'q'I seems to have made a practice of using its patent portfolio as a way to pro- duce profits rather than as a way to pro- tect intellectual property'--~he first truly prophetic statement on doing businessia high techinthe 1990s. In the same newspaper article, Dick Shaffer comes up with the second: 'q~he ques- tion of ownership is so complex that it makes rich men out of patent lawyers." • Keeping up an old rivalry, Motorola T106511161
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tries to match TUs new business thrust by suing Japanese giant Hitachi over microprocessor-design infringement and ends up getting its head shoved in. In a split decision, Hitachi wins an in- junction to stop Motorola from shipping a new microprocessor--a move that would, in turn, almost paralyze Apple and Hewlett-Packard (to complete an even greater circle), m Sun Microsystems, "" and Next. But sup- plies of the chip are never interrupted, and the two firms quickly settle. • TI also puts the muscle on the Japa- nese, hammering its big industrials with demands for exorbi- tant royalty payoffs of as much as 10 per- cent of wholesale val- ue on everything back to the original Kilby integrated-cir- cuit patent--royalties that could reach $750 million per year from that seminal patent alone. Faced with this shake- down, Fujitsu and Mitsubishi start ne- gotiating cross-licensing agreements. But as they are in every new industry that rewards single-minded fanaticism, the Japanese are already the world lead- ers at developing intellectual property. As a spokesman fi-om Toshiba says tell- ingly, "We have some important pat- ents that have been licensed to [Texas Instruments], so we are going to use them as leverage in negotiations." And that leads to the 1990s' third pro- phetic statement: "When it comes to ob- taining patents, don't even think about messing with the Japanese." "When it comes to obtaining patents, don't even think about mes. ng dth the Japanese," Intellectual warfare By the end of the summer of 1990, printers all over Silicon Valley could be heard ham- mering out patent appli- cations as companies raced to build defensive patent portfolios to swap for their corporate lives with intellectual property predators. And in numerous executive offices, C]~Os made mute prayers of thanks that, except for a com- paratively friendly shakedown of Sun, IBM had not decided to rummage through its vast patent vault. Like most great conflicts, the Great Patent War of the 1990s has taken on its own lexicon of military terms: cluster pa~cnting, bracke~ patenting, chai~-fil- ing--words out of a legal artilleryman's field manual. There have always been intellectual- preperty skirmishes in the electronics industry, but for years they were rela- tively infrequent and often entertain- ing. Now, as VLSI's Entin has said, "The semiconductor indus- try's fortunes seem to be decided more and more in court than at any time in the past." Increased litiga- tion, most industry observers agree, be- gan in the early 1980s with two unrelated events. First, the venue for all patent disputes was shifted to the U.S. Court of Appeals for the Fed- eral Circuit. "That is the single most important cause of the recent explosion of patent litigation," says Roger Borovoy, currently of coun- sel in the Pale Alto, California, office of law firm Brown & Bain, who, as corpo- rate counsel for Fairchild and then In- tel, fought the first great patent battles of Silicon Valley. "The federal circuit is populated by patent experts. And, ei- ther collectively or individually, they've decided to put more muscle into the pat- ent system." :.:%:':x".. :;'.:~: :4 :'.~. ¢~ ': : ':..:':.':. ',::~ ":.: Over at nearby Baker & McKenzie, partner and patent attorney Susan H. Nycum agrees: "The federal circuit un- derstands patents; they are technically competent. So companies began to find there were now intelligent ears on the other end, that more patents began to be found valid--where before more than 50 percent were found to be inval- id. The court never said it was swinging the pendulum the other way, but indeed it was." Says Borovoy: "They've limited by judicial interpretation what previously were successful defenses against a pat- ent. For example, it is now much harder to combine references to force the rejec- tion of the other side's patent. It used to be that if you could find two or three ref- erences that could collectively show the invention, you could defeat a patent. You could go to someone skilled in the art, paste all the references up on the wall in front of him, have him spin his head around to suck up all the informa- tion on those references, and then, if he could come up with the invention based on the information available at the time of the filing, that patent was deemed invalid. "Not anymore," he says. "Nowadays, the federal court says you must show a reason why these references should be combined, a reason that must reside in the references themselves. "The federal circuit court," continues Borovoy, "also has changed the rules re- garding what used to be called fraud on the Patent Office and is now known as in- A U;S:PATENT Of the 102,712 U.S. patents issued In 1989, heady half went to residents of other countries, raising g~obal compet[tien for the rights to inventions to new heights. T106511162
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equitable conduct. It used to be that if I had a ref- erence from a foreign appli- cation for a patent on the same invention--say from an office action in Germa- ny-and I didn't show it to the U.S. Patent Office, that was considered fraud. Now the court says the other par- ty has to prove that I con- cealed that information with intent to defraud. And you can imagine how hard it is to prove intent .... After all, there's only one witness." Another change by the federal court that Boro- voy calls "particularly hor- rendous" is a greater willingness to accept chain prosecution. "Take a guy like Jerome H. Lemelson," says Borovoy. "He has now apparently invented every- thing but a 10-foot pole for people not to touch him with. To hear him tell it, he invented compact discs, VCRs, camcorders, Hot Wheels, plasma etching for semiconductors. He's after everybody. Seems he filed ~ for a patent application in 1960 on a jukebox with some sort of loading mecha- nism for records. "Well," adds Borovoy, "he keeps the thing in the Patent Office and keeps filing continuation applica- tions. As time goes on, these new appli- cations start covering things like how you load VCRs. "It just shows that with the possibili- ty of chain prosecution open, you can prosecute long enough and keep amend- ing the patent to follow the latest tech- nological advancements. That way you can end up with your claim around virtu- ally everything." It is just such chain-filing, observers say, that may have earned Gilbert Hy- att one of the biggest payoffs in business history. And according to a recent report in the Intellectual Property Update of the law firm Orrick, Herrington & Sutcliffe, '~£here is a growing body of law that holds individual directors and officers liable in the context of intellectual-prop- erty litigation. '~raditionally a corporate director or "The U.S. entrepreneurial system is being, badly jeopardized by curren~ paten~ law," says industry observer George Gilder. officer was not held liable for the 'tor- tious' conduct of his corporation or its employees .... The modern trend, however, is for plaintiffs to sue officers and directors personally, as well as the corporation." The Japanese offense he second major trend that has set offthe Great Patent War of the 1990s has been the grow- ing internationalization of the intellectual-property business. Not sur- prisingly the Japanese seem to have spotted this coming, identified the weaknesses in the American system, then systematically exploited those weaknesses to become, if not the world's greatest inventors, then at least the world's greatest patent tilers. It is known that many of the largest Japanese electronics corporations er~- ploy entire departments to systemati- cally comb through U.S. patent filings in order to track individual American inventors and companies as they leave a patent trail to- ward some new break- through technology. The Japanese firm then tries to beat that opponent to the goal. Or, short of that, to surround that patent with a cloud of so many incremen- tally related patents that the core-patent owner is es- sentially bracketed, unable to move, forced to negoti- ate licensing with the Japa- nese. Says Nycum, "The Japanese have been very, very assiduous at studying U.S. intellectual-property protection and how to use it. We haven't been as inter- ested in what's going on in Japan." Conversely, Japanese companies will try to create a similar cluster around their own patents, tiling for minute variations in proc- ess, manufacture, and ap- plication, in the hopes of snaring unsuspecting vio- lators. Says Borovoy, "The Japanese will protect a tech- nology by filing on all its features. If you file enough, you can make it impossible for anybody to compete with you." One industry observer alarmed by this trend is the noted author and busi- ness commentator George Gilder. "Last year," he says, "Hitachi won 40 percent more patents in the United States than IBM. In fact, the top four patent winners in this country were Japanese. Some of this was bracket patenting, but most ~vas cluster patenting around any small advance, usually dealing with process. '"Ihe fact is that the U.S. entrepre- neurial system is being badly jeopar- dized by current patent law. For 30 years we gave the Japanese low-cost intellectual property. So now that the Japanese have mastered the patent process and focus on it with the same resolution they bring to bear on any project they take on, suddenly the United States is massively and earn- estly enforcing patent law. Now that all the horses have escaped, we've sud- denly decided to doubly and triply lock 20 ee~oe~'ree~ • FALL1991 T106511163
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the barn. It is a perfect example of how industrial policy always fights to the last--we're still remedying abuse from the days when most patents were Not that Gilder blames the Japanese. On the contrary, he argues, the Japa- nese companies were provoked by cer- tain shortsighted U.S. firms and made the intelligent choice of learning the game from their opponents. 'q~nat started all of this," says Gil- der, "was TI's determination to exploit its patents by suing everybody in sight." As integrated-circuit co-inventor Jack Kilby told Dataquest's patent ex- pert Judith Larsen, '~he corporate ob- jective was to swap patents with other people so they didn't have to pay any royalties and didn't have to be bothered with it. The days of little value are past. Companies that develop original de- signs and original practices will try very hard to protect them." Kilby, of course, is from Texas Instruments. Says Gilder: "The irony is that TI can exploit these old patents for only so long. They're starting a game that they are going to lose. That's because the Japanese are coming on with incom- parably more patents than TI. And the U.S. system offers no home-court advantage--that was proved when Motorola lost to Hitachi. TI's assault on Silicon Valley is going to boomerang on them. ]Vlotorola thought they could fight the patent game with Hitachi. But once lawyers come in, it's lawsuit time, and you can forget it. "The problem with changing the rules," adds Gilder, "is that it leaves American firms vulnerable. It leaves Silicon Valley vulnerable. Companies like IBM and Intel don't have a lot of patents because they didn't file for them." "After people saw what TI was mak- ing [on patent litigation]," says Bo- rovoy, "everybody started combing through their patent portfolios to see how much they could make." Profit isn't the only motive for rum- maging through the patent portfolio; survival is another. To paraphrase the 19th-century military strategist yon Clausewitz: "Patent litigation is a con- tinuation of politicshy m~o~ means." Or perhaps philosopher and writer Samuel Johnson would be a better source: "Patent lawsuits are the last ref- uge of dying companies." '°rne United States has to come to terms with this," says Gilder. "Patent- ingis no longer areflection ofrealinves- tigation, but a way of organizing to exploit the patent process--a matter of megaton litigation. This country is not going to be competitive if, l~e TI, its biggest source of income comes from patent settlements." Tragically, where the patent war will probably hit hardest =.= will be at the most m delicate point in to- day's electronics industry: new entre- preneurial start-ups. "Little start-ups are especially vulner- able," says Gilder, "because they typi- cally don't have large portfolios." Says Borovoy, "It's coming down to this: You either pay patent royalties, or you pay for litigation. Pay a single3 percent royal- I ty and you can survive; get hit with five of them and you don't. Nobody can pay 15 percent royalties and stay in business." The average patent suit lasts three to four years and costs each side $2 million to litigate. Get hit with two suits and the price doubles. How does the little com- pany pay for that? "The only solution I can see right now (for new start-ups) is to make patent defenses part of the company's ini- tial business plan," says Nycum. "That means developing an intelligent patent strategy and using your portfolio as both a shield and a sword." "This country is not going to be competitive if its biggest source of income comes from patent settlements." Survival tactics n the meantime, what can compa- nies do to survive the Great Patent War? Dataquest's Judith Larsen has recommended a number of strategies. In the short term, that includes filing more patents, getting to know intellec- tual-property experts, and considering joint actions with other firms. Over the long term, she calls for dis- cussions of the meaning of intellectual property asitrelatestahigh tech, devel- opment of adequate protection for such technologies as compilers and comput- er software that combine copyright and patent characteristics, American will- ingness to join international agree- ments such as the Berne Convention, more attention to enforcement, and ulti- mately, the revision of U.S. patent laws so they are appropriate for emerging technologies. What form would such revisions take? One possibility, both Borovoy and Ny- cum agree, is to change the nature of patent filing itself. Currently the 17- year protection me- ter begins running the moment the pat- ent is awarded, even if that follows 20 years of refiling amendments. In most countries, in- cluding Canada, the duration of the cover- age begins from the date of the first filing. This would preclude chain-filing. On the other hand, it might be unjust to the pat- ent applicant who spends more than two decades fighting for a just reward, only to run out of time. Another area in which crucial changes should occur (and may have already begun, given some recent deci- sions) is in limiting the so-called Doc- trine of Equivalence. This doctrine was designed to protect patents against such fraudulent acts as competitors attempt- ing to circumvent the patent by making minor and important changes to their products. "I think they should simply abolish that doctrine," says Borovoy. "It would save untold billions. My attitude is if you don't want that kind of infringement then, dammit, claim it right in the first place. Then if you wanted to find out if you were infringing on somebody else's patent, you could pay $1.50 and know exactly. Right now, you go to an attor- ney and pay $25,000 for an infringement opinion only to have him say, 'Well, on the one hand.., but on the other hand .... ' The doctrine may have seemed like a good idea at the begin- ning, but it's expanded way beyond what's reasonable." The one proposal for change that seems to get the most support, how- ever, is to have tighter controls on the notion of originality. Says Gilder, "What we need is to re- turn to the requirement for real origi- nality for a patent to be awarded, for k m~T Of ~ ~. F~L~ 1~Sl 21 T106511164
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At the U.S. Patent Office examiners are pressured to push applications through the process as quickly as possible. 'nonobviousness.' That would protect the inventor with the key idea to make sure he gets the deserved compensa- tion. At the same time it would stop cluster patents and bracket patents, this patent-law-as-power struggle. The problem right now is that technology is moving so fast that nothing seems obvi- ous to the guy in the Patent Office." A house divided Just how are things in the U.S. Patent Office? These days, the federal circuit court is getting most of the attention in the pat- ent war. But ultimately the process, good or bad, begins on the desk of the patent examiner. One person who knows that world as well as anyone is Hunter L. Auyang, an attorney at Wilson, Sonsini, Goodrich & Rosati in Palo Alto, California. Auyang spent three years at the U.S. Patent Of- rice, parlaying his engineering degree to work on electronics patent applications. Auyang sees the Patent Office deeply divided in two directions. One split is be- tween the types of new inventions being scrutinized. "Keep in mind," he says, "that the Patent Office looks at appli- cations in everything fi~om high tech- nology to commodes. And, as you can imagine, there's a big difference in the workday [of} someone who only has to look at the newest chair designs and another examiner who has to stay abso- lutely state-of-the-art on something like semiconductor-processing equipment." Yet, says Auyang, both examiners are held to the same performance standards for promotion. The second schism, according to Au- yang, is one of age and orientation. The senior examiners were typically hired during the Carter years. Many of them were older to begin with and on their second or third government careers. The Young Turks, by comparison, came in during the big push of the Reagan years to beef up the Patent Office and reduce the average pendency time to just 18 months. This group began young- er, is more ambitious, and typically more likely to jump ship for a more lu- crative career in private practice. The Young Turks also tend to be less experienced. Says Auyang, "Because of the government salary structure, it's hard to attract experienced senior engi- neers. You simply can't support a family in Washington on the salary." The high- est salary level--usually reached after about seven years in the Patent Office-- begins at just $50,342 per year, less than that made in industry by many en- gineers fresh out of grad school. Probationary employees go through a nine-month training and check-out pro- gram, says Auyang, "and you discover that what you learned in school is not what you need to know in the Patent Of- rice. Assignments to scrutinize applica- tions are given almost immediately but are heavily reviewed by ~periors." Organizationally, patent examiners are divided into large thematic hierar- chies, such as chemical, mechanical, and electrical. These are further subdivided into groups, then into individual "art units" focusing upon a particular disci- pline. These units typically contain 15 or 20 examiners, ranging fi'om probation- ary and junior up to primary examiners with full and partial signatory powers. But it is the Patent Office's system of rewards and how they are administered that is usually the topic of greatest con- cern to outside observers. "Though the system is based upon meeting both qualitative and quantitative goals," says Auyang, "basically it works as a quota system--and a lot of people use it to their advantage. "Goals are set and your progress is tracked through biweekly reports that contain all the stats, such as cases on the docket and percentile standing toward quarterly and yearly goals. You are put under tremendous pressure to reach those goals, which are especially diffi- cult to meet in the high-tech areas, be- cause incentive awards are based upon exceeding your aim." In practice, observers say, this means that examiners are given a cer- tain number of hours perceived ade- quate to research each application. If you are examining chairs, it is pretty easy to meet that standard, but if you are looking at a new microprocessor, even the greater hours you are given may not be enough. As a result, exam- iners will often hoard time from easier jobs to use on more difficult ones. Examiners are also rewarded for mov- ing applications through the system effi- ciently. The result, needless to say, is an incentive to accept applications quickly. Not surprisingly, Auyang remembers that during his tenure, "The overall al- lowance rate was extremely high, some- thing like 70 percent of all applications. And in my particular area, semiconduc- tor-manufacturing equipment, it was close to 90 percent." What would Hunter Auyang do to im- prove the U.S. Patent Office? As he sees it, the individual examiner needs more guidance. Operating almost autono- mously, the examiner is often pulled back and forth between competing de- sires: to help the applicant while not let- ting lousy applications go through. Further~nore, says Auyang, the or- ganization of the Patent Office "doesn't T106511165
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allow much opport-Lmity to discuss ap- plications or technology with fellow ex- aminers," often leavh~g the examiner in the dark about both the state-of-the-art and the pending, overlapping applica- tions lying on nearby desks. A good step, says Auyang, would be for the of- fice at last to achieve its goal of placing a networked computer on every exam- iner's desk. To counterbalance this increased cen- tralization, Auyang also recommends that the position of patent examiner be given the kind of honor its European co~unterpart receives. In Europe, the typical examiner is a Ph.D. and proud to get the work--"It's an honored and re- spected position," he says, "and you are given time to do things right." Accom- plishing this shift, Auyang says, would require the U.S. Patent Office to raise salaries and increase support personnel. Better wages and more computers. Not likely in the current budget atmos- phere in Washing£on. One person who, not surprisingly, thinks the patent system already works quite well is Gilbert Hyatt. If TI is the fomenter of the Great Patent War, then Gilbert Hyatt is its Audie Murphy, an anonymous figure who suddenly, inexplicably, becomes its emblem. Every paper in the nation carried the news about Hyatt and his controversial patent. Fortune magazine came calling. So did Time. Hyatt, so out of the main- stream of the high-tech revolution that he even answered his own telephone, found himself in the middle of a media blitz. Paris Match photographed Hyatt standingin his front yard surrounded by microwave ovens and othermicroproces- sor-bearing products whose manufac- turers might soon b e mailing him royalty checks. A living legend The apotheosis of Gilbert Hyatt has given the electronics in- dustry a new nightmare to contemplate: How many other Hya~ts are out them, slowly working their way through the patent system? In most countries the clock on patents be- gins with the date of filing. If that were true in America, Hyatt's earthshaking patent would have already (lied, lea~ing him with only a footnote of glory. But Hyatt's patent won't expire until July 17, 2007. By then Hyatt will have perhaps made billions of dollars in royalties. Daniel Klesken of Prudential-Bache has publicly estimated that Hyatt could pull in as much as $40 million a year from In- tel alone, $10 million even at a 0.5 per- cent royalty rate. Or, in an ugly sort of closure, Hyatt may decide to take his lotto winnings in a single lump sum now by, say, selling the rights to the patent to TI. Until he decides what to do, the electronics in- dustry can only mutter, .moan, and pub- licly choose up sides. ~t ON THE RISE Both the number of U,S. patent applications dlly since the early 1980s, ~ls ~o, the Federal Circuit To talk to Hyatt is to hear a man who is not as legally naive as his opponents may hope. "I think the expression is "All's well that ends well.'" he sa.vs. "The patent system works. The Patent Office invested a tremendous amount of effort to make sure it awarded a strong and valid patent to me. And I appreciate the scrutiny." Hyatt believes that he was a benefici- ary of the shift to the federal circuit court: "It forced case law associated with patent litigation to coincide with patent issuance. So the big change was in patent litigation, not in prosecution. In the interim, however, the system recognizes the importance of intellec- tual-properkv rights, and these rights are being strengthened. "What semiconductor companies may and may not do [about my patentl," says Hyatt, "is highly speculative. Most peo- ple who've commented on my case have never read the file history. So it is im- possible for them to speculate on what ~ill happen .... " But doesn't Hyatt fear bloody and protracted court battles? "It won't be bloody for me," he says. "if there is an infl-inger, the patent laws are so fair that the infringer will be at the disadvan- tage. Courts have established that the royalty rate for an infringer must be greater than the estimated rates with- out litigation. Because of the thin prefit margins in most of these markets, if forced to pa~v a greater royalty rate, an infringer probably could not afford to compete with licensed competitors." Thus, Gilbert Hyatt believes that he. justly, has the electronics industry cor- nered. And he seems to take as much pride in this second pioneer role as in the first. "I have spoken to associates at the top of the patent field," he says, "and the general consensus is that the pres- ent environment will last many decades, because the protection of intellectual property is now recognized as being as important as protection of other person- al properties like your home and car. Consequently now that the law recog- nizes this issue, the protection of intel- lectual property should strengthen in succeeding decades rather than weaken back to the old rationale." Some critics predict the hired guns of the electronics giants will descend on Hyatt and crush him for his presump- tion. But if Gilbert Hyatt is worried, he certainly doesn't show it. In fact, Hyatt has even rented a post-office boxin near- Bf~-TeFB~S~NE:$~ Q~JI"I13~Y • F.M.L19~1 23 TI06511166
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by Cerritos, California, to handle the avalanche of queries from companies around the world about obtaining a li- cense on his patent number 4,942,516. As Susan Nycum observes, "I have a feeling we may soon see some more Gilbert Hyatts out there." T. J. Rodgers, the outspoken CEO of Cypress Semiconductor, is furious with such people as Hyatt, who have helped cre- ate the current cli- mate. "You want to know what effect the patent war is having on business?" he asks. "Fine. Today is F~- day and not an atypi- cal one. At 8 a.m. I was at Wilson, Sonsi- ni meeting with Wilf Corrigan (LSI Log- ic), A1 Stein (VLS]), John Carey (IDT), and six expensive lawyers, and we spent three hours I hashing over a T1 suit. Then I came back here and spent a half hour instructing my people on our planned legal defense. "After that, I had an interview with The Wall Street Journal, and the ro- porter got really interested in litigation, so I spcnt an hour on that with him. Now I'm talking to you. Meanwhile over in Tokyo, Mr. Yasafuku-san of Hitachi has spent the entire day figuring out bow better to kick U.S. butt. That's why the Japanese have the advantage. It's not the cost of the litigation--hell, if I could just pay money it'd be easier--but the time could be better spent." What's next? Rodgers's new career as a part-time patent litigant may be a glimpse into the daily life of many CEOs of high-tech companies in the '90s. It is not a pretty picture. "I keep track of all the lawsuits," Rod- gers says. "To date we've had 23 suits or threatened suits, and we've ~von 20, lost none, and have three pending. And we've never been taken to court. You'd think with all these actions that just once one company would be serious enough to take us to court. "Motorola sued the employees [we hired from them] personally, said they were stealing property," Rodgers adds. "When I hear orators out there defending intellec- tual property, I want to throw up. Sleazeballs." '~Faey even told the only woman in the group that she ought to start her own bake~T because she wouldn't be work- ing on microprocessors again. They filed in camera, and now they say they v¢on .... ~q]Ce hired one guy from AM_D, and they sued. I read the suit and realize that it's just a verbatim copy of the ~ Motorola lawsuit. "- They even forgot to change the pronouns to account for it being a single employee. couldn't believe it. I told AMD to screw off '~fhat was the only time we got close to court," Rodgers says. "AMD lost the pre- liminary injunction hearing and started backtracking. With Moto gone, they were hanging out there I alone. They wanted a hiring agreement; I said, 'Screw you.' We finally agreed that they could pick seven employees that I couldn't hire for four months. We got it notarized. Not long after, I call up the [AMD] officer with the list. And the company tells me, 'He's gone, and we lost the list.' Can you believe that? "So when I hear orators out there de- fending intellectual property, I want to throw up. SleazebalJs." Rodgers is especially upset about his run-in with Texas Instruments. "Now, TI is our llth-largest customer," he says. "I personally led the way to get the International Trade Commission to shut down foreign assembly equipment fi'om coming into the country and helped TI get that business. I bought $250,000 worth of their machines. I sell critical chips to one of their divisions. And then the sons of bitches sue me and don't even warn me before they do it. I tell you, it sounds to me like a going-out-of- business plan when you start suing your customers. It's just pure greed. "I tell you," adds Rodgers, "the whole system has gone berserk. TI is leading it. And AMD is not far behind. Mean- while the Japanese are seeing ~¢hat's going on and filing for every preemp~ory patent they can think of. And if we get into a patent war with the Japanese, we are going to take some heavy losses." Private-sector and international com- petitors aren't Rodgers's only problem. He recently received a letter from the legal office of the Department of the Ar- my that reads in part: "The United States Army has applied for worldwide patent protection on passive compensa- tion for such null-output offset [in ana- log circuitry] and expects a United States pa~ent to issue thereon in the very nero" future." "Can you believe it?" Rodgers yells. "Now we're even getting sued by the ]'-~ U.S. Army!" If, as many industry leaders believe, the current system for protecting intel- lectual property is unfair, what can be done to rectify it? What solution will curb the apparent abuses while protect- ing the individual inventor and give the small company its just rewards for inno- vation? In the long term, the answer may lie in Auyang's and Gilder's recom- mendations. But those w~ll take time. In the shorter term, Roger Borovoy may have a solution. "The federal circuit doesn't like hear- ing that it is pro-patent. It has objected to this criticism, but the fact is that judges make judgment calls. Enough hue and cry, enough complaints may change their mindset. And just a tweak here and there can dramatically affect filings in the future." But there may not even be time for that. One of the results of that Friday morning meeting of T. J. Rodgers and the other semiconductor companies' CE0s at Wilson, Sonsini was a decision to send Wilf Corrigan to Japan the next week to talk with three big Japanese companies about teaming up against TI. The worst scenario has now arrived. In Rodgers's words, the Great Patent War "is about to go nuclear." • TIIE WRITER Michael S. Malone is senior contributor to Upside maga- zine and the author of Thv Big Score, a critically acclaimed history of the electronics revo- lution, and Going Public, the story of Mips Computer Systems. Materials reprinted from Upside maga- zine, for Executives and Investors in Technology Companies. ©1991 by Up- side magazine. All rights reserved. This article originally appeared in the Janu- ary 1991 issue of Upside under the title "The Great Patent War." T!06511167
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Rttgged groupisnz The ideal of the self-reliant individual has held the world's imagination for a long time now. The exploits of lone cow- boys will always make great fiction. But in the real world of business, going it alone doesn't get you as far as it used to. At Xerox, we've seen that the best way to get any business to work better is to make it easier for the individuals and the departments in a company to work better together. And the best way to bring them together is to recognize the important role documents play in the life of any organiza- tion. The fact is, 95% of all business information is con- mined in documents. That's because documents aren't merely pieces of paper or electronically stored data. The document is the place where the initiatives of individuals are shared and developed by the skillsofeveryoneAn a work group. Documents com- municate plans and link different departments, often over great distances. Documents are the instruments that help orchestrate the talents of all the diverse individuals that keep companies productive. © 1991 XEROX COP, I~ORATION. ,XEROX" i~ a trademark ~f X.g.ROX CORPORATION. 36 USC 380 Of course, making the document a more effective tool for communication means understanding the role document technologies play in your organization. From copiers to workstations, from laser printers to fax machines to pub- lishing systems, these technologies aren't merely products. The5, are the tools that make it possible for individuals and their work groups to communicate more effectively. And finding ways to work together more effectively is not only good for the work group. Or the company. It's good for the individual. Because when individuals work together, there's nothing they can't accomplish. USA The Document Company ×_~_~ T!06511168
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In recessio.-ravaged Massachusetts, unemployed executives beat a path to master recruiter George Rossi. BY MARGARET PANTRIDGE Photograph by Frank W. Ockenfels 3 The Headhunter Who Car/t Say No Grge Rossi tries to avoid snap judgments. In the executive headhunting game, instant assessment of a job candidate's talents are unprefes- sional, not to mention unfair. Still, if you press Rossi, he'll pick the winners with the sharp eye that a gambler trains on horseflesh: This hopeful candidate is a hot ticket. That one is dead meat. Rossi examines candidates' work his- tones, inspects their haircuts and suits, and assesses their level of self-confi- dence. If he likes what he sees, the 49- year-old Rossi gets a thump in the gut. Gold. He's hit gold. Rossi has honed his instincts during a career in human resources that goes back to 196"/, when with a freshly minted M.B.A. ti~om Northeastern University he signed on with Honeywell Informa- tion Systems. He later worked at Digi- tal Equipment Corporation (DEC) and Data General. At~ DEC he once oversaw the hi_ring of 17,575 employees in one year. Seven years ago, he joined the Boston branch of Heidrick and Strug- gles, one of the country's top executive search firms, where he is now one of the 42 partners who own the company. And today, in the throes of the worst reces- sion since World War II, Rossi is doing just fine. Rossi's success is no secret in the up- per echelons of business, which the re- cession hag ravaged along with the troops. So every day a genteel scramble breaks out in his office as unemployed executives seek to bring themselves to his attention. They ~n'ite, they drop by unannounced, and they call, sometimes lying to get past the receptionist. The hard-luck executives know that Rossi has what they need: a data base stuffed ~4th information about which jobs are open, what the firms are look- ing for, and who's on the shortlist. But Rossi, like all headhunters, works for employers. For a fee equal to a third of the total first-year compensation for the positions he fills--at these levels, that means tens of thousandsof dollars per "This is the worst reces~ion I've seen," says soft-hearted h~adhunter George Rossi. "It's affecting senior-level people in every industry." 26 m~roem~m~s~m~e~Y - F~LLL~ T!06511169
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assignment--Rossi ferrets out the best candidates he can sweet-talk into leav- ing their current employers. If he were to place just three $100,000 executives a year, he would bring in $100,000. And he makes a lot more than that. Ro~i calls candidates; they do not call him. He's not in the business of finding jobs for the dislocated vice-presidents and corporate officers he jokingly refers to as "executive boat people." Those 45-to-55- year-old unemployed executives are so- phisticated enough to know that Rossi has better things to do than to listen to their hard-luck stories. But, hey, you never know when lightning might strike. Since Massachu- setts' unemployment rate began its steady rise in January 1989, Rossi gripes about the amount of time that courtesy interviews have already taken out of his day, a line that has be- come habitual in the rapid flow of his conversation. "Day after day, it gets me down," he says. '~/'ou identify with alot of these people, and you sympathize with them. But this isn't my job." He says he is going to pare his courtesy In tough times, when the supply of executives outstrips the demand, average performance can be the kiss of death. Rossi's in-basket his advice, "she's interviews to one or two a week, instead of the seven to 10 that have become stand- ard. The decision is definite. He made it three or four weeks ago. And he's going to implement it-- soon. In the meantime, Rossi leaps into an enthusiastic descrip- tion of the courtesy interview that kicked off his day. This wom- an is a winner. Above average. If she takes got nothing to worry has refilled each day with unsolicited let- ters, resumes, and phone messages. As Rossi sifts through them, he curses. He complains. And he caves in. You see, Rossi, a former Northeast- ern hockey star who teaches skiing at New Hampshire's Gunstock Mountain and rides a Harley-Davidson, is a softy. He spends up to 10 hours of his fast- paced, 60-to-65-hour week in courtesy interviews with the boat people, dis- pensing tips and contacts even though in the last four years only one of them has ended up in a job Rossi was hired to fill. He can't say no. So when, on behalf of all the unem- ployed white-collar workers who will never land on his calendar, we asked Rossi to share the secrets of high-level- job seeking in a low-water economy, he caved in again. A port in the storm It is late afternoon on what has been for Rossi a particularly busy but unpreductive winter day, a day of yakking with average can- didates, indecisive clients, and hopeful boat people. The headhunter--balding, clad in blue suit and red power tie, a bit wilted--stands behind his desk as he shuffles through a pile of still unan- swered phone messages. about." The woman is a 45-year-old human-resources executive who, like most of the people who get to see Rossi, is connected. She and Rossi worked together at a local high-tech company before he went off headhunting, seven years ago. Now her employer, downsiz- ing and reorganizing, has not only turned her down for a position she wanted but also asked her to make a lateral move that would mean she would be working for a bozo. In half ayear, the woman fears, another round of layoffs may nuke her job altogether. She has been thinking of quitting first and then looking around for a new job. Whoa. That's where Rossi stopped the movie. An executive friend of his, who had confidently done that very thing, he advised her, is now "building porches part time." Accept the lateral move, he told her, and start the shark hunt while you're still employed. Rossi ticks through the woman's in- ventory of assets: she is well dressed, articulate, and a strong performer with a doctorate and a track record in a high- demand specialty. Although not really a~tar and not in the "club" (the compa~ ny's inner circle), as is the bozo, she has nurtured good connections outside her firm. Also, she and her husband are both willing to relocate. Most important, she has sized up her situation and seen her uncertain future with her current employer. She is tak- ing the initiative and will leave on her own terms. As Rossi puts it, she has heard the footsteps, one of the words in his quirky little arsenal of metaphors. Footsteps, the ones that every executive should al- ways be listening for, the sounds that echo in the hall when a job is about to be snatched away. It is incredible, Rossi says, how many executives don't hear them, even when newspapers are carry- ing stories about their industries going down the tubes or when new bosses don't include them in meetings. Earlier this winter day, Rossi spent an hour talking with an unemployed bank vice-president who hadn't heard the footsteps behind him. The banker-- a 45-year-old father of three--is a text- book example of an army of unemployed executives who are in real big trouble. After I8 years with his employer, he had been put out on the street with a year's severance pay and the services of an outplacement firm his former employer had engaged to help him find a new job. "The outplacement firm had posi- tioned him well," says Rossi. "They had obviously helped him gather his thoughts, sharpen his resume, and re- spond to questions." But with the banking industry in a state of crisis and contraction, the mar- ket for his skill is almost dead. "There just aren't enough jobs out there," Rossi says. "He may never again be in as good a position as he had in the last five or six years." It's sad, Rossi adds, because the banker doesn't deserve his fate. He is a good, competent, nice guy. The severity of the recession means that the careers of thousands of execu- tives across the country, like that of the banker, have peaked. As far as Massa- chusetts is concerned, Rossi doubts that financial services or high technology will rebound soon enough to reabsorb all the displaced before they reach retire- ment age--particularly those execu- tives already in their mid-fifties. The solution for some is to move. Others will have to take lesser positions, switch in- dustries, or settle for less secure con- sulting jobs. '¢rhis is the w~rst recession I've seen from the standpoint of numbers and the scope of unemployment," says Rossi. "It's affecting senior-level people in every industry." From an executive-job-seeker's per- 28 B~STI)trE~E3~QUAJtl]3~ • F~.L19Sl r" TI06511171
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BEST OF BUSINESS REPORT Do You Hear the Footsteps? In today's economy, executives must learn to keep their eyes and ears open for signs that their jobs are in danger. BY DIANE COLE C asually clad in a jogging suit and tennis shoes, Marry . j Thompson (not his real %~ name), a43-year-old senior vice-president at a Ylidwestern financial-serv- ices company, stopped by his office on a re- cent Saturday to participate in a spe- cial staff meeting. But after the ses- sion Thompson's boss asked him to stay for a private chat. "We've lost confidence in you," said his boss as soon as they were alone. "You're fired." "I was so shocked I literally could not speak," recalls Thompson, who had been promoted by his company three times in the last four years. "It was a bolt out of the blue." Now, months after his firing, Thomp- son is not so surprised by what hap- pened. "In retrospect," he says, "I see the signals I refused to see earlier. Just two months before, my boss had con- tided in me that two senior line manag- ers felt that I, as a staff manager, was not meeting their needs. But I didn't hear that I was on the way out because my boss had prefaced the bad news by saying, 'You're a trusted member of my inner circle, and I will work with you.' Instead of pressing him to uphold that premise, I let things slide. I was so busy at work, it was just easier to dig in than think about the criticism." Though it may seem odd that Thomp- son didn't hear the warning footsteps coming his way, many otherwise smart executives fail to pick up on even the heaviest footfalls until they themselves hava fallen. Th~ m~on? Taugh econom- ic times have changed the rules that dic- tate who moves up--and who moves on. 'The old rules said that if you do a good job you~l get ahead," says Marge Baxter, the director of resources for IMCOR, a Stamford, Con- necticut, consulting firm that places senior executives in temporary assign- ments. "But now companies are laying off whole groups of employees based on bottom-line thinking. "Still, many people's minds remain fo- cused on the old rules," says Baxter. "They think, 'It can't happen to me!' when they should be asking 'Could it happen to me?' and 'How can I find out if it will?'" If you think there's cause for worry, take the following actions before your worst fears are confirmed: • Get your facts straight. If economic woes are affecting your industry or com- pany, "take a hard look at the financial information in the trade and general press," advises Dee A. Soder, a psychol- ogist and the president of the Endymion Company, an executive assessment and counseling firm in New York City. "Al- so, closely read any internal memos that say profits are down. Then imagine yourself in the role of either consultant or autside m2der and evaluate what changes you might make in how you op- erate. Ask yourself such questions as 'Could this function be done cheaper or better if we contracted out?" • Do a status check. In the best of times, as in the worst, your compa- ny's health isn't the only factor that determines who gets fired or laid off. That's why it's important to take notice of any changes in your -..~.., .,. .: personal or profes- / sional standing. Watch out if responsibilities are taken away from you, for example, or if you are reassigned to a problem project that is doomed to fail. Alarm bells should also go off if you find col- leagues or superiors begin treating .you with sudden coolness or surprising warmth. • Confront the problem head-on. If you feel all the warning signs indicate the worst, talk to your superior direct- ly. Only he or she can let you know the true story. At a Northeastern human resources consulting firm, for instance, senior executives and staff members be- came convinced that they would be fired after a new director was hired. The di- rector's distant, abrupt management style was so contrary to the relaxed cor- porate culture the workers had been used to that they believed he would start bringing in his own people. In- stead of waiting for what they thought would be the inevitable, the employees went to their CEO and asked if their jobs were in jeopardy. He assured them they weren't at risk, and all are still with the company. But what if your boss can't or won't confirm that your job is safe? Then it's time to dust offyour resume, start call- ing your contacts, and keep listening for those footsteps. • Diane Cole is the author of Hunting the Headhunters and After Great Pain: A New Life Emerges, to be published by Summit Books in January 1992. T106511172
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spective, the recession arrived at the worst of times. The merger-and-acqui- sition craze of the '80s had already thrown many executives out of work. A recent U.S. Labor Department survey found that between 1985 and 1990 some 563,000 executives who had held their jobs for three or more years lost them because of a plant closing, a move, downsizing, or slack work. In January 1990, 9.4 percent of them were still look- ing for another job, and another 8 per- cent had left the labor force. White-collar workers, cushioned from past recessions by the growth of service firms, are now drepping like flies as their employers reduce bloated pay- rolls. In December more than 24,500 professional and technical workers in Massachusetts were collecting unem- ployment. Insiders estimate that in the high-tech industry alone, hundreds of topflight executives are out of work. Although the current downturn is of- ten compared to that of 1974-75--anoth- er period in which both jobs and the Massachusetts state budget went ker- flooie--this recession is far worse, says Northeastern University labor econo- mist Paul Harrington. In the earlier recession, as well as in the recessions of 1980 and 1981-82, the numbe~ ef jobs inthe state~seconomy actually grew, says Harrington. Unem- ployment was high only because so many new workers--older women and baby-boomers--were swelling the work force. This time, he says, "our rel- ative job loss is very high. Unemploy- ment hasn't shot up because the labor force is declining." Between December 1988 and Decem- ber 1990, Harrington adds, the Massa- chusetts economy lost an estimated 165,000 jobs or 5.3 percent of the total. Of those about 11,000 were white-collar service jobs, That's what Rossi's hopeful banker is up against. But Rossi suspects that the man has yet another problem. "I would guess that he's probably an average performer," says Rossi. "That's what my gut is telling me. If you put all the people on his level in an array, he would probably fall in the middle." The law of averages In tough times, when the supply of executives outstrips the demand, average performance can be the kiss of death. Being good isn't good enough anymore. Employers want stars and proven performers--and a supply is readily available. Almost by definition, average performance is a common problem for job-seekers. Rossi didn't probe this problem in his talk with the banker. After all, inter- views have got to stop. But even ~f the guy~ad asked for the straight skinny, Rossi wouldn't have hit him over the head with a devastating assessment. "I would say, 'I can tell y~u, from the as- signments I've worked on, this is where the holes are,'" Rossi says. Were Rossi to be blunt, he says, he'd advise average performers to tackle the problem head-on. He would warn them not to inflate or falsify their resumes---a surprisingly common practice that, if discovered, antomatically disqualifies the runner from the race. Then he'd tell them to list their most impressive accomplishments, even if they weren't that impressive. He would tell them to emphasize the accomplish- ments on their resumes and to line up strong references who would emphasize them as well. And he would tell them to anticipate tough interview questions and think through the answers, never lying but quallSfing the negative parts. "The company got big, and I'm more effective in a dynamic situation." That sort of thing. In the end, says Rossi, the unexcep- tional job-seeker may also have to fall back on connections to differentiate himself or herself from the masses of the unemployed. An enthusiastic sponsor can transform the job-seeker's weak pitch into a strong sell. Even if an executive's connections aren't strong enough to get him or her a job, they can be fountains of information about where the jobs are. Tips make the job-seeker's world go round. Now is the time to call in chits, Rossi says. Here is Rossi's version of the advice that every outplacement firm and how- to-find-a-job book hits every job candi- date over the head with: Network until you drop. Stir up activity, attend profes- sional meetings, and find friends and colleagues to ask for job leads. Many strapped companies, cutting back on headhunters for financial reasons, are turning to their employees for candidate referrals. And when you've talked to everyone you can think of, rack your brain again. Read trade journals. Pe- ruse the want ads for ideas about who's hiring, even if it's unlikely you would an- swer an ad. Headhunters, of course, are gold mines of tips. They also have memories like elephants. So it is with peril that even executives who are employed defy a corollary to the networking rule: al- ways be polite to headhunters. In to- day's business world, you just never know ~hen~ahe fickle hand of fate wil.t snatch your job away. A few years ago, headhunters spent an average of three months to complete a search for an executive job candidate. Today, it can drag on for four and a half 30 ~exre~m:,m~ssqt.~e'mu.v - r.m.tzs~. T106511173
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months. That, says Rogsi, is because cli- ents~paralyzed by the importance of .strategic hires when business is bad-- can't make up their minds. Rossi pro- duces another metaphor: they're all looking for an elusive butterfly. Employers think that with so many top executives looking for work these days, the perfect candidate is fluttering just around the bend. "In the past, we pre- sented clients with three to five choices, and they were hap- py," Rossi says. "Now they want 10 candidates because they believe there's an elusive butterfly out there." Another upshot of the new insecurity is a rise in subtle preju- dice that irks Rossi. Employers are mak- ing informal cuts of candidates for rea- sons that have absolutely nothing to do with competence. Woe to the fat, to the tasteless, and to the Midwesterner. Not long ago, Rossi found a man he considered a model candidate for a job as vice-president of a high-tech firm. But the prospective employer was ap- palled when the candidate showed up for his initial interview in a plaid suit, gold chains, and tassel loafers. "In his company," Rossi says, "that's the way they dress." Rossi generally doesn't coach candi- dates. But this time he couldn't control himself. So, like a clucking mother hen, he passed the word: this is a pin- striped-suit-and-wing-tip-shoe compa- ny. Change your clothes, son. 'The candidate said, 'I hear you,'" Rossi recalls. "Aider the second inter- view, the client said he looks fine. It's not an issue anymore." Rossi thinks his candidate has the job nailed. Moral: It's crucial for candidates to swallow their pride and emulate the style sported by executives of the firms they hope to work for. When in doubt, Rossi says, male candidates should play it safe by wearin~ a blue suit, a white shirt, a red power tie, and wing-tip shoes. Women should wear blue suits, too, with white silk blouses, sheer neu- tral-colored stockings, and dark pumps. Ironically, according to Rossi, one "There are three things in life: your family, your job, and your religion.. A job is only a job." deeply ingrained prejudice is easing these days. Employers are now willing to consider executives already out of work. It's always better to be em- ployed, of course, so Rossi has to talk his clients into interviewing boat people. Still, a month or so ofjoblessness is less problematic than 10, the point at which, in Rossi's opinion, the taint sinks in. The severity of the current recession has exposed as myth the assumption that ev- eryone who loses a job is a poor perform- er. These days, peo- ple are rarely fired because they're deemed incompetent. Donald A. New- man's position as the vice-president of communications at Prime Computer va- porized along with many other jobs after ~~A~.~~ the company was sold to a white knight to fend off a hostile raider. Now, more than a year later, Newman is picking up consulting as- signments and still trying to network his way into a full-time job. He is the classic executive who lost a job through no lhult of his own. He~li,~ new wounds Wasn~yhat happened at Prime, s Newman, who is 52 a father of six, was • • "hurtful to anybody who cared. It was like the breakup of a fami- ly. I've heard people say they will never allow themselves to get close to anyone they work with again because they were so hurt." Although Newman was given gener- ous severance pay and says he was treated with dignity, he describes his layoff experience as an emotional roller- coaster ride. "There is a period of anger. You ask, 'How did it happen? Why me?'" In the last year, he says, he has learned that "things change. You cannot always control events." Whereas Newman's feelings are com- mon among displaced executives, his insight is unusual. Such an ability to accept unpleasant facts is an essential step in jump-starting a stalled career. Massive denial is a more common re- action among hard-driving, self-con/i- dent executives, according to Steven Berglas, a Boston psychologist who has treated many executives '~n transition" (the polite phrase preferred by the flicted). Denialis unsurprising, he says, because the corporate fast track does not reward sensitivity. Berglas advises displaced execs to ad- mit that their lives are in disarray and to seek help. "Denying the trauma," he says, "only retards recovery." He also wishes they would avoid flaying them- selves for having been laid off. Success is as much the result of luck as it is of merit, he says; losing a job doesn't mean that you're no damn good. Still, Rossi says, once the job hunt begins, the job-seeker must take an in- ventory of career mistakes or prob- lems-such as the banker's average performance--so he or she can devise a strategy to neutralize them. Rossi lik- ens the process to that of a drinker who goes to Alcoholics Anonymous and ac- knowledges that he has a problem. But many jobless executives who have no-discernible flaws, fit into the "club," and possess great credentials will never regain the status or salary they lost in the recession of '91. "There's going to be a lot of wounded for a lot of years," says Rossi, and they will be forced to grapple with wrenching ques- tions: What is success? What is life? "People who get hurt the most [by layoffs] are those whose jobs have ev- erything else out of balance," Rossi observes. "When the job goes away, they're incapable of handling things. "There are three things in life: your family, your job, and your religion," he says. "As far as I'm concerned, a job is just that. Two-thirds of life is concerned with things that are not a job. People should focus on other things. "A job," says the mighty headhunter, "is only a job." THE WRITER Margaret Pantridge, a native of western Massachusetts, is a senior staff writer for Bos- ton Magazine and a former business writer for the Bos- ton Herald and The Berkshire Eagle. Reprinted by permission from the April 1991 issue of Boston Magazine. ©1991 Boston Magazine. All rights reserved. This article originally appeared under the title "Down Mean Streets." BE~'Ot'~NES~I~IARn~.Y. r-~M.I. 1.~1 31 T10651 t174
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A team that has no prejudice has no limits. The strongest team, the strongest business, the strongest country, is one where there is freedom to be yourself without inequality or prejudice. We have seen prejudice hurt all those who participate in it. And we've seen togetherness and equality give power and joy. That's why, at Xerox, we are dedicated to working towards a world where there is only one race...the human race. T106511175
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Starting in 1968 we began a major effort, both within Xerox and in the communities around us, to make the concept of equal opportunity a reality. In a 1968 memo, Xerox president Joseph Wilson said: "We, like all other Americans, share the responsibility for a color-divided nation and, in all honesty, we need not look beyond our own doorstep to find out why. But we can and will change." And we did. Xerox developed programs in every phase of its structure, from pre-entry training up through the top of upper management. Over the years, our minority programs made so much progress that we were awarded the Department of Labor Exemplary Voluntary Effort Award for afftrmative action. We've created a team that we believe is the strongest possible, without the consa'aints of serve our chents prejudice, to ~ " proudly and productively. But to us at Team Xerox, it's just the beginning. Until the whole world is a team that works together with respect, fairness and equality; until all of us are without prejudice, we have only just begun. XEROX The Document Company T106511176
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BOOK EXCERPT Bringing Up Baby Corporations have long paid lip service to family-friendly policies. But working parents now demand actions, not words. BY RICHARD LOUV Illustration by Norman Walker I,ve heard this refrain from many couples: "What we really need is a job and a half." As Judith Owen, a Swarthmore professor and mother, puts it, "For my husband and me, it's not that two careers are too much, but two ca- reers as they're presently shaped are too much." What does she want? Not two careers of 52.2 hours a week each (the average workweek of professionals in America) but '%wo 37V2-hour weeks, or two 30-hour weeks." She continues: "It seems to me that the whole society must shift its expecta- tions away from the notion that the more you work, the more valuable a contrib- utor you are. I've seen the beginnings of such a change. For example, when I tell my department administrators that I must leave to get my son to soccer prac- tice at three-thirty, they say, 'Oh, sure. We'll see you tomorrow.' Maybe we'll seethat attitude spreadinginthecorpo- rate environment soon." That new disposition won't spread without intense pressure from parents. How do we create a family-friendly workplace? How do we demand a fami- T106511177
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American Bankers Insurance Group in Miami pooled resources with the local government in 1987 to create the nation's first corporate-based public school. iy-friendly workplace? In June 1989 a Louis Harris poll re- po~ed that job satisfaction among office workers was lower than in 1978, a year when job enthusiasm was already in the pits. Disgruntlement on the job is espe- cially strong among parents, who are torn between the worlds of work and home. At work we feel we should be home more. At home we feel we should be at work. Neither one is the right place to be. An AT&T study found that among people with children under age 18, some 73 percent of men and 77 percent of women deal with family issues while at work. Also, 25 percent of men and 48 percent of women spend "unproductive time at work because of child-ca~ is- sues." Indeed, dissatisfactibn with child-care arrangements may be the most reliable predictor of employee ab- senteeism and unproductive work time. Yet despite much sound and fury in the media regarding the need for family- friendly workplaces, the nation's busi- nesses are not moving swiftly toward new options. "Modern paternalistic cor- porations," as one wviter~atts them, are offering medical, dental, and psychi- atric health plans, matching-stock in- vestment programs, meal subsidies, free haircuts, and even in-house gyms and health bars--everything but help with child care. Although the percent- age of employers offering some type of child-care assistance is increasing, by 1989 only 3,000 to 4,000 out of six million U.S. employers provided such assist- ance to their employees. The parent trap everal factors hold back change, including the fact that today's typical top executives are still, after all these years, white (98.6 percent), male (97.7 per- cent), and married--and according to one study, the typical executive's "wife, like his mother, does not work outside the home." Our work institutions are encumbered by tired agendas. Parents share some responsibility, however. Why don't they fight harder for family-friendly workplaces? Several reasons: they're tired, their interest in creating pro-child work- places lasts only as long as their children are small, they're isolated from other parents. And parents are often secretly ambivalent about corporations and gov- ernment being more involved in the d ly care of their childt~en. To end the paralysis, we must face our ambivalence and ask two central questions. First, do we desire a system in which the company becomes the pro- rider of day cam and, in rare cases, of schooling for our children, ordo we wish to be helped by the company in ways that widen our options as parents out- side the company? Second, will we allow. ourselves to be shunted to the rear of the workplace for being parents? The first option is the integration of children into the workplace through company day-care facilities or other in- novative approaches. Oddly, no strong grass-roots push from employees for on- site day care has arisen, though many studies show that Americans think com- panies should offer it. The mason for this inconsistency may be what California Business calls an "information barrier," the invisible wall between parents and employers. What employee wants to ad- mit that her child-care problems are costing the employer money? Who wants to admit he's late, absent, or dis- tracted because he is a parent? To do so is to admit to what. is, in too many em- ployers' minds, a disability. Another reason companies are slow to develop on-site day care is frustration with government regulation, usually de- signed for commercial child-care facili- ties. Jeanne Martin, an employee of a computer-technology company in Berkeley, California, tells this story of trying to create on-site day care at her privately held firm: "More than half of our employees are women, and many of them are having children. So when we bought a new building, we thought in- cluding a child-care center would be a natural. "Then we contacted the state agen- cies and found out we needed so many square feet inside per child and so many square feet outside per child and a sepa- rate kitchen," continues Martin. "And there had to be so many caretakers per child, and they needed so many supervi- sors per caretaker. Even if we could have afforded to put in an extra kitchen, we still physically couldn't deal with the outside requirements for the sidewalk structure. "We gave up. The state won this bat- tle, yet it's something that we clearly would have done." Government overregulation is only one of the reasons companies are slow to adopt~-si~ecare, however. Something else is at work among parents: an often- unexpressed unease with the idea of their company's having so much pow- er-not only over their lives but also po- tentially over their children's lives. T106511179
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Barbara Reisman, the dLrector of the Child Care Action Campaign, alludes to th~s resistance: "I used to work for a union years ago that was helping Gen- eral Electrids employees. The workers said, q"ney have me for eight hours a day--I don't ~nt them to have my ldds too.' We've got to bridge that trust gap. Workers should have some control over what goes on in that child-care program." I asked Reisman if there had been too much emphasis on companies' sup- plying day care. "There's been way too much," she said. "Companies have to do a lot more, but I don't think they can carry the whole burden. We don't ask companies to build hospitals, train doc- tors, and provide on-site surgical cen- ters for their employees. We say companies should provide health insur- ance, but there are 37 million workers in this country who get no health insur- ance. The notion that all those compa- nies are going to run out and build child-care centers is ill-founded." More- over, as more companies open satellite offices and allot tasks to at-home work- ers, centralized company day care may become less attractive to both employ- ers and employees, who might prefer other methods of child-care support. When company day care is adopted, it will likely be created not by individual businesses but by private, shadow gov- ernments-public agency and private corporation partnerships, consortiums, and community associations. While con- ventional government falters in its ap- proach to family issues, these shadow governments are beginning to provide day-care centers. Money in the bank In Miami I visited one possible fu- ture. I pulled up to an empty guard station. A disembodied voice gur- gled forth. "Come on through," it said. An iron gate slid open. Up ahead stood one of those glass mom~ments now so common in suburbia--this one the headquarters of American Bankers In- surance Group. It seemed an unlikely site for one of the nation's most provoca- tive experiments in public education. Not far fram headquarters~ just across a long, grassy field, was a small two-room schoolhouse--America's first corporate-based, publicly supported satellite learning center. At the time of my visit, Dade County was considering establishing other similar satellite schools. The school d~str~ct would pay the teachers at these schools; partid- pating companies would pay for con- structJon, maintenance, custodial work, utilities, and security. Parents provide the transportation, so busing isn't a cost factor. The up-front sav~ngs: $219,000 for every new classroom built by a com- pany instead of government. This idea could spread. After two years in operation, the Bankers school, established in 1987, planned to extend its curriculum ~om kindergarten-only to second grade. And 11 other Dade County companies had expressed interest in similar ven- tures. Inquiries about the concept have come from as far away as Japan. "Bankers made the decision to do this based primarily on our excellent experi- ence in day care," said Phil Sharkey, Bankers's no-nonsense senior vice- president for human resources. "This is not only an excellent recruitment tool but also a phenomenal retention tool." The company's annual employee- turnover rate is 17.6 percent, but among those parents who enroll their children in the day-care or the satellite learning center, the turnover rate is only 4.2 per- cent. Absenteeism has been reduced by nearly 30 percent, and "tardiness is nonexistent because they have to get their children to school punctually," said Sharkey. "We figured $325,000 [the cost of building the school] amortized over 15 or 20 years is a pretty cheap price to pay if we can keep the retention rate as high as it is." He snu'led and pressed his i~ngers together. "This school is money in the bank for us." In a company conference room, sever- al parents described their experiences w~th the school. They were enthusiastic about spending break time w~th their children, and all agreed the program had dramatically increased their loyalty to the company. One woman said she had turned down a job offered by anoth- er company that would have increased her yearly salary by $10,000. Another woman, Manola Gutierrez, remarked, "Until I came here, my kids viewed work as something that was tak- ing Mommy away from them. They didn't know what an office was. To them it was this black box, this monster. They couldn't understand why I was gone eight or 10 hours a day. One day my child said, 'Just kill that ugly monster and stay home, Mommy.' Those were her exact words." Now that Gutierrez drives her kids to work--and to school--she said, "They understand that I'm safe. The monster is dead." ] came a~ay from Bankers Insurance impressed with the company's efforts to be family-fi'iendly and yet vaguely un- comfortable. Bankers is surely benev- olent toward parents and children. But not all companies are so straightforward in their priorities. Economists David Bloom and Todd Steen have suggested that one way to increase the supply of workers as the baby bust creates more demand "is to raise labor-force participation rates. In1981 and '!988 ,the Ro~)er Organization polled 2,000 people to find out what emplo)'ee benefits ~ thought businesses should provide. Although respondents' desire for such benefits as health i~surance and flexUme remained about the same for both years, thor belief that e~nployers should offer paternity leave and help with child care increased significantly. Benefit is a "definite responsibility" or "highly de~rable" Shoukl business... 1981 1988 pray'Me free medical insurance? 77% 76% provide free dental insurance? 66 69 allew flexlble work hours? 51 S1 off~" two people the chance to share 26 30 onejob, each get~ng half the benefits? ~aypartoftbe costoforpro~leday 24 45 care for cl~ldren of female employees? ~ve fathers of newborns paternity leave? 23 34 T106511180
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Men's rates have been declining stead- natqona]ization of capital and labor, ily and should continue to decline some large employers privately believe through the year 2000. In contrast, that they have little economic mason to more women are willing to go to work. make a commitment to the education Better child care could bring a substan- and well-being of American children. fial number of workers into the labor Why should they, when they can move force." They cite a Census Bureau re- their factories offshore and automate? port suggesting that fully 26 percent of The answer to that dismal shortsighted- nonworking mothers with preschoolers ness is international social competition. say they would look for work if reasonably priced child care were available. The good news is that employers will be more likely to offer on-site child care; the bad news is that even fewer parents will be at home with their kids--and mothers and fathers will prob- ably be working even longer hours. Partic- ularly in nonunion- ized regions of the country, some corn- With the coming shortage of skilled workers, a family- leave ,policy would be more practical than utopian. panies may come to ~ew on-site day care as a v,~y of squeezing more hours from their employees. The strands of the new web, particu- larly where the company and govern- ment are involved, should be woven with caution. Yes, we need company help with child care. But we need to scrutinize such help threugh the lens of family liberation, not merely that of con- venience. If a company offers on-site day care and then expects us to work longer hours, who is liberated? The par- ent? The child? Company day care is an important piece in the puzzle, but too few compa- nies are talking about the host of other approaches that, when combined with good day care (corporate or otherwise), increase family time: flextime, part- time work with benefits, job sharing, family leave, career breaks, telecom- muting, and a four-day workweek. These goals may seem out of reach to- day, but as the baby-bust generation creates a labor-seller's market, families should be asking for more. But changing corporate attitudes, de- spite favorable demographics, will not be easy. Parents themselves and their favored elected representativ~sand unions must force the issue. Typical American employers treat child-rearing as an idiosyncratic act bordering on the irresponsible. With the growing inter- In much of Europe, government and pri- vate companies pay for child care, encour- age alternative work schedules, and offer long job breaks. Child-rearing is seen as a service to the wider community, not. simply a private act of procreation. This European atti- tude toward children may seem superflu- ous to American cor- porate leaders now, but as the European Community begins to flex its economic muscle, the payoff for Eurepean compa- nies with pro-family policies will be a work force far more technologically ca- pable and personally secure than our own. That outcome is ensured unless a family-liberation movement quickly re- forms the American workplace. Getting in a family way Apmong the essential elements of a truly family-friendly work- lace is adequate family leave. According to a sur- vey by 9 to 5 and the National Associa- tion of Working Women, most working women--three in five--are employed by companies with no form of maternity leave, despite the fact that 85 percent of those women will become pregnant at some time during their careers. Edward Zigler of the Bush Center in Child Development and Social Policy at Yale points out that the lack of support for a working family at the time of birth can create stress for fathers as well. Typically, the father is not allowed any significant time offwork to deal with the inevitable loss of sleep, to help with child care~ and ~ g~ve the mother needed emotional support. "Caught in a series of escalating stresses, he is severely hampered in his ability to fill the multi- ple reles that society is beginning to ex- pect of him," ~wites Zigler. In recent years Connecticut, Minne- sota, and Oregon have passed leglsla- tion previding some parental leave to either parent. In addition, 25 states had legislation pencSng in 1988 on parental or maternity leave. No state has yet mandated paid maternity leave, howev- er. By contr~-~t, guaranteed paid infant- care leave exists in every industrialized nation other than the United States and South Africa. In Japan, for example, women are en- titled to six weeks' maternity leave both before and after childbirth, at 60 per- cent salary. In West Germany parents can receive six weeks' paid maternity leave before childbirth and eight weeks' paid leave afterward, with an optional partially paid four-month leave. Swed- ish parental-leave policy provides 12 months' leave, with the state providing 90 percent of lost income. Mothers may take an additional six-month leave at 70 percent pay. In the United States pressure is building for family leave, but so is the resolve of the opposition. In 1990 Con- gress passed the Family and Medical Leave Act, which would have provided 12 weeks annually of job-pretected un- paid leave for any employee for the birth, adoption, or serious illness of a child or dependent parent. The bill did not apl~ly to companies with fewer than 50 employees. Two years prior to passage of the bill, presidential candidate George Bush said, "We need to assure that women don't have to worry about getting their jobs back after having a child." When he became president, however, Bush ve- toed the act, which fell 54 votes short of an override. Arguments against such proposals are often made on the basis of national productivity. The U.S. Chamber of Commerce, for instance, claims that the Family and Medical Leave Act would cost $16.2 billion a year in lost produc- tivity. But how much preductivity and creativity are we losing now--and how much will we lose in future decades if we accept without question a society in which parents work longer and harder and children spend more and mm~ time in institutions? The Chamber of Commerce~)ffers no accounting of that loss. It also neglects to mention that most of the costs of pa- rental leave are borne by the parents themselves, who lose weeks or months T106511181
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A_~EST OF BUSINESS REPORT Passing the Buck to Business Although employers say they want to provide family-friendly bznefits, they argue that Uncle Sa.m expects them to shoulder the burdvn alone. Executives may rail against pub- lic demands to "solve" the child- care crisis, but they preb- ably won't have mueh choice in the future about whether to provide at least minimal benefits to work- ing parents. "Uncle Sam doesn't have any more mon- ey," says Mary Tavenner, the senior director of gov- ernment relations for the National Association of Wholesalers, "so he's going to the next deep pocket-- private enterprise. That's sort of been the new wave over the last few years: mandating benefits instead of instituting new social programs." Tavenner voices a lament familiar to many in corporate America, who have seen the amount of money doled out for benefits rise from 17 percent of total pay- roll in 1955 to 37.5 percent of payroll in 1989, or $11,527 per employee. The U.S. Chamber of Commerce attributes this increase, in part, to a prefusion of man- dated benefits. Despite these costs, em- ployers say they want to provide health insurance, day care, and pension plans. However, they're leery of being forced, through such mandates as the Family and Medical Leave Act, to pick up the entire tab. President Bush, sympathetic to the concerns of big business, vetoed the act in 1990, but a determined Congress quickly began work on a revised ver- sion. The new act, which would require companies with more than 50 employees to offer an unpaid 12-week leave ~ar~._adoption, or serious ill- ness of an employee or his or her child, spouse, or parent, has sparked heated opposition. In fact, the National Associ- ation of Wholesalers, National Associa- tion of Manufacturers (NAM), Society BY LEA ANN LEMING for Human Resource Managers, and U.S. Chamber of Commerce, among others, -have joined forces as the Con- cerned Alliance of Responsible Employ- ers (CARE) to lobby against the act. CARE members oppose any federal interference in benefits policies and maintain that the act would stifle much- needed flexibility in employee relations and lessen companies' abilities to pro- vide other benefits that workers may prefer. "We feel that you put employees at risk with mandated benefits," says Tavenner. "At different points in their lives, workers are going to need a leave policy, and then later they're going to want a more generous pension plan, or they're going to want more money." William Even, an associate professor of economics at Ohio's Miami Universi- ty, fears a more ominous trend: "If we force businesses to provide more and more fringe benefits, that's going to drive up the cost of jobs. And in fact, we might just see some jobs disappear." Indeed~ business owners worry that a mandated leave policy will affect their ability to weather tough economic times. "Family-friendly innovations are a func- tion of the economy," says Tavenner. '°lThey're great when the economy is great, and not so great when the economy is down. If you have a federal mandate, you wonder how much worse this would make futm~e re- cessions if you have employ- ees who are out and you're unable to replace them." "It's not that employers don't think child care is their role; it's that they don't want to be told what to do with their employ- ees," remarks Diane Gen- o~ erous, the senior associate ~ director of employee rela- ~ tions for NAM. Generous ~ points out that despite the rising costs of benefits and the hoopla over the Family and Medical Leave Act, most companies find it in their interest to accommodate working-parents' needs. Faced with dwindling numbers of skilled workers, more than 5,400 corpo- rations now offer some form of child care, up from some 200 employers 20 years ago. "We view it as a willful strat- egy to differentiate ourselves in the workplace," says Betsy Bosak, a divi- sion human-resource manager for TRW, which just opened a $2 million child-care facility at its Redondo Beach, California, Space and Defense Center. Such family-friendly benefits may be the wave of the future, but even the most progressive employers maintain that they cannot shoulder the burden alone. "Companies cannot take on the social responsibilities that really belong to communities and to the govern- ment," says Karol Rose, the manager of Work and Family Programs at Time Warner. "They can supplement child care, but the issue needs to be ad- dressed on a much larger scale, it's big- ger than any company can handle." • Lea Ann Leming is the assistant editor of Best of Business. m~TOemr~m~squ~xez~x • F~LI~Z 39 T106511182
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r of salary while newborn or sick children are boosting family expenses. William Even, an associate professor of economics at Miami University in Ox- ford, Ohio, says that if companies are forced to offer maternity leave, they will begin to discriminate against women when they discover how expensive a maternity-leave policy is. "They may try to offset the costs by not hiring wom- en or by lowering salary or benefits," says Even. This criticism is answered by including men in paternal-leave poli- cies and by pointing out that experi- enced workers are too valuable to lose through discrimination. Moreover, corporate America could clearly benefit. A study by the Chamber of Commerce itself confirms the view that parental leave can make companies more produc- tive. A survey of companies offering pa- rental leave found that more than 60 percent cited "recruitment and reten- tion" of good employees as the main rea- son for the program. J. Douglas Phillips, the senior director of corporate planning at Merck and Company, says that his eompany'schild-care leave policyhasm- suited in savings. Phillips estimates the cost of losing an employee at $50,000. But by permitting a worker to take a six- month child-care leave (at a cost of $88,000), the company achieves a net ira- On the campaign trail, a kinder, gentler Bush called for family-leave provisions. As president, he vetoed the Family and Medical Leave Act. provement of $12,000. In Personnel Journal, Catalyst, a re- search organization that helps corpo- rations foster the careers of women. reports that the interim cost to South- ern New England Telephone of main- taining health-care benefits for those on leave was a minuscule one-quarter of 1 percent of the company's total health- insurance bill. Catalyst asserted that the cost of not supplying parental leave is best measured against that of employ- ee turnover, and one estimate indicates that turnover for any position can cost companies approximately 93 percent of a first-year salary--the cost of recruit- ment and training, as well as the cost of lost productivity during the time it takes a ne~v employee to learn the job. The debate about family leave should eventually revolve less around whether family leave should exist than how long the leave ought to be. A panel of experts at Yale's Bush Center recommends an optional six-month protected leave for either mother or father at the time of birth or adoption that would include the continuation of medical and other bene- fits as well as a 75 percent salar~ re- placement up to a reasonable maximum for three months. The panel suggested that this salary be paid through an in- surance fund to which employers and employees would contribute. Career breaks provide another opt-ion. In England, for example, under the provisions of a new return-to-work plan, women who have worked two years for Lombard North Central, a London fi- nance house, can apply for an extended leave to care for babies or toddlers. Lom- bard's plan is one of a small but growing number of career-break programs Brit- ish companies are devising. A typical leave lasts five years, and participants must usually complete two weeks' paid work each year to maintain contacts and update skills. Mothers on leave receive no salary or benefits but are kept informed of activities and changes within the firm. If the company doesn't have a suitable opening when a worker is ready to return, the employee is kept on the plan until an opening occurs. To working parents in the United States a leave of several years to care for small children seems a distant dream-- yet imagine the sense of security such a policy would offer parents and the corre- sponding security for the company, which would enjoy the support of a re- serve force of trained individuals. With the coming labor shortages among high- ly skilled workers, such a policy would be more practical than utopian. Benefiting everyone s company day care, then, an idea whose time has passed? Possibly. A broader mix-and-match ap- proach will likely become a more popular option. A family-friendly work- place might arrange for a discount with private child-care facilities or make voucher payments toward whatever child-care arrangement the parent chooses. A company might also provide temporary emergency care for those days when an employee's regular ar- rangements fail or~ join networks that identify and recruit good day-care help and pass that information on to workers. Jacquie Swaback, the child-care coor- dinator for Sacramento, California, rec- ommends that more companies adopt a "cafeteria" approach to benefits so that an employee can choose among child- care reimbursement, more ~acation days, and health insurance. A two-pay- check family doesn't need two health- care plans, so if one spouse has health care, the other spouse can choose a child-care benefit. The company, then, IIII T1065t1183
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gets a tax write-off for offering either a voucher for child care or on-site day care. By eliminating redundancy in ben- efits, society's expenditure on child care ~ecomes more a matter of shifting re- sources than a major new outlay. A handful of large companies is defin- ing what it means to be a f~mily-f~iendly workplace. For example, Merck and Company offers job- protected parental leave for both fathers and mothers for as long as 18 months. Merck also allows flexible working hours and several on-site or nearby child-care centers. Hewlett-Packard, AT&T, Coming Glass Works, Levi Strauss & Company, and Steelcase have shown similar leadership and creativity. Yet those compa- Parents' needs should not be seen as special, but as central to the welfare of society. hies remain outstanding exceptions. Too often the attitude of employers is epitomized in the statement of one boss, a recently divorced man with no chil- dren, who told me: "I resent all these parents asking for special treatment. Whenever one of them wants time off, one of the other employees without kids has to take up the slack." The fact that these employees are shaping America's future employees escapes him. Al- though smallentreprenem~al companies might be excused for such an attitude, large corporations should not be. What we will see in coming years, then, will be three kinds of companies: those that offer little or nothing to fami- lies, those that offer company day care in an increasingly controlled work envi- ronment, and those that offer a range of choices, flexibility, and time--with or without on-site day care. Beyond the mommy track If we are to create a truly family- friendly workplace, one final question is extremely important: WXfi we _allow ourselves, as p~r- ents, to be passed by for workplace ad- vancement because we have supposedly special needs? The suggestion that such workplace discrimination--creating a so-called mommy track--would be good for par- ents and good for business was made by Felice N. Schwartz, the author ofanow- famous article published in the Harvard Business Review [and reprinted in Best of Business] in 1989. In "Management Women and the New Facts of Life," Schwartz argued that corporations should recognize two different groups of women managers: those who make their careers their chief priority and those who need a flex- ible schedule to put children first. Those of us dedi- cated to family-liber- ation should view any attempt to create a mommy track as dan- gerous to children. For example, the eco- nomic welfare and ca- reer advancement of single mothers would worsen under such a plan, further deepen- ing the feminization of poverty. Moreover, by singling out women to be tracked, such companies would actively discourage ambitious women from expecting any company ar- rangements for family time. The mommy-track proposal makes strategic sense to corporations resisting family pressure: divide and conquer by dividing women among themselves, women from men, and parents from oth- er employees. With the certainty that new work arrangements will have to be made for parents, is there an alternative to the demeaning mommy track? Yes. Call it the family track--by which I mean provisions for all employ- ees who belong to families, including those without children. Family-friendly workplaces will not become a reality as long as women and men, parents and nonparents are seen in competition for special consideration. Parents' needs should not be seen as special but as cen- tral to the welfare of society, essential to any company concerned with the care and feeding of its future workers. A generation ago it wouldn't have oc- curred to men to take time off for the birth of a child, an increasingly com- mon practice today. But nearly three- fourths of fathers in a study of AT&T employees said that they had to deal with family issues while at work, and almost half of Du Pont's male workers reported difficulties making child-care a~angements. I_f business can be flexible about the shape of women's careers, it can be equally flexible about me~'s. Why shouldn't there be many career pat- terns, based on interests besides par- enthood? Arlie Hochschild and Anne Machung, the authors of The Second Shift: Working Parents and the Revolu- tion at Home (Houghton Mifflin, 1991), say that many people are starting to feel they ought to be able to pursue outside commitments other than family. Hochs- child and Machung argue that allowing time for such commitments makes good business sense: "Companies would cut down on absenteeism, low productivity, and depression if they'd allow employ- ees to live balanced lives." Imagine a movement in the work- place that aimed to benefit all of this larger context, including men and non- parents with family needs. Suddenly the idea of a demeaning mommy track fades; instead of creating a company ghetto of underpaid, underappreciated women, a family-track approach would appeal to a coalition of groups. And that principle--viewing improvements for children as improvements for every- one--is crucial to the weaving of the new web. Families need a lot more than day care. They need a work environment that redefines the best way to achieve productivity, an environment that en- courages family time and discourages the current headlong rush into national workaholism. Ultimately, they need to refashion personal attitudes about the value of work. In the words of one Wich- ita parent, "Maybe we need to start questioning how many things we need and whether it's really worth working this hard and being away from our chil- dren so much." • THE WRITER Richard Louv, an award-win- ning journalist and columnist for The San Diego Union, in- terviewed more than 3,000 children, parents, and profes- sionals while researching Childhood's Future. From the book Childhood's Future by Richard Louv, a Marc Jaffe book, pub- lished by Houghton Mifflin Company, Boston. ©1990 by Richard Louv. Re- printed by permission. TI06511184
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The real question isrft where ideas come from. It's where they go and how they get there. Everyone is capable of having a good idea. But every com- pany isn't capable of taking advantage of the ideas people come up with. All too often, there are barriers between people and departments that keep ideas from being explored, debated, nurtured and communicated. It doesn't have to happen that way. Still, breaking those barriers down is no easy matter. The first step is to recognize that ideas themselves are the true products of people who work in offices. And that the initia- tives and innovations these "knowledge workers" generate create what you might call the "intellectual capitaF of a company. The second step is to recognize that the full value of those ideas can only be appreciated if they are effectively com- municated. At Xerox, for example, an idea about capturing information to help improve customer service wasn't fully realized untiIit found its wayinto a document. The idea amounted to a simple observation. Xerox service representatives were learning as much about solving cus- tomer problems from casual conversations with each other ,~ 1991 XEROX CORIaOR~TION. XEROX* ~ as they were from their manuals. But that knowledge was never captured or distributed. So we instituted regular sessions where "war stories" were encouraged, shared, and then put into documents and sent throughout the company. That meant better service for our customers, as well as improved product design. Of course, none of that knowledge could be captured, shared, presented, or distributed without the document or the copiers, fax machines, printers, scanners, workstations and publishing systems that are the communications life- line of any company. It's just one way Xerox technology can help people work together to create and orchestrate the most valuable asset any company can ever enjoy. The ideas that will make it prosper. The Document Company T!06511185
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SPECIAL ~EP 0 RT The Seduction of The American CEO Insider traders languish in disgrace, takeover sharks have lost their bite, and yuppie pursuits have given way to meatloaf and the kids' Sunday school lesson, but one legacy of the '~ne decade" lingers on: chief executives who wallow in the belief that "I've earned it, by God!" God, have they earned it! Many are rich beyond their dreams, and in some cases beyond their shareholders' wildest expectations. The average CEO at a large U.So company earned $2.8 million in 1989 and today receives 110 times the pay of his company's average worker, according to executive-com- pensation expert Graef Crystal, who testified on executive pay before a congressional subcommittee last May. Compensation packages have become so munificent that lawmakers are taking note~and taking aim. In June, Senator Carl Levin (D-Mich.) introduced a bill giving stockholders "the right to question inappropriate executive pay at their annual meetings," and Securities and Exchange Commission official Linda Quinn hinted that the agency might sanction such a resolution. In this Special Report, we examine the epidemic of executive self-aggrandizement. "CEO Disease" reports on its causes, _s~t o_m~ ~ andpmgno~is ~ _and "Taking Stock of the ~mpa~y" describes how some CEOs have managed to enrich themselves at the expense of their companies through a clever ploy known as the stock buyback. 44 BUSINESS WEEK CEO Disease 54 THE WASHINGTON MONTHLY Taking Stock of The Company Ilh~stratio~s by Jot~ Kascid ee:m'OFm,~Q~sQ~UiTn~Y. FaU.l~S~ 43 T!06511186
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SPECIAL REPORT CEO Disease Robert A. Schoellhorn appeared to be the model chief execu- tive. As CEO of Abbott Laboratories, the former sales rep had overseen a major comeback, nearly tripling his company's sales and quadrupling profits during the 1980s. He was toasted as an executive of the year by a business magazine in 1986 and invited on the boards of more than half a dozen corporations and trade groups. But few people knew much about the less-public Schoellhorn--the Pampered, perked, and protected, many American CEOs have devel- oped an unhealthy love of power, which threatens their companies' well-being. grandiose man who ruled over his company as if it were a private fief- dom. Few people, that is, until Ab- bott's board kicked him out in March 1990. He sued over his dismissal, and Abbott countercharged. There was a barrage of embarrassing charges, in- cluding misuse of company assets and expense-account irregularities. The board even looked into a bizarre incident at Sehoetthovn's 60th birth- day party involving a stripper hired by his former secretary-turned-wife. The strange saga of Robert Tl06511187
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Acute . :~ Be.tow are four CEOS Who.proved thatpower not only corrupts, it also pays. Eventually all left their jobs, but not before they managed to traumatize employees, intimidate shareholders, . and in most cases, decimate the bottom-line. E ROSS,JOHNSON iURNAmCO Insi~.ted an all the trap- pings, including a lO,planc air force. His lowbalt LBO package be- came an embarrassment "to his company's directors. WALTER J. CONNOLLY JR. BANK OF NEW ENGLAND (OUSTED 1990) Ruled with such an iron fist that many managers feared telling him any- thing he didn't want to hear. The bank's finan- cial woes led to his ouster. Schoellhorn came to an end with an out-of-court settle- ment that cost Abbott $5.2 million in July 1990. What happened? Many who worked with him believe that Schoellhorn, like some other top-notch executives, fell victim to his own success. Pampered, protected, and perked, the American CEO can know every indulgence. The executive who finally reaches the top of a maj or corporation enters an exclusive fraternity. The CEO's judgment and presence are eager- ly sought by other captains of industry and policymakers. CEOs zip around the world in private jets and cash the heftiest personal paychecks in industry. They take home 85 times what the average blue-collar worker makes, unlike their counterparts in Japan, where the ratio is closer to 10 to 1. It is a job that can easily go to one's head--and often does. '"1"oo many people treat CEOs as some kind of exalted, omnipotent leader," says John Sculley, the CEO of Apple Computer Inc. '"l'he real danger is that you start believing that stuff." Sculley took a sabbatical in 1988 as a ~ay af '2~¢~qaaiating myseff with the fact that I'_m a mere mortal." Many chief executives come to believe that they are much more than that. The perquisites and deferences cre- ate a protective cocoon--if not a full-fledged fantasy world--for the chiei~ins of some of the nation's largest ROBERT it SCHOELLHORN ABBOTT LABORATORIES (OUSTED 'a 0~0) Turned Abbott around, then loaded up on the re- wards of success. A habit of replacing his would-be heirs cost him the trust of managers and the board. JAM E. WAnT LONE STAR.INDUSTRIES (RE,SIGNED 1~1) Ordered layoffs and sold corporate assets but toted up a $2.9 mil- lion expense account and still commuted to work in the corporate jet. companies. "Many CEOs take on a level of self-impor- tance that goes way beyond reality," says Douglas D. Danforth, the former CEO of Westinghouse Electric Cor- poration and now a director at several large corporations. '~hey view the company as their own .... Some peo- ple's personalities change completely. If you're not care- ful, you can be seduced." Call it CEO Disease. The symptoms are all too familiar: The boss doesn't seem to understand the business any- more. Decisions come slowly, only to be abruptly changed. He feels he can do no wrong and refuses to concede any mistake. He begins to surround himself with sycophants in senior management and on the board. Increasingly the boss may seem out of touch--spend- ing too much time away from the job, playing the role of statesman for the sake of personal recognition. He may even compete with industry counterparts over how much money he makes, how big the headquarters building is, or how man~v corporate jets are parked_ o_.n_ th_e landing strip. And when it's time to leave the job, the boss just hangs on, often by undermining potential successors. The majority of chief executives manage to sidestep the job's many pitfalls. They maintain the high level of leadership and commitment that got them into the corner T106511189
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office in the first place. They learn to deal with the intense pressm~s of the job and the awesome responsibility of running f~r-flung enterprises with thousands of employ- ees and billions in revenues. "There are lot~ of CE Os who work in their shirtsleeves and don't hide behind the fa- Fade of corporate leadership," says Jewel Companies' former CEO Donald Perkins. He be- lieves that onlya few of h~s compatriots exhibit the fnll-blown symptoms of "the Imperial CEO." Of course, plenty of chief execu- tives~ under the often enormous strain of churning out positive earnings every quarter, display isolated symp- toms without having the disease. And for some bosses only one or two symp- toms can be enough to undermine a company. Harold S. Geneen, an autocrat who ruled over IT1~ Corporation with an iron fret and an oversized ego, summed up the problem succinctly: "The worst disease that can afflict business execu- tives is not, as popularly supposed, alcoholism," he wrote in his memoirs. "It's egotism." It is a problem, Geneen thinks, that is "still in the closet, a secret everyone knows, few talk about, and almost no one knows how to handle. The egotist may walk and talk like everyone else. But he is im- paired as much by his narcissism as the alcoholic is by his martinis." It is still rare when the board of directors or a company's sharehold- ers-the natural checks and balances to a CEO's power--hold a corporate chieftain accountable for his actions before it's too late. And with the de- cline in takeover activity, which puts more pressure on CEOs to perform, a strong case can be made that the inci- 'an~P on all p~.~ .~I~, : ~er~, and , lob t~ long, dence of this malady is likely to rise in the future. Much of the damage done by an afflicted CEO is insid- ious, striking at the heart of the company's ability to compete: employee morale. One employee survey after another confirms that a severe golf is emerging in many companies between the CEO and his work force. As the rank and file lose faith in top management, morale often collapses. Employees fail to generate the new ideas that are the lifeblood of any enterprise. A we-versus-them attitude prevails. Sometimes it can be a contributing factor in bringing a company down, as it was at Bank of New England and Lone Star Industries, both of which ended up bankrupt. Few chief executives come close to the greed and ex- cess symbolized by F. Ross Johnson, who unsuccessfully tried to take R JR Nabisco Inc. private in a deal that would have enriched Johnson so extravagantly that it made other big LBO payoffs of the decade look paltry. The most visible sign of corporate largess was Johnson's palatial hangar in Atlanta for R JR Nabisco Inc.'s 26 corporate pilots and 10 planes. Adjacent to the hangar,s a three-story building, complete with Italian-marble floors, inlaid mahogany walls, and a roomy atrium with a Japanese garden. It's a remaining asset that Kolhberg Kravis Roberts & Company, which took RJR Nabisco private, has yet to unload. The asking price: $10 million. Unloading Johnson was far more cost- ly: he walked away with $53.8 million, the largest golden parachute ever. If some CEOs feel the need to com- pete on the basis of corporate "aircraft, others gain a sense of superiority by constructing huge headquarters buildings or other large edifices. The late Armand Hammer of Occidental Petroleum Corporation spent more than $50 million in corporate funds to build an elaborate art museum that bears his name. There are dozens of lesser-known examples. In the midst of a $271 mil- lion loss in 1989, Lone Star Industries Inc. chief James E. Stewart ordered layoffs, put $40(} million of corporate assets on the block, and eliminated the company's dividend. But Stewart had a $2.9 million expense account and still flew in the corporate jet to headquar- ters in Stamford, Connecticut, from his home in Florida--even as the free- spending executive told managers to fly coach. Lone Star, the nation's larg- est cement company, filed a Chapter 11 bankruptcy in December 1990, and Stewart resigned a month later as the board conducted an inquiry into his expenses. Stewart says the company's failure was the result of a downturn in the cement industry and a rise in for- eign "dumping." There are, of course, events that have nothing to do with the CEO's hubris that conspire to make the top job tougher. Information once readily available to him as a senior executive often becomes filtered. Few subordi- nates want to deliver the bad news. And a powerful CEO often discourages such behavior. Former Texas Air Cor- poration CE0 Frank A. Lorenzo's reputation as a tough boss so intimidated top executives that they dared not defy him. "When Frank was in a meeting, the whole chemistry of it changed," says one former colleague. "Once people saw which way he was going, they would hop on it, and the train was rolling." It is almost axiomatic that those who rise or raid their wayto the top of large corporations are intensely driven. That's not bad in itself. But trouble can arise when this drive is fueled by what Harvard Business School man- agement professor Abraham Zaleznik calls %mhealthy narcissism." Few if any managers are motivated solely by the altruistic desire to better the corporation. They are also striving to satisfy inner, ego-related needs. Eric T!06511190
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NiceGuys Finish First Many of the country's most effective CEOs rose to the top by keeping their feet firmly planted on the ground. Traditionally, chief executives of steel companies have lii~ed like.po- tentates. They've drawnibig salaries and held court in plush offices inside vainglorious headqu~ters. But F. Kenneth Iverson, the CE0 of Nucor Corporation,the nation's seventh- largest steeImaker,' comes across more like a traveling salesman. He drives his own car to work. He flies coach when visiting Nucor's 22 plants. And his corporate headquar- ters are housed on half a floor of a four-story building across from a suburban shopping mall in Char- lotte, North Carolina. Iverson does have a corner office, but it's cramped and utilitarian by CE0 standards. Nor is there an executive dining room. When Iverson treats his top execs to lunch, they often walk across the highway to Phil's Dell. It's not that Nucor can't afford a few perks. One of the nation's most profitable steelmakers, Nucor hasn't had a losing quarter in 25 years, and last year net income jumped 30 percent, to $75 million, on sales of $1.5 billion. "You won't find any status symbols here," says Iverson. His philosophy: "Reduce any difference between management and anyone else at the compa- ny-destroy corporate hierarchy." Iverson may be a bit extreme, but he's not alone. In- deed, many of the most effective CEOs are intensely aware of the dangers lurking in the corner office and have developed canny strategies for avoiding them. They hire people willing to say what they think. They will decline an outside board commitment if it's likely to interfere with their own jobs. And they fight the dangers of isolation by regularly meeting and talking with the troops. Consider the lunchtime strategy of P. Roy Vagelos, the chief executive of Merck & Company. Merck's cafe- teria isn't exactly an elite hangout. But it's where you'll often see Vagelos, swapping stories with scientists in the tray line. "That's where I get a lot of my informa- tion," he says. "The sbientists can't walt to tell me what they've just accomplished. And I stay very current." At Fard Motto= Company, former chief executive Donald E. Petersen tried to put more emphasis on his top lieutenants by insisting on a four-person "office of the chairman," whose members shared in making critical decisions. "I didn't ~mt a star system," Pe- tersen recalls, "because it isn't one person that's re- Nucor's CEO F. Kenneth Iverson has forged a reputation as a "regular joe." sp~.nsible for success--it's extmnlely successful teamwork.". Pet~ersen wasn't perfect--some detir~c~0rs say he got more credit for Ford's: turn- around than he deserved--:butFord flourished under his management systhm. • The most effective CEO~,are also more likely to welcome aboard posed largely of outsiders--it's their best hope of getting the unfiltered advice they need. Because they tend to be secure in their jobs, those CEOs are willing to recruit and pro- mote strong managers rather than surround themselves with spineless mediocrities. Below are a few more ways some bosses combat CEO Disease: m Impose limits on the job's perks. The trappings of the office put distance between the CEO and workers. That's one of the reasons Robert L. Cranda]] of Ameri- can Airlines shuns many perks that other chief ~xecu- tires take for granted. "I don't want to suggest to anybody that aside from my ability to do the job I'm any different from anybody else," he says. • Stay focused on the job itself. Many of the most admired chief executives limit their outside board com- mitments. Pepsico's D. Wayne Calloway and Johnson & Johnson's Ralph S. Larsen serve on no more than two boards of directors. • Don't assume toughness defines leadership. One of the favorite books of former Herman Miller Inc. CEO Max O. DePree is Servant Leadership by Robert K. Greenleaf. It posits the notion that a leader is the servant of his followers in that he removes obstacles that prevent them from doing their jobs. • Keepthecommunication channels open. At Ameri- can, Crandall hosts annual presidential conferences in which he and other senior managers meet employees to discuss the business and answer questions. Whether in a cafeteria line or an airport lounge, those bosses know the value of staying close to their employees and the business. Executives who follow such measures aren't likely to catch CE0 Disease. And theyLttprobably h~e a better chance of leadingapmf- itable company with executives, managers, and staff- ers who are dedicated to its success. • John A. Byrne and William C. Symonds, with bureau reports, for Business Week. T!06511191
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G. Flamholtz, a UCLA management pro- fessor, says the inner agenda centers on an executive's needs for self-esteem and con- trel over people and events. While those needs are healthy in moderation, they cause problems if they get out of hand. With each higher step on the corporate hdder, an executive discovers fewer re- straints: unlimited expense accounts, few- er performance appraisals, and the power, in some cases, to make decisions unchal- lenged by anyone. '~fou have fewer people to report to and fewer people who control what you do," says Harry Levinson, a cor- porate psychologist. The decreased super- vision and increased power that coincide with success only reinforce and confirm the narcissist's already grandiose self-image. If he attains the top job, it comes bubbling to the surface. "They think they are en- titled to privilege and the royal treatment," says Levinson. Consider the rise of Schoellhorn at Ab- bott. He joined the company in 1973 after 26 years with American Cyanamid Compa- ny, rising to become CEO only six years later. He presided over a steady and unin- terrupted increase in earnings, revenues, and profit margins. But a few years after becoming chief executive, Schoellhorn seemed to change, according to Abbott ex- ecutives who knew him. "He felt the com- pany owed him so much because it was so successful/' says a -former Abbott execu- tive. "There was no price he could extract that would make the ledger balance out." Schoellhorn divorced his wife of 35 years in 1985, citing irreconcilable differences, and married his secretary a few months later. He spent millions of dollars of Abbott money to buy a pa~r of the priciest corpo- rate jets then available--an unusual expense at what had been a conservatively run company. "They were dubbed 'his' and 'hers,' because only Schoellhorn and his wife used them," says one executive. '~l~hat was never part of the Abbott culture before." At work Schoellhorn increasingly refused to allow anyone to challenge him. Over a nine-year period, he ousted three heirs apparent because, several exect/tives say, they weren't yes men. Division heads began to wor- ry that Schoellhorn was sacrificing long-term growth by cutting R&D budgets to maintain 15 percent earnings growth a year. Says a current top executive: '~Phe pri- mary agenda of Bob Schoellhorn was preserving his own power and eliminating his competition." Outside the company,~asAbbottstocks oared, Schoeithorn~ssome- thing of a hero. He joined the boards of other companies and groups and spent so much time on outside activities that his colleagues began to think of him as an absentee manager. One top executive estimates that Schoellhorn PAY FOR PERFORMANCE: ~WHO MKa3URES UP...AND WHO DOESN'T There's no perfect way to correlat~ executive compensation with :.~,pel$ocmance, but two measurement Systems offer useful bem~hmarks. One .relates the boss's pay to total ~arekokler rehJm. The olJmr re]ares pay to , ~um on equity and change in m4um on equ]~. ~i~C~ITiVES WHO GAVE ~DERS THE MOST FOR THEIR PAY... 198~-90 To~l pale Skm~atder .Relat~e (iu thousands) return'* imJex 3.,~.M. ~er ~ 7~ ,:~_~ ~ ~m~M St. J~ ~1 1,161 ...~D ~ WHO ~ ~~ ~E 1, ]Paul B. ~n ~ J~. ~7 16.7 % .2:~. M~ ~ ~r WaR m~ ~ 73.7 4..Mb~ ~. ~s ea~mu~ ~m~ ~.1~ 5.:~ ~ Y~ H~ ~ 9,~1 ~3.4 ' ~ ~ ~P~I~ D~ ~ ~ ~ ~ ~R PAY... T~I ~* A~ ~m R~ (~ ~sl on ~u~ i~ex 2,9% 3.0 3.4 3.S 5.7 2~r~l~p X. i~t Hike 1,049 30.5 169 3~ Mo~ t. Ma~ ~Mr ~d~! 1~4 ~.3 4. ~ ~ P~ ~ 719 ~.4 143 ~,~M. ~ ~n~ 3~5 14.7 142 ...~D ~ ~E ~MPANI~ ~D ~E ~ 1. ~ ~ Holl~ ~ ~,216 1.9% ~9.1% 4. T~ H. ~ ~r ~m 2,~ ~1 -~9 5.~ J. O'~r ~~ ~ 1,~ ~2 -16.6 *Salary, bonus, and fongJeerm c~mpensat]on paid ~or entlre thee-year period **Stock price at the end of 1990 plus divideods for three years, divided by stock price at the end of 1987 Reprinted from the May 6, 1991, issue of BUs/hess Week by special pemission. © 1991 by McGraw-Hill Inc. was on the road 70 to 80 percent of the time. "Schoellhorn lost his ability to lead Abbott because he lost the respect of its executives," he says. When his wife hired a stripper for his birthday party, attended by fellow executives and their wives, it was too much for many of the already disenchanted management team to endure, recall several executives. Many of the guests were appalled. After Schoellhorn forced the resig- nation of his third apparent successor in 1989, the birth- day party became an issue in a board investigation that led to his firing in March 1990. Abbott's board, at least, finally checked Schoellhorn before his behavior severely affected profitability. But in many cases, boards wait until it's too late. One recent ex- ample is the dramatic decline of Bank of New England Corporation, which was seized by the government in January 1990. It wasn't until after an examh~atton by federal regulators, disclosing that the bank had $1.2 bil- lion in bad real estate loans in late 1989, that the board forced out CEO Walter J. Connoliy Jr. Many former executives and analysts lay the blame for T106511192
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the debacle on Connolly, a former Marine who supervised drill instructors. He is widely described as a tempera- mental autocrat with an unpredSctab]e, Jekyll-and-Hyde personality. Connolly so completely dorahated the bank over his five years as chief executive that his manage- ment style was dubbed WWW Whatever Walter Wants. What Connolly wanted, and got, were terrified yes men. During monthly meetings with his top execu- tives, he would aim his sights on one manager picked at random. Connolly would grill the hapless victim with rapid-fire questions and a relentless glare. "One officer might say, "Deposits amuplO percent, and we're really pleased because it's the second month in a rew,'" recalls a former executive. "Connolly would say, qb'hy are you pleased? D o you think 10 perc.ent is enough? Are we running a hank where 10 percent is enough?' and on and on. Once Waiter was riled up, people would end up yessing him to death." L busi~ rants, and hlg often piloted b!]~ sI~acho.:-~ pres~ whose Wordis iaw.~ But aside from table exceptiohs,~top'exe~.: utives .~ Japanese ture agains~ 'sYm.1~ '~'~:i~W.~.~i!e~,n~.h,e'g~ivb'Fs sea~~t:M¢~a,~Kdnic toms of CEO Disease. ' Yamamotb gav~ eus~amers.~.h~vighf:of-.way. "Individually, he is not almighty.--not at ~all," says Shoichi Saba, a former chairman 0f Toshiba Corpora- tion. The perks just don't pile up th~ way they do in the United. States. No private jets, gyms, or dining rooms, no muitimillion-dollar bonuses. But the post usually comes with a car and ~lriver, golfo~lub membership fees, housing, a hefty retirement p.ackage, and busi- ness-related entertainment expenses. Still, the Japa- nese CEO's pay is usually just seven to I0 times higher than those of fresh recrm'ts. The main factor reiningin the boss's ego is the nature of the climb. In a typical Japanese company, a class of new graduates enters each April, working its way through prescribed salary levels and a variety of posts according to a preordained schedule. It's rare for a whiz kid to leapfrog to the .top and nearly unheard-of for senior management to jump ship. At abou~ age 45, it becomes clear who will reach the upper echelons. The winners earn a two-year stint on the board of di- recto_rs in the ann ~ual s~rip~g__mshu__~ng. The presi_dent names his successor, and the board usually rubber- stamps its approval. The president's main job is to draw the master plan and let the rank and file fill in the details. And there's no distractions coming from the lecture circuit or from tending to.~li_~n~. ~ :offi- da~s ~m-~ ,~d ~he go~vernmen~. "That's strictly th~ :chaizman's job," the president,of dist~er S~ L~. Top officem h Japan a~ judged by ~es that k~p th~ ~m losing touch with their commies. A new can boss will typically move~ stamp ~ or her ~nality on the outfit, ~ the point of slashing payroll or ejecting losing units in qrder to hnpress Wall Street. "It's inconceivable that a J_apanese CEO would have to prove his manhood by dramatically dismissing employees," says James Abegglen, the president of Asia Advisory Service. The Japanese CEO is spared Wail Street's pressure for quarterly results and the fickleness of dividend- hungryshareholders. In many cases thin prefit mar- gins are tolerated if a company has prized market share. Mergers and acquisitions are fi'iendly, and long- term investment is applauded. To be successful the boss must dream up ideas to please employees and customers, his main constitu- ents, as well as suppliers and affiliates. Kenichi Yama- moto, the chairman of Mazda Motor Corporation, recalls being dragged out of bed by late-night calls fi~om customers when he was president. The price of this system can be mediocrity. But it keeps CEOs in touch with reality. Sure, there are some arrogant people running Japanese corporations, just as there are in the United St~ Thediffemnce is that their secretaries suffer, but the company rarely does. • Karen Lowry Miller, a Tokyo-based correspondent, for Bu,soiness Weel~. T106511193
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The details he oRen demanded during these monthly Ultimately, the power to prevent and, if necessary, tirades refiectod Connolly's own failure to remove him- cure CEO Disease rests with the shareholders. They self from his bank's nitty-gritty operations. Driven by a have the right and the duty to insist on a board of compe- desire to best long-time rival Bank of Boston Corpora- tent and aggressive outsiders. But in reality company tion, he personally wooed large real estate developers, offering cheap rates on loans with little collateral. Often he made the loans without consulting any of his lending officers, say former executives. Some CEOs become so seduced by the image of the corporate chieftain that they rarely perform their jobs ef- fectively. Howard M. "Pete" Love took office at National Intergroup Inc. (NII) in 1980 with an ambitious vision to diversify the troubled steelmaker. His moves into such far-afield areas as drug wholesaling, oil distribution, re- tailing, and savings and loans have reaped more than $700 million in cu- mulative losses during the past dec- ade. For most of that period, Love was too busy attending to an enormous list of civic commitments to focus fully on the disaster at NII. From 1984 to 1988, during the height of the company's woes, he sat on more than a dozen cor- porate and civic groups. Love was voted out of office at an annual meeting in July 1990. But be- fore leaving his position, he strongly disagreed with these criticisms. [ ~ltimately, the power to prevent and, if necessary, cure CEO Disease rests with the share. holders. Love had some CEO Disease symp- toms pretty much from the beginning. But as the downfalls of both Connolly and Schoellhorn clearly illustrate, the malady tends to become much more of a problem after a person has held the top job for a number of years. By then the boss has had plenty of time to for- get what life was like as a mere mortal. Of course it doesn't have to turn out that way. A few simple reforms would go a long way toward preventing many cases of CEO Disease. One obvious answer is to disperse decision-making. An advantage of this approach is that it focuses attention on a group of executives, not just the CEO. The prevalence of the problem also makes an over- whelming case for more involvement at the board level. To be effective, boards must be composed of a sizable percentage of outside directors who have the time to learn enough about a company and its management to make informed decisions about its leadership. If the boss isn~veceptive and problems mount, a re- sponsible director has no choice but to press for change. On four separate occasions since he started serving on boards, Jewers Perkins says, "I've sat down with the CEO and said, 'In my judgment, you've made the contri- bution you can to this organization.'" Three CEOs took early retirement. shareholders are often passive, indifferent, or only in- vested in the stock on a short-term basis. Still, CEO Disease need not be ter- minal. Consider the recovery of M. Anthony Burns, the CEO of Ryder System Inc. From 1979--when he be- came president of the company at age 37--to 1988, Ryder acquired nearly 100 companies in an effort to shift its focus from trucking to transportation. Earnings and revenues exploded, and Burns quickly became a managerial darling. Celebrated by management guru Robert H. Waterman Jr. as a "master," Burns clearly enjoyed the limelight and was promptly blinded by it. He joined the boards of several companies and nonprofit groups and spent heavily to permit Ryder to co- sponsor the Dotal Ryder Open. But in 1989 Ryder paid for its ex- plosive growth. Burns's bid to build a transportation empire left Ryder vul- nerable to industry downturns. The company saw multimillion-dollar write-offs and conducted layoffs to slash costs and get in line with market demands. As takeover rumors swirled, Burns quickly put in place golden parachutes and a poison-pill defense--both of which drew heavy criticism from unhappy shareholders. "I went from being a genius to being brain dead," concedes Burns. Burns now says that he realized his critics had a point. He quit two boards and cut back some involvement in charitable activities. Now he's far more careful not to overextend himself. "The demands on your time for external activities are incredible," he says. "It's easy to get caught in that trap." Even so, the turn- around at Ryder has a way to go. Burns may be more the exception than the rule. Many CEOs who stray never regain their footing. But at least shareholders of companies with such a CEO have a choice. In this sense the real blame lies not so much with the growing number of flawed CEOs as with sharehold- ers and boards that fail to insist on better management. • THE WRITERS By Rus/ness Week senior editor John A. Byrne and cor- respondents William C. Symonds (in Denver) and 3ulia Flynn (in Chicago), with bureau reports. Reprinted from the April 1, 1991, issue of Business Week by special permission. ©1991 by McGraw-Hill Inc. All rights reserved. T!06511194
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Xerox connectivity is bringing together much more than just machines. Ti06511195
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XEROX To create better business documents, you have to connect two things. Minds. and machines. Then ever3,~hing really comes together. Thafs ~q~y. Xerox printers have more physical connections to processors than ant' other printers. And have more engi- neers on the job supporting them. And ~aen it comes to comprehensive solutions regarding logical protocols. printer format languages and host soft- v,~e drivers, no other maker of high- speed laser printers comes close. It all means an en~,Smnment in which different authors at dift~rent computer systems can bring together text. data. graphics and ideas--seamlessl3.: To create documents that show your printers and your people at their best. And Xerox is even helping people plug into the future. 133,' supporting such industD,-standard groups as CALS committees, the Open Systems Insti- tute, the Xerox Systems Institute, and many more. To learn more about how Xerox can help you connect printers, processors and people, call our Preprogrammed Information Cemer at 1-800-444-.5588 and ask fbr Information Kit #02. It just could be one of the strongest connections you've cvcr madc. ~'~Award XEROX The Document Company T!06511196
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SPECIAL REPORT Taking Stock of the Company Late one night, while waiting for the company limousine, you pour yourself a drink and ponder your life as a CEO: the bonuses, the golden parachute, the private elevator with the pol- ished doors. Perfect--or rather, it would be, if it weren't for those busybody shareholders constantly whining that their stock is stalled. What to do? Invest in a new plant and expand production? Pay a few dweebs in white coats to develop some new techno-doohickey Instead of reinvesting company cash in real growth opportunities, top executives are raiding corporate coffers to purchase stock shares that will line their own pockets with profits. that'll really wow Wall Street? . . . Nah, the very thoughts make you tired. Life is so unfair, you think. If only you could boost stock prices, get rid of some shareholders, and maybe reap a few million bucks for yourself in the process. All without really working. You can. In fact, CEOs have been doing it for years, thanks to Wall Street's best-kept secret: the stock buyback plan. For a classic demon- B Y M ARK F iSCHETTI ,~4 Bi3TOFBUSINt3SQtU~TEI~r/ . FJi.LLI99! T106511197
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stration, consider the o~mers ef the W~h- ington Redskins. Back in the e~rly '70s: Jack Kent Cooke, Milton King, and Edward Bennett Williams sat on the board of Pro Football Inc., the par- ent company of the Redskins. From that position, they bought out other sharehold- ers to take complete ownership of the team. It was quite an expensive purchase-- which is why they used other people's money to make it. During the '60s, I~ the '7os, the ow~ers qf the Wctshi~.qtcm Redski,m sacked.fa~ts by hikht9 ticket prices tu pa~.l.lb~" the, $8.8 million p~reh~se qf lmblie stock sire ~'e.~. George Preston Marshall owned 520 of the 1,000 shares in Pro Football; Williams and his two cohorts held minority positions, and the public held the rest. As Williams came to control more of the daily acti~ities of the company, he directed Pro Football to begin buying back public shares, using company money, for the sole purpose of increasing the board members' relative share. Then, after Marshall died in 1972, Williams--the executor of Marshall's es- tate-had Pro Football buy and retire Marshall's 520 shares. That transaction cost Pro Football $8.8 million, but when they were through, Williams, Cooke, and King owned the franchise. Problem was, the Redskins had nowhere near that kind of money. So the trio put Pro Football into debt-- major debt--to finance the purchases. Although the three owners wouldn't talk, sources at Sports Illustrated and The Washi.~tgton Post put the debt service alone at between $600,000 and $I million per year. And Joe Fan picked up the tab. By 1978 the Redskins had the highest ticket prices in the National Football League. Williams, Cooke. and King had managed to bill consumers--in this case ticket buyers--to get control of the company and of its profits. Today, industry, watchers estimate that, thanks to soaring TV revenues, the franchise is worth more than $150 million. 10 times what it was worth in 1972. There are no outside stockholders left to benefit from that surge. And Cooke, the only surx4x4ng member of the original troika, sure hasn't shared the wealth with the little people who made it all possible. By now we've all heard the cautiona~3' tales: how HenD" Krax~s, Sid B~.~s, and other corporate raiders made billions during the '80s while driving U.S. compa- niesinta c~bt~ imperviou~ ~o the impact on jobs or nation- al competitiveness. Buybacks have many of the same effects--they just work more insidiously, since nobody's complaining. Last year U.S. companies bought back more than $12 billion in stock, according to Goldman Sachs partner Steven Einhorn. That money generally didn't result in better cam, lower food prices, or even cheaper tickets to Redskins' games. It didn't result in leaner, smart.er business management. It. didn't help us as we slid deeper into recession. It did result in hefty profits for the execu- tives who engineered the deals. In major food, met- al, manufacturing, and other companies across the United States, CEOs divert millions of dollars from the quest for innova- tive products, break- through production technologies, cleaner waste management, and better-paying jobs. Then they spend it all manipulating the s~ock market to enrich themselves and their shareholders. So, why haven't you heard about this corporate con? Because most business managers, stock analysts, and re- porters have fallen for the buyback's illusory benefits. A buyback works like this: Say there are one million shares of stock in XYZ Inc., a defense contractor that builds sophisticated Zealot antimissile missiles. XYZ executives own 500,000 shares of the company, and the other 500,000 are held by various investors. If XYZ offi- cers want to increase earnings per share or reduce the relative ownership of outsiders and, with it, their influ- ence on the company, they can buy up the public shares, using the company's money. ~,~,~en the shares are purchased by the company, they are "'torn up"--they cease to exist, since a company can- not own stock in itself. If XYZ executives buy 100,000 shares, fi)r example, they then control 500,000 shares out of 900,000 (or 55.6 percent) instead of the 50 percent they used to control. Why doesn't this power play gall small investors? Because of the built-in bonanza: Even if the company's earnings remain level, they are dN~ided over 900.000 shares instead of one million. Thus, earnings per share increase. Furthermore, after a buyback is announced, the share price tends to rise a bit, thanks to the conventional ~fis- dora among stock traders that higher earnings per share mean a stock is more valuable, and therefo~e is worth a higher price. Brokers and analysts recommend that their clients buy XYZ, and the activity further drives up the price per share. So XYZ has more control, the stockholders make more money, and the shares increase in value. What's so bad about a buyback? Well, there's just one minor detail: buy- ing back stock shares isn't free. IfXYZ execs want to buy 100,000 shares and the shares are trading at $30, they have to spend $3 million of the company's money. That means one of two things: large cuts in the compa- ny's cash flow or, if XYZ's execs borrow money to com- plete the transaction, big corporate debt. Either way, ~6 BE~I'O~I~J~Nt~SQUAJ~EN.Y • F,M..L1991 T!06511199
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huge quantities of cash are diverted from long-term £m- The corporate raiding follox~ing the crash further accel- provements at XYZ--say, inventing a more sensitive crated the practice. If your company was tb.reatened by a homing device for the Zealot, decreasing costs ofproduc- takeover artist, one of your best defenses was either to tion, accelerating and simplifying delivery, during inter- gobble up so much of your own stock that the raider could national crises. Such capital investments would surely pay offin the Iongrun, making the Zealot more attractive to nations now- smitten with the l~rench competitor. Even a small in- crease in orders would boost the de- pressed region where XYZ is located and possibly give jobs to the 15 per- cent of the local population now unem- ployed. But instead, XYZ spends its $3 million on a corporate facelift: the artificial price boost a buyback gives a stock. Unfortunately, like a facelift, that boost usually doesn't last long. For proof of that, you don't need X YZ. Just take a look at the venerable Washi~,t.o'~ Post, where blind faith in the buyback may ultimately hurt not just its stockholders but its coverage. Throughout the '80s, chairman Katharine Graham and her Washing- ton Post Company used buybacks to drive the share price up and up, to a high of $311 in October 1989. Then the tide turned against publishing, but Graham's company kept buying, spending $175 million in the first quar- ter of 1990. Instead of going up, the stock price slid down to $250. The com- pany bought more. By Janua~ 1990 Washi'~tgton Post. stock had declined to around $190. Not only (lid the share price lose ground in 1990, but earnings per share did as well, dropping more than a dollar from the 1989 dividend of $15.50. President Richard Simmons recently predicted another decrease in earnings per shm'e for 1991. So, in the long run, the buybacks not only t~ailed to bring better earnings, they virtually en- sured a worse Washington Post. In the midst of a reces- sion, the Post could use the hundreds of millions it spent on buybacks to run more sto~es, hire more reporters, and go 'after more potential advertisers. But most of that money is gone. "~ ~hat's so bad about a buyback? Well, there's Just one minor detail: buying back stock shares isn't free. The Post was far from alone in its costly int~atuation. In the financially roaring '80s, it was indeed hard to find a buyback that didn't work in the short term. The economy was growing, and many companies had more cash on hand than they could handle. So they bought back stock, driving its price up and making their shareholders happy. With easy credit, often based on junk bonds, even companies that weren't doing well could play the game. After Black Monday, buybacks became even more at- tractive, as the stock prices of hundreds of companies took a nose dive. F_,xecutives at solid firms knew their stock would rebound, so they bought their own shares. not gain control, or to bolster the stock price high enough to make the takeover too expensive. Once learned, ~he buyback proved a tough habit to break. Today, the econ- omy is no longer booming, credit is no longer easy, and the raiding has large- ly ceased. It's riskier than ever to go into debt. But many executives are still playing the buyback game. Why? Because besides offering a short-term gain to shareholders, buybacks often mean a wSndfall for CEOs. The desire of big stockholders for quarterly profits has driven many a chief executive to forget about long- term strategy, especially when the chief executive himself is a big stock- holder. There's no better example of this than Ralston Purina, the St. Lou- is-based owner of everything t~om dog food to Wonder Bread to Chex Mix. In 1986 Ralston's board made a breathtaking offer to the company's top executives: If the stock price hit $100 and stayed there for t0 con- secutive trading days, the executives would take home a bonus of 491,000 free shares, worth a cool $49.1 million. Ra-lston's chairman and CEO, William P. Stiritz, would get 160,000 of those shares, three top vice-presidents would get 40,000 shares apiece, and other managers would get smaller awards. At the time, the $100 mark seemed a pretty tall order: Ralston stock was selling at around $60 a share. But the brass ring was enor- mous. And to Stiritz, the way to reach it was perfectly clear. Since taking over in 1981, Stiritz has spearheaded one of the most aggressive and prolonged buyback programs ever seen in the United States. Under him, Ralston has spent almost $3 billion, more than 95 percent of its earn- ings, on its own stock. By early October 1990, finally, the grail was in sight. So Ralston directors authorized anoth- er buyback of two million shares. That put them over the top. Stiritz got his 160,000 shares, worth $16 million. Ralston argues that its stock plan benefited not just Stiritz but all shareholders, and quite handsomely at that; the company's earnings have doubled since Stiritz took over, and the per-share profits have quadrupled. But now that the plateau has been reached, Ralston's stock is going down. Indeed, by early January 1991, the stock price had slipped to $93. Ralston ha.~ always generated a lot of cash: $250 million a year in play money, after dividends. But it ak~o carries almost $2 billion in long-term debt, most of it used to fi- nance buybacks. "The buyback has been Ralston's only T106511200
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THE GOOD, THE BAD, AND THE BUYBACK In the early 1980s many lmsiness publications touted stock Imybacks as a sound financial investment and a way to prevent possible takeovers. By the end of the decade, however, most magazines had changed their views, especially after h~e 1987 stock.market crash exposed buybacks' weaknesses. ~ "...Repurchase moves can be a beon to investors who own the stocks. Prices can rise and, in many cases, earnings apportioned among the remaining shares should grow fatter." "Prefds From Stock Buyhacks," Fortune, July 9, 1984 "How's this for a takeover defense? You load up your balance sheet with $500 million of debt, buy in 20 percent of your stock, and become one of the most highly leveraged firms in the food industry. A poison pill? More like a sugar-frosted flake. The company is Kellogg Company of Battle Creek, Michigan, and its leveraged bey-in last fall only added to its earning power." 'q'he Snap, Craclde, Pop Defense," Forbes, March 25, 1985 "A lot of people feel that a company buying hack its own stock betrays a pathetic lack of imagination: 'Can't management think of anything productive to do with its money?' they ask. But for many individual companies, a stock buyback is far preferable to such alternatives as rushing out to acquire alien businesses that, it soon turns out, the acquiring management does not know how to r~.." "Common Sense at Exxon," Business Week, August 19, 1985 '~The [buyhack) can have ,as~ side effects .... Wrth GM the bwjbeck seems based more on management confusion than management confidence .... Now-- when Ithe company) is paring investment, sacking workers, and closing plants--it still decides that it is worthwhile to spend $5 billion to dicker with its share price." "Pill-Popping at GM," The Economist, Maxch 14, 1987 "Call it the no-risk investment, a key reason haybacks have become the new way to deploy shareholder money. In this era of stuck- market velalSlity, no other use of money offers the same opporbmity to tell shareholders they have made a terrific investment--without having to own up to the bad ~-~vs if it turns sour." "Losses? What Losses?" Forbes, Februat3" 8, 1988 "Buybacks should have made sense in the wake of the stock- market collapse, when prices were down. But some observers argue that those prices were bargains only in relation to the inflated values before Black Monday. Moreover, some buyhacks were just panicky attempts to boost investor confidence." "Don't Buy a Firm's Stock Just Because the Firm Does," Money. March 1988 game," says Timothy Ramey, a former analyst with County NatWest in New York City. "They haven't done much to improve performance." Ralston, Coca-Cola, and other cash-rich retailers are pm~icularly susceptible to the buyback disease. Manag- ers at those firms argue that, especially during a reces- sion, buybacks are their safest investment. What if they spent the cash acquiring a company that wound up doing poorly? Or overspent to develop new products consumers don't want, and then wasted even more money on large ad campaigns to promote those products? To them, a buyback is a small risk wit;h a predictable return. Such cautious management may be shortsighted and fainthearted, since risks and sturdy R&D drive the best American companies. But it also may be disingenuous. A thorough evaluation of a buyback's merit must include this simple question: who gains the most? Clearly at Ral- ston the answer is not consumers, but the company's top executives. And their stock-driven compensation pack- age does not stand alone. "In the last 10 years the empha- sis in senior executive pay has shifted from salaD" and cash awards to stock options," notes Ted Buyniski of Sibson and Company, a Princeton, New Jersey, consult- ing firm that specializes in compensation. "For many top executives, as much as half their total pa~v is now fiedto increases in stock prices and stock earnings." The object of stock options, Buyniski says, is to focus executives on measures that increase shareholder wealth. But many executives have concentrated almost exclusively on improving short-term stock performance. Granted, for recession-proof, liquid companies such as Ralston or Coca-Cola, buybacks may be lazy, but they probably won't prove catastrophic. However, for com- panies in industries with cyclical downturns, they can. The real danger of buybacks comes when a company should be usingits money to reduce debt or just survive. "If they try a buyback and the stock goes up, but it comes right back down once the buying has stopped, they've blown the money the)" could've used to keep their opera- tions going," says Len Hyman, an enlightened analyst with Merrill Lynch in New York City. That's advice sev- eral metals companies could stand to heed. North American steel, aluminum, copper, and nickel concerns that were ailing in the early '80s found them- selves wading in cash by the end of the decade, thanks to improvements in efficiency made in response to competi- tion fi'om overseas makers. That's the good news. But al- though Alcan Aluminum could have used its new money to wipe out its debt and Phelps Dodge and Inland Steel might're financed a permanent comeback, pressure from investors got to them. All three began buybaek pro- grams, retired shares, and announced special dividends. Of course, resisting stockholders' shortsighted de- mands in order to preserve the long-term health of the corporation takes plenty of tact and diplomacy. But giv- ing in may mean giving up the store. Just ask CBS, which eapituIateO to the desires of a powerful stoekhoIder who already had both feet in the grave. In December 1990, CBS Inc. announced a huge buy- back--10 million shares, at a cost of $2 billion. The rea- son: The estate of company founder William S. Paley, who died in October, found itself with an enormous estate T!0651120I
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tax bill due by July 1991. Paley's family didn't have nearly er Whitman Corporation, a $3 billion coasumer-goods enough cash, so it initiated discussions with CBS about a conglomerate in Chicago, best known for its Whitman buyback. In order not to change the prefile of current Sampler chocolates. In September 1988 Whitman was ownership, CBS decided to make a fixed price, 'fipro rata" already buying back.500,000 shares a month fi~m the 107 offer, meaning CBS would buy the same percentage of million shares outstanding. Then it announced it would each shareholder's stake. The company would pay $190 for each sham. Paley's estate owned 1.4 million shares (or 5.5 percent of those out- standing) and will make $108 million on the deal. But one other entity will also profit greatly: Loews Corpora- tion, which owns 24.5 percent of the outstanding shares. Loews originally bought its shares at an average of $125; the prorated sale of its stake, at $190 a share, will result in a profit of $165 million. Who runs Loews? CBS President Laurence Tiseh. Last December, GBS announced it expected a fourth-quarter loss, the first quarterly loss in the company's long history. The bad news was caused by a $55 million after-tax loss from cov- erage of major-league baseball, lower than anticipated advertising rev- enues, and higher costs sustained by news coverage of the Persian Gulf buildup. Fourth-quarter earnings per share, it said, would be down from $1.10, where they had been each quarter for two years. CBS admitted that "the loss of in- come from the $2 billion used to con- summate the [buybaek] offer" will have a "dilutive impact" on earnings per share, which "will outweigh the ef- fect of having fewer outstanding shares." In other words, the usual ef- fect of a stock buyback--inereased earnings and stock price--will not occur. CBS's buyback will roughly halve the trading value of the company, leaving stockholders with some 13 million shares worth about $2.3 billion. That's a virtual invitation to takeover kingpins who, prior to the buybaek, would have needed $4 billion to buy outstanding shares. buy back 3.4 million more shares, worth about $125 mil- lion, from Carl Pohlad and MEI Diver- sifted Inc., of which Pohlad was the chairman. Whitman feared Pohlad and his clan were seeking company contrel. Whitman borrowed money and got the shams, and Pohlad lost interest. Some observers sympathize with Whitman, saying there ~vas no other option. But as Ramey observes, "A takeover might have been the best thing that could have happened for shareholders." At the time of the Pohlad threat, ~rhitman's stock was selling at around $36. By May 1989 it was at $26, and Whitman had $l.6 bil- lion in debt. By the end of 1990 the stock was trading at around $18, and Whitman was selling off divisions to raise money. Looking back over the '80s, busi- ness writer Kevin Phillips recently noted that, more and more, people speak of American economic hegemo- ny in the past tense. The buyback is one of the many corporate cons that make such laments ring true. As divi- dends shrink and the market slides, maybe shareholders will start to ques- tion why highly paid executives aren't reinvesting revenue to improve the real growth of their companies. "Shareholders," says Ramey, "have to wonder why they're paying top ex- ecutives millions of dollars a year if all they do is buy back stock with the cash the company earns." If more report- ers, analysts, and investors began to see through the buyback's sham virtues, more CEOs would start invest- ing in innovation--which would mean a dividend not just for the captains ofindustr3, and their stockholders but for dwindling American competitiveness, too. • Rrhaps the buyback can be jus- tiffed as a small sin necessary to prevent an even greater one. That a buyback would make it easier for a corporate raider is a new twist. Usually it's the other way areund. Defensive buybacks came into vogue after the crash, when such raiders as Carl Icahn and Asher Edelman sought to accumulate undervalued stock. Executives re- sponded by buying up outstanding shams to ensure ei- ther that the raidors~uldn't get contrebar-that the stock price would be out of reach. Perhaps in these eases the buybaek can be justified as a small sin necessary to prevent an even greater one--a takeover that would result in the dismantling of a compa- ny and the loss of jobs. But there is a price to be paid for this tactic, and some eomparties have paid dearly. Consid- THE W R I T E R Mark Fischetti is a freelance writer specializing in busi- ness and technology. His articles have appeared in such publications as Sport.s lll-ustrated, OMNI, and Scientific American. R~print~el wiLh pexmJssio.n from the Marc:h 1991 isslle of The Washington Monthly. ©1991 by The Washington Monthly Company, 1611 Connecticut Avenue. N.W., Washington, D.C. 20009. 202462-0128. All rights re- served. This article originally appeared under the title "Stock Buybaeks: The Corporate Con You're Still Fall- ing For." T106511202
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Beversal of Fortune Long known as economic workhorses, turnaround experts are riding to the rescue of corporations saddled with excess debt. BY NANCY MARX BETTER Photograph b!l Carolg~ Jo~es Jo. Whitney, a Columbia Business School prol~ssor with the car- riage of a patrician but Lhe message of a scrapper, is pacing in front ors0 M.B.A. students in Uris Hall. He is moving hack and forth, his blue-and-white pin- striped shi~ ~lle(l at the sleeves, un- derlining the bare-hones seriousness of the strut he's telling--a case study that is fictitious but timely to the eennomi- cally stormy Gray Nineties--about a business he calls Bonne (:hance, a small Midwestern jewebT store on the verge of losing its Rolex deale,.ship. To keep Bonne Chance fi~m going broke, t.he (]olumbia students must effect the re- versal of ff~rtune known in management circles as a corporate turnaround. Chewing one end of his glasses and squinting at the back row, Whitney is- sues a command: "Let your gr~, matter [oose~" ~e students begin scribbling on t~ sh~s of white paper ~qth M~ Markers. After a while Whitney ~'abs a Professor Jolot O. Whih~e.q's philosophy tm.'~ become the Napoleo~ ('ode qf the tu ~'m~ romul u,orld. 60 BESI" O~ ~JSINES~ QLMJTI~I~Y • FALL 1991 T106511203
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Armed with a simple plan--and an iron haml--ho'~aruu~td urli.~l Sifloh~ff cnl.s c(,Tmrah, debt lo the bone. roll of duct tape, posts their efibrts over the blackboard, analyzes them intently fro" a ~bw moments, and fi-owns. business is in serious trouble." he says. "The most importan~ think to wort~ about right away is c~ush.'" Cash, Whit- ney believes, is the first and only thing that matters in eveo' turnaround; after that, the solutkms vat~ according to the problems. "Forget about profits, forget about the bottmn line, lbrget about ev- e~'thing except cash," be says. Cash, cash, c,sh, writ.e ~he students. murmuring in accord. Whitney is their ~tru, the nation's lbt'emost academic expert m~ companies in despair. Bleed- ing companies, battered companies. bankrupt companies, these are John O. Whitney's specialty. Organizations tee- toting on the brink of disaster, fitting what he calls "the dark underbide tess." l%ur years ago Whitney pub- lished his maniI~sto, Takit~g Matmgemcnl G,ddc to 7'r, mbled panie.x und Turmtrrmmls. One recent semester 420 Columbia students signed up fi," his course, which nmked ~s the business school'b mobt polmlar ott~ring. "Students are beginning to see that we're in fi)r a long period of crisis." Whitney says. "Nnw they all want jump on the bandwagon. Many of them see tllrnal'OUlldS aN a cal'eel'. It's beginn- ing our new growth industo'." But turnarounds aren't like levera~vd buyouts oi- mergers or takeovers. don't invoke (]le same NellSe of grand, playful gamesmanship. ~ey (hm't come with limousine rides and champagne parties. ~wy Chm'~ turn men into mil- limmires ¢wernight. Turnarounds are trench warNre. "Peolfle ask me whoa like to do this." says Whir m3'. who him- bell has helped salvage halfa dozt, II dis- tressed companies. "'l tell them it's like setting your hair on fin, and putting out with a hammer." The dawn of debt t'.', mornillg again i£~ Amt'L-iCa, mid the huge pile of debt is cunfing due. Companies cranked uI) by I+1',O.~ mv so brittle they're start- ing to crack. Victims ~ff Mick financial eng-ineering are littering the hmdscal~e. (~ce-mighty corpon~,~ions ma.~ strug- gling for sm~qval: household names such as Pan Am. Resm'ts IntenmLionaL S,mthmark, Manville.'('mnpem~. and R(.vco am running fi~r cover behind the ('hapter 11 bankruptcy law. Since the summer of 1990 the n&e of bank~l)tcy filings has exceeded I.:I00 companies each week. Over the past five years bankruptcies have nearly doubled~ and the tide of brininess &ilures toni in- ues to rise. In 19M) nearly 1;80,0011 cases were filed ((~;l.Ot)O corporate and imlividua]). The government the Lota[ number ~o hit Sl(LO00 in 1991 and to reach 890,0()0 in 1992. Suddenly, strangely, the losers~not the wim~ers--of corporate Anmrica are in vogue. ~e day of the underdog has Sandy Sigohfl'f, who toiled seven days a week to save Wickes Coml~any, tim na- l.ion's largest merH~andiser of building- materials, fi'mn extinction, and INImieri, who ~x,suscitatvd Penn tral railroad and the financial-sm'x~ces conglomeraw Bahlwin-United. ~e new ~blk heroes aren't industry raplains such as I,ee lacocea and Harold (]ellPell o1" hotshot en[l'i']ll'enetllS such as Steve Jubs and I)onahl Burr or high- pawered financiers such as Henry Kra~qs and [h'uce Wasserstein. ~ey're also not Tom Peters-style omsultants wh, oflbr ad~qce fi,r a Th~o"re hands-on lixers who gadlop to the resctlt, of u financially troubled com- pany about to dr¢,p uff the cliffand yank hard. pulling it hack tu salbty. klntil recently they um'ked behind ti~e seem.s, wiehlin~ their hatcbvts .tit .f the limelight. "Used to be. turn- alx~tlnd gtlys were. grillD" charact t,rs didn't see tm[ess yotl absolutely had says (~eorge I*ut mun 111. who lmblishes the Tto'mtr..m/Lelh'r in Bost(ul. Now they'vt, been elevated to a st;wring 1 f tilt' Ileal business of t he 'N0s was doing big deals, the hot business of the '~10~ saving them fl-om ruin. We[conic to the Workout Decade. Since the 19~7 crash, ~5rtually eveo" wm-kout department to save crippled by excess deb[. It's ironic. course, that when a company ~ues bu~t. it a, ks a bank thr advice in reMructur- in~. even th, mgh the adxSce of another bank may be what got it in t roubh, in the first place. Says Mat~in Klein. a lawyer with the firm l)tx'yer & Traub. "'In the T106511205
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old days the banks were gi~g compa- nies advice on putting together acquisi- tions. Now they're gix~ng advice on taking them apart." Says Christopher Beard, who ~-ans a Washington, D.C., newsletter called Tummrmtnds & Workouts. "This busi- ness has become chic in the past couple of years." In a sure sign of its ~htality, the workout movement has spawned a trade gax)up, the Turnaround Manage- mcnt Association (sec box). In the l~al] of 1989 the tmnmrounders sponsored a two-day conference at the Marriott Marquis in Times Square. Around 500 people convened at the vast hotel-fortress to assess their moveraent. These weren't the glam- orous faces of the '80s, the Steinbergs and Icahns and Pickenses who met in the pink bungalows of the Beverly Hills Hotel to negotiate the leveraging of America. These were the gray-suited bankers, lawyers, accountants, con- sultants, auctioneers, and liquidators. Men and women with a m~ssioa: to undo the damage wrought by junk bonds. Sigoloff and Palmieri, the turn- around dukes of their respective fief- dams in Los Angeles and New York were there, as were scores of lesser-known practitioners. Frmn this agglomera- tion came a strange, re- vival-meeting fervor, matchingin passion that which had accompanied the Predators' Ball. There were crusad- ing lectures about what had gone wrong with corporate America and how to set it right; there were talks on debt-to- equity ratios and asset valuation. And there, surprisingly, was Mike Milkcn, who had been in~fitcd as the keynote speaker by his good friend Sigoloff. His pro- nouncement was brief and straighttbrward. Restructuring, he said, wouhl engulf the eount~" and would de- pend on human, net fi- nancial, capital. The '99s would belong to the fixers, Milken said, not the financial engineers. The '90s would belong to the workout believers. Many of the workout believers be- c~rne converts to Milken's credo of intel- lectual capital. One such person was Peter Ueberroth, the former baseball commissioner and 1984 Olympics organ- izer, who recently ibunded a turnaround firm he christened the Contrarian Group. "The shortage of the 1990s," he explained, "is a management shortage, not a capital shortage." A boom in bankruptcies faulted could be sold as a slave; if more than one creditor was involved, the body parts of the debtor couhl be di- vided. In the United States, however, the bankruptcy system was predicated on giving indi~hduals the opportunity to make a fi'esh start. This is known as the second-chance doctrine. In business practice it means that unless a company is wor~h raore dead than alive, the courts will let it attempt a recove~.~. Until 197~ bankruptcy filings grew at a i~airly slow rate. That changed with the ~v~siou that year of U.S. federal bank- ruptcy law, which made it easier, quick- er, and cheaper for companies to seek court protection. The re~-ision--along wi~h the oil crisis and the rise in interest rates--kicked off an unprecedented boom in bankruptcies. Total filings per capita during the '80s were double what the:), were in the '70s and 10 times as high as in the '40s. Even in the Depres- sion years, filings were ~ar lower; fi'om 1930 to 1939 there were .t.7 filings per 1,000 people. From 1980 to 1989 there were 18.4. As the numbers went up, a curious side effect occurred: bankruptcy started to lose its stigma. Says Jeff Chanin, a Los Angeles turnaround art- ist, "In t he '60s and '70s bankrnptcy was the kind of thing you didn't talk about at cocktail parties. It was like collecting trash or being a tanner. No self-respect- ing lawyer was going ~o admit being in the bankruptcy business." In the '90s bankruptcy became so- cially acceptable. Perhaps too accept- able. Borne observers believe that the second-chance doctrine has been driven TOP 10 TURNAROUNDS FOR 1991 Every year the Turnaround Management Association (TMA), a national nonprofit organization in Chantilly, Virginia. presents its Turnaround of the Year award to publicly traded companies that have experienced the most successful reversals of fortune. Award winners for 1991 must have experi- enced two consecutive years of net operat- ing losses, followed by two consecutive yearsof net operatingincome between 1987 COMPANY/PRODUCTS 1990 REVENUES (in millions) Growth Industries Turner B~oadcasUngSystem Inc. $1,394 Cable News Network, Superstation TBS, Turner Network Television Elsclnt Limited 162 Com, put, er-based diagnostic memcal-imaging equipment ~.e.lco Systems Inc. 90 ioer-optic transmission equipment ECIrcon Corporation. 55 ndoscope, s and 9evanced uttraminta~ure C-OIOr video systems Graham-Field Health Products Medical sundries and 1990. In addition, these companies must have had at least $10 million in reve- nues in 1986 and not have been primarily involved in the fields of mining, energy, or fi- nancial services. Businesses that meet TMA's criteria are then ranked in four areas: improvement in operating earnings before interest and taxes, change in balance-sheet strength, employee productivity, and mar- ket value. Below are 1991's top winners. COMPANY/PRODUCTS 1990 REVENUES (in millions) Mature industries Maxxam Inc. $2,361 Aluminum, forest-products operations, real estate i~erry Drug Stores Inc. 658 rug stores Acme-Cleveland Corporation 200 Machine-tool products and telecommunication systems Canandall~ua Wine Company 180 Wild Irish'Rose. Manischewffz. Sun ~ WLne Coolers 44 Glenmore Distilleries Company 165 Moderately priced spirits SOURCE: STE'VE~ L HOCHBERG, SIGOLOFF & ASSOCIATES Ti06511206
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An "'(~rchitecl of .~uh,otion,'" Victor Palmieri has worked to reline the drawers IIIII I t. Lhe]imit. SaysMarLin KleinofDreyer he restructured Lhe business--and & Traub, "I think it's vetT disc,re(err- ing. Bankruptcy was traditionally viewed as a last resort. Now it's being viewed as a first resort." "'If we start using bankruptcy casual- ly'," sWs Whituey, "we're going to de- stroy the little bit of moral thbrie that's left in our business society. We have got t,~ buihl businesses on a certain ameunt of trust." The call to duty ~~ehitney spent most of his as an entrepreneur in hometown of Tulsa, • • Oklahoma. But in 1968 he was in,Sled to teach a marketing e()urse at Harvard Business School, where he shortly became an associate clean. In 1972 Whitney got a earl from the Pathmark division of Supermarkets General Corporation. %e company, he says, w~s in a tailspin and needed help desperately. Its stock had plummeted fi~m $26 a share to $2 a share. Whitney accepted the position of president at Pathmm'k, and fro" the next five yem-s achieved his first turnaround. I)uring this time he began developing his philosophy that turmu'ounds go through three stages. In the crisis stage the bleeding must, be stemmed, in the second stage stability must be achieved to allow the limping husim.,ss to get back on its feet. In the transformation stage the company must grow. Throughout the process Whitnw repeated his man- ira: cash, cash, ca.sh. Debt was (langer- ous, he said. It could pull the trigger on a troubled company. Later, others would value his words. Like Donald Trump, who when t~ying to unload the Trump Shuttle, an- nounced that cash was in and debt was out. But during the mating '80s, when junk bonds flooded the economy, few listened, By the time Trump heeded Whitney's call. it was thr too late. When Pathmark was restored to health, Whitney returned to Tulsa. In 1986 he was invited to teach at Columbia as an executive-in-residence. The fol- lowing year he was made a lull pm/bsst)r and retired fi'om actively doing turn- ma)unds, -~though he worked as a con- sultant Dora time to time. "'[ wouldn't ~vant to (h) another ¢me. 1 really wt,uldn't.... I get fi)ur or five calls a week saying. "John, ~511 you stilt up and help us with one of these things?'" Bu~ Whitney refuses. "'~e thrust of my course here.'" he says. "'is not to teach the stu(lents just to ge out and be turna~xmnd artists but to teach them how to recogmize the symp- toms, the early warning signs. S(, it's more of a p~ventive approach. My in- terest today is looking at larger compa- nies that a~n't yet in the tank and saying. 'Hey, why dnn't you grab hold of y(,urselves and do something, damn bctbrc you get in trouble?'" Mos~ turnaromad artists didn't plan to bc turnaround artists. ~ey got hooked. "Most of these guys had a vm3; intense experience once, in a high-pa~ssure situ- ation, and they had to react instinctive- ly. Alter that they could never go back to boring day-to-day stuff'like adding up numbers." says Christopher Beard of T~ra(~rol~t(Is t~ Wor~ol~ls. "Once you've done two or three turnar( unds you become a stress junkie. Nothing else is much ihn anymore " ~at thirst fin" thrills takes a certain bungee-jump mentality: Sigoloff and Palmieri, I)ouald Bibeault (who rescued Best S~eeb, and Dave Schul~e (who sal- vaged Castle & Cooke) share stoic tem- peraments and ironclad stomachs. ~ey don't mind taking the heat tbr bruised egos and hm't t~clings. They go into co,npany without sentimental attach- ment to it and strip it bare of unhealthy or unpromising dix4sions as well as cor- porate perks. Naturally this doesn't endear them to existing management. "Some expense cuts are both simp[e and symbolic." says Whitney. "Club memberships, fancy company cars, first-class travel, com- pany credit cards, condominiums... out, out, oul~'" Turnaround artists, he says, are "the true gladiators of the business world. I malty believe tha ir ynu're in a crisis, the kind (ff authoritarian eommand-and- eontr(,l leadership, which you have in a mi[ita)w situatiun under tim, is the kind you should observe. You don't have time R~r debate. Yell have to do your recon- naissance and listen to the reports you get fl'om the field." IJke commanders, turnaround art- isis don't have the luxm3, of building a consensus. They parachute onto the fi~nt, called in by ~ompanies under C~4 BE~I'O~'I~IRET~Q~AIfI'ER~ - FALL[991 T106511207
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vere duress. But the re~rards are high: in addition to million-dollm" manage- ment contracts, top turnaround artists often demand a bundle of stock options. If the workout succeeds, they can make a mint, as did Q. T. Wiles, the high-tech workouL guru, who transformed his $1.6 million investment in disk-drive maker Miniscribe Corporation intu $13 million. And thw always demand unilateral authority. EveL'yone in the company must listen, and everyone must obw. Those who don't risk demo- tion or immediate dismissal. "We are a Lone Ranger breed." s~kvs Ribeault. "We are the G~en Berets of corporate management." A deep bond unites the workout corps. It's an evangelical zeal born of that firsL intense, ecstatic experience. Sigoloffs language is sprinkled with ~- ligious image~'. Turnaroumis are resur- rectinns. Troubled companies have lost their souls. Says Pahnicri, "The archi- tects of disaster must he followed by the architects ofsalvation. Somebody has to replace the old vision with a new xSsion." Turnarounds provide redemption some and damnation fin" other's. It ~- quires spiritual leadership and a certain mystique. "Top crisis managers bring an aura to a troubled situation," says Beard. "There's usually lots of confusion, bit- terness, tension, anger. The m~ra gives you an enormous advantage. It changes the complexim~ of the enterprise. It means people art'. inclined to g~ve yon the benellt of all doubts." Of course it helps to have made a name for oneself in a particular industry_. That may be why Peter Ueberroth chose Adklas as his first turnaround. In late 1989 Ueberroth became a consultant to the German sporting-goods maker, w.:th options to acquire 4 percent of A, litb~s A.G.. the parent company, and 45 pc.r- cent .f Adklas U.S., the domestic sub- sidiat~,, by the end of ,,~ 1991. During the '80s -- the family-owned firm fell far behind competitors Nike and Reebok, losing $70 million by 1989. In 1990 a French finan- cierbought Adidas tbr about $400 million. He and Ueberroth then embarked on an ambitious turn- around strategy, dos- ing Eurupcan plants and moving produc- tion to Asia. replacing U.S. management, and working on an entirely new market- ing campaig~a. While the jm3"s still out on Adklas, Ueberroth's pre~5ous winning streak with such projects as the Los Angeles Olympics is bound to help. So is his hands-on style. The workout believers want t.o make companies look good rm the shop ttom', not just on paper. 'l~at's why they scorn financial engineering. Says Whitney, "We've established this shtick around numbers. People lo~k at "Once you've done two or three turnarounds, you become a stress junkie. Nothing else is much fun." them and think they know something about the company, but they draft know a damn thing. ~e United States began tu get into trouble the day we stm-t ed say we can express the world in num- be~, in symbols rather than what ere- ares these symbols, so now we have all these symbols floating around out them. We've cut the hem't out of business. We thought we couhl manage without pas- sion, and we've lost oHr way." ~e workout corps believes. ~, bring to their jobs a pin, siam fiw the nuts and bolts of business. ~e LBO guys had a pas~i~m too. But theirs was solely for the num- bers, the big-ticket transactions~/he companies themselves were completely in ~erc] mngeable. One of the must passionate crisis managers is Robert L. Guyctt. a senior xhce-p~sident of Fluor Corporation, one of the world's ]argest engineering and construction compa- nies. Five yem:s ago Ftuor hit ~ck bof tom: it ~u fitted net losses of $633 million and l.st almost 70 percent of its equity. Undm" Guyett's hand the company be- gan a rifforOllS rest~cturin~ In'Og~'am, disposing of noncore businesses. [~y 1990 ~'luor's revenues reached histork.al hiffh~, and its market value tripled. company was named Wtll'nala~und uf the Year by the Turnaround Management Association, and Guyett was im4ted to speak at the ~n',~up's annual eonventio~l. Horror stories Most audiences viewing Roger & Me. the hit docu- mentary about General Motor's' plant closings, find it amusing. To a turnaround artist it's the equivahmt of watching Nigh! of the Liciny Dead with 3-I) glasses while squattiug lhur l~ct li'om the screen. It ~minds them of the agony of slashing jobs and shut tering factories and watch- ing emphLvecs pack [heir bags. Because uf the attendant horrors, turnarotmd stories make their way into the public's sight. Among the most vis- ible of recent years is that of Wickes. "It's really a classic." says Whitney. Af- T106511208
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ter a series ,)f rapid acquisitions during the late ~70s loaded it with debt, the $4 billion conglomerate started sinking. By the early '80s it w,~ coming apm~ at the seams. It owed nearly $2 billion to 250,000 creditors. In 1982 Wickes's board of di~ctors called Sandy Sigoloff to salvage the when Sigoloff tried to .make Wickes grow. He stm-ted snapping up other companies, borrowing nearly $2 million in Drexel junk bonds from his good fiiend Mike Milken. By 1988, un- der pressure from shm~holders, he put the company up fin- sale and vowed never to do another turuaround. A few eompm~y. While Sigoloff sorted out his months later L. options, he asked -.- Wickes's managers to ~ work six days a week rather than five. Not since the Great Those who resisted had a choice: they Depression has debt could be fired or they could quit. AmonthafterSigo- been so high--which hff£s arrival, Wickes nled rot corn protec- is why Whitney and Lion under Chapter ll. Itwasalldonewith the other turnaround military precision. Late one Friday eve- gllrlls ma~'~er. ning all the company's top managers flew Lo headquarters for a briefing. On Saturday morning press re- leases were sent to key publications. By Monday, when the bankruptcy was of- ficially annnuneed, a letter from Sigoloff was on eve~3, emph)yee's desk. Sigoh)ffs plan was simple: pump the winners, dump the losers. Wickes had 3{} divfisions and subsidiaries; ultimately 17 were casualties of the bankruptcy. Some were easy to lose. 0Lhers were agony. Take Aldens, a 100-year-old mail-order outfit--much like Sears, Roebuck & Company--based in Cicero, Illinois. It. was losing $40 million a year. Aldens was more than a business. As Sigoloff says, "It was a city. It had its own health department, post office, nurseW, canteen." And the economy of Cicero, a depressed blue-collar town, relied heavily on Aldens. When, in 1984, employees got wind of Sigoloffs plan to shut it down, things took an ugly turn. Shotgun blasts and angle irons shat- tered windows of the motel his turn- m'ound team st~,ed in. Sigoloffi~ people began drawing their shades, traveling with bodyguards, and entering and leaving by different exits during the AI- Ultimately it took three yem's to pull Wickes out of bankruptcy, but Sigoloff succeeded. The bankruptcy judge t-ailed the turnaround "a mit-acle.'" The p~ess called Sigoloff a sax~ior. But the happy ending didn't last J. Hooker, the Aus- tralian company that purchmsed B. Airman and Bonwit Teller, went hankFupt. Sigo- loff returned to the fl'ont lines. In Goue With the WieLd, Scarlett O'Hara visits Rhett Butler after Appo- mattox and finds him flush with cash. She asks how he did it, and he tells her, "Most people don't realize there's just as much money to be made when a society's l~all- ing down as when it's rising up.'" The vulture capitalists arc the anti- heros of the Workout Decade. These speculators snap up distressed securi- ties at bargaiu-basement prices. George Putnam of the T,~rm~ron ml Leth, r says they then hope to "use their position to impose their will on the company." But that's not all bad. he says. "'In the '80s, healthy businesses were forced into un- healthy amounts of leverage to fend off raiders. In this case the companies m~e unhealthy to begin with. Any change may be beneficial." Transforming the turnaround ince the flood of bankruptcies began, the vultures have pro- liferated at an alarming rate. In 1980 investment in Chapter 11 companies totaled about $100 million an- nually. Today it accounts lbr more than $2 billion. As Whitney wrote in Takb~g Charge, the bible of the turnaround business, "lThe vultures] leave only as the bones begdn to dry in the sun or as the cor- pus regains sufficient vitality to drive them away .... The.,," a~ a drems, 1.t, tainting both the aura and the act of the turnaround." But lately, just like bankruptcy law- yers, the vultures have started to be- come socially acceptable. In spring 1990 the Chicago financier Sam Zell launched a $1 billim~ fund to invest in troubled companies. Several months later W~fll Street gm~ped when Goldman, Sachs an- nounced the formation of the }Vacer Street Corporate Recover3" Fund, which has $750 million to invest in dis- n-essed securities. ~e manager of that fuml is one Mikael S~dovaara, who for- merly headed the firm's leveraged-buy- out ~m~up. And sometime soon another player may enter the fl'ay: professor John O. Whitney himself, in tandem with a couple of fiiends. "~'re not going to be like most of the others," he says. "We won't be out to make a quick buck. We won't have a find 'era, ~n'ind 'em, mine 'era strategy." He t)~mses and shags. "'We're not going to be buying companies in bankruptcy. We're looking fin" companies that a~ un- dermanaged, that need prevention. We're Looking tbr companies that could be turnarounds some(lay if they don't get help." ~ere are bound to be plenty of them. Not since the Great I)epression has ~here been such a level of personal and corporate bankruptcies. And m)t since then has the level of debt in the coun~T been so high. In fact, says I)un & Brad- street, the amount of debt emnpanies can't pay~more than $64 billion at last tally~is equal to 1.1 percent of the count~3/'s total GNP. Economists be- lieve these fi~mres will make it harder to pull out of a recession. Which is why Whitney and the other turnm'ound rus matter. ~eirjob is tostem the flood ~ff Nilures. Only theu can growth re- sume. ~at's where Whitney's students come iu, scribbling solutions with ~heir Magic Markers, trying to transform A~nerican business all over aKain. T 11 E W R I T E !l Nancy Marx Better is a New York-based business writer whose articles have apt)eared in such publications as The New York 7'im,,s and Wet// Street J(mrmtl. Formerly she worked as a reporter fo~ Fort.~te and senior editor of Ma,diotht~t. i~tc. Reprinted by permission of Nancy Marx Better. ,¢.1991 Nancy Marx Bet- ter. All rights reserved. This article originally aptmm~ed in the March 1991 issue of M ira'. under the title "The Workout De(-ade." T106511209
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If productivity is such a buzzword. why aren't' more companies humn g? The statistics arc nothing short of stunning. Productivity in manufacturing has improved by 90% in the last two decades. Productivity in the office, by a meager 4%. And that's not for lack of trying. Improving office productivity is one problem with no simple answers. But any lasting solution can only be found by asking the right questions. In our experience, the most effective questions to ask are about the role the document pla.vs in getting work done. Do you know, for instance, how much you're spending to create and process the documents that help run your business? Or how much it costs to prepare a presentation on a page by page basis? Have you established a company- wide document format for more effectivecommtmication? Have you analyzed how well different departments work together on documents? Start asking these questions and the answers take you down a path Xerox has been pioneering for years. They ~ ~! XEROXt'ORPOIL-~TION XEROX" ~a~rad~u~x~ofXEROXCORPORAT[OI~L36USC350 suggest solutions that will help you break down the barriers between departments; encourage interaction between people, between work groups, and between you and your customers. We can help you enjoy the benefits of that kind of inter- action by helping you improve the way documents flow through your company; from workstations to printers, copiers, faxes and publishing systems. Because when you improve the way that people use documents to communicate, you help people work together more effectivel.~: And that's what keeps a company humming. USA The Docotnenf Com.oan¥ ~ T106511210
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BOOK EXCERPT As brand loyalty goes up in smoke, the ad industry must look for new ways to reach consumers. BY MARTIN MAYER Illustration by Marry Blake Madison Avenue.. At a Dead End? Fthe marble in the lob- bies, the elegant offices in the towers, and the nine-figure deals in which one advertising agency purchases another, the advertising industl.~, in the United States is troubled as the century of its efflorescence dies. Through the decade of the 1980s, the relative importance of advertising to American industry steadily declined as expenditures on other sales techniques steadily in- creased. Consolidation of store chains, for example, strengthened the bargain- ing power of the retailer. New tech- nologies for gathering and processing information cast doubt on the effective- ness of advertising as a sales tool. And the mass audiences that had made ad- vertising efficient began to fragment with the spread of cable tele~lsion and the arrival of the VCR, the specializa- tion of magazines, and the growth of suburban newspapers. In the 1960s, however, Madison Ave- nue not only stood for elegance, power, and gray-flannel suits but also fi)r a cer- tain roguishness--lavish expense ac- counts, huck.~terism, and hidden forms of persuasion. As a ~sult three of the four then giants--J. Waiter Thompson, Young & Rubicam. aml McCann-Erick- son--cultivated an image of great digni- ty. At Thompson event senior executive had a budget with which to decorate his own office in anything from Louis Quinze to Mies van der Rohe. Young & Rub[cam went (and still goes) for the color green, with overstuffed green leather couches and chairs, wide hall- ways, and open spaces around the secre- taries. McCann w~ ve~, modern but restful, with paste[ colors. Only Batten, Rarton, Durst[he & Osborn {BBDO)-- perhaps because Bruce Barton was the lay preacher of American capitalism and needed no fi~rther dignity, or perhaps because he was cheap--housed senior as well as junior employees in a rabbit warren of cream-colored eorridom and closets. Even today, housed in one of those utilitarian huildings that ex- tended Rockefeller Center across Sixth Avenue, BBI)O is a litde less decorated than its rivals. Thompson, the biggest agency, em- ployed about 2,500 people in its U.S. ~=~ BE3T~:BUSINET~QUARTE]I1X • FALLLq91 T106511211
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quisitions. Well over half the magazine ads and commercials today are pro- duced by a large organization, with seve~a] thousand employ- ees flung far around the globe. There must be a system in place that permits top management to control expenses and allocate re- sources, and the tendency is for the people who acquire these powers to run the agencies--or for the people who run the agen- cies to become absorbed in inter- nal problems. "When you get too big," says adman Hal Riney, "your interests in preserving the company transcend your inter- est in the longevity of the client business." That difficulty is generally recognized offices in 1960, but most of them were engaged in scut work of one kind or another, punching keys on typewriters and adding machines, detailing layouts sketched by other hands, calling re- spondents to questionnaires, billing, fil- ing. There was no table of organization. From the Great Depression to the 1960s J. Walter Thompson had grown organically--by the expansion of its own clients and of the packaged-goods industry. Most large agencies were dominated by the people who handled, and in a sense owned, the client ac- counts-just as Wall Street brokerage houses were dominated by the "custom- ers' men." Good account executives took their clients' businesses very seri- ously indeed (just as good customers' men lived or died by the investment success of those who used their serv- ices). Proper performance of the ac- count-service function wm~ the fulcrum on which the successful agency moved the world. "A lot of clients t~-asted agencies to look after their affairs," says William Phillips, the retired CEO of the Ogilvy Group. "Then the clients became more marketing oriented and hired better marketing people themselves. If the account people weren't qualified, the agency got ou slippery ground. If your account person isn't smarter or more ex- perienced than ~la~ client, you lose con- trol. And when you lose control in a service industry, you can't manage your expenses." Today's big agencies, except for" Leo Burnett and Young & Rubicam, are in large part the result of mergers and ac- and worried about. "In any advertising agency, you have the inside people and the outside people," says Roy Bostock of D'Arcy Masius Benton & Bowles. "The outside people create the ads and solicit new business. You've got to have some- body on the point, a linebacker who puts his nose in every day. The inside should be done by a CFO, by internally focused people. I should be outside because this is a service business, a hands-on busi- ness, but much of the time I can't be." And D'Arcy, with $4 billion in billings, is one of the three large agencies that never went public. Elsewhere the situation is worse. The brochure for Backer Spielvogel Bates proclaims, "This is the only truly global agency where two of the names on the front door still signify individuals who actually work with clients and create advertising." From 1960 to 1975, with the exception of 1972 (when the Federal Reserve loos- ened all the restraints on the money supply, in part to help Richard Nixon beat George McGovern, and all busi- nesses had some unanticipated cash to spend), adver~ising's share of the GNP declined, bottoming out at 1.75 percent in the recession of 1975. Then came the greatest boom the industry had ever known. In the nine years between 1975 and 1984, expenditures on advertising rose by an average of 13.5 percent a year, from $28 billion to $88 billion. There was a more-than-threefold in- crea.~e in agency revenues. Some of that was attributable to inflation, but for most agencies costs inflated much less than revenues. They had long-term leases on their office space and the dee- tronic revolution was cutting their ex- penses (a report from the European Association of Advertising Agencies noted that in 1970 a computer cost the ~ages of 20 people, whereas in 1990 you could buy 20 computers with the wages of one person). Because there w~ more money to spend, agency Leadership passed from the cost controllers at the gateway between advertiser and agent to the creative department. Conglomeration began in this heady time. "There's no question but that the largest agencies, as a group, are contin- uing to increase their market share at the expense of the medium-sized agen- cies," said Doyle Dane Bernbach presi- dent Nell Austrian at the company's annual meeting in 1982. "This is happen- ing because most of the large budget increases are coming fi~m multinational clients who are assigning their ac- counts, with increasing frequency, to the large multinational agencies." Then the roof fell in. Prom 1985 to 1990, the industry's customary double- digit growth fell to a rate consistently below 8 percent. "Everyone said the problem was costs," says Phillips. "But really it was revenues." And it was in those years of economic pressure and low margins--not in the glory years of 1975 to 1984--that the megamergers and takeovers rocked the entire adver- tising business. Poor boys go public Ayblmost by definition, mergers nd acquisitions are not driven the creative side of the usiness. And the money men, in the modern world, have no in- terest in the future. David Ogilvy was one of the first to take an agency public and is now ashamed of it: "'My excuse is that I'd been a poor boy. I'd never even owned a house. A million dollars seemed like an immense amount of mon- ey to me." Bill Bernbach, another poor boy, also cashed in early, to his son's lat- er discomfiture. The fact is that going public substantially disabled the agen- cies in terms of their ability to recruit and keep talent. The price the sellers got for their interests reflected esti- mates of the cash flow the agency wouid generate in future years. Simply, they took for themselves the discounted value of an income stream that others would in fact earn. Those transactions often involved T106511213
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taldng on debt. Even when purchasers ing customers for cable. of the stock paid full price, the agencies now became accountable to the people who managed the money of the nation's pension funds, universities, and hospi- tals. Agencies got paid for their results, quarter by quarter, by an avaricious collection of market manipulators with the time horizon of a caterpillar. So they became much less flexible in their abili- ty to respond to the changing economic environment. And during the years when the mergers and acquisitions made news in the ad- vertising industry, the underpinnings of the business grew in- creasingly shaky. Agencies had risen historically with the growth of national media and the con- quest of the distri- bution system by large, nationwide manufacturers. A lot of what made ad- vertising workin the postwar years was the power of television. At that time money spent on television was almost never wasted since every ad was effec- tive to some degree. The situation was tailor-made for the Procter & Gamble approach to marketing--hang a sample of a new product on every doorknob and then run commercials that simulated word-of-mouth. 'ffrade promotion turns consumers into disloyal husbands who chase whatever comes along." Missing the target In the 1980s the national media be- gan to fragment: network televi- sion lost almost a third of its share of the national audience. Cable channels grew unbelievably in number, profiting by the desire of advertisers to target messages to narrow audiences. "The difficulty now," says Reginald Brack of Time Warner, which owns a number of cable systems in addition to Home Box Office and Showtime, "is channel availability. I never thought I'd live to see a day when 85 channels wasn't enoughf The specialization of cable channels meshes well with the increasing spedalization of magazines. Brack reports that cable has become the largest source of new magazine sub- scribers, while magazines and book clubs have become the largest advertis- sion-production commissionable. Absent such specialization, the ef- fectiveness of network advertising plunged. Thirty-second spots had taken over from one-minute commercials in the 1970s; as the 1980s proceeded, the 15-second spot became common. In the last years of the decade, the networks were broadcasting more than 6,000 commercials a week, a third of them in the form of 15-second spots (one-minute and longer commer- cials constituted only 2 percent of all the commercials broad- cast). And the agen- cies were hooked on television--it was part of the routiniza- tion of the industry and part of the way the compensation structure worked, because both televi- sion time and televi- costs had remained Meanwhile, retail outlets were con- solidating, and the arrival of the com- puter would dictate their move to centralized information control. Charles Peebler Jr. of Bozell argued as late as the spring of 1990 that it hadn't hap- pened yet: "Of the 25,000 supermar- kets, scanners are being used in maybe 200 to control and replace inventory. All that money has been spent, and they're only glorified checkouk~. In one store we are aware of, there were 20,000 items, and only 11,600 of them were scanned in a given week. About 8,400 never sold at all, and of the 11,600 that did sell, 4,000 sold less than four units each. This gives advertising agen- cies a chance to assume a different kind of relationship with manufac- turers and retailers." But Peebler was out of date. From Vons to Jewel to Safeway to Publix, the big supermarket chains had bought their IBM systems and were busily evaluating the profitability of every inch of shelf space in the stores. They had already flexed their muscles with the food manufacturers by de- manding "slotting allowances" and "co- operative advertising" beyond what the space actually cost them, fees for set- ting up displays, rights to return new products that didn't sell, and much else. '~l~h ere's no question," says Grey Adver- t~sing's CEO Ed Meyer, '%hat today the advertiser has to spend more of his money against the trade." By 1990 trade promotions for the b ene- fit of the stores, not the consumer, had become not only an occasional substitute but an absolute precondition for an adver- tising campaign. The impact on brand equity is severe. "For 10 years American business has been destabilizing brand loyalties," says direct-response expert Lester Wunderman. "That's what pro- motion does: it turns stores and consum- ers into disloyal husbands who chase whatever comes along." In July 1990 General Motors an- nounced significant price increases for its 1991 models. In August the company announced rebates to be offered by deal- ers even before the cars officially went on sale. "At age 5," says market re- searcher Larry Light scornfully, "I had an image of a Chevrolet or a Pontiac or an Oldsmobile. There are now 315 name- plates on cars in the United States, but the brands don't exist anymore. You only think about the price because the marketing people have destroyed the brands." Worse lies ahead for the agencies that live by packaged-goods advertising. In- store advertising of one sm~ or another is going to be a major feature of the 1990s. Besides end-aisle displays and counter cards, there are now back- ground-music tapes with commercials that play in the stores, electric sign- boards, with messages running along them, and video screens built into shop- T!06511214
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ping carts to carry advertising mes- sages triggered by transponders in the section of the store to which the cart has been pushed. Several of the larg- est packaged-goods advertisers have already decided that the creative de- partments of advertising agencies have no contribution to make to in-store ad- vertising, which should therefore be noncommissionab]e. In the 1990s advertising agencies must face the fact that many clients feel advertising is no longer the central ele- ment in the marketing of branded prod- ucts. "We have techie management," says Peter Georgescu, the president of Young & Rubicam, meaning technologi- cally oriented bureaucrats, "who don't feel the power of advertising in their gut as their predecessors did." But the skeptics are not doctrinaire or naive. Most of them are people who used to work for advertising agencies and now work for clients. They know perfectly well that the best advertising sells vast quantities of whatever it is they have to sell, at very low cost per sale. "Every so often," says one of them, "we see a brand take off for no reason other than advertising. We're very interested when that happens." But they also know that routine ad- vertising is not cheap per ~le. They have been taught, rightly or wrongly, that market share drives profits, and they see too many experiments where heavying-up the advertising budget does little for market share, while other elements in the marketing mix produce dramatic (if short-term) effects. "Know- ing my share of market is useless unless I know the price," says the Pepsico CEO Roger Enrico, "because price (meaning the comparison between your price and competitors' prices) drives share." Still, Enrico, a good client whose company has been with the BBDO for 32 years, credits the agency for many of its victo- ries in the cola wars. Keith Reinhard of DDB Needham notes grimly, "I have a client who says, 'Don't waste your breath telling me how advertising built brands. I know that. What can you do for me today?'" And the answer had better be something more than "I can make advertising for you that will jump the hurdles raised by the copytesters who work for you." Strike up the brand erhaps the most levelheaded evaluation of modern adver- tising is by the British re- searcher Simon Broadbent, whose conclusions are summarized in "The Longer and Broader Effects of Ad- vertising," a pamphlet assembled by the Institute of Practitioners in Adver- tising. 'iBranding," he writes, "is one reason consumers buy one product rath- er than another .... Advertising is usually the major contributor to brand- ing .... The brand image is a mass of great momentum which is slot, to alter direction, and often we are dealing with unquantified effects. This does not mean that they are unreal True marketers have the instinctive and correct feeling that the brand is their most valuable proper~y, that it will evaporate slowly unless supported, and that long-term effects are the main justification for the advertising investment." The half of the advertising dollar that is not wasted supports consumer atti- tudes as well as trade enthusiasm. Broadbent points to a case where the loss of sales following a cessation of ad- vertising seemed far more the result of dealer discouragement than loss of consumer support. For the results of ad- vertising to be measurable in the mar- ketplace, Broadbent notes drily, "the advertising content must be sales effec- tive (this cannot be assumed)." Good advertising, in other words, pays off. The conclusion is far fi'om sur- prising, but it leads quickly to a ques- tion: are the conditions right in the industry for the creation, recognition, and support of good advertising? The answer is by no means certain. Risk aversion and lot, time horizons may work their worst harm here, and the national tolerance for high greed levels may have w]'ecked the industry's natu- ral resilience. It is hard for people to argue that- their clients should take a long-term view when they have them- selves sold for their own benefit today the cash flow that will come from the work of their successors. "On the marketing side," says Pep- sico's Enrico, "I can't see what the agen- cy brings to the party. Why should great marketing minds go to work for an advertising agency?" The future of the industry resides in its ability to find an answer to this ques- tion. If advertising is merely a way to execute a marketing strategy devel- oped by the client, the advertising agency will indeed become a vendor of technical services and nothing more. And because the client has so many things to think about other than the re- lationship of his brand and its custom- ers, the value of brands themselves is likely to decline. Agencies can flourish only to the ex- tent that they establish themselves as the custodians of the brands. Though I thought some of the customs of the in- dustry degrading a generation ago, there were odd symbolic v~rtues about the old ways. When Leo Burnett de- manded that the employees of his agen- T!06511215
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cy use the brands it advertised, he was demanding of them a gesture of faith that their b~ands were better than oth- ers. When brands sponsored radio and television shows, the people choosing the shows were guided by some sense of the personality of their brand. The copywriters visited the factories to be sure they had a grip on the qualities of the brand and how those qualities got into it. The consumer research that the agencies performed was directed at how customers ranked this brand and why, what they liked about it, and what they disliked about it. The attitudes went back a long way. "The brand is a concept that goes back to the medieval guild," says Larry. Light. "It began with silver, pewter, and cloth. The tradesman put a mark on it. His mark was a promise that he would make the same thing to the same quality next time. He called that mark his trademm-l~ A trademark is not a brand. A trademark is a name. A brand is what you do with the name. It means the quality of the product will be there next year: quality is in open stock. The Europeans understand this. That's why the luxury products come out of Europe today, why the Japanese buy European rather than American. We sell prod- ucts. They sell brands." The conventional American wisdom these days is that advertising agencies work in condlt~ons of parity preducts." This attiLude, too, is not entirely a nov- elty. A generation ago, Rosser Reeves said that his clients came into his office at the Ted Bates agency with two half- dollars, threw them on his desk, and said, "Mine is the one on the left. You prove it's better." Even a genuine prod- uct advantage, Reeves argued, couldn't last very long, because it would be cop- ied. Reeves, however, took this as a challenge to find something in the prod- uct or the manufacturing process that was not being advertised by anyone else (and that was of some importance to consumers) to create a unique selling proposition. By getting there first with the claim, his client would secure pos- session-especially if he kept advertis- ing it. Anybody else who made the same claim, true as it might be, would in large part advertise the brand that had got there tirst. Today, by contrast, the copywriters rarely visit the factories, and the plan- ners who advise them are experts only in consumer attitudes. Focus groups tell the people who prepare the ads what A Universal Appeal As more corporations go global, ad agencies must create campaigns that play in Paris as well as Peoria. My wife, who was born in Sweden, has a subscrip- tion to a Swedish maga- zine called ICA Kur~ren. One of the ads in her summer 1990 issue was a two-page color spread with an im- mense moose occupying about a page and a half, and a Volvo sedan occupying the remaining half page. The moose and the Volvo were face-to-face. The head- line on the ad said (in Swedish, of course), THERE ARE NO MOOSE IN JA- PAw. I mentioned the ad to Ed Meyer of Grey Advertising as an example of how a product benefit that is the same for all cultures (the sturdiness of the Volvo) can be presented differently according to the customer's location. He was amused. "You know," he said, "our agency in Stockholm has the Volvo ac: count. We must have done that ad." Most large American advertising agencies now have networks of branches and subsidiaries and partners abroad that account for at least a third of their revenues. In general they went abroad to service a domestic clientele that was becoming increasingly multi- national. As of the late 1980s, 87 of the 100 largest advertisers in the United States were multinational companies. "Multinationals are taking over the world," says Carl Spielvogel of Backer Spielvogel Bates. "They want multina- tional agencies. We do advertising for the Mars Corporation (the makers of such brands as Milky Way and Three Musketeers) in 32 countries--and it employs additional agencies for the other countries." The buzzword through the late 1980s was the pan-European account, the representation of an advertiser through the 12 countries of the Common Market. Most observers expect that this amalga- mation of national accounts will become standard procedure once so many other national barriers dissolve into the single market in 1992. But the universality of advertising has natural limits. "I think you can launch an intern~ional campaign from a single idea source," says Jay Chiat, the CEO of Chiat/Day Inc., "but you can't manage it centrally. You have to man- age it from inside local cultures." Backer Spielvogel Bates, for exam- ple, handles the ads for Mars's Pedigree brand of pet food across a number of markets. The agency uses the same slogan to sell dog food in all of them-- THE WORLD'S BEST DO(; BREEDERS REC- OMMEND PEDIGREE--and includes pictures of the breeders and their prize- winning dogs. In each country, how- ever, they use that country's best breeders and their individual dogs. Ronald Beakson, the executive direc- tor of the European Association of Ad- vertising Agencies, told a meeting of Euremarketers in 1989 that products with "the same formula, the same name, the same positioning, the same package design; and the same advertising across the EC account for less than 5 percent of the sales value of branded products. These are standardized products like Head & Shoulders, Michelin, Pampers, and Rolex." Their share, he added, will probably rise to 10 percent by the mid- dle of the t990s. Though unstandardized Eurebrands accounted for only 5 percent of sales in 1988, Beatson continued, "they may grow to 60 percent of the sales value of branded products during the next five years." At least some of the developing Eurobrands will be ones that were purely national as the decade began. Nurturing the growth of local and re- giona| brands into Eurobrands--and perhaps, who knows, world brands-- will be the exciting and profitable task of the multinational agencies as the decade progresses. • ~Martin Mayer TI06511216
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consumers want from this sort of prod- uct, and the ad then seeks to tell what looks like the largest identifiable group of prospective customers, within the bounds of a legality greatly stretched in the Reagan years, that this product of- fers what they want. Peter Georgescu says that the answer to Enrico's challenge will come when advertisers realize _ J I[111:~--: ...... that modern technol- "-- ogy has made the con- sumer king, and that'ffhere's a big the advertising agen- cy is much closer tomarket out there the consumer than the advertiser can {~a|lL~ the United be. But the argument is less than self-evi- dent. It's at Procter States, If yOu go & Gamble, not at the agencies, that every after it's employee, including the CEO, is supposed the death knell." to spend 15 minutes on the consumer-com- plaint hotline once '- a year. Though there are clearly ex- ceptions, the people who work for ad- vertising agencies are even less likely than the people who work in consumer- oriented corporations to have a natural- fellow feeling for Joe Sixpack or Harriet Homemaker. Time spent in the office will not effectively substitute for time spent walking up and down the world and looking a~)und; qualitative research in sterile surroundings may yield in- sights--but not strategies. Looking to what the consumer wants rather than to the product has gener- ated some of the most effective adver- tising--"less filling" for Miller Life, "good neighbor" for State Farm--and it fits well with the instincts of many high- quality creative people. But because it rests on what may be the shifting sands of consumer taste rather than the en- during qualities of the product itself, such advertising may do less to estab- lish the brand for a long haul. In the end, brands do not seek their customers; cus- tomers seek their brands. Apart from its purely informational function (most often used to convey the news of price promotion), advertising adds a value and carries the existence ofthatvalue to the attention of those who will be moti- vated to find it. Consumer research is essential to find the benefits people hope for when they buy the product and to choose the proper media for the ad- vertising message, but it can't tell you what value can most effectively be added to the brand. If an agency is goingto perform effec- tively as the custodian of the brand, it must have some degree of say on the packaging of the product, the other uses of the name (to what extent will line ex- tension weaken or cannibalize the origi- nal, as Miller Life did to Miller High Life, or Orange Slice did to the original Slice), the consonance of the distribution and the brand character (Jay Chiat urged Mitsu- bishi not to sell its television sets to dis- count stores), and the extent to which the existing franchise should be risked by advertising designed to induce switches by people not now con- sumers of this brand. Adve~'tising agencies understand as advertisers often do not that you can't sell everything to anybody, and you can't sell anything to everybody. "There's this great big market out there called the United States," says Jim Car- ter of Sears' information services. "If you go after that, it's the death knell." Choices, choices To live on the human plane," economist Frank Knight said in 1925, "is to choose." Bill Moran, a social analyst and writer, who at various times headed the research function for Lever Broth- ers and Young & Rubicam, has echoed this sentiment, saying, "We should en- courage proliferation of choice, allow- ing that even though the new choices will be less price elastic at first, they will pay for the maintenance of the old choides while increasing the number of specific times and chocumstances and people that can be satisfied .... There is value added by association as well as by engineering specifications in prod- uct design and in advertising .... There is social value in the o~her per- son's choice." These attitudes were always latent rather than conscious among advertis- ing people, but they were, beyond the money and the fun, the ultimate justi- fication for the efforts that built this in- dustry_ There has been a substantial loss of nerve in the last third of a cen- tury, a lowering of horizons caused in large part by the fortress mentality of a conglomerating debt-based capitalism that digs itself ever deeper into the trenches of assured cash flow. Choice is not served by line extensions. Imagi- nation is not likely to be highly valued when agencies working for one or more of the three giant advertisers (P&G, Philip Morris, R JR Nabisco) place more than half of all national advertising bill- ings. The idea of added value fits poorly into an ethos where time is money; a mentality that is forever trying to con- trol costs will not stimulate creative ef- forts that are by their nature highly wasteful. Those who do not believe there is a mystery about advertising will never be good clients. But mystery does not lie in averages. Once upon a time, clients thirsted for breakout advertising, and the leaders of the industry reveled in the opportunity to slake that thirst, some- times with Montrachet and sometimes with branch water. For advertising to remake itself, and for American busi- ness and society to benefit by advertis- ing's capacity to promote choice, the nation will have to be shaken h, om its insistence on safety first. That's not the way the world is moving~indeed, it's not the way the leaders of today's adver- tising industry would like to move--but one of the lessons that can be drawn from the study of advertising, or busi- ness, or society, is that change comes when you least expect it. • THE WRITER Martin Mayer, a resident of New York City, first inves- tigated the advertising in- dustry in 1958 in Madison Avenue, U.S.A. Since then he has written 27 fiction and nonfiction books on topics ranging from business and finance to education. He recently probed the S&L crisis in The Greatest- Ever Bank Robbery: The Collapse of the Savings and Loan Industry. Adapted from Whatever I4-a4rpened ~o Madison Avenue? Advertising in the "90s by Martin Mayer. ©1991 by Little, Brown & Company. Reprinted by per- mission of Little, Brown & Company Inc. All rights reserved. T106511217
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XEROX Productivity isrft how much you put together. It's how well you put it together. This is a short business story. About improving the way you do business by changing the way you put documents together. With over one million vehicles being driven in 150 countries, a leading automotive manufacturer wanted to improve the way it produced the highty specialized docu- meats that went with each of its vehicles, no matter where in the world they were going. Working with each of the manufacturer's different divisions, Xerox put together a comprehensive information network with sophisticated laser printing options. Connecting a host of Xerox equipment to a host computer, work groups were able to break new ground in creating and processing documents. A few telling examples: The cost of technical publications was-reduced by 250/0. The time it took to do complex foreign language translations of the Driver's Handbook on demand was reduced by 50%. The lead time to produce a publication was reduced by 80%. ~ LOgI XEROX CORPORATION. XE}~O)~." ~ a ha~lcma~ ~X~IROX (~Z) P.I~OPu&TION. 3~ USC 2~lg0 Or, to put it in other numbers: The average lead time to create a document essential to customer service was reduced from 67 days to 10. Not incidentally, the initial investment in the Xerox solutions was returned in the first nine months. To see if your organization can enjoy similar results, the first step is to consult with experts from our organization. We can help you analyze how ideas and documents work in your business. And we can show you more productive ways for everyone to work better together with the copiers, printers, workstations, fax machines and publishing systems that create, shape and move the documents that move your company forward. But that would be another story. ~'~ USA The Documen! Company ~ T106511218
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MONITOR Business forecasters are part mathematician, part soothsayer, and, sadly for those who rely on them, far from perfect. BY LIZ ROMAN GALLESE Illustration by Russ Willms 76 e~TOem(LeAmDu. FALL19el Is There Safety in Numbers? Every day economic in- formation affects the prices of things you buy, the taxes you pay, the right or wrong decisions business executives make, and the major policies political leaders choose. That economic informa- tion is more computerized, more nearly instantaneous, more sweepingly in- clusive than ever. But how accurate is it? Figures don't lie. Unless they're the wrong figures. Get the right economic forecast and your global business can win in the earn- ings column as never before. Get the wrong information, make the wrong de- cisions, and you can find your firm in receivership faster than ever. The same is true--only on a larger scale--for governments, their trade balances, their central bank moves, and their budgets. Consider, for example, the following two cases: • In the wake of the 1987 stock-market crash, the North American fibers indus- try figured its market would collapse, because consumers would cut back on such big-ticket purchases as carpeting. Toronto-based Du Pont Canada, 75 per- cent of which is owned by Du Pont USA, figured differently. Sleuthing for two years, its three economists uncovered data suggesting the market was indeed strong, says the Canadian unit's chief economist, Anthony D. Amery. Com- petitors slashed production. Du Pont's flooring-systems division upped its pro- duction instead and became one of the few suppliers with enough merchandise to meet the robust demand of the late 1980s. • Now flash back to the early 1980s. This time the Du Pont economic gurus missed the boat on the major 1981-82 re- cession, as did their counterparts at cor- porations, government agencies, and private forecasting firms across North America. The results were devastating. The company continued to produce its wares long after the market had grown soft. Inventories piled up and Du Pont was forced to slash its work force by a whopping 20 percent--twice the rate that would have been the case had the forecast been correct. So it goes. Faulty figures lead to T!06511219
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faulty conclusions--and questionable l~licies--in the so-called garbage in, garbage out relationship. Example: For years America's Con- sumer Price Index (CPI), which tracks cost-of-living changes, had included real estate in its '~narket basket" of goods and services--the measure of what a typical urban family buys. Yet the typical family hardly buys a house every year--indeed some fami- lies never do. In the 1970s real estate prices were rising faster than most oth- er items. Could that decade's skyrocket- ing inflation have been overstated? Some statistics watchers thought so: the CPI's market basket was subse- quently revised to exclude homes. ~fl~ute Acurate figures, by contrast, ead to accurate conclusions-- and smart decision-making. Here's how economists at America's largest private forecasting firm--DRI/McGraw-Hill, founded as Data Resources Inc. and based in Lex- ington, Massachusetts--used figures to call it right for one client, a major player in the transportation business. In the mid-1980s a business-strategy con- sulting firm had advised that same com- pany to pull out of Asia. Exports from the United States had slowed because the U.S. economy was retrenching, the strategy house reasoned. And since Asian economies depend on U.S. ex- ports, trade would be sliced in halfi Economic data--trade figures from Japan, South Korea, and Taiwan--con- vinced forward-thinking minds at DRI otherwise. "We said, 'Throw everything into Asia,'" recalls David G. Hartman, DRI's managing director who oversees international clients. The figures showed that demand for goods between those countries had escalated and would grow even more rapidly. Besides, the U.S. economy would rebound. Says Hartman: "Japanese imports have been growing 30 to 40 percent since we made that forecast." DRI's call, he adds, "became our client's salvation--and ce- mented a relationship that exists to this day." On the scare of accuracy, U.S. eco- nomic figures lie some of the time. Data from abroad lie more olden. Such is the consensus among both practicing econo- mists and students of the forecasting field in the United States. 78 B~I"OF~,e;iNESSQUA~'TlgO.Y • F~lLl.l.qgt '~nere's need for a lot afwork," even on U.S. data, says Victor Zarnowitz, an economics professor and forecasting scholar at the University of Chicago, who asserts that ~tatistics aren't accu- rate enough for forecasting or determin- ing government policies. In January last year the prestigious Council of Economic Advisers, which advises the president and is chaired by Stanford University economist Michael Boskin, launched a sweeping effort to upgrade the figures on three fronts: (1) productivity, output, and prices; (2) invest- ment, savings, and national wealth; and (3) employment, in- come, and poverty. Such trade groups as the National Asso- ciation of Business Economists and the American Economics Association (AEA) had pushed for years for an over- haul. One major cause for concern: Fig- ures reflect "the economy of the 1950s and '60s," says Thomas Juster, an eco- nomics professor at the University of Michigan, who chaired a special study committee set up by the AEA. Get the wrong information, make the wrong decisions, and you can quickly find your finn in receivership. Yesterday's news Though the U.S. economy has shifted from one dominated by manufacturing to one domi- nated by services, American data banks cannot possibly begin to doc- ument the rapidly expanding services sector. When DRI economists recently tackled a problem for a group of compa- nies in a service business, they ran up against a brick wall. The companies, whose major offering wasn't growing, had to decide whether to cut back, merge, or get out, says Roger M. Wims- by, DRI's managing director in charge of the account. In reviewing the input-output ta- ble--a measure of the flow of all goods and services through the economy, which is compiled by the Bureau of Economic Analysis--Wimsby discov- ered that the field under study was in- eluded only as part of a larger field, the characteristics of which were complete- ly different. Everyone knows that, for a manufactured product, price relates to tangible factors: A dining room table crai~ed in solid cherry costs more than a plastic table, in par~ because of the val- ue of the respective materials. But how do you measure the value of a service? The solution? Well, for a solution Wimsby turned to unpublished figures, gathered numerous opinions from in- dustry sources, and swallowed hard when making his call. "Billion-dollar deci- sions had to b e made," he says. "The clients couldn't wait for proof beyond a reasonable doubt." Within the declin- ing manufacturing sector, another big shift has occurred: domination by high technology rather than more traditional smokestack indus- tries. Yet the Stand- ard Classification Index, into which broad industries are categorized for the purpose of tabulating data, reflects a by- gone era. Exploding new technologies such as computers don't rate a separate category; antiquated fields like "extrac- tion of pine gum" do. In the United States, at least, data gathering has a long history. It harks back to 1790, virtually the dawn of the Union, when the Census Bureau launched the first national head count. Today that agency gathers much of the raw data for other surveys, such as the number of new homes under construc- tion and the dollar volume of goods sold in stores. The bulk of the country's statistical profile, moreover, is formulated by just three other government bodies: the Commerce Department, which tracks the gross national product, or GNP, the measure of all goods and services pro- duced; the Bureau of Labor Statistics, which compiles information about the growth of jobs and the number of people employed; and the Federal Reserve Bank, the central force for most finan- cial data. The mle~of trade betweenzxamtries has escalated in the past few decades. But only economically stable nations such as Japan and the countries of West- ern Europe have data-gathering mecha- nisms as sophisticated as those in the T106511221
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The Trend Meisters Pricey trendspotters are shaking up the stuffy corridors of corporate America with visions of future fads. BY LYNDA EDWARDS Wo~hile forecasting holars agonize r computer-gener- • • ated models containing 1,000-plus complex equations, trend guru Faith Popcorn deci- phers the future armed with noth- ing but chutzpah and a ball-point pen. Each year Popcorn and. the 20-odd employees at her consulting firm, BrainReserve, read scores of magazines, watch countless mov- ies, and chat with lots of ordinary people. After these grueling la- bors, Popcorn's people brainstorm vigorously and, for $2 million per proj- ect, offer their predictions to such cli- ents as Eastman Kodak, Pillsbury, and Campbell Soup. We're not talking East- ern European upheaval or structural unemployment here; we're talking com- fort foods--as in Americans want meatloaf, big turkey sandwiches, and Dine-O-Mats. That particular prediction came in 1988 when, after eight years of Reagan, Popcorn concluded, "Americans are re-' turning to tradition," a facet of which is "morn food." For clients willing to spend an additional $12,000 per year, Popcorn assembles a bimonthly box of kitsch called a Trend-Pack. One recent offering included a worldbeat music tape, herbal energizer pills, and a New Age self-help manual. CEOs from Pepsico, Unilever, and Philip Morris subscribe to Pop- corn's services nonetheless. They're awed by her putative hipness. With her spiky hair and scarlet lipstick, Popcorn seems always one step ahead of the mainstream. But Popcorn doesn't tread the wilder shores of trendspotting alone. It's a multimillion-aollar industry. Corporate America seems willing to throw big wads of money at anyone who'll confi- dently claim that he or she's seen the fu- ture-and deduced that it looks mighty bright. Like John Naisbitt, a failed busi- Trend guru Faith Popcorn lands $1 million per assignment.from such clients as Pepsico. nessman who once pleaded guilty to concealing assets during bankruptcy proceedings. Now he earns a cool $15,000 per corporate appearance, thanks to his bestselling books Mega- trends and Megatrends 2000. In the lat- ter work, published last year, he painted a utopian vision of the millenni- um, claiming the '90s would bring peace along with an end to unemployment, hunger, and conflict in Lhe Middle East. Although current trend gurus have an accuracy ratio lower than Jeanne Dixon's, trendspotting methodology has been around for almost 25 years. For decades everything from skin cream to champagne had been pitched to mid- dle-aged homeowners. But in the '60s the youth culture began to define how those over 30 should look anal sound-- and corporations wanted on-the-street reporters.to discern the latest lhshions. In the '70s that haphazard reporting coalesced into a thriving industry. Pop- corn left her job at an ad agency to open BrainReserve in 1974, and John Naisbitt sank two trend shops before hitting pay- dirt with the Naisbitt Group. Mean- while in France a hundred Paristrend shops bloomed. The trendspotting field requires vir- tually nothing in the way of track record or credentials. For instance, Naisbitt claimed to be a Harvard man until a 1985 magazine article disclosed that he'd only taken a six-week course at the university. As for methodol- ogy, the Naisbitt Group relies on a clipping service and phone inter- views in lieu of the research and market data that economic fore- casters employ. Popcorn's ap- proach is equally ethereal. To !pinpoint coming breakfast trends, example, BrainReserve corn- !piled a video of breakfast scenes from current TV shows and movies. And then there are the Pari- sians. Every year, Paris-based trend shops pay young trend "agents" to spy on Americans in restaurants, sub- ways, and at ballgames. Last year agents documented the following:, busi- ness people in Wall Stxeet coffee shops described the Drexel Burnham disaster in moral terms like '~bad" and "wrong." Yuppies carried paperbacks of religious readings. And pub-crawlers adorned themselves in crystal and glass jewelry. Sifting through these and other clues, the Parisians formulated a new trend for 1992: Despite the success of Desert Storm and David Letterman, there will be a movement away from militarism and irony and a trend toward authentic emotion. Greedy Gordon Gekkos will be reviled and despised. And, just as important, the big colors of 1992 will be ethereal--pale yellow, amethyst, and arctic white. Flowing lines will replace tailoring, and the next music and food fads will be Latin. The Parisians may be mystical, but they un- derstand marketing. ,, Lynda Edwards has written for Regar- die's, The Washington Monthly, and Rolling Stone. Adapted fi'om a March 1991 Spy mag- azine article entitled "Tomorrow's Forecast .... " ©1991 Spy Publishing Partners L.P. Reprinted by permission. T!06511222
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United States. Elsewhere the pic- ture is mixed to muddled. Central data-gathering services are pro- vided by both the International Monetary Fund and the Organiza- tion for Economic Cooperation and Development, a Paris-based con- sortium of 24 countries, including the United States, Japan, and the nations of Western Europe. But the information is often outdated. In some developing countries, procedures are laughable. In 1988, for example, Bolivia just didn't m- lease its GNP, presumably be- cause the news was so bad. DRI's Hartman observes: "It's better than lying, I guess." To learn about the Soviet Union and Eastern Europe, U.S. econo- mists have turned routinely to PlanEcon Inc., a Washington- based group. Statistics from those countries themselves haven't been merely inaccurate; they have been fraught with missing information, political tinkering, and, yes, out- right lying. Virtually all econo- mists missed forecasting 1989's I dramatic upheavals in Eastern Europe by failing to listen to PlanEcon, says Hartman: '~at group told us that data [from those countries] was misleading and that their economies were in terri- ble shape." Yet--and here's where matters get complicated--data can be sketchy even f~m developed nations. For example, France once didn't release its industrial production table for more than a year because it was redoing it, says Hart- man. "That would be unconscionable in the U.S.," he remarks. "But some coun- tries are just more casual." Statistical weaponry As the move to a global economy [ ~intensifies, governments and ~ companies that rely on inac- ~_ ~ curate information do so at their own peril. Once a handy, albeit arcane, tool for the world's most sophis- ticated players, statistics are now must- have weapons in an economics war waged across continents by the giant multinationals, says George ie. Brown Jr., executive vice-president of DR I. In the 1980s, he explains, U.S. busi- ness looked inward, focusing on cutting costs and restructuring operations. In this decade, it must "master the exter- Back to the fitture: John Maynard Keynes laid the groundwork for econometrics. hal environment," he says, by placing bets only on those markets in which it can soundly beat the competition. On the economic f~ont Asia has long since become a world powerhouse. Ahead is the economic unification of the European Community in 1992. "Niches will be different," predicts Hartman. "A niche market used to be people who spoke Italian. Now it will be Europeans with yuppie-type household incomes." In this fast-changing computerized era, the way data are gathered and pre- sented is itself changing. Few econo- mists use statistics alone. Rather their road maps are so-called models, comput- erized interpretations of the relation- ships believed to exist among various facets of economic behavior. An over- simplified example: When mortgage rates fall, the number of new houses un- der construction increases. Why? Be- cause more people can afford to buy houses. Real models, of course, contain far more variables in complex equations. As recently as a half century ago, the notion of a computerized srmpshot of future economic activity was best left to the soothsayers. In the 1930s, however, John Maynard Keynes, the famous Brit- ish economist whose theory of deficit spending revolutionized the field, laid :_,~ the groundwork for a new spe- .... cialty, which would be called econometrics. Seeking to coordinate produc- tion for British defense in World War I_I, Keynes developed the con- cept of national income account- ing, a move which initiated the first large-scale effort to centralize the collection of economic data. Advances in mathematics and the advent of computers subsequently permitted the creation and rapid solving of equations using this new data. In the jargon of the industry, the equations are called regres- sions; the process of statistical- ly evaluating them is regression analysis. Econometrics as a field is gener- ally considered to date from 1963, when Lawrence Klein, an econom- ics professor at the University of Pennsylvania, founded Wharton Econometric Forecasting Associ- ates Inc., the country's first pri- vate forecasting firm. Klein had compiled the first computerized model of the U.S. economy, for which he won the Nobel Prize. That ru- dimentary model contained 34 equa- tions; today's versions feature upward of 1,000. The vagaries of chance The new field flourished during the 1960s and early '70s. In 1969 another luminary, the late Otto Eckstein, a Harvard University economics professor, founded DRI. At corporations and gov- ernment agencies, forecasting depart- ments multiplied. By the late 1970s, however, the bloom was off the rose, in part because models failed to predict some significant devel- opments, among them the severe 1974-75 recession, worsened by the 1973-74 Arab oil embargo. Another factor was corporate cost cutting. These days, macroeconomic forecasts in particular are a dime a doz- en; economists at banks and investment firms issue them free to clients--or spout off regularly to major business publications. "The chief executive felt he could get forecasts out of The Wall Street Jour- nal," says John A. Quails, the former head of Monsanto's now-defunct fore- casting department. T106511223
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Though they are an elite group, pri- vate forecasting firms have suffered as well. "Wharton merged with rival Chase Econometrics, and Citibank's unit closed its doors. In 1979 DRI itself was sold for $105 million to McGraw-Hill Inc. and is still trying to regroup. At first, DRI sold its forecasts using time sharing on big computers; it hadn't moved quickly enough to adapt when the personal computer eclipsed that market. Numer- ous reorganizations ensued, the latest in early 1990. Economic models are surely hurt when data isn't accurate-- hence, the "garbage in, garbage out" ref- erence. Yet faulty fig- ures don't tell the whole story. Indeed, questionable statis- I tics go into relatively accurate forecasts such as the GNP, because "no one in- dicator is big enough to push around the GNP," explains Stephen K. McNees, a forecasting scholar who is also a v~ce- president of the Federal Reserve Bank in Boston. Financial figures, on the other hand, are among the most accurate, but stock- market forecasts rank at the bottom of the heap. That's because the market re- acts strongly to emotional factors such as rumor and innuendo. "Ifthereis a strong view, it will become a self-fulfilling prophecy," says McNees. "If we think the stock market will go up, it will." One of the biggest problems is that models must try to pre- dict the future by relying on the economic relationships of the past. And even the most tried and true relationships sometimes don't hold up in a new era. What's more, models can't account for "exogenous" factors, those unexpected developments that wreak havoc on the tried and true; in industry jargon, mod- elers can't '~pin jello to the wall." In the early 1970s forecasters missed the severe recession because they failed to adjust figures for an inflation rate that was then unprecedented. The Arab oil Statistics from Eastern Europe have been fraught with missing information, political tinkering, and outright lying. embargo similarly came out of the blue. And in 1981-82 a surprise move by Paul Volcker, ~vho was chairman of the Fed- eral Reserve Board, helped throw the economy into a tailspin: his credit- tightening measures were unparalleled in their severity. Another limitation on economic mod- els: Though computer-generated, they are highly subjec- tive-and even more so as forecasters in- creasingly model smaller segments of economic activity, such as specific indus- tries or regions, where data is hard- er to find or even nonexistent. In devising the winning model of the fibers industry in 1987, for example, Du Pont Canada's three economists looked to Statistics Canada, the country's central source of data. There they found that published data documented volume for only the carpets sold in department stores, a fraction of all sales. Foraging, they un- covered unpublished figures--unpub- lished because agency officials wouldn't vouch for their accuracy. This data re- vealed the dollar volume of carpet sales in all outlets. "We went searching. We went up to people and asked, 'What do you have?'" says Du Pont's chief economist Amery. But the bulk of their work didn't oc- cur until they began talking to people in the industry. Wit~ the unpublished fig- ures as ammunition, they approached store managers, trade-group officials, and other industry experts. '~Fney'd say, 'Look, this is what ap- pears to be happening. What do you think?'" Amery recalls. This anecdotal information convinced the tireless researchers that they were finally on the right track. So they took the Canadian consumer price index and extracted from that figure the portion of the increase that could be attributed to an increase in prices. What remained was the portion~that could be attributed to an increase in the number of items sold. They adjusted that latter figure for seasonal factors, then made their call: the fibers industry was growing rather than retrenching. Amery notes, "We married quantitative information with qualitative opinion." Scholars of forecasting wince at the use of subjective information. Wffiiam Ascher, professor of public policy at Duke University, says he has thrown up bJs hands. Virtually all models are con- ditional rather than absolute; that is, they call for certain factors to be part of the case, including highly unpredictable policy developments, he argues. "Models reflect the herd instinct," says Ascher. "They only show what modelers, on ~ gut level, think is going to happen." Some forecasters--Ray Fair at Yale University, for example--don't use subjective information; yet Fair claims his models stand up to the competi- tion's. "There may be information fi~om a pure model that you won't get if some- one massages the data," he says. Sub- jectivity, he adds, means that "you don't know if the economist is massaging the data to make it right or if the model is, in fact, accurate." Other scholars, such as Vernon Smith at the University of Arizona, are devis- ing models that depict not only how the economy appears at one point in time but how it gets from one point to anoth- er. This is futuristic, however; today's computers aren't powerful enough to portray the economy in this way. A mo- tion picture rather than a snapshot of the economy "is where the action is," he says, "but it will take fi~esh thinking and fresh technology." Meanwhile the stakes get larger. Governments and businesses continue to seek the elusive economic grail: accu- rate forecasts to help them make tril- lions of dollars' worth of decisions. I TIIE WRITER Liz Roman Gallese is a free- lance writer specializing in economic issues. A former Wall Street Journal staff writer, her stories have ap- peared in Fortune, Inc., and Forbes. She holds a master's degree in journal- ism fi-om Boston University. Reprinted from the l~Iarch 1991 issue of World Monitor. ©1991 Liz Roman Gallese. All rights reserved. This ar- ticle originally appeared under the ti- tle "The Strange World of Business Forecasters." T106511226
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Though they are an elite group, pri- vate forecasting firms have suffered as well Wharton merged w~th rival Chase Econometrics, and Citibank's unit closed its doors. In 1979 DRI itself was sold for $105 million to McGraw-Hill Inc. and is still trying to regroup. At first, DRI sold its forecasts using time sharing on big computers; it hadn't moved quickly enough to adapt when the personal computer eclipsed that market. Numer- ous reorganizations ensued, the latest in early 1990. Economic models are surely hurt when data isn't accurate-- hence, the "garbage in, garbage out" ref- erence. Yet faulty fig- ures don't tell the whole story. Indeed, questionable statis- tics go into relatively accurate forecasts such as the GNP, because "no one in- dicator is big enough to push around the GNP," explains Stephen K. McNees, a forecasting scholar who is also a vice- president of the Federal Reserve Bank in Boston. Financial figures, on the other hand, are among the most accurate, but stock- market forecasts rank at the bottom of the heap. That's because the market re- acts strongly to emotional factors such as rumor and innuendo. "Ifthereis a strong view, it will become a self-fulfilling prophecy," says McNees. "If we think the stock market will go up, it will." Statistics from Eastern Europe have been fraught with missing information, political tinkering, and outright lying. One of the biggest problems is that models must try to pre- dict the future by relying on the economic relationships of the past. And even the most tried and true relationships sometimes don't hold up in a new era. What's more, models can't account for "exogenous" factors, those unexpected dewlopments th_a~t wreak havoc on the tried and true; in industry jargon, mod- elers can't "pin jello to the wall." In the early 1970s forecasters missed the severe recession because they failed to adjust figures for an inflation rate that was then unprecedented. The Arab oil embargo similarly came out of the blue. And in 1981-82 a surprise move by Paul Volcker, who was chairman of the Fed- eral Reserve Board, helped throw the economy into a tailspin: his credit- tightening measures were unparalleled in their severity. Another limitation on economic mod- els: Though computer-generated, they are highly subjec- tive-and even more so as forecasters in- creasingly model smaller segments of economic activity, such as specific indus- tries or regions, where data is hard- er to find or even nonexistent. In devising the winning model of the fibers industry in 1987, for example, Du Pont Canada's three economists looked to Statistics Canada, the country's central source of data. There they found that published data documented volume for only the carpets sold in department stores, a fraction of all sales. Foraging, they un- covered unpublished figures--unpub- lished because agency officials wouldn't vouch for their accuracy. This data re- vealed the dollar volume of carpet sales in all outlets. "We went searching. We went up to people and asked, 'What do you have?'" says Du Pont's chief economist Amery. But the bulk of their work didn't oc- cur until they began talking to people in the industry. With the unpublished fig- ures as ammunition, they approached store managers, trade-group officials, and other industry experts. 'q'hey'd say, 'Look, this is what ap- pears to be happening. What do you think?'" Amery recalls. This anecdotal information convinced the tireless researchers that they were finally on the right track. So they took the Canadian consumer price index and extracted from that figure the portion of the increase that could be attributed to an increase in prices. What remained was the portion-that could be attributed to an increase in the number of items sold. They adjusted that latter figure for seasonal factors, then made their call: the fibers industry was growing rather than retrenching. Amery notes, "We married quantitative information with qualitative opinion." Scholars of forecasting wince at the use of subjective information. William Ascher, professor of public policy at Duke University, says he has thrown up his hands. Virtually all models are con- ditional rather than absolute; that is, they call for certain factors to be part of the case, including highly unpredictable policy developments, he argues. "Models reflect the herd instinct," says Ascher. "They only show what modelers, on ~ gut level, think is going to happen." Some forecasters--Ray Fair at Yale University, for example--don't use subjective information; yet Fair claims his models stand up to the competi- tion's. "There may be information from a pure model that you won't get if some- one massages the data," he says. Sub- jectivity, he adds, means that "you don't know if the economist is massaging the data to make it right orifthe model is, in fact, accurate." Other scholars, such as Vernon Smith at the University of Arizona, are devis- hag models that depict not only how the economy appears at one point in time but how it gets fi~om one point to anoth- er. This is futuristic, however; today's computers aren't powerful enough to portray the economy in this way. A mo- tion picture rather than a snapshot of the economy "is where the action is," he says, "but it will take fresh thinking and fresh technology." Meanwhile the stakes get larger. Governments and businesses continue to seek the elusive economic grail: accu- rate forecasts to help them make tril- lions of dollars' worth of decisions. • THE WRITER Liz Roman Gallese is a free- lance writer specializing in economic issues. A former Wall Street Journal staff writer, her stories have ap- peared in Fortune, Inc., and Fcrrbes. She holds a master's degree in journal- ism from Boston University. Reprinted from the ]VIarch 1991 issue of World Monitor. ©1991 Liz Roman Gallese. All rights reserved. This ar- ticle originally appeared under the ti- tle "The Strange World of Business Forecasters." T106511227
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Harvard Business Review Today's globe-trotting managers can take their business anywhere. America must do its best to keep them at home. BY ROBERT B. REICH lllustratio~.~ by Ross MacDo~aht The Stateless Manager (~ (~ Wseated at a negotiating table. "They" are seated across from us. The outcome of these talks will shape America's future com- petitiveness and economic well-being. But "we" are not necessarily companies based in the United States. "They" are not foreign nations. Rather, we are the people--most prominently, the work force--of the United States. And they are the growing cadre ofglobal manag- ers-supranational corporate players whose allegiance is to enhanced world- wide corporate performance, not to any one nation's economic success. Unlike their preglobal predecessors, global managers feel little allegiance to us. In the global enterprise, the bonds between company and country--be- tween them and us--are rapidly erod- ing. Instead, we are witnessing the creation of a purer form of capitalism, practiced globally by managers who are more distant, more economically driv- en-in essence, more coldly rational in their decisions, having shed the old affil- iations with people and place. Today, corporate decisions about pro- duction and location are driven by the dictates of global competition, not by national allegiance. Witness IBM's re- cent decision to transfer 120 executives and the headquarters of its $10-billion- per-year communications business to Europe, a move that is both symbolic (a recognition that globalization must take companies beyond their old borders) and practical (an opportunity for IBM to capitalize on the expected growth in the European market). As this and countless other examples show, business competition today is not between nations, nm" do trade flows be- tween nations accurately keep score of which companies are gaining the lead. For the past two decades, U.S. busi- nesses have maintained their shares of world markets even as the country has lost its lead. Nor does a nation's wealth turn on the profitability of corporations in which its citizens own a majority of shares. Cross- border ownership is booming: Ameri- cans are buying into companies based in Europe and East Asia; Europeans and Asians are buying into companies based T106511230
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in the United States. And most corpo- ager put it, "IBM h~ to be conce~ed rate profits are plowed back into new with the competitiveness and well-be- investments around the world, ing of any country or region that is a Ultimately, our wealth and well-be- major source of IBM revenue." ing depend on the value that the world When it comes to global managing, no places on the work we do, on our skills group of citizens--no government--has and insights---hence the importance of a special claim. Edzard Reuter, the the negotiations between us and them chairman of Daimler-Benz and one of about what jobs we are to perform in the the most powerful men in German in- new global economy. In this regard, the logic of the global manager is clear: to undertake activities anywhere around the world that will max- imize the perform- ance of the company, enlarge its market share, and boost the price of its stock. Our logic is just as clear: to get global manag- ers to site good jobs in the United States. Our best interests are. served by making it Tod y, .corporate , decisions are driven by the didies of glob ! co .petition, easy, attractive, and productive for ghem to do so, regardless of the nation- ality of the company they represeng. The image out of the past is a compell- ing one. A strong and proud American company is centered in an American community and run by American man- agers. The offices, the factories, the community all bear the unmistakable mark of connectedness. But it is an image that is fading, an ideal that exists more in our memories than in reality. Gone are the company town, the huge local labor force, the monolithic factory, and the giant, vertically intega-ated cor- poration that dominated the entire re- gion. Vanishing too are the paternalistic corporate heads who used to feel a sense of responsibility for their local communi- gy. Emerging in their place is the new global manager, driven by the irrefuta- ble logic of global capitalism to seek higher profits, enhanced market leader- ship, and an improved stock price. The playing field is the world. This is not to impugn the patriotism of ~hose Americans (or Italians or Ger- mans) who manage globally. Global managem are no less patriotic, no less concerned~about their countries' fu- tures. But it is in business that global manager-s become "them." Their out- look is cosmopolitan; they are corporate citizens of the world, wherever they conduct business. As one top 1BM man- dustry, insists that the company has no special duty to invest in the former East Germany. "We are not national or nation- alistic pioneers but entrepreneurs," he has said. "When [re- turns are good] in East Germany, we will invest--but not to do some politician a favor." Regardless of the manager's national backgn'ound, the prin- II I I ciples are the same. The global manager invests in the most promising opportunities and abandons or sells off underperforming assets--no matter how long they have been part. of the corporate family or whe~ they may be located. "You can't be bound emo- tionally to any particular ~sset," Martin S. Davis, the chairman and CEO of Par- amount Communications, told a report- er. Charles (Mike) Harper, the head of ConAgra, the giant food-processing and commodity-trading company, which is crucial to the economy of Omaha, Nebraska, recently threatened to move the company unless the state changed its tax code. The bonds of loy- alty could slip over the weekend, Har- per warned: "'Some Friday night, we could turn out the lights--click, click, click--back up the trucks, and be gone by Monday morning." Home is where the market is ~Hlthough the tone of such a state- ment may sound menacing, arper's logic is anything but sinister. The new glob- al manager's job is to exploit the (~pportunities~e-ated by the high-po~- ered technologies of worldwkte commu- nication and transportation and by the relaxation of controls over cross-border flows of capital. Competition is internee and growing. The manager who fails to take advantage of global opportunities will lose profits and market share to global managers who do. In deciding where around the world to do what, the global manager seeks to meet the needs of customers worldwide for the highest value at the lowest cost. Some production will be done under the company's direct supervision; much will be outsourced. Design and marketing activities will often be sited close to the markets to be served; ~search and complex engineering will be located where skilled scientists and engineers can be found; routine fabrication and as- sembly will take place where workers are available at lowest cost. But there are exceptions--depending on prod- ucts, marke~s, and circumstances. When there is danger that a market might be closed to imports, production might be shifted. When two or more locations are about the same, the deci- sion will be based on where the manager can secure the most prefitable deal. The global manager's task is to put it all together, worldwide. For example, Mazda's sports car, the MX-5 Miata, was designed in California and financed fi'om Tokyo and New York. Its pro- totype was created in Worthing, Eng- land, and the car was assembled in Michigan and Mexico, using advanced electronic components invented in New Jersey and fabricated in Japan. Saat- chi and Saatchi's recent television cam- paign for Miller Lite Beer was conceived in Grea~ Britain, shot on location in Can- ada, dubbed in Britain and the United States, and edited in New York. Boe- ing's next airliner will be designed in Washington s~ate and Japan, and assembled in Seattle with tail cones 5"om Canada, special tail sections from China and Italy, and engines from Britain. The logic of the global manager is not confined to large, well-established com- panies. In 1989, in the first six months of its cosmopolitan life, the tiny Momenta Corporation, headquartered in Moun- tain View, California, with 28 employ- ees, raised almost $13 million from Taiwanese and American investors. A small band of U.S. enginee~ was de- signing Momenta's advanced computer; the components would be engineered and produced in Japan; the actual prod- uct would be assembled in Taiwan and Singapore. Kamran Elahian, Momen- ta's Iranian-born founder, said to a re- pol"cer that global finm~cing was "one of T106511232
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the only ways we [could] be assured of the $40 million we needed" and that global production was required to '~nake use of the best technology that is available to the company." Weng Kok Slew, the president of Singapore Tech- nologies, another upstart, has de- scribed his worldwide strategy in words that could stand as the global manager's credo: '~Ve plan to manufacture in any country in the world where there is an advantage--to make things in Thai- land, where the cost is low, in Germany because the market is big, to do R&D in Boston." If the company town, a relic of the 1950s, is vanishing, so too is the old multinational corporation, a reminder of the 1960s and 1970s. Like the company town, the multinational exuded a sense of hierarchy, place, and order. The loca- tion of headquarters was a reflection of company history (the founder had be- gun the company in this place) or of in- dustry requirements (headquarters had to be where the biggest factory was lo- cated or where research was done). Headquarter managers made all the crucial decisions. Foreign subsidiaries were just that--subsidiary to head- quarters. Their work usually consisted of exporting materials back to the par- ent corporation for assembling or of selling finished products in a foreign ma~-ket. The lines of power, of communi- cation, of corporate decision-making, all led back to headquarters. Spinning the global web The emerging global manager works within a global web, which operates according to a new and different logic. The location of headquarters is not a matter of great importance; headquarters is not even necessarily in the country where most of the company's shareholders or employees are. Headquarters for the new global web can simply be an office suite near an international airport--a communications center where the web's threads intersect. In 1988, for example, when RJR Na- bisco moved its worldwide headquar- ters to Atlanta from Winston-Salem, North Carolina--w~here years before, it had built the city's largest skyscraper, created a community arts center, and been the chief patron of Wake Forest University--the citizens of Atlanta were expecting great things. But the new headquarters turned out to be leased space in a mall, housing only 450 employees (about a third of 1 percent of the company's worldwide work force). Ross Johnson, then RJR Nabisco's president, cautioned Atlantans to ex- pect no more from the business than they would from any tiny 450-person company in their midst. In fact, the global web may have sev- eral headquarters, depending on where certain markets or technologies arc. Britain's APV, a maker of food-process- ing equipment, has a different lead country for each of its worldwide busi- nesses. Hcwlett-Packard recently moved the headquarters of its person- al-computer business to Grenoble, ~'rance. Siemens A.G., Germany's elec- tronics colossus, is relocating its medi- cal-electronics division headquarters from Germany to Chicago; Honda is planning to move the headquarters for its power-products division to Atlanta. The global web's highest value-added activities--its most advanced R&D, most sophisticated engineering and de- sign, most complex fabrication--need not be in the nation where most of the company's shareholders and executives are. Ford's state-of-the-art engine fac- tory is in Chihuahua, Mexico. Texas in- struments fabricates some of its most complex wafers in Japan at its Sendal facility and is building an R&D center in Japan's science city of Tsukuba. By 1990 Hewlett-Packard's German researchers Made i~ ]a:pa.n? Califor~ia designers, Japanese financiers, and Mexican assembly workers joined forces ~.o create Mazda's MX-5 Miata. I II I II Ill ill were making strides in fiber-optic tech- nologies, as its Australian researchers were in computer-aided engineering software and its Singaporean research- ers in laser printers. Increasingly, the managers who in- habit the global web come from many different nations. Take, for example, Whirlpool's approach to going global. Headquartered in Benton Harbor, Michigan, Whirlpool recently formed a joint venture with the Major Appliance Division of Philips, based in Eindhoven, Holland. The administrative headquar- ters of this joint venture--Whirlpool International--is in Comerio, Italy, where it is managed by a Swede. On the six-person management committee sit managers from Sweden, Holland, Italy, the United States, and Belgium. Such cosmopolitanism is equally ap- parent at the top of the world's leading companies: IBM prides itself on having five different nationalities represented among its highest ranking officers and three among its outside directors. Four nationalities are represented on Unilev- er's board; three on Shell Oil's. The threads of the new global web also include transactions between global managers in different companies. In- vestment decisions travel through far- reaching relationships between global companies headquartered on opposite sides of the world. Profit-sharing agree- meats, strategic alliances, joint ven- tures, licensing agreements, and supply e~e~m.~t,,~qo,~'t~y • FXJ.L~.~I 87 r" T106511233
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arrangements tie together units and subunits. In the 1980s, for instance, Coming Glass abandoned its national pyramidlike organization in favor of a global web, giving it the capability, to make optical cable through its Europe- an partner, Siemens A.G., and medical equipment with Ciba-Geigy. In 1990 these kinds of foreign alliances gener- ated almost half of Corning's earnings. AT&T has also sought to transform itself from a self-suffi- cient bureaucratic monopoly into a mul- tilateral global web; Japan's NEC helps AT&T supply and market memory chips; Dutch-owned Philips helps AT&T make and market telecommunications switching equipment and application- specific integrated The more c~mpanies" the world on an equal footing with lo- cally based companies. By contrast, the worldwide opera- tions of such multinational giants as NEC, Fujit~su, and Mitsubishi, and even some European-based companies such as Siemens, are still considered foreign subsidiaries--subunits whose identi- ties derive from the nation where their worldwide headquar- ters are. As a result, these companies sometimes have diffi- ~ culty gaining equal treatment with local- ly based companies. In fact, even the most cosmopolitan Japa- nese companies are finding that the gen- eral reputation of Jap- anese business for putting Japan's inter- ests first is creating a competitive disad- vantage, making it III III III I increasingly difficult for these companies to export their products or undertake foreign invest- ment without encountering political opposition. Furthermore, the well-known predi- lection of Japanese companies to do business in a way that uniquely benefits Japan has created a backlash among competitors. Both U.S. and European global managers have grown wary of de- pending too heavily on Japanese compa- nies for critical high-tech components. They worry that Japanese suppliers will allocate the parts they make to other Japanese companies first or that Japa- nese companies will use the parts to gain a predatory foothold, gradually dis- placing their foreign partners as the relationship becomes more and more lopsided. Although these concerns about Japa- nese corpo~ate practice are not neces- sarily yielding more investment in the United States, they are leading to more alliances across the Atlantic or with non-Japanese Pacific Rim partners. For example, IBM's efforts to ensure itself a supply of random-access-memor), semi- conductor chips independent of Japa- nese companies h~ ledit into a spate of investments and alliances across Eu- rope. IBM's strategy, like that of oth- er Western global corporations, is not pro-United States: it is pro-IBM and non-Japanese. d~centr~l.ize their operations, the less authority anysingle government-can asse~;t ~imr them. circuits; Mitsui supplies AT&T with value-added networks. No nation is immune to the logic of the global web. France's Renault has teamed up with Sweden's Volvo to create Europe's fourth-largest i~dustrial group; Germany's Daimler-Benz is dis- cussing an assortment of links with Mit- subishi; Pilkington, Britain's largest glassmaker, has joined with France's Saint-Gobain and Japan's Nippon Sheet Glass; Italy's Olivetti is distributing mainframe computers for Hitachi and developing laptop computers with Ja- pan's YE Data. To be successful, the global manager cannot bias decisions in favor of the cor- poration's home base, Even the appear- ance of bias is likely to cause political problems--making it more difficult to utilize people, capital, technology, and natural resources across the global web. Successful global competitors such as IBM, GE, McDonald's, Ford, Shell, Philips, Sony, NCR, Unilever, the News Corporation, and Procter & Gam- ble have willingly shed their national identities and become loyal corporate citizens wherever they do business-- siting high ~ahae-added activities in many nations, hiring foreign nationals for senior positions, and giving local and regional managers substantial discre- tion. As a result, these companies are usually treated by governments around In fact, as corporations spin their global webs, other corporations, rather than governments, are likely to engage in strategic countermoves. The more companies decentralize their op- erations, the less authority any single government can assert over them. A company that is comfortable investing all over the world can negotiatex~ith gov- ernments all over the world and, with enough leverage, dictate the specific terms and conditions of its investment. Let's make a deal hey, as global managers, want to increase their world mar- ket shares, profits, and share prices. We, as citizens ofa pm'- ticular nation, want to secure national wealth and national economic well-be- ing. They parcel activities around the world according to economic criteria. We feel a special allegiance to our coun- try and to our compatriots. Our interests diverge from theirs for two specific reasons: we are concerned about our nation's relative wealth and power, and we want to capture for our nation the public benefits that spill over from global investment. Consider the following two scenarios for economic growth between now and the year 2000 for the United States and Japan: The U.S. economy grows 20 per- cent, but the Japanese economy grows 90 percent. The U.S. economy g-rows only 8 percent, and the Japanese econo- my grows 8.2 percent. When I've offered this choice in classes and corporate training semi- nars, a majority of the Americans in my audience usually select the second option. Many Americans are more concerned with our country's relative wealth and power than with our abso- lute gavwth. We not only want global managers to favor the United States, locating their high value-added activi- ties in America, but many of us would also sacrifice some additional wealth to prevent the Japanese from enjoying even greater gains. Whether or not these sentiments should be commended as a principle of international economic behavior, they cannot be ignored. Even those of us who select the first option might still want global managers to favor the United States because of national benefits that do not typically appear on the global manager's balance sheets. These spillovers include the jobs T!06511234
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that result from having sophisticated factories, labs, and equipment, whose high wages multiply throughout the economy, raising other incomes. Good jobs also generate higher tax receipts, which permit government to invest in improved schools and transportation and also to care for the elderly and the disadvantaged. Moreover, on-the-job training and the resulting technical know-how enable Americans to inno- vate and thus generate more wealth for the United States in the years to come. Our goal, then, is to attract into the United States the most high-value- added activities with the greatest posi- tive spillovers--and to keep and grow them here. We can pursue our goal by ensuring that America's children re- ceive a first-class education and that our transportation and communications in- frastructure is second to none. But those steps alone will not guarantee the kind of global investment we need. In a world in which even" other nation is bid- ding for high-value-added jobs, Amer- ica must negotiate as well. When trade was the primary, engine of global economic integration and cor- porations were rooted in particular countries, negotiations were govern- ment to government. Each nation's ob- jective was to open foreign markets to the exports of its own companies or to protect its own companies from foreign competition at home. Countries meas- ured their success by the extent to which they were able to sell their goods and services within foreign nations and how much world market share their own companies could command. But the new global economy renders obsolete these old forms of negotiating and keeping score. Global investment is supplanting merchandise trade as the major engine of world economic inte- gration-and the key to a nation's wealth and well-being. And negotia- tions between governments and global managers--between the new "us" and the new "them"--are displacing the old government-to-government talks. Between 1983 and 1988, world-trade volumes grew at a compounded annual rate of 5 percent. 0vet the same period, global direct foreign investment in- creased by more than 20 percent annu- ally in real terms. As a result, sales by foreign-owned affiliates within a nation now typically exceed foreign exports to that nation. In fact, when the foreign sales of U.S.-owned companies are calculated against total purchases by Americans of the products of foreign- owned companies, America's trade defi- cit turns into a net surplus. The foreign operations of U.S.-owned corporations now account for more than $1 trillion in annual sales around the world, roughly four times the total export of goods made in the United States and about seven to eight times the value of Amer- ica's recent trade deficits. Today much of what is actually "traded" across borders is intangible services--research, engineering, de- sign, management, marketing, and sales--transferred within global corpo- rations fi~om one location to another. IBM exports relatively few machines f~om the United States to the rest of its global web; most of its U.S. "exports" are ideas and insights. Honda now im- ports relatively few automotive compo- nents into the United States; most of its Japanese "imports" are technological specifications and management know- how. The threads oft.he new global web are computers, facsimile machines, sat- ellites, high-resolution monitors, and modems~Ymkingideas and money from each of the company's worldwide loca- tions with ever)" other. This change in the locus of economic activity--from trade to direct invest- ment-implies a change in the nature of negotiations. Although we focus our at- tention on the office of the United States Trade Representative (USTR), looking for government-to-government talks to open up foreign markets to the products of "our" companies, that is no longer where the important action is. Even when these old-fashioned trade talks succeed in opening a foreign market to a U.S. company, the effect on our in- comes .and standard of living is often tangential. For example, the recent agreement secured with Japan, after in- tense government pressure, to permit Toys "R" Us to open a large retail outlet in Tokyo will have almost no effect on the U.S. work force, apart from a few U.S. managers. Almost ever),thing that Toys "R" Us sells in Japan will be con- ceived, designed, and manufactured outside the United States. Doing the companies' bidding A(~tother sort of negoLiation is be- oming far more important. one side of the bargaining able still sit government represen~tatives, but on the oLher s~de they sit--the global managers. The gov- ernment negotiators represent the cit- izens of the nation, not the nation's corporations. Their job is to induce the global managers to site certain activi- TI06511235
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ties in the nation and thus provide ciLi- zens with good jobs. In return, the government negotiators offer a car- rot--assorted tax breaks, financial in- ducements, and public investments. There is also a slick: government nego- tiators may threaten to dose the na- tional market to the company unless it makes the desired investments. Like ever), other nation, the United States is taking an active part in these new sorts of negotiations. But unlike other countries, we are not represented by a high-ranking federal official such as the U.S. trade representative. Instead, we are represented by 50 state gover- nors and hundreds of mayors and city managers. These officials pay no atten- tion to the nationality of the global man- agers on the other side of the table. In ~act, 4:3 states maintain permanent of- flees in foreign capitals to conduct nego- tiations full time. Just as often, the global managers sitting across the table are Americans, whose companies are headquartered in the United States-- but they drive as hard a bargain as the foreign managers. The process works in a crude but ef- fective fashion: the possibility of a new factory, lab, or branch office within a state or a city sets offa furious auction; a casual threat to move an existing facility starts an equally impassioned round of negotiation. The governor or mayor who successfully lures or keeps the jobs is a hem; the one who loses the bidding m<v soon lose his or her own job. The problem is that our U.S. bargain- ing agents often compete against them- selves. A case in point: In the early 1980s the Hyster Co~poraLion, a manu- facturer of forklift trucks, notified public officials in eight locations where Hyster had factories that some of the facililies would be dosed. Hyster invited each po- litical jurisdiction to bid to keep its local jobs. The resulting auction was a great success for Hyster. By the time the bid- ding closed, American states and cities had surrendered a total of $18 million to preserve about 2,000 jobs. The big "winner" was Danville, Illinois, a town with a population of only 39,000. In ex- change for 850 blue-collar jobs, Dan~ille and the state of Illinois agreed to pro- vide Hyster with roughly $10,000 per employee in subsidies. Over time, the bidding has become more ferocious and the incentives more generous. In 1980 Tennessee paid the equivalent of $11,000 per job to entice Nissan to Smyrna. By 1986 Indiana had to spend $50,000 per job to induce Su- baru-Isuzu to set up shop in Lafayette. When ConAgra threatened to leave Omaha, the state of Nebraska felt the heat of the bidding war directly. "It's like a poker game," said Donald Pursell, the former director of Nebraska's Bu- reau of Business Research. "Nebraska makes a bid; Iowa ups it." Bidding to attract new plants or keep existing ones requires that such state and local largess be routinely parceled out. Few global managers expect to pay the same rate of property tax as local residents pay. It is relatively easy to insist on a better deal simply by point- ing out that without more ~:avorable tax Lreatment the company will move to one of its other global locations. Partly as a result of this kind of leverage, corpora- tions now contribute a much smaller percentage of local taxes in the United States than they did in the past. In 1957 co~orations accounted for about 45 per- cent of local revenues; by 1989 corporate taxes made up only 16 percent. Paradoxically, such tax breaks and subsidies make it more difficult for slates and communities to finance public education and infrastructure, For exam- ple, GM's successful effort to cut its an- nual taxes by $1 million in Tarrytown, New York, where the company has had a factory since'1914, has forced the com- munity to lay off dozens of teachers and to cut back on school supplies and main- tenance. Ultimately, these "beggar thy neighbor" ploys undermine our ability to attract investments--since the quali- ty of the work force, good transporta- tion facilities, and a good quality of life are ultimately more important lures for attracting businesses than tax conces- sions and subsidies. It is simple common sense that large nations that bargain as a whole with global managers--or groups of smaller nations that pool their bargaining strength behind a single agent--have much more clout than small nations or separate states and cities. By avoiding internal bidding contests, they end up paying far less to attract investment and have an easier time getting the jobs they want when and where they want them. F.or example, the European Com- mission reviews location incentives of- I~a~n|ng~or,- Diamond $1~r Motors S~..$ $500-$700 N~I, IlL ~y~e, Ind. " ~m-ls~ - ' ~ ~ 1,7~ ~ng H~I, T~n. ~m ~ ~,7~ 3,~ ~6,~7 ~ R~ M~h~ " Man~l~g U~. ST~ 3,~ S11,~ Ma~cudng T!06511236
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fered by member nations in order to minimize bidding by one against the other. As a result, when Honda decided in 1989 to locate its first European plant in Britain, it did not receive a shilling of inducement from Downing Street. Af- ter 1992 a united Europe will be in an even stronger bargaining position in ne- gotiations with global managers. investment, the United States contin- ues both to dissipate its bargainingpow- er by permitting bidding wars and to discourage foreign investment by creat- ing federal barriers. We could serve ourinterests by creat- ing an office of the U.S. Investment Representative (USIR), paralleling the USTR and preempting by federal law Before the ratifica- tion of the U.S. Con- stitution, every state carried out its own trade policy, nego- tiating separate trade pacts with foreign na- tions. Today that re- sponsibility is firmly lodged in the federal government. Trade negotiations are cen- tralized in the office of the USTR. But with - direct investment supplanting trade as the engine of world commerce, we lack any similar vehicle to negotiate on our behalf with global managers. As a con- sequence, we are relatively easy pick- ings for them. We need to attT~act invest~nent from all over the world, not raise barriers on the I~.asis of national identit~y. Turning the tables Wv~halls needed is a shift of thority over global in- tment, from states and • • cities to the federal govern- ment. What little authority the federal government now exercises over global investment is negative. Under the Om- nibus Trade Act of 1988, the federal gov- ernment can block foreign investors them gaining a controlling interest in a U.S.-owned corporation if the purchase is likely to "impair national security." Under several other recent statutes, the federal government subsidizes pri- vate-sector R&D only if it is undertaken by a U.S.-owned company. Even more recently, Congress has sought to im- pose special tax and disclosure burdens on non-U.S, companies operating in this country. Most of these investment disincen- tives make little sense.-It isin ourinter- ests to attract investment from global managers all over the world rather than raise investment barriers on the thulty basis of national identity. More impor- tant, while other nations are improving their bargaining power to attract global those separate state and locallaws that au- thorize their officials to offer investment incentives. In other words, the federal government should effectively bar states and cities from bid- ding for global cap- ital. Just as the USTR negotiates na- tional trade issues, the USIR would ne- gotiate investment issues. The USIR would determine what sorts of global investments we need in order to enhahce our wealth and create impor- tant spillovers, as well as where those investments should be located. It would also monitor major factories, labs, and offices in the United States that. mana- gers were planning to close and move abroad. The tools available to the USIR in ne- gotiating on our behalf already exist but are now scattered across the national landscape: tax abatements, tax credits, R&D incentives, loans and loan guaran- tees, use of public lands, and more. Moreover, working with the USTR, the USIR could offer trade concessions in exchange for the investments we seek--lowering tariffs on certain com- ponents to be used in the proposed U.S. manufacturing facility, providing relief from voluntary restraint agreements on other parts and components, granting immunity from certain antidumping levies. And if other nations threaten to close off their markets to global corpo- rations unless they make certain invest- ments there, America would be in the position to use similar threats as a means of ensuring its fair share of such investments. Just as we need a U.S. investment representative to parallel the efforts of the U.S. trade representative, so we need a General Agreement on Tariffs and Trade (GATr) for direct investment to parallel the GATr that establishes rules for global trade. A GATI" for direct investment would establish interna- tional rules by which nations bid for global investment and processes for set- tling disputes over such bids. Now come back to the global negotiat- ing table where we started. We are on one side; they are on the other. There is nothing sinister or hostile about this setting. It is, in fact, an inevitable ex- tension of the emerging global econo- my. It is not, however, absolutely true that our interests and theirs conflict. Both sides, for example, benefit from our having a well-educated, well- trained work force; a well-developed, well-maintained public infrastructure; a high-quality environment; and a high overall standard of living. But there are differences as well-- places where our interests diverge. Many global managers, more sensitive to the requirements of the bottom line and thus more agile in adapting, have realized the implications of globaliza- tion. We and our governments are still struggling to catch up. They are chang- ing the shape, size, location, and operat- ing principles of global businesses. We are mired in the obsolete practices and attitudes of a previous era; our govern- ment lags behind the epochal events un- folding around the globe. Other nations are reacting to these same events: the European Community, Japan's cautious emergence in world councils. Now we in the United States must move to create new institutions and attitudes that will permit us to negotiate effectively with them--that will allow us to negotiate as if our future depended on it. • THE WRITER Robert B. Reich is the highly acclaimed author of The Next American Frontier and The Work of Nations: Preparing Ourselves for 21st-Century Capitalism. A professor at Harvard's John F. Kennedy School of Govern- ment, he was a policymaker in the Ford and Carter administrations. Reprinted by permission of Harvard B~tsi~ess Re~,iew. An excerpt fi-om "Who Is Them?" by Robert B. Reich. issue March-April 1991. Copy- right ©1991 by the President and Fel- lows of Harvard College; all rights reserved. T106511237
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We make drug documentation painless. From the creation of a new drug to getting it to market can take 3,000 days. And because a single day's sales on a patented drug could be $50,000 to $300,000 (or even higher), it's obvious that getting a drug to market faster is one of the most profitable things a drug company can do. Around the world, Xerox can help--with everything from workstations to networks to high-speed laser printers to our unequaled copiers. Our systems let you integrate information from different sources and formats, compose it, index it and print it out in a fraction of the time it takes now. T106511238
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We'll work with you to design exactly the system that satisfies your particular needs. And since your markets are worldwide, we've designed our systems to. create documents in over 40 different languages--including the major European languages, Russian, Arabic, Chinese and Japanese. Plus, our systems are backed worldwide by the service and support of Team Xerox, which operates throughout the world with partners and operating companies. Our product quality is known worldwide, too, and has been recognized by the Baldrige Award for Quality in the U.S., the Deming Award for Quality in Japan, the U.K. National Quality Award, and several other international quality awards. Wherever you are in the world, for more information write to us at Xerox Corporation, Attn: Pharmaceutical Programs, P.O. Box 24, Rochester, New York 14692. Or call 1-800-TEAM-XRX, ext. 216. make your documentation painless. And your company more profitabl as well. XEROX The Document Company © 1990 XEROX CORPORATION. XEROX~ is a trademark of XEROX CORPORATION. T106511239
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iBo OK BRIEFS American Steel. "[ think the steel busi- ness is the most excit- ing business I've ever seen. I guess I'm a hot-metal man at heart," says Keith Busse, the vice-presi- dent and general manager of Nucor Corporation in Crawfordsville, Indiana. Busse is just one of the many colorful characters in writer Richard Preston's dramatic ac- count of how one company set out to resurrect the American steel industry. Preston, a regular contributor to The New Yorker, spent two years chroni- cling Nueor's creation of the first large- sheet steel mill in America in 20 years. Starting from the early planning stages of the mill in 1987, Preston provides a behind-the-scenes look at the men and women who carried off a project many considered impossible. Preston also brings home the danger of working at the mill. In one frightening_account, he tells how a ladle filled with 90 tons of boiling hot metal fell to the ground, claiming the life of one worker and se- verely burning others. American Steel: Hot Metal Men and the Resurrection of the Rust Belt by Richard Preston, Pren- tiee Hall Press, New York, $19.9g. Opening Arguments. Prosecuting attorney Jeffrey Toobin may have thought his days of controversial court- room battles were ever when his work on the Oliver North trial ended in 1987- that is, until he tried to publish a book about his experiences. Toobin's former boss, independent counsel Lawrence Walsh, tried to block clearance of the publication, claiming it violated a con- fidentiality agreement Toabin had But Toobin, now an assistant signed. U.S. attorney in New York City, even- tually won the case. His book, a diary- like account of the two years he helped prosecute North for his role in the Iran- Contra scandal, is filled with insightful, ot~en humorous descriptions of the tri- Ms' courtroom proceedings. Toobin, an idealistic 26-year-old who joined the prosecution team fl~sh out of Harvard Law School, takes the reader through one frustrating obstacle after another-- from the opposition's frequent use of "national security" as a defense to the never-ending task of avoiding all news coverage of the congressional hearings. The action spirals to the final crushing blow: the reversal of North's conviction, which reduces Toobin to shameless tears as he reflects on his courtroom loss. Opening Arguments: A Young Lawyer's First Case: United States v. Oli.verNorth by Jeffrey Toobin, Viking, New York, $22.95. Rainmaker. Jeff Beck, one of Wall Street's most celebrated deal- makers, was a liar. He lied to his col- leagues, his friends, and even his three wives, inventing elaborate tales about his background and bank account. Busi- ness Week senior wTiter Anthony Bian- co traces Beck's life from his troubled childhood to his status-seeking years on Wall Street, where he closed the two largest leveraged buy-out deals of the '80s, Beatrice and R JR Nabisco. During his spectacular rise, Beck claimed to be everything from an heir to a billion-dol- lar fortune to a Vietnam War hero (sup- posedly nicknamed Mad Dog for his fearless combat in the jungles of 'Nam). At the height of his success, he rubbed shoulders with everyone from junk- bond king Michael Milken to director Oliver Stone, who hired the dealmaker to serve as a key technical adviser for the film Wall Street. Then in 1990 a Wall Street Journal expos~ brought his de- cepgiorm to a halL~ No~ a millionaLm, Beck., 45, has come clean about his past and has retired from Wall Street. Rai~- maker: The Saga. of Jeff Beck, Wall Street's Mad Dog by Anthony Bianco, Random House, New York, $25. The Big Six. Once known as the "world's premier account- ants," the Big Six has earned a reputation as a group of money- hungry firms that have abused their power in the past dec- ade, Sa.vs financial writer Mark Stevens. In this book Stevens, who studied America's major accounting firms in his 1981 book The Big Eight, uncovers to- day's accounting industry's many fail- ures and shortcomings. He details, for instance, how faulty auditing by Big Six firms contributed to the recent savings and loan scandal and describes the way firms "cross-sell" their consulting serv- ices to their own audit clients. The book also provides an inside look at the secret negotiations that led to the two 1989 megamergers of Ernst & Young and of Deloitte & Touche. "The megamergers that have transformed the Big Eight into the Big Six are not isolated events," says Stevens. "Instead they are sym- bolic of the many profound changes that have been l~shaping the accounting gi- ants, changes that have clouded their perception, diminished their profession- alism, generated bitter internal conflict, and made possible financial debacles that have shocked the nation, l~'om every standpoint this is a profession in crisis." The Big Six: The Selli~tg Out of Ame~:ca's Top Accounting Firms by Mark Stevens, Simon & Schuster. New York, $19.95. Cracking the Japanese Marke~. "To beat the Japanese you've got to beat them in their own back yard," say James C. Morgan and his son, J. Jeffrey Morgan. In their book that the keys to breaking into the Japa- nese business world are technology and relationships. Drawing on their profes- sional experiences, James C. Morgan, the chairman of Applied Materials (a T106511240
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supplier of semiconductor equipment that does 50 percent of its business in Japan), and J. Jeffrey Morgan, a former employee of Mitsui & Company (Japan's oldest trading conglomerate), outline the problems Western companies are likely to encounter in Japan. They also examine the strategies used by compa- nies, such as Procter & Gamble, Swatch Watch, and Upjohn Pharmaceuticals, that have successfully infiltrated the tough but rewarding Japanese market. For companies wanting to do the same, the Morgans provide tips on establish- ing a presence in Japan, including learn- ing the Japanese people's likes and dislikes, copying and improving upon existing ideas and technologT, and tar- geting often-ignored segments of the Japanese population in need of such products as pharmaceuticals and spe- cialty foods. Cracking. the Japanese Market: Stra~egfes for Success in the New Global Economy by James C. Mor- gan and J. Jeffrey Morgan, Free Press, New York, $24.95. ~~he Day America Told Um Troth. When ad ex- ecutives James Pat- terson and Peter Kim decided to find out what Americans real- ly thought about life, love, and work, they conducted in-depth interviews with more than 2,000 people nationwide, posing such tantalizing questions m~: "Are you an ethical boss?" and "How satisfied arc you with your job?" The results were less than reas- sm~ng: Only one in I0 respondents said he was satisfied with his job, and only three in 10 Americans said they were loyal to their companies. The answers to questions covering such areas as sexual values and general morality didn't pro- vide any more consolation. The survey found that ~4 percent of Americans "will steal from those who won't really miss it." The authers, who illustrate their findings with interesting facts, figures, and anecdotes, come to the conclusion that at home and work "Americans are making up their own rules, their own laws.., ttheir] own moral codes." The Day America Toht ~I~ Tr~th: What People Really Belieoe Abo~t Eye,T- thing That Really Matters by James Patterson and Peter Kim, Prentice Hall P~ss, New York, $19.95. Play Money. Before she was legally old enough to buy, sell, or own stock, Laura Pedersen had made her first million dol- lars in the stock market as an op- tions trader on the floor of the American Stock Exchange. A college dropout, Pedersen had joined the exchange in 1984 as a clerk but soon was catapulted into the chaotic trading pit where she lasted for five years before "retiring:' in exhaustion at age 23. Ped- ersen, who now lectures on the college circuit, chronicles.her incredible adven- ture and explains complicated trading procedures with humor and insight. Pedersen also laments what she sees as the imminent demise of her former pro- fession: "Against the efficiency of the mainframe computer, traders don't stand much of a chance... " Play Money: My B.rief But Brilliant Career on Wall Street by Laura Pedersen with F. Peter Model, Crown Publishers, New York, $20. The i~er aadthe ter. Frank Sinatra and John F. Kenne- dy. Shirley MacLaine and George McGov- ern. Warren Beatty and Gary Hart. Such alliances have exist- ed for decades and have generated millions of dollars--and millions of votes, says Ronald Browns- tein, a political correspondent for the Los A,~@eles Tim~s. Brownstein exam- ines why the rich and famous of Holly- wood and Washington have eagerly formed friendships, beginning witb the Depression-era mutual-admiration society between Herbert Hoover, Louis B. Mayer, and William Randolph Hearst. He also covers the investiga- tions into the Communist activities of the famous by the House Committee on Un-American Activities, which de- stroyed the careers of many in Holly- wood in the 1940s. The Power and the Glitter: The Hollywood-Washi~gton Connection by Ronald Brownsteiu, Pantheon Books, New York, $24.95. VIDEO BRIEFS ~The Mosaic Work- place. By the year 2000, American- born white males will make up only 15 percent of the U.S. work force. But this is just one of many rapidly developing shifts in the ethnic and sexual make- up of American business, according to this video. The three tapes in this set (~otaling one hour in viewing time) explore the implications of future changes for workers and managers by focusing on personal anecdotes about ethnic diversity, including how racism and sexism can affect an em- ployee's career. Experts also explain the steps business people must take to adapt to the new workplace real- ities. The Mosaic Workplace, pro- ducedby Films for the Humanities & Sciences, distn'buted by ANA Video, 800-225-3215 (rental: $170; purchase: $395 per tape). The Write Stuff. Poor writing skills can cool down even the hottest executive career. This 45- minute video is aimed at those who need to learn the basic elements of business writing or to improve on those ele- ments. Using vignettes and charts, the tape demonstrates the construc- tion and style requirements of every- thing from reports to proposals, and coaches writers through the steps needed to communicate more effec- tively than they have been. The tape also covers clarity, brevity, read- ability, vocabulary, grammar, and style. A style manual and audiotape are included. The Write Stuffi" A Pxo, ctieal C_ndd~ ta ~ a Bet- ter Business Writer, produced by JWA/Video, 800-829-9074 (purchase: $95). T106511241
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Behind every great accomplishment is a document. Behind every document are the people who put it together. Who stops to think that before an idea'can get offff~e ground it first takes shape as a Document. A Document that becomes the charter of the work group that conceived it. A Document that becomes its communal pride. At Xerox, we never forget that almost every great accomplishment started as jottings on paper, or words on a computer screen. And that as it grew and took • T106511242
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shape, there were more and more contributors, putting together more and more documents. We design equipment to facilitate the realization of an idea. Xerox scanners, copiers, fax machines, laser printers, and publishers blend the contributions of all disciplines--the blueskyers and the down-to-earthers, the engineers and accountants, the assistants and managers. ., At Xerox we understand that without the people who put it together, it just wouldn't have happened. For when we put it together, is there anything we can't • . accomplish? /IAO~E~i ~E 1989 XEROX The Document Company T106511243
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XEROX We made 99.999660/0 perfect. For 500/o less-money In 800/0 less time. • 9 Any questaom. You probably have a few. We certainly did. Because the situation one of our best clients presented to us was one you might find familiar. The case was as dramatic as it was simple. Motorola announced to all its suppliers that it was deter- mined to manufacture all its cellular phones on a just- in-time basis. That meant they needed a way to print a portfolio of 50 different Motorola cellular phone manuals, with the capability to constantly make revisions due to new product innovations. To the people at Rich Graphics, with a significant com- mercial printing business, this news was an opportunity to grow their company by using new technologies to meet Motorola's ambitious quality demands. Helping them meet those demands was the job Xerox took on. It meant integrating personal computers and pr~mters. It meant cutting out cutting and pasting so people could compose and.edit on Xerox workstations. It meant creating text and scanning graphics by using workstation editing © 1991 XEROX CORPORATION XEROX" i~ a tmde~na,-k of XEROX CORPORATION. 36 USC 350 technology to create flawless laser-printed manuals to go with each cellular phone on a just-in-time basis. It meant working together to change work processes so that all this was done faster, for less money and with virtually no defects. The productivity gains from all this innovative work are in our headline. What we didn't tell you is that by helping Motorola and other customers find more productive ways to put together their documents Rich Graphics has put together a printing business that has more than doubled in size, not to mention reputation. Which is the kind of results you get when you start out asking the fight questions. USA The Document Company r T106511244

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