Friday, June 29, 2012

Creative Destruction

Finishing up my physics doctorate in late 1971, I was considering an offer to join the Xerox Corporate Research Labs in Rochester, NY. I did a summer internship in 1966 and had been working there part time for about a year while completing my thesis. Needing a full time job -- with two children and a stay-at-home wife -- I turned to my Xerox mentors for advice. Bob Gundlach was the top scientist and inventor at Xerox and a good friend. I was totally surprised when he advised against my joining Xerox. Bob said that the company had gotten fat and lazy and was no longer the innovative dynamo he joined two decades earlier. My part-time boss had similar reservations, and he graciously offered to continue my part-time employment while I worked full time as a college physics professor. After more than seventeen years of this arrangement, I did finally join Xerox as a full time research scientist and manager. What changed my mind?

During the 1970-80s Xerox suffered through some tough times, “fumbling the future” on personal computers (to Steve Jobs’ immense satisfaction) and losing copier market share to the Japanese. It took two decades for the management culture to change course, led first by the adoption of Japanese style “Leadership Through Quality” techniques. Product quality and efficiency became pillars of the corporate culture, and by the early 1990’s Xerox became the first American company to win back lost market share from the Japanese. Xerox re-branded itself “The Document Company” and transitioned to the next big things: color printing and software services.  Manufacturing became a much smaller part of its bottom line.

As David Brooks points out, this was a common storyline in corporate America. “Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations. The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient.” (“How Change Happens.” New York Times, 5/21/12) Companies as diverse as GE, IBM and Apple remade themselves.

The transition has been astounding. Economic output per person is now 20 to 25% higher in the U.S. than in Japan and the major European economies, and America's economy dominates the world in size and prestige. According to The Wall Street Journal, the revenue per employee at S&P 500 companies increased from $378,000 in 2007 to $420,000 in 2011. And American exports are surging, due to smart machines, the shale oil and gas revolution, and the growth of the global middle class that is dramatically increasing demand for pharmaceuticals, semiconductors, planes and entertainment, all important American products.

But not all is well. As Tyler Cowen reports in The American Interest (“What Export-Oriented America Means”), there are actually two American economies. On the one hand are the companies that have to compete with everybody everywhere. With the sword of foreign competition hanging over them, these companies have become relentlessly dynamic and very efficient. On the other hand, there are large sectors of the economy that do not face this global competition — health care, education and government, and industries that depend too much on government (eg. autos). These segments cling to an economic model that no longer works because the pillars have eroded.

This was the issue discussed in my last piece (“America’s Economic Problem” 5/10/12). While America transitioned from a manufacturing economy to a service economy, the productivity gains achieved by the multinational companies have displaced many low-medium skilled workers. Those workers will need to find employment in new enterprises, in fields some of which have not yet been imagined. After all, ten years ago who dreamed of Facebook or Myspace or Hootsuite? Who knew we needed personal trainers, personal shoppers or personal assistants of all types? Who would have imagined the growth of pet services (canine psychologists, for heaven’s sake)? New skills will be required.

The future can be very lucrative for America if only we strive for it. Sadly, there is a sizeable and growing segment of the population that has stopped striving. A bifurcation of American society is occurring before our eyes. Increasingly, our country is becoming segregated into high-income groups with a tendency to pre-1960s social mores, and low-income groups experiencing profound social breakdown. The double whammy of declining economic opportunity and growing dysfunction has created a new lower class in America like nothing we have seen before. That is the subject of my next piece.


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