Transcript high growth mgt

Growing Pains: Management
under Stress
The Mal-adaptation of
Economies and Firms to Slow
Growth
Michael Smitka
W&L
January 2004
Strategic Context
• High growth
– Real GDP at 10% pa - avg for entire economy
– Expanding sectors grew 20% pa or more
• Strong labor movement
– Layoffs are to be done only in extremis
• Bank-centered financial system
– Own finance (retained earnings) crucial
– Outside borrowing (esp large firms) massive
Strategic Objective
• What makes sense?
– Profit maximization?
– Market share? (synonymous with growth!)
• Corporate “governance”
– who has voice and what are their objectives?
– Mgrs vs bankers vs workers vs suppliers vs
customers
Hypothesis
• Goal is growth
• Proxy is market share - concrete, practical
– How to achieve?
– Implications for shape of firms?
– Implications for wider economic structure?
M- vs U-firms
• Terminology from Alfred Chandler and Oliver
Williamson
– U is “unitary” firm (single industry / product line)
– M is “multidivisional” firm
• High growth context favors “U” firms
– Lessens info requirements
– Lessens skill mix
– Facilitates forward planning
• Do more of the same, only better
So a manager…
• Is hungry for resources
– Labor
– Capital
– Technology
• But
– Needs no complicated strategic planning or internal
allocation mechanism
– Tied to LES*
– Needs firm-specific human capital
* “lifetime” employment system
Who rises to the top?
• Who is most powerful in a US firm?
– Finance!
– Why?
• Allocation across divisions
• Complicated fund-raising situation
• Need to manage short-term profits
• Who is least powerful in a US firm?
– Production
– Personnel
Who rises to the top?
• Production!
– The crucial resource: technology
• Personnel!
– The other crucial resource
• Never finance, marketing
– Dealing with banks involves little skill
– Doing more of the same involves little skill
Challenges of slow growth
• Workers are hard to shed
• Seniority wages: how to keep paying?
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–
–
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In fact wage profile less steep over time
Bonuses can be adjusted, post-retirees good
Temporary & contract & part-time workers
Subcontract!
• Finance: high debt : equity ratios
– Slow growth can be dangerous
Slow shrinkage
• Easy during high growth era
– Workers could find alternate employment
– Absolute firm size small
– Capital stock small
• How about now?
– High U
– Large LF
– Lots of xs capital
1980s & slower growth
• Slow-growing firms faced a “hard” budget
constraint
– Without growth plans, banks wouldn’t lend
• Can’t expand
• Hard even to diversify
– But no sudden death
• No M&A market
• “Eat” assets - workers come before shareholders
Then came the “Bubble”
• The macro environment shifted
– Non-bank finance available
– Interest rates very low, no dividends need be paid
• Diversify or die!
– Slow growth of existing demand
– And projections of Japan rosy
• Financial center of Asia, if not the world
• Dominant in leading mfg sectors
• Lots of skills while hoarding existing labor
– Plus no downside: no sharp recession except 1974
The Solution
0% interest rates produce 0%
management - anything can be
justified as sound business
practice!
quip made by yours truly in a panel
discussion at the Association of Japanese
Business Studies
Can “U” become “M”?
• We have the empirical answer:
– NO. diversification doesn’t work
• Why?
– No financial skills - even among bankers
– No multiproduct planning capabilities
– Dedication to internal resources
• Human skills, technology
So what’s next?
• Many years of sub-par growth