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Growing Pains: Management under Stress The Mal-adaptation of Economies and Firms to Slow Growth. Michael Smitka W&L February 2002. Strategic Context. High growth Strong labor movement Segmented labor markets: wages costs are higher in larger firms Bank-centered financial system
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Growing Pains: Management under StressThe Mal-adaptation of Economies and Firms to Slow Growth Michael Smitka W&L February 2002
Strategic Context • High growth • Strong labor movement • Segmented labor markets: wages costs are higher in larger firms • Bank-centered financial system • Own finance (retained earnings) are of course crucial
Strategic Objective • What makes sense? • Profit maximization? • Market share? • Growth? • Of members of the “governance” mechanism, who favors what? • 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 • M is “multidivisional” firm • High growth context favors “U” firms • Lessens info requirements • Lessens skill mix • Facilitates forward planning
So a manager… • Is hungry for resources • Labor • Capital • Technology • But • Needs no complicated strategic planning or internal allocation mechanism • Benefits from LES and firm-specific human capital
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 • 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 • But 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 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
Interaction with bubble • Slow-growing firms faced a big constraint • 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 before shareholders
The “Bubble” • Then, as we’ll see later, the macro environment shifted • Non-bank finance available • Interest rates very low • Diversify or die! • Demand growth slow • Demographic projects well-known: not temporary problem
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. • 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