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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
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Growing Pains: Management under StressThe 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? • 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