April 1996 € Volume 6 € Number 4

Customer Connection

The Best and Worst of Times

By Tom Wallace

"Is the glass half full or empty,"
I asked her as I filled it.
She said, "It doesn't really matter.
Pretty soon you're bound to spill it."

Those words were penned by the Indigo Girls, a musical group that often gives new meaning to the word "pessimism." And they describe pretty well how things look to many people today.

The glass is half empty
Here's the view from the bad news perspective, one that's held by a majority of the American working public.

"This layoff situation is terrible. Job security is a thing of the past. We can't count on having our jobs tomorrow."

"I feel alienated. I've been loyal to this company for years, but the company feels no loyalty to people in my situation."

"The rich get richer, and the less rich get more insecure; the gap between top management's pay and middle management's is wider than ever."

It's not an upbeat situation, and it's made worse by a widespread lack of confidence in our leaders on Capitol Hill and in the White House.

The glass is half full
There's another view of our situation and it's through the eyes of the customer, the end customer. Thanks to amazing productivity growth, global competition and the growth of discount mass merchandisers, products today don't cost much more than they did five years ago. As a matter of fact, if one eliminates the big ticket items like automobiles and housing, prices have actually declined.

The consumer is king. We have more selection, more sources, and -- in many respects -- better service than ever before. Why? Because we have choices. If we don't like the U.S. product, we can buy the one made in Europe or Malaysia. If we don't like Kmart or Wal-Mart, we can drive a half-mile down the street and go to Target. If we can't find the product locally, we can order it from a catalog or via the Internet. These choices create competition, which forces down prices, which in turn creates substantial pressure on costs -- which means puny raises and people sometimes losing their jobs.

Nobody ever said capitalism is all sweetness and light. It's efficient, but not easy. It's competitive, but not kind. We can paraphrase Winston Churchill's words about democracy as a political process: Free enterprise may be the worst economic system ever invented-except for all the others. Communism, socialism, and other forms of centralized economic control have come up dry; they just don't work.

Getting back to the situation employees find themselves in, we can paraphrase another prominent Englishman, Charles Dickens. Our situation today seems like the best of times and the worst of times. We have regained our position as the number one industrial country in the world; our productivity gains are stunning; inflation is under control; the customer is king; and the stock market is doing extremely well, thank you. Then why does it feel bad? Why aren't we having fun?

My theory is that we're at the extreme end of a pendulum swing. It goes like this:

1. Following World War II, U.S. industry dominated the world. Our industrial base was intact; demand for products was high, but capacity was limited. During the several decades after the war, we became complacent, arrogant and fat. We overspent and we overstaffed. Guns and butter spending by our government led to high inflation, which masked low growth in corporate earnings. Productivity growth slowed dramatically, and we took our industrial base for granted. We forgot how to run lean and mean. The pendulum had swung to one extreme.

2. During that period, America's standard of living improved dramatically. We lived far more affluently than our parents. But the enormous improvement in standard of living was an aberration, based on the aftermath of the second world war. I don't know if today's younger generation will have a higher standard of living than their "fifty-something" parents, but I'm convinced that the generation-to-generation increase in their standard of living won't come close. It can't.

3. The wake-up call came during the 1970s and '80s in the form of foreign competition, and most of us remember what that was like. The resulting trauma started the pendulum to swing back toward the middle.

4. There's a herd-like mentality to much of what American industry does. The general mind-set went something like this: "If Jack Welch at GE can dramatically increase shareholder value by reducing headcount, why can't we?" So we downsized, delayered and reengineered with missionary zeal. The pendulum shot right past the mid-point to the other end of the arc, and this is where we've been for some time.

Now the pendulum may be starting to swing back. Business Week magazine stated late last year: "What has been unusual in this expansion's efficiency spree is the absence of rising living standards to reward workers. Now, there are nascent indications that workers are beginning to reap the fruit of Corporate America's push to lift productivity. With inflation low, and with the hourly pay of production workers growing a bit faster, real wages are starting to rise." In my recent travels, I see the hiring sign out more and more often.

We're working enormous amounts of overtime. I saw an estimate that, if overtime were reduced to 1982 levels, three million new jobs would result. I predict that overtime will ease somewhat and more people will be hired, creating more new jobs and making wage gains more likely.

Historically, productivity gains result in wage gains. But, historically, wage gains lag increases in profits. I believe that wages will start to catch up, as Business Week indicated they're already starting to do. For every Caterpillar standoff, we'll be seeing a Boeing settlement.

Robert Samuelson, the economist, writing in Newsweek last year, made an interesting point about lower prices and higher wages. He said, "People see fewer large wage increases, the usual benchmark of 'getting ahead.' Price cuts are not appreciated, because they are scattered and small." So the glass looks half empty during this season of discontent.

But, hang in there. The pendulum really is swinging back towards the middle, driven by a number of factors:

1. Increasing availability of jobs in the skilled components of the job market. The law of demand and supply is starting to reassert itself.

2. Corporate leaders are beginning to realize that contraction alone doesn't lead to long-term competitive advantage. Cutting fat is OK, but cutting muscle and bone diminishes the company's ability to deliver high quality services to its customers. I feel that, in particular, service quality (as opposed to product quality) has declined during this period of staffing contraction, and I attribute this to the pendulum swinging too far.

3. A rediscovery of the notion that there's more than one way to grow the bottom line. Cutting costs is one approach, but that has a finite lifetime; sooner or later, one runs out of processes to reengineer and people to cut. Growing the business is a far more enduring strategy for increasing shareholder value over the long run.

This point is made forcefully in a new book titled, Grow To Be Great, subtitled "Breaking The Downsizing Cycle," sub-subtitled, "No Company Ever Shrank To Greatness." Authors D.L. Gertz and J.P.A. Baptista point out that the first foundation for growth is "competitively superior value as determined by the customers." Isn't that interesting? They're saying that the path to long-term success does not center around cutting headcount, but rather by providing superior customer service and value.

Makes sense to me.

Tom Wallace is an independent consultant based in Cincinnati. He is the author of Customer Driven Strategy: Winning Through Operational Excellence (1992) and editor/author of The Instant Access Guide to World Class Manufacturing (1994). Tom is co-director and a Distinguished Fellow of the Ohio State University's Center for Excellence in Manufacturing Management.

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