Downfall of the Business Giants
Bell, Daniel
In 1984, IBM, the largest and most advanced technology firm in the world, made after-tax profits of almost $7 billion. No other company in the world had ever made so much. Eight years later, in...
...Profits rose almost 30 percent from previous levels in the last quarter of 1992 and rose 15 percent for the year as a whole...
...The personal computer was a social and technological revolution...
...And, if not for the steady pressure by the U.S...
...SUMMER • 1993 321 IBM jumped into the market and, with its superior resources, went in three years from zero to four billion dollars in sales, capturing 80 percent of the PC market...
...The paradox today is that the same process and technological cycle are being repeated in Japan, which had replaced the United States as the most efficient and major steel producer in the world...
...By combining variety with efficiency, this system also allows producers, such as Mazda, to become a "niche" manufacturer, making smaller numbers of specialized models on the production line...
...What does steel have to do with IBM and SUMMER • 1993 • 317 computers...
...It is a complicated game because innovation is always a gamble, the costs of innovation are always high, and one has to estimate the risks in moving ahead with new investments against recouping the costs or maintaining the profits of the products one has already invested in...
...In the incredibly fast-moving world of advanced technology, the "name of the game" is innovation—new products, new methods, new designs—then getting to the market first, establishing market share, and keeping it...
...In automobiles, the newly developing countries, such as Korea and Malaysia, are building their own cars and, as in the case of Korea, have sought to break into the American market...
...And once there has occurred the explosion of "stand alone" PCs and work stations, the next step is networking, or hooking these up through common standards...
...The personal computer began when a number of young inventors and entrepreneurs, in 1975, took the microprocessor, hitched it to a circuit board, plugged that into a television set for display purposes, and out came the Apple 1. In a short time, dozens of small entrepreneurs were creating these small computers, which, in short order, could sell for a few thousand dollars (as against several hundred thousand for a mainframe) and have a speed and memory as large as the older mainframe computers...
...Over the years, the fundamental change in computers has been the move from hardware (the physical structure of the machine) to software, which is the operating system that directs the computer to diverse tasks, and to programs that allow the user to do specific tasks (such as word processing, or financial spread sheet analysis, and the like...
...It means the end of an older way of business, of the integrated companies that sought to dominate an industry, which was the feature of the older industrial capitalism...
...But will it expand the number of jobs...
...There were strong shifts in demand: the competition of aluminum for tin cans, of plastic for automobiles, the decline in construction...
...For the first time since 1984, the biggest microchip maker is Intel, which has been at the forefront of developments in personal computers...
...U.S...
...But its new IBM System/360 (later 360/370) aimed to replace all other machines in the computing business...
...Typically, Japanese automobile firms, such as Toyota, contract out 70 percent of their parts production to several hundred first-tier suppliers who are organized in a loosely knit keiretsu of interdependent companies, which, in turn, may subcontract their needs to thousands of tiny family-run machine shops that are the shock absorbers of Japan's economy...
...The crucial point here is that there is no longer a single computer industry, but many different industries, using the diverse technology for different purposes, and no single company, clinging to proprietary or its own ownership devices can stand out against the flood tide...
...And IBM will remain a major player in a number of areas, such as large, mainframe computers...
...By 1985 the top-of-theline IBM 370 mainframe was running at eight to ten million bits per second...
...Though the economy is now turning around, unemployment has not come down and few net new jobs have been generated...
...1 steel-producing country...
...None of this means that the United States lead, or even dominance, in advanced technology is threatened...
...IBM was Copyright 1993, by Daniel Bell...
...The stock dividend, on which most of the pension firms in America had depended to fund their payments to retired employees, has dropped by more than 55 percent, from a $4.84 yearly dividend per share of stock to $2.16...
...They did no research and development, and thus lagged behind when new processes were introduced...
...government on Japan to "voluntarily" reduce its exports, Japan would have an even larger share...
...Its lock was broken...
...In other words, the economic recovery has come from belt-tightening and lower costs, not from job growth...
...As a particular item, of course, they are largely different...
...In 1974 the A. T. & T. modem ran at 9,600 bits per second...
...The breakup of U.S...
...Steel and General Motors and IBM does not mean the collapse of American capitalism...
...Now there is, however, a paradox: a startling increase in productivity, with an unexpected result...
...The importance of this is demonstrated by a chart in the Economist (October 17, 1992 supplement on the automobile industry), which points out that in Japan there are 61.6 suggestions per employee per year, as against 0.4 in the United 318 • DISSENT States...
...With its proprietary lock broken, IBM found the market swamped by "clones," such as Compaq and Dell, while Microsoft was selling the technology once sponsored by IBM to any small computer maker...
...Yet three hundred miles from Kimitsu, in Okayama, the little Tokyo Steel Company opened a plant onetwentieth the size of Kimitsu but five times as efficient, undercutting by 30 percent the sheet-steel prices of Nippon Steel...
...Yet a larger question remains for the economy as a whole...
...IBM customers were "locked into" that system and IBM earned oligopoly profits...
...The new market was data processing and "number crunching...
...The larger point is that the technological and product cycle that we have witnessed is not restricted to the United States alone, but is a common feature of technological change...
...But, typically, Saturn is being built outside the existing GM structure, and does not use the GM name in its advertising...
...It exercised a quasi-monopoly, since it set the prices for the entire industry, through a system (later outlawed by the Supreme Court) called the "Pittsburgh-plus" system, whereby all prices, whatever the location in the country, were set at Pittsburgh plus transportation...
...In the nature of technology today, no large firms or even group of firms can exercise monopoly or oligopoly control of an industry or a market...
...And while the United States is still running a large trade loss in the overall economy, it runs a trade surplus in what the Commerce Department calls "leading edge" products, running to about $35 billion in 1992...
...But General Motors, under the leadership of Alfred P. Sloan, went far beyond this and so transformed American society...
...The second was General Motors, the prototypical corporation of the middle of the century...
...But all it succeeded in doing was to kill any capacity within IBM to initiate independent businesses that could be responsive to new market needs...
...All three are now effectively shattered...
...But the other paradoxical reason has been the dramatic shake-out of jobs in the service sector, principally the whitecollar jobs...
...Today, in many American universities, individual personal computers are required for those taking science and business courses...
...One is that the investment in computers and high tech—about $1 trillion dollars in the last decade—has begun to pay off as firms have learned to use the new systems...
...Since the mainframe computers were so huge and expensive, it was argued that the government should guarantee access by treating computers like a public utility, the way electricity and telephones were regulated by government agencies (as they still are in most instances...
...Rising productivity and lower costs means that American firms will be more competitive in the global economy, particularly vis-à-vis Japan...
...There was one other major system, and that was the UNIX operating system developed by A. T. & T. But that was used by A. T. & T. for its own computer-switching systems, and became available only in the last decade, when A. T. & T. was itself broken up by court decree...
...For eighteen years IBM held dominance in the field, yet the cost up updating the system, at the new speeds of the new chips, made it difficult for IBM to maintain its hold...
...Eight years later, in 1992, IBM lost $5 billion, more than any other company in the world...
...General Motors is now shutting down more than twenty plants, especially in the Midwest, and will be reducing its work force by more than a hundred thousand workers...
...Last year, General Motors had an operating loss of almost $3.5 billion, and because the government forced GM to acknowledge unfunded health and pension liabilities, the corporation wrote off $23.5 billion from its assets, reducing the equity in the company by more than 15 percent...
...government on its size and the effort to reduce its "proprietary" hold on the systems architecture...
...It was to be used by banks and insurance companies for processing all financial transactions...
...The constant refrain has been the need for greater productivity...
...This was the entry point for the smaller, compact Japanese automobiles, which today have about 30 percent of the American car market...
...Its strength and profits came from the integrated steel mills and the high volume of production...
...The intriguing question is why IBM failed to keep up with the new developments...
...The crux of the matter is employment...
...market in cordless phones...
...What Sloan did was to introduce different cars for different segments of the auto market, from Chevrolets to Cadillacs, and create annual model changes so as to induce buyers to trade in their old cars and buy a new one every year...
...Steel, the prototypical corporation of the first third of the 316 • DISSENT century...
...The market value of the company, which had been about $75 billion, is now down to about $36 billion...
...Now almost all of this is gone...
...In a second system, called jidoka, a high degree of autonomy is given along the assembly line to each worker, who can thus adapt tasks and supplies as needed for the orders at hand...
...It was to be used by the Defense Department for all its systems, especially the large early-warning systems against possible Russian attack...
...In the case of the PCs, the initiative has passed to the software producers, in particular the sensationally successful Microsoft Corporation started by Bill Gates, a Harvard dropout...
...the vested interests of its large and profitable mainframe division...
...At its height, General Motors controlled half of the American car market and became the largest industrial corporation in America (as it still is...
...That is the route into the twenty-first century...
...The sums either way, it should be noted, are larger than the total Gross Domestic Product (GDP) of more than ten of the hundred major countries of the world, including Bolivia, Iceland, Ghana, Costa Rica, Zimbabwe, Jordan, Panama, Cyprus, and Honduras...
...The computer architecture consists of the instructions for the operating systems (which control the "traffic" of the different programs) in the machine, the instructions for programming, or the lines of code that programmers have to write to specify the sequence of steps for the particular purposes of the program, and the like...
...These are the changes that the new post-industrial technology and the competition in a global economy force on all enterprises...
...One was U.S...
...So no customer, no matter how close to a steel supplier, could get a better price by saving transportation costs...
...Microsoft created the DOS operating system for IBM's personal computer...
...And it became one of the most profitable corporations in the world...
...And it was to be used by all large businesses for inventory, scheduling, billing, and payroll records...
...Australia had created the largescale basic oxygen furnaces, which were quickly taken up by Japan and West Germany...
...One was the kanban (or just-in-time) system of production...
...Previously, IBM had been a business-machine company (tabulators, accounting machines, and the like...
...capitalism...
...And it is likely that in the next two or three years IBM will be broken up into many different pieces, some sold off to other companies, some to stand alone within a loose IBM shell...
...Today a number of major Japanese firms (Oki Electric, Sanyo Electric, Matsushita) are withdrawing from the race to build new generations of chips, while the major Japanese chip firms — Toshiba, NEC, Hitachi, Fujitsu—are trying to diversity and produce more specialized chips...
...By laying off so many whitecollar workers—in the 1991 recession, whitecollar workers accounted for 43 percent of the unemployed (as against 22 percent in the 1982 recession)—yet maintaining efficiency with the new technology, productivity in the service sector increased enormously...
...In 1985, IBM imposed an umbrella software strategy called Systems Applications Architecture (SAA) on all its business units, seeking impose on hundreds of products an extra software layer to make each of the designs compatible with IBM proprietary devices...
...It featured what had become emblematic of American capitalism: mass production and mass consumption...
...The "secret" of IBM's dominance—which few persons understood, because of the technical nature of the problem—was that the company had created and owned a pervasive industry architecture...
...SUMMER • 1993 • 319 The received view has been that the U.S...
...But if there is a central feature it is technology itself: the simplifications of technology and the extraordinary rapidity of changes that led to the two major innovations that dominate the computer field today: the speed of microprocessor chips, which can now process information at tens of millions of instructions per second, and the personal computer...
...It is an entirely new design that can also achieve high speed but, more important, can be used on PCs, or the "small" personal computers...
...In the area of "high tech" the United States is still, overall, the major country in the world economy...
...The major technological change is the creation of the "flexible factory," through computer-integrated manufacturing (which the Japanese call "holonic" production...
...In the 1960s, IBM took the first gamble and invented the mainframe computer industry...
...In the 500 metals section, the large steel producers Bethlehem Steel and LTV Corporation rank behind the aluminum companies...
...The oxygen furnaces could produce two hundred tons of steel every forty-five minutes, as against the older open-hearth furnaces at U.S...
...All this strengthens American business...
...And that brings us to IBM...
...Hewlett-Packard is the world leader in computer printers...
...In the computer area, four 322 • DISSENT Japanese firms created an oligopoly in DRAM (dynamic random access chips), which are the main memory and storage components of the computer...
...It is a stunning reversal of fortune...
...and that productivity in hours per car is 16.8 in Japan, as against 25.1 in the United States (and 36.2 in Europe...
...Steel, with its belching fire, heat, smoke, steam, noise (and pollution from the smokestacks), was the symbol of the industrial age...
...IBM had developed a Systems Network Architecture, which was used by 50,000 data networks in the United States—about 60 percent of all companies —for airline reservation systems, financialtransfer networks, and the like...
...If there is a quick answer, it is that IBM tried to protect its proprietary advantages in the older systems, which had given it its dominance in the industry...
...the attacks by the U.S...
...Yet why could not General Motors (and Ford and Chrysler) in time meet the Japanese challenge...
...An important point here: big steel was producing high-volume but low-addedvalue steel, as was, for example, the nationalized British Steel in Great Britain...
...This standardization and "open" computer architecture led the way to hundreds of new entrants in software, in components, and in peripherals such as printers and disk drives...
...GM has tried to create a different company culture...
...But the PCs are built with the same microprocessor chips, and run the same "off the shelf" software, and can connect to machines made by rivals...
...This gains added importance by the fact that the trade gap has again widened ominously, rising to $84 billion in 1992 after being cut to $65 billion in 1991...
...This is what Antonio Gramsci called "Fordism...
...But the processes of change, the simplifications of technology, the move away from integrated production, the growth of high-value-added, more flexible and adaptive firms, is exactly the pattern that has been taking place in the computer industry, if not in almost all manufacturing processes...
...SUMMER • 1993 323...
...What happened...
...The PC, or small personal computer, and following it the laptop, or the smaller notebook computers, are the major case in point...
...Flexible production means not only the building of different versions of the same car on a single line, but also building completely different cars, thus lowering fixed costs and spreading the cost of production across five or ten cars...
...General Motors was the quintessential corporation of the second third of the twentieth century...
...But once IBM adopted Microsoft's system, it no longer controlled the "interfaces" with other products...
...But the Japanese firms maintain a strict discipline so that, as one may often see, hundreds of trucks line up outside of Toyota City, near Nagoya, to be there "just in time...
...Steel, formed in 1901 by J. P. Morgan & Co., was the first billion-dollar corporation in the world...
...In the areas of production there is a "downsizing" of structures to allow for greater "customization" and adaptation to consumer demands...
...Steel and the American steel industry fail to adapt...
...The intriguing question is why has this happened in all three instances, and what will be the new, structural configurations of American industry...
...It has been the new, startling rise of productivity in the service sector that accounts for the recent rise of productivity as a whole...
...Higher cash flow provides more money for capital investment...
...Thus, in steel, Japan today faces, with Korea, the problem that the United States once faced with Japan...
...the competition from other firms, including to some extent Japanese companies, though in the computer business itself Japan was not the major threat, and so on...
...One can adduce many factors so as not to oversimplify the situation...
...Will the unions, which have been weakened in the past decade, now be able to demand higher wages...
...Steel, which took eight hours for a similar tonnage...
...What happened...
...The issue is how to "allocate" the gains from productivity...
...Smaller competitors sought to make "clones" (for example, computers that copied some of the IBM modes) or manufactured peripherals, such as disk drives or printers...
...A. T. & T. is first in the one billion dollar U.S...
...If there is a single, general conclusion to be drawn from this account, it is that in manufacturing —if not in other areas as well—the system of mass production and huge factories (such as the River Rouge plant in Detroit) is now obsolete, and that smaller, flexible plants, and flexible companies that are more adaptive, become the means of survival and success...
...And Motorola leads the world in cellular phones...
...Until recently, IBM had been the master of the game...
...Windows does only some of the jobs of the OS/2, yet that is what the customers wanted...
...In 1957, the first A. T. & T. modem ran at 750 bits per second, transmitting data on its own phone lines...
...Yet in 1992, productivity (outside the farm sector) grew by 2.7 percent, the largest increase in 20 years...
...But in recent years the most important change has been from the large, integrated steel mills, with their presumed economics of scale, to mini-mills, which do flexible, adaptive, specialized production, often for customized purposes, and can adjust quickly to new patterns of demand...
...The former chief executive officer of IBM, John Akers, has been fired, and for the first time an outside executive, Louis Gerstner, who was not raised in the IBM "culture," has been brought in to shake up the company...
...General Motors transformed the automobile from a utility vehicle to a status badge...
...And IBM was the third...
...Let me turn to one more case study—that of General Motors and the automobile industry...
...Today, IBM holds about half the world market in mainframes, about 15 percent of the market in minicomputers (a field it had not entered strongly), but only 10 percent of the personal computer market, where it had hoped its future would lie...
...In the last year, Microsoft became impatient with IBM's proposed system to integrate the computer networks into a single system (the OS/2) and broke its alliance with IBM to sell its own product, called Windows...
...It "democratized" computing and gave the small business person, the scientific researcher, and the engineer the computer power they needed...
...Tokyo Steel is a "mini-mill " As against the older processes, using iron ore and coke for making large quantities of molten steel, mini-mills feed scrap into electric furnaces to make molten steel that is usually converted into finished form in minutes...
...General Motors did not wish to lose "control" over so much of its production...
...In effect, one must not only play against outside competitors who are developing new products but also against one's self, that is, one's older divisions against the new...
...But the rise and fall of IBM in a thirty-year period does demonstrate some major structural changes taking place in U.S...
...that Japanese workers receive 380 hours of training as new workers, as against 46 in the U.S...
...To tell both stories briefly: the costs of data processing depend upon the speed of transmission...
...The small flexible plants are more responsive, they can change production schedules or products more quickly, they require less movement of materials, and, because of smaller size, create better solidarity of the work force...
...The newer products, such as jet engines, gas turbines, and nuclear reactors, require specialized alloy steels, which "big steel" was not making...
...The "hinge" of the matter was the demand of the government for emission controls to reduce air pollution and for increased mileage economy on every car...
...It was to be used by the government for all record-keeping, especially Social Security and welfare payments for tens of millions of people...
...The major irony is that U.S...
...When the role of the computer became decisive in the 1960s, the theme arose that "knowledge is power," and that access to computers would be crucial for those in business and universities...
...economy suffers from low savings, low investment, therefore low productivity and fewer jobs...
...D.B . From "The Changing Face of America," in El Pais (Spain, March 1993...
...RISC had been invented by a senior scientist at IBM, but because it was not compatible with the IBM 360/370, the company kept it secret for more than a decade, until other companies such as Intel or Sun Microsystems invented their own...
...Here the answer lay in a crucial technological and organizational difference—the difference between the "heavy" manufacturing styles of the American firms and the "lean" manufacturing of the Japanese companies...
...There is one path for the Clinton administration, which is to seek to increase exports and thus increase employment...
...But productivity in the service sector— which accounts for about 70 percent of employment —has been only 0.1 percent a year, dragging down the entire economy...
...Overshadowed by the deficit, the problem of international trade may be the turning point, if not the stumbling stone, of the Clinton administration...
...This has been due to two factors...
...All the competitors had to play by IBM rules—writing software, manufacturing clones, running timeshare centers—all being systems that IBM defined, and only IBM had mastered.* For twenty years thereafter, as Charles Ferguson and Charles Morris report in their book Computer Wars, IBM's dominance of the industry was almost total...
...In Korea, the twenty-year-old steel maker, Pohang Iron and Steel Co., known as Posco, has become the third largest mill in the world, and as Korean steel is cheaper, it now exports more than 3.5 million tons to Japan...
...The new weight of white-collar unemployment gave the recent recession a different psychological character from the previous recessions and has contributed strongly to the loss of selfconfidence and anxiety that is now felt...
...Nearly 30 percent of the world's steel is made in electric furnaces, which is double the amount of two decades ago...
...General Motors, like Ford and Chrysler, had been producing the large, heavy "gas guzzlers," which had been despoiling the environment...
...the dominant company in what is the world's most important industry, one on which almost all advanced technological progress depends— whether it is the satellites in the sky, the production of automobiles, the processing of all bank and other financial transactions, or even the organization of the machines on which this magazine is printed...
...The new technological change came with a microprocessor chip called RISC, or "Reduced Instruction Set Computing...
...IBM kept growing by more than 15 percent a year, making it the largest and most profitable industrial company in history...
...The labor force is growing at more than 1 percent a year, and these additional workers have to be absorbed...
...Productivity has long been a crucial problem for the American economy In the 1980 decade, productivity had averaged only 0.8 percent a year, less than half that of Japan or Germany...
...U.S...
...And, most important, what is the fate of the large number of white-collar and middle-management personnel who have lost their jobs...
...And the Clinton administration is seeking to provide incentives for such investment...
...capitalist firms in the twentieth century...
...Productivity growth in manufacturing has been consistently high, averaging about 1.7 percent in the 1980s and recently about 3 percent a year, roughly the same pace as in Japan, but higher than in Germany...
...IBM had built its prosperity on controlling the proprietary standards, so that its machines did not work with those of other makers...
...At its height in 1953, the steel industry employed 650,000 workers...
...Yet the cartel was broken by the entry of South Korean companies into the market by underselling those firms with those chips, which are relatively easy to design...
...If one can sum it up simply in one sentence, it is the breakup of "big business," the huge megalith production firms, and, in a way, it repeats the story of similar breakups of the largest U.S...
...320 • DISSENT Why such an extraordinary company as IBM fell from grace, and so quickly, is inevitably a large and complicated story, involving the growth of a large corporate bureaucracy...
...In 1992, Microsoft's Windows 3.1 was selling a million copies every two weeks...
...Steel was bought by a medium-sized oil company, Marathon Oil, and is now called USX and listed in the Fortune 500 industrials under petroleum refining...
...Large companies such as RCA/Honeywell and General Electric left the computer business, in some instances licensing some of their processes to Japanese firms...
...Steel was heavy industry, the basis for the building of railroads, skyscrapers, automobiles, trucks, ships, cans for food, wires, and nails—and the armaments of warships, tanks, and the like, either making them or importing them...
...Henry Ford had initiated mass production with the assembly line, interchangeable parts, and the extreme division of labor, all of which allowed for economies of scale and integrated production...
...This increase in productivity, which many economists had hoped for, is a mixed blessing...
...The problem has been the service sector...
...This is no temporary occurrence...
...In principle, any production system can apply these methods, and General Motors has been trying to do so, where at its new Saturn plant it is building a new car from scratch...
...Three corporations have dominated the economic history of twentieth-century American capitalism...
...Technology and the market had broken IBM's dominance...
...There is a multiplicity of companies that have already taken the lead in different fields...
...In Britain, firms had to import their specialty steels from Austria, which heavily reduced the terms of trade for the industry...
...It is an instructive lesson in the nature of modern technology, in the way failure to understand it, and adapt, undermines the older established giants, and the way— as we have seen so often in economic history — that newer, flexible firms, led by more aggressive entrepreneurs, can, through competition, take the lead and reorganize an industry...
...Japan's Nippon Steel Corporation's Kimitsu Works has long symbolized the might of Japan's big steel mills, the biggest mills of the biggest steel maker in the world's No...
...But why did U.S...
...In the past decade, the investment of technology per service worker had doubled in real terms, but the ratio of clerical and administrative workers to managers and professionals had remained the same...
...The answer is that they had had a privileged monopoly position that was unchallenged for many years...
...The company, which had as many as 400,000 employees a dozen years ago, will shrink to a little more than 200,000 in the next few years...
...Real wages have fallen and so has real disposable income...
...The cornerstone of IBM's strategy was an alliance with Microsoft, which has become the world's biggest supplier of software for personal computers...
...Again, if one wishes to generalize, it is clear that the older model of the "classic" capitalist industrial firms, which gained their advantages by large size and integrated production, hoping for economies of scale in large production runs, is giving way to the flexible, adaptive factories responsive to the diverse and specialized products that the new technologies can produce...
...and it could not do so...
...They had heavy investments in their older processes...
...But there was one crucial difference in the nature of the PC...
...The age of consumerism had arrived...
...By 1990, the Japanese market share had risen to more than 80 percent...
...Unit labor costs increased less than 1 percent in 1992...
Vol. 40 • July 1993 • No. 3
