Hedrick Smith's Books

> Rethinking America

Introduction

"The way we see the problem is the problem."
-Stephen R. Covey, The 7 Habits of Highly Effective People

"Global competition is not just product versus product, company versus company, or trading bloc versus trading bloc. It is mindset versus mindset."
-Gary Hamel andC.K. Prahalad, Harvard Business Review

"There is nothing more difficult to carry out nor more doubtful of success nor more dangerous to handle than to initiate a new order of things."
-Niccolo Macchiavelli, The Prince

This book is about the need for Americans to develop new ways of thinking-about ourselves as a people; about how we educate our children and run our businesses; and about how we can work together more effectively, to make America work better for more Americans.

We live in a world of explosive technological change and of intense global competition. In this restless new world, what is needed above all is a new mindset-if America is going to sustain a high standard of living into the 21st Century, and to prevail long-term as a global economic power.

And in fact, a new mindset is being developed by the American Innovators whose first-hand stories I recount in this book.

Take Ford Motor Company as one example of why a new way of thinking is needed in America.

When Don Petersen became President of Ford in 1980, he was appalled. This company, once the pioneer of modern mass production, was in dire economic peril. It was losing customers and money at such a disastrous rate that Petersen was afraid Ford could not survive.

Ford's leadership decided that drastic measures had to be taken. And so, like other embattled American companies in the 1980s and '90s, Ford slashed its production, shut down plants, and fired tens of thousands of workers.

But then Petersen and his colleagues discovered that these emergency measures were not enough to save Ford.

"It was the first time in my life when I could not see a solution," Petersen admitted. "On any other job I had taken, I had a pretty good idea of how to solve things after a month or so. This time, I had no idea-even after several months. We didn't have a solution to our basic problem."

Only when Petersen and his top-level colleagues at Ford had exhausted all the traditional business fixes, did they finally realize that what was wrong with Ford was Ford: what had worked for so long simply did not work any more. They realized that a deeper, more systemic change was necessary-a rethinking of Ford's entire way of doing business, inside and out.

In order to survive, let alone compete in the new global game, Ford Motor Company had to go through a cultural revolution from the ground up-and from the top down: starting with management's frame of mind.

An entirely new mindset, a completely different way of thinking was necessary, if Ford was going to win back its place in the new, dramatically more competitive global environment-an environment in which the rules of the economic game had shifted, without Ford's being aware of it.

And so Ford transformed itself from within. It adopted a whole new concept of how to do its business. It rethought its old philosophy of management. It let go of old concepts about power, hierarchy, responsibility. It created new relationships among its people. It committed itself to a strategy of pro-active participation, constant learning and perpetual change.

This bedrock, fundamental change in thinking is what began Ford's turn-around in the early 1980s, a decade ahead of Chrysler and General Motors. At Chrysler, as at Ford, only when the thinking changed did Chrysler's fortunes begin to change. Even later, that same process of rethinking began at General Motors, though the transformation of GM has a long way to go; and in fact, it is far from over even at Ford and Chrysler.

Yet Ford's turn-around represents the kind of deep process of systemic change that is needed throughout America-a revolution that reaches far beyond the world of commerce into many walks of American life, and especially in the way children are educated and in the way young people are prepared for the new world of work; in how different parts of American society must learn to work together; in how America sees itself, and then in how Americans go about building a more promising, more reliable future in a world where America is no longer the uncontested champion.

The American Innovators-in education, in business, in government, and in communities around the country-have understood that what is needed in America is a rethinking of old purposes, patterns and priorities, and so they have been moving ahead, and making America work better, as a result.

Many other Americans are still stuck in old-think, in trying out half-measures and old fixes, as Ford did at first, and so they have been struggling or falling behind.

Traditional fixes of the old system, as Ford found out, are not enough. New technologies and global competition challenge America at the very heart of its culture-its educational system, its industry, its economic system, from the top of American society to the bottom.

Over the past decade or more, the new game of global competition has shaken up the world's old economic order, just as the end of the Cold War has altered the old diplomatic order and left America unable to impose its political will on a disorderly world. In the 1980s and early 1990s, the new economic game challenged America's economic supremacy and ravaged America's industries, from the heartland to Silicon Valley.

Now, in the mid-'90s, America has made an economic comeback, but critical difficulties persist and more change is needed. As America readjusts, millions of Americans are being left behind. Millions more are uneasy about the future. Rivals in Japan, East Asia and Germany have been going through their own difficult readjustments in the past two or three years, and they are now gathering strength to compete with new force in the years just ahead.

What is more, the painful '80s have left an imprint that has soured the mood of America even during recovery. Americans mistrust gains in the short-term because they understand that the short-term is forever changing. In economics as well as in education, it is the long-term that counts.

History and a Failure in Thinking

When people get in trouble, they often do what Don Petersen did at Ford: They look first at symptoms rather than at causes-at actions or at inaction, rather than at a failure in thought.

When the new global economic challenge first hit America, the early reflex of many Americans was to check their performance: Were they doing things right? That is, were they operating as efficiently as they could? What could they do differently?

But the more important question was: Were they doing the right things? That is, did their vision, their concepts, and their strategy fit the present global reality? Or was there a failure in thinking?

History teaches us that countries crumble and whole civilizations collapse when their core ideas fail or become obsolete. That is one of the prime lessons of the collapse of the Soviet system after seventy years. Its ideology was so out of touch with reality, so unable to motivate a nation, that by the mid-1980s some Kremlin leaders launched what became a new Russian revolution. In the post-Cold War era, American and Western diplomacy has floundered, most strikingly in Bosnia, not for lack of military strength but for lack of a core idea that fits and responds to the new global reality: the old anti-Communist doctrine of NATO no longer provides a guiding, unifying purpose for collective security. America and the world suffer from a conceptual vacuum.

That malady of mistaken or outdated thinking afflicts American businesses and schools, too. Their problems and dilemmas shed light on the problems and dilemmas of the wider society in which they exist, and successful new strategies in business and education point the way to winning solutions for society as a whole.

Peter Drucker, the business strategist from Claremont graduate school in California, makes the trenchant observation that major companies in America and worldwide have gotten into serious trouble in the 1980s and '90s because their "theory of the business"-the assumptions and rationale on which the business was built-"no longer fit reality."

What is instructive is that America's most far-sighted innovators have been wise enough to see that they faced not only new competitors, but a new kind of economic competition-and that only a fundamental change in thinking, not piecemeal changes in behavior, would meet this new and continuing challenge.

In commerce, for example, the American Innovators realized several years ago that there had been a seismic shift in the way the global economy works. They saw that the old rules of business no longer applied and that the old levers of economic advantage had been powerfully altered by the new economic game.

Size and scale, advantages long enjoyed by America, are now often liabilities, less desirable in the new competitive arena than flexibility and agility. Low cost has given way to quality as the premier touchstone of performance. Developing technology, while important, does not work without developing the full potential of people who can apply the new technology. Virtuoso individuals and commanding CEOs cannot operate effectively without teamwork and production networks. Collaboration has become the name of the new game.

In almost every case, hardware is less important than human software. Machines and money can be moved anywhere in the world; and since they are universally available, they are less decisive for a country in the long run than the way its people learn, organize themselves and become motivated for high performance.

Fortunately, there are hopeful lessons for the rest of us, and for America's future, in the experience of the American Innovators, whose reforms offer paradigms for American society as a whole.

Their experiences illustrate that Rethinking America demands first of all looking closely at our old thinking-not only looking at specific companies and educators who did not see the new game coming and at why they remained stuck in the status quo, but also at the mindsets that crippled them and may now be crippling other Americans.

Over the long-run, for example, labor unions cannot protect their members' jobs by clinging to outmoded job classifications and refusing to share responsibility for corporate survival; nor can management sustain dynamic growth, as Ford's management tried to do, by mass layoffs and by protecting its own power, without long-term employment security and active engagement as policies for its workforce. Similarly, teachers cannot achieve world-class performance by invoking the inviolate catechism of old methods, by resisting new partnerships with parents and business, or by ignoring the need for new relevance to the world beyond the classroom; nor can parents and industry hope for the best results by leaving education to the professionals, without far deeper engagement on their own part or without focussing more resources on learning. And finally, America cannot thrive as a democratic society, riven by the divisions of income, skill, race, and place, raised to raw wounds by uncivil public discourse, without a more democratic system of education.

By contrast, the experience of the American Innovators shows the power of inclusion. It demonstrates the dynamic renaissance generated by sharing power and by tapping the minds of ordinary workers and students, long treated as unimportant cogs in America's industrial machine. Companies such as Motorola, Republic Engineered Steel, Corning Industries, Southwest Airlines, and Levi Strauss have found that success springs from engaging the energy and imagination of average employees.

In a larger context, then, Rethinking America entails the recognition that people at all levels of society are the nation's most valuable asset and that the path to renewal for America lies in the pro-active engagement of as many people as possible in the common endeavor.

In industry, the daring minority have found certain keys to a winning strategy: that trust is their most powerful motivator, that people rise to the level of the responsibility they are given, and that learning is the engine of continuous growth. Similarly, daring educators have found that trust, setting high expectations for all students, and providing every single student with close personal mentoring can stimulate high performance among troubled inner-city youth, and can even conquer violence in schools. In the American heartland, businesses and high schools have demonstrated that the apathy of "the forgotten majority" of average, non-college-bound students can be overcome by giving them an education that is relevant to the economy of tomorrow and inviting them to learn in the adult world.

Time and again, the American Innovators have found that in the new competitive environment, the old adversarial game does not work as well as collaboration-as a sense of shared interest, common responsibility, and mutual respect-though it has often taken enormous effort to break old stereotypes and reach across the barriers of mistrust. Their lessons about trust, engagement and partnerships have wider importance for American society, which is so often preoccupied by searing divisions rather than focussed on its common ground.

The lesson from the innovators for Rethinking America, then, is the need to forge integrated strategies and to make connections between elements of American society that have been at arms length or at odds in the past.

In the new economic competition, the pieces need to be fitted together more purposefully-management and labor, business and education, government and industry. For the new global game tests much more than the competitive level of American business and technology. It challenges not only America's commercial resilience but the capacity of disparate forces to work together. It tests not only the brilliance of America's Nobel scientists but also the ability of America's public high schools to deliver a world-class education to the vast majority of average American teenagers, who are the foundation of America's economic future. It puts on trial our values and priorities as a people. And it tests the capacity of our leaders and of our economic and political systems to lift our sights from parochial short-term interests to enlightened long-term interests.

In both education and in industry, the American Innovators have shown us the way. And their stories, case by case, indicate how more Americans-children, young people, workers, CEOs, businesses and schools-can develop innovative ways to think, to learn, and to work together for our mutual benefit in the future.

Benchmarking America-The Perplexing Questions

It was America's mounting economic troubles that prompted me, in 1990, to begin thinking about writing this book.

Like many Americans, I was troubled by the sight of America's industrial giants stumbling, and by the disappearance of more than two million good jobs in a little more than a decade (Robert Lawrence, a Harvard economist, estimates that major U.S. multinational firms eliminated 2.2 million U.S.-based jobs from 1977 to 1991, Fortune, Dec. 26, 1994, p. 32.). Many of them were shifted abroad by big American companies looking for cheaper foreign labor. (In one decade, for example, AT&T cut 72,000 employees at home and hired 54,000 abroad.)

In the 1980s, so much of American industry had lost its competitive edge and so many American consumers had become dependent on foreign imports that the nation's total trade deficit in that decade ballooned to $1 trillion. (Competitiveness Policy Council, "Building a Competitive America," First Annual Report to the President and Congress," March 1, 1992, p.2) America became a debtor nation; by 1990, it was $650 billion in the red to foreign creditors.

In an earlier book, The Power Game: How Washington Works, I focussed on the competitive arena of politics-how America's government works and why it did not work better. That book combined both an overview of how the elements of Washington's power system fit together, and the personal stories of individual players from Ronald Reagan to new breed politicians such as Newt Gingrich and Dick Gephardt.

Now, my focus has shifted to America beyond The Beltway, to what is happening out there in America, in our schools and businesses, that has been causing us to falter in another competitive arena-the marketplace. I wanted to find out how America's culture of commerce was working and why it was not working better.

Here, too, the personal stories of people-from the boardroom to the classroom to the factory floor and the research lab-were important to me, the stories of both ordinary people and of corporate CEOs in America, and in Japan and Germany as well. I wanted to find out why America had lost so much ground in the '80s, economically and educationally; and I wanted to know who in America-or anywhere in the world-was doing it better.

Many questions perplexed me:

• If, as we thought, the business world was driven by technology, how could General Motors invest $77 billion in new technology and still lose ground to a much less automated company, such as Toyota? What explained that seeming anomaly?
• How could an American electronics giant such as RCA simply disappear? Why had it failed to develop its own great inventions, while Sharp, an unknown mid-sized Japanese company, became a global leader by developing one of RCA's inventions?
• By contrast, how could Motorola first be driven out of consumer electronics by Japanese rivals, and then turn around and become a winner, doing $1 billion-a-year's worth of business in Japan?

I wondered what differences in mindset made Motorola a winner, while GM and RCA became losers in the new global economic game. How did the CEOs of these companies think?

• Were there important differences in the ways that other societies operated? How could the Europeans, for example, start an aircraft consortium from scratch and overtake every American company in the field, except Boeing? And how was Boeing going to hold the European competition at bay over the long run?
• What would cause Ronald Reagan, an ardent apostle of free enterprise, to set up a partnership between the federal government and private industry in the field of computer chips? And could that partnership fairly claim a role in America's comeback?

In the field of education, I wanted to see how children in other countries were being educated to prepare them for global competition, and what America could learn from its rivals about helping young people make the often difficult transition from high school into the world of work. There, too, many questions nagged at me:

• At the primary level, does tracking by ability groups make sense? If so, and if America does more tracking in the early grades than countries in Asia, then why do comparative tests in math show that the highest-scoring U.S. schools fall below the lowest-scoring schools in Japan, China and Taiwan-by fifth grade? (Harold W. Stevenson and James W. Stigler, The Learning Gap (New York" Summit, 1992) .p. 34.)
• Or, if so many average American high school graduates were having a tough time finding good jobs, how were Japanese high schools managing to place their students in jobs before graduation?
• Why was there such a big earnings gap between college-educated Americans and the non-college-bound, while the German system gives high school graduates an educational base that guarantees the vast majority good jobs and helps many others rise to become middle managers and top corporate executives?
• If American public schools were as hopeless as some critics suggest, how could an inner city high school in Harlem graduate 90 percent of its students, year after year, and send 90 percent of its inner-city graduates to college-a record to be envied in more affluent suburban districts? And how can this school's formula for success be applied all around America?

For more than three years, I pursued the answers to these and other questions, traveling and reporting across America and in two other economic superpowers, Germany and Japan. I followed the trail of America's most hard-headed and open-minded corporate leaders. Like them, I went abroad to "benchmark" America, as they like to say-to compare America's performance with America's main rivals.

Like these CEOs and American educators, I studied the practices and attitudes of our competitors, not as models to be copied, but as a lens for re-examining America's strengths and shortcomings, for rethinking America with a fresh perspective.

Talk of Change: People Usually Mean "Somebody Else Changing"

The changes undertaken in recent years by America's most agile and innovative companies have helped power America's economic recovery in the mid-90s. They and others have become models, inspiring imitation abroad as well as at home.

But changing the way people think and behave does not come easily. Take a simple things such as dieting: millions of people try to diet every year, and they fail, time after time-because permanently losing weight means changing ingrained habits. Multiply that problem for the individual to the scale of a large organization-whether a business or a school system-and the challenge of change is enormous. As Machiavelli observed four centuries ago, "There is nothing more difficult to carry out nor more doubtful of success nor more dangerous to handle than to initiate a new order of things."

Americans love to talk about change. We embrace the newest fads and fashions, the latest news, the freshest innovations-what's "hip" or "in" at the moment. Change is America's credo. We are a young nation that has thrived for 200 years on tilting at the Old Order and on proclaiming that we are at the New Frontier. In taste as well as in ideology, we want to be modern, up to date, leading edge.

Yet as David Kearns, the former CEO of Xerox, observed wryly: "Everyone likes to talk about change, but they're really talking about someone else changing. Change is onerous.... And often, therefore, big institutions don't make the changes until it's too late. One of the mistakes that I made at Xerox was doing too little, too late-several times in a row."

In fact, Kearns asserted, it usually takes a crisis to shake people out of their old ways. "Without outside pressure, such as the competitive pressure from the Northern Europeans or the East Asians," Kearns asserted, "you don't make those changes because they're too difficult.

Jiro Aiko, a managing director of SONY, commenting in 1991 about America's complacency, declared with shocking bluntness: "What America needs is an economic Pearl Harbor!" (Jiro Aiko, interview with the author, Feb. 25, 1991.) In short, unless the threat is overwhelming and unless it impinges directly on our vital interests, we Americans can be slow to react. And for many Americans, the global economic challenge crept up too gradually to set off alarms.

Still, here and there, private "Pearl Harbors" did galvanize people such as Don Petersen at Ford, David Kearns at Xerox, and Jack Murphy at Dresser Industries. In his shirtsleeves one warm September afternoon in his Dallas office, Murphy, the quiet-spoken CEO of Dresser, recalled his own Pearl Harbor-the shock that woke him up to deep-seated problems at Dresser. He had flown to Tokyo mainly as a precaution, to benchmark Dresser's performance against Japanese industry. Knowing that Dresser was the world's biggest producer of heavy oil drilling equipment, Murphy was feeling confident about his company.

"We had no direct competitors in Japan. I figured we were the best in the world at manufacturing," Murphy told me. Suddenly his voice dropped: "Then I saw the Japanese-and I realized we had a long way to go." When Murphy landed back in Dallas, his colleague, Dresser President William Bradford, found Murphy "white-faced-scared to death." (Jack Murphy and William Bradford, interviews with the author, Sept. 8, 1992.)

And Murphy went to work like a religious convert-he set about to rethink, to transform, and to rejuvenate Dresser Industries.

Sometimes the wake-up call comes from a totally unexpected quarter. For Procter & Gamble, that is what happened when it decided to market Pampers, its disposable diapers, in Japan. Procter & Gamble expected to impress Japanese consumers with American ingenuity and corporate prowess. Instead, confessed E. L. Artzt, CEO of Procter & Gamble, the Japanese housewife gave the American company a lesson in quality.

The typical Japanese mother is an extraordinarily demanding consumer because, according to Artzt, she has grown up in a business climate "where virtually every company manufactures products to a standard of zero defects, and she had come to expect that level of quality in every product." (E. L. Artzt, speech, Stanford University, Nov. 12, 1987, p. 15.) And Pampers did not make the grade.

To meet the perfectionist standards of the Japanese housewife, Procter & Gamble had to re-engineer its Pampers over and over again. Step by step, P&G made its Pampers lighter, more portable, more leak-proof. Listening to Richard Laube, P&G's Pampers manager for Japan, you would think that P&G had created a new high-tech spacesuit for astronauts. "To survive in Japan," said Laube, "Pampers had to upgrade its product no less than four times in 36 months. This Pamper is now three times thinner than the original model. It's shaped for better fit, has a waist shield, and leg-gathers to stop leaks." (Richard Laube, quoted by Artzt, op. cit., p. 15.)

Procter & Gamble eventually got it right, and its sales in Japan grew nicely. The improved Pampers were also marketed in the U.S., and so American consumers benefited from the perfectionism of their Japanese counterparts. From that experience, Procter & Gamble gained a new sense of the meaning of quality and, as Ed Artzt commented later, a new appreciation of Japan as "perhaps the toughest, most competitive, fastest-moving consumer market in the world." As Artzt observed, "One of the reasons the Japanese products are so successful in the U.S. and Europe, is that Japanese companies sharpen their teeth-competing furiously against one another-in their own home market." (Artzt, p. 7.)

When the global challenge first hit Americans with full force, however, the reflex of many American corporate leaders was not to rethink their ways or their products, but to deny that they had serious problems. Resistance to change was widespread, even among America's best and brightest. Very good people blamed cheap Asian labor, foreign exchange rates, the lack of investment capital in America, the federal deficit. They blamed everything but themselves as the sources of the problem, and not until that finger-pointing gave way to self-examination did their fortunes begin to change.

The Danger of Declaring Premature Victory

Now, even though America has bounced back in the 1990s, there is a danger in declaring premature victory, and using America's recovery, while Japan and Germany have been in recession, as a reason to avoid change.

America was ranked by the World Economic Forum in Switzerland as the world's most competitive economy in 1993, for the first time since 1985. Yet even so, the Forum warned of future U.S. decline unless America makes progress in such vital areas as education and worker training. (The Wall Street Journal, Sept. 7, 1994, p. 7.) In the rankings of The World Competitiveness Report prepared by the International Institute for Management and Development and the World Economic Forum, the authors cautioned that poor secondary-school education and work attitudes as well as low savings rates raise risks of a longer-term U.S. decline if not corrected.

After several years of humbling setbacks, the temptation to declare victory is strong. That triumphant cry-"We've won. We're No. 1"-echoed in Corporate America and the business press throughout 1994, with the implication that America was over the hump-that fundamental changes were no longer needed and there was really not much that America could learn from foreign competitors.

Yet while the picture has improved for America, trade figures offer no fundamental consolation for the long-term. Fortune can trumpet that in 1993, Chrysler made more profits than all of the Japanese carmakers put together, but Japanese producers still managed to win more than 23 percent of the American car market in 1994, while the American Big Three were selling to less than one percent of the Japanese car market. (The Wall Street Journal, Nov. 4, 1994, p. A2.)

Nor have the chronic economic migraines of the 1980s been cured. In 1993, the Japanese exported $28 billion worth of autos and auto parts to America, while American auto and auto parts exports to Japan were $26 billion less, or $1.8 billion. In 1994, U.S. automotive exports increased slightly, but auto imports from Japan rose even more sharply, so the automotive trade deficit widened. (Office of the U.S. Special Trade Representative, Nov. 28, 1994.)

In computers, chips, and telecommunications, the pattern was similar. In those arenas, Japanese exports to America in 1993 were $31.9 billion and American exports to Japan were only one-sixth that level ($5.2 billion)-partly because the Japanese market is not truly open to imports. ("Flowing Across the Pacific," Trade Flow Chart, The New York Timeshe , Feb. 21, 1994, p. D1.)

And there were other disturbing omens-the value of the dollar dropped to 100 yen, American middle-class living standards stagnated, corporate layoffs continued. More broadly, while America's overall economic growth in 1993-94 outshone Japan and Germany, what counts most is long-term performance. From 1979 to 1992, America's economic growth per capita averaged 1.1 percent a year, compared with 1.8 percent for Germany and 3.2 percent for Japan. (Jeff Faux, "Does America Have the Answer?" paper for International Seminar, Magdalen College, Oxford, April 14-15, 1994, for 1979-1989 period; Lawrence Mishel and Jared Bernstein, Economic Policy Institute, for 1989-1992.) The gap was narrowed by America's comeback in 1993 and 1994, but to recover from the past 15 years, America had a lot of ground to make up.

Moreover, America's rivals have not been idle. Just as America made painful adjustments during its 1990-92 recession, Japan and Germany have lately been doing the same. As they have done throughout the post-war period, both countries were learning from America. They have engaged in their own restructuring, modifying their economic systems at the margins, yet maintaining the most essential and distinctive elements-lifetime employment in Japan; power-sharing and youth apprenticeship training in Germany. By 1994, the German and Japanese economies were turning up again, and economists were projecting new competitive tests ahead for America, especially from Japan and East Asia.

Finally, and most importantly, the process of change is steady, never-ending. It stops for no one.

And that means that the process of renewal in both thought and action must be constant in order to assure survival and success, as I believe the stories in this book demonstrate.

There is no such thing as the perfect plan, the final plateau. Improvement must be continuous; the revolution is perpetual.

The temptation to interpret America's economic recovery as proof that American industry has conquered the global challenge would misread the basic lesson of the American Innovators-namely, that the challenge to America, its businesses, its educational system, its culture of commerce, is permanent and unceasing, and that a basic rethinking of America is essential to attain a higher quality of life for ourselves and our children in the 21st Century.