How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy

"Impressive... This is an evidence-based bottom-up account of the realities of globalisation. It is more varied, more subtle, and more substantial than many of the popular works available on the subject." -- "Financial Times " Based on a five-year study by the MIT Industrial Performance Center, " How We Compete" goes into the trenches of over 500 international companies to discover which practices are succeeding in today's global economy, which are failing -and why. There is a rising fear in America that no job is safe. In industry after industry, jobs seem to be moving to low-wage countries in Asia, Central America, and Eastern Europe. Production once handled entirely in U.S. factories is now broken into pieces and farmed out to locations around the world. To discover whether our current fears about globalization are justified, Suzanne Berger and a group of MIT researchers went to the front lines, visiting workplaces and factories around the world. They conducted interviews with managers at more than 500 companies, asking questions about which parts of the manufacturing process are carried out in their own plants and which are outsourced, who their biggest competitors are, and how they plan to grow their businesses. "How We Compete" presents their fascinating, and often surprising, conclusions. Berger and her team examined businesses where technology changes rapidly-such as electronics and software-as well as more traditional sectors, like the automobile industry, clothing, and textile industries. They compared the strategies and success of high-tech companies like Intel and Sony, who manufacture their products in their own plants, and Cisco and Dell, who rely primarily on outsourcing. They looked closely at textile and clothing to uncover why some companies, including the Gap and Liz Claiborne, choose to outsource production to foreign countries, while others, such as Zara and Benetton, base most operations at home. What emerged was far more complicated than the b

CHAPTER 1

Who’s Afraid of Globalization?

Globalization means a world of opportunity and a world of danger. We rush to Wal-Mart for the basics, but we know that many of them are made in China or some other low-wage country. We want low prices at Best Buy and Circuit City on digital cameras and flat-panel TVs, but we fear that our good fortune as consumers costs jobs at home. We like to be able to place orders on the telephone twenty-four hours a day, but when we hear strange accents on the other end of the line, we wonder where on earth the operator sits. We realize when we think about it that the rise out of poverty of more than 2 billion Chinese and Indians must be good for the world; we question whether it’s good for us.

We celebrate the fact that American success is built on innovation and rising productivity, but we wonder whether the new technologies and products will create enough jobs and if our children will live as well as we do. Surveys in the United States and Europe find very mixed opinions about globalization, often reflecting these conflicting feelings within individuals themselves, rather than simply the rifts between supporters and opponents of globalization. A majority of Americans and Europeans think globalization raises their standard of living; a majority also believe that it is bad for employment and job security.(1)

For the questions about who wins and who loses in the new global economy and the uncertainties about whether the opportunities are worth the risks, there is no one right answer. People disagree about definitions of globalization, its causes, and its consequences. Many simply wonder whether any job in America is safe. By mid-2004, about 1,000 stories a month on outsourcing and offshoring were appearing in the U.S. print media, with such titles as “Is Your Job Going Abroad?”(Time, March 1, 2004), “Is Your Job Next?”(BusinessWeek, February 3, 2003), and “Is Your Job Coming to India? Get Used to It” (William Pesek Jr., Bloomberg.com, October 5, 2004).(2) One consulting firm predicted in September 2003 that 1.4 million American jobs would move overseas over the next twelve years, and that the real wages of 80 percent of the population would fall.(3) But a McKinsey study conducted a month earlier concluded that offshoring jobs was a “win-win” for both the United States and developing countries like India, as many low-skilled jobs would move overseas, raising incomes there, and U.S. firms would become more productive and profitable and better able to expand higher value-added operations at home.(4) Despite their optimism, however, McKinsey researchers did acknowledge that 55 percent of those reemployed after losing a job because of import competition or offshoring end up earning less than 85 percent of their old wages in the new job. Many take even bigger pay and benefit cuts.

Other studies claim that outsourcing low-end jobs leads to more job creation at home. Matthew Slaughter, an economist at Dartmouth, analyzed government data on U.S. multinational corporations and found that for every job offshored, a company created almost two in the United States.(5) Catherine Mann at The Brookings Institution showed that by lowering the cost of information hardware, production abroad has raised
U.S. productivity and generated $230 billion of additional GDP between 1995 and 2002. Furthermore, an open economy in which U.S. companies can create jobs abroad is also one in which foreign companies can create jobs in the United States. Between 1986 and 2001, the number of jobs that foreign businesses established in the United States actually
doubled, while the number that moved offshore grew only by 56 percent. The private services work (like legal services, programming, banking, and consulting) that the United States sells to foreigners exceeds by over $50 billion the services Americans buy from foreign companies.(6) Similar findings are reported for Europe. Oxford University researchers found that while U.K. companies are buying more services from firms abroad, U.K. exports of business services have grown even faster.(7)

Mainstream economists like Alan Greenspan, the chairman of the Federal Reserve Board, and N. Gregory Mankiw, former chairman of the Council of Economic Advisors, assure the public that outsourcing work raises productivity and the standard of living in the United States. Free trade, they argue, ultimately creates more and better jobs in the United States than it destroys. Historically, Mankiw explained, innovation has always generated good new employment opportunities:

It is hard to predict what changes American ingenuity will bring to the
U.S. economy. For example, over the past half century, new technology has led to great advances in farm productivity. As a result, the number of Americans working on farms has declined from almost 20 percent of the workforce in 1940 to about 2 percent today. In 1940, no one could have predicted that some of the grandchildren of farmers would become website designers and CAT scan operators. But they did, and at much higher wages and incomes.(8)

The economists base their optimism about globalization and jobs on standard trade theories of comparative advantage. These theories predict that as developing countries with large populations move into activities that use a lot of unskilled and semiskilled labor, the United States and other advanced countries will gain advantage in activities requiring more intensive use of capital and well-educated workers. Some of these neoclassical economists now, however, are having second thoughts. Paul Samuelson, Nobel Prize-winning economist at MIT known for his contributions to modern trade theory, published an article in fall 2004 in which he shows how even skilled workers in the advanced countries could lose out as China upgrades its economy.(9) Globalization should increase the world’s total income and its average standard of living, but there’s no reason to think that any particular country or region’s advances will outweigh its losses. As Samuelson points out, worldwide gains will only be “cold comfort” for losers.

Some think that in an open global economy, government can no longer regulate or buffer citizens against strong economic tides of change. In The Borderless World (1990), one of the first books on globalization, Kenichi Ohmae, a well-known management consultant, claimed that “[the global economy] is becoming so powerful that it has swallowed most consumers and corporations, made traditional national borders almost disappear, and pushed bureaucrats, politicians, and the military toward the status of declining industries.”(10) Thomas Friedman, the New York Times op-ed writer, describes globalization as a race of Formula One cars.(11) If you’re worried about drivers smashing into the walls, you can give them driving lessons and improve the skills of the ambulance technicians. But, says Friedman, you can’t put bales of straw around the walls of the racetrack to buffer the accidents without ruining the race. “If you don’t want to do all these things, then you should forget about Formula One racing and become a jogger. But be careful, because as a jogger in this world you will be run over by a Formula One Car.”

Ohmae and Friedman are enthusiastic about globalization’s impact in shrinking the role of government in the economy, thereby allowing people to develop their talents without hindrance from the bureaucracy. Critics of globalization, though, see a world “running out of control toward some sort of abyss.”(12) They regard the World Trade Organization, the International Monetary Fund, the World Bank, the G8 summits, and the Davos World Economic Forum as arms of multinational capitalism: institutions bound on destroying the safety nets that once cushioned economies, rather than organizations working to moderate and regulate the international system. Starting with the huge demonstrations against the World Trade Organization in Seattle in 1999, massive protests against globalization have been mounted at virtually every important international meeting. At Seattle, the “turtle and Teamster” alliance of environmentalists and union members showed the glimmerings of a new politics building on anxieties about the global economy.

In countries around the world today, political movements are organizing around these issues. Politicians have climbed on the bandwagon, too. In the U.S. 2004 presidential election campaign, Democrats accused managers who offshore jobs of being “Benedict Arnold CEOs,” while Republicans claimed that savings from outsourcing created more jobs than were lost. But are the new jobs in the economy as good as the ones that are disappearing? The Democrats proposed to remove tax loopholes for companies who invest abroad. But are tax breaks really a major factor driving offshoring? To these and other basic questions about the impact of globalization, the politicians provided little in the way of convincing evidence to back up their positions.

The contradictory claims about globalization and its effects led a group of us who are researchers at the Industrial Performance Center (IPC) at the Massachusetts Institute of Technology to launch a systematic investigation into the large-scale changes in the international economy that have occurred over the past twenty years and their effects on the organization of economic life. Globalization may be the single most important change in our lifetime, yet virtually everything people think they know about its consequences comes either from opinions, anecdotes, or very general economic theories. Analyses based on hard evidence from the experience of societies dealing with these pressures are few and far between. While facts alone will not necessarily force anyone to reach one conclusion or another about the effects of globalization, they can provide an anchor and a point of reference in the hot debates being fought out everywhere from factory floors and corporate boardrooms to political campaigns.

Every day, managers and workers grapple with the question of whether their companies and jobs can survive in the New Economy and what to do about it. They do what we all tend to do when we face new problems: reach into an old tool kit filled with explanations and beliefs from previous experiences and try to use them to understand the new sit-uation.(13) The concepts we have been using to decipher globalization are a jumble of old theories about cheap labor, competition, comparative advantage, convergence, and the inevitable triumph of the market. These ideas are all around us, and they seem to make sense.

At the start of the research, though, our group was convinced that we needed to reconsider many of the standard ideas about globalization. Instead of beginning with general theories about trade and growth and looking for evidence to confirm or reject them, we began with a bottom-up analysis of the actual experiences of 500 companies in North America, Asia, and Europe as they responded to globalization. After observing a large number of different approaches and successful or failed outcomes, we became skeptical about the notion that globalization forces any one set of strategies or sets up an inevitable race to the bottom in wages, working conditions, and environmental standards. When we discovered that there were different solutions to the same economic challenges, and found that a number of these solutions are about equally likely to produce success in the marketplace, we realized we could no longer fall back on “globalization” as an all-purpose explanation for why a company chooses one strategy over another and for why it does or does not work. Dell, the American computer company that focuses its own organization on distribution and outsources all the manufacturing of components overseas, is a rapidly growing, profitable business–but so is Samsung, a vertically integrated electronics company that makes almost everything under its own roof. GM is struggling to survive in economies with high-wage labor; Toyota, which keeps much of its production at home or in other advanced countries, is thriving. Most American apparel retailers outsource all their production, but the fastest-growing retailer in rich countries is Zara, a Spanish company that makes more than half its clothing at home.

When we observed companies whose approaches to competing in the global economy succeeded in keeping good jobs in high-wage countries, we began to wonder what it would take for more companies in advanced industrial societies to follow their lead. In this book, I retrace the pathway of our team’s research: from an analysis of the big forces that have been changing the international economy over the past twenty years (in Parts One, Two, and Three); through an examination of the responses of many of the 500 companies we interviewed about their practices and strategies (in Parts Four and Five); to the lessons we’ve drawn about the wide range of choices available to businesses (Part Six).

A Short History of Globalization
Globalization is a word that has been used to describe, explain, and forecast just about every major change in society in the last few decades. To make this term a useful one, it needs to be pared down to the core idea, which is the emergence of a single world market for labor, capital, goods, and services. By globalization, I mean the changes in the international economy and in domestic economies that are moving toward creating one world market.14 If the world really had a single global market, wages for the same work would be the same around the earth; interest rates, allowing for different levels of risk, would be the same; and the price of a product or a service would be identical no matter where it was purchased. By any test that might be applied, however, the world is still far from such a situation, and likely such an endpoint will never be reached.15 A more concrete definition of globalization, then, is the acceleration of the processes in the international economy and in domestic economies that operate toward unifying world markets.

This is not the first time that the world has seen borders between the major economies open up enough for the prices of labor and capital in poorer parts of the globe to put tremendous pressures on wages and interest rates in more prosperous countries. Between 1870 and 1914, levels of capital mobility, trade, and immigration among the countries of the North Atlantic region were by some measures even higher than those we experience today. These factors led to a narrowing of the gap between wages and prices in different countries.(16) The major drivers of this “first globalization” were technological innovations, which drastically speeded up transportation and communication and reduced costs. At the time of the American Revolution, it took Benjamin Franklin forty-two days to travel to France. By 1912, he could have made the trip in five and a half days. In 1815, the English branch of the Rothschild bankers used carrier pigeons to learn the outcome of the Battle of Waterloo, an information coup that allowed them to earn a fortune on English markets. Before the laying of the transatlantic cable in the 1860s, stock market prices took three weeks to travel between London and New York City, but by 1914, telegraph and telephone linked the major financial centers of the world, making communication almost as fast as it is in our Internet Age. These advances rapidly reduced the spread in interest rates on the two sides of the Atlantic. Today, of course, satellites, the Internet, and broadband connections make information transfers and financial transactions virtually instantaneous.