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November 13, 2007
Falling off the Flat Earth?
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Norm Augustine has written a new book, Is America Falling Off the Flat Earth?
Much of the book is an expansion and elaboration of the topics covered in the report he Chaired - Rising Above the Gathering Storm. Like that report, these essays should raise concerns.
One quibble: I think he overstates the "death of distance" argument. There is still a strong need in many areas for tacit knowledge and "being there". But he certainly does not overstate the impact of the telecommunications revolution and the impact it has had (and will continue to have) on US based employment:
It thus appears highly likely that the United States will suffer a substantial wage disadvantage for many years to come and that some means will have to be found to offset that fundamental tilt of the flat earth away from America.
To produce such great accomplishments, our economic system, evidencing its version of what has been called creative destructionism, destroys 29 million jobs each year while generating 31 million new jobs. In fact, about one-sixth of all jobs in the United States are destroyed in any given year. Mathematicians would describe the process as encompassing the most hazardous of calculations in that it concerns relatively small differences between relatively large numbers, and economists would say that the job market is highly volatile. But if one assumed a 10% adverse change in both job creation and job destruction, it would result in the disappearance of twice as many net jobs as are now being added. Such is the tenuousness of life in a modern economy.
For me, one of the most instructive sections of the book is entitled "Welcome to the 21st Century Board Room." Augustine knows of what he speaks. As the CEO of a Fortune 100 company and member of numerous Boards, he has been there.
He hones in on one of the key questions:
it is instructive to ask, What is an American firm? For example, one respected company with which I have been associated as a director for 18 years was founded in the United States well over 170 years ago and maintains its headquarters in the United States, but some 10% of its owners (shareholders) are foreign; over half its customers are foreign; over half its employees are foreign; and not long ago its CEO was foreign. Is that an American firm, or is that a global enterprise? And even if it were judged “an American firm,” the most disastrous thing a CEO could do for any firm’s employees and shareholders alike would be to make business decisions designed to protect the interests of a few if those decisions are harmful to the competitiveness of the organization as a whole and thus endanger the prosperity, even survivability, of the enterprise itself—and the jobs and profits it sustains.
But that outlook extends beyond the Boardroom:
In the case of most large US employers, it is quite probable that a substantial majority of their shares are owned by institutional investors, and the primary, if not sole, interest of that set of shareholders is financial return—preferably near-term financial return—and certainly not the matter of preserving jobs. In fact, announcements of job layoffs in times of prosperity are almost always greeted favorably on Wall Street. Ironically, the institutional investors who own those companies often are fiduciaries for the pension funds of American workers—workers who, for their own part, have seldom displayed any great reluctance to purchase foreign-made cars, television sets, and DVD players if they thought doing so was in their immediate interest as consumers.
He also points out that universities are becoming global:
Not atypically, the University of Chicago states, “We educate the next generation of the world’s leaders, not just United States leadership,” and a few years ago, 260-year-old Princeton University changed its motto from “In the Nation’s Service” to “In the Nation’s Service and in the Service of All Nations.”
Also of interest was his take on the work ethic – or lack there of:
Gilman Louie, the Silicon Valley entrepreneur and former CEO of the high-technology firm In-Q-Tel, tells of attending a lecture by an industrial leader in Japan at which the student audience spontaneously began chanting in unison the Japanese word for innovation. Some businesses in India outfit work cubicles with cots for employees who elect to work late and remain overnight. On a visit to Bangalore, I was told that the young engineers and computer scientists writing software were so committed to their tasks that if an employer simply provides them pizza (yes, in India!) for dinner, “the kids will work all night.” In contrast, in a recent survey of 431 US business leaders, nearly three-fourths cited a lack of work ethic and professionalism as a characteristic of US high-school graduates. (As a case in point, I recently had difficulty gaining the attention of a clerk at—where else?—the customer- service desk of a local computer store because of her ongoing telephone conversation with a boyfriend. When the clerk finally appeared in front of me, I, rather amused by the ridiculousness of the situation, smilingly remarked, “You know, if you worked for me, I’d fire you!” The clerk returned my smile and replied, “That’s why I don’t work for you!”
He goes on:
USA Today reports one US business executive as saying that “[organizations] are realizing it’s less risky to [employ] internationals because they’re more coachable, more socialized, have no posses, and have not been Americanized.” That executive predicts that in his field, by about 2010, foreigners will fill 50% of all the jobs available, compared with the roughly 25% they fill today. The article goes on to assert that US youth are “lacking the fundamentals.”
The executive being quoted was not whom one might expect. It was not the CEO of some high-technology company, such as IBM, Microsoft, or Dell. Rather, it was George Raveling of Nike—speaking of basketball players in the National Basketball Association!
Raveling’s remarks are echoed by Red Auerbach, legendary coach of the Boston Celtics: “All those years I traveled overseas and held clinics, I said to people, ‘You know what? There’s going to come a day when these countries are dangerous for us because these guys are listening. You look at the foreign kids who come over and everyone of them is solid fundamentally. Not our guys. No one can teach them because they all think they are stars when they’re 15.” As if to punctuate his observation, the United States had just finished in sixth place in the world basketball championships.
Former NBA executive Jerry Colangelo could easily have been referring to America’s free-enterprise system and our system of higher education rather than basketball (or baseball, for that matter) when he lamented, “We invented the game, we taught people how to play the game, and they came back and knocked us off the perch.” The two teams in the 2007 NBA finals, San Antonio and Cleveland, had half and one-fourth of their players from abroad (including the tournament’s Most Valuable Player), respectively. Their players came from Argentina, France, Slovenia, Netherlands, Lithuania, Serbia and Montenegro, Brazil, and the Virgin Islands. No fewer than 28 countries were represented on the rosters of playoff teams. NBA Commissioner David Stern is reported in the above mentioned USA Today article as being “startled at how fast the rest of the world has come along.” To take an example from another sport invented in the United States, fully 44% of the starting lineups in last year’s major league baseball all-star game were foreign-born. This trend is being replicated in many fields other than basketball and baseball in which, ironically, other nations are successfully adopting our own proven but oft-ignored practices. In the case of economic competitiveness, the nations posting the most remarkable gains in recent years have to a large extent been doing so simply by copying the attributes of our systems of higher education, business management (pre-Enron era), and free enterprise and in many instances implementing them more effectively than we.
On how we can compete:
Given the immense population disparities among nations, America cannot reasonably hope to produce the same number of engineers as, say, China or India. Nor does it need to do so. What is needed is not more engineers capable of performing relatively routine engineering functions—those jobs have already been commoditized and will continue to move abroad—but more engineers capable of creative, innovative thinking, engineers who can challenge the status quo and “see around corners,” engineers who are entrepreneurs, and engineers whose ideas are bounded only by a solid understanding of the fundamental physical laws of nature.
On Wall Street and innovation:
But before condemning industry, consider the following incident that occurred a few years ago at the company where I was employed. Motivated by an unusually large stable of highly promising research opportunities, the company’s management conducted a briefing for Wall Street analysts to inform them of a planned increase in investment in research and the promise this would offer for the company’s future growth and profitability. At the end of the briefing by the company’s president, most members of the audience ran from the room and sold the firm’s stock. The company’s share price dropped by 11% during the next few days, then gradually declined for nearly 2 years before the tide could be stemmed. When, shortly after the debacle on Wall Street, as the event became known in the company’s research laboratories and executive suite, I asked one of the attendees at the briefing what had been said that was wrong, the analyst impatiently responded, “You should know that it takes 10 or 15 years for research to pay off . . . if it does at all. Your average shareholder owns your stock for about 18 months, doesn’t care what happens to you 10 or 15 years from now, and certainly doesn’t want to pay for it. In fact, by that time the investor will probably own one of your competitors’ shares and would be just as happy if your firm were not competitive.”
On finding our niche:
Even when undertaking all reasonable steps to remain competitive in science and technology, it is unlikely that on the flat earth any nation, even one as wealthy as the United States, can maintain a position of such broad prowess as the United States has enjoyed in recent decades. A few areas can undoubtedly be singled out in which to seek prominence, more areas can be pursued wherein a nation can be a “fast follower” in applying new knowledge, and still more will simply have to be monitored or even forgone.
On the patent system:
The US patent system is in many respects antiquated. In the words of Michael Splinter, CEO of Applied Materials, Inc., “Those of us who are patenting inventions are becoming hostages to those who are inventing patents. The current system is an invitation to litigation.” It seems that the jobs that our patent system is creating are largely for lawyers, not scientists, engineers, and entrepreneurs and those they serve.
On market forces:
It is tempting, especially for people who are disciples of Adam Smith (a group that includes myself), simply to dismiss the untidy competitiveness matter that results from this drift by saying, “Let market forces solve the problem.” But, unfortunately, that is the problem—at least from America’s perspective. Indeed, market forces are solving the problem. They are solving it by moving jobs outside the United States and by reducing or limiting compensation and benefits for employees who remain in the US workforce.
. . .
The irony is that “American” companies may well survive, and their owners even prosper, but market forces will cause this to be at the expense of America’s workers. In such a scenario, America could evolve into a nation comprising a number of extremely wealthy shareholders (fully 55% of Finland-based Nokia’s shares are owned by Americans) and a few corporate headquarters (at least for a time) mired in an enormous sea of unemployment. That is not a formula for stability, national security, or quality of life for most of America’s future citizens.
I especially like his 7 intangibles of the innovation ecosystem:
The first is an environment that provides researchers and inventors the freedom to explore—an environment that offers creative, inquisitive people the opportunity to pursue promising new avenues that may appear unexpectedly in their research and to be rewarded for their successes.
The second element is an atmosphere wherein disruptive ideas are welcomed, not discouraged or dismissed.
Third is an environment that is tolerant of risk—not irrational, injudicious, intemperate, or “overly exuberant” risk but rather prudent risk based on considered judgments that offer commensurate payoffs.
Fourth is an understanding that failures must not be unreasonably punished.
Fifth is an environment that produces and facilitates the search for discontinuities.
Sixth is an interactive environment wherein creative people can identify and pursue synergistic cross-cutting technologies.
Seventh is the acceptance of the notion that those responsible for managing the innovation process must not run around pulling up the flowers, as the saying goes, to see whether their roots are healthy. Patience, continuity, and their close relative perseverance are all fundamental catalysts of successful innovation.
Those are some of the insights I've taken away from the book. I'm sure you will find your own.
Posted by Ken Jarboe at November 13, 2007 8:29 AM
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