THE WINNING ORGANIZATION Companies will have to move with startling swiftness and offer new rewards to more demanding workers in the coming decade. Middle managers could be in deeper trouble.
(FORTUNE Magazine) – AMERICAN executives feel a sense of vast impending change, and they ought to. Take a look at what they can already foresee in the Nineties. Companies will be forced to develop products and make decisions faster. They will adopt fluid structures that can be altered as business conditions change. More than being helped by computers, companies will live by them, shaping strategy and structure to fit new information technology. They will engage in even more joint ventures, gaining access to techniques and markets they might not have developed on their own. And they will have to cope with a work force made more demanding by a scarcity of labor. The Nineties will be tougher than the Eighties, which have seemed pretty tough. American companies did much to raise productivity and quality in the current decade; they will have to do even more in the next. Says Ray Stata, chairman of Analog Devices: ''What the electronics industry has to do to stay competitive in the next five years is incredible. It almost seems impossible.'' GE Chairman Jack Welch told his stockholders recently that ''the Nineties will be a white-knuckle decade for global business . . . fast . . . exhilarating.'' The gurus who think about such things are floating their visions of the corporation of the Nineties. The Hudson Institute's William Johnston, a former assistant secretary of transportation, sees companies becoming ''increasingly unstable collections of people.'' They will resemble firms in the toy industry today, which expand rapidly when they have a hit and shrink fast when a fad passes. In a flight of imagination in the Harvard Business Review earlier this year, Peter Drucker envisaged the business organization of the Nineties as being less like today's model and more like ''the hospital, the university, the symphony orchestra.'' In Drucker's vision, employees in the new information-based company will know what they have to do without a flock of vice presidents feeding them information and orders. One conductor -- the chief executive -- will be enough to keep the oboes and cellos on the same beat. In interviews with business school professors, consultants, and executives, FORTUNE found the issue of change much on their minds. Business school deans are worried that they may be preparing students for the wrong world (see box). Of the many ideas and visions these experts expressed, the following are anchored in reality -- and already visible.
SPEED Speed has become a competitive weapon. Citibank has introduced as many as three new financial services a week. The Limited rushes new fashions off the design board and into its 3,200 stores in less than 60 days, while most competitors still order Christmas apparel the previous May. IBM's development time for mainframes has dropped from three years to 18 months. Honda and Toyota can take a car from concept to market in three years, vs. five for General Motors. Ford has already cut its new-car cycle from five to four years and is shooting for three. David Cole, director of the University of Michigan's center for automotive studies, thinks the Big Three can get it down to a year in the Nineties. Better technology is one reason things can happen faster. Improved simulations allow IBM to skip two of the usual three generations of prototypes in making new integrated circuits. That cuts development time by 70%, says William Rich, IBM's corporate secretary. Simplified designs are another help. IBM has been making five medium-size computers, each available in three cabinets, for a total of 15 different boxes. The new medium computers, this year's AS/400 and last year's 9370, use only three cabinets between them. Speed also calls for a new attitude among managers, who, like most people, tend to resist change. Paul Hirsch, a professor at the University of Chicago business school, says that managers must learn to see change as it occurs. That sounds simple enough, but it turns out to be an enormous challenge. Hirsch suggests that companies may have to promote oddballs who might not normally fit at the top. Example: Gerald Tsai Jr. The unpredictable, Shanghai- born Tsai hardly fitted into the manufacturing culture of the old American Can Co. But as the company, now called Primerica, tried to get out of the declining packaging industry, he was the right man to lead it into financial services and a planned merger with commercial credit. How fast is fast enough? The Limited tracks consumer preferences every day through point-of-sale computers. Orders, with facsimile illustrations, are sent by satellite to suppliers around the U.S. and in Hong Kong, South Korea, Singapore, and Sri Lanka. Within days clothing from those distant points begins to collect in Hong Kong. About four times a week a chartered 747 brings it to the company's distribution center in Ohio, where goods are priced and shipped to stores within 48 hours. Says Chairman Leslie Wexner: ''That's not fast enough for the Nineties.''
INFORMATION The technology of information will alter the legal and physical boundaries of companies -- in ways that may well give the lawyers heartburn. You might allow a supplier access to your computer so he can see what you need and reorder for you. But you will also risk giving an outsider too much information about your operations. Computers can let customers look into your company too. Pacific Intermountain Express, a big trucking firm, is already / giving customers access to its computers so they can check the status of their shipments. Roger Samuel, manager of a five-year study of information technology at MIT's Sloan School of Management, suggests that vertical integration becomes less necessary when companies use information systems imaginatively. A company that once might have acquired a key supplier to get more control over raw materials may now feel it can do better simply tracking the supplier's performance by computer. It's not that computers will invade chief executives' offices in the Nineties; they are already there. What will change is how the top man uses his terminal or PC. Until now, according to Samuel, he set strategy and then told the computer people to support it. In the future, Samuel says, strategy and information technology will be considered together. You can't decide to go to just-in-time inventory controls or automatic ordering unless you have the technology to back it up. Says professor J. Brian Quinn of Dartmouth's Tuck business school: ''Very few companies have an integrated information strategy.'' With a good management information system, says Daniel Valentino, president of the consulting firm United Research, an executive can see where everything stands and who has made what decisions. He can put a spreadsheet on his screen and ''drill down,'' as computer buffs say, to get at what's behind a particular figure that interests him.
ORGANIZATION Managers have been reading for years that the hierarchical model adapted by business from the military nearly a century ago will fade. But they may not have imagined how extensive the changes could be. With the help of information technology, managers can increase by several magnitudes the number of people reporting to them. ''Corporate staffs will virtually disappear,'' says Jewell Westerman, a consultant with Temple Barker & Sloane who specializes in organizational issues. He says some of his clients have gone from a dozen layers of managers between the chief executive and front-line supervisors to six, and he thinks maybe one more layer could go. IBM has cut its payroll by 16,000 since 1985, mostly through early retirement. The company shifted many remaining workers out of headquarters and manufacturing into marketing and sales. But the company wants to be leaner still. ''We haven't done as well as we should have,'' says corporate secretary Rich. ''We will have to be structured differently in the Nineties.'' The major reorganization last January was a start. The company decentralized into seven largely autonomous business units, including six product lines and one support group to serve the others. The new units, says Rich, no longer have to suffer the ''insidious delays of excessive staff reviews.'' The company was also split into four worldwide geographic regions. Since taking over Franklin Mint three years ago, Stewart Resnick has cut management layers from six to four while nearly doubling sales, to about $500 million. He has also doubled the number of people reporting to him to 12. Professor Quinn of Dartmouth thinks that in general the number could be much larger than that. He argues that so-called spans of control -- the number of subordinates one executive can effectively command -- are giving way to ''spans of communications,'' the number of people an executive can reach through a good information system. Ultimately, he says, one manager could have as many as 200 people reporting to him. Just like that symphony orchestra! These trimmed and flattened companies will occasionally find themselves short-handed. Instead of rebuilding staffs, they will create temporary task forces to address particular problems, such as a quality glitch. They will also hire outside consultants and specialists. IBM has signed up a new Pitney Bowes service to run mail rooms, stockrooms, and reproduction operations in two locations on a trial basis. Engineering design shops like the Troy Pioneer Group, which has ten branches in Michigan, are busier than ever helping the Big Three develop new cars. Troy Pioneer can build prototypes, clay models, and show cars, and can design many of the pieces that go into a car -- work that used to be done mostly by the automakers' staff designers. Troy Pioneer's revenues reportedly reached $135 million last year. President Gerald Mahoney was director of specialty vehicles -- such as limousines and convertibles -- at GM until last August.
ALLIANCES To enhance their competitiveness, U.S. companies will form more strategic alliances -- through partnerships, joint ventures, or other agreements. Kathryn Harrigan, a Columbia University business professor, says the number of such ventures began to pick up in the early Eighties, from a growth rate of some 6% a year to around 22%. She looks for much faster growth in the next few years. IBM, which once felt strong enough to go it alone, today has 40 active alliances, including several major partnerships in Japan. It is also cooperating with ADP to provide Merrill Lynch with software and hardware that enable brokers to call up displays of data about their clients. IBM is also one of 14 companies supporting Sematech, the new research consortium in Austin, Texas. Sematech, which gets half its funding from a $100 million appropriation from Congress, is designed to help the U.S. semiconductor business become competitive again.
GLOBALIZATION ''The root cause of change in the Nineties will be globalization,'' says Noel Tichy, business professor at the University of Michigan. ''You'll have to have global standards for quality, for pricing, for service, for design. You will have to have global leadership.'' The decade will see upheavals and opportunities in world markets, most dramatically in 1992 when the European Economic Community removes most of the remaining barriers between member states, and in 1997 when China takes over Hong Kong. The U.S. has many multinational companies, of course, but Tichy argues that few are truly international. Most are what he calls multidomestic -- companies with a string of relatively unconnected operations in various countries. Many top executives, Tichy says, don't have a global grasp. For managers, time spent overseas has meant time off the career ladder. In the Nineties, says Tichy, overseas experience will be crucial to executive advancement. Many non-Americans will climb high in U.S. companies. Already half the recruits who go through Morgan Guaranty's management training program in New York are foreigners. GE is a prime example of a company that is developing a global strategy. The company sold its consumer electronics business in Europe to Thomson SA of France, then bought Thomson's medical equipment business, Thomson CGR, to strengthen its own medical unit. Together with GE Medical Systems Asia, CGR gives GE a global organization that can compete against Siemens, Philips, and Toshiba in the world market for X-ray, CAT scan, magnetic resonance, and other medical equipment. Just 13% of GE Medical Systems' sales came from outside the U.S. in 1985. John Trani, the GE group executive who runs the unit, says the figure will be 45% for 1988. Trani is using a few other Nineties techniques. He wants what he calls a loose, flexible organization with no rigid chain of command. And he has formed leadership groups of managers from three continents to work on matters like shortening the product development cycle.
PEOPLE Now that virtually all the baby-boomers hold jobs, growth of the work force will slow way down -- from 2.4% a year in the Eighties to 1.2% in the Nineties. The Bureau of Labor Statistics estimates that the number of jobs will grow a bit faster than the labor force. To attract workers, companies will have to develop new appeals, especially to women, who will make up two- thirds of the new workers.
IBM personnel vice president Walton Burdick says, ''Basic economics are still important. But other things are emerging, such as the company's response to societal issues.'' Four years ago IBM helped finance and set up a referral network for day-care centers for its employees. The service now lists 7,500 around the U.S. Like a growing number of companies, IBM is offering other innovative family benefits, such as care for elderly relatives and takeout dinners that working spouses can pick up at the company cafeteria on their way home. Companies will have to hustle to hang on to employees. ''In the waves of restructuring, the long-term contract has been ruptured,'' says Harvard business school professor Howard Stevenson. ''The commitment will always be tentative.'' The University of Chicago's Hirsch points out that the task of rebuilding trust is especially difficult because restructuring is still going on in many companies.
Higher pay is an obvious answer. Another is to help skilled people keep abreast of their specialties by sending them to professional meetings or paying for additional education. If engineers and scientists, for instance, think their talents are highly marketable, they will worry less about being restructured out of a job.
MOTIVATION The new buzzword in employee motivation is ''ownership,'' which can mean either an equity share or just a worker's sense that he counts. Says Harvard business school professor J. Richard Hackman: ''If you want me to care, then I want to be treated like an owner and have some real voice in where we're going.'' The concept grows out of the ''employee involvement'' of the 1980s, which got off to a shaky start with quality circles that never amounted to much, then grew stronger as workers were brought into decision-making. Rochester Products in Coopersville, Michigan, which makes fuel injectors for GM, solicits advice from workers on who should be promoted to supervisor. The company also asks them to help evaluate potential suppliers. Ownership goes a step further by seeking to put employees in the shoes of entrepreneurs. Xerox, 3M, and Honeywell help finance startups by employees who have promising ideas in return for a minority share. Alfred West, founder and chairman of SEI Corp., a $123-million-a-year financial services company in Wayne, Pennsylvania, is planning a more radical experiment with his 1,100 workers. He intends to divide his company into entrepreneurial units, each led by a so-called champion who has been particularly effective in promoting whatever the unit does. West will give each group of employees a 20% interest in their unit. After a suitable period, he will invite an investment bank to put a price on the unit. Then West will pay members for their 20%. If the unit flops, the members get nothing beyond their salaries. Says West: ''I'm an entrepreneur, and I want more people like that here.''
ACCOUNTING The elaborate U.S. accounting system, designed for clerks of a generation ago, has a lot of catching up to do. Says Robert Kaplan, professor of accounting at Harvard: ''It just isn't giving managers the information they need to run a business.'' While the system may provide useful information for regulators and stockholders, Kaplan says, it is too cumbersome to help managers react fast enough. Kaplan even suggests that some U.S. companies have abandoned the low end of their product lines to Asian competitors because accountants gave them a false picture of costs. He argues that simple, moderately priced items have low overhead costs. But as a company adds higher-priced models with more options, it spends relatively more on capital goods and administration. Overhead costs rise disproportionately. But accountants take what Kaplan calls the peanut butter approach, spreading costs according to the amount of direct labor involved in each product line. The low-end items get loaded up with high overhead costs created by high-end items and soon appear to be too expensive to produce. To know how a company is really doing, says Kaplan, you need some physical performance figures, such as defect rates or delivery numbers, in addition to financial figures. Kaplan has hardly started a corporate rebellion against present accounting methods, but one chief executive has independently begun doing what he wants. Ray Stata of Analog Devices this year is dropping all but four or five of the 20 financials in his quarterly and annual reports. He is replacing them with nonfinancial numbers on quality, deliveries, and output. Analysts and stockholders always want to focus on the dollar numbers, says Stata, but ''if they had any sense they wouldn't look at the quarterly financial numbers.'' They'd learn more from production data.
A few pessimists think that even if U.S. business takes all these steps, it may not remain competitive globally. Quinn of Dartmouth, for one, thinks that American companies, burdened by what he considers a preoccupation with high and rapid rates of return, will always trail Asian companies that presumably will continue making more modest demands. That view underestimates the creativity of U.S. business. The fact that business organization is the subject of so much thought, talk, and experiment today is a promising sign. Daniel Valentino of United Research says that in the companies he studies he usually finds room for a 30% to 50% improvement in productivity. With innovative force applied to that potential, there is no reason American business should not be a world leader indefinitely.
BOX: WHAT SHOULD B-SCHOOLS TEACH?
With so much change ahead in the Nineties, business school deans -- and managers who hire MBAs -- worry that U.S. schools at best have slipped off the leading edge and at worst have become irrelevant. Says Xerox vice chairman William Glavin: ''They are developing middle managers, but we are not hiring or promoting very many of them.'' J. Brian Quinn, a professor at Dartmouth's Tuck school, is blunter. He says business schools -- including his own -- are turning out graduates who are ignorant of technology, especially information technology, and who know little about America's growing service economy. The top schools are only beginning to adjust to such criticism, adding a course in quality here and a course in manufacturing there. The University of Pennsylvania, in response to the need for globally minded executives, offers a dual master's program, combining the full requirements of its Wharton business school with international studies at its Lauder Institute. Glavin is one of a number of businessmen helping Wharton figure out how it needs to change by the year 2000. Dartmouth has begun a full-blown review of its curriculum. MIT's Sloan school has nearly finished a five-year study of information technology, financed by $6 million in grants from ten large companies plus the Army and the Internal Revenue Service. Professor Jerry Wind, who heads the Wharton study, says business schools have always been good at teaching specific business functions, such as accounting or marketing, but not so good at turning out the rounded person who understands business. In the Nineties even well rounded may not be enough. The task is to train managers to deal with constant, rapid change. Nobody yet has any idea how you go about doing that.
BOX: HOW THE LIMITED CUTS THE FASHION CYCLE TO 60 DAYS
From point-of-sale computers, daily reports on what is selling well flow into headquarters of the Limited in Columbus, Ohio.
To restock, the company sends orders by satellite to plants in the U.S., Hong Kong, South Korea, Singapore, and Sri Lanka.
The goods are hustled back to Columbus from Hong Kong aboard a chartered Boeing 747 that makes four flights a week.
At a highly automated distribution center in Columbus, apparel is sorted, priced, and prepared for shipment -- all within 48 hours.
By truck and plane, the apparel moves out to the Limited's 3,200 stores, including Express and Victoria's Secret outlets.
Within 60 days of the order, the apparel goes on sale. Most competitors still place orders six months or more in advance.
CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: COMING SURPRISES DESCRIPTION: Projected number of jobs and workers in labor force from 1990 through 2000.