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

Suzanne Berger (Author)

Book Description

Publication Date: December 27, 2005

"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 black-and-white picture presented by promoters and opponents of globalization. Contrary to popular belief, cheap labor is not the answer, and the world is not flat, as Thomas Friedman would have it. How We Compete shows that there are many different ways to win in the global economy, and that the avenues open to American companies are much wider than we ever imagined.

SUZANNE BERGER is the Raphael Dorman and Helen Starbuck Professor of Political Science at MIT and director of the MIT International Science and Technology Initiative. She was a member of the MIT Commission on Industrial Productivity, whose report Made in America analyzed weaknesses and strengths in U.S. industry in the 1980s. She lives in Boston , Massachusetts.

Editorial Reviews

About the Author

SUZANNE BERGER is the Raphael Dorman and Helen Starbuck Professor of Political Science at MIT and director of the MIT International Science and Technology Initiative. She was a member of the MIT Commission on Industrial Productivity, whose report, Made in America, analyzed weaknesses and strengths in U.S. industry in the 1980s. She lives in Boston, Massachusetts.

Excerpt. © Reprinted by permission. All rights reserved.

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 glo...

Product Details

• Hardcover: 352 pages
• Publisher: Crown Business (December 27, 2005)
• Language: English
• ISBN-10: 0385513593
• ISBN-13: 978-0385513593
• Product Dimensions: 6.4 x 1 x 9.6 inches
• Shipping Weight: 1.3 pounds (View shipping rates and policies)
• Average Customer Review: 3.5 out of 5 stars  See all reviews (4 customer reviews)
• Amazon Best Sellers Rank: #726,423 in Books (See Top 100 in Books)

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0 of 1 people found the following review helpful:

4.0 out of 5 stars great book, October 7, 2008

By 

J. Swanoski - See all my reviews
(REAL NAME)   

This review is from: How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy (Hardcover)

This is a great book that explores globalization. It presents information about offshoring and outsourcing that most people do not hear or think about.

1 of 6 people found the following review helpful:

5.0 out of 5 stars Nice one, February 25, 2006

By 

Giovanni Polastri (Stockholm Sweden) - See all my reviews
(REAL NAME)   

This review is from: How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy (Hardcover)

A real page turner, plenty of insight into outsourcing and globalisation, very impressive piece of work!

21 of 44 people found the following review helpful:

2.0 out of 5 stars They Can't See it Coming!, January 20, 2006

By 

Loyd E. Eskildson "Pragmatist" (Phoenix, AZ.) - See all my reviews
(HALL OF FAME REVIEWER)    (REAL NAME)   

This review is from: How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy (Hardcover)

More than two million jobs disappeared from the U.S. between '01 and '04 - half a million in high-tech industries alone. Further, Steven Roach, chief economist at Morgan Stanley, estimates that there have been about 8 million fewer jobs in the current recovery than would have been expected from prior history, and most of the new jobs come with low wages and few benefits.

Berger knows these numbers have caused a rising fear that no American job is safe from low-wage countries. To discover whether these fears are justified, Berger and a group of MIT researchers visited over 500 workplaces and factories around the world. Their conclusion is that cheap labor is not the answer.

This conclusion is currently true in some instances; however, the authors fail to see that cheap labor (the "China price") is increasingly dominating decision-making - both in services and manufacturing. Jobs that formerly were not candidates for outsourcing (finance, market research, industrial design, computer systems design, paralegal research, reading X-rays) now are; strategies that previously fought off Asian alternatives often fail to work several years later as China and India adopt new techniques; in fact the authors often cite previously highly successful American companies that subsequently succumbed.

G.M. and Ford are additional examples where this may yet happen - despite years of world-leadership. Part of their problem was believing that they could let Japan have the low-cost market - this worked for awhile, but now Toyota et al have applied the lessons learned in that market segment, and leveraged their distribution etc. systems on to producing competitive SUVs and innovative hybrids as well. Meanwhile, Toyota sees Korea and China as its most formidable future challenges, and despite its vaunted Toyota Production System, maintaining direct control throughout all stages (so does Microsoft, but that hasn't kept it from substantial outsourcing to India), and co-locating with suppliers, is seriously looking at China. Remember Visteon and Delphi (Ford and G.M.'s former parts arms)? Spinning them off was supposed to encourage more companies to utilize them, and it worked - for a time. Today's successes are far too often ephemeral!

To be fair, the authors also point out that studies and analyses on the impact of outsourcing reach conclusions all over the map. However, I think the most accurate (and certainly highly credible) conclusion is that of former MIT economist (and Nobel prize-winner) Paul Samuelson - globalization should increase the world's total income and average standard of living, but there's no reason to think any particular country or region's advances will outweigh its losses.

Berger, et al, also go on to recommend substantially improving American education. The "bad news" is that this has been tried for at least 30 years, with little impact. Further, others have determined that Asian IQs average about ten points over that of American whites. Regardless, what difference would improving education make, even if we did achieve equality with Asian outcomes, when the workers are paid but a fraction of Americans?

Berger does mention the rationale for foreign corporations choosing to continue building millions of cars in the U.S. - laws requiring U.S. content. Toyota, Nissan, Mercedes, BMW, Subaru, VW and others have built large plants in the U.S. as a result of this act. However, the authors fail to recognize this as a potentially strong and viable overall solution to the hollowing of America.

Another important omission is the problem of outsourcing large numbers of jobs to illegals within this country - in fact, Berger et al reference a situation involving such as a solution! Estimates are that AT LEAST nine million illegals from Mexico are here - depressing wage levels and stealing jobs that Americans formerly did. And what about the large number of Canadian truck drivers within the U.S. - soon to be augmented by Mexicans. (There are NO American truck drivers in Mexico that I know of, and very few that I've seen in Canada.) Then there is the self-inflicted problem of L1 and H1B visas bringing hundreds of thousands more, albeit legally. While technically not "outsourcing," the impact of each of the preceding is the same.

Another thought from some "experts" is that sending off the lower-level jobs allows the U.S. to focus on "higher level" jobs such as innovation. That's ridiculous for at least two reasons: 1)Manufacturing, for example, involves more than drilling, welding, molding, etc. It also involves design, production management, production layout, machine design, etc. These are NOT low-level jobs, nor is operating highly technical equipment. 2)How are all the displaced workers going to become eg. biomedical researchers, rocket scientists, etc.? (Oh yes, the Chinese and Indians are moving into those areas also; I have encountered a number of Americans who took recommended training in new areas after being "outsourced" from a long-term occupation only to become outsourced again.)

Also missing from "How We Compete" is any discussion and recommendation on healthcare. Auto manufacturers repeatedly claim that having to pay healthcare for their employees adds $1,000+ cost to each car - creating government-funded universal healthcare like other nations would help save jobs in America.

"How We Compete" address an important topic - however, its focus on CURRENT approaches (vs. trends) results in conclusions that are seriously over-optimistic. (Inadequate analysis by Berger and others helps explain the maze of contradictory conclusions on this topic; political and economic motivations of short-sighted clients are additional drivers.) Eight million jobs here, nine million there, etc., etc. - it adds up and hurts a lot. Meanwhile, America's competitive status declines daily and our government does little or nothing in defense.