Last year the Levi Strauss Corporation announced the closure of 11 U.S. factories. Six thousand employees-one-third of its North American workforce-would lose their jobs. Just another downsizing American corporation, prowling the globe for low-cost labor to replace its unwanted domestic workers? Hardly. In what The New York Times called “an extraordinary gesture of largesse,” Levi’s softened the bad news for its employees by providing remarkable severance benefits. All the laid-off workers, the company said, would be given eight months’ notice, three weeks of pay for every year worked, and $6,000 in benefits to cope with the dislocations of job loss. And unlike the case with most severance packages, the workers could collect even if they found a new job the next day. In addition, the company announced that it was making gifts totaling $8 million over three years to the communities affected most severely by the retrenchment. Even union officials praised the company’s handling of the layoffs: “By far the best severance settlement apparel workers have ever gotten,” said one.
While Levi’s gesture was extraordinary, it wasn’t a departure for the company. Treating its employees fairly and valuing their contributions have long been hallmarks of the way Levi’s does business, and the company is well known for offering its employees opportunities for growth and for sharing with them the wealth created by its successes. These core values are also reflected in the company’s principal business strategy since the 1980s-upgrading what had been a very basic, inexpensive commodity, blue jeans, into a range of high-priced fashion products. When coupled with investments in new technology and with new manufacturing methods, this strategy has enabled Levi’s to retain many of its domestic manufacturing jobs long after most other apparel-makers outsourced their operations to low-wage countries.
Levi’s powerful commitment to its employees’ welfare has served the company well, helping it to post 10 consecutive years of record sales between 1986 and 1996-almost tripling revenues during this period. And Levi’s is not alone in either the strength of its values or their consequences. The research done for my new book, The Productive Edge, from which this article was adapted, suggests that an enduring, deep-rooted commitment to a handful of core beliefs about corporate identity and purpose helps to explain the accomplishments of other durably successful companies too. The specific content of those beliefs varies from firm to firm, but in each case they are understood by everyone in the company and infuse almost every action it takes. They have guided and inspired successive generations of employees. In effect, they are the glue that has held these companies together and enabled them to grow over long periods.
Ultimately, even Levi’s couldn’t completely insulate its employees from the effects of cutthroat global competition and technological change (and, in this case, the fickleness of fashion). Though the Levi’s workers helped the company create new economic value-in which they themselves shared-their future roles couldn’t be ensured. The events at Levi’s bring into especially sharp relief the forces now sweeping the whole U.S. economy as it confronts the historic challenges of global integration and the digital revolution. Each presents tremendous opportunities for economic growth. But for the American workforce each also means more volatility and a loss of control.
Losing the Productive Edge
With the U.S. economy still humming in the eighth year of this century’s longest expansion, the nation’s political and business leaders are in a self-congratulatory mood. There is indeed much to celebrate: strong job growth; unemployment and inflation at their lowest levels in decades; a soaring stock market; consumer confidence at record levels; American firms dominating world high-technology markets. Small wonder then that the issue of “economic insecurity,” once expected to dominate the politics of the 1990s, has faded into the background.
But the ultimate test of any nation’s economic performance is the prosperity of its citizens, and here the news isn’t quite so good. True, many Americans (especially the more affluent ones) have seen their incomes go up recently. But nearly half of all American families still have incomes below $35,000 per year-less than what most people regard as being necessary to live in reasonable comfort. Moreover, the economic circumstances of the majority of families haven’t improved much in two decades. Indeed, by one estimate the incomes of the least affluent 60 percent of families are lower now than they were in 1979, after adjusting for inflation.
In the long run, no country can enjoy sustained growth in its standard of living unless it also achieves a healthy rate of productivity growth, and the single most important factor behind the disappointing statistics on U.S. living standards is the weak productivity growth of the American economy.
During the 100 years leading up to the early 1970s, America’s productivity, expressed in terms of output produced per hour of labor, grew at an average rate of about 2.3 percent per year. The result was a twelvefold increase in productivity over this period, and a dramatic increase in American living standards. Sometime in the early 1970s, however, the rate of productivity growth declined sharply, and for more than two decades the U.S. economy has been stuck in low gear. Labor productivity during this period grew at a rate of about 1.1 percent per year. A decline from 2.3 percent to 1.1 percent might not seem very significant, but over a long period it matters a great deal. If productivity growth in the past 25 years had matched the previous century’s average growth rate, American household incomes would be about 35 percent higher than they are today, and millions more American families would be enjoying a middle-class standard of living.
What must we do to regain the productive edge? There is no one simple answer to this question. But a key part of any solution is more investment. Today the combined forces of globalization, technological innovation, and the deregulation of many industries at home and entire economies abroad are creating enormous opportunities for American firms to invest in the development of new products, services, and markets. Yet the very forces creating such great potential for growth are simultaneously giving rise to unusually turbulent business conditions. What actions and strategies are most likely to produce a higher rate of productive investment in this environment?
Today some of America’s greatest economic assets are its nurseries of innovation-its deep, sophisticated venture-capital markets; its system of industrially connected, high-quality research universities; and an entrepreneurial culture that encourages risk-takers and rewards them handsomely when they succeed.
But after studying the origins of America’s industrial revival over the past decade, I have concluded that a group of successful mature companies-Levi Strauss among them-also have important lessons to teach us about growth under conditions of uncertainty. These firms are all quite different, but they all share one fundamental quality: a powerful, lasting awareness of identity and of values extending beyond the bottom line. Over the years these companies have exhibited a sense of purpose beyond profit that, paradoxically, has helped them to increase their profitability, and to navigate through periods of great uncertainty along the way. There are important lessons here for other companies. And, as we shall see, for our society as a whole.
Winners and Losers
in one sense, the productive edge is a sequel to made in America, a book that summarized the conclusions of MIT’s Commission on Industrial Productivity on the overall performance of the U.S. economy in the late 1980s. The commission (of which I was a member) analyzed firms in eight sectors of the economy and identified striking similarities in what the most successful firms in those industries were doing. Most features of what we called “best practices”(such as breaking down internal organizational barriers, flattening hierarchies, developing closer links with customers and suppliers, adopting innovative human resource practices, committing to continuous improvement, integrating new technology with production and marketing strategies) were relatively well known even then, and have since become conventional wisdom. But what was most striking about the leading firms was their ability to see these practices not as independent solutions but rather as part of a coherent system. While most companies had settled for piecemeal reform, the most successful firms recognized the need for systemic change and the importance of aligning their organizational practices with one another.
But that begged another, deeper question: Why? Why had those firms and not others understood the need for dealing with change as a whole, not as a set of separable tactics to be selected as if from a menu? To answer that question, my colleagues at the MIT Industrial Performance Center and I more recently went back to many of those same companies.
As we went from one firm to another, we got a surprise. We had expected that market pressures would be the strongest impetus to transformation. But the top managers we interviewed frequently pointed to another source. Even though the market is never absent from the manager’s mental screen, market perturbations seemed to be playing a less direct role than we had imagined. More often, the driving force for change seemed to be coming from within.
the injunction to “listen to the voice of the customer” is today one of the most common forms of advice to business. Indeed, for many firms it has attained almost religious significance. Yet as we revisited the firms in our group, we could not help noticing that, while listening very carefully to what their customers were saying, the employees-at every level-also seemed to have an understanding of their mission that transcended the customer’s voice. It was as if they were also listening to an inner voice, a voice that was not always in perfect harmony with the voice of the customer. As William Weisz, former CEO of Motorola, once put it: “When you are pioneering in something the world doesn’t even know it wants, you have to have a belief that the world is going to want what you have, and that it will start falling all over its feet to get it.”
Similarly, though these firms were paying very close attention to their competitors, their actions in the marketplace were not purely reactive. Their strategies were shaped as much by a core belief in what they were trying to accomplish as by the drive to pre-empt or mimic the competition. These are companies that never seem to stop thinking hard about who they are.
Take Boeing, a firm with a history of taking huge financial risks-“betting the company” to build the next generation of planes. The best-known example is the 747. One of the greatest gambles in aviation history, the development of the hugely expensive 747, like other Boeing projects before and after, was not really a response to a competitor, since no other company was then seriously entertaining such a project. Nor was the project justified purely on the basis of return on investment. Indeed, given the risks involved for the company’s existence, it is quite unlikely that such a decision could ever have been justified on purely financial grounds. Although profitability was always involved in the decision, by most accounts it was Boeing’s sense of itself as a company whose mission is to push the envelope of commercial aviation-a company that “eats, breathes, and sleeps” aeronautics-that made the difference.
Levi Strauss, mentioned at the beginning of this article, provides a very different example. One of the few unequivocal success stories in the struggling American apparel industry over the past decade, Levi Strauss’s emphasis on the long term, on building its organizational capabilities, and on increasing the contribution made by its workers to the business, has set it apart from the volatile, highly reactive, often exploitative norm in the rest of the industry.
Perhaps the biggest test of the company’s commitment to these values has been posed by its network of overseas subcontractors, some 600 of them sewing Levi’s in 35 countries. Though the company still relies primarily on its U.S. workforce to manufacture products sold in North America, its global competitiveness is heavily dependent on its access to the low-cost labor in many of these countries. But not all of them are known for respecting the rights of their citizens to work in safe conditions, and some have failed to meet international norms regarding human rights.
The company’s top managers had to face the question of how to apply their ethical standards in such cases. The choices weren’t easy. To insist on a universal standard of behavior among suppliers would rule out production (and probably also sales) in some of these countries-with immediate negative bottom-line impact. Furthermore, the loss of jobs would almost certainly be a severe blow to the employees of the affected subcontractors, for whom risky work might well be better than no work at all. On the other hand, for Levi Strauss to waive its ethical standards in its overseas dealings would smack of hypocrisy and risk alienating U.S. workers already fearful of losing their jobs to cheap foreign labor. Besides, rumors of child and prison labor don’t help sell jeans.
In 1992, the company introduced new guidelines governing its dealings with overseas business partners. The guidelines asserted that the company had “a heritage of conducting business in a manner that reflects its values. As we expand our sourcing base to more diverse cultures and countries, we must take special care in selecting business partners and countries whose practices are not incompatible with our values. Otherwise, our sourcing decisions have the potential of undermining this heritage, damaging the image of our brands, and threatening our commercial success.”
When we reconnected with Levi’s soon after that policy was promulgated, the company was struggling to decide what to do about its operations in China, a decision that involved balancing the Chinese government’s human rights violations against the costs of losing access to the potentially enormous Chinese market. Eventually, Levi’s decided to discontinue all production, sourcing, and sales in China, a decision that a top executive described to us as one of the toughest the corporation has ever had to make.
Once again, the point is not that Levi’s decision was driven purely by ethical, altruistic concerns. The company was clearly also very apprehensive about the risk to its brand image posed by Chinese labor and human rights policies. The point is that the decision to terminate Chinese operations grew out of a deeply held sense of what Levi’s stands for, in which issues of commercial brand, corporate values, and self-image are all intertwined. It is a decision that would not-indeed, could not-have been made if the company had been reacting only to external market pressures.
Another example of this internally driven behavior is offered by Motorola. The successes of Motorola over the years in a wide range of communications and electronics markets cannot be ascribed purely, or even primarily, to a goal of beating the competition, even though that has very often been the outcome. But unlike Levi Strauss, what drives Motorola is not primarily a set of ethical concerns or an egalitarian philosophy. The most important motivation seems to be the more technical objective of always trying to do better than before, the impossible quest for “perfection before the customer.” Mobilizing the entire company around apparently impossible goals has long been a central part of Motorola’s leadership strategy. Targets such as the famous “Six Sigma” quality goal of reducing the error rate in every one of the company’s processes to fewer than 3.4 mistakes per million operations have helped create a common vocabulary and sense of purpose for a company that is considerably more decentralized than most others its size. Even more important, stirring the pot this way has kept the organization moving and searching. As longtime chairman Bob Galvin put it: “It doesn’t really matter what the goal is exactly. As long as it is reasonable. The point is to stimulate. To catalyze.”
Galvin, who chooses his words carefully, is perfectly aware that goals such as Six Sigma quality strike many observers as less than reasonable (and the company, despite making vast improvements, did in fact fall short of the Six Sigma goal). But the idea of Motorola as a company that is driven by a long-term vision to pursue the seemingly impossible is integral to its sense of corporate self. Galvin adds: “At times we must engage in an act of faith that key things are doable that are not provable.”
In recent months Motorola has been sharply criticized on Wall Street and in the business press for overextending itself, falling behind with new product introductions, and other transgressions. But Motorola has weathered worse crises in the past, and though a recovery isn’t ensured this time, it would be unwise to write off an organization that over the decades has repeatedly drawn on its fundamental values to renew itself and its products.
The research that i and my colleagues have carried out over the years has convinced me that internal values are a key part of corporate success. But I can hear some skeptical readers saying “Show me.” To those schooled in hard-nosed quantitative analyses of competitive situations and strategies, explanations such as this will no doubt seem very “soft.” And a handful of examples certainly does not prove that every company with a strong sense of identity and internal values is successful or that every successful company has succeeded because of its values.
However, further evidence to support these conclusions comes from a detailed study of 18 companies with a record of exceptional achievement extending back over many decades (several had also been the subject of the MIT research, including Hewlett-Packard, Boeing, Motorola, and Ford). In this pioneering study, conducted by James Collins and Jerry Porras of Stanford, each of the 18 “visionary” companies was carefully compared with another company of comparable vintage that had started out pursuing similar products and markets. The firms in the comparison group were themselves no slouches, and in many respects had been above-average performers. Yet each had been outdistanced by its more visionary counterpart. Collins and Porras (who published their results in a book called Built to Last: Successful Habits of Visionary Companies) asked what had distinguished the most successful companies from their competitors.
Their answers undermine many of the most pervasive myths about effective corporate management-for example, that business success requires a single-minded focus on maximizing profits and market share; that it requires visionary, charismatic leadership; and that it requires brilliant, sophisticated strategic planning. In general, these characteristics were no more likely to be found in the visionary companies than they were in the others; indeed, they were often entirely absent from the most successful companies, and so could not be implicated in their success at all.
So what does explain the difference? A key finding of the Stanford study reinforces and valuably amplifies our conclusion on the importance of a corporation’s “inner voice.” In each of their 18 visionary firms, Collins and Porras saw a set of core beliefs-an “ideology”-that had remained essentially unchanged over long periods and that had mobilized and inspired people at all levels of the organization. They found that in almost all cases the visionary companies had been motivated more by such beliefs and less purely driven by profit than the comparison firms, even though, paradoxically, they had been more profitable in the long run.
Collins and Porras insist that these core beliefs are unique to each company, that there is no “correct” version. Examples include dedication to serving the customer (Wal-Mart, Nordstrom); respect for individual employees (Hewlett-Packard); and innovation (3M). What matters is not correctness, but authenticity: the strength of the belief that this is what the company stands for and that this is how it should do business.
The Broader Lessons
The great forces of change at work in the economy today hold tremendous promise not just for the owners of American corporations but also for American workers and consumers. Yet the turbulent energies released in their wake are understandably also fueling unease and apprehension.
More than a billion workers in developing countries are projected to enter the global labor market over the next 20 or 30 years, with most earning only a tiny fraction of the average wage in the advanced economies. Some American workers, especially (but not only) the least skilled, are sure to be adversely affected. The vast armies of new workers and their families in developing countries will also present huge new opportunities for growth, of course-opportunities that large American corporations, well capitalized and sophisticated in the use of technology, seem well positioned to exploit. But the extent to which American workers will share in those benefits can only be guessed at today. Where will the investment go, and the jobs? And what will be the impact on the number and quality of jobs remaining at home?
The continuing rapid advance of information technology is creating equally profound uncertainties. The new digital technologies will open up wholly new frontiers of economic activity, making possible the delivery of products and services that are unimaginable today. They will also radically transform the way businesses collect, process, interpret, and distribute information-in other words, the way work gets done. (The re-engineering movement will be seen in retrospect as a primitive step in this direction.) But this great structural transformation is almost certainly still in its early stages, and it will be a time of dislocation and disruption, as obsolete economic structures are torn down to make way for the new demands of the information era.
Every economic change creates losers as well as winners, and for some the price of change will be high. But even many who stand to gain from these changes have come to equate them not with opportunity but with disruption and a loss of control over their lives. In America and throughout the industrialized world, the fear of rapid economic change has already brought increasingly strident calls for stringent regulation of corporate behavior, protectionist trade policies, and other expressions of populist sentiment.
These anxieties abated in the United States during the robust expansion of the 1990s, but they have not disappeared. They will gain new force when the economy turns down, as it inevitably will, and the pressure on policy-makers to do more to relieve the anxiety may then build dramatically. The risk is that the resulting policies will exact a very high price in terms of private investment abandoned or forgone. And that, in turn, would mean lower productivity growth, which, as I argued above, is the key to our future well-being. In a very real sense, then, the solution to the problem of productivity growth will depend on how much uncertainty ordinary people are willing to bear before a backlash against the forces of change sets in.
In dealing with this problem, I believe that we have something to learn from the companies that follow their “inner voices.” Throughout these organizations there is a clear and concrete understanding of core goals and values, which helps employees remain focused on what needs to be done-even while everything around them is in flux. People know what they are doing, and why they are doing it.
In this respect, the employees of a company may not be so very different from the citizens of a country. Just as a strong sense of identity and of purpose beyond profit has helped the most successful companies navigate through confusing and unpredictable territory, a shared sense of national direction and purpose can help advance prospects for future growth.
Today, however, talk about shared purpose and economic values is largely absent from the national debate about growth. The debate is dominated instead by talk about how much growth to achieve, and how to achieve it. We are like one of the “non-visionary” firms mentioned above, paying lots of attention to the bottom line and not enough to what lies beyond it.
If people are to be persuaded to embrace change rather than resist it, if they are to be convinced of the need to live with the volatility and the radical uncertainty of the new economy rather than fight against it, they must see the possible benefits of such a stance. They must have a positive reason to open themselves up to economic forces that will sometimes seem arbitrary and out of control. They must, in short, have a sense of direction and purpose.
For many in the workforce, perhaps even the majority, the promise of greater material compensation and wider consumer choice will fill in only part of the picture. What is also needed, I believe, is a coherent vision of the place of work and learning in society and what the work experience itself might become for the majority of contributors to the new economy. At a time when so much is changing in the workplace, what are the basic principles-the core values-that should govern the employment relationship? What are the rights, responsibilities, and resources that should be accorded to those who will contribute their efforts to the new economy? How should we define this “New Economic Citizenship”? I do not have the space in this article to develop the idea fully (it is elaborated further in The Productive Edge). However, there are two aspects that I’d like to touch on briefly: those relating to information technology and to benefit structures.
The new information technologies that are transforming the workplace seem to have a Jekyll-and-Hyde aspect. To some they are job-destroying, occupation-reshaping, wage-polarizing, socially divisive wrecking balls. But that is far from the whole story. The same technologies can also offer unprecedented opportunities to move beyond the production systems of the past, systems that offered intrinsic satisfaction only to people at the top of the economic pyramid. Used well, these new technologies can eliminate much of today’s narrow, repetitive work and provide personal and professional satisfaction to a far greater number of workers than ever before in history.
Which will it be? Not easy to say, because both outcomes-liberating or repressive-are possible. We may choose to use technology to diminish the human contribution: to pressure, to downskill, or to demean. Or we may choose to use it to augment human capabilities and enhance the work experience. The point is that such a choice exists-and it is one of the key issues at stake for our society in the debate about growth. Yet that choice is hardly acknowledged in the debate today.
By affirming and reaffirming the values that the new technology should serve-for example, by protecting rather than compromising the dignity of work, granting workers control over their working environment, and making it possible for their endeavors to be appreciated and appropriately rewarded-I believe that our society stands a far better chance of realizing the full potential of technological advance.
Beyond technology lies the issue of lifelong change and career development. Just as companies such as Levi Strauss put great stress on the possibility of their employees learning new skills and moving to new roles, our society needs to think hard about the fact that lifetime careers with a single employer are now very much the exception, not the rule. As in the case of information technologies, this fact has two quite different faces. For many people, the prospect of a multiple career path with multiple employers will seem daunting, a prospect to be endured rather than welcomed. That’s the unpleasant face of change. But it is also possible to imagine a future in which individuals not only take on more responsibility for managing their own careers but also obtain more control over the resources needed to do this well.
This, I believe, is the larger implication behind current policy proposals for more portable pensions and benefits, such as health benefits, individual skill grants, tax-deductible individual training accounts-indeed, even the movement for greater parental choice of children’s schools. All such proposals move in the direction of giving individuals greater control over what they need to manage economic and technological change. Anthony Carnevale, chairman of the National Commission on Employment Policy, argues that new career development and benefit structures, by promoting autonomy and private choice, would bring the world of work into closer alignment with our society’s individualistic and participatory values. Carnevale and others believe that these offerings would offer a true alternative to the “standardized offerings of the welfare state on the one hand and the increasingly rare and uncertain embrace of corporate paternalism on the other.”
These are certainly not the only aspects of a “New Economic Citizenship.” Nor do I claim that they are the best of all possible proposals. I do believe very strongly, however, that these are the kinds of issues we should be talking about when we debate how to achieve stronger growth. Growth remains the central problem facing the American economy. But the question of how to achieve it cannot be divorced from the question of what it is for, of what kind of economy we want to build, of the values we care most about. In the final analysis, maintaining a healthy growth rate means maintaining a healthy relationship between industry and society-a relationship without which neither can survive, let alone thrive. The creations of modern industrial enterprise are a glorious living monument to society’s powers of cooperation, ingenuity, and imagination. As we stand on the threshold of the new century, we have an extraordinary opportunity to harness those same powers, those same values, to the design of the new world of work. Our nation’s future well-being may well depend on it.