New challenges for business

Much of what separates businesses that have long track records of consistent performance and profitability from those that have never achieved success, or whose success has been fleeting, is the ability to anticipate change. The very difficult, but critical, challenge in business is to see today where the market opportunities will be tomorrow, then react quickly and gear up to turn out products and/or services to meet those needs. That may involve new products, processes, suppliers, customers, employees or all of these things.

In the 1980s, we saw breakthroughs in industrial automation and productivity. In order to keep up with domestic and foreign competitors, U.S. smokestack industries restructured massively. Many manufacturing jobs were lost, but opportunities expanded in the high-tech and services sectors.

In the 1990s, the pace of economic, demographic and technological change is even more rapid. For businesses, both large and small, this makes for growing dynamism in potential markets, sources of supply, and pools of labor and managerial talent.

In such an environment, there is no approach more perilous than giving in to the all-too-human urge to keep on doing what has produced today's prosperity rather than doing the hard work and thinking, and going through the uncomfortable process of change that will result in the production of wealth and jobs in the future.

Two of the most important trends in force today, which no large businesses and few small ones can afford to ignore, are the related developments of a global economy — rather than local or national — and the evolution of communications and transportation technologies that make the distance between suppliers, producers and consumers less of a factor or none at all. Failure to react to these trends could put a business at serious cost and service disadvantages and keep it from taking advantage of opportunities for growth.

The institution of American business has, on a number of occasions, paid a price for failing to perceive such emerging trends. In the 1970s, for example, the U.S. automobile industry did not adequately react to the changing attitudes of consumers, the potential for skyrocketing gasoline prices and the ability of Japanese automakers to take advantage of the situation.

Although U.S. automakers are, without doubt, better businesses today for having had to respond to competition, the pain of lost jobs and shareholder value was all too real.

Fourth in a series of nine essays A challenge for Illinois: Shaping the future This is the fourth essay in a special series being published from 1994 through 1996 by Illinois Issues. The premise of the series, entitled "A challenge for Illinois: Shaping the future," is that our major institutions have an inadequate understanding of the profound changes that are challenging today's leaders. Consequently, our institutions are not addressing current issues effectively and seem incapable of looking to the future creatively. Illinois Issues has asked a group of distinguished Illinois leaders and thinkers, within their areas of expertise, to address how this problem is being played out in our major institutions such as business, education, philanthropy, the law, organized religion and the family. The series began in January 1994 with an essay by a noted historian who provided a historical perspective on the overall problem of how we misread the past. The essayist was Douglas Wilson of Knox College in Galesburg. Among the other writers involved in this project are Nancy Stevenson (see our July 1994 issue), Martin Marty (December 1994), John Corbally, Dolores Cross, Susan Getzendanner and Sara Paretsky. The editors

24/January 1995/Illinois Issues

In the first nine months of the North American Free Trade Agreement, according to media reports, U.S. exports to Mexico are up by 22 percent, and to Canada by 11 percent. For Illinois businesses, the increases are 38 percent and 14 percent, respectively. Geography had helped make Illinois and the city of Chicago a center for exchanging commodities by the early part of the 19th century. The Chicago Board of Trade, shown here, is still key to the worldwide grain market, but today's traders even buy and sell futures contracts on foreign currencies.

Illinois businesses have done better than those in most areas of the country in recognizing the need to serve global markets and being willing to adopt new communications and information-management technologies and make other adjustments needed to do it. According to World Trade magazine, of the nation's 60 leading export companies, seven are in Illinois. No other state has more. In addition, the state's Department of Commerce and Community Affairs has made a particular effort to foster international trade for Illinois, which ranks fifth among states in exports, helping the state's businesses to expand beyond mature domestic markets.

Trade has been much in the news of late, in large part as a result of political controversy involving U.S. participation in the North American Free Trade Agreement and the General Agreement on Tariffs and Trade. Although NAFTA has been in force for only about a year, it seems to have had the desired effect. In the first nine months of NAFTA, according to reports in the media, U.S. exports to Mexico are up by 22 percent, and to Canada by 11 percent. For Illinois businesses, the increases are 38 percent and 14 percent, respectively.

Companies of all sizes are better businesses because of globalization. Their horizons expanded, they are doing a better, more efficient job of serving all of their customers. They've found suppliers and customers they wouldn't have dreamed of five years ago. The idea of a Chicago restaurant, for example, ordering its produce and other supplies from all over the world is not the wild idea it would have been only a few years ago.

My own company, AT&T, has in Lisle and Naperville a multidisciplinary team of engineers and computer scientists to design, develop and support the company's 5ESS®-2000 Switch. This is the domestic market leader among the huge, digital computer-based systems that direct enormous volumes of voice, data and video communications — recently named, by the way, one of two Illinois Engineering Council "Projects of the Year."

Before the 1984 divestiture that broke off the Ameritech companies and the other Bell Operating Companies from AT&T, AT&T's development of switching systems and other network telecommunications equipment was part of a vertically integrated system, serving a market made up largely of AT&T-owned service providers. With the divestiture, the Bell Companies, understandably, wanted to begin buying at least

January 1995/Illinois Issues/25

Revolutionizing the business from within was, as one might imagine, not a comfortable process for AT&T

some of their new network equipment from suppliers other than AT&T. Like other businesses, they wanted to gain the security of diverse sources of supply and the price advantages of competition.

For AT&T, that meant that although the domestic switching systems business — with sales to its own long-distance network and other telephone companies, as well as the Bells — was still a very good market, its growth potential was limited. If the business was to grow, it had to look outside the United States.

The international market had, and still has, enormous potential for growth. The major nations of Europe, Asia and Latin America, recognizing the need for state-of-the-art telecommunications infrastructures for full participation in the world's economy, were prepared to spend billions of dollars on upgrading to digital networks.

But there were difficulties associated with serving the international market. Countries such as Germany, France and Japan were quite satisfied with their own switching suppliers. International technical standards differ from U.S. standards, requiring significant changes from U.S. market hardware and software. And, AT&T had only a small international sales force and few people within the company who had experience selling to and serving customers outside of the United States.

In the intervening decade, AT&T has established a foothold in the international market for switching. Revolutionizing the business from within was, as one might imagine, not a comfortable process. For AT&T, adjusting to both a competitive and an international market was a case of culture shock.

Named a Project of the Year by the Illinois Engineering Council, the switching center at AT&T's Bell Laboratories in Naperville develops switches that direct enormous volumes of voice, data and video communications.

It took five years and a huge capital investment to get on a technological and operational par with the competition in the market outside the United States. AT&T executives debated strategic issues, such as where to focus our efforts, whether or not to engage in joint ventures and, if so, with whom, and where and how to find the best managers. This is still a problem, as described in a recent Wall Street Journal article, "U.S. Companies Struggle with Scarcity of Executives to Run Outposts in China." Some of the approaches we tried didn't work. We made our share of mistakes.

But by recognizing the need and having the willingness to undergo revolutionary changes, we are now ready to benefit from serving these new markets well into the next century. We have had a number of recent successes, including the signing of a $4-billion contract with Saudi Arabia and a memorandum of understanding with the People's Republic of China. We have switching customers in 42 countries.

A number of other Illinois-based enterprises have been willing to undergo similar processes of change to adjust to the global marketplace. A scan of recent media turned up several, including:

• Peoria-based Caterpillar, the world's largest builder of earth-moving equipment, which recently had the most profitable quarter in its 69-year history, largely as a result of sales in Canada, Australia, Asia, Latin America, and to nations of the former Soviet Union.

•Itasca-based software developer Cimlinc, half of whose revenues come from overseas markets.

• Urbana-based Frasca International, a manufacturer of flight simulators, 80 percent of whose 1992 sales of $14 million came from outside the United States.

• Lisle-based Molex Inc., maker of electric, electronic and fiber-optic connecting devices, has factories in 19 countries and gains more than 70 percent of its sales and profits from outside the United States.

There are other advantages, according to World Trade, for a business to become more globally oriented. As strong a market as is the U.S. mainland, it is a mature one. The opportunities for exponential growth lie abroad. In addition, the magazine reports, "Foreign trade can help companies ride out downturns in domestic business

26/January 1995/Illinois Issues

cycles, because international trade tides rarely move in parallel."

A number of business writers and academics have looked into the sorts of changes organizations and individuals need to make in order to operate successfully in a global economy. Some salient observations include:

• Adapting products and technologies to serve global markets is not enough. A unified approach must also address strategic issues (including sensitive dealings with foreign governments), human resources and organizational structures.

• The use of information technology to compress time and space is an important means for developing collaborative relationships with external partners in other parts of the world.

• Managers must develop a "global mindset," which means, among other things, trusting organizational processes rather than structures to deal with the unexpected, viewing change as opportunity, being comfortable with surprises and ambiguity, and constantly rethinking boundaries.

• Companies that have succeeded in the global marketplace have created and sustained an obsession with winning at all levels of the organization; a passion for customer focus and quality, and a willingness to customize products to meet the standards and tastes of new markets.

Companies that have not moved swiftly enough — for failure to see the opportunities associated with globalizing, the threats associated with not globalizing or for lacking the resolve to take the steps outlined above — are paying a price. On May 23, 1994, Business Week reported that "companies that have been slow to globalize their management structures now have to scramble to play catch-up." The article went on to discuss the experiences of three large American corporations — Ford, IBM and Bristol-Myers Squibb — that have been doing such scrambling and making dramatic changes in the way they work. Simply cloning the U.S. structure abroad, Business Week says, is a formula for failure.

Despite the fact that the top managers of many businesses were too slow to appreciate what the move to a global economy would mean to their industries, to the disadvantage of their employees and shareholders, I think we can take comfort in the knowledge that, by the mid-1990s, American business has, on the whole, gotten the message.

Even as American business faces the challenges of a global economy, it must also confront the need to redefine its relationship to its employees. With the need for new skills and rapidly reacting organizations working against the maintenance of a large, domestic bureaucracy, global competition is one of several factors that have served to undermine the traditional unwritten contract (loyal service in exchange for lifetime employment) between big business and employees.

In a recent paper, pollster Daniel Yankelovich states that business has been sending its employees a mixed message ("You are expendable/You are indispensable") that has left many "confused, skeptical and deeply conflicted." Employees have reacted to restructurings and downsizings by discarding their old sense of mutual loyalty and looking less to their work as a source of satisfaction and rewards other than money. They are shifting emotional investment from their work to other aspects of their lives.

Management must, Yankelovich concludes, take steps to repair the damage if it wants to have a chance of achieving among its employees the superior level of customer focus needed to maintain and increase market share in a highly competitive world.

He suggests that corporations do three things:

• Be as thoughtful about the stability of people's jobs as we are about the stability of dividends.

• Strengthen the management side of the unwritten contract by finding ways to do things for our employees above and beyond what we need to do.

• Learn to substitute dialogue for traditional top-down communications.

Employees have reacted to restructurings and downsizings by discarding their sense of mutual loyalty and looking less to their work as a source of satisfaction

I see evidence that many corporations, including AT&T, are taking positive actions in each of these areas. Working together with the unions that represent our occupational employees, AT&T has, in recent years, instituted a number of efforts to show our employees the kind of concern that they demonstrate for the company through their work. For example:

• Some downsizing is unavoidable. But through central placement operations that match job openings with internal candidates, training and career-planning services, and leaves of absence for pursuing career enhancement or personal goals, we're able to retain as many employees as possible.

• We've established programs that help employees find quality care for their children and elder relatives, enabling our people to balance their home and work lives better.

• Our unions are participating in business planning and in transforming the traditional workplace to one focused on quality for customers and quality of work life for employees.

It is difficult for businesses to address employee needs while simultaneously dealing with the pressures of changing markets, customers and technologies in a fiercely competitive global economy. But it is something that we must do. Yankelovich's advice is so important, I believe, that we ignore it at our peril.

Bill Clossey has been AT&T corporate vice president in Chicago since 1989. During his 28-year AT&T career, he has held a variety of management positions in operations, public relations and external affairs.

January 1995/Illinois Issues/27