Guide Understanding Management of Decline

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As economist Burton G. Since , however, lower rates of private investment have led to a decline in that growth rate to 1. Moreover, the recent composition of investment [in ] has been skewed toward equipment and relatively short-term projects and away from structures and relatively long-lived investments. Thus our industrial plant has tended to age…. Other studies have shown that growth in the incremental capital equipment-to-labor ratio has fallen to about one-third of its value in the early s.

To attribute this relative loss of technological vigor to such things as a shortage of capital in the United States is not justified. As Malkiel and others have shown, the return on equity of American business out of which comes the capital necessary for investment is about the same today as 20 years ago, even after adjusting for inflation. The conclusion is painful but must be faced.

Responsibility for this competitive listlessness belongs not just to a set of external conditions but also to the attitudes, preoccupations, and practices of American managers. In consequence, they have abdicated their strategic responsibilities. No profound sea change in the character of thousands of individuals could have occurred in so organized a fashion or have produced so consistent a pattern of behavior.

Instead we believe that during the past two decades American managers have increasingly relied on principles that prize analytical detachment and methodological elegance over insight, based on experience, into the subtleties and complexities of strategic decisions. As a result, maximum short-term financial returns have become the overriding criteria for many companies. For purposes of discussion, we may divide this new management orthodoxy into three general categories: financial control, corporate portfolio management, and market-driven behavior.

As more companies decentralize their organizational structures, they tend to fix on profit centers as the primary unit of managerial responsibility. This development necessitates, in turn, greater dependence on short-term financial measurements like return on investment ROI for evaluating the performance of individual managers and management groups. Increasing the structural distance between those entrusted with exploiting actual competitive opportunities and those who must judge the quality of their work virtually guarantees reliance on objectively quantifiable short-term criteria.

Although innovation, the lifeblood of any vital enterprise, is best encouraged by an environment that does not unduly penalize failure, the predictable result of relying too heavily on short-term financial measures—a sort of managerial remote control—is an environment in which no one feels he or she can afford a failure or even a momentary dip in the bottom line. This preoccupation with control draws support from modern theories of financial portfolio management. Originally developed to help balance the overall risk and return of stock and bond portfolios, these principles have been applied increasingly to the creation and management of corporate portfolios—that is, a cluster of companies and product lines assembled through various modes of diversification under a single corporate umbrella.

When applied by a remote group of dispassionate experts primarily concerned with finance and control and lacking hands-on experience, the analytic formulas of portfolio theory push managers even further toward an extreme of caution in allocating resources. In the past 20 years, American companies have perhaps learned too well a lesson they had long been inclined to ignore: Businesses should be customer oriented rather than product oriented. At last, however, the dangers of too much reliance on this philosophy are becoming apparent.

In contrast, worshippers of the marketing concept have bestowed upon mankind such products as new-fangled potato chips, feminine hygiene deodorant, and the pet rock….

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The argument that no new product ought to be introduced without managers undertaking a market analysis is common sense. But the argument that consumer analyses and formal market surveys should dominate other considerations when allocating resources to product development is untenable.

It may be useful to remember that the initial market estimate for computers in projected total worldwide sales of only ten units. Customers may know what their needs are, but they often define those needs in terms of existing products, processes, markets, and prices. Deferring to a market-driven strategy without paying attention to its limitations is, quite possibly, opting for customer satisfaction and lower risk in the short run at the expense of superior products in the future.

Satisfied customers are critically important, of course, but not if the strategy for creating them is responsible as well for unnecessary product proliferation, inflated costs, unfocused diversification, and a lagging commitment to new technology and new capital equipment. These are serious charges to make. But the unpleasant fact of the matter is that, however useful these new principles may have been initially, if carried too far they are bad for U.

Consider, for example, their effect on three major kinds of choices regularly faced by corporate managers: the decision between imitative and innovative product design, the decision to integrate backward, and the decision to invest in process development. A market-driven strategy requires new product ideas to flow from detailed market analysis or, at least, to be extensively tested for consumer reaction before actual introduction.

It is no secret that these requirements add significant delays and costs to the introduction of new products. It is less well known that they also predispose managers toward developing products for existing markets and toward product designs of an imitative rather than an innovative nature. There is increasing evidence that market-driven strategies tend, over time, to dampen the general level of innovation in new product decisions.

Confronted with the choice between innovation and imitation, managers typically ask whether the marketplace shows any consistent preference for innovative products.


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If so, the additional funding they require may be economically justified; if not, those funds can more properly go to advertising, promoting, or reducing the prices of less-advanced products. Though the temptation to allocate resources so as to strengthen performance in existing products and markets is often irresistible, recent studies by J. Hugh Davidson and others confirm the strong market attractiveness of innovative products. Nonetheless, managers having to decide between innovative and imitative product design face a difficult series of marketing-related trade-offs.

Exhibit V summarizes these trade-offs.

Managing Our Way to Economic Decline

Potentially large but unpredictable demand; the risk of a flop is also large. Market recognition and acceptance are rapid. Market acceptance may be slow initially, but the imitative response of competitors may also be slowed. Readily adaptable to existing market, sales, and distribution policies.

May require unique, tailored marketing distribution and sales policies to educate customers or because of special repair and warranty problems. Fits with existing market segmentation and product policies. Demand may cut across traditional marketing segments, disrupting divisional responsibilities and cannibalizing other products. By its very nature, innovative design is, as Joseph Schumpeter observed a long time ago, initially destructive of capital—whether in the form of labor skills, management systems, technological processes, or capital equipment.

It tends to make obsolete existing investments in both marketing and manufacturing organizations. For the managers concerned it represents the choice of uncertainty about economic returns, timing, and so on over relative predictability, exchanging the reasonable expectation of current income against the promise of high future value. It is the choice of the gambler, the person willing to risk much to gain even more.

But in every case I tell my people to go back and bring me some new product ideas. Market-driven, follow-the-leader companies usually end up following the rest of the pack as well. Sometimes the problem for managers is not their reluctance to take action and make investments but that, when they do so, their action has the unintended result of reinforcing the status quo.

In deciding to integrate backward because of apparent short-term rewards, managers often restrict their ability to strike out in innovative directions in the future. Consider, for example, the case of a manufacturer who purchases a major component from an outside company. Static analysis of production economies may very well show that backward integration offers rather substantial cost benefits.

These efficiencies may be achieved by companies with commodity-like products. In such industries as ferrous and nonferrous metals or petroleum, backward integration toward raw materials and supplies tends to have a strong, positive effect on profits. However, the situation is markedly different for companies in more technologically active industries. Where there is considerable exposure to rapid technological advances, the promised value of backward integration becomes problematic.


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  • It may provide a quick, short-term boost to ROI figures in the next annual report, but it may also paralyze the long-term ability of a company to keep on top of technological change. The real competitive threats to technologically active companies arise less from changes in ultimate consumer preference than from abrupt shifts in component technologies, raw materials, or production processes.

    Hence those managers whose attention is too firmly directed toward the marketplace and near-term profits may suddenly discover that their decision to make rather than buy important parts has locked their companies into an outdated technology. Similarly, the commitment of time and resources needed to master technology back up the channel of supply may distract a company from doing its own job well. Such was the fate of Bowmar, the pocket calculator pioneer, whose attempt to integrate backward into semiconductor production so consumed management attention that final assembly of the calculators, its core business, did not get the required resources.

    European automobile manufacturers, for example, have typically chosen to rely on their suppliers in this way; American companies have followed the path of backward integration. The resulting trade-offs between production efficiencies and innovative flexibility should offer a stern warning to those American managers too easily beguiled by the lure of short-term ROI improvement. A case in point: The U. In an era of management by the numbers, many American managers—especially in mature industries—are reluctant to invest heavily in the development of new manufacturing processes.

    Essays on Organizational Decline

    When asked to explain their reluctance, they tend to respond in fairly predictable ways. Each of these comments rests on the assumption that essential advances in process technology can be appropriated more easily through equipment purchase than through in-house equipment design and development. Our extensive conversations with the managers of European primarily German technology-based companies have convinced us that this assumption is not as widely shared abroad as in the United States. Virtually across the board, the European managers impressed us with their strong commitment to increasing market share through internal development of advanced process technology—even when their suppliers were highly responsive to technological advances.

    By contrast, American managers tend to restrict investments in process development to only those items likely to reduce costs in the short run. Not all are happy with this. The results show that, contrary to the dominant theoretical approaches in the studies of growth and success, organizational decline studies are impacted by learning, decision-making, threat-rigidity and denial. Despite the proposal for a research agenda, through which we intend to stimulate the growth of future research and show that there remains much to learn and understand about this important phenomenon, the findings show that organizational decline brings specific challenges in overcoming the negative connotation of the theme.

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    The first is to understand that decline is not necessarily the opposite of success. It is also difficult to access reliable data, and it is necessary to attract future researchers. Organizational decline is a relevant and important phenomenon to study.

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    It is not sufficiently researched, and it appears to not be well served by existing mainstream theories. Overcoming the challenges for future research on organizational decline is important to enable future studies. It is a problem-choice issue. This situation is not restricted to the study of decline, but to research practices and the abandonment of important topics due to specific difficulties and negative connotations.

    Acedo, F. The resource-based theory: dissemination and main trends. Strategic Management Journal, 27 7 , Aldrich, H. Organizations and environments. Even dwarfs starred small: liabilities of age and size and their srtategic implications.

    Essays on Organizational Decline

    Research in Organizational Behavior , 8, Altman, E. Corporate financial distress. New York: John Wiley and Sons.