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Each Monday I post the next section of my 2001 book, which was originally called (by the publisher) Hoover’s Vision but which I have now retitled The Art of Enterprise. I have posted over half of it already; click on the “Monday” column to see all the prior sections. The entire book can be downloaded as a PDF for $10 at https://garyhoover.dpdcart.com
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The Evolution of Industries
It’s also important to understand where an industry stands on what I call the evolution curve. In the last 40 years, most industries in the US have gone through substantial restructuring. Those that have not experienced these changes are likely to do so in the future, and these same changes will likely affect enterprises around the globe.
One of the first major industries in America to go through these changes was the steel industry. Dragged down by old methods, old facilities, old technologies, old managements, and old attitudes, by the 1960s our once world-class steel industry was in no position to compete with rising Japanese and Korean competitors. In order to survive, the old leading companies like US Steel and Bethlehem Steel had to slim down, reduce layers of management, cut out waste, adopt new attitudes, drop the costly perks enjoyed by their executives, and begin taking the new competition seriously.
This was a tough transition that rattled the steel industry to its core. In fact, the old industry leaders were not even capable of doing it all themselves, and new innovative companies like Nucor Steel took leadership positions alongside the old players or displaced them. This painful process lasted many years, and even today it may not be completely over.
At first, most observers assumed the problems of steel were unique to the industry. Even those who saw a broader trend emerging believed that it reflected mainly the flaws of the old heavy-industry segments of our economy. Few thought that the trend would ever touch America’s best companies, such as AT&T, Sears, and IBM.
But as time went on, this sweeping trend reached more industries. General Motors and the other car makers were among the first to follow steel down the path. Banking and, more generally, the financial services industry were close behind. By the 1990s, even such historically powerful consumer products makers as Procter and Gamble and the pharmaceutical makers were facing layoffs, management restructurings, early retirements, and a reduction of management layers. One by one, most of America’s giant industries had to look in the mirror and ask, “Are we as competitive as we need to be?” Even AT&T, Sears, and IBM, all once seen as providing jobs for life, had to lay off thousands of workers in an effort to become streamlined and efficient for the new global competition.
Despite the pain involved, US industry has survived this series of revolutions, often emerging more competitive than ever before. In some cases, new companies lead the pack (Wal-Mart, Dell, Microsoft, Intel), while in other cases re-invigorated old leaders are in the forefront (Alcoa, International Paper, GE).
I believe that this trend is far from over. In fact, I would argue that America’s most important industries are just beginning to feel the heat.
In the 1990s, the health care industry began to be buffeted by waves of change. Employers in Minneapolis and other cities said, “We aren’t going to send our employees to your hospital anymore unless aspirin is less than $10 a pill,” and things began to change. Since the health care industry is so huge, so entrenched, so important, so good at much of what it does, and so important in our daily lives, the management revolution that is happening in health care is perhaps the most painful and challenging to digest yet. And yet, based on the history of other industries that have passed through similar changes, we can predict that US health care and all of us who rely on it will emerge “healthier” than before.
We have still more giant, entrenched industries that have not yet felt the sweeping waves of change. The first of these is education. While our higher education system of colleges and universities is the envy of the world and one of our nation’s strongest industries, it is also one of the few which continues to allow costs (and prices) to outpace inflation. This situation is causing increasing problems for students, parents, and others who use educational services, and it can’t continue much longer. There are other signs that the higher education industry is headed for change. The rise of privately-owned education empires like Knowledge Universe (backed by investor Mike Milken) and Apollo Group (including the 80,000-student University of Phoenix) is producing competitive pressure that will only accelerate creative change in the higher education industry.
Similar turbulence is in the cards for other non-profit industries, from museums and symphony orchestras to libraries and philanthropic foundations. Another big entrenched industry that is behind the times is government. We’ll say much more about these important industries later.
The historical patterns are clear. Therefore, in studying any industry, I believe it is important to ask, “Has this industry been streamlined yet? Is it lean enough to compete? If not, when will it happen?”
Entrepreneurship vs. institutionalization
When looking at the nature of an industry, another factor to take into account is the degree of entrepreneurship versus the degree of institutionalization. An entrepreneurial organization is resourceful, flexible, ever-adapting. The final chapter of this book is devoted to examining this mindset. If you show up 5 minutes after closing time, you’re likely to be let in the entrepreneurial business. By contrast, an institutional organization is built around rules and procedures. You won’t get in after closing time. Most enterprises lie somewhere on the scale between these extremes.
If a manager with an institutional mindset sees a mosquito in his office, he will fill out a form (in triplicate) to start the process of hiring a pest-control company. A request for bids will be sent out to the leading exterminators, and—with luck—someone will be on the job with mosquito spray six months down the road. If a manager with an entrepreneurial mindset sees a mosquito in his office, he runs to the corner store and gets a can of Raid.
Most of the economic fundamentals of a business can be analyzed from a distance. The Internet and tools like Hoover’s make it easy to track down the key numbers about most enterprises. But sensing whether an organization is entrepreneurial or institutional requires more work. You will probably have to visit the company or at least talk to some people who work there. And you may have to read between the lines to interpret the corporate-speak you’re likely to hear. Most companies like to claim they are entrepreneurial in spirit; very few truly are.
I have been active in education all my life – as a student, as a proponent of adult literacy, as a bookseller, and as a supporter of the University of Chicago. When I sit with educators, particularly those in the public schools, and I question some of the rigid and inflexible policies and procedures they follow, I often hear an answer like, “Well, we have to do it that way because we want to make sure that every student is treated the same.” This is the institutional mindset in a nutshell. The entrepreneurial leader wants to make sure that no one is treated the same. The entrepreneurial ideal is to customize every relationship.
Today some of the airlines are trying to get the airports to enforce size limits for carry-on bags at the security checkpoints. This would save the airlines the hassle and take them out of the role of disappointing customers. But Gordon Bethune at Continental thinks differently. He’d rather empower his people to make the right decision in each case. If the flight is half full, you can bring a larger bag on board. Bethune says that the airlines who want strict rules placed on all flights are trying to lower their competitors to their own low standard of service and flexibility – a level at which those weaker airlines can compete and their people are not required to think for themselves.
Where you find institutions, you find rules and regulations printed up and widely distributed. You find systems designed to be airtight enough so that robots can do the work. You find buzzwords and consultants. You find complacency and smugness.
By contrast, at the entrepreneurial end of the scale, you find power and initiative distributed well down into the organization. You find straight talk. You find leaders who are dissatisfied and hungry for improvement.
Between these two extremes you find almost every major corporation in the world. One of the most important things you can know about any enterprise is where it falls on the entrepreneurship scale. Entrepreneurs see opportunity when they see industries or companies that are rule-bound institutions. Always ask, what’s most important in this enterprise or this industry:
· Paying people based on years of service or quality of service?
· Being efficient and conserving resources or developing and following procedures?
· Trying new things, being proud of failure, or avoiding embarrassments and mistakes?
· Serving the customer or following the rules?
· Doing your best or meeting minimum standards?
More about Economics
Hidden Order: The Economics of Everyday Life by David Friedman is exactly what the title says, by one of the clearest economic thinkers around. Guess who his dad is? Also by David Friedman is Price Theory: An Intermediate Text, the real stuff of microeconomics if you want to take the time to really think and understand. Basic Economics: A Citizens Guide to the Economy by Thomas Sowell – a top economic thinker makes it accessible to the rest of us. I just wish he had illustrated the book with some graphs. The Making of Modern Economics by Mark Skousen tells the story of the evolution of economic theory.
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