Three business stories caught my eye this past week.
Bethlehem Steel Corporation, long the nation’s second-largest steel maker, filed for Chapter 11 bankruptcy. So did Polaroid Corporation, a much younger, more technologically advanced firm based in Cambridge, Mass. But St. Jude Medical Inc., a Minnesota company in the doldrums just a couple of years ago, reported sterling third-quarter earnings.
Why do some companies prosper while others hit the wall?
The obvious answer is that some firms are managed better others. But economists can’t provide much insight beyond that statement of the obvious.
After-the-fact performance measures can grade management skills, but there are no good predictors of whether a particular management team will succeed or fail. There is no “theory” to explain management performance.
But we still can glean useful lessons from case studies.
Bethlehem was once a huge corporation, employing 300,000 people at its peak during World War II. It produced a full range of steel products, built bridges and ships and manufactured naval cannons. Now it’s reduced to 13,000 active employees but has a legal obligation to pay retirement benefits to 74,000 former workers.
Like other large integrated steel makers, Bethlehem grew complacent when the industry was a cozy oligopoly. For years, large firms did not really balk at granting generous pay or benefit increases because limited competition allowed them to pass these costs on to steel buyers.
This complacency ended when newer, hungrier companies such as Nucor and North Star built mini-mills that produced a narrower range of products than traditional firms did, but at much lower prices. Bethlehem and other large firms were slow to react to this technological change as they were to a changed global environment in which U.S. steel imports grew strongly.
Saddled with the high fixed costs of pension obligations carelessly incurred in an earlier generation, many large firms entered a death spiral. Bethlehem has opted for Chapter 11 reorganization rather than Chapter 7 liquidation, but many analysts see few buyers for the firm’s components and predict that the federal Pension Benefit Insurance Corporation will end up saddled with a mammoth liability.
Polaroid’s history is much shorter than Bethlehem’s.
It grew out of the creative genius on one man, Edwin Land, but never was able to move beyond its initial and principal product, the instant camera.
After Land died, the firm’s managers failed to meet the competition of digital technology and let administrative costs grow out of control. What sort of firm, if any, will emerge from the Chapter 11 process is anyone’s guess.
St. Jude, the medical device producer in Little Canada, is much younger than either Bethlehem or Polaroid.
Like Polaroid, it was founded by a bright, charismatic individual, Manny Villafana. It similarly fell into a funk after the founder left.
But there are differences. Polaroid never successfully diversified much beyond the instant camera. St. Jude was heavily dependent on one product, a mechanical heart valve, for many years. But a decade ago it plunged into pacemakers, defibrillators and, through acquisitions, surgical sealants, catheters and aortic connectors. This diversification caused problems, but recent performance may indicate that these are now history.
Lessons?
- Complacency is dangerous.
- Technical innovation is important, and the pace of technological change is accelerating.
- Decisions made in the short term, but with long-term implications, can come back to haunt you.
- Management personality types that are good for startups are not necessarily good for longer-term maturation and growth.
There isn’t much profound economics in these lessons. But what about the effects of large-firm failures on an overall economy?
History tells us not to worry.
Take Baldwin Locomotive Works. In 1940, Baldwin was a giant firm, a large employer and a mainstay of U.S. manufacturing. It was one of the firms in the Dow Jones index. It had produced nearly as many steam locomotives as all its competitors combined.
But it failed to meet the challenge of the diesel-electric locomotive and in 30 years it effectively disappeared. Are we as a society worse off because Baldwin no longer exists? Clearly not.
Indeed, if the government had intervened to save Baldwin, as many European and Latin American countries have acted to save their flagship domestic firms, we probably would be worse off.
Allowing firms that no longer can successfully turn resources into goods and services helps maintain a vibrant economy. Creative labor and capital eventually do move to more productive firms. Attempts to delay the inevitable usually just increase the damage of wasted resources.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.