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Competition, So 'Threatening,' Is Invigorating U.S. Firms

March 24, 1988|ROBERT J. SAMUELSON | Robert J. Samuelson writes about economic issues from Washington.

Among the business success stories of the 1980s are Ford and Xerox. A few years ago both were stumbling badly. Both have staged spectacular comebacks and are far stronger than a decade ago. Their quality is higher, their costs have been trimmed. Whom can they thank? The Japanese.

What forced Ford and Xerox to change was the fear that if they didn't they might be driven out of business. They adopted concepts of cost and quality control--first developed by Americans W. Edwards Deming and Joseph Juran--widely used by Japanese companies. Theirs was an exercise in survival.

The moral is that we can't have competitive companies without subjecting ourselves to the pressures of foreign competition. We want to be No. 1, but we resent foreign imports and investment. Our confusion echoes in the presidential campaign, with Democratic candidates promising both superiority and security. It echoes in the trade legislation now before Congress. We deny the conflict by giving protectionism new labels like "fair trade" and "managed trade."

But the conflict endures. Competition is invigorating because it's threatening. It brings new ideas. It makes companies reexamine what they do and how they do it. When U.S. industries dominated world markets, we didn't need those pressures. Now we do. It's not that U.S. companies are second best in everything. In many industries they're still leaders. But they're no longer alone. In 1987 foreigners accounted for 46% of new U.S. patents.

Xerox's experience emphasizes the evils of insularity and complacency. When Japanese companies began selling smaller copiers in the 1970s, Xerox barely reacted. Having created the market for office copiers in 1959, Xerox executives found the threat absurd. The company didn't wake up until 1980, when it discovered that Japanese prices on small machines were less than Xerox's manufacturing costs on similar machines. As the Japanese moved to larger machines, Xerox would have no room to earn a profit or cover its overhead.

"That was scary, and it woke us up in a hurry," said David Kearns, the company's chairman. Since then Xerox has transformed itself. It practices "competitive benchmarking"; it evaluates and tries to beat the best features of rivals' products and services. Each month Xerox sends 50,000 questionnaires to customers asking them to rate equipment reliability, service responsiveness and copy quality. "Quality" is the chief corporate theme. The results are impressive:

--In the past three years customer-service ratings have improved about a third.

--Since 1982 average manufacturing costs per unit have dropped 20%.

--The average period for developing a new product has decreased as much as 60%.

--The defect rate of components from outside suppliers has dropped from about 8% to 0.5%.

There has been a change in the attitudes of corporations. A decade ago many U.S. companies--Xerox and Ford included--felt that achieving high quality meant higher costs, said David Garvin of Harvard Business School. They now increasingly reject that. Doing it right the first time saves money. It reduces warranty expenses, service costs and waste.

At Ford, labor costs per car are significantly below those at General Motors. That's not because Ford's hourly labor costs are lower; they may be slightly higher. Ford is simply more efficient. To reduce defects, the design and production engineers work closely. Cars are designed initially with ease of manufacturing in mind. Components are made more reliable by reducing the number of suppliers. The company listens to workers' suggestions.

The rise of foreign competition and investment seems menacing. To restrict these intrusions, through trade and investment controls, seems to assert American over foreign interests. But these proposals embody defeatist assumptions about our future. They imply that U.S. firms and workers can't stand the pressure, that they can survive only with protection.

Our strength is that we can adapt. The real danger in a world of dispersed economic power is that we will allow ourselves to fall behind. Our living standards--and global standing--depend on U.S. companies absorbing the best products, technologies and management techniques available. Everyone accepts that, because it's so obvious. But the corollary gets forgotten: Policies that wall us off from the rest of the world are ultimately harmful.

American companies have plenty of shortcomings. At many firms the concern with quality is still rhetorical. Large corporations have trouble translating good research advances into viable products. We need all the stimuli that we can get. When foreign companies invest here, they come with new technologies and ways of doing things.

By whatever label, protectionism is a policy of short-term comfort and long-term pain. It perpetuates mediocrity. The assumption is that companies become competitive by spontaneously recognizing the need to improve. Nothing could be more naive.

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