“Richard D’Aveni understands that managing competition between the United States and China—and their quite different forms of capitalism—will occupy leaders on both sides of the Pacific for decades to come and will shape the first half of the 21st century more than any other factor. This book is a welcome addition to a vitally important debate.”
—Ian Bremmer, president of Eurasia Group and author of Every Nation for Itself
“Understanding the pluses and minuses of modern ‘capitalism,’ in more than a sloganeering way, is the great challenge for corporations and for government from North America to Europe to East Asia. Strategic Capitalism is a valuable contribution to clear thinking about this imperative.”
—James Fallows, The Atlantic, and author of China Airborne
“Professor D’Aveni is a business provocateur extraordinaire. He tells you the straight scoop and will never cave to conventional wisdom unless there is proof that it is right. Strategic Capitalism is another example of D’Aveni’s ability to synthesize a complex topic down to its key elements.”
—Bill Achtmeyer, Founder, Chairman, and Managing Partner of The Parthenon Group
The Capitalist Cold War Has Begun
The United States and its economic allies are under attack by a force unlike any they have ever faced. China and other emerging nations are competing for markets around the world using their own versions of capitalism—and, thus far, they are winning handily.
In Strategic Capitalism, one of the world’s leading authorities on global business strategy, Richard D’Aveni, describes how the “economic cold war” began, how it is being played out now, and how the West can change the course of events in its favor.
Brilliantly conceived—and sure to ignite passions on both sides of the political aisle— Strategic Capitalism calls for an end to the economic idealism that dominates the national dialog. It also calls for a cold, hard focus on reality, which is this: government-managed capitalist systems consistently outmaneuver and outperform the traditional laissez-faire capitalism of the West.
With refreshing levels of thoroughness, knowledge, and detachment, D’Aveni describes the competitive landscape today. These are the facts:
- The world’s best competitors—with China in the lead—have adopted elements of managed capitalism, in which government and businesses work together toward a single aim.
- China’s objective is clear—to displace the United States as the world’s economic leader by becoming the global rule maker.
- If the West does not act soon, it stands to lose everything it holds most dear: financial prosperity, economic freedom, geopolitical power, national security, and even democratic values.
This is disruptive innovation on a global scale. But instead of companies using breakthrough products and brands to gain market share, nations are devising “game-changing” economic systems to seize influence over—and beyond—the global economy.
Bleak as the situation may be, D’Aveni contends that the West can reverse the trends currently tilting the global balance of power.
In order to meet the challenges of the future, America must revisit long-held assumptions about economics and economies, seriously consider radical alternative policies, and embrace the concept of Strategic Capitalism.
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THE NEW ECONOMIC STRATEGY FOR WINNING THE CAPITALIST COLD WAR
By RICHARD A. D'AVENI
The McGraw-Hill Companies, Inc.Copyright © 2012Richard A. D'Aveni
All rights reserved.
Hypercompetition and the Disruption of Superpowers
Let me make a prediction right off: history is going to repeat itself. The United States went through a period after World War II in which capitalism struggled to overtake communism; later, American capitalism was challenged by an emerging economic power, Japan. The Japanese version of capitalism easily stunned the smug and complacent United States. Over time, the United States righted itself, recalculated how to compete, and came back with new moves to secure its role as the world economic leader.
That was the 1980s. Japan had huge trade imbalances with America. The U.S. capitalist system had grown vulnerable. American businesspeople felt entitled. Companies enjoyed lofty profits, even though they had high labor costs and underutilized assets. The Japanese undercut the United States with lower costs and better quality. U.S. manufacturers somehow didn't see Japan's economic advances coming. It was as if an upstart boxer walked right up to the veteran and pulled the proud fighter's shorts down. A chill then ran through all of U.S. industry.
This comeuppance ended the complacency of the giant global industrial power. The United States reinvented the way it conducted capitalism and rallied back. American oligopolies were reorganized, ineffective top management teams were removed, and stockholders and boards of directors were given more power. Wall Street played an active role in this switch, using hostile takeovers, forced divestitures, and friendly mergers and acquisitions.
And now another challenger has come along: China. Like Japan, China feels neither complacent nor unprepared. In a painful sense of déjà vu, the American veteran has his boxing shorts around his ankles, and industry is feeling another chill. We are now facing the questions of the decade: Will history really repeat itself? And will the United States again emerge as the champion?
My prediction—and my conviction—is that, yes, it will. The veteran boxer will right itself, recalculate how to compete, and come back with new moves that will give it the momentum to control the flow of punches and counterpunches in the economic ring. America will secure the heavyweight title for decades more.
But that leaves other questions: How will the old fighter do it this time? What approach will it use?
That's where I have another prediction. The United States will come up with an innovative round of economic moves and countermoves, and it will outsmart, outmaneuver, and outbox China. As part of the comeback, U.S. national leaders will rebuild the country's fiscal physique, rework its capitalist system, create a strategy for a succession of competitive actions, and reclaim the center of the global boxing ring. But America will not be able to use the same methods that it used to best the USSR and Japan. China is a much bigger and very different contender, and hypercompetition is now the global reality.
History Is Hypercompetition
What is hypercompetition between nations? It comprises a series of actions by rivals who are seeking to tilt the playing field to their advantage—in effect, to set the rules of competition. It also comprises moves and countermoves to disrupt or undermine the form of capitalism used by rivals. Hypercompetition is rough-and-tumble competition with the intent of diminishing rivals' advantages while creating surprising new competitive advantages for one's nation. It is a concept that characterizes the aggressive nature of global competition today.
The lineage of hypercompetition and the strategies it demands can be traced back to Sun Tzu. More than 2,500 years ago, the Chinese military leader advocated the power of surprise to disrupt and eventually destroy competitors. However, while they may be timeless and universal, the clever and swift actions championed by Sun Tzu sometimes are not decisive enough and take too long. This is when strategists look to the principles outlined by Carl von Clausewitz, the Prussian soldier and military theorist. Clausewitz advocated unleashing massive, overwhelming force with relentless extreme superiority at a given moment and a specific place.
From my two-decade study of hypercompetition, I have found that when nations (or corporations) engage in hypercompetition, they create competitive advantage by doing the following:
Go on the offense for a decisive victory.
Disrupt rivals before rivals do the same to them.
Change the rules of competition often.
Escalate competition before rivals do.
Force others to play catch-up.
Surprise rivals by making current advantages obsolete.
Learn strategy from business, military science, and diplomacy.
Prepare a strategy of future moves and countermoves.
Execute the strategy faster than rivals can react.
Consider how Japan took advantage of the United States by disrupting and destroying national oligopolies and uncompetitive manufacturing industries—especially in autos, electronics, machine tools, and steel. To some extent, it is a moot point whether Japan intended to do economic harm to the United States. It can be argued that Japan was simply trying to rebuild its economy after World War II, but the effect was the same: it harmed U.S. economic power. (Of course, much the same could be said of China. But whether it is consciously setting out to overturn American economic superiority or not misses the point: the effect is the same.)
Japan developed a form of managed capitalism that featured domestic industry groups called keiretsu and informal zaibatsu (which were formally outlawed after World War II). They did not seek to maximize corporate profits in the short run. They sought to maximize employment in Japan and reinvestment in the long-term growth of the groups. The Japanese Ministry of International Trade and Industry (MITI), which championed a national strategy for economic growth, intervened in markets to make this happen. As part of its industrial policy, it favored one or two companies in each industry as "national champions." It also protected domestic markets and created export incentives to maximize the growth of the Japanese economy.
As it spread its influence in the 1970s and 1980s, Japan, Inc., also brought new management methods to the fore. These included kanban and hourensou. The two concepts facilitated collaboration and information flows, and they enabled just-in-time inventory systems, supply chain management, and speedy management decision making. Meanwhile, a new form of quality management transformed cheap Japanese goods into premium ones. "Made in Japan" went f rom an emblem that evoked contempt to one that inspired awe. With its newly developed prowess, Japan pushed Western companies out of automobiles, home appliances, cameras, copy machines, steel, consumer electronics, memory chips, televisions, and other industries. Manufacturing cities in Japan earned lustrous reputations. Manufacturing centers in the United States earned the moniker "Rust Belt."
In Japan's version of capitalism, government and industry develop a cozy relationship. Arm's-length relationships are considered unrealistic. Officials in regulatory agencies work hand in hand with businesspeople to improve each industry's global competitiveness and achieve the nation's goals. In the United States, arm's-length relationships between the government and corporations are the rule—or should I say the myth. Government regulators attempt to keep their distance to avoid corruption and bias. Even corporations avoid cooperation with one another for fear of being accused of collusion and other antitrust violations.
The United States Gets Blindsided
The United States became a sitting duck for the sharp aim of Japanese industrial groups and MITI. After the war, the United States had settled into a model of capitalism that emphasized oligopolies—a limited group of firms in each industry that influenced the total supply, capacity, prices, and quality of goods. The oligopolies were referred to by the names of the cities in which many of the firms were located: Pittsburgh meant steel; Hollywood, movies; Detroit, automobiles; Boston, defense and space electronics; Hartford and Boston, insurance. Oligopolies developed in airlines, aluminum, beer, carbonated beverages, chemicals, cigarettes, gypsum, industrial gases, synthetic fibers, tires, and mainframe computers.
Business strategist Michael Porter described America's capitalism in 1980 in his seminal book Competitive Strategy. He showed that five forces allowed oligopolies to thrive: high barriers to entering their markets, limited power of buyers, limited power of suppliers, few substitute products, and limited rivalry among the players. By following the principles that Porter highlighted, big companies could set premium prices, make good money, pay people handsomely, and support a growing American middle class, without getting caught in collusion or predation. Of course, this wasn't always good for the consumer. To keep up the good times, for example, Detroit used strategies like "planned obsolescence" to force consumers to buy a new car every five years and to keep the repairs and parts businesses flowing.
At the time, the United States didn't operate free markets in many industries. Archaic regulations affected airlines, alcohol distributors, automobiles, banking, bus transportation, chemicals, healthcare, insurance, railroads, securities, trucking, utilities, and many other industries. Regulations guaranteed airlines, defense contractors, and utilities a "fair rate of return" on assets or cost-plus pricing. Some regulations hindered new firms' entry into markets like pharmaceuticals. Others punished aggressive firms for "predation." All told, while many people thought that these regulations were protecting the public from oligopolistic practices, many others realized that the regulations helped to protect existing companies. It gave industry veterans "sustainable" advantages. In essence, the government maximized the welfare of producers at the expense of consumers. And the Japanese took advantage of this mistake by undermining the oligopolies through better quality, lower prices, and better service.
Before 1970, many U.S. companies enjoyed a honeymoon from fierce competition. That explains why U.S. manufacturers reaped the highest return on assets of the century in the 1950s and 1960s. Their results came easily in the wake of the destruction of global capacity during the war. Consumers around the world thirsted for new products, and the United States, largely alone, had the capacity to make them. The high point of the period came from early 1961 to mid- 1969. U.S. gross domestic product (GDP) grew by 53 percent, or 5.1 percent a year. The United States was literally reaping the spoils of war.
The good times set the United States up for a fall. It learned to operate with a capitalist system that, in hindsight, made it weak. U.S. oligopolists let their free-market competitive muscles atrophy. The Japanese not only muscled up but came out fighting in a new way. For one thing, the Japanese started treating customers well, aiming to please them with better quality and lower prices. For another, they treated their suppliers well, aiming to develop partnerships that would create efficient supply chains in which everyone shared the savings. They supported their approach by refining their manufacturing skills to such an extent that the United States could not quickly match their speed or quality. As U.S. customers flocked to buy goods from Japan, U.S. companies collapsed.
At first, the United States reacted like a stunned boxer. It wobbled and followed a tortuous, uncoordinated path. The government presented no strategy. Policy makers didn't even agree that they should have a strategy—and they didn't. As businesses sought to compete, they often ran a ragged race until the Japanese firms outran them. Many of them sold out or liquidated. High-wage jobs disappeared. They reappeared in the same industries in Japan.
The United States was at a turning point. The industries that plunged into crisis included machine tools, autos, steel, small home appliances, consumer electronics, and memory chips. Political pressure from the United States helped to establish voluntary import goals for U.S products, limit exports of certain goods, and set goals to balance U.S.-Japanese trade. Some deals stuck—import limits on steel and autos, telecom procurement agreements, and semiconductor import agreements. But others came too late, or were too laxly enforced, to help save U.S. industries.
Once-prosperous cities, in turn, tipped into decline: Detroit, Buffalo, Rochester, Cleveland, Pittsburgh, Flint, Syracuse, Erie, Utica, Toledo, Youngstown, Lansing, Saginaw, Gary, South Bend, Elkhart, Milwaukee, Indianapolis, and Chicago. To this day, except for Chicago and Pittsburgh, most of these cities are still languishing. This is an important point: although the United States recovered its economic poise, it did so at a great cost. That cost was the hollowing out of America's manufacturing base.
In the years that followed, as we shall see, the United States moved to become a knowledge-based economy. However, it never rebuilt its manufacturing core. Something was permanently lost—America's manufacturing self-reliance. This is one of the reasons why the United States has proved so vulnerable to competition from China.
The Reagan Revolution
When Ronald Reagan came to power in 1980, he responded with an ideological conviction that would leave a lasting legacy: laissez-faire capitalism would unleash the country's latent economic power. Reagan believed that free markets would spur better decision making than was possible in government. They would allocate capital to its highest and best use more efficiently. And, in turn, they would encourage the wealthy to invest more cash to create more jobs, with the accumulated wealth "trickling down" from the rich to the poor.
Among the highlights of Reagan-era thinking were the following: Deregulation (initially begun under President Carter with airlines in 1978 and railroads in 1979) would spur lower costs, better service, and more business start-ups. Quashing union power would create more flexible labor markets. Open international trade based on free-trade rules would create more wealth for all. Privatizing government functions would make services cheaper and better. Moving R&D efforts out of government and into private companies would make R&D more productive. Getting the government out of industrial policy would allow the fittest industries to flourish.
Along with the Reagan revolution came many benefits: Cheap imports gave consumers more choices of affordable products. Low down payments and government support encouraged homeownership. Tax cuts for individuals and business left more money for people to save, spend, and invest according to their own wishes. Hostile takeovers forced companies to maximize wealth for shareholders. Perhaps most important, new corporate strategies emerged that whipped U.S. firms into trimmer, more agile, and more imaginative fighting shape.
By the end of the 1980s, the laissez-faire capitalism championed by President Reagan had captured the hearts and minds of politicians in both parties. One of them was President Clinton, who in the 1990s did not reverse the Reagan model, but instead supported open trade, notably the North American Free Trade Agreement (NAFTA). Clinton worked diligently to open several industries in Japan to U.S. exports. When needed, he raised the specter of a trade war to force Japan to open its doors.
This new brand of laissez-faire capitalism, reprising some of the methods used in the United States prior to 1900, disrupted the surge in Japanese strength. Two periods of sustained GDP growth in the United States ensued: the Reagan boom from late 1982 to mid-1990, at 37 percent (4 percent a year), and the Clinton boom from early 1991 to late 2000, at 43 percent (3.8 percent a year). Shareholder wealth skyrocketed. Observers credited laissez-faire capitalism with creating 16.3 million jobs under Reagan, from January 1981 to December 1988, and 22.8 million under Clinton, from January 1993 to December 2000.
Laissez-faire capitalism worked to counteract Japan, Inc. Indeed, it grew in stature and came to be regarded as the savior of American business. People widely believed in the new formula for success: deregulation, an orientation toward stockholder wealth, a powerful Wall Street monitoring firms and CEOs, outsourcing and offshoring to cut costs, using nonunion workers for flexible and less expensive labor, product lines favoring higher-value-added products and services, and efficiency and quality as the guiding stars of manufacturing success. Laissez-faire capitalism gave the United States everything it needed to take on the world: lean, hypercompetitive firms that were ready to fight companies based in low-cost nations.
The new U.S. approach to capitalism stalled Japan. We matched its costs, improved our quality, became more proactive, disrupted Japanese strategies, and undermined Japanese competitive advantages. Japanese firms persisted with their strategy, in particular seeking to compete with greater efficiency and higher quality. But the United States and other global manufacturers caught up. As the gap between Japanese and U.S. quality narrowed, consumers noted the diminishing returns on buying Japanese goods. Meanwhile, Japanese consensus-based decision making constrained innovation and change. The Japanese didn't have the bold moves to outdo the Americans the way they once did.
The United States also forced changes on Japan that made the country less competitive. For example, before the 1980s, a six-day workweek was common, but the United States complained, using the Organization for Economic Co-operation and Development (OECD) and the International Labour Organization (ILO) to pressure Japan to make five-day workweeks the standard. While workers enjoyed more freedom, productivity fell. Japan's educational system faced the same pressure to move to a five-day week, and the country began the phase-in of this in 1992. In the eyes of many Japanese, this reduced the drive, work ethic, stamina, and intellectual capabilities of schoolchildren, which in the long run would undermine Japanese corporate productivity.
Excerpted from STRATEGIC CAPITALISM by RICHARD A. D'AVENI. Copyright © 2012 by Richard A. D'Aveni. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Table of Contents
Foreword by Daniel R. DiMicco....................
Introduction: A Turning Point in History....................
Part 1. Analyzing Capitalist Systems and How They Act: The Four Cs of Capitalism....................
1 Competing Capitalisms: Hypercompetition and the Disruption of Superpowers....................
2 Combining Capitalisms: Comparative Advantage and Capitalist Systems....................
3 Controlling Capitalist Systems: At Home and Abroad....................
4 Capturing Other Capitalist Nations: The Struggle for Strategic Supremacy and Economic Spheres of Influence....................
Part 2. Crafting Capitalist Strategy: The Four Rs of Strategic Capitalism....................
5 Rebalancing Ambitions, Resources, and Threats: Constant Reallocation to Prevent Overstretch and Financial Paralysis or Collapse......
6 Reinventing Capitalism: Constant Rejuvenation and Revolution of Capitalist Systems....................
7 Reenergizing the Capitalist System: Constant Proactive Strategies to Seize the Initiative....................
8 Restructuring the World Economic Order: Constant Struggle for Economic Leadership or Influence....................