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The Comeback Of The Operating Executive

As an avid reader of annual reports, I have been duly impressed in the past year or two by the …

As an avid reader of annual reports, I have been duly impressed in the past year or two by the number of CEOs who say in their letter to shareholders, “We have taken the necessary steps to make this company lean and mean. Our goal is to become the low cost producer in our industry.”

Sometimes, there’s a hedge. For example, “We are beginning to take steps…” or “We aim to become a low cost producer” or adding, “in the United States” or applying the statement to only a part of the complete corporate line.

It hasn’t always been a voluntary move on the part of the CEO to develop those lower costs and thus bring lower prices to customers or higher profits to shareholders. As often as not, he has been goaded into a restructuring by an actual or threatened tender offer, by the loss of business to foreign producers or by the compelling need to stay in business. Whatever the catalyst, the accompanying spin-off of losers, the corporate staff cutbacks, the plant rationalizations and the compression of organizational layers have created a new focus on operations. When the investment bankers are paid and gone, when the management consultants have written their reports and, when the corporate task forces have been disbanded, the spotlight finally shines on the almost forgotten operating managers.

Who are these people? They are the presidents and general managers of the operating divisions who make and sell the products and services of the corporation. They oversee our cost and profit centers and watch over things like quality, inventory, delivery schedules, labor relations, packaging, productivity and other such activities that we underemphasized while we concentrated on things like poison pills, leveraged buy-outs, preferred stock conversions and maximizing shareholder value. The last time we paid any significant attention to operating managers in this country was in the 1940s when they did such a superb job of producing for the war effort.

So when the CEO says, “Welcome back to our headquarters meetings; tell us what’s been going on these days”-he gets an earful.

First and foremost, CEOs are learning from their operating managers that the low-cost way is also the quality way. Doing it right the first time saves doing it over, reduces scrap and inventory, and simplifies inspection. Doing it right from the start reduces complaints and callbacks and helps to assure customer satisfaction.

Our professional operating managers are teaching us that a properly engineered machine-a robotic, if you will-is consistently more accurate than the best worker and has greater production flexibility. The skillfully programmed computer can control the flow of material and paper to the point that meaningful savings in downtime and investment can be realized. The new experts in quantitative analysis, sampling and queuing, are allowing us to pinpoint problems on a real-time basis and to become effectively prevention-oriented.

Many of our corporations are finding that it is possible for American-based plants to become fully competitive with most of their foreign counterparts. This is certainly true in several capital-intensive industries-paper, for instance-where we are the highest-quality, lowest-cost producer in the world. It is equally true in much of our chemical industry, in food processing, in aircraft engines, in computers and a host of other areas.

The Japanese, not so inscrutably, are showing us how to operate cost-efficient facilities in the United States. Our own companies-General Electric, for example-are rethinking some of their global-sourcing programs and re-establishing domestic manufacture of certain appliances and electronic items. Specialty producers in sections of a besieged industry-Nucor Steel is a case in point-have learned how to build new, efficient American plants and out-compete low-wage and subsidized importers.

It isn’t easy, to be sure. Most of the time, an entirely new approach and style is required to generate the participative management techniques that seem to work best, to gain the necessary labor cooperation and concessions and to deal with the new breed of professionals in our operating departments.

Furthermore, despite these positive signs of American resurgence, Marshall McCluhan’s forecast of the “global village” has actually happened to manufacturing. Worldwide production and global sourcing is an integral part of an operating manager’s job these days as he gets involved in licensing, joint ventures and intercontinental mergers.

As a result, new executives coming into top operating positions tend to be sophisticated managers. On top of their technical degrees or deep-seated product experience, they often have an MBA or extensive educational exposure: As operating division presidents, they may originally have had marketing or control backgrounds as opposed to straight manufacturing, but because of their line experience, they have a full awareness of the modem manufacturing situation. In all cases, they have become skilled administrators, leaders and result achievers.

For some time to come, amongst the bust-up raiders and the conglomerated portfolio companies, we are going to continue to have a number of financially driven CEO’s who have little more than a transitory interest and concern for operations. At the bulk of our American corporations, however, where there is a need and a striving for competitive performance, the operating executive is making a comeback. And that’s great news for CEOs and management succession committees who want their businesses to be professionally and competitively managed.

Robert W. Lear is former CEO of F. & M. Schaefer Corporation and teaches at Columbia Business School where he is executive-in-residence. He holds directorships with Cambrex Corporation Inc.; Church & Dwight Co.; Crane Company; Scudder Capital Growth; Development and International Funds; Korea Fund; Turner Corp.; and Welsh, Carson, Anderson, Stow Venture Capital Co.; and, he is a member of the National Advisory Board of Chemical Bank. He authored the recently published book How to Turn Your MBA Into a CEO.

About robert w. lear