IN THE MID-1960S few Americans were aware of the sweeping changes taking place in management practices in-side Japanese companies that would, in less than a generation, force the United States and the world to rethink the very way they do business. In 1965 the United States was the most powerful nation on the face of the earth. Its military might, though shaken by the Russian advances in nuclear weaponry and outer space, was still unassai-lable. American technology was the envy of the world.
U.S. companies dominated international trade and commerce in the mid-1960s. Millions around the world looked for the “Made in America” label when they purchased products, convinced that U.S. goods meant top-of-the-line quality. On the domestic front, salaries and wages were rising and millions of Americans were enjoying the benefi-ts that go with middle-class status.
Nineteen sixty-five was also the year that American corporations saw their after-tax profits rise to a postwar high of 10 percent. Although no one could have foreseen it at the time, that was to be the high-water mark for Ameri-can business—the last great year of steadily rising profits for the corporate community. By the 1970s corporate pr-ofit had shrunk to less than 6 percent. A combination of domestic and international factors contributed to the decl-ine.^
The U.S. consumer market had become saturated with consumer goods. By 1979 there was one car for every two Americans, and more than 90 percent of American households were equipped with refrigerators, washing machine-s, vacuum cleaners, radios, electric irons, and toasters. At the same time that demand was tapering off, foreign competition for American markets was increasing. Cheap imports
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flooded the U.S., dramatically cutting the market share of American companies. Between 1969 and 1979, the val-ue of manufactured imports relative to domestic products rose from 14 percent to 38 percent. By the mid 1980s, for every dollar spent on goods produced in the United States, American families and businesses were spending 45 cents on imported goods.^
Increases in both corporate taxes and wage benefits to American workers reduced corporate profits still further. The OPEC oil embargo increased the cost of energy, driving corporate profits lower in the late 1970s and early 1980s. The decision to deregulate protected U.S. industries during the Reagan years—especially the airlines, telec-ommunications, and trucking—heightened competition for market share between traditional corporate giants and ne-wcomers anxious to expand their niche. Again profits declined.
Old-line companies that had become complacent during the boom years began to take stock of the new circumsta-nces confronting them. Faced with increasing competition from abroad and greater competition within each industry at home, companies searched for new ways to cut costs and improve market share and profits. They turned to the new computer and information technologies in hopes of increasing productivity in lean times. In the 1980s, U.-S. businesses invested more than one trillion dollars in information technology.^ More than 88 percent of the total investment was made in the service sector, to help improve efficiency and reduce costs. By 1992 virtually every white collar worker in the country had access to $10,000 in information-processing hardware.^ Despite the large in-vestments, productivity continued to limp along, increasing at about 1 percent a year. Economists began talking about the “productivity paradox.” Some, like Harvard’s Gary Loveman, spoke openly about the utter failure of the highly touted technological revolution to whom so many had looked for their salvation. “We simply can’t find evide-nce that there has been a substantial productivity increase—and in some cases any productivity increase—from the substantial growth in information technology,” Loveman told his colleagues.^
Just as corporate CEOs began to sour on the new information technologies, the productivity paradox suddenly dis-appeared. In 1991 output per hour increased by 2.3 percent. In 1992 productivity soared to nearly 3 percent, the best performance of any year in more than two decades.^ MIT’s Sloan School of Management published productiv-ity data collected over a five-year period from 1987 to 1991 for more than 380 giant firms that together generated nearly $2 trillion in output per
year. The gains in productivity were impressive, suggesting that the vast amount of money invested in information technology for more than a decade had begun to pay off
The authors of the study, Erik Brynjolfsson and Lorin Hitt, found that between 1987 and 1991, return on investm-ent (ROI) for computer capital averaged 54 percent in manufacturing and 68 percent for manufacturing and service combined. Brynjolfsson said that computers not only “added a great deal to productivity,” but also contributed mar-kedly to downsizing and the decline in the size of firms.” Morgan Stanleys Stephen Roach who, along with others on Wall Street, had raised the issue of a productivity paradox, dropped his earlier reservations, proclaiming that ‘T-he U.S. economy is now entering its first productivity-driven recovery since the 1960s, courtesy of efficiency gains being realized through the use of information technology.” Much of the gain in productivity, says Roach, is coming in white collar areas and in the service industries.^
It became increasingly apparent to Roach and everyone else concerned that the failure to achieve productivity gai-ns faster lay not with the new laborsaving, timesaving information technologies, but rather with outmoded organiz-ational structures that were not able to accommodate the new technologies. Michael Borrus, of the Berkeley Roun-d-table on the International Economy, went directly to the heart of the matter, saying, ‘Tt simply isn’t good enough to spend money on new technology and then use it in old ways.” Borrus opined that “for every company using computers right, there is one using them wrong—and the two negate each other”^
American corporations and companies around the world had been structured one hundred years earlier to produce and distribute goods and services in an age of rail transport and telephone and postal communication. Their orga-nizational apparatus proved wholly inadequate to deal with the speed, agility, and information-gathering ability of computer-age technology.

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