Last night I gave a brief after dinner talk to the National Summit of Chief Executive Boards International, a group of small/medium sized business CEOs. It went really well and they were a very good audience. The title of my talk was "The Outlook for American Businesses in an Age of Customization and Globalization."

My (draft) remarks are below the fold.

After dinner remarks by Robert A. Lawson at the Chief Executive National Summit of the Chief Executive Boards International. Blackwell Hotel and Conference Center, Thursday, March 30.

Good evening ladies and gentleman. I want to thank you very much for inviting me to join you. I deliver about 9 hours of lectures to students per week, yet it is a rare occurrence in my life to be able to speak to a group of people who appear interested in what I have to say! I hope that I don’t disappoint. I’ve been asked to talk for about 15 minutes, and I’m sure you appreciate the immense difficulty this presents for me. As a college professor, I don’t usually hit my stride until 40-45 minutes into the lecture.

Let me begin by telling you what I am not going to say. I am not the kind of economist that pretends to know more (or for that matter anything at all) about your line of business. (I hope that that won’t stop you from hiring me as a consultant however!) As an academic living in the last bastion of feudalism on earth, the American university, I am sure that I have a lot more to learn from you about the particulars of doing business in America. In addition, I don’t know much about the regional outlook for manufacturing or services or construction or whatever. Likewise, I don’t know what to expect on the job front over the course of the next few quarters. I imagine there are other economists who know (or claim to know) about such matters, but I am not one of them.

I want to talk to you about two much broader trends facing business in America. Trends that, at any point in time, are easy to ignore, but represent important on-going shifts in the competitive landscape facing your business. They are globalization and customization. The former of course has had no shortage of ink spilled about it in the last few years. The latter, however, customization, has not received as much attention but I will argue is every bit as important as globalization. And the two trend are linked.

Customization. Let me begin with a story about one of my favorite professors at Ohio University. He had been teaching economics for 30 years and was accustomed to given the same multiple-choice exam year after year after year to his freshman economics classes. He went through elaborate steps to count each exam given to the students to be sure he got the same number back. He kept the exams under lock and key in his office. Why do all this? If even one exam leaked out to the students then he’d have to set a new exam. In the days before computers, he would have had to make up exam questions or cut and paste from the ones provided by the textbook publisher. This is a laborious process and would take several hours. Today, when I want to set an exam, I hop on my computer and pull questions from a database with over 10,000 questions. I can randomize the order of the questions and the order of the answers. In total it takes me about 10 minutes to create and printout an exam. And each exam I give to each class each semester is completely customized and unique.

This story highlights the importance of the computer in changing the way we go about our business. In the era before computers (and related technologies such as robotics) the American economy thrived and became the envy of the world by producing large quantities of goods. Lots of cars, lots of clothes, lots of food. The variety of the items was sometimes limited but we had a lot of it. You can have a car in any color as long as it’s black, right? Obviously overtime, more variety was introduced. But the variety was still mass produced variety. We had Chevy, Buick, and Oldsmobile selling slight different but essentially the same cars. The technology of the day was well suited to turning out large quantities but still of a very similar product.

Enter the PC. Increasingly if you want to buy a car, a computer, a window, or a set of kitchen cabinets, or whatever, you don’t go to the store to pick from a set of mass produced products, instead you hope on dell.com and select the exact computer you want. It is then made specifically for you and delivered. This kind of customization was always possible, but the difference is that today you can get this level of customization for essentially the same price (in terms of money and time) as the old standardized product. I recently purchase custom dimension windows and was amazed to find that the price was basically the same as the stock windows of similar quality available at the store.

An interesting side note is that this customization revolution has had little impact on the GDP measure for the U.S. A hundred standardized windows selling for $300 each contributes the same to GDP as a hundred customized windows selling for $300 each. We’re better off as consumers with the customized product, but our measured GDP is unchanged. For this reason, it is my belief and that of many other economists that the GDP of the U.S. has dramatically understated the productivity gains generated by computer technology.

Ok. What does this mean to you? First, it means that your business, if it produces a relatively standardized product, is going to face increasing competitive pressure from your domestic competitors who offer customizable products to customers. Second, your business is going to face competition from foreign producers who are now able to produce large quantities of standardized products cheaper than we can here. The bottom line is that American businesses must offer customizable products. The days of being able to churn out millions of identical widgets are gone.

This brings me to the second theme, globalization. The United States is a “capital rich but labor poor” country. That is, in we have more capital than labor in relation to other countries. In layman’s terms, workers are relatively scarce in the U.S. In contrast, developing nations are “labor rich and capital poor”. Poor nations have a lot of workers but less in the way of capital.

Generally being “capital rich/labor poor” like the U.S. is a good thing. It means we have high productivity per person and therefore high wages and a high standard of living. It is also a problem as some products require relatively large amounts of labor (relative to capital) to produce. In the U.S. this means that these items will be very expensive or we may even have to do without some things altogether. Hiring domestic servants for example has all but disappeared in the U.S. because of the scarcity of workers and the high wages needed to hire them. Similarly, gas station attendants, movie theatre users, etc are essentially extinct. In other labor intensive areas like health care and education that are harder to do without, it means prices are rising very fast.

In recent years, the dramatic reductions in transportation costs, tariffs, and other costs of trading between nations have opened up trade with a host of labor rich (i.e., low wage) nations. Overall this is a good thing for America. It means that we will once again have access to products at reasonable prices that are labor-intensive to produce. Of course, it does mean than some labor-intensive American industries have been driven mostly out of business. While this process began with textiles and certain types of manufacturing (especially assembly processes), it has recently expanded, because of the computer, to include even services. It is now possible to get a set of architectural plans or a computer program written by an architect or programmer in India instead of having to hire an expensive American.

From the standpoint of your business, what does this mean? It means than the most successful American businesses will be those offering products for sale that are capital intensive and require relatively little labor. If you produce a labor-intensive product, you will not be able to compete effectively with firms operating in labor rich nations. And those of you in the business of providing services are not immune from this trend as the recent “outsourcing” issue has illustrated.

Customization, the drive to create unique products and services for customers, and globalization, the ability of consumers to buy low from producers around the world, are two of the biggest trends facing American businesses. While both of these trends will make your jobs harder, and some of your firms will, I am afraid to say, fail, both trends will usher in great improvements for the well being of Americans as a whole. I have tremendous faith that American businesses, operating on one of the freest and most dynamic economies in the world, will weather these storms well, and that our economy will continue to produce a high quality standard of living for us all.