Chapter 21 A New Paradigm?

The next morning found us circling Monterey Bay into Santa Cruz, then cutting northward through the mountains. We wound through a magnificent stand of redwoods, eventually crossing the San Andreas Fault. Skirting San Jose, we headed up the peninsula toward San Francisco, following a parallel path to the cloud-covered Santa Cruz Mountains. Flanking us were rolling foothills, dotted with scrub oak trees and the occasional shiny glass-and-steel office park. The arid, gold-hued landscape carried a bleak beauty in its sparseness. Near the horizon a brown haze of smog and humidity lay over the San Francisco Bay as far north and east as we could see.

By eleven o'clock we arrived on the outskirts of Palo Alto.

"This is the stuff of dreams," I said, exiting the highway onto Page Mill Road.

I was excited, almost ecstatic at being in the heart of Silicon Valley. Ahead of us, along a long stretch of road, was Hewlett-Packard's headquarters. Massive low-slung buildings and factories were designed to create the feeling of a college campus. Across the road, up a side street, was Hoover Tower, landmark for Stanford University. Tens of high-tech research buildings sprouted around the campus like mushrooms. Farther along we saw the legion of support industries that make up Silicon Valley, the finance capitalists, consultants, lawyers, and business journalists. We toured, finding the manufacturing giants of the information age: Intel, Sun Microsystems, Cisco Systems, Motorola, and Lockheed Martin. Here is where hundreds of technology start-ups began, such as Apple, Adobe, and Netscape, but not Microsoft, which made Seattle its home.

"This is the heart of the new America," I said. "Least until the market crash."

Smith looked around with interest.

"Fastest export growth of any sector," I continued. "Phenomenal productivity—new chips introduced every few months!"

Peter Chen's specialty chip factory occupied a one-story warehouse building in the neighboring town of Mountain View. It was set off from the road with an assortment of trees and plants. A small sign said, "Ecosystem habitat regeneration." We parked and went in, tying Rex to a shade tree and leaving a bowl of water.

Peter greeted us at the door. He wore a neat pair of jeans, a white shirt with blue tie, and penny loafers. He had the same gentle smile and warm eyes, but today there were creases on his forehead that weren't there two days before. He ushered us past an open reception area. A woman in her mid-thirties stood by the counter, her eyes red. An older woman was beside her, an arm on her shoulder.

"Something the matter?" I asked, as we went into Peter's office. It was a small, eight by twelve foot room with a clear window facing the factory floor. There were two guest chairs which we sat in, and Peter settled behind an unassuming wood veneer desk.

"We've got a little crisis," Peter said, running his hands through his hair. "Well, why lie, it's a big crisis."

Smith and I looked at each other. "Perhaps we'd best come back," Smith said.

"No, you might as well hear it. Don't want you to get the wrong impression that running a business is only fun and games." Peter stood and shook his head. "Jim Macdonald of Macdonald Semiconductor, our largest customer, called a half-hour ago. He raked our account manager Barbara over the coals." He nodded in the direction of the woman at the desk who'd been crying. "It isn't the first time either. Every time he calls, my staff ends up in tears. Not just Barbara, but her assistant, our technicians, everyone. He wants to throw his weight around, like a damn emperor, just to feel people squirm and let them know who's boss."

"What did he want?" Smith asked.

"He demanded that his chips be given priority. He wants them this afternoon, instead of tomorrow as specified by our contract."

"An unusual request?" I asked.

"Not at all, we're constantly juggling to accommodate if we can. But today we've got twenty orders ahead of him. Some of these are from small start-ups that operate with tiny margins. They need their products just as badly as Macdonald does."

"You can live without the start-ups," I said. "But Macdonald's the big fish, I guess."

"He's thirty percent of our volume," Peter sighed. "He regards me as an equal but he's tyrannical with my staff. I've asked him to lighten up, many times. He doesn't listen."

"Anyone higher up in his company you can talk to?"

Peter shook his head. "He's the founder and CEO. He thinks money rules and he can get away with this bullying. Barbara can't take it anymore. Says she's going to quit."

"The consumer is king," I said. "That's the first law of competition. You can't cut off your nose on this one. I guess you'll have to hire a new account manager."

Peter walked to the filing cabinet and rested against it. He expelled a breath of air and thumped his palm against the metal. Smith and I glanced at each other, wondering whether this would be the time to make a graceful exit.

He straightened and returned to his desk. In a weak voice, he said, "No, I've got to face him." He sat and picked up the phone. In a moment he had Jim Macdonald on the line.

"Jim? It's Peter. About your request: I can't push up delivery today. No, I won't ... because we'd break our commitment to others. We'll have your product first thing tomorrow, as promised."

Peter took a deep breath. "One more thing, Jim."

In a few sentences Peter laid out the problem with Barbara and finished with, "I'm instructing my staff not to accept any new orders from you."

Peter gave a bleak smile as Smith and I sat in astonished silence.

We could hear yelling emanating from the earpiece. Peter grimaced and punched a button on his receiver. A voice bellowed from the speakerphone, "Cancel my business? I gave you twenty million in orders last year! You can't fire me, I'm the goddamn customer!"

"Jim, we've thought it through and you've had plenty of warning. I'm sorry it has to be like this. That's our final word."

Peter hung up. He was pale. He got to his feet and swung to face the factory floor. He rested his forehead against the plate glass window, his breath fogging the pane. He said softly, "The customer comes first? Not really. The employees come first."

"I love a paradox." Smith smiled. "Do go on."

Peter exhaled and turned to face us. "A mentor of mine, Paul Hawken, once told me, there's no way to instill a positive customer service ethic before you embody a positive employee ethic. Responsiveness in, responsiveness out."

"What does that mean for the bottom line?" I said.

"Our company lives by its productivity," Peter said. "We have virtually no absenteeism, low turnover, no pilfering, and our people thrive in the constant chaos of this industry because we face problems together. The old way of doing business, of hiring and firing people like cogs of interchangeable steel, leads to terrible morale. Fear serves as the motivator. People become too scared to risk, too frozen to innovate or cooperate. The culture becomes stifled with sycophants, bureaucrats, and spongers."

"Still, it took courage to fire your largest customer," I said.

"Barbara is like a sister to us. She'll be around long after Macdonald's workers jump ship."

Peter turned again to point out the window onto the factory floor. "I know I sound mystical, but consider how our company would be different if we let Jim Macdonald go on terrorizing us. And not just him, but think of all the hundreds of other small and large encounters of each week, each one giving us the chance to signal what our values are? If we chose profits ahead of everything, even ahead of our core values, then we'd make different decisions: We'd install safety and pollution equipment only to the minimum letter of the law; we'd tie workers to rigid schedules regardless of their personal emergencies. You know what would happen? Our workers would figure out pretty quick they're just pieces of meat, disposable items on the bottom line. The level of tension around here would mount. Workers would call in sick, from ulcers and mental stress, or just plain meanness. Our production crew would start making mistakes, and when we needed something special from our crew they would have nothing special to give us. What had we given them that was special? We would start downhill, little by little. So that's why there's a paradox. We follow our higher aspirations for what kind of 'family' we want at work, and customer service and profit are natural by-products of doing that well."

As suddenly as he had gotten up, Peter sat in the chair and covered his face with his hands. He stayed that way for half a minute before drawing his palms slowly across his features, squeezing his cheeks, eyes, and nose. He looked like he'd seen a ghost.

"I may have just made the biggest mistake of my career," he said. "It's all very fine to talk about empowering workers, but that means little if this company goes belly-up. That's hardly caring for workers in the long run."

Peter stood again. "Make no mistake, we can't be doing what we do unless we keep making a good profit." He motioned around the room. "You see how we're frugal. No fancy offices. No company cars. No management cafeteria or health club. We fly coach, except for Paula, who's five months pregnant. We keep health insurance down by reducing negativity and stress on the job. We struggle like all companies, and we have our share of problems. I just hope to God we make it through this one."

Peter headed for the door. "I need to tell people what's happening. We'll have to make some big adjustments without Macdonald's business."

He went out into the reception room and we saw him talking to Barbara. She hugged him. Peter motioned us outside and we entered the plant. "It's going to be tough, but I know we'll survive." Peter said. He sounded happier and more confident than he did twenty minutes ago.

"Doing the right thing has a deep affect on all the people involved," Peter said as we walked down a white corridor. "Good energy is unleashed and life expands. It's not just Barbara who's now willing to walk on coals for us, it's everyone else who hears about this. I mean, people learn fast that we don't bull."

"Your approach sounds pretty idealistic," I said.

"Yeah. We've had to let people go who needed fear as a motivator," Peter said. "They're so wounded they can't think for themselves, they wanted someone to tell them what to do every moment, and someone to watch them to see it gets done. No question our model won't work for everyone. But it's made us profitable, until now."

We entered a large production area with vats of cleaning acids. Peter cautioned us to not get too near.

"We're in competition with the world's leading companies," Peter said. "That forces us to be different. We do it by creating relationships, genuine ones."

Smith looked at him with a dreamy gaze. "A 'fellow-feeling' with others, is it?"

"Yes, but it has to be real. You can spot a phony in a heartbeat. I don't lecture this, I just do it. The beauty is, once you have relationships, everyone looks out for others."

Smith interjected softly, as if reciting something he had put to memory, "All is not lost, when one puts the people in a condition to see it has intelligence. On the contrary, all is lost when you treat it like a herd of cattle, for sooner or later it will gore you with its horns."

Peter turned to Smith, gazing at him. "That's beautiful."

Smith nodded. "The great Voltaire."

"Poetry aside, business can't be run by being nice," I added.

"No one said anything about being nice," Peter replied. "Nice is the falsity that gets people killed on the job from sloppy procedures. You've got to be forthright, straight out, in the moment."

We reached the design area where computer chips were being etched. Four or five workers looked up and nodded as Peter entered. Peter went over and picked up a silicon wafer. The intricate pathways were a beautiful contrast of emerald green and gold.

Peter smiled, "If we can make it work here, what's stopping others in less competitive arenas? I can't help but think we're a harbinger of things to come."

"You don't think conditions here are unique?" Smith asked.

"Not anymore," Peter said. "Look, I studied engineering at Stanford. We learned how Henry Ford revolutionized industry through mass production. He had a simple idea: switch from producing cars in series, one-by-one, to producing them in line, along a conveyor belt. Long production runs allowed Ford to hire unskilled workers to do the same simple, repetitive motions."

"Aren't those economies of scale still valid?" I said. "How can you compete with Taiwan, for example?"

Peter smiled. "We don't try. They make volume chips, commodities with low value added. We make specialty chips, with high value added. Speed and quality are more important for our business." Peter set the wafer down. "Ford's innovation has run its course, and it's easy to see why. Remember what Ford said, 'You can have any color Model-T you want, as long as it's black'?"

We laughed.

"Would consumers stand for that these days?" Peter asked. "Today everything is custom orders, short production runs, quick setups and turnarounds. That means even in factory jobs you need workers who can handle constant change, think for themselves, take responsibility, be pro-active in finding solutions. If you can motivate employees, you can cut out layers of high paid managers and supervisors telling workers what to do every step. Think what you'll save in time, money, and productivity. And if this is true in manufacturing, double what I've just said for service jobs."

I mulled these ideas as we walked back to the entrance. "Your breakthrough is simply realizing that worker productivity depends critically on how a worker feels about the job?" I asked.

Smith prodded me. "Good heavens, I pointed that out in Wealth of Nations. Seems hardly worth debating that a worker should work better in good spirits than disheartened."

Peter nodded assent. "Absolutely. But getting a worker to feel excited, loyal, and dedicated may mean turning a traditional company's management style on its head. You don't learn this in an MBA program and you can't put it in a memo; you have to live it."

Smith nodded. "Prudence, benevolence, and justice are the character of virtue. The truly developed person exudes these qualities, the latter two of which connect him to others in a genuine way."

"We show benevolence and justice to our friends, our families," I said. "It's not something economists typically put in economic models for running a business."

"Do you want to live your life in an isolated box?" Peter replied. "Is that the path to wisdom?"

* * *

On Peter's recommendation we stopped for lunch at a bagel shop on University Avenue in Palo Alto. The spot was a haven for students hunched over books and newspapers while munching sandwiches and sipping lattes. From their clothing and demeanor, these students appeared to come from all parts of the globe, attracted like magnets to the education and industry in Silicon Valley. Peter told us there were more Ph.D.'s per capita here than in any other spot on the planet. We looked over the crowd and wondered who would be the next Hewlett or Packard, Gates or Jobs.

With coffee cups in hand we strolled downtown. A short walk from University Avenue took us to the small white garage where Bill Hewlett and David Packard began their fledgling electronics business just as the Great Depression ended. Winding our way back, we stumbled on a low-slung adobe building. A sign told us it was the public library. Smith and I looked at each other and silently nodded.

"You check the papers, I'll try the Internet," I said.

A half-hour of searching produced a mountain of information.

"Here's something," Smith said, holding up a newspaper article. "There's a trade summit in San Francisco next month, the same week as WorldChemm's meeting. That's no coincidence, I'm sure. POP has threatened to break them both up."

"Not just POP." I pointed to my stack of printouts from the web. "Environmental groups, labor unions, Marxists, the Republican far right and the Democratic far left: It's a coalition of odd bedfellows uniting against world trade."

Smith pondered this, then said, "I should like to be there."

I was more optimistic than I should have been. "Of course," I said, "but how can I protect you against that mob? Isn't it bad enough having Max Hess and POP shooting at us? Do you think that fanatic Hess will ever give up?" I asked. "And POP or no POP, I've got to finish my dissertation."

"Where to then?" Smith asked.

I smiled ruefully. "Harold's sister lives a stone's throw away in Oakland. But that would be putting you in the spider's web, wouldn't it? We can't risk it."