Early Warning Systems: A Proactive Economic Strategy for Labour in the Local Economy

by Dan Swinney

This article appeared in the South Africa Labour Bulletin, April 1999

Introduction:

The following article on Early Warning Systems relies completely on experience in American cities. Yet as the destruction of the economy of local communities by emerging trends in capitalism is international in character, so might the tools developed by labor and community organizations in stopping that destruction have relevance in South Africa, particularly in the major urban economies such as Johannesburg, Durban, and Capetown.

A Response to the Crisis in Chicago's Manufacturing Economy

In 1975, I was hired at Taylor Forge, a subsidiary of Gulf +Western (G+W) in Cicero, an industrial suburb of Chicago. Taylor Forge made big pipe, fittings, and flanges for the Alaska pipeline and big utility companies. I led the successful organizing drive to bring in the Steelworkers Union, and served as Vice President of USWA Local 8787. Unknown to me at that time, G+W was at the cutting edge of new corporate strategies that were emerging with force in the American economy of the late 1970s and that now are the dominant strategies of multinational companies in the international economy. With a huge loan from Chase Manhattan Bank, G+W purchased a number of U.S. manufacturing companies, including Taylor Forge, with the intent of "milking the cashcow," as it was described in a Harvard Business School case study. G+W had no long-term strategy for the particular companies (or the products or the workers) it had purchased except to pull out cash and value and to use the money to finance acquisitions in other, more lucrative sectors, like entertainment--e.g., Paramount Pictures, a movie company. The short-term objective was the only concern. It was like buying a car and never changing the oil.

G+W began to close Taylor Forge department by department, never telling us what their strategy was. To make matters worse, the executives suggested at the end that if we gave up part of our wages and pensions, we might be able to save our jobs--testing our level of fear to see how much they could squeeze out of us before they closed the doors. This was 1982, when hundreds of companies were closing in Chicago and thousands were losing their jobs.

Taylor Forge closed, and I lost my job in 1983. G+W shareholders made a ton of money and the corporation continued to expand. Cicero--the town that had been home to Taylor Forge for several decades--was to lose 50% of its job base in the next six years as other companies, also, closed. During the 1980s alone, Chicago saw the closing of 3,000 of its 7,000 factories and a loss of 150,000 manufacturing jobs. This happened in every major city in the U.S., and this loss of core manufacturing jobs gave rise to the explosive growth of poverty in urban and rural areas.

I had founded the Midwest Center for Labor Research in 1982 along with other local leaders in the Steelworkers Union and several community organizers and supportive academics, to provide the kind of research and analysis that I had needed at Taylor Forge, and for unions, communities and others concerned about saving jobs and stabilizing our economy. In its work, MCLR chose to focus on the micro-level of the economy--the firm and the community, engaging in in-depth research as a foundation of information for grassroots community and labor organizations and local government.

We were uncertain about our future strategies and how we could respond to the economic transition unfolding in front of us. We began by looking at hundreds of companies in Chicago that had closed or were in danger of closing.

The prevailing and powerful view then, as now, is that this chain of events and its consequences was painful and destructive in many ways, but inevitable. The logic was, and is, that we live in a new global economy witnessing a fundamental change in the international division of labor. The new role for the United States is as a source of intelligence, information, and finance. The Third World with its low-cost labor will be the center for making things. Then there is this new complex and powerful communication technology.....the new Information Age.....the end of work......the new service economy....and so forth. At MCLR, we were overwhelmed by what we were witnessing, but felt that this notion of inevitability needed to be examined in the context of the specific companies and communities so obviously at risk.

Of course, we found a few companies that really needed to close--like slide-rule producers. Their products or technology were completely out of date and there was no way they could compete in the marketplace. It is a strength of a system to let obsolete things die. When we found companies like that, we told labor and the community the truth, so no one invested in trying to do the impossible.

On the other hand, the overwhelming majority of companies that we examined were not obsolete. They were at risk because of problems that could be solved in the context of our economy under our current system. Some of the problems are simple and require straightforward solutions; others are more complex.

The more we looked into the details of the larger companies like Taylor Forge, we found many closing not because of some objective requirement of the market, but because of a particular business strategy that was based on securing the highest possible return in the shortest period, and a refusal or failure to make adequate investment in the company that would ensure long-term survival. Yet no one challenged the management strategy until it was too late and the damage had been done. Unions would react to efforts to cut wages and benefits or to fight the actual closing, but not challenge in a timely way, the investment and management decisions that would inevitably lead to cuts in pay or a closing.

When they did, success was possible as was the case with Morse Cutting Tool in New Bedford, Massachusetts. Morse was a company also owned by G+W, and G+W was pursuing the same destructive strategy they used at Taylor Forge. But at Morse, United Electrical Workers Local 277 recognized the early warning signs of G+W's corporate strategy. Two year before the anticipated crisis, the union, with the assistance of a consulting firm like MCLR, did a detailed analysis of the company, its markets, management, and the positive economic impact of this large factory on this small town. They documented how G+W's business plan was destroying a perfectly healthy company that had long-term potential. With this information, they patiently organized in the community and created a broad-based coalition to save the jobs at Morse Cutting Tool. With this base of support they went to the local mayor with their analysis and the demand that G+W be stopped from destroying the company. The mayor told the company, "Either invest in Morse Cutting Tool, or sell it to someone who will, or I will take it away from you with my powers of eminent domain." The press howled that this stand would wreck the business climate of New Bedford as well as the company. But it didn't. G+W reversed its plans and sold the company to a local investor who developed an effective partnership with the union.

And success was possible with hundreds of small companies that were being falling through the cracks in the economy. In 1986, Gladys Scott, a resident Chicago's South Side, called MCLR with alarming information about a printing company--Bankers Print--that had handled her printing needs for more than 16 years. The owner, Carl Wilson, had cancer and no heir to take over the business.

After meeting with Mr. Wilson and talking with the employees, we were able to arrange an employee purchase of the company--a successful conclusion that no one had seen as an alternative. The experience focused our attention on small companies. After all, despite public perception to the contrary, 90% of all manufacturing companies are not big, complex, fully integrated firms, but small companies with less than 100 workers. Individually they are insignificant, but in their aggregate they are the bedrock of the manufacturing economy. They typically have local markets, adequate technology, and a skilled work force. They are frequently linked to the larger companies, providing services and materials for production. The health of these small companies is a major variable in the success or failure of the larger companies and the community.

MCLR did a study of 800 of these small companies with an owner 55 or older, and found that almost 40% were at risk of closing because of the issue of succession of ownership. A typically successful white entrepreneur would move to the suburbs as his wealth made it possible, and often encouraged by the shift of the community from white to African American or Hispanic. Facing sickness, death, or retirement, he would be unable to find a successor in his family or in management to take over the company, which would be difficult to sell because of its size and location. Typically, the father turns to the son, and doesn't consider the daughter. The son typically would not want to go back into the "ghetto" to run the company. Even if the son had gone to business school, he would want to make money in the "casino economy" by moving stocks and bonds or working as an MBA for a large Fortune 500 corporation.

Yet this problem can be solved with conventional resources and a little creativity and extra effort by those concerned with community development. Small companies with aging owners and no successors can be identified in a number of different ways. They are often good opportunities for employee buyouts, as was the case of Bankers Print. Or they are an excellent opportunity for aspiring local entrepreneurs who are typically African American and Hispanic, heretofore excluded from this kind of opportunity. MCLR arranged a number of buy-outs of this kind preserving jobs, union membership, and stabilizing--rather than losing--critical assets of the local economy.

Creating an Early Warning System:

After a decade of evaluating these companies in crisis and engaging in scores of efforts to save viable companies, I estimate that we could have saved 75% of the jobs and companies lost in the 1980s with some creativity and determination by labor, community, government, and business. The crisis in the manufacturing economy wasn't inevitable, but due to a combination of:

New corporate strategies that were destroying productive capacity

An anarchy in the economy that traditional markets didn't address

A passivity in labor, community development, business, and government in a changing economy.

At the heart of any successful effort to save these company was timely, accurate information in the hands of people who had the interest, capacity, and power to save the company. MCLR developed a tool that could be used by a broad range of organizations--particularly labor--whose interests were closely tied to the health of the manufacturing economy--the Early Warning Business Development System. This system:

identifies companies at risk of moving or closing

provides assistance to companies in need of resources or skills or bringing pressure through union or government action;

identifies opportunities for increasing corporations' performance and stability

How an Early Warning/Business Development System Works :

1. We develop a local coalition of community, labor, the religious community, government, and local business: These are the key players who have a material interest in a healthy local economy. They can accomplish all the tasks, have the skills, the commitment, and the responsibility to protect and develop the local economy. Neither by themselves can do a job as effective as they can together. A key for the success of the system is creating this coalition, in one form or another.

2. We gather published and unpublished information about area businesses: Published information on companies can be found in annual reports, data bases, trade journals, the business press, and public records. Unpublished information comes from people with first-hand knowledge of the company, including employees, customers, residents, service providers, local development officials, and local government. Often, these people are seeing signs of trouble without knowing how to recognize or interpret them. Educating the workers, community residents and others to read the signs can provide critical information that allows for effective intervention and assistance.

Some of the Early Warning signs are:

An aging owner with no apparent successor

Layoffs

Decline in machine maintenance

Contracting out work

Outdated technology and production techniques

Equipment removal

No new product lines

Cosmetic improvements and unidentified visitors

Management instability

Loss of customers/layoff of sales staff

3. We identify a problem or opportunity and develop a plan of action: With both published and unpublished information, you can identify potential problems or opportunities at a company, develop an analysis of the particular problem and opportunity, verify the information, and develop a course of action to encourage and assist a company to keep its doors open or expand. (You can also identify companies that are really beyond repair and assistance, and candidly inform the stakeholders to prevent misinformed public investment and misplaced expectations.) This kind of systematic approach to local companies can result in as much as two years' notice of a potential problem, that if unrecognized, could result in a crisis at the company and a potential closure. This approach also identifies opportunities frequently overlooked by local management that can lead to expansion of an otherwise healthy company such as:

Identify a qualified, community friendly entrepreneur or group of employees who can buy the business if it is faced with a succession problem

Provide access to new and improved management personnel or access to capital

Offer business planning assistance or technical assistance to improve productivity

Offer turn-around assistance

Train and develop the local workforce

Facilitate an effective working relationship with city and state agencies

4. We use the System to build the community vision and capacity: This System is a great entry point to playing a dynamic and effective role in the local economy whether it is with an individual company, a sector, or all the other factors that make companies and communities successful.

How do you build an Early Warning Business Development System?

In 1996, MCLR initiated such a network in New York City. With initial financial support from New York State's economic development department, we developed a pilot project in Brooklyn--a borough that was experiencing a loss of manufacturing companies and growth of poverty. We started with two activities: research and recruitment.

We gathered a list of all the companies in Brooklyn with 100 or more employees and begin to gather as much public information as we could about each of these 700 companies. Were they locally owned? Was employment increasing or decreasing? Were they in industrial sectors that were growing or retracting in the economy? Were the workers unionized? What financial information could we find out from annual reports, trade publications, government resoures, investment data bases, etc? With this information, we assembled a data base and began to analyze these companies, looking for early warning signs of trouble.

At the same time, we began to systematically reach out to labor, community, religious, development, business, professional, and governmental organizations. We introduced them to the concept and tried to recruit them to the project. After several months, we held training sessions for leaders from 30 interested organizations, using our Early Warning Training Manual as a tool.

We then held the founding meeting of the New York Industrial Retention Network (NYIRN), bringing together the various organizations, introducing them to the results of our research and data gathering, and proposing the creation of a staffed project. This project would continue to build this network, gather information from each of these participating organizations that they would be gathering from their own members on local companies; and then provide various kinds of assistance to save and create jobs.

Now NYIRN is operating in all five boroughs of New York City, has a small full-time staff; has a Board of Directors including the Central Labor Council, local community development organizations, and government; and has provided assistance to over 300 companies in the last two years.

The Key Role of Labor:

At the heart of such a system, has to be labor. Labor is the key source of information about the problems and opportunities inside the firm, and information is crucial to developing effective policy. Workers--organized or unorganized-- provide the best source of non-public information about a company, by virtue of the fact that they:

spend 40 to 80 hours a week there;

observe or participate in all aspects of operations in every department;

may have years of experience and perspective in evaluating the significance or insignificance of any change in the company; and

have a long-term vested interest in the success and continued operations of the company.

Workers often do not know the significance of the information around them, nor what to do with it, nor how it can and should be used. Traditional relations of production discouraged workers from becoming aware of the centrality of their role or the benefits that might come from analyzing what is going on. Neither unions, managers, local government, development corporations, or others in the community yet reach out routinely to employees as a source of information. Yet their information is critical for a new strategy for development and needs to be part of the foundation of effective action at the firm, community, or macro level of the economy.

When I worked at Taylor Forge, I was periodically assigned to be a janitor when other work wasn't available. Always curious, I would go through every trash box I emptied in the management offices and read various memos. I knew a lot about the company, but I never realized how important that information was in recognizing that the company was at risk of closing. And nobody asked me for it. Yet the information I gathered, combined with some of the other obvious problems in the shop should have raised the flag of alarm three or four years before the company closed--and at a time that the union could have taken action that could have prevented the closing.

There are two benefits from gathering worker's information: the information itself, and the resulting change in the consciousness of the worker. The information gathered is critically important to not only prevent a possible closing of the company, but to also prepare the union to be more effective in fighting for improved wages and benefits, and to strengthen their organization within the company. And there is also a powerful impact on the individual worker who begins to gather this information who begins to see themselves more than just a person working for a wage but someone who can play a key role in determining the future of the company and building the strength of labor.

A critical foundation for labor's economic strategy

This approach is a starting point for a whole new approach to building the local economy that combines social values and priorities with business sophistication. It helps shatter the illusion that labor and community must remain powerless in face of the "inevitable" shifts in the global economy; that labor and community must only be in a position to "react" to traditional management initiatives in the local economy, and that "there is no alternative" as we face the continuing increase in poverty whether in the United States or South Africa. There are several specific benefits of initiating Early Warning Business Development Systems:

1. It creates an effective entry point of popular labor and community organizations into economic development and the manufacturing economy. To retain a manufacturing company has a significant positive "ripple effect" on the rest of the local economy. Experience in retaining companies is an excellent training ground for learning how to start-up a company.

2. It creates an opportunity for genuine and effective partnerships between labor, local business, government, and the broader community and serves as a practical reflection of a stakeholder vision of the economy. Labor organizations are in the best position to initiate, lead, and benefit from this approach because they are at the place where work is done. In leading this work, labor unions can demonstrate their commitment and capacity to act in the interests of the whole society, not just for the benefit of only their members.

3. It creates a practical opportunity for labor and community-based organizations to go beyond a sole focus on redistribution of wealth and take responsibility for protecting and building our productive capacity and leading in the creation of wealth. Taking full responsibility for the creation wealth lies at the heart of transforming a society from the old to the new. In an era when larger segments of the traditional business community are turning to business strategies that are destroying local economies, labor doesn't have the luxury of being only reactive or oppositional.

March 13, 1999