Sam Keller's TEC Blog

Tuesday, March 29, 2011

Why Manufacturing Matters

After decades of outsourcing, America's ability to innovate and create high-tech products essential for future prosperity is on the decline, argue professors Gary Pisano, Professor of Business Administration at Harvard Business School, and Willy Shih, Professor of Management Practice in the Technology and Operations Management Unit also at Harvard Business School. Yet they are cautiously optimistic that it is not too late to get it back. From HBS Alumni Bulletin. Click here for the full article.

Key concepts include:

  • There is a long standing misconception that manufacturing is kind of the brawn and not the brain, and that the country should focus on the brain, i.e., product design and innovation.
  • There is a role for public policy in terms of making sure the country is maintaining a broader set of manufacturing capabilities.
  • Manufacturing capability takes a while to erode, but the damage is almost irreversible. So now is the time to be doing something about it.

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The authors argue that the United States is still an innovation powerhouse, but the problem comes about as more manufacturing moves offshore and commercialization capabilities diminish. This is true because exporting manufacturing ultimately drains away American innovation.

There has been a naive view that innovation is just about R&D and separate from manufacturing. People in the United States and other advanced industrialized countries say that the future is in innovation, not manufacturing, as if manufacturing is not part of the innovation process. In many sectors that's simply not true. The ability to develop very complex, sophisticated manufacturing processes is as much about innovation as dreaming up ideas.

In my own 30+ years in engineering design and manufacturing, product innovation and product design are only part of what’s needed to produce high quality, low cost products. Manufacturing processes are also key to success. Moreover, close collaboration between design and manufacturing are essential. I use the term “design for manufactureability”. This becomes problematic when the design engineer and the plant are 10,000 miles apart.

So here’s the problem. For any individual company, it is often better, in the short or intermediate term, to outsource production to an overseas supplier. The company can buy manufacturing services at a much lower rate if it goes to China or elsewhere, depending on the industry.

But if everybody is doing that, you get a general erosion in the ability to innovate - to increase quality, reduce costs and develop breakthrough products. This results in the long term erosion of the American economy. An individual company, though, can move assets anywhere. So companies can reward their shareholders regardless of what happens to the national economy. As a result, the interests of companies and the Country have diverged.

The authors point out that one of the issues in developing a national economic strategy has been confusion with the term "industrial policy," which “has been anathema in Washington”. "Industrial policy" suggests some degree of central planning. We don’t and shouldn’t do that.

They further point out that, unlike other nations, we don't currently have a national economic strategy. Note that strategy is different from policy, which is tactical. The authors think that we should develop a national strategy. I agree.

If you look at the United States in the post WWII period, there was a very strong national economic strategy around using science to drive economic growth. We created the National Science Foundation and the National Institutes of Health, among others, and the government invested dramatically in building a scientific and technical infrastructure needed to fuel growth. That was the national strategy, and it was not industrial policy.

Pisano and Shih conclude that there's an important need today for having a coordinated national manufacturing strategy at the highest level. I say that the need is more than important, it is critical in order to stop the erosion that we have been experiencing.

On the bright side, there are real reasons to be optimistic: The U.S. economy is quite resilient, and it's quite flexible. “We wouldn't want anybody to interpret what we are saying as the sky is falling. While there are some issues around policy, and there are some issues around management, it's time for executives to be leaders in terms of building the kind of capabilities that are going to make their enterprises great over a longer period of time.

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