A Parable of American Competitiveness

In the February 6, 2012 edition of Working Knowledge, Dina Gerdeman interviews Harvard Business School Professor Willy Shih and former President of Eastman Kodak's digital imaging business for several years.  Professor Shih makes the following observations:

• Outsourcing has chipped away at America's what he calls “industrial commons”.  I prefer the more descriptive term “tribal knowledge”.  In either case, it means the collective R&D, engineering, and manufacturing capabilities that are crucial to product innovation and new product development.

• Unless the US Government increases its support of scientific research and collaborates with the business and academic world, United States will continue slipping further in its ability to compete on the industrial stage. 

My concern is twofold.  We should not rely on the Government to fix this.  This is principally a free market issue, although the Government can certainly help. 

Secondly, we have seen that there is a difficult balance between the Government picking winners (and unfortunately losers) and letting free markets work.  The Government should invest in the research and let the markets through business people and entrepreneurs pick the winners.

From his experience at Kodak, Professor Shih saw that when American companies move pieces of their operations overseas to achieve cheaper manufacturing and labor costs, they often risk moving the expertise, innovation, and new growth opportunities as well.

Disastrous fallout

Outsourcing manufacturing operations has been occurring for decades, based on the assumption that moving grunt work overseas wouldn't affect US companies' competitive edge in the global marketplace. But Shih says that this assumption is wrong, and the fallout has been disastrous.

In reality, developing and executing a manufacturing process often sparks ideas that lead to creation of innovative new products. So when American companies allow the production of high-tech products to disappear from the local landscape, they also inadvertently risk losing expertise to produce the next generation of cutting-edge products.

Executives who defend outsourcing argue that there aren't enough American workers with the right skills or American factories with the same speed of production found in other countries. And besides, by moving work outside the United States, they contend that enough profits can be generated to stoke innovation at home.

I would add that if these two issues are in fact the problem, it begs the simple question “why is this?” The problem for US policymakers and companies competing in a global marketplace is this: How do we get enough American workers with the needed skills?  Once that issue is solved, the speed of production question becomes a simple matter of investment. 

 

Heading upstream

Shih says letting go of the design work is dangerous because it could block American companies' chances of designing the newest high-tech products and learning from those experiences. 

The United States didn't always allow technological innovation to run adrift. In the 1960s through the '80s many high-tech products could only be found in the United States. These successes were due in large part to government investment in basic science research and mass production.  The US Space Program, which is now being significantly reduced, is a prime example.

Government's role

Shih continues that if the United States wants to keep from slipping further in its ability to compete on the industrial stage, the government must increase support of scientific research and collaborate with the business and academic world. In addition, government officials and business leaders need to map out a long-term plan focused on efforts to keep important capabilities in the United States with the idea that they might bear future innovative fruit.  I would add that collaboration in the area of education to assure that American workers with the skills needed for today’s and tomorrow’s needs are available. 

Outsourcing by itself is not evil, Shih says. In many cases it makes perfect sense, but "we need to be more thoughtful and take a more sensible approach."

Shih concludes that US companies need to continue making long-term investments in R&D, and at the same time, management needs to stop "exaggerating the payoff and discounting the danger" of outsourcing production and cutting R&D.

"The United States is still the world's richest and largest economy. But at some point we need to have a discussion on the national agenda about what kinds of capabilities are important for the United States in the twenty-first century, and we need to invest in them.”

Click here for Gerdeman’s complete article less my insightful comments.