01 Mar 2011

The Path to Economic Revival

America Needs an Economic Strategy to Put Innovation Back on Track
by Roger Thompson


After decades of destructive outsourcing, America’s ability to innovate and create high-tech products essential for future prosperity is on the decline, argue Gary Pisano, the Harry E. Figgie Jr. Professor of Business Administration, and Professor of Management Practice Willy Shih. They won the prestigious McKinsey Award for their July–August 2009 Harvard Business Review article, “Restoring American Competitiveness,” which lays out their views in detail. Despite their dire analysis, Pisano and Shih remain cautiously optimistic that the United States can regain its competitive footing.

When it comes to manufacturing, do you see a future for Made in America?

Shih: I think it becomes more and more problematic. We see the symptoms of decline, which are driven by things like labor arbitrage and industries moving assembly overseas, followed by more and more sophisticated work. The thesis that we advance is that exporting manufacturing has a negative impact on the country’s industrial commons, which represents the collective capability to sustain innovation.

Pisano: Is there a future? Yes. It’s not too late. There’s still a manufacturing base in the United States, and it’s quite large even though it’s a small percentage of the economy. But if things continue the way they’re going, I’m more doubtful. Manufacturing capability takes a while to erode. But the damage is almost irreversible; that’s the concern. So now is the time to be doing something about it before we get to the point where the answer is no.

Isn’t it true that the United States is still an innovation powerhouse?

Shih: I think so. But the problem comes about as more manufacturing moves offshore and commercialization capabilities diminish. Flat-panel displays are a good example. Because there is no flat-panel manufacturing capability in the United States, there is a real question in my mind whether companies here will continue to be competitive in developing flat-panel display innovations.

So exporting manufacturing ultimately drains away American innovation?

Pisano: Absolutely. That’s the heart of our argument. That’s what we feel is not well understood in a lot of discussions. Willy and I would characterize it as 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.

What does this reliance on manufacturing tell us about globalization?

Pisano: 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 of the economy, which could lead to a decline in the standard of living. 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 interest of companies and the country have diverged.

Shih: I’ll give you a historical example. In the semiconductor industry, outside of Intel and a few smaller players, most U.S. semiconductor manufacturing has moved offshore to places like Taiwan, Singapore, South Korea, and increasingly China. As more and more capability moved offshore, other industries in the host countries have benefited from the semiconductor manufacturers’ capabilities. It’s no coincidence that the entire flat-panel display industry emerged from semiconductor industry capabilities. The people who built the factories to make semiconductors used that knowledge to build factories to make flat-panel displays.

The next thing to watch is the replacement of the incandescent lighbulb. The lighting industry is moving to LED technology at a very high speed. And all the LED lighting companies draw on the same capabilities that emerged in the flat-panel display and the semiconductor industries. So the world’s supply of high-efficiency lighting will be from those same regions of the world, primarily Taiwan, South Korea, and China.

Could semiconductor makers have foreseen that outsourcing one day would hurt the country’s ability to produce flat-screen TVs and LED lighting?

Pisano: Semiconductor companies were not thinking about the future of lighting. That’s not their business. But that’s a challenge, and that’s the complexity of this. It also suggests a role for public policy in terms of making sure the country is maintaining a broader set of manufacturing capabilities.

You talk about China having a national strategy for economic development. Does the United States need one?

Shih: 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” involves some degree of central planning. What we’re talking about is a discussion about strategic capabilities that need to reside within the country.

Pisano: Unlike other nations, we don’t have a national economic strategy. There’s this big debate about whether we should have one. My answer is absolutely yes. If you look at the United States in the postwar 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, but it was not industrial policy. There’s an important need today for having a coordinated national strategy at the policy level.

Will U.S. manufacturing stage a comeback?

Pisano: There are real reasons to be optimistic: The U.S. economy is quite resilient, and it’s quite flexible. These are things to build on. 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.

When you address the country’s manufacturing challenges in your classes, what do you hope your students take away from the discussion?

Shih: What I hope for is that future managers will take away a more thoughtful approach about manufacturing and think about, as Gary said, the longer-term implications of their actions for their companies as well as for the countries in which they operate.

Pisano: One of our key messages is to get students to appreciate that manufacturing involves a lot of knowledge work. There has almost been a whole generation of MBA students and managers who have been brought up on a false idea that manufacturing is kind of the brawn and not the brain, and that the country should focus on the brain.

We also have to acknowledge our predecessors in the Technology and Operations Management Unit. For many years, people like Bob Hayes, Kim Clark, and Steven Wheelwright were arguing that manufacturing mattered to competitiveness. So what Willy and I are saying today is a continuation of a core theme taught here for twenty years. And we plan to stay at it for another twenty years.

—Roger Thompson


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