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Statement of the Problem
/
For U.S. manufacturing, an extended period of world domi-
nance in manufacturing innovation, process engineering, produc-
tivity, and market share has ended. Other countries have become
leaders in certain industries, the U.S. market is being flooded by
manufactured imports, and U.S. manufacturers are faced with rel-
atively low levels of capacity utilization and declining employment.
The reasons for this fundamental change are complex. Unproved
capabilities and competence of foreign manufacturers are partly
responsible. Either government interference or the lack of govern-
ment support has been blamed. Cultural disadvantages are often
cited. Many economists explain the relative decline of U.S. man-
ufacturing simply as economic evolution, with the United States
moving toward a service economy. These and other factors have
been held responsible for the relative decline of U.S. manufactur-
ing, and all are legitimate partial explanations. The truth re-
mains, however, that U.S. manufacturing is not performing as
well as that of many foreign competitors and has lost competi-
tiveness in many industries. Regardless of why the environment
has changed, the managerial practices, strategies, and organiza-
tional designs applied by U.S. manufacturers have not adapted
sufficiently to the changed competitive environment, and, conse
5
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6
fluently, U.S. manufacturing has not been as successful as that of
other countries.*
These changes in relative manufacturing strength are occur-
ring at the same time that many technological innovations promise
to revolutionize products and processes in manufacturing. Just
as major technological breakthroughs spurred industrial develop-
ment in the mid-eighteenth century Astern power, new engine-
driven machinery) and the development of the modern factory
system in the late nineteenth century (electricity, the telephone,
and mass production techniques), current breakthroughs in elec-
tronics, materials, and communications are creating another revo-
lution ~ manufacturing. Just as earlier changes forced new direc-
tions in manufacturing management, production strategies, and
national policies for maximizing competitiveness, the competitive
and technological changes affecting manufacturing today should
create new goals, new priorities, and new expectations in U.S. in-
dustry. Many manufacturing managers and national policymak-
ers, however, have been slow to recognize the implications of these
developments. U.S. manufacturing is in danger of being unpre
~ The term competitiocr~ca~ is subject to a variety of definitions. In simplest
form, an industry is competitive if the price, quality, and performance of its
products equal or exceed that of competitors and provide the combination
demanded by customers. International competitiveness is somewhat more
complicated because price is heavily influenced by exchange rates, which can-
not be controlled by an individual producer. Many economists would claim
that the recent high rate of the dollar has been responsible for any lost com-
petitiveness of U.S. manufacturing, and recent adjustments to the dollar will
restore competitiveness. This may or may not be true, however, because ex-
change rates are only one determinant of product price, and price is only one
determinant of competitiveness. Price is also determined by production costs,
and quality and performance, including innovation, unique or superior design,
and reliability, are in many cases more important determinants of competi-
tiveness than price. If U.S. manufacturers can produce high-quality goods
with less labor, materials, overhead, and inventory than foreign producers,
then competitive production can be ensured. These are the areas in which
U.S. manufacturers have lagged improvements in the use of these resources,
as well as product quality and performance, are the requirements for improved
competitiveness.
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7
pared to compete in the coming age, a failure that would cause
rapid erosion of the nation's manufacturing base.
Effective response to the changes in manufacturing depends
on a clear understanding of the new environment. Although spe-
cific developments are difficult to predict with certainty and the
types of changes wiD vary tremendously among industries, likely
trends can be identified. Competition will continue to increase
both at home and abroad. New products win proliferate; many
products wiD have shorter life cycles and development cycles.
Some industries will have smaller production volumes, with more
product customization and variety. New technologies, especially
those based on microprocessors, will optimize control of the pro-
duction process and offer entirely new capabilities. Fewer pro-
duction workers and middle managers wiD be needed, but the re-
maining jobs will require higher skill, more technical knowledge,
and greater responsibility. Managers wiD need to manage man-
ufacturing as a system, basing decisions on new, nontraditional
indicators. Direct labor costs will decrease significantly, and the
costs of equipment, materials, distribution, energy, and other over-
head will grow in importance.) Quality, service, and reliability will
receive much more emphasis as determinants of competitive pro-
duction.
These trends indicate that competition, both international
and domestic, will be more intense and that the factors determin-
ing competitiveness wait differ substantially from past experience.
Strategies and priorities designed to enhance competitiveness in
the mid-twentieth century will be far less effective in the future.
The new manufacturing environment will be sufficiently familiar
to permit many firms to continue to use traditional approaches,
but these firms will lose market share, profits, and the ability
to compete. In the new environment, it will not be sufficient to
do the same old things better. Companies will need to adopt
new management techniques, organizational structures, and oper-
ational procedures to strengthen their international competitive-
ness. Government policies must also ensure that U.S. manufactur-
ers receive the infrastructural support they will need to compete
effectively.
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8
TABLE 1 Changes in U.S. Manufacturing Outputs
Average Annual
Percentage Change As a Percentage of
Durable Nondurable Total Output
Period Total Goods Goods (average)
195~1983 3.1 3.0 3.1 24.4
195() 1973 4.0 4.0 4.0 24.6
197~1983 0.9 0.7 1.1 24.1
Slowdown 3.1 3.3 2.9 0.5
a Gross product originating in manufacturing in constant dollars.
i Gross national product in constant doDars.
SOURCE: U.S. Bureau of Labor Statistics, 1985.
A HISTORICAL PERSPECTIVE
ON U.S. MANUFACTURING
For much of the twentieth century, U.S. manufacturers were
unchallenged in an environment In which conservative approaches
to both process technology and managerial techniques produced
successful results. Foreign competition was minimal, the vast do-
mestic market encouraged product standardization and economies
of scale, and the preeminence of Yankee ingenuity was unchal-
lenged. Companies modified strategies and processes in minor
ways in response to shifting economic circumstances, but mostly
the system worked and they had little incentive to change. The
relative stability of the manufacturing environment was unsus-
tainable, however; a series of changes has gradually converted the
traditional strategies to handicaps.2
One change has been in the way companies justify new invest-
ment in manufacturing. During the 1950s and 1960s, the emphasis
in manufacturing was on providing substantial additional plant
capacity that was needed just to keep up with market growth.
The addition of capacity provided the opportunity to incorporate
process improvements that otherwise were rarely implemented.
Beginning in the early 1970s, the rate of growth slowed (Table 1),
in many cases eliminating the need for additional capacity. Com
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9
panics needed to develop new justifications for reinvestment in
manufacturing, which many have been slow to 30.3
Another major change in the manufacturing environment was
in the process of developing and implementing new innovations.
The first Industrial Revolution in the 1800s produced a series of
significant innovations in process and product technologies that
represented an integration of several types of technologies. In
contrast, during the early to mid-19OOs, manufacturers, except
perhaps for electronics and chemicals manufacturers, increasingly
refined proven technologies rather than developing and integrat-
ing new and diverse technologies to accomplish, or even elim~-
nate, traditional tasks. This apparent trend toward a more stable,
conservative approach to process technology in a broad range of
U.S. industries combined with a variety of other factors such as
changing labor demographics, higher energy prices, and lower ex-
penditures on research and development-to cause a shift toward
more modest improvements in productivity.
U.S. industries in which new technology did seem to offer
great potential focused predominantly on product engineering at
the expense of process engineering. (The semiconductor, chemical,
and biotechnology industries are exceptions most of the break-
throughs in their products depend on breakthroughs in process
capabilities.) Since manufacturers had their hands full simply
adding capacity of a known type, they saw no pressing need to
add new process technologies at the same time. Consequently,
many U.S. firms spent incremental dollars on product technology
and very little on new process technology. Generally speaking,
U.S. manufacturers left process development to equipment suppli-
ers and allowed their own skills at such development and its link
with product technologies and product quality to decline.
THE CURRENT ROLE
OF THE MANUFACTURING FUNCTION
These historic trends illustrate aspects of the manufacturing
environment that have shaped the strategies of U.S. managers.
For these and a variety of other reasons rooted in the history of
industrial development,4 many managers have focused on increas
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10
ing the productivity of the manufacturing function, emphasizing
production volume instead of product quality and reliability and
process development. They believe that manufacturing, at best,
can simply provide adequate support for competitive advantages
in marketing or design engineering. It is true that many firms,
particularly those in the Fortune 500, do enjoy substantial advan-
tages in manufacturing owing to economies of scale and degrees of
specialization that they have been able to achieve as large orga-
nizations. Generally, however, the charge to manufacturing, even
in these companies, has been "Make the product-without any
surprises." 5
The traditional view in many U.S. firms is that manufactur-
ing is a problem that can be solved with a given process at a
given tune. That process is then operated efficiently, with lit-
tIe incremental upgrading, until a significant improvement or new
technology is implemented by competitors. This command-and-
contro! view of manufacturing is based on the premise that smart
people should be able to determine the optimal solution (process)
for handling the tasks of the manufacturing function and then
control the process and organization for maximum stability and
efficiency until some external event forces change. Since the time
between changes varies, the repercussions of this view may not
be readily apparent. The key point is that it is a reactive view
that overlooks the potential contributions of the manufacturing
function to overall competitiveness.
Such an approach can erode the strength and competitive ad-
vantage provided by manufacturing. Quality, reliability, and deliv-
ery problems get blamed on manufacturing-the plan is assumed
to be good, so the people in production must have failed to de-
liver. The organization increasingly refines the detailed measures
of manufacturing in the process of removing degrees of freedom.
Scientific management techniques were developed to measure, pre-
dict, and control all the aspects of production in an effort to limit
change, or at least eliminate surprises, and achieve maximum pro-
ductivity. Advances in production planning, project evaluation,
and operations research offered new tools for maintaining stability
and increasing productivity. The introduction of computers and
manufacturing information systems in the late 1960s and early
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11
1970s was hailed as finally giving manufacturing a too} that could
be used to pursue the command-and-control approach to opera-
tions. Although designed to ensure stability in daily operations,
these detailed measurements and sophisticated control tools too
often can become ends in themselves and impediments to process
changes.
The consequence of this approach to manufacturing has been
increased tuning and refining of a set of resources that were out-
dated and increasingly inappropriate. The individual firm often
slipped into a debilitating spiral: additional investment was with-
held because the current investment was not performing as ex-
pected; those operating the current investment simply tried to
minimize the problem in the near term rather than looking for
long-term solutions they knew would not be approved and sup-
ported.
RECENT PERFORMANCE OF U.S. MANUFACTURING
The repercussions of this command-and-control approach,
with its reactive nature and short-term focus, are not difficult
to find. The United States has sustained a steady erosion of com-
petitiveness and overall manufacturing strength over the past two
decades that must be attributed at least partly to deficiencies
in standard management practices in manufacturing. Individual
companies have adapted to the new environment and fared well,
but overall the picture has been bleak. Declining growth trends in
manufacturing output have already been cited. Other indicators
include
.
Growth in manufacturing productivity (output per man-
hour) in the United States during the past 25 years has been
among the lowest in the industrial world (Table 2~. Although
manufacturing productivity in this country remains the worId's
highest, it has been virtually equaled in recent years by Japan,
France, and West Germany. Based on average hourly compensa-
tion and output per hour, unit labor costs in U.S. manufacturing
have been higher than those of our major competitors (Table 3~.
· In contrast to the growth in manufacturing trade surpluses
enjoyed by Japan and West Germany, U.S. performance over the
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12
TABLE 2 Output per Hour in Manufacturing, Average
Annual Percent Change
Country 196o~1973
1973-1983
Canada 4.7 1.8
France 6.5 4.6
West Germany 5.7 3.7
Japan 10.5 6.8
United Kingdom 4.3 2.4
United States 3.4 1.8
SOURCE: U.S. Bureau of Labor Statistics, 1985.
past 15 years has been highly erratic, with deficits of $31 billion
in 1983, $87 bdlion in 1984, and more than $100 billion in 1985
(Table 43.
· By 1984, manufacturing output was ~ percent above the
previous peak in 1979. Defense production, however, accounted
for more than 40 percent of that increase; nondefense output has
risen less than 1 percent annually since 1979, compared with 3.5
percent annually from 1973 to 1979.6
· Recent employment trends have been unfavorable in most
durable goods manufacturing industries, particularly import-
competing industries (Figure 1~.
· Capital investment as a percentage of output in U.S. man-
ufacturing has increased slightly over the past 10 years (Table 5),
but the composition of investment has tended to neglect tradi-
tional industries and new factory construction.7 Although U.S.
manufacturing investment has shown some improvement, it has
continued to be below that in other countries.
A major reason for the level and types of investment in
manufacturing, cited by other reports on U.S. manufacturing,8 is
the high cost of investment capital. The cost of capital in this
country is far higher than in other nations, and the return on
manufacturing assets has not kept pace with the return on finan-
cial instruments (Table 6, Figure 2~. In addition to the obvious
impact this differential has on investment costs, lower capital costs
and different sources of capital allow some foreign competitors to
succeed with much lower rates of after-tax profit on sales than
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13
TABLE 3 Foreign Labor Cost Components in Relation to U.S.
Producersa
Country
1970 1975 1980 1981 1982 1983 1984
-
Average Hourly Compensation
41 72 92 75 68 63 56
56 97 125 97 90 85 75
42 73 81 68 63 62 58
24 48 57 57 49 50 50
N.A. 6 11 10 10 10 10
36 51 75 65 58 51 46
100 100 100 100 100 100 100
France
West Germany
Italy
Japan
Korea
United Kingdom
United States
11
Output per Hour
France65 70 82 81 85 86 87
West Germany66 71 79 78 79 79 78
Italy56 60 70 70 71 68 69
Japan44 52 72 74 79 79 84
KoreaN.A. 15 17 18 18 17 18
United Kingdom41 43 42 43 44 45 44
United States100 100 100 100 100 100 100
Unit Labor Costs
France63 103 112 92 80 74 65
West Germany85 136 157 123 114 107 95
Italy75 123 115 96 89 91 84
Japan53 92 79 77 62 63 60
KoreaN.A. 39 63 57 59 60 56
United Kingdom86 120 177 151 132 115 105
United States100 100 100 100 100 100 100
-
NOTE: N.A. = not available.
aBased on U.S. dollar values derived from average annual exchange
rates.
SOURCE: Data Resources, Inc., 1985.
U.S. firms (1-2 percent versus 5-6 percent for U.S. firms). This
ctifference effectively provides extra funds for capital investment
or research and development expenditures.
There are a myriad of explanations for these troubling trends
in U.S. manufacturing. Management, labor, and government all
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14
TABLE 4 Trade Balance in Manufacturing, Billions of U.S.
Dollars
YearUnited States Japan West Germany
.
19703.4 12.5 13.3
19710.0 17.1 15.0
1972-4.0 20.3 17.7
1973-0.3 23.3 28.7
19748.3 38.0 42.4
197519.9 41.7 38.7
197612.5 51.2 42.1
19773.6 63.0 46.9
1978-5.8 74.2 53.5
19794.5 72.0 59.2
198018.8 93.7 63.1
198111.8 115.6 61.7
1982-4.3 104.0 67.5
1983-31.0 110.3 58.7
1984-87.4 127.9 60.5
1985-107.5 107.7 59.5
SOURCE: U.S. Department of Commerce, Bureau of Economic
Analysis, 1985, and International Trade Administration, 1986.
share responsibility. Macroeconomic factors such as domestic in-
terest rates, exchange rates, the availability and cost of labor,
foreign and domestic trade policies, and the constant seesaw of
business cycles all have had an impact. Uncertainty about gov-
ernment spending, tax, and regulatory policies, and changes in
the relative attractiveness of nontechnological (even nonmanufac-
turing) investments have deterred risky investments in new pro-
cess technologies and bred caution in managers. Pressure from
stockholders, standard financial evaluation procedures, and the
disruptive effect that new technology can have on short-term op-
erational efficiency also have caused managers to give priority to
maximizing returns on existing assets.9
OCR for page 15
15
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OCR for page 20
20
products, is not a long-term advantage. Constant improvement in
both products and processes is needed to ensure survival.
As these examples illustrate, pervasive and potentially dam-
aging change is overtaking U.S. manufacturing across the spec-
trum of industries from traditional to thigh tech." Industries as
diverse as motorcycles, consumer electronics, and semiconductor
memories also have been subject to lost leadership and declining
market shares. Many firms recognize the change and are respond-
ing, though often in limited ways. Many more do not recognize
the problem or think that it does not apply to them or their in-
dustries. Still others attributed their difficulties to the recent high
value of the dollar and are looking forward to the benefits of the
recent dollar depreciation.
Factors such as interest and exchange rates and unfair for-
eign competition do have significant effects on industrial health.
Unfavorable trends in these areas, however, provide easy scape-
goats and disguise other important factors that are changing the
manufacturing world. A majority of U.S. manufacturers need to
recognize that lowering the cost of the dollar in international cur-
rency markets, while important, will not solve all their competitive
problems the price elasticities of many important U.S. imports
and exports will determine the long-term effect of the recent de-
cTine in the dollar. Although some U.S. commodity exports, such
as timber, coal, and some agricultural goods, are likely to increase
as the dollar declines, exports of capital goods and major imports
of items such as machine tools, automobiles, and consumer elec-
tronics may change little as the dolIar's value changes, at least
in the near term. Many consumers continue to prefer foreign
goods because of perceived quality and reliability advantages over
their U.S. counterparts. Furthermore, many foreign companies
in a range of industries have advantages in production costs that
permit them to offset even unexpectedly large devaluations of the
dollar by limiting price increases in the U.S. market.~9
More U.S. firms need to join the minority that recognize the
challenges emerging in manufacturing and are devoting resources
to meet them.20 Although competitive challenges are spreading
to more and more products and industries, too few companies are
making the essential commitment to competitive manufacturing
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21
operations in the United States. The rising competition from pre-
viously weak or nonexistent sources is prompting a response, but
it is insufficient. The initial, and natural, reaction is to do every-
thing better. Redoubled efforts are nearly always beneficial; it is a
rare company that does not have room to improve. Doing things
better than yesterday or better than competitors today, however,
will not necessarily ensure long-term competitiveness.2i
Another response has been to move production facilities off-
shore, through foreign direct investment, outsourcing, joint ven-
tures with foreign producers, or other mechanisms. While such
arrangements have clear short-term advantages in terms of for-
eign market penetration and labor cost containment, the long-
term repercussions of offshore production strategies are not clear.
In some industries, firms must move constantly in search of even
lower wage rates; in others, host countries insist on domestic con-
tent, technology transfers, and domestic equity positions that lead
to independent, competitive production capabilities. Factors vary
across industries, and some firms in labor-intensive industries may
have no choice but to move production offshore or purchase com-
ponents or products from abroad. As technological developments
yield effective alternatives to offshore production and conditions
for foreign direct investment become more stringent, a better un-
derstanding is needed about the effects of offshore production
strategies on the long-term interests of individual firms and the
domestic industrial base.22
Another response from U.S. manufacturers has been based on
the widely held idea that technology will solve the problem. Ad-
vanced manufacturing technology can provide dramatic improve-
ments in efficiency, but only if the groundwork is laid. The benefits
of new technology will not be fully achieved if the organizational
structure and decision-making process are not changed to take
advantage of available system information, if the work force is
not prepared for the changes brought by the technology, and if
potential bottlenecks created by automating some operations but
not others are not foreseen and avoided. Many companies that
have powerful computer-aided design (CAD) systems, for exam-
pie, are using them as little more than electronic drafting boards,
negating many of the capabilities that CAD provides because am
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22
propriate adjustments in the organization have not been made.23
Managers need to understand that technology is both a too] for
responding to competitive challenges and a factor causing change
in manufacturing.
Recent economic data and the experiences of specific indus-
tries suggest that a strong case can be made that U.S. manufactur-
ers, with the exception of a handful of enlightened companies, are
not responding adequately or entirely appropriately to new com-
petitive challenges, even as those challenges intensify. The first
corrective step is to convince managers that they face a manufac-
turing problem that new technology, offshore production, changes
in exchange rates, and redoubled efforts cannot resolve. The next
step is to indicate the kinds of changes in manufacturing organiza-
tions that will be needed to maintain long-term competitiveness.
The changes needed can be described broadly as a shift from
the traditional management goal of maximizing stability, produc-
tivity, and return on investment in the short term to the new
goal of maximizing adaptability to a rapidly changing market,
with long-term competitiveness as the first priority. A number
of authors have detailed the changes that are necessary in the
management of the manufacturing function.24 Hayes and Wheel-
wright, for example, describe the needed changes as a shift from
an "externally neutral" role for the manufacturing function, in
which the firm only seeks to match the process capabilities of its
competitors, to an Externally supportive" role, in which process
improvements are continually sought and implemented in an effort
to maintain a lead over competitors, and manufacturing is viewed
as a significant contributor to the firm's competitive advantage.25
This shift cannot be made overnight, and it is far too easy to back-
slide once a new plateau is reached. The shift requires changes
in organizational structure and decision-making processes, and it
demands new skills: managers must learn to manage change.
STAKES FOR THE U.S. ECONOMY
Because manufacturing remains crucial to national economic
and defense interests, the repercussions of declining competitive-
ness could be devastating. Many economists argue that continued
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23
erosion of the domestic industrial base is limited because manufac-
tured goods are the major component in international trade. The
United States will remain a major manufacturer because world
markets wiD not tolerate a constant large U.S. trade deficit. Ex-
change rates will adjust to ensure that the United States can ex-
port manufactured goods. Alternatively, the United States will
suffer a recession that wall dampen demand for imports and aDe-
viate the trade deficit. Recent historical evidence for this argu-
ment, however, is ambiguous at best: the United States managed
only small surpluses in manufactured goods during the late 1970s,
when the doDar was relatively weak, and had a small deficit in
the recession year of 1982 (see Table 4~. Particularly because
exchange rates increasingly react more to financial flows than to
goods flows, the sustained process of devaluation of the dollar
necessary to maintain the competitiveness of U.S. manufacturers
would be difficult to accomplish both economically and politically.
Recessions and shifts in currency value can be painful ways
for the nation to reach equilibrium in its manufacturing trade. An
alternative is for U.S. manufacturers to implement the organiza-
tional, managerial, and technical changes necessary to maintain
a strong manufacturing sector. Competitiveness would be based
on leadership in product performance and quality rather than on
a declining exchange rate. The resulting strength would provide
the basis for continued economic growth and provide crucial ad-
vantages in areas of national importance, such as
· Defense-Counter to conventional ideas that a strong in-
dustrial base is necessary to meet U.S. defense commitments, some
economists have argued that these commitments can be met with-
out broad support for manufacturing.26 Although it may be pos-
sible to meet them through selective policies designed to support
specific defense production instead of entire industries, such an
approach would be inadvisable for two major reasons. The first
is that it would not provide the productive capacity needed for
surges or mobilization in the event of a prolonged conventional
engagement. The second reason is that selective policies would
hinder the ability of defense contractors to maintain broad tech-
nological superiority. This, in turn, would limit their flexibility
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24
in response to new defense needs. Production capacity and the
technological level of weapons systems are closely linked. Ad-
vanced weapons that maintain the qualitative advantage built into
the U.S. defense posture require complex manufacturing processes
and advanced production equipment, which in turn require broad-
based manufacturing capacity.27 Both the weapons and the pro-
duction processes are most effectively developed and implemented
in the broad context of a healthy manufacturing sector.
· Living standards Although an absolute decline in the
manufacturing base might be countered in the short term by
growth in the service sector, services are unlikely to be able to
absorb a large percentage of unemployed manufacturing workers
at their customary level of wages and benefits. Economists dis-
agree about the validity of projections of a shrinking middle class,
but declining manufacturing employment would certainly have a
large impact on total wage and benefit packages.28 The increased
competition for jobs in services, as well as the likely increase in
competition among firms in that sector, would moderate wage
growth in services.
International competition in services also can be expected
to intensify and moderate wage levels. Apart from the effect of
this competition on wages, sufficient growth in services is not at
all ensured because many services are tied to manufacturing; if
manufacturing decays, these services will decline, too. Further-
more, there is no guarantee that the United States can maintain
a comparative advantage and large trade surplus in services that
would be necessary to pay for manufactured goods.29 It is not at
all clear that the nation's long-term economic strength lies in ser-
vices or that potential strength in services is greater than potential
strength in manufacturing. Given these considerations, the extent
to which services can absorb workers displaced from a declining
manufacturing sector and drive overall economic growth remains
in doubt.
A technologically advanced manufacturing sector also would
result in displacement of workers, but in a competitive, dynamic
economy that should be much more successful at creating new
jobs. The development of new products, technologies, and support
needs would create whole new industries with job opportunities
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25
that would be unlikely to develop in a stagnating manufacturing
sector.
· National economic and political goad In the domestic
economy, regional concentration of manufacturing activity creates
the potential for economic disruption from a declining manufac-
turing sector that would be disproportional to its share of the
gross national product. The decline of whole communities depen-
dent on a single factory is, of course, not a new phenomenon, but
past experience has clearly shown that the necessary adjustments
are difficult and costly. Services in those regions and communities
tend to depend on manufacturing and are ill equipped to provide
employment and generate income in the face of a declining indus-
trial infrastructure. The decline of U.S. manufacturing would have
a severe adverse effect on these regions, and the national policies
that would be necessary to support them would be politically dif-
ficult to enact. These patterns of regional strength and weakness
serve to exacerbate the national economic dilemmas posed by a
decline in U.S. manufacturing.
On an international scale, the sheer size of the domestic mar-
ket is a major driver of economic development, competition, and
continued advances on a global scale as a growing number of for-
eign manufacturers compete for a share of the U.S. market. A
declining ability of the United States to supply its own manufac-
tured goods, however, would fundamentally change the relation-
ship between this country and foreign manufacturers. Domestic
companies would have less revenue and incentive to pursue strong
research and development programs, leading to less innovation
and invention and fewer patents. The lack of manufactured goods
to trade and of manufacturing income to purchase foreign goods
would reduce the bargaining position of U.S. producers and the
attractiveness of the U.S. market.
These points illustrate the importance of a strong manufac-
turing sector and the danger of considering the demise of U.S.
manufacturing in purely economic terms. Clearly, each individ-
ual industry need not survive, but manufacturing as an economic
activity is too important to let decay. Changes in management,
process technology, corporate organization, worker training, moti
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26
vation, and involvement, and government policies are necessary to
ensure that resources flow to manufacturing. Changing traditional
ideas about education, the role of workers, investment in research,
development, and innovation, and overall attitudes toward manu-
facturing will require input and active participation from a variety
of sources. The transition will not be painless. Job displacement,
plant closures, and changing industrial patterns will be the norm,
as they always have been. But these events will take place in a
dynamic economy and, therefore, will be accepted and resolved as
smoothly as possible. The result will be a competitive manufac-
turing sector, far different from today's, that will be a leader in
the new era in manufacturing.
This prospect of a dynamic manufacturing sector is, in fact,
the Manufacturing Studies Board's vision for U.S. manufacturing.
The nation's manufacturers are likely to succeed in making the
transition from stable, controlled enterprises to flexible, adapt-
able businesses that use the latest technology to keep pace with
rapidly changing consumer demands and competitors. Timing is
essential, however. Market pressures should force these changes
eventually, but by then most U.S. firms would be a step behind.
The Manufacturing Studies Board hopes to stimulate debate on
the nature of the challenge and to hasten the response of U.S.
manufacturers, government officials, educators, and labor leaders
to the new environment. The following chapters sketch both the
technological and human aspects of manufacturing in the future.
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NOTES
~ Time trends for the components of value added in manufac-
turing are clearly illustrated by the following graph. See Miller,
Jeffrey G., and Thomas E. VolIman, 1985, The Hidden Factory,
Harvard Business Review 63~5~:142-150.
80
C, 70
LL
>
IL
o
LU
z
C)
60
50
40
30 _
20
--- Overhead as a percentage of value added
Direct labor as a percentage of value added
-X~
./ \~1 BAJA /
A_
-
1 1 1 1 1 1 1 1 1
1855 1870 1885 1900 1915 1930 1945 1960 1975
YEAR
2A number of papers addressing aspects of the evolution of
the manufacturing environment and manufacturing management
from a historical perspective can be found in Clark, Kim B.,
Robert H. Hayes, and Christopher Lorenz, eds., 1985, The Uneasy
Alliance: Managing the Productivity Dilemma. Boston, Mass.:
Harvard Business School Press.
3Much of the significant drop in the growth of manufacturing
output since the 1970s can be attributed to short-term, transient
factors, making long-term projections of output growth difficult
at best. Long-term manufacturing output as a percentage of U.S.
GNP has remained fairly stable at around 22-24 percent.
4In particular, see Skinner, Wickham, The Taming of Lions:
How Manufacturing Leadership Evolved 1780~1984, pp. 6~110 in
The Uneasy Alliance.
5Whee~wright, Steven C., and Robert H. Hayes. 1985. Com-
peting Through Manufacturing. Harvard Business Review (Jan-
uary/February), pp. 99-109.
dormer, Lionel. 1985. U.S. Manufacturing at a Crossroads:
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28
Surviving and Prospering in a More Competitive Global Econ
omy, p. 4. Washington, D.C.: U.S. Department of Commerce
International Trade Administration.
7For a detailed analysis of the composition of U.S. manufac-
turing investment, see Eckstein, Otto, Christopher Caton, Roger
grinner, and Peter Duprey, 1984, The DRl Report on U.S. Man-
ufacturing Industries, pp. 21- 28, New York: McGraw-Hill Book
Company.
The issue of high capital costs is given particular emphasis in
The President's Commission on Industrial Competitiveness, 1985,
Global Competition: The New Reality, Vol. 2, p. 113, Washing-
ton, D.C.: U.S. Government Printing Office. Also see pp. 28-35
in The DR! Report on U.S. Manufacturing Industries.
9For a more elaborate discussion of the factors influencing
managerial investment decisions, see Gold, Bela, 1979, Produc-
tivity, Technology and Capital: Economic Analysis, Managerial
Strategies, and Governmental Policies. Lexington, Mass.: D.C.
Heath-Lexington Books.
i°For exa~nple, see I.awrence, Robert Z., 1985, Can America
Compete? Washington, D.C.: The Brookings Institution.
Probusiness Week. April 22, 1985. Can Detroit Cope This
Time?, p. 84.
i2 U.S. Congress, Office of Technology Assessment. 1986. Tech-
nology and Structural Unemployment: Reemploying Displaced
Adults, p. 388. Washington, D.C.: U.S. Government Printing
Office.
i3This figure represents aDDroximatelv .; n~r`~F`nt. of 1~1 ~z~l"o
of $1.7 billion.
~_ ,, ~ ~ ~ ~ ~
l4 Business Week. August 26, 1985. Fighting Back: It Can
Work, p. 64.
15The company uses electric furnaces and scrap iron to pour
slightly more than 1 million tons of steel per year, compared with
an average capacity for an integrated steel plant of 3.2 million tons
per year.
i6Fighting Back: It Can Work, p. 64.
t7Note on Small Companies in the Disk Drive Industry. 1985.
Palo Alto, CaTif.: Stanford University Press.
reporter, Michael. 1986. Why U.S. Business is Falling Behind.
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29
Fortune 113(April):255-262.
t9For an analysis of the relationship between a dollar deval-
uation and the trade deficit, see Karczmar, Mieczyslaw, 1985, A
Weaker Dollar Won't Slow Imports, The New York Times, Oc-
tober 20, 1985, p. F3. In its 1986 World] Economic Outlook, the
International Monetary Fund estimates that if the dollar remained
at its March 1986 level, the United States would still have a cur-
rent account deficit of $100 billion per year. As a specific example,
between September 1985 and March 1986, the dollar depreciated
by about 27 percent against the Japanese yen, yet Toyota raised
prices in the U.S. market by an average of only 3 percent in Jan-
uary and by an additional 4.3 percent in March. See The Washing-
ton Post, January 7, 1986, Toyota Raises Prices on U.S. Exports
by Who, p. D2; and Seaberry, Jane, Dollar Drops to Post-War Low
Against Yen, The Washington Post, March 18, 1986, p. E1.
20For example, 48 percent of U.S. manufacturing executives
responding to a Business Week/Harris poll think their own comp-
panies have done a "pretty good" job fighting off Japanese com-
petition. See Fighting Back: It Can Work, p. 68.
2iThese concerns are reflected in a report of the Manufac-
turing Futures Survey Project, initiated at Boston University in
1981. In an effort to understand the manufacturing strategies
of companies in Japan, Europe, and North America, a survey
of nearly 1,000 manufacturers was conducted over two years. Al-
though the results are subject to various interpretations, a general
image that emerged is that American (and European) manufactur-
ers are focusing on improved quality and delivery times, while the
Japanese are striving for better cost and flexibility because they
have already met the quality and delivery demands of the mar-
ket. Consequently, American firms seem intent on correcting past
deficiencies- doing the traditional things better and Japanese
firms are trying to strengthen and develop an additional competi-
tive edge. Even if they achieve their goals, American firms run the
risk of facing a new threat in the future with continued erosion of
competitiveness. See Ferdows, Kasra, Jeffrey G. Miller, dinchiro
Nakane, and Thomas E. VolImann, 1985, Evolving Manufacturing
Strategies in Europe, ~Japan, and North America, Boston, Mass.:
Boston University.
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30
22The Manufacturing Studies Board is planning a major study
of the reasons U.S. manufacturers move production offshore and
the repercussions of this strategy for the U.S. economy.
23McKinsey and Company. 1983. Computer Integrated Man-
ufacturing. Cleveland, Ohio: McKinsey and Company.
24Recent books on manufacturing management include Aber-
nathy, W. J., Kim B. Clark, and A. M. Kantrow, 1983, Industrial
Renaissance, New York: Basic Books; Goldrath, E. M., and J.
Cox, 1984, The Goal Excellence in Manufacturing, Croton-on-
Hudson, N.Y.: North River Press; Schonberger, Richard J., 1982,
Japanese Manufacturing Techniques, New York: Free Press; and
Skinner, Wickham, 1985, Manufacturing The Formidable Com-
petitive Weapon, New York: John Wiley and Sons.
25 Hayes, Robert H., and Steven C. Wheelwright. 1984. Re-
storing Our Competitive Edge: Competing Through Manufactur-
ing. New York: John Wiley and Sons.
26For example, see Can America Compete?
27The argument that sophisticated weapons systems require
advanced manufacturing technology is made more fully in Com-
mittee on the Role of the Manufacturing Technology Program in
the Defense Industrial Base, 1986, The Role of the Department of
Defense in Supporting Manufacturing Technology Development
Washington, D.C.: National Academy Press.
28Both sides of the argument are presented in Work in Amer-
ica Institute, 1985, Middle Class Shrinking as Pay Inequality
Grows, World of Work Report (August), p. 5.
29For example, the New Development Corporation (NDC)
in Taiwan provides engineering services for the development of
computer hardware and software for International Business Ma-
chines Corporation (IBM). NDC engineers, with reportedly higher
productivity, are paid one-fourth the salary of American engi-
neers. Subcontracting such services was an unprecedented step
for IBM but has proven so successful that other American elec-
tronic and computer firms are considering establishing their own
engineering and development operations in Taiwan. See Stokes,
Bruce, 1985, Rising Trade Deficit, High-Tech Growth Are Threats
to U.S.-Taiwan Relations, National Journal (November 30), pp.
2696-2702.
it,
Representative terms from entire chapter:
exchange rates
