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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
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.
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.
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
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
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
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
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
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
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
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16 TABLE 5 Capital Investment as Percentage of Outputa in Manufacturing, Selected Countries, 1965-1982 West United United Period France Germany Japan Kingdom States 1965-1982 15.1 12.8b 21.2 13.6 10.5 196~1973 16.5 14.3 25.3 14.3 10.0 197~1982 13.6 11.2C 17.1 13.0 11.1 a Fixed capital and output measured in constant dollars. b 1965- 1981. C 1974-1981. SOURCE: U.S. Bureau of Labor Statistics, 1985. OTHER EVIDENCE OF A CHANGED MANUFACTURING ENVIRONMENT Because of the diversity of the manufacturing sector and the factors affecting manufacturing output and trade, there is little agreement among economists and policymakers that U.S. manu- facturing is losing competitiveness. Some authors have used eco- nomic data to demonstrate that U.S. manufacturing remains gen- erally strong despite the problems of a few industries.~° Many re- ports have addressed the issue by using macroeconomic data, but they have had little impact on either policymakers or the general public. Statistics on the manufacturing sector tend to be inconclu- sive because of the complex, transient econorn~c factors that affect TABLE 6 Average Weighted Cost of Capital to Industry, 1971-1981 (in percent) Country 1971 1976 1981 France 8.5 9.4 14.3 West Germany 6.9 6.6 9.5 Japan 7.3 8.9 9.2 United States 10.0 11.3 16.6 SOURCE: U.S. Department of Commerce, "Historical Compari- son of Cost of Capital," April 1983.
17 the data. Other indicators, however, show that at least some U.S. companies have perceived both eroding competitiveness and a ba- sic change in the nature of the manufacturing environment. These data tend to be anecdotal and industry specific and can be illus- trated by a few examples. · Through improved management, changed work rules, large investments in automation, and a variety of other measures, the three major U.S. automobile manufacturers have reduced their break-even volume for domestic production by more than 30 per 12 10 8 ~6 is UJ IIJ ~4 2 o - A A\ ' - \ 'N Return on Manufacturing Assets \ '' '_ a/\ Bond Yield \ I x~ ~\1 I \\ \ I \ \ _J 1 ~I \ \ ! I v_/: J 1 1 1 1 1 1 1 1 1 1 1 1 1 960 1 964 1 968 1 972 YEAR 1976 1980 1984 FIGURE 2 U.S. real return on manufacturing assets and industrial bond yield, 1960-1983. Sources: Quarterly Financial Reports of Mining, Manufac- turing and Trade Corporations, Federal Trade Commission, 1960-1961; Cen- sus Bureau, 1981-1984; inflation data from Economic Report of the President, 1984; Moody's Industrial Bond Yield from Survey of Current Business (July 1984~; and Business Statistics, 1979 and 1982.
18 cent since 1980. Despite this dramatic improvement, estimates of the cost advantage of Japanese producers have grown from $1,000-$2,000 per car In 197~1980 to $2,000-$2,600 in 1985.~2 Based on consumer surveys, U.S. cars also have lagged behind Japanese makes in quality. U.S. producers have launched new projects General Motors' Saturn, Chrysler's I.iberty, and Ford's Alpha- to eliminate these gaps by rethinking management con- cepts, employee relations and compensation, and technology. All three companies also are aggressively pursuing joint ventures with foreign producers and captive imports of finished vehicles and parts from several countries to offset the cost disadvantage of do- mestic production. The companies' approaches differ, but these programs clearly indicate that senior managers in the U.S. au- tomobile industry recognize both the shortcomings of traditional practices and the opportunities that new technologies and new management approaches will provide. Although these efforts may solve current competition problems with Japan, in many cases they will not become operational until about 1990. By that time, other disadvantages and new competitors may have emerged that U.S. firms will be ill-equipped to address. · Companies in other industries also have aggressively pur- sued a strong competitive position only to be confronted by inten- sified competition. Black and Decker Corporation, for example, has devoted significant effort to reducing costs and increasing ef- ficiency by pursuing new investments, increasing automation, re- ducing its work force, and standardizing parts and product lines across its international operations. Despite these long-term ef- forts, the company faced growing competition in the world power too! market from Makita Electric Works, Ltd., of Japan and lost a significant part of its market share. Since 1980, Black and Decker has spent $80 million on plant modernization,~3 cut its work force by 40 percent, and adopted new manufacturing practices. The company has regained a 20 percent share of the world market in power tools at the cost of reduced profits resulting from price pressures from the Japanese company.~4 The efforts by Black and Decker indicate the kinds of commitment that are absolutely nec essary to maintain a worldwide competitive position. · The Japanese are not always the prime competitors. Cha
19 parral Steel Company, a minimill operation based in MidIothian, Texas, figures that if it can produce steed at a labor cost per ton no higher than the per-ton cost of shipping steel to this coun- try from Korea, it can beat Korean producers. In achieving this goal, the company has invested in some of the most modern steel plants in the worIdi5 and can produce steed using 1.8 man-hours per ton, compared with 2.3 for the Koreans and 6+ for integrated U.S. producers. Although its capacity and range of product are more focused than that of large integrated producers, Chaparral illustrates two important aspects of the new manufacturing en- vironment. First, the company's experience (and that of other minimill operations, such as Nucor Corporation) has shown that U.S. producers can be world leaders and can pose more of a threat to traditional U.S. manufacturers, albeit in a relatively narrow product line, than foreign competitors. Second, traditional com- petitive targets, such as matching the production costs of com- petitors, may not be enough to ensure long-term competitiveness; other targets, such as the shipping costs used by Chaparral, may need to be considered.~6 A final example comes from the computer disk drive in- dustry. Floppy disk drives are used in lower-end home computers and personal computers, whereas rigid disk drives are used most often in advanced personal computers and engineering work sta- tion products. The disk drive industry was created by U.S. elec- tronics firms from technology developed by International Business Machines and Control Data Corporation. Several smaller firms entered the field in the ~rnd-1970s and quickly grew to substantial size. In recent years, however, the status of U.S. disk drive man- ufacturers has changed considerably. The leading U.S. maker of floppy disk drives in 1980 was Shugart Associates. Xerox Corpora- tion, the owner of Shugart, has since announced the closing of the unit as a disk drive manufacturer. In 1984, more than 20 Japanese firms manufactured floppy disk drives; no U.S. manufacturers did so. While the United States retains a strong position in rigid disk drives, the Japanese are likely to dominate the next-generation technology, optical disk drives.~7 Developments in this industry show that being the first to market, even with high-technology
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
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
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
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
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
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
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.
27 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:
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.
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.
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,
