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How Serious Is America’s Industrial Position?

Has U.S. industry shot itself in the foot? Productivity analysis says yes-but shows how to fix the wound before it permanently cripples our capacity.

From the boardroom to the stockroom there is a strong perception in this country that U.S. industry is in poor shape. Many Americans believe that our products are inferior, our factories inefficient, and our work force poorly educated. To a large degree, this perception has been borne out in reality. This nation is facing a huge trade imbalance and a real growth rate in productivity of less than one percent during the past two decades, compared with twice or three times that rate by our trade partners. Yet oddly enough, co-existing with this negative judgment is another strong belief among many other people that everything is all right in America. Inflation and unemployment are low, factory capacities are high, and U.S. industrial productivity is the highest in the world, regardless of its slow growth rate. Is U.S. industrial performance in trouble or not? And if it is, what are the causes and what should be done to regain the nation’s productive edge?

The MIT Commission on Industrial Productivity was created to answer these questions. We embarked on an extraordinary two-and-a-half-year study, funded by the Alfred P. Sloan and William and Flora Hewlett Foundations, to determine whether there were inherent weaknesses in our industries and, if so, what weak nesses. Initiated in 1986, the MIT Commission was made up of 16 MIT faculty members who are economists, engineers, management experts, and political scientists.

The verdict of our commission is that the U.S. is indeed in serious trouble with respect to its industrial performance. Moreover, if left uncorrected, this problem will impoverish the U.S. relative to other industrial nations.

To fix this problem, we must first understand it by identifying the major weaknesses that have led and are leading to it. Yet, when we collected what the scholarly literature and the press had said about these weaknesses, we were appalled: Over 100 causes, some in conflict with one another, were allegedly at the root of the problem. Disbelieving this information, we set out to identify the weaknesses ourselves. We formed teams and pursued eight industries, accounting for about one third of U.S. manufacturing: automobiles, chemicals, commercial aircraft, computers and office equipment, consumer electronics, semiconductors, steel, and textiles. A ninth team was formed to assess educational issues from grade school to on-the-job training. To conduct this investigation, we visited over 200 companies and 150 plant sites on three continents. Over 600 interviews were conducted on factory floors, in research laboratories, and in boardrooms throughout the U.S., Europe, and Japan.

SIX PATTERNS OF WEAKNESS

When the teams completed their investigations, we compared their results. To our surprise, six patterns of weakness emerged. They are not new, since they are contained in the very large number of weaknesses that have already been reported. What is new, and important, is that they are few in number and they represent the weaknesses that emerged from a bottom-up study, rather than the weaknesses that we, or anyone else, wish had emerged. These six patterns are described next.

First, U.S. industry clings to outmoded strategies, like inflexible mass production of a large number of standard goods that does not reflect the growing demand for individualized custom quality products. This system, pioneered by Henry Ford, can be likened to a gigantic wheel of production, where workers, suppliers, and other participants are highly specialized cogs. The objective is to keep the wheel turning, no matter what. Anyone who misbehaves is replaced. By contrast, the new systems of production, both in the best-practice U.S. companies and abroad, entail a nimbler approach where broadly trained workers produce shorter runs of tailored goods. They are winning over the older system of mass production.

Narrowing the vision of managers further are the blinders of parochialism. In the 1950s and 1960s, for example, U.S. steel makers did not use the basic oxygen furnace early enough, because it was a foreign technology. By not aggressively scanning the world for the best technology and processes, U.S. managers have missed important opportunities to improve productivity.

Second, U.S. industry is weakened by its short-term horizons. The high cost of capital pushes U.S. managers irresistibly toward shorter time horizons; nevertheless we believe this short-term view is caused by more than high interest rates. The following pattern is not unusual: A well-known U.S. electronics company encounters Japanese competition in radios. Instead of waging an all-out fight, it retreats and abandons the market to Japan. The company holds onto its other high-end electronics product line and buys a rental car agency and finance company because they show a higher return on investment.

Meanwhile, the Japanese company, without showing any profits over a dozen years, slowly builds its knowledge and market share in consumer electronics. In time it assaults the higher-end products of the U.S. company and causes it to retreat into oblivion. As a result, whereas in consumer electronics we once produced 96 percent of what we used, we now produce only 4 percent. By not sticking to our knitting-electronics in this case-we were unable to capitalize on the great consumer electronics market that eventually emerged, which no U.S. company could have anticipated in its conventional ROI calculations.

Third, while very inventive, U.S. industry has trouble translating its new ideas into high-quality products. We found an overriding failure to design for manufacturability and to work to continually improve the manufacturing process. As Americans, we glorify the inventor and ignore the manufacturer. This is the nation that invented transistors, color television, the VCR, and the facsimile machine. Yet none of these products are made in significant numbers here today. The world’s best companies have learned the value of gradual, relentless daily improvement in the quality of the product and the quality of the processes that make it, while we still stick to bromides like, “if it ain’t broke, don’t fix it.”

Why billions of dollars in potential earnings were lost can be summed up by an executive we interviewed on the factory floor: “I don’t want intelligent people involved in manufacturing.”

Fourth, we neglect our human resources. First and foremost, at the kindergarten through grade 12 level, U.S. students rank between fifteenth and eighteenth among their international peers. This is happening at the worst possible time, when the work force must be better educated in order to cope with more sophisticated materials and equipment.

When it comes to education, schools are not doing their job. Nor is industry. The American notion of job training is remedial reading or “following Joe around on the job.” By contrast, in Japan and Germany, workers undergo systematic job rotations that enable them to be more flexible and more willing to learn new skills. That translates into better performance for their companies. As a result, when a plant fails in the U.S., a team of specialists must be hired to do the repairs, causing expense and delays. In Germany and Japan, for the same kind of trouble, the plant operators themselves have enough breadth of knowledge to repair the problem, saving time and money for their company. To sum it up, our study found that many U.S. companies still view labor as a cost to be minimized rather than a precious asset to be cultivated.

Fifth, our study showed a consistent pattern of failure to cooperate both within and across companies. There are failures of cooperation among different departments in a company, between employees and management, between industries and their suppliers, and among firms in the same industry (e.g., for setting standards). Failure to cooperate costs time, money, and quality. In many U.S. industries, product designers create a design and throw it over the wall to production people, who then build it. The production people find problems and toss it back to the designers. This “ping pong” can continue for months, causing two-to-one delays in overall production that dramatically affect our ability to compete. The U.S., which once led the world in auto production, has dropped to third place. It takes 18 months longer for Americans to get a new car developed than it does the Japanese.

In many U.S. industries, there is also a lack of cooperation among companies and their suppliers. Instead of forging common-goal partnerships with a few quality suppliers, a company will maintain arms-length relationships with thousands. If problems develop, suppliers are either replaced, sued, or both. The world’s best companies, including those in the U.S., work with few suppliers in strong cooperative relationships based on mutual trust, long-term relationships, and shared goals.

The sixth and final weakness revealed by the commission’s work is that U.S. government and industry are at cross-purposes, oblivious to each other’s needs, aspirations, and goals. Although complaints about overregulation abound, we found that government intervention is often as valuable and necessary as it is bungling. The problem is neither too much nor too little government, but too little interest, cooperation and understanding between government and industry, on both sides of the divide.

These six weaknesses are real, and unpleasant as it is to dwell on such negatives, we must confront them and understand them well if we wish to recover from their grip. But we must also go beyond them to gauge changes in tomorrow’s world. The MIT commission believes that, in addition to repairing past and current weaknesses, the U.S. must be better prepared to compete in a world where there will be an even greater international focus, an increased demand for more sophisticated, higher quality, yet less expensive products, and a greater reliance on advanced and rapidly changing technology.

FIVE STRATEGIES FOR RECAPTURING THE EDGE

The MIT commission blended the six weaknesses with these future trends and with the practices already being pursued by America‘s best companies to arrive at the following five strategies that must be pursued by industry, government, and educational institutions if the U.S. is to regain the productive edge.

First, we must learn to produce well the new way. The old, rigid system of production in which each person is an expendable cog no longer works. Companies must put production ahead of finance and must focus on the human and technological resources needed for production. The bottom-line measure of success must be augmented with measures of product quality, like the number of defects per thousand products, and user satisfaction.

Second, employees must be given greater responsibility and broader training in order to fully participate in developing and using the new flexible systems of production. We must insist on training and educating the work force more broadly on the job so they can better contribute to the performance of the corporation. And since so much more will be expected of them, we must reward employees with a greater participation in the firm’s profits. This new economic citizenship of the work force not only results in a greater bottom line for the firm but also in a more satisfied work force.

Third, companies that blend cooperation with individualism can improve their performance. Leaner and considerably flatter organizational structures within companies, along with rewards for individualism and for teamwork, can go a long way toward this goal.

Fourth, we must learn to live in the world economy by, for example, paying more attention to foreign languages, cultures, and practices. We must also shop internationally for the best technologies and compare our products against the best international standards, not the company next door. And although protectionism has no place in the world economy, we must insist that our products are treated abroad as fairly as foreign products are treated at home.

Fifth, we must provide for the future. This means establishing national policies that will help balance the budget, stimulate savings, and reduce the cost of capital. Investing for the future in the broadest sense also means better educating the young people that will form tomorrow’s work force. The budget gap can be closed virtually overnight, for example, by bringing the cost of gasoline in the U.S. closer to (not even up to) international levels. While people may furiously debate the wisdom of such a move, there is nothing anyone can do overnight to raise the average SAT scores of the nation’s high school graduates by, say, 150 points. This does not mean we should not begin. We need not reinvent the wheel; we need simply look at how it’s done elsewhere.

Best-practice companies worldwide go after these five imperatives simultaneously, because they are mutually reinforcing. That may be why our companies have not been able to emulate these practices. To make so many wrenching changes at once is very difficult. And to pick and choose one or two fads, like quality circles, without doing the rest, is inadequate. Yet, difficult though it may be, the change of attitude that we must undergo is mandatory.

If we want to live well, we must produce well. There are no shortcuts.


Michael Dertouzos served as chairman of the Commission on Industrial Productivity at the Massachusetts Institute of Technology. He is a professor of computer science and electrical engineering at MIT, as well as director of the MIT Laboratory for Computer Science.

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