Steve Brown

Professor Steve Brown

Is the U.S. Killing Its Innovation Machine?

Professor Steve Brown has shared an online discussion entitled "Is the U.S. Killing Its Innovation Machine?" with a panel of experts including Ed Catmull, president of Pixar Animation Studios and Walt Disney Animation Studios; Robert H. Hayes, the Philip Caldwell Professor of Business Administration, emeritus, at Harvard Business School;  Jeffrey Liker, Professor of Industrial and Operations Engineering at the University of Michigan; and Robert B. Reich, Professor of Public Policy at the University of California at Berkeley.

Professor Brown made his case like this: ‘As global competition has increased, corporate America seems to have abandoned much of its in-house manufacturing operations and surrendered these to competing nations. Undoubtedly, in global markets, no single organization can perform all operations in-house and collaboration in a range of activities is an important strategic factor in today’s highly competitive business world.

Clearly, the days when organizations competed against each other as huge, vertically integrated, entities have long gone. However, the question is: how many organizations are really thinking strategically about the dangers of downsizing operations and pursuing outsourcing and offshoring?

After two decades of researching, interviewing, and consulting for, scores of companies in the United States and Europe it has become abundantly clear to me that very few Chief Executive Officers (CEOs) really understand the strategic importance of operations within their own organizations. In the last decade, CEOs in corporate America have downsized and outsourced manufacturing operations in order to reduce costs. But we have found that many CEOs did so because they simply do not understand the strategic power and opportunities that reside within the organization’s operations – nor do they appreciate the profoundly negative consequences that such outsourcing can have on the organization’s capabilities in a range of areas, including quality and innovation.

Part of the problem is that even where there is a Chief Operating Officer (COO, or a person with a similar title) in place, this might not be enough to safeguard operations because any strategic influence and power that a COO, or operations managers, may have are normally subject to the yet higher strategic authority of the CEO. In many organizations, the COO has little strategic input other than reacting to strategic plans that have already been devised. The problem this provides is that although Chief Operating Officers are supposed to be responsible for developing, accruing and safeguarding operations capabilities within their organizations, so that their organizations can compete successfully, COOs have little strategic authority and power to retain these capabilities within many U.S. organizations. It has become quite common for an organization to develop expertise over time within its operations and then to have this overturned by a corporate (often a short-term) financial decision.

We have found strong evidence that senior-level managers constantly struggle with short-term versus longer-term strategic issues and favour the former when making decisions on manufacturing operations. The reason is that these decisions are easy to quantify, they can look impressive in the short-term; and will satisfy some financial criteria, including ratios such as return on capital employed and other short-term measures of profitability. This short-term myopia is understandable to some degree, though, because the average tenure of the CEO in US organizations is just over 2 years – hardly an incentive for the CEO to think strategically! The biggest problem, though, is not the length of tenure of the CEO, but the organizational gap, and lack of strategic resonance, that exists between many CEOs on the one hand and other, senior-level, operations personnel on the other, in terms of how strategic plans are both devised and implemented.

Some senior-level managers have defended outsourcing operations by stating that this very act then creates jobs back in the U.S. However, our analysis of this has shown that where jobs are created, they are linked, essentially, to aspects of service, and have nothing to do with innovation processes. This is ironic, given the justification for outsourcing is that it supposedly enhances the innovation process. In particular, we have found that organizations lose the ability to ‘learn by doing’ via their operations capabilities when outsourcing and this can damage innovation processes.

Sadly, the USA is following the same fatally flawed policy that has gripped the UK in the last two decades. The same short-term obsession shown by senior-level managers in the UK, intent on satisfying “The City” in London, has wrecked the UK manufacturing base. The same demise is now taking place in the USA, with the need to placate the short-term frenzy demands of Wall Street. And organizations need to be very clear - once these operations capabilities are gone, they are gone forever and do not come back.’

Date: 5 November 2009

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