Dynamic Manufacturing: Creating the Learning Organization

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It is management, and particularly managers' willingness to learn and change -- not unfair competition or unsupportive economic policies -- that is at the heart of America's manufacturing crisis, contend Robert Hayes, Steven Wheelwright, and Kim Clark. These world-renowned authorities on manufacturing and technology base their conclusion on studies of hundreds of American and foreign firms.


Writing for general managers in this long-awaited ...

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Hardcover: 448 pages Publisher: Free Press (September 6, 1988) Language: English ISBN-10: 0029142113 ISBN-13: 978-0029142110 Like new book in like new dust jacket.

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Overview

It is management, and particularly managers' willingness to learn and change -- not unfair competition or unsupportive economic policies -- that is at the heart of America's manufacturing crisis, contend Robert Hayes, Steven Wheelwright, and Kim Clark. These world-renowned authorities on manufacturing and technology base their conclusion on studies of hundreds of American and foreign firms.


Writing for general managers in this long-awaited successor to their award-winning Restoring Our Competitive Edge, the authors go beyond the structural decisions -- the "bricks and mortar" of facilities and equipment -- to the infrastructure of a manufacturing company: the management policies, systems, and practices that must be at the core of a world-class organization. Most importantly, they address the difficulty of creating that infrastructure, emphasizing the management leadership and vision that are required.


This thorough and comprehensive volume points out the weaknesses of traditional management practices, which are built into authoritarian, hierarchical organizations. The authors show dramatically how many companies today are breaking out of this "command and control" mentality and creating a whole new set of relationships involving workers and managers, engineering, marketing and manufacturing, and suppliers and customers, which is giving them a competitive advantage in the international marketplace.


Comparing the companies that are winning with those that are losing market position, Hayes, Wheelwright, and Clark conclude that the key differences are that the winners focus on creating value for customers, continual improvement, quick adaptability to change, and extracting the full potential of their human resources. They constantly strive to be better, placing great emphasis on experimentation, integration, training, and the building of critical organizational capabilities. They are, in short, "learning" organizations.


Dynamic Manufacturing explores in depth such key infrastructure issues as capital budgeting, performance measurement, organizational structure, and human resource management, demonstrating how they interact to foster productivity growth, new product development, and competitive advantage. The book shows today's managers how to implement the changes that must be made if they want to create a truly superior manufacturing company. Taking concerned, committed managers step-by-step on the path toward better products, lower costs, and increased profits, this seminal work provides a road map for manufacturing firms seeking to build a competitive advantage through manufacturing excellence.

Writing for general managers, the authors go beyond manufacturing structural decisions to actually changing the infrastructure of a manufacturing company--the leadership and vision, the policies and practices that are vital to creating superior factories and a dynamic learning continuum.

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Product Details

  • ISBN-13: 9780029142110
  • Publisher: Free Press
  • Publication date: 1/1/1988
  • Pages: 448
  • Product dimensions: 6.49 (w) x 9.63 (h) x 1.71 (d)

Table of Contents

Preface

1. Rebuilding a Manufacturing Advantage
2. America's Manufacturing Heritage
3. Thinking Long Term: The Capital Investment Process
4. Organizing the Manufacturing Function
5. Measuring Manufacturing Performance
6. The High-Performance Factory
7. The Architecture of Manufacturing: Material and Information Flows
8. Controlling and Improving the Manufacturing Process
9. People Make It Happen
10. Laying the Foundation for Product and Process Development
11. Managing Product and Process Development Projects
12. Molding the New Manufacturing Company

Appendix A: Analyzing Manufacturing's Financial Impact on the Profitability of the Firm
Appendix B: The Measurement of Total Factor Productivity
Notes
References
Index

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First Chapter

Chapter 1: Rebuilding a Manufacturing Advantage Introduction: The Decline of American Industry's Competitiveness

The storm that flickered on the horizon for American industry during the 1970s came ashore with a rush in the 1980s. Torrents of imported products flooded our markets and eroded the profitability of domestic suppliers. The U.S. balance of trade in manufactured products went negative for the first time this century in 1971, recovered briefly in the late 1970s, and then plunged into increasing deficits after 1981. In 1986 America's imports of manufactured goods exceeded exports by almost $140 billion. The trade deficit for nonmanufactured goods, such as agricultural and petroleum-based products, pushed the total deficit to $170 billion, or 3 percent of GNP. West Germany displaced the United States as the world's mightiest exporting nation.

In 1985, as a result, a country that had been the world's largest creditor nation (its international investment position had peaked at about $150 billion in 1982) became the world's largest debtor nation -- with a deficit greater than the next two largest debtors combined. By late 1987, the United States net international investment position was approaching $400 billion in the red.

A deterioration in corporate profits reduced the real (adjusted for inflation) pretax rate of return on manufacturing assets in the United States below the prime interest rate, discouraging investment in the new equipment and products required to improve competitiveness. Over the same period, and partly as a result, the U.S. standard of living sagged. By 1986 both the hourly earnings of the average worker and the weekly earnings of the average family -- adjusted for inflation and taxes -- had fallen at least 5 percent from their peaks in the mid-1970s and were about where they had been in the mid-1960s. The GDP (gross domestic product) per employee in the United States was no longer the highest of the developed countries, and most of America's major competitor nations were expected to surpass it by 1990 if current trends continued. Reflecting this decline in relative wealth, only one of the world's ten largest banks (and none of the five largest) in terms of deposits was American. Six, on the other hand, were in Japan -- the home of more than half the top twenty-five banks versus America's two.

This faltering competitive position would not have been so disturbing if it had been restricted largely to a few nonessential industries. It was possible to rationalize the loss of the U.S. domestic shoe industry as the natural working of David Ricardo's famous law of comparative advantage: that such an ancient and labor-intensive item should rightly be produced in countries whose workers had simple manual skills and low wage rates, while the United States should concentrate its attention on newer, higher technology and capital-intensive products like airplanes and electronics. The same logic softened the loss of much of the textile and apparel industries (despite the fact that they were major employers) but became troubling when applied to such "strategic" industries as machine tools, shipbuilding, and steel. Most Americans comforted themselves, however, with the thought that despite the temporary inconvenience and dislocations associated with the decline of a few industries, the laws of economics were working properly as long as the overall U.S. trade deficit in the older, declining, low-technology products was offset by a surplus in the newer, growing, high-technology products.

Indeed, these two groups were in rough balance until about 1980, at which point a high-tech surplus of almost $30 billion largely offset the low-tech deficit of almost $50 billion. But then a deluge of both kinds of imports pushed the low-tech deficit to over $130 billion in 1986, and the surplus in high-tech products went negative for the first time. Of the ten major industry classifications (out of twenty-six in total) that were classified by the Department of Commerce as high tech -- on the basis that they spent at least 3 percent of their sales revenues on R & D -- seven lost world market share between 1965 and 1986. By 1983 America's trade deficit with Japan in electronics products was $15 billion, bigger than its bilateral deficit in autos.

By the mid-1980s imports had taken about 25 percent of the U.S. domestic market in autos, steel, and textiles -- and would probably have taken considerably more were it not for a variety of bilateral and multilateral protectionist barriers engineered by the U.S. government: "voluntary" restrictions on Japanese imports in the case of autos and steel, and the "multifiber arrangement" (whose roots were planted as early as 1957) in textiles. The world's largest auto company, G.M., flirted with unprofitability even in an expanding market, as did the U.S. steel industry. LTV, the steel industry's second largest company, declared bankruptcy in 1986, while rumors of a similar action swirled around Bethlehem Steel, the third largest. U.S. Steel, once the symbol for American industrial might, having lost its position as the largest steel company in the world in the early 1970s, found steel production increasingly less attractive than opportunities in oil and chemicals. By 1985 steel production accounted for less than half its revenues, and it even removed the word "Steel" from its new name: USX.

The situation was just as bad in semiconductors, one of America's flagship high-tech industries. Even though Americans had invented the semiconductor and the integrated circuit (IC) -- as well as almost every one of its major derivative products, such as random access memories and microprocessors -- and almost totally dominated world production through the mid-1970s, by 1984 foreign producers had taken almost 25 percent of the American domestic market. The major U.S. merchant houses were hemorrhaging cash and seeking assistance. In mid-1986 the U.S. government, under strong pressure from its semiconductor industry, was forced to negotiate a trade agreement with Japan that resulted in sharply higher prices for imported ICs.

A similar situation prevailed in the machine tool industry -- perhaps less glamorous than semiconductors, but almost as critical in its impact on American industry's long-term ability to compete. Although U.S. producers had been in the forefront of developing computer-controlled machine tools and multipurpose machining centers, between 1977 and 1986 imports rose from less than 10 percent to over 50 percent of domestic consumption. The prospect of irreversible damage to America's industrial and military infrastructure forced its government to negotiate trade pacts with both Japan and Taiwan in late 1986, restricting their exports (and, by inference, those of several European companies) to the United States to the levels prevailing in 1981.

There was no clause in the law of comparative advantage that suggested that the United States should want to import such products as high-performance autos, sophisticated videotape recorders and electronic cameras, state-of-the-art integrated circuits and fiber optics, or computerized robots and machine tools. Even the American food products industry, long dominated by U.S. producers because of their size and market power as well as their closeness to low cost sources of materials, experienced a growing trade deficit (beginning in 1984) and increasing competition from the U.S. plants owned by foreign producers. Either the laws of economics were no longer working as we had thought they worked, or America had lost its comparative advantage almost everywhere.

The Underlying Causes: Cost, Quality, and Innovativeness

Every industry is different, and a careful explanation of its success or failure in the world marketplace must be tailored to the specifics of each situation. But the kind of broad-based competitive decline just described must have some common roots. The obvious ones are the three primary bases for competitive differentiation in manufactured products: relative cost, relative quality, and relative innovativeness.

Cost

The difference in the cost of two similar products produced by two companies in different countries is due both to the difference in the companies' productivity (their effectiveness in translating such resources as labor, materials, and capital into products) and to the exchange rate between the currencies of the two countries.

For several years the apparent inability of U.S. companies to compete effectively with foreign producers in industry after industry was blamed primarily on the overvalued dollar. The high value of the dollar, it was argued, both effectively priced American products out of world markets and made imported products more attractive. Although there is little doubt that an overvalued dollar had a significant impact on U.S. industrial competitiveness, it was not at all clear that it was the most important factor. In fact, examining the behavior of the measures of competitiveness that we have been describing over the past twenty years shows quite clearly that the problem developed long before the dollar began to surge in late 1979.

Moreover, within two and a half years after reaching its peak in early 1985 the dollar had been pushed down over 40 percent against a weighted average of the currencies of the major developed countries with which the U.S. competed (and over 50 percent against both the Japanese yen and the German mark). Yet, although it led to a resurgence in some industries, including steel and semiconductors, this tremendous relative price change had little impact on America's overall trade deficit in manufactured products; in late-1987 it continued at a record level. The competitive positions of a number of prominent companies, including once mighty GM and Caterpillar, continued to deteriorate. A variety of explanations were offered: that the inevitable corrective action was simply experiencing a somewhat longer-than-usual delay; that the fall of the dollar had thus far had little effect on America's trading relationships with countries like Taiwan, Korea, and Singapore, whose currencies were roughly tied to the dollar; and -- most ominous of all -- that U.S. consumers had simply gotten used to the high quality and good service associated with many imported products and were willing to pay more for them rather than switch to lower-cost domestically produced products. As one business writer phrased it, "The good news we're waiting for may never come."

The evidence with regard to productivity was more conclusive. The rate of increase in the productivity of American manufacturing workers (the value of their output, adjusted for inflation, divided by the labor hours required to produce it) fell by 50 percent over the 15-year period extending from the mid-1960s to the late 1970s: from an average of over 3 percent a year between 1948 and 1965 to about 1.5 percent a year between 1973 and 1979. The decline in the growth rate of total factor productivity, which includes both labor productivity and capital productivity, followed a similar path.

Between 1979 and 1986, however, manufacturing labor productivity increased once again at over 3 percent per year. This resurgence in productivity was heartening to many, particularly when contrasted with the continuing stagnation of nonmanufacturing productivity (which grew by less than 1 percent through 1986). But while it indicated that American industry had gotten back on track, in a sense, it did not necessarily mean that American industry was becoming more competitive. In fact, while U.S. manufacturing productivity was growing at almost 4 percent per year during the first half of the 1980s, Japan's was growing at over 5 percent. More encouraging was its performance versus its major European competitors during this period. Total factor productivity comparisons were similar.

This point is worth stressing: America's cost position relative to foreign firms is not determined by how quickly the productivity of a given industry or company is improving relative to its past rate of improvement, but by how quickly it is improving relative to its competitors' rates. To put this into perspective, between 1970 and 1984 the total number of people employed in manufacturing in the United States remained essentially the same, as it did in Japan. By the end of that period, however, real production of manufactured products had more than doubled in Japan but only increased by about 50 percent in the United States.

With this in mind, there is growing concern about the behavior of capital investment, one of the major drivers of productivity growth, because there is abundant evidence that productivity grows most rapidly in companies and countries where investment in new plant and equipment is highest. Whereas gross capital investment in the U.S. economy as a whole, whether expressed in terms of its growth rate or as a percent of GNP or sales, exhibited a relatively consistent pattern between 1955 and 1986, problems revealed themselves as one made corrections for the effect of inflation, for the amount of investment in residential construction and company automobiles (which would not be expected to have much impact on business productivity), and for the increase in the rate of depreciation that occurred over this period. After removing the effect of inflation, for example, the dollar investment (after depreciation allowances) in nonresidential structures and equipment during the first half of the 1980s was about the same as it was during the last half of the 1960s -- even though the inflation-adjusted GNP grew by 50 percent during this interval. As a result, the real (adjusted for inflation and depreciation) rate of increase in business investment dropped from about 7 percent per year during the 1960s to less than 1 percent per year between 1982 and 1987. As a result, America's plant and equipment was both older and aging more rapidly than its major competitors'.

The bulk of this slowdown occurred in the service sector of the economy, however. The manufacturing sector fought against the trend, and its real investment per worker grew at about 3 percent per year -- maintaining its long-term rate. Unfortunately, simply maintaining that previous trend was unlikely to lead to productivity parity because the major countries with which the United States was competing were increasing their capital investment per worker at an even faster rate. In Japan, for example, the growth in real investment per manufacturing worker was about twice the U.S. level.

Just as ominously, the productivity of this capital investment (output divided by the capital required to produce it) appeared to be declining in the United States. After growing at about 0.6 percent per year between 1948 and 1965, manufacturing capital productivity fell at a rate of almost 2 percent per year between 1973 and 1979, and by 0.3 percent per year between 1979 and 1985. As a result, the growth rate of the combined productivity of both labor and capital in U.S. manufacturing fell below its long-term growth rate to roughly half that of Japan's.

A closer examination of the causes of American industry's productivity resurgence in the 1980s suggested that it was due primarily to three factors: market expansion, corporate restructuring (downsizing), and manufacturing rationalization. Companies could not depend on these forces alone for their future productivity growth, however. Sustained improvement in international competitiveness would require ongoing changes in such areas as capital investment, R & D spending, and management behavior.

Quality

In virtually every industry in which American manufacturers lost market share over the past decade, there was evidence that their products were perceived by consumers as offering poorer quality than equivalently priced foreign products. The day of reckoning for the U.S. semiconductor industry, for example, came on March 25, 1980, when Richard W. Anderson, general manager of Hewlett-Packard's Data Systems Division, reported on H-P's results from testing 300,000 similar memory chips (16K DRAMs) from six different producers, three American and three Japanese. The incoming inspection failure rate of the American products was at least twenty times greater than that of the Japanese products, and their field failure rate ranged from three to twenty-five times greater. Similar differences in the defect rates of room air conditioners were reported in 1983, and a variety of studies in other industries (including Consumer Reports' annual survey of a large number of consumer products) all pointed in the same direction: American manufactured products generally were perceived as offering poorer performance, and were more likely to experience operating problems, than Japanese or European products.

As a result of these studies, quality-improvement efforts were stepped up in company after company. A 1986 survey of manufacturing managers in the United States, Europe, and Japan -- across a broad cross section of industries -- showed that quality had become American managers' chief concern. But it was also the chief concern of Japanese and European managers. Hence, American producers were chasing a moving target, and there was considerable evidence that by the mid-1980s they still had not eliminated the gap between the perceived quality of their products and that of their foreign competitors. For example, a 1986 study of new-car buyers in the United States showed that purchasers of American-built cars experienced an average of over 1.7 problems per car in the first ninety days of ownership (down dramatically from 2.5 in 1985), whereas Japanese-car owners reported an average of less than 1.3 problems per car.

Innovation

The huge lead in technology that the United States built up during and after World War II was also crumbling, as reflected by a variety of measures. First, American firms lost position in a number of specific high-technology industries, such as semiconductors, telecommunications, scientific instruments, and various types of advanced capital equipment -- in fact, as mentioned earlier, in seven of the ten industries classified by the Department of Commerce as high technology. As a result, the U.S. balance of payments for these seven industries went negative (by about $2 billion) for the first time in 1986. The picture was especially bleak in high-technology capital goods. One economist estimated that by late 1984 over 80 percent of U.S. firms' expenditures on high-tech capital equipment were absorbed by imported products.

Second, in industry after industry U.S. companies were effectively withdrawing from specific high-tech segments because of their inability to keep up with the innovativeness of foreign products. As of late 1987, no U.S. firm had developed or produced a video tape recorder, a camcorder (electronic camera plus recorder), or a compactdisc player. All but two American merchant semiconductor firms had withdrawn from the production of DRAM memory chips.

Third, several rankings of relative capabilities in a variety of specific technologies placed the United States behind countries that it had previously dominated. A study group sponsored by the National Research Council, for example, concluded in early 1986 that Japan led the United States in seven major areas that were key to future developments in electronics and optics. That same year the European Management Forum (a Swiss-based research group) rated Japan and Germany, among others, as being ahead of the United States in terms of total industry technological effort.

A number of different measures of technological vitality were pointed to as the causes of this deterioration. The percentage of U.S. GNP devoted to R & D, for example, fell from almost 3 percent in 1965 to about 2.2 percent in 1977 before rebounding to nearly 2.7 percent (slightly ahead of Japan's) in the mid-1980s. Moreover, over half this total was spent by the American government, and almost three-quarters of that went to defense and space-related projects that were much less likely to have significant commercial application. Only about I percent of the U.S. government's research budget went to promoting industrial growth, while the West German government invested 14 percent of its research budget in such activities, and Japan 13 percent.

Just as alarming, less than 6 percent of American industry's total investment in R & D went to basic research -- the kind that leads to entirely new products, markets, and industries. Even when combined with government spending on basic research, basic research accounted for less than 10 percent of the United States' total R & D spending. Other countries were spending proportionally more both on basic research and on industrial research, and during the mid1970s the United States began experiencing a "balance of patents" deficit to go along with its balance of payments deficit: more West Germans and Japanese filed patents in the United States than U.S. inventors filed in Japan or Germany. In fact, almost 45 percent of the patents granted in the United States in 1985 were given to foreign applicants. Other measures of the rate of innovation in various American industries, such as their increasing propensity to source high-technology components from foreign rather than domestic suppliers, showed similar declines.

This was coupled with a decline in the attractiveness of scientific professions in the United States. The number of Americans graduating with engineering degrees each year was less than in Japan, which had half America's population; as a result, by 1986 there were more electrical engineers in Japan than in the United States. Leading American technical universities, such as MIT, began expressing concern about the nature and adequacy of the education they were providing their graduates and initiated curriculum reviews.

Finally, just as in the case of capital investment, there was troubling evidence that the productivity of R & D investment in the United States was decreasing. Not only was the country spending less -- less than it had in the past, less than was required in specific areas of R & D, and less (proportionally) than some of its major competitors -- America was getting less "bang for the buck" than it used to.

The Causes Behind the "Causes"

Declining productivity growth, insufficient capital spending, inadequate quality, and sluggish technological innovation are obvious reasons why a nation's competitiveness might be expected to decline. But these explanations raise more questions than they answer, because one then has to explain why these "causes" have arisen in a country whose workers, for at least thirty years, have been the most productive in the world, whose products have set the standards for high quality, and whose technological virtuosity has dominated world industry. In the national debate that arose around these causal issues, at least three widely differing explanations surfaced.

One school of thought argued that there was no real problem -- that the difficulties being experienced by American industry were simply the normal response of an economic system to a series of external shocks (such as the dislocations caused by world energy shortages and price rises during the 1970s), the maturation of certain older "sunset" industries (which, as in the past, had caused them to move offshore), or the symptoms of an accelerating transition to a "post industrial" service-dominated society. Although this view became increasingly difficult to defend as industry after industry crumbled under the pressure of foreign competitors, it continued to be espoused by powerful adherents -- including the Reagan administration and the bulk of the economics profession.

A second school held that a serious problem did exist, but that it was due primarily to macroeconomic policies and events: a mushrooming federal debt that had led to comparatively high interest rates (and therefore contributed to an overvalued dollar); a tax system that warped investment decisions in certain ways, implicitly favoring consumption and borrowing over saving and investing, and residential construction over industrial modernization; and a maze of inconsistent trade and industrial policies that thwarted a coherent response to attacks from countries that targeted specific industries for development and foreign expansion. This school included those who placed much of the blame for America's noncompetitiveness on the structure and operation of American capital markets, on the grounds that the increasing incidence of hostile takeovers, financed by "junk bonds" and encouraged by investment banks that stood to gain whatever the outcome, forced a short-term perspective on corporate managers and encouraged the formation of a "casino society" mentality in the United States.

The adherents of this point of view included a number of influential Democratic senators and representatives, most economists who did not belong to the first school, and a broadly dispersed group that believed in the necessity of establishing a coordinated industrial policy for the United States.

A third school also believed that the problem was serious and would not go away of its own accord, but that simply correcting some of the obvious inconsistencies and imbalances in macroeconomic and industrial policy would not be sufficient to restore the nation's competitiveness. The real problem, this school argued, lay in human behavior -- especially American managers' attitudes, capabilities, and strategies -- particularly in the areas of manufacturing and technological development.

There were relatively few adherents to this position when it was initially expressed, and not surprisingly they came under severe criticism, particularly by some influential corporate managers. The chairman of General Motors, for example, asserted in late 1986 that "it was not declines in the competitiveness of American firms' management and technology that were responsible for the deterioration of the U.S. trade position, but rather...the business climate of the United States," and shortly thereafter he engineered the removal of H. Ross Perot, a man who strongly disagreed with that position, from his own board of directors.

But this school began attracting converts as the situation worsened in the mid-1980s, despite the fact that corrective actions at the macroeconomic level had taken place. Even some members of the Reagan administration, which had long been publicly united in its adherence to the first school, began to espouse it. Richard Darman, deputy secretary of the treasury and one of the architects of the administration's tax and financial policies, fired the first salvo in late 1986 when he criticized big corporations for being "bloated, riskaverse, inefficient, and unimaginative" and for not spending enough on R & D. Corporate executives were being paid too much for doing too little, he suggested. And at about the same time, the president of Harvard University began speaking out about the need for the American educational system to take action to improve the nation's ability to meet the economic challenge from abroad, lest it follow Great Britain into economic decline.

Where We Stand

The authors of this book stand firmly in this third camp. Even though we agree that better management of fiscal, monetary, and trade policies at the national level might provide some assistance to American industry, we feel that its flagging competitiveness is in large measure the result of human factors -- and specifically management factors -- at least as much as it is due to unfair competition or an unsupportive economic climate. The evidence for our position falls into four categories:

Simple Logic. Although high interest rates might be expected to dampen capital investment, and an overvalued dollar to burden American products with comparatively high costs, it is highly unlikely that macroeconomic policies would cause companies to produce products whose quality and reliability are inferior to those of foreign producers. Nor can they explain why some foreign companies were able to produce similar products with less than a quarter of the work-in-process inventory required by their American counterparts or half the floor space and capital investment. Finally, although a decline in technological literacy might explain part of the loss of America's technological leadership in automobiles, consumer electronics, integrated circuits, and computer peripherals, it could not explain why some foreign producers of these same products were able to cut the design-to-introduction time almost in half and thereby introduce new products at a faster rate than their competitors.

Turnarounds. Despite the supposedly debilitating economic climate that American firms had to struggle against, there were numerous examples of companies that had been able to make tremendous improvements in their competitive posture in a relatively short period of time. Chrysler, for example, was able to improve its productivity (as measured by cars per worker per year) from the worst to the best of the Big Three over a period of five years. Xerox was able to blunt and then reverse the inroads made by foreign competitors in its copier markets. And a number of other lesser known companies in a variety of industries responded to severe competitive pressure by making astonishing improvements in their labor productivity -- on the order of 100 percent or more -- by cutting their work-in-process inventories by 60 percent, or by reducing their defect levels by a factor of 100, to parts-per-million levels. Similar evidence was provided by the widely publicized success of a number of leveraged buy-outs (LBOs) -- companies on the brink of bankruptcy that, after being taken private, were able within a few years to achieve dramatic improvements in their profitability and market position.

In most cases such improvements were not achieved through exotic -- or even unfamiliar -- management approaches. Instead they followed the familiar "turnaround management" recipe: cutting out unnecessary people and getting back to basics. As if in affirmation of Darman's charge that American companies had become bloated, hundreds of large corporations began reducing the size of, and the number of levels in, their management hierarchies. Various observers estimated that between 1981 and the end of 1986 at least 10 percent of the middle management positions in American industry were eliminated. Even as GM's chairman was responding angrily to Darman's attack, his company was preparing to announce plans to reduce its salaried ranks within three years by more than thirty-five thousand people -- one-fourth of its total -- following the example set by IBM, Kodak, AT&T, Du Pont, G.E., Exxon, Xerox, and many of the other flagship American companies.

Longitudinal Comparisons. A turnaround provides one means for doing a longitudinal analysis: looking at the performance of a single organization over a period of time and trying to determine the causes of the changes that occur. This can be done either at the company or the country level. As an example of the latter, consider the assertion (long popular in American business circles) that powerful unions and a top-heavy government bureaucracy were major causes of America's competitive decline. Yet union power, as measured by the percentage of the work force that belongs to unions, by their ability to influence legislation in Congress, or by a variety of other indicators, has been on a steady decline since the end of World War II. And the government has been reducing the number of its nondefense employees since about 1970 -- when our competitive decline was just beginning to become visible.

Individual companies or factories can be similarly analyzed, as we do in Chapter 6. All these analyses suggest that the major causes of performance changes are due to management actions, not macroeconomic factors.

Cross-sectional Analyses. Similarly, one can assess the impact of various external factors by comparing the behavior of two or more organizations that confront the same or very similar macroeconomic conditions. Again, such comparisons can be made either at the company or the country level.

At the country level, for example, it is possible to test the effect of oil price increases, strong labor unions, high tax rates, and a massive influx of unskilled workers into a labor force by comparing the performance of U.S. industry during the 1970s with that of West Germany's manufacturing sector during the same period. West German manufacturers had to deal with oil-crisis dislocations that were at least as severe as those experienced in the United States (since Germany almost totally lacked internal sources of crude oil), confronted much more powerful labor unions (which forced a reduction of the standard German workweek to 38.5 hours in 1984, against the united opposition of the German business community), endured higher taxes (both on average and in terms of marginal rates) than in the United States, and had to assimilate a proportionally larger number of unskilled "guest workers" from a variety of southern European and northern African countries (most of whom arrived not only without industrial training but unable to read or speak the German language). Yet the productivity growth rate of German manufacturing actually increased during the 1970s, while that of U.S. industry fell by 50 percent.

At the company level, on the other hand, one study of over 200 American business units over periods of eight or more years found that on average they only achieved about 40 percent of their potential, and only 12 percent exceeded that potential. Indeed, in most U.S. industries it was possible to find some companies that did very well, even though the rest of the industry was succumbing to foreign competition. Even in the steel industry, such companies as Chaparral, Nucor, Allegheny Ludlum, and Worthington were prospering as bigger companies retreated. And within the same company it was not unusual to find that different factories -- all residing in the same country, all producing the same or very similar products, and all using similar manufacturing equipment -- had widely differing levels of performance.

For example, in the studies we summarize in Chapter 6, the variation between one company's best and poorest plants -- whether performance was measured in terms of labor or total factor productivity, defect rates, number of days worth of inventory, or effectiveness in assimilating new capital equipment -- was often over 80 percent. This variation in between-plant performance was far greater than could be explained by differences in the size, age, or location of the plants. In fact, we found that it was possible to ascribe the great bulk of it to specific management activities that were taking place within each factory.

Another type of cross-sectional analysis can be based on comparing the performance of U.S.-owned factories in the United States with that of factories owned by foreign companies in the same industry. Since both are subject to almost the same economic climate, one would expect to see similar behavior if macroeconomic variables were the primary drivers of performance differences. But whether one is looking at new factories (such as Sony's television plant in San Diego, California, or Honda's automobile assembly plant in Marysville, Ohio) or old ones (such as the Quasar facility in Chicago that Matsushita purchased from Motorola or the Toyota-GM joint venture in Fremont, California), the performance of the foreign-owned facilities is often strikingly superior to that of its indigenous American counterparts.

What Went Wrong?

If the problems faced by American industry are largely the product of inadequate management, it follows that their solution requires a different approach to management. Specifically, it requires a different mind-set toward manufacturing and technology. As we argue in the next chapter, American industry entered the 1960s with an enormous capital base, a skilled and inherently enthusiastic work force, an experienced and aggressive management group, and acknowledged leadership in most of the world's important process and product technologies. Yet, for reasons we will later explore, many companies began to treat those resources as if they were constraints. Lulled by sluggish competitors and an inflation psychology that allowed them to pass along cost increases to their customers, they began to look upon their factories -- all that brick and mortar, all those complicated machines, all those people -- as though they were impediments, obstacles to their flexibility and creativity. Their attitude was summed up by one business manager a few years ago: "How's business?" we asked. "Oh, business would be fine," he answered, "if only we didn't have to make the stuff."

Making the stuff was the dirty part; it involved the grubby details of coaxing products out of recalcitrant machines and uncaring workers. Manufacturing managers spent most of their time "fighting fires," scrambling every minute to try to repeal, or at least find loopholes in, Murphy's Law (If anything can go wrong it will go wrong -- and usually at the worst possible time). It was the last hurdle -- more often the last roadblock -- to bringing all their beautiful product designs, all their careful marketing plans, all their precise financial calculations, to fruition. As a result, they tended to treat those manufacturing resources as liabilities, not as assets -- which is, after all, the way they are entered on a company's balance sheet.

When one looks upon something as a liability, not as an asset, it tends to change the way one manages it. One manages around it, not through it. It gets a low place in the pecking order when the time comes to allocate corporate resources, with predictable consequences. Equipment runs down. Buildings get old and dirty. Workforce relations get ever more strained. In an effort to regain control over a deteriorating situation, management installs more sophisticated measurement and control systems, which tend both to increase overhead costs and to stifle innovation. Power and expertise increasingly migrate from the line to the staff, from the factory floor to the corporate counting room. The prime motivator becomes the fear of punishment.

A downward spiral of performance, then confidence, and finally investment takes place: lower performance creates doubt about a plant's ability to use additional investment effectively, so money is channeled elsewhere. Workers and managers see this, assume that nobody else is interested in them, and so start looking out for themselves. People look elsewhere for opportunities, and some of them -- usually the best ones -- leave. Performance and morale suffer further, and the cycle repeats itself, at an ever lower level.

We have been in many factories around America that exhibited the results of this kind of spiral: old, worn-out equipment, dispirited workers looking to unions for support and protection, and cynical, tired managers. Suddenly somebody at corporate headquarters does an analysis and says, "Let's close this place down and go somewhere else." So the company builds a new plant in a new location -- far away from those tired managers and hostile workers. But unless it changes its attitudes and practices, the same downward spiral begins all over again. After twenty-five years or so, it will find itself again with twenty-five-year-old equipment, and workers and managers locked into the same old endgame.

In such an environment, American managers became preoccupied with simply getting goods through the process. Meeting production schedules -- in the face of machines that were always breaking down, uncooperative workers, middle managers who were continually fighting fires when they weren't protecting their turf, and worse, suppliers that were just like oneself -- became the overriding objective. Quality was relegated to secondary status and dealt with through such conceits as an "acceptable quality level," which implied that there was an acceptable level of bad quality. It wasn't called bad quality, of course; it was called "off spec product." And it was dealt with by setting up repair facilities -- as profit centers -- and selling service warranties.

To guarantee production in such an environment required lots of buffer inventories, rework stations, and expediting. Because all those expediters tended to get in each other's way, companies tried to maintain order by hiring coordinators. They piled staff on staff (a phenomenon that has been called "staff infection") until they had three or four overhead personnel for every production worker, and top management became increasingly removed -- both physically and psychologically -- from the production line. One of the authors has in his files the written summary reaction of participants to a course on manufacturing management that he taught to high-level general managers of American companies in the mid-1970s: "[You] did very well with a subject that unfortunately has limited appeal."

Many business schools became trapped into the same kind of thinking. Their faculties and students focused their attention primarily on how to develop techniques and systems for managing the flow of products through processes that were loaded with uncertainties and constraints, on how to manage the inventories that appeared to be so indispensable in such processes, and on how to expedite orders in such a way that as few as possible of them were indefinitely delayed. Such topics, needless to say, were not the most exciting that business school students were exposed to; therefore not many were encouraged to go to work in factories. Manufacturing people were like the infantry in our industrial army: minus the glory and usually without air support.

Fighting within the company and against the U.S. government's attempts to impose its will (as Will Rogers put it, "We don't get half the government we pay for, thank God!"), both in the attempt to wrestle materials through the process and to avoid blame when they didn't get through, became such a way of life in that kind of environment that one tended to forget who the real enemy was. It was, as it always has been, people who want what you have. But this time the enemy, foreign competitors, were playing by different rules. They were working together -- workers and managers, suppliers and customers, engineering and marketing and manufacturing -- exploiting new technology, and stressing output quality above quantity. They were using their manufacturing resources as assets, as opportunities, and they were gaining a competitive edge by competing through manufacturing.

American managers eventually learned that all that infighting and pointing of fingers was a luxury they couldn't afford. Fortunately, they now had the opportunity to study what their competitors were doing and learn from them. For a long while Americans didn't think they could learn much from others, but that has changed. The bad news is that it will take time to put those ideas -- and some of the ones Americans have developed themselves -- into practice. The good news is that it can be done.

One of the reasons a resurgence is going to be more difficult than it might have been is that too many companies became infatuated with the notion of "leverage" during the past couple of decades. When applied to financial management, that means adding other people's money to one's own: if one can get a lot of other people's money, one doesn't need to commit as much of one's own. But one can apply the same approach to other kinds of resources. For example, one can develop less of one's own new technology -- new product ideas and new processing techniques -- and borrow or buy it from the companies that do develop new technology. One can also rely on other companies to design and build one's manufacturing equipment and hire more and more of one's skilled workers out of other companies' training programs.

This other kind of leverage isn't like financial leverage, however, and it doesn't work for long. If one uses too much of it, one will never again be able to be a technological leader. One's manufacturing equipment will be the same as that available to all one's competitors, and one's workers will be less skilled than those in companies who train them internally. In short, this kind of leverage may allow a company to augment its profitability in the near term, but it will eventually find itself at a disadvantage vis-aà-vis those of its competitors who try to be leaders. Forging manufacturing excellence therefore means making investments and taking risks that many companies once thought they could avoid; indeed, they could -- as long as none of their competitors were making those investments and taking those risks.

A number of American companies are coming to grips with this realization. The challenge is clear: they have to try to be the best in the world in selected aspects of their business. They have to learn how to grow their own technology and their own skilled people, not simply scavenge the leavings of others. They have to make their factories run right again. Workers and managers have to stop fighting each other and work together to turn back their common enemies. They must guard against the onset of that downward spiral that begins with complacency and selfishness and ends with vacant plants and wasted human resources. Rather than accept the limitations imposed by unreliable workers, machinery, and suppliers, companies must set about developing new relationships with workers and learn to design, make, and operate equipment and systems that can produce perfect products and run without interruption. Then they must push the same philosophy and commitment back down into their suppliers.

This will not be easy. Nor will it happen by itself. The organizations they have created, with all their checks and balances, are intensely resistant to change. Breaking down old barriers, creating new values, and encouraging new ways of thinking demand strong leaders: people who look at their situation and say, "This can't go on like this"; business statesmen who can create a new vision and persuade others to turn it into reality. This book is about this task, and is directed toward such men and women.

Becoming a World-class Manufacturer

As we described in an earlier book, the ultimate purpose of strategic management is to focus an organization's resources, capabilities, and energies on building a sustainable advantage over its competitors along one or more dimension of performance. Such an advantage may derive, for example, from lower cost, from higher product performance, from more innovative products, or from superior service. This does not mean that your competitors will not occasionally match or better your competitive position for a short period of time by, for example, acquiring a new technology, establishing production in a low-cost location, or moving rapidly to exploit a narrow window of market opportunity. But if one's goal is to develop a sustainable competitive advantage, one's efforts must be directed not toward opportunistic deal making but rather toward the development of specific organizational competences and relationships that are difficult for competitors to match over the long term.

Many companies around the world have become household names because of their success in doing this: Rolls-Royce has become synonymous with luxurious, Ferrari with high performance, and Toyota with dependable automobiles. Depending on the competitive advantage they are seeking, different corporate functions are emphasized. For example, Hewlett-Packard has historically competed on the basis of innovative products and has therefore placed particular emphasis on R & D. IBM, although its products sometimes were not as technologically advanced as its competitors', won business from them by offering superior customer service; and Caterpillar's enduring reputation for dependability has been based both on product design and on the logistics system it has established to service its independent dealers.

Unfortunately, during the past two decades relatively few companies in the United States have sought to build a competitive advantage around their manufacturing ability. Yet the organizational and technological skills required to produce products better than one's competitors are extraordinarily difficult to duplicate, and therefore constitute one of the soundest bases for achieving a sustainable advantage. Many companies have recently begun to appreciate this. They have discovered that the "secret weapon" of their fiercest competitors is often based not on better product design, greater marketing ingenuity, or superior financial strength but on the ability to make relatively standard products more efficiently, more reliably, and with higher precision. As they seek to marshal their own organizations to respond to this new threat, many of them have been forced to confront the fact that they have systematically neglected their manufacturing function over a rather long period of time. Like an unused muscle, their manufacturing capabilities have been allowed to atrophy.

Their problem is not that they cannot "make the stuff." They can, but so can their competitors. Their problem is that they are not world-class manufacturers but are facing competitors who are. Another title for this book could have been "Building a World-Class Manufacturing Organization," for that is what we shall be discussing in the chapters ahead. But before we begin, we should describe what is implied by the term "world-class manufacturing." Basically, this means being better than almost every other company in your industry in at least one important aspect of manufacturing.

Once it has been decided what kind of competitive advantage the organization is going to seek (or, going further, once priorities have been established among various performance criteria, such as cost, quality, dependability, flexibility, or innovativeness), it has to configure itself in such a way that it can achieve, and continually enhance, that competitive advantage. This requires making a series of coordinated decisions of both a structural and an infrastructural nature. The former refers to such "bricks and mortar" decisions as

1. The amount of total production capacity to provide;

2. How this capacity should be broken up into specific production facilities (how they should be specialized and where they should be located);

3. What kind of production equipment and systems to provide those facilities with; and

4. Which materials, systems, and services should be produced internally and which should be sourced from outside the organization (and what kind of relationships should be established with outside suppliers).

By infrastructure, on the other hand, we refer to the management policies and systems that determine how the bricks and mortar are managed:

5. Human resource policies and practices, including management selection and training policies;

6. Quality assurance and control systems;

7. Production planning and inventory control systems;

8. New product development processes;

9. Performance measurement and reward systems, including capital allocation systems; and

10. Organizational structure and design.

Because of their influence on an organization's behavior and effectiveness, such policies are analogous to the "software" that guides a computer's "hardware." And just as when designing an effective computer system, not only must the software fit the hardware, but the hardware and software design choices must be consistent with organizational objectives.

Our earlier book focused most of its attention on manufacturing structural decisions, but over the years we have become increasingly impressed by the importance of infrastructural elements. We have seen a number of companies that were able to build a powerful competitive advantage around their internal capabilities and teamwork, even though their plants and equipment were not exceptional; but we have never seen one that was able to build a sustainable advantage around superior hardware alone. For this reason, as we shall later argue, it is almost impossible for a company to "spend" its way out of a competitive difficulty.

In its closing chapter that earlier book described the four stages of manufacturing competitiveness. Stage I companies consider their manufacturing organization to be internally neutral, in that its role is simply to "make the stuff," without any surprises. Such companies believe that their product designs are so unusual or their marketing organizations so powerful that if the product can simply be delivered to customers, as advertised, the company will be successful.

Although often naive, such a philosophy is sometimes successful, particularly if a company is able to find a niche in its market that protects it from immediate competitors. But as such companies grow, one of two things typically happens. Either they outgrow their niche and come up against competitors in adjoining niches, or the niche itself grows to the point where it becomes attractive to other companies. At this point simply making the stuff is not enough; one must also meet the cost, quality, and delivery standards achieved by one's competitors. Therefore, Stage II companies look outward and ask their manufacturing organizations to be externally neutral, that is, able to meet the standards imposed by their major competitors. Such companies tend to adhere to industry practice and industry standards. They buy their parts, materials, and production equipment from the same suppliers that their competitors use, follow similar approaches to quality and inventory control, establish similar relationships with their work force, and regard technicians and managers as interchangeable parts -- hiring both, as needed, from other companies in the industry.

Some companies eventually reach a point, however, where this kind of copycat behavior no longer seems appropriate. If their competitive strategy is different from that of most of their competitors, why should they follow industry practice as regards manufacturing? In seeking to develop a coordinated set of manufacturing structural and infrastructural decisions tailored to their specific competitive strategy, such companies evolve to Stage III: a manufacturing organization that is internally supportive of other parts of the company.

But for a few companies even this is not enough. It is clear that a regional airline that is competing on the basis of flexibility will probably want to choose airplanes that are different from those adopted by its large competitors; but this does not mean that it will prevail over other small airlines that have chosen similar equipment. Success will depend on its ability to use its equipment more effectively than its competitors use theirs, and to exploit better the capabilities of that equipment in other parts of the organization. Stage IV companies regard their manufacturing organizations as externally supportive, that is, playing a key role in helping the whole company achieve an edge over its competitors. Such companies are not content simply to copy their competitors, or even to be the "toughest kid on the block" in their own neighborhood. They seek to be as good as anybody in the world at the things they have chosen to be good at -- that is, world-class.

How does one know when one is world-class? The obvious way is by observing how one's products fare in the marketplace and by checking one's cashbox. World-class (Stage IV) companies tend to grow faster and be more profitable than their competitors. But there are a number of other more subtle indicators:

1. Having workers and managers who are so skilled and effective that other companies are continually seeking to attract them away from one's organization;

2. Being so expert in the design and manufacture of production equipment that equipment suppliers are continually seeking one's advice about possible modifications to their equipment, one's suggestions for new equipment, and one's agreement to be a test site for one of their pilot models;

3. Being more nimble than one's competitors in responding to market shifts or pricing changes, and in getting new products out into the market faster than they can;

4. Intertwining the design of a new product so closely with the design of its manufacturing process that when competitors "reverse engineer" the product they find that they cannot produce a comparable one in their own factories without major retooling and redesign expenses; and

5. Continually improving facilities, support systems, and skills that were considered to be "optimal" or "state of the art" when first introduced, so that they increasingly surpass their initial capabilities.

This kind of behavior does not "just happen" by itself. In fact, in many ways it is very unnatural behavior in companies whose organizational structure, staffing policies, and performance measurement and control systems are predicated on the assumption that an organization should be composed of a collection of specialists who operate within fairly narrow job descriptions. Such companies (Stages I or II, described earlier) typically operate under a "command and control" mentality: senior management is expected to make the major resource allocation decisions (with the help of staff and external experts whenever necessary), and the role of line management is simply to operate the resulting configuration of facilities, systems, and personnel in such a way that the performance expected from them is attained.

This command and control mentality values specialists, assumes that whatever capabilities are lacking in an organization can be purchased from the outside, and considers management's primary task to be the orderly assimilation, exploitation, and coordination of separate sources of expertise. Factory location decisions are made by real estate experts and outside consultants, equipment decisions by engineers (the equipment itself is designed and built by independent equipment suppliers), the selection of production scheduling and inventory control systems by computer specialists, quality systems by outside consultants, and personnel decisions by human resource specialists. Whenever a particular set of worker (or manager) skills is desired, the outside world is combed for them. Finally, these organizations are inherently hierarchical, in the sense that the primary relationships between people are vertical: decisions (and rewards or punishments) flow down and information flows back up.

World-class Stage IV companies dislike being dependent on outside organizations for expertise. They want to grow their own people, equipment, and systems, but they also respect the capabilities of others. Therefore they continually scour the outside world -- and particularly their best competitors -- to ensure that they are on top of all the newest ideas and approaches. They strive to build strong horizontal relationships throughout the company, so that product design decisions are closely coupled with manufacturing process decisions, vendor management with production scheduling and quality management, and personnel with everything. Finally, they place great emphasis on R & D, experimentation, training, and the building of general organizational capabilities. They continually push at the margins of their expertise, trying on every front to be a bit better than before. Standards, to them, are ephemeral -- milestones on the road to perfection. They strive to be dynamic, learning companies.

This emphasis on continual improvement is the ultimate test of a world-class organization. Any well-run and adventurous company may seize a temporary advantage over its competitors by adopting a particularly innovative product or process design, or by investing (usually at great expense) in a state-of-the-art production facility. It may appear to the outside world -- the company may delude itself, in fact -- that it has achieved parity with those other companies that truly compete through their manufacturing capability. But if this new design or facility comes to be regarded as a goal in and of itself, if the organization does not immediately begin experimenting and tinkering with it, pushing it to do things for which it wasn't intended (but which it might eventually accommodate), the advantage is soon lost. Their energy spent, they watch in frustration and helplessness as their world class competitors relentlessly march past them.

Although this book's focus is ostensibly on manufacturing, our concern extends to the larger problem of creating and managing this kind of learning organization. We have found that companies that are quick both to learn new things and to perfect familiar things, that adapt imaginatively and effectively to change, and that are looked up to by their competitors because of their ability to lead the way into new fields, tend to have certain attributes in common. Moreover, companies with these attributes tend to be excellent throughout. Reforging manufacturing into a competitive weapon lays the foundation, therefore, for building a company that is worldclass in everything it does.

An Outline of This Book

Our studies of a number of companies have convinced us that history matters. Unless one understands how an organization got where it is, it is difficult to determine the appropriate steps to take next. If not properly understood, the forces that drive it in a certain direction will continue to operate, despite whatever well-intentioned decisions are imposed upon it. It is for this reason that we conclude the first part of this book with an historical perspective.

We start in Chapter 2 by examining the basic beliefs, concepts, and approaches to manufacturing management that have developed -- largely in the United States -- over the past 100 years, and that continue to sha pe the attitudes of many managers today. We pay particular attention to two topics: the development of "scientific management" and the subsequent development of a more holistic and humanistic approach to manufacturing management that flowered in the United States during the 1940s and 1950s, when its production expertise turned the tide in World War II and won the admiration of the rest of the world. Today much of the expertise, and most of the philosophy, that underlay that approach to manufacturing have been lost in the United States. They live on, unfortunately for us, in the foreign competitors that studied us carefully back then and transplanted our approaches to their own soil.

The basic beliefs, assumptions, and approaches that have developed over time still color the way we think about the role of production management. They are clearly reflected, for example, in the contrasting responsibilities assigned to line versus staff organizations, to shop-floor-level workers versus managers, and to manufacturing infrastructure (systems and policies) versus structure (facilities and equipment) that we see throughout American industry. As we explore changes in each of these areas later in this book, we must be aware how deeply they are rooted in management philosophy and historical practice.

In the book's second part we turn our full attention to these infrastructure issues: the management policies, systems, and procedures that establish the organizational context within which manufacturing (in fact, any functional organization) must operate. In Chapter 3 we look at the modern capital budgeting paradigm and how it affects -- either positively or negatively -- the creation of a competitive advantage in manufacturing. We describe three contrasting but representative investment proposals and point out the pitfalls that companies can encounter when trying to evaluate them using traditional capital-budgeting approaches. Not only does the investment decision-making process help shape top management's thinking regarding specific projects, it colors their overall view of the nature of manufacturing competitiveness. We close the chapter by outlining a more comprehensive framework for guiding capital-investment decisions.

In Chapter 4 we look at the organization of the manufacturing function, which profoundly influences how various manufacturing resources (people, systems, capital, and technology) are marshalled, coordinated, and enhanced. We describe some of the different approaches that a company may select in organizing its manufacturing function, and the major implications of each choice. We also examine the contrasting roles of staff and line organizations, and how each can mesh with and complement the other in pursuing the business unit's desired competitive advantage. Finally, we look at the impact of growth on a manufacturing organization and explain why many companies find it so hard to adapt to the changes it brings.

In Chapter 5, the end of the second part, we address issues associated with measuring manufacturing performance. We describe why we are uneasy both with the aspects of performance that companies typically choose to measure and with the measurement techniques they employ. The methods an organization employs for measuring, evaluating, and rewarding performance not only influence people's behavior but constitute an integral component of any management "control" system. After identifying several of the dysfunctional aspects of current practices, which are largely based on the traditional cost-accounting model, we briefly describe an alternative approach (known as total factor productivity) for measuring how rapidly an organization is improving its effectiveness in utilizing all the major resources available to it. We conclude by outlining an approach for comparing a company's performance against an external reference system: the performance of its best competitors.

In the third part we focus specifically on manufacturing management at the factory level. We begin, in Chapter 6, by describing some of the recent research that we have done in trying to understand why, within the same company, some factories are more productive than others. After analyzing the data we have collected, we summarize some of the basic approaches to managing improvement -- as reflected in the growth of total factor productivity -- that appear to be particularly effective. We place particular emphasis on the impact that factory complexity and confusion, as well as organizational learning, have on productivity growth. Because the factory is such an important nursery for growing manufacturing capabilities, we emphasize that general managers, as well as those in manufacturing, need to understand the underlying concepts and principles of outstanding factory performance.

Building on these fundamental concepts and principles, in Chapter 7 we examine the competitive leverage that can come from effective management of the flow of both physical materials and information in the factory environment. We present two contrasting manufacturing "architectures" for managing these flows and show how each interacts with a factory's capital and human assets to influence both its current performance and its potential for continued improvement.

In Chapter 8 we explore the relationships between the concepts of control, knowledge creation, and manufacturing capability by describing four levels of control: reactive, preventive, progressive, and dynamic. The types of knowledge required for each level of control, and the organizational capabilities that are required to implement it, are outlined. We also describe how the requisite layers of knowledge can be developed within the factory environment, through problem solving and controlled experimentation. We conclude by outlining an approach for starting an organization along a path of steadily increasing improvement.

Chapter 9 concludes the third part by focusing on human resource management, and the role that people play in extracting the full potential from equipment, processes, and systems. Although most economists and government leaders argue that technology, particularly as embodied in modern equipment, is the primary solution for declining manufacturing competitiveness, we explain why we think people -- the way they are trained, organized, and managed -- are at least as important. We end by describing some of the basic principles that we feel should guide the management of human resources in a manufacturing organization.

The last part is devoted to issues associated with the management of technology, from the perspective of both new product and new process development. Our view is that both types of technological development provide rich opportunities to capitalize on and enhance manufacturing capabilities, thereby strengthening a firm's competitive position. Chapter 10 describes how general managers can assess their organization's readiness for product or process development projects, and some of the steps that can be taken to increase the likelihood of a project's success. Product and process development projects can provide an important vehicle both for altering the way functional groups interact, coordinate, and communicate and for strengthening an organization's competitive position. Unfortunately, this potential is too seldom exploited, because general managers hesitate to involve themselves directly in such projects.

In Chapter 11 we explore the characteristics of superior project management. We have observed a number of organizations whose development projects take half the time and half the resources of their industrial competitors, yet result in superior products and processes that are not easily imitated by others. We describe a number of the approaches such companies follow, and how those approaches enable them to continuously improve the effectiveness of their product and process development efforts.

In the last chapter we attempt to weave together the various threads of the tapestry that we have been assembling and provide advice about how a company can get started on the road to manufacturing excellence. We describe how it can objectively assess its manufacturing capabilities, and the steps it has to take if it is to restructure itself so that manufacturing becomes a source of competitive advantage. Then we examine why the changes required are so difficult for most companies to implement, and describe the leadership role that top management has to play if these changes are to occur.

A Final Note

Throughout this book we adopt a point of view that may be puzzling to some readers and is therefore important to understand from the onset. Much of modern management theory is based on rationalist principles: that events, behavior patterns, and specific decisions reflect logical processes; that complex activities can be decomposed into underlying variables and the relationships between them; and that the key to understanding (or predicting) the outcome of the complicated interplay between people, organizations, and their environment is through ascertaining these causal relationships. Although the authors were all trained in these rationalist principles and conduct the bulk of their research under its dictates, we have become increasingly convinced that certain important human phenomena are not yet sufficiently understood to be satisfactorily modeled in this fashion. Even though modern medicine may understand quite clearly what causes a certain disease and how to treat it, it still does not fully understand how the psychological condition of a specific patient, and the relationship between that patient and the attending physician, affect the prognosis. Briefly, we believe in modern medicine, but we also believe in the importance of the physician's bedside manner.

Hence, in the pages that follow we often emphasize the importance of human qualities that are as yet too poorly understood to predict or even measure properly: qualities like trust, confidence, commitment, integrity, vision, and leadership. Such human traits often combine with other phenomena that are equally obscure to produce behavior patterns in organizations that defy conventional analysis. To use our previous terminology, there is an overlay of human software that often overwhelms the hardware of precise relationships and rational thinking that we like to think drives managerial behavior. The interaction of such hardware and software, of clear structure and obscure infrastructure, produces what we refer to as "organic" or "holistic" behavior in organizations. We focus considerable attention on this kind of behavior because it is key to understanding why some organizations are able to achieve superior performance even though they appear, on the surface at least, to be behaving irrationally.

In fact, it is often important in business not to be too rational. People who are totally rational do not start up new businesses, attack the largest company in an industry, or try to overtake, with limited resources, the leading industrial power of the time. When business becomes too analytical, too concerned with the calculus of costs versus benefits and risks versus returns, it becomes prey to those who seek market share, the dynamics of growth, and a place in the sun. As John Maynard Keynes wrote fifty years ago,

A large proportion of our positive activities depend on spontaneous optimism rather than on [mathematical logic]....Our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits -- of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities....If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but [logic], enterprise will fade and die.

A business acquaintance phrased it slightly differently: "The easiest competitor to drive out of a business is the most rational one. All you have to do is convince him you're not."

Copyright © 1988 by The Free Press

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