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Response to competitiveness RFI – manufacturing and services


Following on yesterday’s posting, I would like to take up some of those intriguing questions posed by the Commerce Department’s Competitiveness study RFI (see earlier posting).

Let’s start with something I have written on before: manufacturing and services.

For topic #6: Manufacturing.  The RFI asks the following questions:

What is the role of advanced manufacturing in driving American economic growth and international competitiveness, and what are the key obstacles to success at advanced manufacturing? In which manufacturing industries will our nation have comparative advantages?

The short answer to the first question is simple: manufacturing will continue to play a major role in American economic prosperity.  It will be a different role.  As we pointed out a year ago in our Policy Brief–Intellectual Capital and Revitalizing Manufacturing, manufacturing is in the process of being transformed into a much more knowledge-intensive activity.  The process is analogous to the transformation of agriculture in the early 20th century.  Farming did not simply move to other nations with lower-cost producers using the traditional techniques. Agriculture was mechanized–or industrialized, if you prefer. That transformation led to efficiencies that revolutionized the production of commodities and contributed to U.S. economic growth.

Understand this transformation, and you will understand that the last question — about comparative advantage — needs to be rephrased.  As it now stands, it focuses on the output of the manufacturing process.  The issue is not just what products we will compete in.  It is about the changes in the production process.  Production is moving toward greater customization — “just-it-time; just-for-me”.  Customers are becoming more active in the production process as pro-sumers.  Virtual reality is beginning to revolutionize the product design process and 3-D printing has the potential for changing the production process.  The transformation will affect all sectors and all industries.

As manufacturing is transformed into a much more knowledge-intensive activity, it will require attention to all the inputs to the production process — technology, worker skills, and cooperative/collaborative organizational structures.  All of which are key intellectual capital and intangible assets.

Embracing the role of intellectual capital and intangible assets in manufacturing requires going beyond the narrow view of formal intellectual property. Scientific and creative property are valuable assets that include product development activities beyond the patent, new architectural and engineering designs, and social and organizational sciences research. Computerized information, including customized software and databases, are other important company assets that go beyond our definitions of intellectual property. Specific business models, organizational structures, and organizational capabilities are key elements of any company’s ultimate success. Worker skills and tacit knowledge–both general and firm-specific–are assets that managers describe as leaving the company every evening and returning every morning. Brand equity, reputation, and relationships with customers and suppliers are all important. All of these forms of intellectual capital need to be explicitly developed and managed by successful manufacturing companies.

Thus, the key question is not which industries.  The question is how do we position American manufacturers to make the transformation.  It will not be an overnight leap, but a gradual process that will require sustained attention.  At the heart will be helping companies understand the transformation and how to best utilize their intellectual capital. 

There are a number of specific actions that could be taken to support the transformation.  We should expand the Manufacturing Extension Partnership (MEP) services to explicitly include assistance in indentifying and managing their intellectual capital.  Likewise, we should include intellectual capital management in Small Business Administration (SBA) training programs and Economic Development Administration (EDA) business incubator programs.  We could also create a specific award and assessment program similar to the Baldrige Award. 

Assistance for on-the-job training should be expanded.  We should also create a program to allow businesses to use their intangible assets, specifically their intellectual property, as collateral on loans.  This could provide an important source of capital to help companies finance the transformation.  The government could also do more to promote innovative manufacturing through its procurement process and through the establishment of demonstration and technology diffusion programs.

Research on the manufacturing transformation should also be undertaken.  But this should go beyond the traditional advanced manufacturing concept to embrace the entire transformation.  For example, the concept of “design thinking” is becoming increasingly important in product development.  Just like we have created Engineering Research Centers in a number of areas (including advanced manufacturing), we should create one for design thinking.  Likewise, research need to be continued on new manufacturing business models and the linkages between services and manufacturing.

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That last point is especially important as the RFI also raise an important subject in a corollary area.  Topic #9: Innovation in services – asks the following questions:

What sectors of the economy have gained less from innovation in the past and–to the extent that innovation could have sustained competitiveness–what are the obstacles to their progress? What are the policy issues that are raised by the nature of innovation in the service sector?

 First, we should recognize that the barriers between “manufacturing” and “services” are eroding.  Service activities are increasingly linked manufacturing activities. In fact, companies such as the German Mittelständler companies are successfully competing in “old” industries based on that linkage.  They offer knowledge — not low cost.  Knowledge is what gives them a superior product and knowledge is what makes their services so valuable. But is it not just generic knowledge. They are selling their knowledge as a means to create solutions for their customers. Their customers want the knowledge to be specifically applied to them – not some abstract concepts. That is the “service” part of the equation.  So, all of the activities described above for helping manufacturing should recognize that these manufacturing companies are already in the “service” business.

Next, it should be recognized that all of the activities described above for helping manufacturing also apply to services. Service industries are becoming more knowledge-intensive and need to understand and better their intangible assets.  MEP could be further expanded to a offer assistance to service providers — just as the Baldrige Award was opened up to service businesses.  Promoting innovative service delivery activities the government procurement process and through the establishment of demonstration and technology diffusion programs is also just as important as in manufacturing.  Likewise, research on the organizational and business model aspects of service delivery should be undertaken.

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Bottom line answer to both questions: our goal should be to help American companies make the transformation to a more knowledge-intensive, information-fueled innovative production process — in all sectors and in all industries.  Some of those industries will be labeled “manufacturing.”  Some will be labeled “services.”  Some will be a combination of both.  What we label it is less important than the action we take to help make the undertaking of these activities here in America as productive, competitive and wage/job creating as possible.


Crossposted from The Intangible Economy.

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