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The Case for Manufacturing and the Need to Understand the Transformation

As a recent post by Stephen Ezell referenced, a recent op-ed by Christina Romer has touched off a back and forth on the blogshere on whether manufacturing matters.  The fact that the question is even asked illustrates the lack of understanding of the issue and of the structure of our economy. Back in December Susan Hockfield, the President of MIT, made the case for manufacturing in her own op-ed “Manufacturing a Recovery”. Central to her argument is a description of some advanced manufacturing companies:

Like the jet aircraft made by Boeing, one of the country’s largest exporters, products like these require sophisticated manufacturing equipment, operated by skilled workers, and benefit from the tight integration of design and production. With goods like these, the United States can reassert an economic advantage. If we can find ways for companies of every size to exploit the possibilities of nanofabrication, advanced materials, robotics and energy efficiency, we can create networks of innovation, joining lab research to new production processes and business models.

That tight linkage between product creation and product manufacturing has been highlighted by a number of others, most notable Gary Pisano and Willy Shih at the Harvard Business School in their HBR piece “Restoring American Competitiveness”.

I would go one step further and stress the tight linkage between product manufacturing and servicing.  As I have noted many time in this blog, the difference 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.

The fusion of product and service is part of the overall shift of manufacturing.  As I pointed out in the Athena Alliance 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.

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.

The policy question, therefore, 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 identifying 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.

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.

Thus, it is not just a movement to advanced manufacturing in the sense that Hockfield describes that concept — as important as that is.  What we face is a transformation of the entire production system.  Companies are already in the middle of that transformation.  Our public policy needs to catch up.

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