For both private and government leaders, how to promote American productivity growth in an interdependent global system is the central economic challenge of the 1990s. The decade just passed saw disappointingly slow gains in U.S. productivity low levels of profit, investment, and economic growth, and consequent stagnation in average wages. Companies based in the United States often found themselves unable to match Japanese, German, Italian, and Scandinavian competitors in their ability to put new technologies in practice, to bring new products to market, or to upgrade their work force. Can America -- and American business -- do better in the 1990s?
High public deficits and low private savings have figured prominently in the standard explanations of slow growth. Those who look beneath the macroeconomic level at institutional and structural causes have mainly stressed reform of education and other measures to improve human capital. We have no quarrel with educational reform, as long as we also provide better economic prospects for young people who stay in school. But formal education is at best only part of a solution, and perhaps not the most urgent part.
Down in the industrial trenches, at a level of activity ignored by most conventional economic analysis, lie the relationships that will ultimately determine U.S. industrial productivity. Of decisive importance, we believe, are the choices managers make in organizing four relationships:
- between research-and-development activities and manufacturing;
- between companies and their subcontractors;
- between shop-floor workers and their supervisors; and
- between workers and technology.
Along these four dimensions are to be found the most striking differences between American business as a whole and its most successful foreign competitors (or, for that matter, between the more successful and floundering managements in the United States).
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For the big firms, the lessons from abroad are by now crystal clear. Better integration between research, product and process development, and manufacturing; collaboration with key suppliers; giving workers on the shop floor greater responsibility and control over workplace decisions; and upgrading the ability of employees to work with the new technologies -- these are the ingredients that have proven themselves to lead to productivity advances, from the bottom up.
In the U.S. context, however, all of these approaches carry big risks for management. Whether managers prove willing to take the necessary risks will, we think, determine the ultimate success of the restructuring experiments now underway across American industry. And that, in turn, will shape the future path of U.S. industrial productivity and economic growth.
Integrating Research, Design, and Production
Ever since pioneering research by the Harvard Business School's Robert H. Hayes and William J. Abernathy, academic critics and management consultants have broadly agreed that American firms have difficulty translating technological breakthroughs from the laboratory into production processes and useful products. The American managerial culture, and its traditional system of labor relations, resists this integration. The financial, managerial, engineering, and shop-floor parts of the firm tend to dwell in separate realms. Few CEOs come up through the technical ranks.
At the same time, this is a balancing act. There is a genuine risk that tying the R&D labs of a company too tightly to the immediate priorities of production managers will undermine the purely scientific research necessary for the next generation of new products. Overemphasis on applied research might drive the company's "best and brightest" research scientists back into a university environment.
Yet the best foreign companies are doing far better at integrating research and design with the process of manufacture. Where a General Motors, for example, cannot seem to overcome its tradition of designing new car models in the engineering department and then passing finished blueprints "over the wall" to the factory floor, such global giants as Fujitsu, Olivetti, and Siemens, to name just three hugely successful foreign competitors, follow a markedly different approach. Production engineers and representatives of the blue-collar teams that assemble products as diverse as semiconductors, computers, internal combustion en- gines, or air conditioners, collaborate intimately with designers. At every stage of the production process people are engaged in an elaborate, ongoing conversation. Designs likely to generate hard-to-build or costly-to-maintain products get reconcep-tualized before they are inflicted on production managers, assemblers, and customers.
To be sure, some American companies are attempting this approach. At NCR's new Atlanta plant, where checkout-counter registers are made, an experiment begun in early 1987 brought designers, production engineers, and factory floor workers into more collaborative ongoing contact.
The results are impressive. NCR's new registers have 85 percent fewer parts than the previous model and can be assembled in one-fourth of the time. Today, NCR employees involved in design, software development, hardware, purchasing, actual manufacturing, and even customer support are all required to work together, in rotating combinations according to the needs of each project. This approach has not spread to all of NCR's other plants yet, but management views the Atlanta experiment as a model. AT&T is trying out its own version of what some call "concurrent engineering" in building its newest phone-switching computers, as is John Deere with its latest lines of forestry and construction machinery.
But, despite their promise, such experiments are still considered too risky by many American managers. Ours remains a society in which the dominant management style seems to be the "hot potato" approach to risk -- seeking fast returns and passing unexpected costs to others, rather than sharing risks and gains among a group of stakeholders committed to one another for the long term. This is compounded by the influence of American financial markets, which emphasize the primacy of short-run profit over long-run market share. Quick profitability still serves as the prime incentive governing the rewards and hence the behavior of most managers and senior technicians.
A telling symptom, which only intensifies the disease, is the American habit of prematurely licensing promising technologies to foreign companies, before encouraging potential users in the U. S. to create profitable domestic applications and markets. Alone among the industrialized countries, the U.S. and Britain have a "negative balance of trade" in technology licensing with the rest of the world: We license out far more than we get. The world's other leading industrial nations turn our technological breakthroughs into long-term manufacturing skills and product opportunities. This story is as old as West-inghouse's premature abandonment of solar energy technology two decades ago, and as recent as the unwillingness of U.S. consumer electronics firms to compete with the Japanese in the evolution from color TVs to VCRs to high-definition television.
Other countries' large firms deal with these risks by engaging in "strategic alliances." There are some American rough counterparts, but their limits are very revealing. For example, in microelectronics, two pioneering research and development consortia, the Microelectronics and Computer Technology Corporation (MCC) and Sematech -- both located in Austin, Texas -- seek to develop technological breakthroughs. MCC is a consortium of major computer and microelectronics companies founded in 1982 to promote the joint undertaking of basic research, with the hope of speeding up the development of the next ("fifth") generation of computer technology. Each member company is free to take the results of that joint research and turn them into marketable products for itself. No federal funds are directly involved, although the state of Texas has given generous tax abatements and provided additional support to the state university to generate engineering talent.
With Sematech, created in 1987, the federal government became directly involved in supporting a European-style "pre-competitive" R&D consortium, via financing from the Defense Department's Defense Advanced Research Projects Agency (DARPA). Sematech's joint research and development activities aim at spawning a new generation of chip-making technology for the next generation of semiconductors. DARPA matches the investments of private consortium members such as IBM and Intel on a dollar-for-dollar basis, and state government contributes about a fifth of overall costs.
What spurred this collaboration was the recognition by the major U.S. chip manufacturers that they were not able to manufacture the current generation of semiconductors as cheaply as their Japanese competitors, such as Fujitsu. Perhaps, with the next generation of chips, these companies could leapfrog over their foreign competitors to a more efficient production technology. As with MCC, Sema-tech consortium members are encouraged to use the fruits of their joint R&D efforts in products that will compete on the open market. But, in this case, as a condition of federal support, the new technologies developed must also be licensed to companies outside the consortium.
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These two efforts may seem like the beginning of a more collaborative approach to new technology and pooled risk. But upon closer inspection, both organizations betray the characteristic American corporate reluctance to make significant commitments or investments predicated on collaboration. In practice, there is no shared commitment to collaborate on further ("downstream") development of either products or even processes. Indeed, Sematech actually limits the ability of member firms to appropriate the technology that the consortium develops. The statutory requirement that Sematech license out any new technology reflects Reagan-era thinking that mistrusts collaboration as incipient monopoly. But in practice the requirement denies firms the necessary commercial incentive of capturing advantage from the risks they incur. And that, in turn, deters risk-taking.
Both Sematech and MCC have been justly criticized as half-baked attempts at collaboration that actually encourage member firms to hold back, rather than to share knowledge with each other fully. And the premature abandonment last January of yet another consortium, U.S. Memories, undermined by a profound split between the largest American computer and semiconductor makers and the smallest, proves that all too many American managers still misunderstand and fear the principle of "cooperative competition."
Going Steady With Suppliers
Perhaps the single most stunning aspect of Japanese business relationships is the widespread use of what sociologist Ronald Dore has called "obligational contracting" between large firms and their suppliers. Where American companies in the auto, steel, consumer products, and electronics industries have tended to keep even their most important subcontractors at arms length, using the bidding system to play off one supplier against another as a method of regulating cost, the large Japanese firms commonly organize "core-ring" networks among supplier and customer firms held together by mutual obligations, and long-term sharing of risk and reward.
The first-tier subcontractors typically receive financial and technical assistance from the big customer firms; regular visits by engineers from the customer firm are common. This encourages the smaller companies to experiment and innovate. There is rigorous quality control, yet both partners are in for the long haul. Penalties for occasional faulty quality or late delivery of parts or subsystems seldom include termination of the relationship in favor of a competing supplier. Similarly, if a risky R&D project undertaken by one or another contractor within the network does produce a new product or process innovation, the gains are shared throughout the production system, not appropriated entirely by the lead (or "hub") corporation.
The result of such risk sharing -- as opposed to the traditional American model of risk avoidance -- is to increase greatly the exchange of information between firms. When suppliers routinely participate in product and process design, the lead firm can mobilize the capabilities of many other companies and their workers early in the product development cycle. The result is higher product quality and shorter development time. With local variations, this brand of "collaborative manufacturing," in the phrase of MIT political scientist Charles Sabel, is also increasingly common practice in German and Italian industry.
There is an important inference from this story for economic theory. Long-term relationships between manufacturers and suppliers violate a prime tenet of mainstream American economics -- the idea that economic transactions must be competitive, one-time "price auction" events in order to maximize quality and minimize cost. But, as Dore suggests, negotiated price and supply, in the context of a stable, long-term relationship, can produce just as much price discipline, more innovation, and far less institutional havoc.
Learning to Collaborate
Will American corporations adopt this more collaborative way of doing business? There are encouraging beginnings, but serious obstacles remain. Segments of the auto industry, until recently one of America's industrial dinosaurs, are now pioneering longer-term contracting. Each of the Big Three has reduced the number of first-tier suppliers, leaving to these contractors the task of managing the much larger number of lower-tier subcontractors who tend (in this country as in Japan) to be smaller and less technically sophisticated. The preferred suppliers are then awarded longer-term contracts, enabling them to take the risk of upgrading their technological and human resources and dedicating at least part of their own production to the interests (and specifications) of their big customers.
That these connections matter for productivity is clear from the research of Case Western Reserve University economist Susan Helper. In her studies for the MIT International Motor Vehicle Project, Helper has discovered that the longer the length of the contract with one of the Big Three, the more likely a parts supplier is to have adopted computerized machine tools -- an important source of productivity improvement.
This more collaborative approach is even being extended from contractor to subcontractor. The automotive division of TRW, which supplies air bags and seat belts to Ford, now designs as well as manufactures such components. TRW is also trying out similar relationships with the smaller companies from which it purchases parts and sub-assemblies. In a recent interview with the Harvard Business School's Richard Walton and George Lodge, TRW Vice President John Marshall described the company's new "downward-looking" initiatives this way:
In the past we sought bids from a number of suppliers, and price was the principal issue. Now we want flexible relationships with a few suppliers.... It is not unusual these days for two or three engineers from our suppliers to be working in our plants for a while. We network through computers. I might call one of our suppliers and urge them -- if not help them -- to locate a plant near us.
Nor are such experiments confined to the auto business. At the highly profitable and much-praised (but non-union) Texas minimill Chapparal Steel, teams of engineers and workers collaborate with suppliers of steel-making equipment, to tailor the design of this very expensive machinery to fit Chapparal's particular needs. So does the Massachusetts-based Digital Equipment Corporation, the country's leading maker of mini-computers. To conduct such a relationship sometimes requires the customer -- in this case, DEC -- to share unusually detailed information with its suppliers about existing operations and even long-range strategic plans. Indeed, one DEC executive told Rosabeth Moss Kanter, a professor at the Harvard Business School, that "we are telling stuff today [to our suppliers] which I'm sure if the old purchasing manager of two years ago knew we were doing, he would roll over in the grave."
Nevertheless, interviews with auto parts suppliers conducted by researchers at Cornell University, at the Industrial Technology Institute, and by Helper, show that the typical manager of a supplier firm in this country continues to be wary of being blind-sided by his large business customers, whether by being forced to take a sudden large price cut or by being expected to upgrade his technology without the financial wherewithal to do so. Moreover, in a random sample of all U.S. metalwork-ing plants in 1987, Maryellen Kelley and Harvey Brooks found that only 3 percent reported having received any financial assistance from customers between 1985 and 1987 to upgrade their technology, and only 16 percent had received technical assistance in the form of visits from the customer's engineers. If our leading corporations indeed wish to build stable long-term relations of trust with their suppliers, turning from risk-avoidance to risk-sharing, they first need to overcome the distrust that is the legacy of many years of stop-and-go contracting.
In some ways, it is even more important in the U.S. than in other countries that big firms provide such financial and technical assistance to smaller suppliers. For in the U.S., government support is also conspicuously absent. According to the U.S. Congressional Office of Technology Assessment, the Japanese government spends perhaps $31 billion on technology extension and loans to smaller firms each year, while all levels of government in this country -- federal, state, and local -- probably spend no more than $50 million. That is what makes the Kelley-Brooks finding on the limited extent of linkages (let alone full-scale collaboration) between large and small companies in the U.S. so worrisome. In the U.S. neither government nor large firms adequately disseminate technological learning.
What Could Unions Do?
American managers have been widely faulted for underinvesting in the continual, long-term training of their work forces. Only a small minority of large manufacturing companies provide any classroom instruction or apprenticeship training to their employees. Most manufacturing workers are considered semi-skilled operatives, whose on-the-job training consists of little more than a few days of orientation.
In fairness, a few companies are making some progress in this area. Perhaps the most celebrated worker education and training programs in the private sector are Motorola's. But in a recent Harvard Business Review article, Motorola's own vice president in charge of these activities, William Wiggenhorn, says that the quid pro quo for the company's commitment to training is that employees must accept a work week of "50 or even 60 hours," if management decides that is what is needed.
Some workers enjoy (and badly need) overtime. But ten to twenty hours per week of mandatory overtime, if sustained over a long period, not only reduces the number of new job openings but, in some cases, can be dangerous to the health and safety of overtaxed workers. Moreover, the unilateral style of management decision-making that imposes such mandatory overtime rules seems inconsistent with the kind of employee involvement in workplace decision-making that Motorola and kindred non-union companies profess to support.
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Among American managers, employee involvement (known as "EI") has taken hold with a vengeance. In the Kelley-Brooks survey, half of all metalworking plants in the U.S. now have some form of employee involvement via collaborative problem-solving committees with management. The theory behind employee involvement is that institutionalized collaboration among workers, and between workers and their supervisors, will encourage higher motivation of workers and a willingness on their part to share previously concealed knowledge with plant managers, thereby increasing quality and productivity and reducing waste. The workers gain the opportunity to have jobs enlarged and enriched. Some industrial relations scholars have suggested that such arrangements may even obviate the necessity for having unions in the workplace, altogether.
The presence of a union, however, seems the key to a real payoff from employee involvement programs. The Kelley-Brooks survey studied firms in the 21 industries that make up the U.S. metalworking sector (including auto, aircraft, machine tools, farm equipment, and scientific instruments) for signs of a payoff from joint labor-management problem-solving committees. One significant finding is that workers in plants equipped with the latest generation of computerized automation and having an EI program are likely to have their jobs upgraded to include computer programming skills only if a union is present. In fact, if they have no union, manufacturing plants with EI tend to be less efficient than plants without EI.
After a decade of widespread government, corporate, and editorial page hostility to unions, it may sound improbable that unions actually promote plant-level productivity. But consider how management-initiated employee involvement usually functions in practice. Although participants sit down periodically to work on particular problems, the framework is typically dictated by management. Moreover, even as these deliberations are proceeding, management is unilaterally making other crucial decisions -- about what new technology to introduce, whether to expand or contract operations, and even whether to shut a facility altogether. These are the real life-and-death decisions for employees. But most EI programs, at least in the U.S., are not empowered to address them.
By contrast, as Harvard economists Richard Freeman and James Medoff have shown in their book What Do Unions Do?, unions -- or in the European context, works councils -- constitute a structurally independent, as well as collective, "voice" for workers. Through the actions of shop stewards and other union representatives, there is continual interaction between labor and management -- not just in periodic meetings. Most of this is informal; the filing of written grievances and periodic contract negotiation are only a small part of what unions do. Where such continual interaction is possible, and where workers have an independent voice, there is a far greater basis for development of trust. Workers have the chance of having their interests protected as well as suggestions heeded.
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Without such safeguards, employees on the shop floor (or in the office) are far less likely to risk revealing candidly to management their "tacit knowledge" of how the workplace really operates. Companies that try to operate "high commitment" environments without unions, or works councils -- or some other, as yet undeveloped source of independent authority -- are vastly limiting the potential of this approach. These managers are still haunted by the risks that come with unionization -- the challenge to unilateral control; the threat of strikes; the uncertainty of how next year's earnings will translate into dividends to shareholders -- but are ignoring the potential benefits of more widespread sharing of information and authority.
Observers of group problem-solving processes often point out that discussion tends to focus on those solutions that are the most acceptable to those in authority; members are subtly deterred from breaking free of prevailing assumptions. But innovative solutions to both technical and organizational problems will often violate commonly held assumptions about the causes of the problem and the range of possible remedies. Without a mechanism through which workers can exercise an independent and critical voice, employee participation schemes initiated at the behest of management are unlikely to make a significant dent in the productivity problem in U.S. industry.
In those European companies that have had the greatest success during the past decade in their own internal restructuring -- from Italy's Montedison to Germany's Bosch to Sweden's SKF -- teamwork, quality circles, and the rest are almost invariably implemented where works councils are mandated by law and unions represent a large percentage of the labor force. With such institutions for employee representation, the participation process deals with a broader range of subjects and alternatives for handling the problems that undermine productivity growth in the workplace.
Collaboration is Risky Business
Obviously there are risks to managers who accept the notion that chances are best for high-quality, efficient production when labor has an independently organized voice. There are also risks involved in the integrating of R&D and manufacturing and the formation of more collaborative, long-term relations with subcontractors. The question is whether enough managers in America's leading companies will be astute enough to see the connection and accept the risks for the sake of increasing product quality and overall productivity.
The short-run, risk-averse bias of American finance has had great influence on what kind of industrial managers make it to the top. The system does not reward managers with a long-term perspective. If American finance were more patient, it would certainly facilitate the kind of business reform we advocate. But the relative absence of patient capital is no reason to forego new ways of conducting business that are good for productivity in their own right. If industrial reform must first wait for a total overhaul of Wall Street, it will wait a very long time.
The connection between collaborative production and the decade-long industrial policy debate is also instructive. Without a radically altered strategy at the plant and enterprise level, the national and regional technology and industrial policies that liberals espouse remain unconvincing. Indeed, the industrial policy offered by liberals in the early 1980s had little resonance even with their own constituents, precisely because it had so little connection to the arena where American industry needs the most fundamental transformation -- the factory itself. In 1984, the International Association of Machinists printed a bumper sticker: "Fight for Industrial Policy." But to most Americans -- even to most machinists -- industrial policy seemed an abstraction hardly worth fighting for. To some people, industrial policy meant protection against imports; to others, it meant government subsidies. Only now are we beginning to appreciate the necessary changes in the way industry must actually be run.
Managers and union leaders willing to take the risks of engaging in collaborative production could become a powerful political constituency for industry and technology policies that ratify and reinforce plant-level innovation. The absence of such a constituency for industrial policy helps explain why conservatives succeeded in denying the very legitimacy of the issue -- for it was not clear that national industrial policy could make much practical difference. But with a new commitment down in the trenches, industrial and technology policies at last become meaningfully connected to industrial practice.