One of the themes that came up while I was profiling White House manufacturing czar Ron Bloom earlier this fall was managerial talent. A lot of people talk about reviving the domestic manufacturing sector, which has shed almost one-third of its manpower over the last eight years. But some of the people I spoke to asked a slightly different question: Even if you could reclaim a chunk of those blue-collar jobs, would you have the managers you need to supervise them?
It’s not obvious that you would. Since 1965, the percentage of graduates of highly-ranked business schools who go into consulting and financial services has doubled, from about one-third to about two-thirds. And while some of these consultants and financiers end up in the manufacturing sector, in some respects that’s the problem. Harvard business professor Rakesh Khurana, with whom I discussed these questions at length, observes that most of GM’s top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost. As Khurana quips, “That’s how you end up with GM rather than Toyota.”
How did we get to this point? In some sense, it’s the result of broad historical and economic forces. Up until World War I, the archetypal manufacturing CEO was production oriented—usually an engineer or inventor of some kind. Even as late as the 1930s, business school curriculums focused mostly on production. Khurana notes that many schools during this era had mini-factories on campus to train future managers.
After World War II, large corporations went on acquisition binges and turned themselves into massive conglomerates. In their landmark Harvard Business Review article from 1980, “Managing Our Way to Economic Decline,” Robert Hayes and William Abernathy pointed out that the conglomerate structure forced managers to think of their firms as a collection of financial assets, where the goal was to allocate capital efficiently, rather than as makers of specific products, where the goal was to maximize quality and long-term* market share.
By the 1980s, the conglomerate boom was reversing itself. Investors began seizing control of overgrown public companies and breaking them up. But this task was, if anything, even more dependent on fluency in financial abstractions. The leveraged-buyout boom produced a whole generation of finance tycoons—the Michael Milkens of the world—whose ability to value corporate assets was far more important than their ability to run them.
The new managerial class tended to neglect process innovation because it was hard to justify in a quarterly earnings report, where metrics like “return on investment” reigned supreme. “In an era of management by the numbers, many American managers … are reluctant to invest heavily in the development of new manufacturing processes,” Hayes and Abernathy wrote. “Many of them have effectively forsworn long-term technological superiority as a competitive weapon.” By contrast, European and Japanese manufacturers, who lived and died on the strength of their exports, innovated relentlessly. One of Toyota’s most revolutionary production techniques is to locate suppliers inside its own factories. The New York Times’ Jon Gertner recently visited a Toyota plant and reported that the company doesn’t actually order a seat for a new truck until the chassis hits the assembly line, at which point the seat is promptly built on-site and installed. “If the front seat had not been ordered 85 minutes earlier, it would not exist,” Gertner observed. Alas, these aren’t the kinds of money-saving breakthroughs the GM brain trust has ever excelled at.
The country’s business schools tended to reflect and reinforce these trends. By the late 1970s, top business schools began admitting much higher-caliber students than they had in previous decades. This might seem like a good thing. The problem is that these students tended to be overachiever types motivated primarily by salary rather than some lifelong ambition to run a steel mill. And there was a lot more money to be made in finance than manufacturing. A recent paper by economists Thomas Philippon and Ariell Reshef shows that compensation in the finance sector began a sharp, upward trajectory around 1980.
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COMMENTS (15)
Is there something screwy with the talkbalk sections? I see comments show up, vanish, then show up again. There were 4-5 comments an hour ago, now none. What's going on?
Is there something screwy with the talkbalk sections? I see comments show up, vanish, then show up again. There were 4-5 comments an hour ago, now none. What's going on?
Really sorry about this - we had some glitch that appears to have wiped them out. They were great comments, so it pains me to lose them.
Really sorry about this - we had some glitch that appears to have wiped them out. They were great comments, so it pains me to lose them.
I guess maintaining webpage commentary is not one of our "Core competencies".
I did a MBA myself at an internationally rated B-School. Still figuring out what I got from it other than a dislike of group work.
I guess maintaining webpage commentary is not one of our "Core competencies".
I did a MBA myself at an internationally rated B-School. Still figuring out what I got from it other than a dislike of group work.
Wow, two of the TNR staff "talking back" to a post I had. Must be my lucky day. :-)
Wow, two of the TNR staff "talking back" to a post I had. Must be my lucky day. :-)
And Noam, I think this a great article. It hits my pressure points quite well. It also reinforces why Dilbert is so popular (and unfortunately too often true).
And Noam, I think this a great article. It hits my pressure points quite well. It also reinforces why Dilbert is so popular (and unfortunately too often true).
So, if it takes n years and $x to earn an MBA, and a career in finance is expected to pay multiples of a career in operations, is it any surprise that there has been an incentive for (after all, they are business students) to go into a more profitable line of work? Is it any wonder then, that the top business schools would have an incentive for hiring finance professors (after all, they are business schools)?
Isn't the real question not even particularly why finance salaries took off, but rather, why they have remained so high for so long?
So, if it takes n years and $x to earn an MBA, and a career in finance is expected to pay multiples of a career in operations, is it any surprise that there has been an incentive for (after all, they are business students) to go into a more profitable line of work? Is it any wonder then, that the top business schools would have an incentive for hiring finance professors (after all, they are business schools)?
Isn't the real question not even particularly why finance salaries took off, but rather, why they have remained so high for so long?
Noam, you don't have a clue how business decisions are made and the loss of manufacturing jobs in the U.S. has nothing to do with managerial competence. Manufacturing competitiveness is determined primarily by the costs of capital and labor and to a lesser extent by proximity to suppliers and markets.
The U.S. has been shedding manufacturing jobs for the same reason that it has been losing agricultural jobs for the last 150 years.... innovation. With mechanization and automation you can produce a lot more stuff with a lot less people. The reason manufacturing is shifting out of the U.S. is not due to a a lack of managerial talent, it's because it's cheaper to hire 100 people to work in a Chi ... view full comment
Noam, you don't have a clue how business decisions are made and the loss of manufacturing jobs in the U.S. has nothing to do with managerial competence. Manufacturing competitiveness is determined primarily by the costs of capital and labor and to a lesser extent by proximity to suppliers and markets.
The U.S. has been shedding manufacturing jobs for the same reason that it has been losing agricultural jobs for the last 150 years.... innovation. With mechanization and automation you can produce a lot more stuff with a lot less people. The reason manufacturing is shifting out of the U.S. is not due to a a lack of managerial talent, it's because it's cheaper to hire 100 people to work in a Chinese factory than it is to put a $2 million dollar automated line in an existing or new U.S. plant.
Wishing for a resurgence of manufacturing jobs is like wishing that 90% of the population was back on the farm ploughing fields with an ox.
"...After World War II, large corporations went on acquisition binges and turned themselves into massive conglomerates. In their landmark Harvard Business Review article from 1980, “Managing Our Way to Economic Decline,” Robert Hayes and William Abernathy pointed out that the conglomerate structure forced managers to think of their firms as a collection of financial assets, where the goal was to allocate capital efficiently, rather than as makers of specific products, where the goal was to maximize quality and market share...."
"...The new managerial class tended to neglect process innovation because it was hard to justify in a quarterly earnings report, where metrics like “return on in ... view full comment
"...After World War II, large corporations went on acquisition binges and turned themselves into massive conglomerates. In their landmark Harvard Business Review article from 1980, “Managing Our Way to Economic Decline,” Robert Hayes and William Abernathy pointed out that the conglomerate structure forced managers to think of their firms as a collection of financial assets, where the goal was to allocate capital efficiently, rather than as makers of specific products, where the goal was to maximize quality and market share...."
"...The new managerial class tended to neglect process innovation because it was hard to justify in a quarterly earnings report, where metrics like “return on investment” reigned supreme."
First, the implication that allocating capital efficiently is somehow incompatible with or must be traded off against "maximiz(ing) quality and market share".
Second, that seeking and measuring the return on investment is somehow responsible for a lack of innovation. Assertion is not a form of evidence, and drivel is, well, drivel.
And other thing, wages are based on marginal supply and demand. Having worked both in derivatives on Wall Street and as director of a manufacturing company. I can tell you even amongst MBA grads, there are very few people who have the skills necessary to be really successful on Wall Street. It's not just a question of being able to do the job, you have to do it faster and better than anyone else to get the deal. There are a lot of guys who play ball in the NCAA, very few of them make it to the pros, and even fewer are successful there.
There are more people who have the skills needed to run a manufacturing operation, but the bigger issue is that while a dozen people working for a year can wri ... view full comment
And other thing, wages are based on marginal supply and demand. Having worked both in derivatives on Wall Street and as director of a manufacturing company. I can tell you even amongst MBA grads, there are very few people who have the skills necessary to be really successful on Wall Street. It's not just a question of being able to do the job, you have to do it faster and better than anyone else to get the deal. There are a lot of guys who play ball in the NCAA, very few of them make it to the pros, and even fewer are successful there.
There are more people who have the skills needed to run a manufacturing operation, but the bigger issue is that while a dozen people working for a year can wring out an extra $1 million in manufacturing efficiency in the factory, on Wall Street, one person with the right skills can generate the same amount of revenue in a day.
And other thing, wages are based on marginal supply and demand. Having worked both in derivatives on Wall Street and as director of a manufacturing company. I can tell you even amongst MBA grads, there are very few people who have the skills necessary to be really successful on Wall Street. It's not just a question of being able to do the job, you have to do it faster and better than anyone else to get the deal. There are a lot of guys who play ball in the NCAA, very few of them make it to the pros, and even fewer are successful there.
There are more people who have the skills needed to run a manufacturing operation, but the bigger issue is that while a dozen people working for a year can wri ... view full comment
And other thing, wages are based on marginal supply and demand. Having worked both in derivatives on Wall Street and as director of a manufacturing company. I can tell you even amongst MBA grads, there are very few people who have the skills necessary to be really successful on Wall Street. It's not just a question of being able to do the job, you have to do it faster and better than anyone else to get the deal. There are a lot of guys who play ball in the NCAA, very few of them make it to the pros, and even fewer are successful there.
There are more people who have the skills needed to run a manufacturing operation, but the bigger issue is that while a dozen people working for a year can wring out an extra $1 million in manufacturing efficiency in the factory, on Wall Street, one person with the right skills can generate the same amount of revenue in a day.
rather than as makers of specific products, where the goal was to maximize quality and market share..."
Investors seek to maximize expected return on investment for a given risk tolerance.
rather than as makers of specific products, where the goal was to maximize quality and market share..."
Investors seek to maximize expected return on investment for a given risk tolerance.
the market-share point was imprecise. the point there is long-term market share -- thinking about how to build strategic advantages for a product over time, which gets short shrift if you're trying to maximize return on investment from quarter to quarter.
the market-share point was imprecise. the point there is long-term market share -- thinking about how to build strategic advantages for a product over time, which gets short shrift if you're trying to maximize return on investment from quarter to quarter.
I'm sure I'm biased as a Wharton grad who went into consulting, but...
1. Don't underestimate the importance of vibrant capital markets. In part, American innovators like Cisco, Juniper, EMC, VMWare, Qualcomm (and the list could go on for pages) exist because they could secure funding. A comparable list of continental European startups would be much shorter.
2. A strong grounding in finance is pretty helpful in being a strong operational manager.
3. There's nothing other than close-mindedness that prevented GM from hiring the best folks from top business schools. Interestingly, many F500 companies have started to compete for talent at top b-schools by creating "executive training" programs w ... view full comment
I'm sure I'm biased as a Wharton grad who went into consulting, but...
1. Don't underestimate the importance of vibrant capital markets. In part, American innovators like Cisco, Juniper, EMC, VMWare, Qualcomm (and the list could go on for pages) exist because they could secure funding. A comparable list of continental European startups would be much shorter.
2. A strong grounding in finance is pretty helpful in being a strong operational manager.
3. There's nothing other than close-mindedness that prevented GM from hiring the best folks from top business schools. Interestingly, many F500 companies have started to compete for talent at top b-schools by creating "executive training" programs which combine high starting salaries with rotation through several functions.
Well it's kind of refreshing to see someone start to look at failures within America, but outside the industry. But it is lacking in looking a little deeper at the problem.
Mr. Scheiber points out that GM's top leaders came from the Finance side of the house, but fails to mention the Delphi situation. GM Spun off Delphi as a 100 Billion Dollar outfit in the late 1980's, unable to compete in making car parts for it's own products. Last year in Delphi's bankruptcy they effectively shut down every US based Plant and moved everything off shore.
But this was more than a failure to find good managers. Union labor, legal challenges and high managerial wages all contributed to decisions to offshor ... view full comment
Well it's kind of refreshing to see someone start to look at failures within America, but outside the industry. But it is lacking in looking a little deeper at the problem.
Mr. Scheiber points out that GM's top leaders came from the Finance side of the house, but fails to mention the Delphi situation. GM Spun off Delphi as a 100 Billion Dollar outfit in the late 1980's, unable to compete in making car parts for it's own products. Last year in Delphi's bankruptcy they effectively shut down every US based Plant and moved everything off shore.
But this was more than a failure to find good managers. Union labor, legal challenges and high managerial wages all contributed to decisions to offshore the manufacturing. Even the Apple iPod is offshored to a bunch of really smart Chinese folks.
The Harvard Business Review really hasn't had much to read in the last 15-20 years. I agree that modern finance has made many things possible and is a huge benefit to the economy. But without manufacturing you don't have the economi base to continue to grow the way we have in the past.
I am always interested in discussions of why the US has shed manufacturing labor, and other labor for that matter, but I'm not sure I agree with some of the reasoning of this article. As a professor myself in a major business school that actually has a strong operations/supply chain program, I think I could actually agree with the broad thesis that business schools do have something to do with this phenomenon, but the imputation that because GM sourced its strong talent from finance instead of operations seems like generalizing from the particular. It may tell us something about GM but tells us little about the American business education system or manufacturing labor trends.
I think a be ... view full comment
I am always interested in discussions of why the US has shed manufacturing labor, and other labor for that matter, but I'm not sure I agree with some of the reasoning of this article. As a professor myself in a major business school that actually has a strong operations/supply chain program, I think I could actually agree with the broad thesis that business schools do have something to do with this phenomenon, but the imputation that because GM sourced its strong talent from finance instead of operations seems like generalizing from the particular. It may tell us something about GM but tells us little about the American business education system or manufacturing labor trends.
I think a better thesis tying b-school to manufacturing decline is that political categories invade the science of economics in ways that they do not in other sciences. A premier example of this is the false dichotomy of "protectionism" and "free trade" and the even more pernicuous collusion of free trade with free markets. These specious categories are hoisted on Americans, via our business schools, as if they were accurate descriptions of the economic reality. They are not. Free trade is more like protectionism than anyone gives it credit for - saliently here I would include the good folks at TNR. Meanwhile free markets have protections for labor that free trade eschews.
TNR - please give me an article to write about this some day. ;->. But here's how it works: The 50 American states have a free market. That means employers can leave California, close the Bay Area factory and open up shop in Georgia where it's less expensive, all the while sending goods back to California where they sell for as much as they did before the corporate move - shareholders pocket the difference, California laborers are out of luck.
BUT - workers in Georgia are equally free to decide that labor conditions in their state are inadequate and move to greener pastures, i.e.: Washington state, NY, somewhere in the sunbelt, etc. This equalizing factor prevents employers from getting to stingy with their labor policies. The relative bargaining equality elevates prosperity for everyone.
Compare that to "free trade". Free trade means the California shops are shut down and replaced with factories in Mexico, Indonesia or China. There labor is paid at penury rates. The shareholders and management class still pocket the difference when goods are sent back to the US, but US workers can't exactly go overseas to compete for jobs and the workers overseas can't improve their bargaining position by threatening in mass to take their wares to North America.
In this respect, what we call "free trade" is really just protectionism for employers, shareholders and the management class, all at the expense of labor.
Good economics, looking at the empirical situation without being jaded by politicized categories would see this, but we don't have enough of that and we keep up this myth, "free trade, good; protectionism, bad."
It's high time we had some visionary policymakers who are willing to put the brakes on free trade, but that doesn't mean rolling it back and going to protected markets, it means that we should be creating international free markets, not unlike the EU, where workers are as free to move between nation-states to seek work as they are to move within the United States.
If Indian engineers were as free to come to the US as American employers are free to open up shop in Bangalore, there would be no "overseas outsourcing" issue. Instead Indian engineers and their families would be buying homes in American suburbs, buying cars in American lots, putting their money in American banks, paying for American doctors and other health care, paying American taxes and employing American teachers, among other VERY good things that all serve to promote local employment.