Friday, January 27, 2023

Innovation can trump drive for efficiency

In 1980, NBC aired a special called “If Japan can do it …. Why can’t we?”  The focus was on how Japan was crushing our manufacturing companies because it had become incredibly efficient and quality-focused. The program introduced many Americans to the concepts of quality guru W. Edwards Deming, who had achieved iconic status in Japan. The Japanese were clobbering us with management and quality principles developed by an American.deming

This was a depressing time, because America’s industrial might was being hollowed out by the onslaught of foreign competition. A lot of consultants got rich by teaching Deming methods in the ‘80s and ‘90s, which became hugely popular here after the NBC program. Companies jumped on the Deming bandwagon for survival. It was also a little scary, because one goal of the quality movement was to constantly decrease costs, and you know, a big chunk of costs was us. (One of Deming’s 14 principles for management was also to “Drive out fear, so that everyone may work effectively for the company,” but this was often not a high priority in our business culture. Not being dumb, we sensed that the American execution of Deming management was not going to end well for some of us.) 

I thought back to this early period of my career on Friday when I got an alert that Microsoft had become the most valuable company on the planet, at $2.49 trillion. (It dipped to $2.47 trillion at Monday’s close.) Back when NBC was airing its special and scaring the heck out of everyone, a young Harvard dropout named Bill Gates was on the verge of his now-historic deal with IBM to supply an operating system for Big Blue’s new PC.

While we were moping in 1980 that America’s days as an economic powerhouse were done, the next great wave of American companies was taking off. In our despair, we forgot our competitive advantages: Our education system, dynamic capitalism and an economy that rewards innovators. You can teach someone statistical processes, but it is much more difficult to replicate an entrepreneur-friendly environment.

I remember sitting in a room decades ago, listening to one of the quality consultants my employer had hired, a Deming evangelist named Bill Conway, who had been featured in the NBC special. Conway was telling us that Asian companies were selling hard drives at a profit for less than it cost American manufacturers to make them. We were toast if we couldn’t figure out how to lower our costs. That was worrisome, I thought. 

Today, with the benefit of hindsight, I know the question I should have asked Conway: Why do we want to compete with Asia on a commodity product like hard drives? But when Conway was trying to turn us into mini-Demings, we didn’t get what was happening. Our country was moving from a manufacturing economy to an information technology economy. We could still manufacture, and Deming’s principles were valid, but we would have to pick our manufacturing spots where we had advantages – like location or technology – over low-cost countries. No matter how good we got at quality, we were not going to make T-shirts cheaper than the world. 

Today we have some of the most valuable companies in the world. Apple was launched around the same time as Microsoft by another college dropout – and it is the second most-valuable company by stock market capitalization, $2.44 trillion.  Google is at $1.91 trillion, followed by Amazon ($1.68 trillion), and Tesla ($1.21 trillion.)

Tesla is a carmaker that is four times the value of Toyota. The Japanese automaker has been the epitome of excellence in manufacturing for decades. It was one of the companies that NBC was describing in 1980. Many U.S. companies adopted its methods. Go into American factories, and you will hear workers talking about kaizen and kanban and poka-yoke. 

But the markets value Tesla as a technology company for its battery R&D and software, not its cupholders.  Toyota’s president has been famously skeptical of electric cars, hence the market is valuing his company as a very efficient automobile manufacturer. Lately, Toyota looks like it is trying to catch up, and I would be thrilled if the company built its proposed billion-dollar battery plant at one of our advanced manufacturing megasites, as opposed to Alabama.

But I’m not sure that any car plant that might come here this decade will still be in business in 2040. With the speed of developments in autonomous vehicles, artificial intelligence and battery technology – transportation will be a disrupted industry for a long time. The winners may not even be companies yet. 

Incidentally, immigration continues to be a good source of founders and CEOs of trillion-dollar American companies.  Sergey Brin (Google co-founder) came here from Moscow as a child. Elon Musk (Tesla CEO) was born in South Africa. Satya Nadella (Microsoft CEO) was born in India. This is not a new revelation.  A 2019 report found that 45% of Fortune 500 companies were founded by immigrants or their children.

And that is perhaps one of our greatest competitive strengths in a global economy: People want to come here, work hard, and make a better life for their families.

Related Articles