[Infowarrior] - Why can't Americans make things? Two words: business school.

[Richard Forno]

Upper Mismanagement
Why can't Americans make things? Two words: business school.
	• Noam Scheiber
	• December 18, 2009 | 12:00 am

http://www.tnr.com/print/article/economy/wagoner-henderson
One of the themes that came up while I was profiling [1] 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 [2] 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.

The business schools had their own incentives to channel students into  
high-paying fields like finance, thanks to the rising importance of  
school rankings, which heavily weighted starting salaries. The career  
offices at places like Harvard, Stanford, and Chicago  
institutionalized the process—for example, by making it easier for  
Wall Street outfits and consulting firms to recruit on campus. A  
recent Harvard Business School case study about General Electric shows  
that the company had so much trouble competing for MBAs that it  
decided to woo top graduates from non-elite schools rather than settle  
for elite-school graduates in the bottom half or bottom quarter of  
their classes.

No surprise then that, over time, the faculty and curriculum at the  
Harvards and Stanfords of the world began to evolve. “If you look at  
the distribution of faculty at leading business schools,” says  
Khurana, “they’re mostly in finance. …  Business schools are  
responsive to changes in the external environment.” Which meant that,  
even if a student aspired to become a top operations man (or woman) at  
a big industrial company, the infrastructure to teach him didn’t  
really exist.

In fairness, all that financial expertise we’ve been churning out  
hasn’t been a complete waste (much as it may seem that way today).  
Many of the financial restructurings of the ‘80s and ‘90s made the  
economy more efficient and competitive. Likewise, it would be  
ludicrous to suggest that simply changing the culture of business  
schools would single-handedly revive U.S. manufacturing. As I  
explained in the Ron Bloom piece, that sector faces a variety of  
challenges, not least the mercantilist industrial policies of our  
foreign competitors.

On the other hand, it’s hard to believe that American manufacturing  
has a chance of recovering unless business schools start producing  
people who can run industrial companies, not just buy and sell their  
assets. And we’re pretty far away from that point today.

Noam Scheiber is a senior editor of The New Republic.

*Added after original publication.