ECONOMY DECEMBER 18, 2009
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.
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.