America can't make things because managers all learn finance instead of production

In a provocative New Republic article, Noam Scheiber proposes that the collapse of American manufacturing is due to a general shift in management to people who have MBAs, and to a shift in MBA programs to an emphasis on finance instead of production:
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."
Upper Mismanagement (via Making Light)

(Image: Venn Diagram - Happiness in Business a Creative Commons Attribution image from budcaddell's photostream)

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  1. I could’ve told you that. What could be more obvious than saying that MBAs are entirely clueless when called upon to administer business that’s in any way not generically finance?

    Still, good thing someone’s writing it. But… Toyota? GM’s not exactly the gold standard in vehicle manufacturing, but…

  2. As a student in Business school, I can say that Mr. Scheiber has called it in spades. I hear “Cash Cow” in nearly every single course I take. But long term planning and investment? Not even talked about. Management is not financing.

    Maximizing Profit today is all everyone thinks about and talks about. But the best way to maximize today’s profits is to sell the current product like mad, then sell everything for scrap. This works for people who move from one business to the next, ruining them as they go, but it doesn’t work for businesses.

    Unfortunately, it’s really the stock market’s fault. Everybody expects double digit growth every single quarter, which is absurd. Think about near Monopolies like Comcast. How do they grow 10% every quarter? Their only choices are to raise prices a bunch and sell off assets or eliminate expenses (ie employees). Doing this just cheapens the product and steals value from the customer.

  3. Liars…

    I call “TOTAL LIE” on this theory. Smoke and mirrors, hogwash.

    During the 60s and 70s those who stuck in college and got business and engineering degrees got to dictate their salaries while those who majored (and partially completed) “arts” degrees had to go back to college and work a McJob once they left the “Long Strange Trip”… It wasn’t everyone being a hippie, but a long period of prosperity giving too many people the guts to take ‘non-traditional’ stuff, so those that just went “I want to be an engineer, I want to run a company so I’ll study business”…etc. had a real edge.

    The reason manufacturing jobs went overseas was class warfare of the Rich Elite against all of America and pretty much all the world in collusion with other elites. They can take a “Service Industry” mass strike, but “Manufacturing” strikes can damage them. So they move overseas where the local “Genralismo Sadismo” just has the army machine gun strikers and then round up more “Workers”. The workers get “Paid” to sometimes literally starve to death working, the quality is horrible, the machines are used to “Pirate” the same product, the officials need bribes like they are pieces of candy and the cost of transport alone almost always makes up for any wage/safety laws in the USA. But they get “Tax Breaks and Subsidies” to make up the difference.

    This is nothing other than pure corruption and class warfare. I’ve actually heard from a CEO, (#2, large Euro Corporation that does a lot of USA business) that they are right now preparing for a “Flood of Isolationism” and possibly “Class Warfare” in a few years. Watch Zeitgeist, it’ll give you an idea.

    1. Right. So no one could just build lean manufacturing plants and use more expensive American workers efficiently, it’s all class warfare? Gotcha, down with the man.

  4. My sister graduated from Harvard Business School in the mid-1970s. She came from a math and psych background and ended up falling in love with manufacturing. Her first job with her MBA paid her $14,000 per year and was, if memory serves, with Boise Cascade making paper products. She did that for a number of years with a variety of companies and eventually went to GE where she helped close down one of the last TV production lines in the US. Then she went to DEC and from there to Black and Decker and now she hasn’t had anything but consulting jobs for over a decade. She can make a factory hum but nobody seems to be looking for that kind of talent these days.

    Whether it is class warfare or the triumph of finance over everything I don’t know. I do know that the stupidity of our managerial class is overwhelming. If they’d go down to the shop floor once in a while, it would make a world of difference but to do that they’d have to get their expensive shoes dirty and might mar their manicured fingernails. Feh.

  5. If you have no experience in the industry you’re trying to manage your MBA stands for “Mostly Bloody Aweful”.

  6. The business i work for seems to be going the same direction; “Building a bike is like folding a towel.”

  7. I started typing a response but it was getting too long. Here’s the short version:

    American manufacturing is a victim of its own success. Decades of prosperity led management to become complacent and averse to risk. This in turn inhibited innovation -and even further investment- in manufacturing. Productivity began to erode as technology stagnated, and the bright and ambitious sought careers elsewhere. Unable to maintain profit margins with mismanaged, underfunded, and neglected manufacturing facilities, management decided that the problem was… employee wages… and moved the factories overseas.

    It is entirely possible to have a profitable manufacturing business in the United States- but you have to take it very seriously. Too many American managers -and engineers- think that manufacturing is something that somebody else does.

  8. This is a strawman: the article doesnt argue the origin of the crisis lies solely on this factor.

    It does argue, correctly, that financial, rather than operational decision-making and strategies have dominated business culture in the USA.

    In very simple terms, the same or more amount of money could have been made via operations development (ie better production methods, more efficiency, more productivity, better technology etc) but instead this was done via financial decisions, one of the biggest results being cost cutting via outsourcing.

    In fact, corporations that concentrated on operations, have actually survived and remained competitive. Only reason we dont see more like those is because there are no managers for them.

  9. I agree with this assessment except I think the right question – as always – is to ask why everybody wanted to do a finance degree in the first place. What was the incentive for a bunch of people to act in a particular way.

    As I’ve said before, I have a theory that whenever a single specialisation becomes the dominate or controlling specialisation it turns the coordination into a technocracy. I might be using technocracy in the wrong sense but I’m using it to mean that a single specialisation (i.e. a single branch of technical knowledge) becomes dominate.

    from – http://www.managewithoutthem.com/blog/?p=205

  10. I thought it was a natural consequence of a strong dollar. it’s simply more cost effective to have someone else manufacture toys or semiconductors off shore and import them.

    1. Yeah, we hear the same about our nasty German unions. Bo.ho. And somehow we are still one of the, if not the, world’s top exporter.

    2. hmm, manufacturing died because everyone got programmed to aspire to be middle class, but a manufacturing job which could equally well be done by someone in china or india isn’t going to support what american’s expect as their birthright in terms of that lifestyle.
      unionisation was a way to try and reverse that trend, but ultimately, the money just wasn’t there, so everyone borrowed huge piles of cheap credit to pay for their suv’s and mortgages and hilarity ensued.

      ie, it was that generations unrealistic expectation of entitlement which kinda parallels this gen’s movies-and-music-for-free entitlement attitude. whatever.

  11. MBAs?

    You’re talking about glorified accountants here, and by definition there is no a priori know-how required here. It’s all about crunching the numbers after thr close-of-business.

    Or should be, somehow these bean counters were allowed to become high priests of their own teleological fantasy of limitless growth and profit.

  12. I am an MBA. I understand the technology my company makes down to a level that many engineers do not. I am not in thrall of the latest management fad. My education did not consist primarily of finance topics. I believe few of my class mates are, either.

    Oh, and I don’t think any of us eat babies, either.

  13. This reminds me of the long, slow, sad decline of the British manufacturing industry. (The refrain of their last 50 years? “So, we designed something neat, scrapped it, burned the drawings, and hoped the Americans would soon sell us something cheaper”. Every second verse ends with “So we tried to centralize it, but it still wasn’t big enough to survive”.)

    Not entirely similar, of course – the USA don’t really have a country to fall back on like the British did with them, and your inner market is large enough for more industries.

  14. There are many theories about the decline in manufacturing. Many of them aren’t even exclusive of one another.

    Yes, like many here, I’ve had a lot of angst over what passes for an MBA education these days. The sick thing is that while engineers are required to take courses in economics, most business students aren’t required to take any courses in engineering.

    I’ve met some capable MBA types. However, like the engineers who move up the ladder in to executive work, they’re usually the sort who managed to absorb a lot on the job. What’s really going on here is a stratification of knowledge. And to make matters worst of all, they have been teaching a generation of these poor people that “a good manager/leader can manage/lead anything” –which is utter balderdash. You wouldn’t expect a professional figure skater coach to be good at coaching a professional basketball team; so why do we keep making up this nonsense?

    grumble mumble spit…

  15. This is certainly the case where I work. Personnel management is non-existent, but the financial side gets put under an electron microscope.

  16. An MBA is not a finance degree – you will also typically study operations management (or even – clue in the title – Production and Operations Management, POM), HR (or SHRM), OB, OD, MIS, Marketing, Strategy even Business Ethics (which for me was in a ‘live’ Benedictine Monastery in France which was pretty cool) etc etc.

    Just thought I’d point this out ‘cos it seems like MBA-envy is hitting most of the posts here and over at the actual article. I agree for many it can mean Maybe Best Avoided or Master of Bugger All but at the most basic level the least we’re taught is to get some facts before stating our opinion.

    Robin J. Gleaves (MBA)

  17. This article has the tail wagging the dog.

    Business students are only responding to market conditions: (1) Manufacturing output is at 70 percent of capacity causing a drop in demand for managers. (2) Global manufacturing jobs continue to disappear by the millions causing a drop in demand for managers. (3) There is already an excess supply of “people who can run industrial companies.”

    1. That says you don’t need a field expert to run an industry, but it also says that’s because the executives shouldn’t be involved in details. Many are, however, in which case it would be much better for them to have some idea about them, wouldn’t it?

  18. Xenu:

    > Bill Gates vs. Steve Ballmer
> Walt Disney vs. Michael Eisner
> Steve Jobs vs. Gil Amelio

    thequickbrownfox:

    > these bean counters were allowed to become high priests of their own teleological fantasy of limitless growth and profit.

    Yep, it’s a high priesthood of form, the stultification of performing traditional techniques, and disputes between the dogmas of Keynes and Friedman and Austrians. Henry Ford is one of the gods.

    Profit is the ideal, it’s the worship of the process of making things, rather than actually making things.

    Nothing wrong with Capitalism when it actually solves problems and creates solutions. It’s a dead religion when its just about managing and controlling the solutions.

    1. Lovely blog post. Ah, I love the smell of technology and intelligence in the morning. Great post. And I agree very much with Doug Rogers. . . religion (in the form of Belief) has been seeping into the square assessment of capitalism in our lives. Why do we have to believe in anything?

  19. I have worked on the training side in manufacturing on two continents (Europe and North America), and while some of the observations in this article (and comments) resonate, the problem is much more subtle.

    For example, the goal of production efficiency (productivity) is what drives manufacturing, but is subject to the law of diminishing returns. Essentially process improvement is about investing in processes and tools. This is the case for how businesses are run in North America. This was done at the expense of soft skills.

    The reverse is true in Europe, where there is a much greater investment in soft skills (not at the expense of processes and tools).

    European manufacturing has managed to survive and thrive by carving out a higher value niche, instead of trying to win the race to the bottom with pricing.

    As soon as (north) American manufacturing began focusing on price competition instead of other stakeholder values, it began the downward slide to oblivion.

    I also find it odd that people are comparing the MBA with the priesthood and religion. All belief systems are metaphysical in nature…the problem is where we put our faith and trust. Placing that in MBAs or any other community of practice is foolish and irresponsible, and why we have chosen democratic political processes.

  20. MBAs are glorified accountants? Nah – they can’t count that well.

    The people I’ve seen go into the top programs, and the product they put out – it’s incredible, the whole thing is such a load of rubbish, inflated beyond belief. I’ve interviewed many, many MBAs who end up relying on their contact network as leverage to attempt to get the job – useless lot.

    They’re a bunch of play-the-game, unsophisticated, lacking-in-creativity, overpaid monkeys.

    And if I never see another one, I won’t be sad.

    MBAs any good? My Bulbous Ass.

  21. This is happening not only in the US, but all over the Western world, and not only in business, but also in education. The private school where I work, in Brazil, hired an out-of-MBA administrator in March, replacing a teacher who had been doing her work flawlessly for more than 15 years. Among the wonderful explanations we are now receiving, all in the name of a so-called “maximization of resources” (I probably hear this expression at least twice a week), is the fact that “everything should be managed as a business” and thus “you (addressing the teachers) should always remember the we praise quality, but also the students are the only source money for our organization” (yes, it actually is a non-profit organization). My friends in the US told me that this has been the rule in American schools for at least a decade, and is one of the worst thing we decided to import…

  22. Any analysis that blames the choices of MBA students or B-Schools for areas of study is putting the cart before the horse. B-schools largely recruit from within industry and if future managers chose different areas of focus than their fathers, it’s because they saw writing on the wall. Saying that what people study created the decline of manufacturing is a bit like saying that vacuum tube amps make up such a small portion of their market because no one studies solid state electronics anymore.

    Of course, in this case I think we have to blame reading comprehension more than the original text. Indeed, the article itself argues that management focus moved from product to capital allocation and then to asset valuation because of conglomeration and its reversal. The shift of management competency was market driven, not vice-versa.

    The most you can argue here is some kind of positive feedback loop between the creeping number of finance MBA’s and the receding number of American factories. But given the other forces that were driving de-industrialization, most of those arguments would likely be anecdotal and ultimately moot.

    1. #29

      Management by cliche is usually a good sign that you’ve gotten a “Mostly Bloody Awful” instead of a person experienced in their field who’s gotten an MBA as the step up to the next level. Here come the team building exercises and long business meetings to discuss why we’re not productive enough.

  23. I blame video games. All those fast rewards for twitchy skills and instant do-overs make finance types addicted to fast action and rotating goals. Games don’t make kids killers, they make them arbitragers.

  24. It is the MBA program. It is not the fact that China, India and emerging economies can produce the same, largely disposable goods for pennies on the dollar. It is not that oil prices -despite the peak during the housing boom- has remained relatively cheap and has allowed inexpensive goods to be imported cheaply. No, it is some cabal of educators, the evil assholes.

    Also, the US leads the world in manufacturing.

    http://www.npr.org/templates/story/story.php?storyId=102761476
    http://seekingalpha.com/instablog/420242-john-galt/21991-china-doesn-t-lead-the-world-in-manufacturing-or-exports

  25. Well, at least with all those people with an accounting background, we won’t have to worry about US corporations lending money to people who will never be able to repay it, investing in worthless securities, or going bust in massive financial implosions, will we?

  26. I’m an engineer for a heavy industrial manufacturer located in western PA (I work in Canada). Our factory has been in the same spot for close to 100 years, some of the management for about the same time.

    Because of the very specialized and engineered nature of our product we have survived in-spite of our 1950’s manufacturing style. Even in the past 20 years with CAD and CCM its just bolt on improvements to the old way of doing things.

    In the past 10 years we’ve seen our ability to compete dry up, German, Italian, Japanese and even other American companies are able to out sell us, not becuase they did any more cost cutting and outsourcing then we did, but becuase while they where doing that they also changed their manufacturing processes. They are doing in 40 weeks what takes us 60, when your number one cost is labour 20 weeks is a lifetime.

    TO be fair current management is attempting to correct this, but it will be very costly to our owners. But comparing the new parts of manufacturing to the old is night and day.

    My solution in general is never hire and MBA who doesn’t have a degree and experience outside business. Taking political science or finance as a “pre mba” degree does not make a good manager. An MBA needs to be something you do after years of experience.

  27. I have an MBA from a “top school;” some of my classmates were highly capable individuals, including scientists, engineers, former military officers – even a movie producer. Others… were less impressive.

    My (admittedly anecdotal, self-preserving) view of this debate is that while Noam Scheiber is correct in that many MBAs and MBA programs have become all too focused on optimizing profit and have lost the ability to manage (similarly, the programs have neglected instruction in management theory), his article places all MBAs in a single greedy bucket. A more accurate truth is that the MBA career path, like every other career path, has a full spectrum of characters – from the entrepreneurial, thoughtful and idealistic, to the trough-feeding, belt-fed hogs.

  28. This schismatic group has also managed to make advertising an unprofitable industry. Imagine, an industry which once inked million dollar contracts on napkin sketches, made unprofitable and unsustainable. Mad Men indeed.

  29. I think the main problem I have with this is that it buys into the common problematic view of the US economy as one declining- therefore necessarily in crisis. It also buys heavily into the trope of single-cause, massive-effect that doesn’t always apply quite so directly in these cases.

    I know a bunch of MBAs and not being one myself, I honestly can’t say they’re all a useless lot. This article oversimplifies things. The question of how and why the US is declining in manufacturing dominance (though we are still number one) involves more factors than simple pithy observations- regardless of how correct they may seem to be.

    A lot of what I’ve seen in the comments so far are specific anecdotal cases. For every one of these there is a counter-anecdote, I’m sure. However their are too many things that enter into the equation that will allow us to pin this on any one thing.

    Between the growth of other economies (let’s face it, they’re not going to stagnate forever and ever.) and labor costs in the United States, there’s enough “blame” to go around.

    Personally, I’m not worried. I don’t think we’re sinking so much as settling. There needs to be a balance. I’m pro-union, but I acknowledge they increase costs. I’m okay with this because unions serve a social purpose that makes America* and other countries better places to live in. After all, you can have as much GNP and GDP as you like, but to what actual observable end? China’s got a massive economy (still half the size of the American one), but it’s not exactly a bastion of freedom and a high standard of living.

    Being number two, should such an extremely unlikely thing happen, won’t suddenly and irrevocably lead to abject suffering. Translation: Calm. The fuck. Down.

    *America doesn’t really have unions that compare to other countries per se, many of the laws we have that restrict them and force them to consolidate create problematic situations in many states.

  30. Isn’t it the fact that there are too many people to produce all of this junk none of us need to survive? Who cares about all of the outputs. I need an MBA who knows how to manufacture happieness and keep me well fed.

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