Giving too much away?
Eastman Kodak, the one-time film giant and inventor of the digital camera recently humbled into bankruptcy protection, was a victim of its foolish policy of outsourcing key operations far from its factory floor in the United States, says Willy Shih, a professor of management practice at Harvard Business School.
Before joining Harvard, from 1997 until early 2005, Shih was president of the consumer digital and applied imaging business at Kodak. He says that although there may be short-term financial attractions for high-technology companies in outsourcing basic manufacturing and assembly work to places where labour is cheaper, they must be careful not to throw the baby out with the bathwater.
He uses a concept which he calls 'industrial commons', meaning a critical mass of people, ideas, manufacturing, engineering and research and development facilities that are crucial to product development, and which must not be lost if a firm is to keep its technological advantage.
Shih's thoughts on Kodak's decline are contained in a Harvard newsletter called Working Knowledge. He has also been researching the dangers and opportunities of outsourcing over several years.
He says that developing and executing a manufacturing process often sparks ideas that lead to creation of innovative products. So when companies send production of items such as televisions and memory chips abroad, they risk losing the critical expertise to produce the next generation of cutting-edge products.
In the case of Kodak, founded in 1880 and for decades synonymous with films and cameras, Shih says: 'Much of the camera technology was invented in the US, but US companies gave it all up. Because of the decisions of managers in the distant past, the US had lost its capability to make all the critical components that were needed to put together digital cameras.'
When he started at Kodak, Shih noticed that the significant pieces used to make the firm's digital cameras - such as lens, shutters and electronic screen displays - were all manufactured far from its Rochester factory floor, and US companies had ceded much of the camera-related technology to Japan years earlier.
In addition, he says that he understood how mobile telephones, also being made outside the US, would steal business away from digital cameras. In consequence, the US has lost more that 'that Kodak moment', which was the company's slogan for memorable events.
Kodak is only one case among many, Shih says, where the US is not so much losing the battle as throwing its weapons away. He cites large areas of energy storage and green energy production - including lithium ion batteries for mobile phones and laptop computers, silicon solar cells and power semiconductors for solar panels. This means that thin-film solar cells, the latest solar-power technology, will be beyond US capabilities.
In an article jointly written with Harvard professor Gary Pisano, they list the manufacturers where production has migrated and damaged US technological leadership. They cite flat-panel displays, machine tools, metal forming including castings, stampings and cold forgings, precision bearings, optoelectronics, solar energy and wind turbines.
'In other industries, such as biotechnology, aerospace, and high-end medical devices, the US lead is now endangered,' they add.
Design is a crucial matter, Shih argues, especially in promoting allimportant innovation. He notes that Apple, which has outsourced much of its manufacturing of its popular products, insists on keeping design inside its Silicon Valley headquarters.
Shih laments a decline in interest in science and in government investment in basic science research and mass production. 'During World War II, the American public believed science won the war with the atom bomb, radar, computer technology, antibiotics. There was a feeling that if we invest in science and technology, it would lead to jobs and prosperity, and for that, the US was an unquestioned leader.'
He and Pisano also look at the experiences of the mainland and Taiwan. They say that in 1986, four Chinese academics met government officials to develop a 'wish list' of strategic capabilities. As a result, China went on to develop and capture the supply chain for the global electronics industry. Taiwan took strategic decisions and today owns 70 per cent of the global semiconductor foundry capacity, an industrial commons that allows it to be a critical player in flat-panel displays and energy-efficient lighting.
'Too many American companies base decisions on how to source manufacturing largely on narrow financial criteria, never taking into account the potential strategic value of domestic locations,' they say. 'Proposals for plants are treated like any other investment proposal and treated to strict return hurdles. But executives give short shrift to the impact that outsourcing may have on a company's capacity to innovate. Indeed, most don't consider manufacturing to be part of a company's innovation system at all.'
They admit that it can be 'devilishly difficult' for a company to know whether manufacturing is critical to innovation, and suggest that one criterion should be the maturity of the manufacturing technology.
Another factor should be the degree of modularity between research and development and manufacturing. In some industries, the same process technology is used to manufacture just about any product design, so that designers do not have to worry about the process. But in others, 'every conceivable product design requires a unique manufacturing process', so close links are required between designers and the factory.
Shih is saying that in spite of advances in internet and communications technology, being in the same room with other key team players can spark a chemistry that all the high-technology communications in the world cannot. The 'water cooler moment' - indeed that Kodak moment - requires personal contact.
In filing for bankruptcy protection, Kodak says it has secured this amount of financing, in US dollars, to keep it going