Tag: R&D

OM in the News: Do We Need a New National Industrial Policy?

Robots assemble a Ford F-150 truck at the Ford Rouge assembly plant in Dearborn, Mich

In 1987, two economists issued a prophetic warning: “If high-tech is to sustain a scale of activity sufficient to matter to the prosperity of our economy…America must control the production of those high-tech products it invents and designs. Production is where the lion’s share of the value added is realized.”

Even as trade tensions with China have deepened, many U.S. leaders continue to believe that offshoring is not only profitable but also sound national economic strategy. Manufacturing in China is cheaper, quicker and more flexible, they argue. With China’s networks of suppliers, engineers and production experts growing larger and more sophisticated, many believe that locating production there is a better bet in terms of quality and efficiency. Instead of manufacturing domestically, the thinking goes, U.S. firms should focus on higher-value work: “innovate here, manufacture there.”

Today many are rightly questioning this perspective. There is a growing recognition that we can no longer afford the outsourcing paradigm. Once manufacturing departs from a country’s shores, engineering and production know-how leave as well, and innovation ultimately follows, writes The Wall Street Journal (Nov. 16-17, 2019). It’s become increasingly clear that “manufacture there” now also means “innovate there.” A 2015 study found that U.S. companies have been moving R&D to China to be closer to production, suppliers and engineering talent—not just to reap lower costs and more dynamic markets. An estimated 50% of overseas-backed R&D centers in China have been established by U.S. companies.

American manufacturers have learned that the applied research and engineering necessary to introduce new products, enhance existing designs and improve production processes are best done near the factories themselves. As more engineering and design work has shifted to China, many U.S. companies have a diminished capability to perform those tasks here. The solution? It’s time for the U.S. to adopt an industrial policy for the century ahead.

Classroom discussion questions:

  1. What should the new industrial policy encompass?
  2.  Which theory do you agree with–“innovate here, manufacture there” or “manufacture there, innovate there”?

OM in the News: R&D Shifts Towards Asia

If yesterday’s blog about increased productivity in US factories provided some good news during these difficult economic times, today’s may take the wind out of our sails. It is based on with two separate articles in the Wall Street Journal (Jan.18,2012) about why we are losing critical (and high-paying) R&D jobs.

In the first, we find we are rapidly losing our research labs to China and Asia. Firms like GE and Caterpillar are spending billions to expand R&D overseas to: “tap a broader pool, of scientific talent, tailor products to overseas markets, and curry favor with foreign governments”. Here is what 3M’s CEO George Buckley has to say: 3M is expanding overseas labs “in preparation for a world where the West is no longer the dominant manufacturing power. Given the moribund interest in science in the US, this is strategically very important”. 

To a large extent, companies are setting up labs near factories (where ideas can be tested) and where engineering and scientific talent is becoming concentrated. Since 56% of the world’s engineering degrees are awarded in Asia–compared to 4% in the US — Caterpillar is hiring 500 engineers at its China R&D center while GE is setting up six product development centers there.

In the second Journal article, Harvard’s  Michael Porter answers that what is making us less competitive is “political gridlock, faltering schools, and a convoluted tax code”. Nearly 1/3 of the 9,750 execs he surveyed said “other countries offered better access to high-skilled workers and labor productivity”. More disquieting, of 607 site decisions resolved the prior year by respondents, work was moved out of the US in 511 (or 84%) of the cases–and many of these “involved R&D and engineering activities, belying the common perception that only low-skill jobs are at risk”.

Discussion questions:

1. What are the chief obstacles to retaining high-paying R&D jobs in the US?

2.  Why are the major manufacturers moving labs overseas?

Good OM Reading : Pfizer–The Inside Story of Revenge, Betrayal, and Power

Fortune’s cover story (Aug.15, 2011) is a wonderfully written article about a dysfunctional pharmaceutical giant, Pfizer, and the palace coup that removed CEO Jeff Kindler last December. The inside view (from 42 interviews over a 4-month period) of a $68 billion company that produced such blockbusters drugs as Lipitor and Viagra is movie material. Once a Wall Street darling and corporate icon, Pfizer has tumbled into disarray, with its stock price sagging from $49 down to $18 today and its pipeline dried up. What went wrong  and how is this an OM topic?

 First, there is the management issue. “Its managers descended into behavior that would do Machiavelli proud. There was the ex-CEO who wouldn’t relinquish his power. There was the HR chief who divided the staff rather than uniting it. There was Kindler himself who agonized over decisions even as he second-guessed everyone else’s actions”, writes Fortune.

The real OM story, though, is R&D and new product development (Ch.5), which is the lifeline of every drug company.With 3 of its biggest drugs about to lose patent protection and face generic competition (Lipitor alone brought in a staggering $12 billion/year and loses its exclusive rights this year), investors wanted to know what Pfizer was going to do to replace them. Its immense R&D budget of $9.4 billion last year produced two major hopes. Both ended in disaster. A cholesterol drug, torcetrapib, cost $890 million to develop and produce. A late trial revealed it increased death rates over control groups– and the drug was killed 2 days later. Exubra, an insulin system, cost a $2.8 billion write-off when unhappy customers  bought only $12 million of the product.

With the business model failing, the R&D budget cut to $7 billion, Pfizer laid off 1,600 researchers at its Groton ,CT, flagship site, fired CEO Kindler and the HR VP (with massive severance packages, of course). The big pharm industry is one that requires excellent management, and I think you will be interested in  reading about what happens without it.

OM in the News: New Products Drive Profits at 3M

I love reading The Wall Street Journal from cover-to-cover every day. Where else can you find an article on the importance of sandpaper and a quote from the 3M CEO, “Why can’t abrasives be sexy?” (Nov.1,2010)

I share this with you because the real gist of the article is not just how 3M spent three years trying to improve one of basic products, sandpaper (they did it by using new technology to make every grain on the material the exact same size and shape). Rather, the article ties directly to Figure 5.2 in our chapter called Design of Goods and Services.

For any company to be successful, a substantial portion of its sales must come from products less than 5 years old.  We give examples of Disney and Cisco as industry leaders, with almost 50% of sales from new services or goods. 3M falls just under this, expecting 30% of its sales to come from products introduced in the last 5 years. This places it in what we call the “top third”.

CEO George Buckley believes his firm’s edge is due to spending 5-6% of sales on R&D, even during the recession. On average, US manufacturers spent 3.4% of sales on R&D in 2008.

What other “sexy” products is 3M pursuing? Its masking tape, an old standby, now comes with an edge lock that keeps paint from seeping under the tape, which could spoil the straight line. 3M knows it must keep those improvements coming to stay in the top third.

Discussion questions:

1. Discuss the success rate for introducing new products in the marketplace.

2. What other approach is 3M taking to boost sales?

3. Where do new product ideas come from?