Does It Really Matter That Amazon Can't Manufacture A Kindle In the USA?

My article a few days ago on the Amazon’s inability to manufacture a Kindle in the USA and the decline of manufacturing attracted a lot of interest, many supporting comments and a number of questions.

Does it matter?

One question was: does it really matter?  For instance, one reader (“ssaikia”) said that my article reflected “Flawed Logic.” He wrote

If another country is able to manufacture at a lower cost companies such as Dell are doing absolutely the right thing to outsource to a foreign manufacturer. I would rather that the US focus on high-value work such as design, marketing and sales.

This notion of attributing the shifting of industries to foreign countries to cost accounting, management short-sightedness is absolutely flawed.

Here is an optimistic view of where the US should be and IS focusing:  Marc Andreesen in the Wall Street Journal, Why Software Is Eating The World.

The view that the migration of mature manufacturing industries away from developed countries like the USA is just part of the healthy natural process of economic evolution that allows resources to be redeployed to new, higher potential businesses is certainly widespread.
It is however mistaken. As Pisano and Shih point out in their HBR article, “It ignores the fact that new cutting-edge high-tech products often depend in some critical way on the commons of a mature industry. Lose that commons, and you lose the opportunity to be the home of the hot new businesses of tomorrow.”
For instance: once silicon-processing and thin-film deposition capabilities are gone, it’s hard to become a major player in solar panels.

Is software the answer?

Marc Andreessen’s article in the Wall Street Journal, Why Software Is Eating The World, is certainly right to point out that software development is a huge part of both the present and the future economy.
The successful firms that I frequently cite, such as Apple [AAPL], Amazon [AMZN] and Salesforce.com [CRM], are certainly firms that have exploited software and the Internet as key parts of their success, while those that are struggling, like GE [GE] and Wal-Mart [WMT], have been slow to respond to the opportunities.
But software per se is not the solution. The firms that I cite were successful in seemingly mature sectors like music, books and mobile phones. Saying that “software is the solution” is like saying that the winning firms of the early 20^th Century were successful because of electricity. The difference wasn’t electricity. The difference was more imaginative management that took advantage of the opportunities that electricity presented.
In any event, the idea that software development is immune from the experience of being undermined by disruptive innovation from low cost producers is a comforting but dangerous illusion, particularly in fields where software and hardware development is intimately intertwined.
Similarly, the idea that the USA has a perpetual lock on software development is as solid as the idea that Detroit owns auto manufacture or that the IBM [IBM] owns the PC. The reality is that “ASUSTeKs” of the software world are already beginning to emerge.
The issue is not hardware or software. The issue is how the firm is managed. Traditional management is killing both the firm and the economy. The statistics of the decline are well-documented.
There is another way. Unless we diagnose the problem right, we are not going to find it.
It is true that software firms are often better placed to practice radical management, because most of them have some experience with the subsets of radical management known as “Agile” and “Scrum”. But for all the successful examples of Agile being extended to the whole organization, like Salesforce.com, there are many more examples of traditional management effectively killing Agile and Scrum. Understanding the kind of management that is adapted to the needs of he economy of the early 21^st Century is key to the future.

Is cost accounting the problem?

One reader (“justin431”) wrote:

I think it’s a bit shortsighted to say the issue is cost accounting. Dell’s problem wasn’t that it’s method of attributing cost was flawed, it was that it’s business model wasn’t globally competitive anymore. If they didn’t take the cost savings from ASUS, competitors like Gateway, HP, Lenovo, etc., would have and Dell would have lost market share until they lowered cost or exited the marketplace.

This comment is in fact an illustration of the mental guide-rails generated by cost accounting. There is an automatic assumption that when faced with a market challenge the way to be more competitive is to cut costs. The possibility of adding more value is unconsciously eliminated.
It would be wrong though to say that cost accounting is the main cause of these problems. But it is a contributing factor. With decisions and thinking and values based on cost-accounting and short-term profits, Dell’s fate was sealed. If decisions and thinking and values had been based on how could Dell deliver more value to customers sooner, the outcome would not have been predetermined, as Apple [AAPL] has shown.

Did Dell do the right thing anyway?

Another reader (“dismayed”) wrote:

The real challenge, in my mind, is that outsourcing is rational. If Dell hadn’t done it, they would have lost market share sooner to competitors that did outsource. Yes, I suppose that Dell could have focused more on great hardware design to become the Apple of PC’s. But that could be copied by the companies that outsourced.

I agree that there was no easy course for Dell. (I never promised that radical management was easy.) It involves a wholly different mindset, and in effect different lens for understanding and interacting with the world. That lens will tend to suggest that short-term financial gain at the expense of core capabilities is a very dangerous way to go if the company wants to survive.
It is true that a one-time effort to add value through better design is not a permanent solution. An improved design can easily be copied. New platforms and new business models are more difficult to copy, though they too can eventually be copied. Even Apple will have to go on innovating, or it will start falling behind. The market of the early 21^st Century requires continuous innovation, which is why radical management is inevitable. The message is clear: innovate or die!
When “everyone is doing it”, it’s hard for individual companies to make the right decision because there will be no “industrial commons” to support the right decision. That’s why Pisano and Shih are right in recommending a significant role for government in getting the playing field right. This of course would require a level of understanding and maturity from our industrial leaders and politicians that they have only rarely been demonstrating in recent times. Repetition of mantras like “get government out of the way of the private sector” is not going to solve this fundamental problem, which goes to the very future of the nation. .

Is Government really capable of helping?

One reader (“artfigueiredo”) wrote:

My concern is that whatever the Government does turns into a special interest boondoggle.

Not necessarily. The US Government did after all help invent the Internet. That was the result of small teams, highly focused, goal oriented and innovation minded. One can argue: that will never happen again. But why not? The Government is suffering from the same problem as Dell: the hierarchical bureaucracy of traditional management focused on outputs rather than outcomes. The solution in both cases is the same: radically different management.

Nothing new here?

One reader (“johnfein”) wrote:

Seriously, this is news? Saying U.S. high tech companies are dependent on Asian manufacturers is like saying it’s hot in Texas – it’s been that way for a while.

I agree that the idea that there is a lot of outsourcing going on is hardly news. The idea that it is irreversible and destructive of the economy’s ability to grow is less well known. Even so, it’s not exactly new news: the HBR article that I cite is two years old.
What is really new news is that (1) these fairly obvious truths haven’t yet dawned on economists at the Federal Reserve Bank of San Francisco, CEOs, accountants, politicians, among others and (2) the way to manage in a radically different way to deal with these issues is now more fully articulated than it has been before.