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Hayes, R. H. and W. J. Abernathy. 2007. Managing our way to economic decline. Harvard Business Review (July-August): 138-149.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

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The purpose of this reprint of their 1980 paper1 is to describe and explain the reasons for the decline in competitiveness of U.S. corporations from around 1960 to 1978. The authors provide statistics to show how U.S. manufacturing productivity growth lagged behind the productivity gains of other countries during this period, e.g., U.S. 2.8% compared to Germany's 5.4% and Japan's 8.2%. They also show how research and development expenditures in the U.S. by both business and government measured in constant dollars declined since the mid 1960s. Their main argument or explanation for this decline is that American managers "have abdicated their strategic responsibilities" as indicated by their attitudes, preoccupations, and practices. Hayes and Abernathy refer to this as "the new management orthodoxy".

This new management orthodoxy includes three general categories:

1. financial control focused on profit centers and short-term measurements such as ROI, referred to as management by the numbers, or managerial remote control.

2. corporate portfolio management including quick paybacks and an unwillingness to assume risk, and

3. market-driven behavior that places emphasis on marketing products that are relatively easy to make, rather than making innovative marketable products.

American managements' short-term, control oriented mentality has biased investments towards imitative rather than innovative product designs. In addition, American managers have tended to choose backward integration (or make rather than buy) that in many cases has prevented innovation by locking their companies into outdated technology. Their unwillingness to assume risk has caused a lack of investment in the new manufacturing processes needed to maintain a competitive edge.

Why?

Part of the problem was created by the increase in the percentage of corporate Presidents with finance and legal backgrounds2 and the increase in managers hired from outside the company. Hayes and Abernathy refer to them as pseudo professionals. These are people who have no special expertise in any particular industry or technology, but run the company using financial controls, portfolio concepts and a market-driven, follow-the-leader strategy. They attempt to simplify and quantify complicated business situations at the profit center level. This over simplification and emphasis on the separate parts of the company creates a serious problem. Someone at a higher top management level needs to integrate all aspects of the business situation to make informed decisions. Someone who understands the company and the industry, someone who has a holistic or systems view. Someone who can lead innovation and value creation where it did not exist before. Pseudo professionals can not do this.

Hayes retrospective: Managers today will have to go beyond investment, innovation and the creation of value where none existed before. Managing the new complex information technology and networked virtual world will require creating and implementing a new set of essentials.

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1 Hayes, R. H. and W. J. Abernathy. 1980. Managing our way to economic decline. Harvard Business Review (July-August): 67-77.

2 Ocasio, W. and H. Kim. 1999. The circulation of corporate control: Selection of functional backgrounds of new CEOs in large U.S. manufacturing firms, 1981-1992. Administrative Science Quarterly 44(3): 532-562. (JSTOR link).

For a related paper see the following: Groysberg, B., A. N. McLean and N. Nohria. 2006. Are leaders portable? Harvard Business Review (May): 92-100. (In spite of stock market reactions, results based on 20 GE executives indicates that they are not portable unless their human capital (strategic skills etc.) match the challenges of the new corporate environment).

Related summaries:

Berliner, C., and J. A. Brimson, eds. 1988. Cost Management for Today's Advanced Manufacturing: The CAM-I Conceptual Design. Boston: Harvard Business School Press. (Summary).

Johnson, H. T. 1989. Professors, customers, and value: bringing a global perspective to management accounting education. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 7-20. (Summary).

Johnson, H. T. 1992. Relevance Regained: From Top-Down Control to Bottom-up Empowerment. The Free Press. (Summary).

Johnson, H. T. 2006. Lean accounting: To become lean, shed accounting. Cost Management (January/February): 6-17. (Summary).

Johnson, H. T. 2006. Sustainability and "Lean Operations". Cost Management (March/April): 40-45. (Summary).

Johnson, H. T. and A. Broms. 2000. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. The Free Press. (Summary).

Johnson, H. T. and R. S. Kaplan. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. (Summaries and additional information).

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