By Daniel Gross

 


illustration by Gordon Studer

 

ne hundred years after Henry Ford founded the car company that bears his name, auto manufacturing is still an immense force in the U.S. economy. Last year, Americans bought 16.8 million cars, and the Model T’s progeny accounted for a significant chunk of U.S. retail sales. But while Detroit is still justly referred to as Motown, the auto industry is far more decentralized and global than it was in Henry Ford’s day. And present-day automakers would never try to mimic Ford’s efforts at vertical integration. There’s too much money to be saved – and too much to be learned – by working cooperatively with suppliers. In their article, “Supply Chains,” Masaaki Kotabe, Xavier Martin, and Hiroshi Domoto study relationships between U.S. and Japanese automakers and their respective suppliers, and help us understand how they can do a better job.

Cars may be the largest mass-produced consumer items. Some of the products made by pharmaceutical companies – i.e. pills – may be the smallest. And yet it adds up to a big business. The drug industry today is at root a manufacturing process – scientists and engineers figure out ways to turn chemicals and other elements into pills, liquids, serums, and gels. But making drugs successfully also involves basic scientific research, knowledge of genetics, the ability to negotiate political and regulatory minefields – and a desire for constant regeneration. “Whenever we introduce a new product, 10 years later the patent is gone, and the income from that product goes to zero,” said Pfizer Inc Chairman and CEO Hank McKinnell, who appeared as part of Stern’s CEO series. “If we don’t re-invent ourselves every 10 years or so, we go out of business.”

General Electric, the largest U.S. manufacturer, has been in business for more than a century. And it still makes some of the same things it did in the early part of the 20th century, like light bulbs. But over the decades, it has evolved into a manufacturer par excellence of jet engines and power turbines, plastics and CAT-scan machines. This gives the company – and its Chairman and CEO, Jeffrey Immelt – an early look at whether the industrial sector is finally turning around. “Plastics is sold everywhere,” he said. “It goes into cars, computers, it’s ubiquitous. In that business I see low, single-digit volume growth versus last year, and that’s a good sign.”

GE also owns the television network NBC, which makes it a producer in the Hollywood sense as well as a producer in the manufacturing sense. Of course, producing entertainment is more of an art than a science. But in “Independents’ Day,” Al Lieberman makes the case that independent producers are really entrepreneurial managers. “Producers don’t have to possess any of the skills necessary to make film,” he writes. “They don’t have to write, direct, act, compose music, or design costumes and sets. Instead, a producer must figure out how to get people who are the best at their crafts to do even better.”

ne of the biggest challenges a movie producer faces is managing high-maintenance personalities. But just think of the difficulties managers of opera companies must cope with on a daily basis. After all, this is the place where we get terms such as prima donna and diva. “The management problems in a large opera house are highly analogous to the problems faced in the most complex business organizations,” said Vice Dean Richard Freedman, who for several years has been leading students in intensive encounters with the Metropolitan Opera and its director, Joseph Volpe. “Something like this can only be done on this scale in New York City.”

he marriage of art, manufacturing, and commerce is seen in another New York institution – Steinway. With a factory in Queens and a showroom in midtown – just a few blocks from Lincoln Center and the Met – Steinway has not only defied the odds, but maintained its position at the top of the piano business by making its products meticulously – and by hand. In his article, “The Keys To Success,” David Liebeskind describes how the company has “perfected the 88-keyed instrument to the point where the company’s name and the word piano are almost synonymous.”

Shrewd marketing and advertising campaigns are most frequently associated with consumer products like Steinway pianos. But the anti-drug advertisements run by the Partnership for a Drug-Free America (“Just Saying No”) provide an example of a highly effective ad campaign geared at a social ill. “Our model, based on survey data from 1987 to 1990, indicates that increases in amounts of anti-drug advertising are associated with decreases in teenage drug use,” write Lauren G. Block, Vicki G. Morwitz, William P. Putsis, Jr, and Subrata K. Sen. The money committed to the ads, the authors conclude, “appears to have been a worthwhile investment.”
“But there is one sector
that combines industrial processes and information-age disciplines, that involves production in the media sense and physical production. Magazines.”

Steinway has lasted for 150 years not just because it makes a good product, but because it has good management. In recent years, time and again, companies with lengthy histories and dominant market shares have been undone by poor corporate governance. Last spring, a distinguished panel convened at Stern to discuss the problems (“Governing Principles”). Moderated by Dean Thomas Cooley, the panel included former Federal Reserve Chairman Paul Volcker, longtime investment banker Felix Rohatyn, and Richard Fuld, a Stern alumnus and the current Chairman and CEO of Lehman Brothers. “I think all our failures of corporate governance – and they are clear, and they are not limited to a handful of people – are representative of a wider malaise,” said Volcker, who nonetheless expressed optimism that investor confidence would return.

Recent reforms may have addressed some of the weak spots in the system that had layered and built up over time. But Larry White (“The Bond-Rating Game,” p. 32) identifies one area that has thus far escaped regulatory attention: the ratings cartel. “In essence,” he writes, “the SEC has given the incumbents a captive audience: the entire U.S. bond market.”

For much of the past century, telecommunications companies had a captive audience for their services. But in the past two decades, consumers have benefitted from some of the deregulatory initiatives that helped spur hundreds of new companies to enter the field. In his article, “Dial ’C’ for Competition,” Prof. Nicholas Economides assesses the incomplete revolution in telecommunications.

Producing bonds, or producing telecommunication systems is far more abstract than making light bulbs or cars. In these spheres, technology, communications and numbers are the products.

But there is one sector that combines industrial processes and information-age disciplines, that involves production in the media sense and physical production. Magazines. The raw materials – the texts of the articles – are composed of information. And they are processed and improved by the efforts of editors and designers – who work almost exclusively on computers. Ultimately, the package is sent off to a plant for final production, and then moves through a distribution chain to its ultimate consumers. There’s a sense of old-world pride associated with this 21st-century process.

No person involved in the production of this issue of STERNbusiness will find his or her fingers stained with ink at the end of the day. But we all find it remarkably satisfying to hold an attractive, solid, and engaging final product in our hands.

Daniel Gross is editor of STERNbusiness.