Consider, for example, the bad news from the Middle East that hit Household GmbH, a Europe-based consumer goods manufacturer, in 2003. (The company name is changed, but the details are accurate.) Household’s market share in hygiene products, one of its flagship divisions, had recently tumbled in such cities as Cairo and Abu Dhabi. When Household’s regional managers investigated, they discovered that a private-label producer based in Egypt had begun to aggressively undercut the shelf price of Household’s products.
At first glance, it seemed as if Household could easily win a price war with any local private label. After all, Household’s Middle Eastern manufacturing sites were running at higher capacity than the competition’s sites, with advanced proprietary technology and a highly productive, well-trained staff. But the private-label manufacturer refused to go away, and its prices remained low while its market share kept rising.
Household’s managers had assumed that their competitor was selling under cost. But gradually it became clear that, despite Household’s scale and technological edge, the competitor spent less to make most hygiene products, without any sacrifice in quality — at least as perceived by customers. In short, Household’s ostensible manufacturing advantage — its distinctive technology — had become its biggest disadvantage. To make matters worse, Household had nearly completed a new factory in Ukraine, which had been intended, in part, to add capacity to serve the Mideast, but which now would simply add to Household’s manufacturing costs.
There are many such stories in manufacturing today. Executives do all the right things to improve operations, but somehow get outperformed on cost, quality, or delivery. They may turn to benchmarking exercises, but those are rarely meaningful. Low-cost competitors appear with prices that can’t be completely explained by lower wages. Rising warranty costs or dramatic product recall levels indicate the ongoing erosion of quality.
As a last resort, companies outsource production, and thus erode their own company’s competence in it. Gradually, manufacturing is treated more and more as an outcast, and plant communities become disenfranchised.
We call this condition “manufacturing myopia.” It is akin to the “marketing myopia” that Harvard Business School lecturer Theodore Levitt identified in the 1960s. Professor Levitt argued that companies made themselves vulnerable when they defined their brands too narrowly. Railroads are not in the passenger-train business, he argued; they’re in transportation. Every business should define itself through the interests of its market, not its own production priorities.
Today, myopia is even more prevalent and dangerous in manufacturing than it was in marketing four decades ago. Like marketing myopia, manufacturing myopia is caused by isolation; it is the inevitable outcome of keeping manufacturing strategies contained to the functional or even plant level, with little or no connection to enterprise-wide strategies. As the factories and supply chain oversight functions are cut off from the rest of the executive decision makers, the manufacturing focus grows narrower, and overall competence can atrophy. This compels companies to cut costs even more blindly and irresponsibly, often by setting company-wide targets determined by financial fiat rather than by competitive or customer insights. (See Exhibit 1.)