vigorously regulated that the overseas company’s service and quality need to be competitive with those of American firms as well. Increasingly, they are – and the foreign firms get more business as a result.
In addition, offshore manufacturers have become not only more desirable in recent decades, but also easier to access. The drastically greater breadth, increased penetration, and reduced cost of both telecommunications and transportation have allowed businesses to avail themselves of the choicest manufacturers from around the globe. Increasingly, these manufacturers are located outside of the United States, frequently in Asia.
We caution, however, against taking this approach to its logical extreme. A future in which no manufacturing happens in America is a risky one for business and society alike. Carefully considering the state of manufacturing in high-tech industries – focusing here, because of our specialized expertise, on pharmaceuticals – argues strongly in favor of a more balanced approach. Continuing to draw on sophisticated manufacturers overseas, while also nurturing domestic capacity, is an approach that maximizes not only value in the present, but also the likelihood of capturing value in the future.
Perhaps the most valuable trait of the manufacturing sector is its capacity for supporting innovation. In fact, experience shows that innovation and manufacturing processes are too interdependent to work well when they’re separated; the direct feedback loop between the two disciplines creates a competitive advantage for both. A number of firms, recognizing this interrelationship, are concentrating their R&D operations in new facilities built in the shadow of their factories. This, by itself, is a good decision: discoveries that emerge during manufacturing often provide valuable “in-process learning” that circulates back to R&D’s drawing board and improves the finished product.
This widespread creative potential of manufacturing also means that, as a rule, innovative discoveries could happen anywhere. They could happen in central China or they could happen in an industrial park in New Hampshire. Companies in need of manufacturing services can’t predict these sudden upwellings of creativity, but if their business would benefit from that innovation, they had best be ready to capitalize on it. Being thus prepared requires not flexibility – arguing in favor of flexibility is pointless since few businesspeople would argue for less – but, rather, a diversified approach to manufacturing.
Maintaining flexibility allows a business to reconfigure itself to chase an important new innovation; it’s reactive. But having a diverse supply chain already in place gives a firm the chance to be proactive. It maximizes the option value of manufacturing. The importance of diversification is best seen by analogy to one current economic model, that of the Santa Fe Institute. Although hotly debated in academic circles, the Santa Fe model is a useful heuristic for thinking about manufacturing. According to this model, the economy is a complex adaptive system – that is, a network of multitudinous agents (here, individuals and firms) that interact and display several emergent properties, which is to say, properties that the system as a whole displays without being intended or even observed by any of its participants. Capitalizing on a system with emergent properties requires keeping as many options open as possible. In manufacturing, a diversified supply chain – one that relies on domestic as well as overseas manufacturers – provides just this type of strategic advantage.
An example from our own experience is the technique of spray-drying, a manufacturing process that starts with a drug that isn’t soluble in water and converts it into a form that is. (The trouble with water-insoluble drugs is that they don’t dissolve enough in the gastrointestinal tract to be absorbed into the bloodstream, so they’re less likely to reach their intended target when a patient takes them.) The process was developed and perfected, independently, by several manufacturers – including one in Europe and one in the United States. The employer of several of our authors, Vertex Pharmaceuticals, took an interest because spray-drying was an important step forward, at the time, for several of Vertex’s candidate drugs. Vertex has long taken a broadly global approach to manufacturing. It was, therefore, relatively straightforward for us to take our spray-drying process, developed internally
