Toyota and the Japanese Auto Industry:

March 2005 Takahiro Fujimoto Professor, Faculty of Economics, Director, Manufacturing Management Research Center, Tokyo University Senior Research Associate, Harvard Business School

C Takahiro Fujimoto, University of Tokyo

An Alternative Perspective: Capability-Building View

CAPABILITY-BUILDING VIEW Organizational Capability Matters Most Size as a Result of Capability-Building Capability-Building Competition Evolutionary Change Continues Learning (Basics Do Not Change Much) SIZE VIEW Size Matters Most Size (4-10M) as a Goal Price Competition Only Revolutionary Changes Unlearning Chasing Fashion Static Capability is Key

Evolutionary Learning Capability is Key

An Alternative Perspective: Capability-Building View

CAPABILITY-BUILDING VIEW M&A is Not a Main Driver of Evolution Capability-Enhancing Alliance (Nissan) SIZE VIEW M&A as Main Driver Financial Motivation (Control/Risk) Only 6-10 Firms Survive IT as Competitive Driver

Multi-Layer Network of Alliance & M&A IT NOT Sufficient for Competitive Advantage

An Alternative Perspective: Capability-Building View

CAPABILITY-BUILDING VIEW Japanese Operational Advantage Continues Strong Factory, Week Headquarters Balanced Lean System is a Goal All Stakeholders Are Important SIZE VIEW Western Catch-up Done Operation Hollow-out Lean Is Obsolete Stockholder is Sacred

Capability-Buliding View for Analyzing Industrial Performance

Capability-Building Competition is the Long-Term Driving Force Evolutionary Perspective: Toyotas Evolutionary Capability is Key Organizational Capability is the Source of Competitiveness Product Architecture -- Its Dynamic Fit with Organizational Capability Competitiveness at Deep and Surface Levels (Productive vs. Market Performance) Competitiveness Should not be Confused with Profitability Strong Factory Weak Headquarter Syndrome in Japan Positioning Strategy and Brand Power are Important for Profitability Multiple Stake-holders Should be Considered

The Capability-Competitiveness-Profitability Chain

Figure 12 Capability, Competitiveness, and Profitability other factors of environments and strategy

Organizational Capability organizational routine

Productive Performance productivity lead time conformance quality etc.

Market Performance price delivery perceived quality etc.

Profit Performance

Arena of Capability-building Competition

Capability-Building Competition
The automobile industry of the 20th century --- cumulative evolution Product Architecture --- integral, closed and stable since Ford Model T Radical product innovation will not happen very soon (e.g., FC) Capability-Building Competition has been key in the late 20th Century -- and maybe in the early 21st Century Market Performance -- Competition on the surface of customer interface --price, product performance, service, etc Productive Performance -- Competition at deeper levels on parameters not directly observable to the customers but are linked to organizational capabilities, --- productivity, lead times, defect ratio, yield , etc. -- From which stage of the CHAIN do you start your competitive strategy?

Triad of Profit Strategies in the 1990s

European
Brand Power

Japanese
Operation

Strategy

American
Who Gets these Three Capabilities in a Balanced Way?

C Takahiro Fujimoto, University of Tokyo, GERPISA 2002/6

Multi-Layer Evaluation of Performance

Operational Capability (JIT, TQC,etc.) Productive Performance (productivity, lead time,etc.) Market Performance (price, brand identity, etc.) Profit Performance (ROE, ROS, etc.)

Strategy, Environment (e.g., exchange rate)

Estimated Relative Performance in the Late 1990s

Japanese European American

Who Gets these Four Performances in a Balanced Way?

C Takahiro Fujimoto, University of Tokyo

The Case of the World Auto Industry in the 1990s -- Three Profit Strategies
Three ways for automakers to make profits: process, product, and corporate strategy Companies from Japan, Europe and US relied on different sources of profits. Japanese Operational improvement Process-focus --- productive performance European Brand management Product-focus --- market performance US Truck-strategy in North American market Strategy focus --- profit performance

--- But none of them were strong in all the three domains.
C Takahiro Fujimoto, University of Tokyo

Design-Information View of Manufacturing

Product as design information that is embodied in a particular medium

Figure 1

Product = Design Information + Medium

Design Information Product

Medium

C Takahiro Fujimoto, University of Tokyo

Product development means creation and verification of design information. Production means repetitive transfer of product design information
from the production process to materials or work-in-process.

Figure 3 Production and Development as Design Information Processing Product Development = Creation of Design Information Design Information Stored in the Production Process Producion = Transmission of Design Information from Process to Product

Materials = Medium

Work in Process = Medium

Product = Design Information + Medium

Key:

Design Information

Medium

Non-essential information and medium were omitted for graphical simplicity.

C Takahiro Fujimoto, University of Tokyo

Design Information Body Exterior Design Embedded in Press Dies Product Development

Production

0.8 mm thick steel sheet

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Purchasing Media (Material)

What is Going on at the Press Shop

Body exterior design information, embedded in press dies (steel block), is transmitted to 0.8 mm thick sheet steel (media) Information transmission time = value-adding time Information non-transmission time = MUDA

C Takahiro Fujimoto, University of Tokyo

Sheet Steel (Media) Absorbs Design Information through the Press Operation

Design information, embedded in press dies, is transmitted to sheet steel

C Takahiro Fujimoto, University of Tokyo

Body Exterior Design Embedded in Press Dies

Product = Design Information + Media

0.8 mm thick steel sheet

Production = Marriage of Design Information Media

C Takahiro Fujimoto, University of Tokyo

Efficient/Accurate Information Processing at Toyota Integration-Based Manufacturing Capability

Production --- Dense and Accurate Transmission of Design Information from Process to Product Development --- Early and Integrative Problem Solving Cycles For Fast Creation of Design Information Purchasing --- Long-Term Relationship, Capability-Building Competition, Bundled Outsourcing for Joint Creation of Design Information with Suppliers Toyotas Manufacturing capability Smooth, dense and accurate transmission of design information between flexible (information-redundant) productive resources. --- Integration-Based Manufacturing Capability

(1) Higher Productivity and Shorter Throughput Time

Figure 9 Organizational Capability Regarding Productuvity and Throughput Time (Toyota)
product design for manufacturability Product Design (M+A+B) black box parts system A in-house design of equipment incremental impovement of equipment low cost automation
M

parts design for manufacturability Parts Design (M)

revision of work designs by supervisors

Work Design Equipment Design

B

Work Design Equipment Design A

workers participate in Kaizen (improvements)

multi-skilled worker flexible task assignment (shojinka)

supplier's Kaizen (impronements)

Worker and Equipment

communication

Worker and Equipment

flexible equipment quick set-up change preventive maintenance

pull system

maximizing value-adding time

B

visualizing non-value time (JIT, andon, line stop cord)

regular pace of information transmission (levelization, small lot) A

supplier Kanban

customer dealer

M+A+B

M+A

JIT delivery supplier

lshort-term levelization of production volume levelization of product mix (heijunka)

reduction of finished goods inventory

process step 2

mixed-model (small lot) assembly

reduction of work-in-processi inventory or piece-by-piece transfer

process step 1

designing process flow pror to work & equipment design

reduction of raw material inventory

Muda" is unnecessary non-transmission time, which includes inventory, waiting time, transportation and defects
C Takahiro Fujimoto, University of Tokyo

 Higher Mnufacturing Quality

- Information sources do not make transmission errors in the first place.
Figure 10 Organizational Capability Regarding Manufacturing Quality (Toyota)
design for manufacturability Product Design
M+A+B Worker and Equipment M+A+B

(M+A+B)

M+A

Worker and Equipment

Kaizen (continuous impronements)

Worker and Equipment

maintenance of process information stock (total productive maintenance, worker training, standard operating procedures) supplier's on the spot inspection

quick feedback of defect information

M+A+B

dramatizing the defect information (andon, jidoka, etc.)

prevention from sending A error messages (poka-yoke, jidoka, etc.)

M yes process step 1 no

M+A M+A+B? M+A+B? yes process step 2 no yes M+A?

customer

M?

yes final inspection no

supplier

reduction of inventory or piece-by-piece transfer

on the spot inspection

elimination of inspection of receovomg parts no

supplier's Kaizen (impronements)

scrap or rework

scrap or rework

scrap or rework

scrap or rework

Key:

information flow material flow A,B,M information content

inspection transformation productive resource

Toyota-style manufacturing as an integrative organizational capability

C Takahiro Fujimoto, University of Tokyo

Basics in Product Development

Themes in Clark & Fujimoto (1991) Product Development Performance (1) Early Supplier Involvement in PD (2) Applying JIT-TQM to PD (3) Overlapping Problem Solving (4) Compact and Coherent Team (5) Heavy-Weight PM as Champion The Key is Early and Integrated Problem Solving New Information Technology is Necessary, but not Sufficient Organizational Capability is Key After All

C Takahiro Fujimoto, University of Tokyo

Information Patterns of Product Development at Effective Japanese Auto Makers

supplier
concept early supplier involvement
product planning product planning

car maker

market

concept generation

continuous and direct input from market

planning

engineering

release of preliminary information intensive supplier communication

mutual adjustment

product engineering
quick problem solving

continuous elaboration of product concept early information exchange and early conflict recognition continuous and direct contact of concept generation unit with all development stages

unstable unpredictable equivocal see-saw game in price and basic performance total vehicle concept is key

process

overlapping solving problem

process engineering production

production

close supplier ties in operations

Key:

alternatives

evaluation

final approval

information flow for actions

information flow prior to actions is omitted for simplicity Source: Adopted from Clark, Kim B., and Takahiro Fujimoto. Product Development Performance. Harvard Business School Press, 1991, p. 291.

ExampleShortening PD Lead Time

Japanese Makers Shortening Lead Times Lead Times Design Fix to Sales): Late 1970s -- 30 months Late 1980s -- 30 months Early 1990s -- 30 months Late 1990s -- 20 months +/2000-2010 - 18 - 12 months 3-D CAD-CAM-CAE is Necessary, but NOT Sufficient Condition Capability of Early Problem Solving by Early Simulation and Evaluation Much Fewer Problems Remaining at the First Prototype Stage
C Takahiro Fujimoto, University of Tokyo

Shift of Cumulative Problem Solving Curve

total number of actual problems of the previous mode l total number of actual problems unfound problems: minimize

reduction of problems between generations: maximize

unsolved problems: minimize problem found

alternative proposed

solution verified

early problem solving dead line Time product development lead time C Takahiro Fujimoto, University of Tokyo

C Takahiro Fujimoto, University of Tokyo

Three Levels of Toyota-Style Capabilities

1. Routinized Manufacturing Capability Ability to Achieve Speed / Efficiency / Accuracy Repetitively (e.g., Kanban, Multi-Task Work Assignment, Self-Inspection) 2. Routinized Learning Capability Ability to Achieve Speed / Efficiency / Accuracy Repetitive Problem Solving Cycles (e.g., Kaizen, Product Development Routines) 3. Evolutionary Leaning Capability Ability to Learn Anyway in the Long Run Capability to Establish Routinized Capabilities Despite Complicated Multi-Path System Emergence
(Fujimoto, The Evolution of a Manufavturing System at Toyota, Oxford, 1999)
C Takahiro Fujimoto, University of Tokyo

of

Architectural Thinking and Industrial Classification

Supplementary industry classifications -- based on product-process architecture Product architecture, Basic way of thinking of engineers when they design functions and structures of a new product
Figure 4 Product Architecture

Product Function

Mapping between Functional and Structural Elements

Product Structure

Compo nent Interface Interface Component Sub-functions

C Takahiro Fujimoto, University of Tokyo

Basic Classifications of Product-Process Architecture

Modular architecture one-to-one correspondence between functional and structural elements
Computing Projection Printing PC Projector

PC System

Printer

Integral architecture Handling many-to-many correspondence Ride between the functional Fuel Efficiency and structural elements
Automobile

Body Suspension Engine

Open architecture Closed architecture

C Takahiro Fujimoto, University of Tokyo

mix and match of component designs across firm mix and match only within a firm

Three Basic Types of Product Architecture

(1) Closed-integral , (2) Closed-modular, (3) Open-modular
Figure 6 Basic Types of Product Architecture

Europe and Japan?

Integral small cars

Modular
Closed-modular

Closed-integral

mainframe computer machine tools LEGO (building-block toy)

Closed

motorcycle game software compact consumer electronics

Open-modular

personal computer (PC) Open bicycle PC software internet

US and China?
C Takahiro Fujimoto, University of Tokyo

Closed-Integral Architecture (Car)

Figure 6 Basic Types of Product Architecture

Int egral small cars Closed motorcycle game software compact consumer elect ronics Modular

mainframe computer machine tools LEGO (building- block toy)

personal computer (PC) Open bicycle PC soft ware internet

C Takahiro Fujimoto, University of Tokyo

Closed-Modular Architecture (LEGO)

Figure 6 Basic Types of Product Architecture

Int egral small cars Closed motorcycle game software compact consumer elect ronics Modular

mainframe computer machine tools LEGO (building- block toy)

personal computer (PC) Open bicycle PC soft ware internet

C Takahiro Fujimoto, University of Tokyo

Open-Modular Architecture (PC)

Figure 6 Basic Types of Product Architecture
Int egral small cars Closed motorcycle game software compact consumer elect ronics Modular

mainframe computer machine tools LEGO (building- block toy)

personal computer (PC) Open bicycle PC soft ware internet

C Takahiro Fujimoto, University of Tokyo

Hypothesis: Capability-Architecture Fit at National Level

A group of firms in the same country or region, facing similar environmental constraints, national-regional institutions, demand patterns or other forces specific to a particular geographical area may develop similar types of organizational capabilities Products with the architecture which fits this organizational capability tend to demonstrate competitive advantage (-- if not profitability) History matters
Figure 6 Basic Types of Product Architecture
Int egral small cars Closed motorcycle game software compact consumer elect ronics Modular

mainframe computer machine tools LEGO (building- block toy)

personal computer (PC) Open bicycle PC soft ware internet

C Takahiro Fujimoto, University of Tokyo

Predictions on Architecture-based Comparative Advantage

Japanese firms More competitive in products with closed-integral architecture. based on integrative manufacturing capability Capability-building competition, rapid-growth, chronic resource shortage, shared by many Japanese firms, shaped up this capability. European firms More competitive in closed-integral products based on brand-design-marketing capability U.S. firms More competitive in knowledge-intensive products with open-modular architecture Chinese firms More competitive in labor-intensive products with open-modular (or quasi-open) architecture
C Takahiro Fujimoto, University of Tokyo

Dual Architecture Strategy

Source of the US Revival in Financial Performance in the Late 1990s (1) Reverse Catch-up in Manufacturing ? (2) Strategic Maneuver of The US Makers ? Dual-Architectural Strategy of US Firms in the Late 1990s (i) Promotion and Protection of Truck-Based (Modular) Products (ii) Reverse Catch-up (although incomplete) in Unit-Body (Integral) Products (Small Cars) --- Lean Production Simple Catch-up and Turn Around Theory Misses the Point But US firms Slowed Down Its Efforts for Operational Catch-up Their Strategy was too Successful! This strategy collapsed in and after 2001 Their operational weakness surfaced
C Takahiro Fujimoto, University of Tokyo

10 Auto-makers Worldwide Hypothesis is Misleading

Only auto-makers with annual production of 4 million units will survive?? Minimum efficient production scale: 200,000 to 300,000 units per platform 5 product platforms may be desirable for stability -- but this still equals 1 million to 1.5 million Japanese-style assembler networks Even smaller ones may survive (Fuji Heavy Industry)

C Takahiro Fujimoto, University of Tokyo

Nissan-Renault Case
Journalism Focusing Too Much on Short-term Financial Benefits/Risks New Paradigm of Alliance Mutual Learning and Joint Capability-Building. Can Nissan Replicate Renaults Recovery Process in a Compressed Way? Financial Restructuring Operational Improvement Cost Cutting Design-Concept Renaissance Product Development Performance is Crucial Many New Products

C Takahiro Fujimoto, University of Tokyo

Lean-on-Balance System in the 1990s and After

- Strengthen Lean Production System - Adapt the System to: Low Growth and Fluctuation in Product Markets Decrease in Labor Supply in Labor Market Intensified International Competition - Regain the Balance Customer Satisfaction vs. Employee Satisfaction Lean Manufacturing vs. Fat Product Design Capabilities for Competition, Cooperation, Conflict - Some elements of Volvo-ism at the concept level?

C Takahiro Fujimoto, University of Tokyo

Conclusion
Architecture-Capability Fit Capability-Building Competition Evolutionary Learning Capability Strong Strategies and Operations Balanced Lean System

C Takahiro Fujimoto, University of Tokyo

Reference:
Fujimoto, T. The Evolution of a Manufacturing System at Toyota (OUP) Clark, K. and Fujimoto, T. Product Development Performance (HBS Press) Womack, J., et al., The Machine That Changed the World (Rawson) Yoshikawa, H., ed., Made in Japan (MIT Press) Dirks, D., et al., eds., Japanese Management in the Low Growth Era (Springer) Fine, C. Clock Speed