PRODUCTION

AND OPERATIONS MANAGEMENT Vol. 5, No. I, Spring1996 Prmed in LLYA

THE

CHALLENGE OF MANUFACTURING ADVANTAGE*

C. WHEELWRIGHT
AND

BOWEN Harvard Business School, Boston,Massachusetts 163, USA 02 In spite of the significant progress made by a wide range of manufacturing companies over the past decade, few senior executives in U.S. firms would point to manufacturing as a significant source of competitive advantage. This paper seeks to explore some of the basic reasons for this. It begins by providing a framework for manufacturing competitiveness. It then outlines a handful of characteristics that seem to have been pervasive in a wide range of manufacturing competitiveness programs over the past decade. In contrast to those characteristics, it uses three quite different organizations to illustrate a very different mode for pursuing manufacturing competitiveness. Finally, the paper concludes by outlining three elements that appear to be essential in the successful pursuit of manufacturing advantage. (MANUFACTURING STRATEGY; COMPETITIVE ADVANTAGE)

STEVEN

H. KENT

The competitive landscape of manufacturing-based industries-ranging from automobiles to steel, and from consumer electronics to medical devices-has changed considerably in the past decade. During the same period, the number of books, articles, courses, and seminars focused on helping practicing managers cope with the challenges of such an environment has grown dramatically. Numerous consulting firms, ranging from the big accounting firms (such as Arthur Andersens Andersen Consulting and Deloitte-Touche) to the corporate strategy houses (such as Bain and McKinsey ) and on to the specialty consultants (such as PRTM and Analysis Group), have prospered by focusing a major part of their practice on manufacturing opportunities and challenges. Even at graduate schools of business, few would have predicted as recently as a decade ago that MBA courses on technology and operations management would be listed among student favorites and that student-run manufacturing and technology management clubs would flourish. Yet despite such apparent successes and advances for the manufacturing cause, one does not encounter many CEOs who point to their manufacturing activities as a significant source of competitive advantage. Nor does one find many senior manufacturing executives who think their organization has a meaningful, sustainable lead over competitors or who would describe manufacturing as a full partner and peer with its corporate counterparts. In short, while many firms can point to significant progress in their manufacturing operations over the past decade, few feel they have achieved the competitive results they believed pursuit of manufacturing strategy promised.
* Received July 1994; revised June 1995; accepted August 1995. 59 lO59-l478/96/OSOl/O59$1.25
Copyright 0 1996, Production and Operations Management Society

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Observing these mixed results while acknowledging the substantial resources that have gone into the development and application of new concepts, techniques, and tools for improving manufacturing competitiveness, one might well ask why such efforts have fallen so short of their intended results. Has the past decade shown these concepts to be inappropriate and/or ineffective in a complex world? Are the techniques generally correct, but practitioners unable to adapt and implement them in their own setting? Or is it that the tools address such a small fraction of extant challenges that the areas not addressed overwhelm the positive results expected? The purpose of this paper is to suggest some partial answers and to identify a number of issues and questions worthy of additional discussion and research. We begin by summarizing a widely published and frequently embraced framework for manufacturing strategy development and the pursuit of competitive advantage in manufacturing. While that framework and its basic elements have continually evolved and been refined, many of its central concepts and techniques have been part of the manufacturing management scene for well over a decade. A review of this framework offers three advantages. First, because thinking has evolved and no single publication has attempted to pull together all the elements currently advocated, such a summary might be useful in its own right. Second, a review makes quite clear the frameworks stability and consistency over the past several years, facilitating an evaluation of its appropriateness given the experience firms have had applying it. Finally, to the extent that revisions and further elaboration on the framework are needed, it will be easier to describe where they would fit and the challenges in developing them following such a summary. In the second section, we provide an assessment of the manufacturing strategy pursuits in which so many industrial firms have engaged over the past decade. Although not based on an exhaustive statistical study of such efforts, we describe the readily identifiable patterns we have observed consistently in a wide range of industries. In the third section, we describe four firms that have been extremely successful in establishing and utilizing manufacturing as a source of significant competitive advantage. After characterizing the activities of these firms, the final section outlines a handful of important principles that underlie their successful efforts. We also comment on the interaction among these principles and indicate how we think the approaches taken by so many firms undermine the establishment of significant manufacturing advantage. We close with some observations and predictions as to the prerequisites that must be met if achievements in manufacturing competitiveness during the coming decade are to differ in kind and impact from those of the past decade.
1. A Basic Framework for Manufacturing Competitiveness

To better understand the context within which manufacturing strategy develops in an organization, it is useful to consider three levels of strategy in business: corporate strategy, business unit strategy, and functional strategy (such as for the manufacturing function). Much has been written about each of these levels of strategy and their relationships with one another. (Especially useful in this regard is work by Kotha and Orne 1989, and Kim and Lim 1988.) Moreover, substantial literature has been developed over the past decade exploring various aspects of manufacturing competitiveness. (Some of the most widely referenced work includes Swamidass and Newell 1987, Miller and Roth 1994, Gerwin 1993, Ettlie and Penner-Hahn 1994, and a review article on manufacturing strategy by Adam and Swamidass 1989.) One of the most widely discussed and examined frameworks for manufacturing strategy is that suggested by Skinner ( 1985 ), Hayes and Wheelwright ( 1984 ), and Hayes, Wheelwright, and Clark ( 1988 ). These authors have identified a handful of alternative dimensions that might be the focus of a business unit strategy and thus represent the desired

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competitive advantage that manufacturing would be expected to support and enhance. The candidate dimensions include cost, quality, dependability, flexibility, and innovativeness. Each business must not only decide on which of these dimensions it seeks to be distinctive for its intended markets, but also determine the appropriate definitions of these dimensions as they apply to its product lines, technologies, and competitive environments. Clearly the goal is to develop a position (capability) on one or more of the performance dimensions that is both highly valued by customers, and superior (distinctive) to that of competitors. The basic logic is that achievement of this goal will provide a strong competitive advantage. In most markets, creating such a competitive advantage is not a once and for all proposition. Improved technologies and changing customer tastes challenge an organization to improve constantly. A strong competitor is thus one that excels (is well above the industry acceptable range) on one or two performance dimensions, and very competitive (but perhaps still within only the acceptable range) on each of the other dimensions. However, a strong competitor will only retain its distinctiveness and competitive advantage if its rate of improvement is as great as or greater than that of its competitors. Although we will return to the need for dynamic, continuous improvement, it is instructive at this point to examine an organization that fails to meet the acceptable range on each performance dimension. Such an organization can be distinguished from its strong competitor in at least two ways. First, for the organization in catch-up, all five dimensions may need attention-not just the one or two on which it is seeking to be distinctive. This has major implications for signaling priorities to the organization because a function in catch-up is likely to emphasize the performance dimensions that are most troubling, not necessarily those where it is seeking to be distinctive in its business strategy. Second, the acceptable range sets a very clear standard for the organization in catch-up, making it easier to identify (and benchmark) what must be accomplished as a minimum to be viable. For the strong competitor, certain trends may be readily apparent, but the target it must pursue-particularly on those one or two dimensions on which it is seeking to be truly distinctive-is much less clear than for the organization in catch-up. (See Edmondson and Wheelwright 1989, for a more complete discussion of the dynamic nature of the manufacturing challenge.) Having identified the pertinent performance dimensions, the next element of this manufacturing strategy framework is to consider the patterns of decisions built up over time in a function (such as manufacturing) that account for and result in the degree to which the firm achieves a strong competitive position. According to this framework, it is not a single decision or even a handful of major decisions that in most instances determines how a firm is positioned over time. Rather, competitive positioning is the composite and cumulative effect of literally hundreds and even thousands of decisionssome large, but many small. (See Ferdows and De Meyer 1990 and Gil& Roth, and Seal 1990 for further discussion of the cumulative impact and importance of patterns of decisions in manufacturing.) Wheelwright and Hayes ( 1985) suggest that, of the many decisions made by a manufacturing organization, it is possible to group them into a handful of categories or types. One such grouping consists of ten types of major manufacturing decisions: capacity (amount, utilization, timing); facilities (type, size, location, specialization) ; vertical integration and vendors (direction, extent, balance, number); process technologies (scale, flexibility, interconnectedness); new products (integration, start-up, modification); human resources (selection/training, compensation, security); quality management (definition, role, responsibility, yields); information technology (maintenance, material flows, production planning, cost tracking); organization (organization structure, layers, reporting); and customer (access, relationship, support).

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Utilizing such groupings to recognize patterns of decisions has a number of advantages. First, it enables an organization to link its daily and repeated decision making to its strategy and competitive positioning. Second, because every operating organization has such a pattern of decisions, it suggests that every organization has a manufacturing functional strategy. Third, it provides a tool to diagnose the historical pattern in such decisions and then relate those decisions to the firms competitive performance realities. Finally, it provides a level of detail that can be used to guide future decisions so they more fully and consistently reinforce the desired competitive advantage of the business. An important discovery by those who have examined their patterns of decisions in manufacturing is the presence of driving forces. Patterns do not arise randomly; rather, they are a response to a set of internal and external pressures. Examples of internal pressures would be those related to senior management directives, organizational structure, incentives and performance measures, and decision making processes such as capital budgeting. Examples of external drivers would include customer requests, competitor pricing and product moves, and industry technological evolutions. Recognizing how past driving forces have influenced historical decision patterns not only gives insight into the existing competitive position of the business and manufacturings contribution (or lack thereof) to it, but also suggests how new patterns might be formed. Many managers who try to change patterns of decisions on a management by exception basis find it a frustrating and, in the end, largely futile exercise. Seeking to change decision patterns by creating and amplifying a set of forces that will result in the correct patterns is a much more successful path to follow in seeking to alter functional and business unit strategies. Interestingly, the emphases of the last few years on listening to the customer and benchmarking against best in class competitors are simply recognition of the fact that these external drivers-customers and competitors-should be given top priority in establishing appropriate decision patterns. This relationship of the critical linkages in manufacturing strategy is summarized in Exhibit A-l. Essentially, it suggests that manufacturings competitive contribution seeks to connect market performance (the far right hand side of Exhibit A- 1) through products and services to the capabilities (those that are distinctive and valued by the customers) that the business unit is seeking to provide and pursue through its business strategy. Those capabilities, however, come about because of the patterns of decisions adopted within the various subparts of the business unit (such as the manufacturing function) and are the consequence of the driving forces to which those subunits have chosen to listen and respond. (See also Roth and Miller 1992 for a further discussion of the relationship between a set of manufacturing decisions and measures of business success. Similarly, the work of Vickery, Droge, and Markland 1993, and Cleveland, Schroeder, and Anderson 1989 seeks to relate manufacturing competencies to business performance.) As a result of observing senior managers in a variety of manufacturing industries, Wheelwright and Hayes ( 1985) have suggested that an additional condition that often determines the extent to which the manufacturing function reaches its full potential is its organizational role. Using a continuum consisting of four stages, they suggest that manufacturings role can range from minimizing its negative impact (internally neutral) to providing superior capabilities for competitive advantage (externally supportive). While originally developed with the manufacturing function in mind, subsequent application

Drivers l internal l external

Patterns of Decisions EXHIBIT A- I. Critical Linkages in Manufacturing

Products and Services Provided Strategy.

+P

Resulting Performance

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in a number of businesses has revealed that a similar continuum, divided into four stages, is equally applicable to other functions such as marketing/sales and R&D/product development. As summarized in Exhibit A-2, stage 1 consists of a functional role that is in catch-up or reactive mode; stage 2 consists of matching but not exceeding industry practice and standards; stage 3 consists of setting appropriate functional priorities to support the business strategy; and stage 4 puts a function in a proactive role, seeking to establish additional competitive advantage for the business unit. Experience with this four-stage framework has suggested a common cycle. Most businesses start out emphasizing one function as the primary source of business advantage (externally supportive, or approaching stage 4) and seek to have the other functions be neutral (in a stage 1 or stage 2 role). As businesses mature and their industries become more competitive, stage 2 in all functions and stage 4 for the function that has been chosen as the basis for competitive advantage become the minimum requirement for acceptable performance. At this point, having one function at stage 4 competitively and the others only at stage 2 creates two classes of citizens in an organization. Internal choices regarding systems, procedures, performance evaluation, and even organizational structure combine to reinforce the stage 2 role of certain functions and the stage 4 role of the chosen function. Furthermore, progress toward stage 3 on the part of the stage 2 functions is often interpreted by the stage 4 function as a direct attack on its contribution to the business. A classic example is the high-tech firm focused on innovation and product features that discourages the marketing/sales and manufacturing operations from making early inputs to product development because such inputs are viewed as hindering and inhibiting the creativity and value-added of R&D/product development. As industry competitiveness increases, firms find the need to move stage 2 functions more fully into stage 3. For example, as the rate of product innovation increases and the speed of competitive imitators quickens, a firm such as one described above finds that stage 2 manufacturing is no longer adequate. However, an interesting characteristic of stages 1-3 is that any function therein finds itself in a derived role. That is, its role is derived from the business strategy, which is established largely by the function considered stage 4 in the organization. This puts all but the stage 4 function in the role of follower and gives them the assignment of fixing themselves while not interfering with the value provided by the stage 4 function. The full potential of a stage 4 role for a function can occur only when it is complemented and enhanced by the other functions being at stage 4 as well. That is, over time, the full benefit of superior and distinctive capabilities in one function can only be realized when other functions are at that same level. The old adage that a chain is only as strong as its

EXHIBIT A-2 The Four Stages in a Functions Strategic Role

R&D/Pi'Oduct

Development Stage 1 Internally Stage 2 Externally Stage 3 Internally Stage 4 Externally neutral neutral supportive supportive Catch-up imitate Industry cycle and specs Obvious needs fill gaps Innovative new products

Marketing/Sales Order taking sales focus Industry terms Marketing support New markets/channels

Manufacturing Operations Reactive (do as told) Industry practice Correct priorities Distinctive capabilities

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weakest link applies to competitive advantage and business strategy. A stage 4 business unit is of necessity an integrated entity. It is instructive to conclude this section by returning to Exhibit A-l and the critical linkages in manufacturing strategy. The objective of such strategy is to improve business performance as measured, for example, by return on investment or total return to investors. While much has been written about industry analysis and business unit performance, the experience of the authors and some of their students has been at odds with two widely held notions concerning performance. The first is that outstanding performance tends to be associated with more attractive industries. The most systematic evidence countering this belief is provided by Hall ( 1980). In looking across a number of different industries, he discovered that the best performer in each of several industries had performance results closer to the best performers in all other industries than to the average performance in its own industry. Our observations of the past decade support this finding. For example, the best performing U.S. steel companies achieve performance levels comparable to those of the best ethical pharmaceutical or proprietary electronics firms, and the same is true for the best auto, disk drive, and paper companies. Their results are not dependent on the attractiveness of their industry. A second widely held premise regarding performance is that market position (e.g., market share), absolute size (e.g., scale), and proprietary technologies (e.g., patents) provide the most lasting and defensible sources of competitive advantage. Authors as varied as Peters and Waterman ( 1982) and Prahalad and Hamel ( 1990) recently have challenged this premise; they posit instead that capabilities (which we would claim are the result of patterns of decisions) are the best and most durable source of competitive advantage. If one largely rejects these two traditional premises and accepts their alternatives, then the level of business unit performance should vary dramatically as an organization moves from stage 1 or 2 on into stage 4. Such changes in performance are illustrated by the curve in Exhibit A-3. Hypothesis I illustrates the performance one might expect if a single function provides competitive advantage, whereas hypothesis II is what one might expect when all the functions pursue and achieve an integrated stage 4 capability. The next section of this paper describes four businesses that have made substantial headway in

Performance

Industry Average

I
Stage 1 Stage 2

I
Stage 3

I
Stage 4

Composite Stage of Companys Function

EXHIBIT A-3. Relating Functional Roles to Business Unit Performance.

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moving their entire organization to stage 4. These provide empirical evidence that supports Hypothesis II and suggests the dramatic impact stage 4 status can have on performance.
2. The Characteristics of Manufacturing Strategy Pursuits during the Past Decade

The reader might well ask at this point why, with so many firms over the past decade seeking to improve their manufacturing performance and achieve the associated benefits, have so few achieved true manufacturing advantage? To answer this question, it is helpful to consider where the center of gravity has been with respect to manufacturing competitiveness efforts during the past ten years. Our observations are that while tremendous energy, resources, and attention have been devoted to manufacturing strategy during this period, the vast majority of efforts have suffered from three characteristics that, while seemingly consistent with the framework outlined above, in fact undermine progress toward the goal of competitive advantage. These characteristics might well be thought of as biases or central tendencies that many firms have incorporated unconsciously, yet pervasively, into their manufacturing improvement efforts. The first has been a focus on fixing something that is broken. The vast majority of manufacturing improvement programs of the past decade have been conducted by manufacturing organizations that found themselves in a catch&p position. The primary motivation for their improvement efforts has been to close the gap with identifiable, known competitors, not to move ahead. Because the majority of U.S. manufacturing was in trouble and the competitive gap was wide and readily apparent, this was a natural focus for improvement efforts. In the auto industry, for example, by the early 1980s it was widely recognized that U.S. manufacturers had a $2,000+ cost disadvantage as well as a significant quality disadvantage vis-&is their Japanese counterparts. As a natural consequence, the Big Three auto makers focused on reducing costs and improving conformance quality to get into the ballpark with competitors such as Honda and Toyota. Frequently, much was accomplished by fixing the obvious, but the fundamental driversthe things that had caused or allowed the weaknesses to become significant in the first place-remained uncorrected. Because performance gaps threatened the very existence of U.S. auto companies, they were compelled to concentrate their attention on correcting manufacturing problems. Furthermore, given competitive and investment community pressures, something had to be done quickly, and the results (i.e., savings and quality improvements) had to be dramatic and measurable. A number of powerful tools became widely touted during this period as means by which organizations seeking to fix manufacturing could make significant gains. Representative of the variety of such tools were just-in-time (JIT), quality improvement, benchmarking, and facilities rationalization. Understanding these tools and their impact helps explain the detrimental side of these efforts for U.S. manufacturers. By the mid-1980s JIT had been amply proven in practice by Toyota. The benefits achieved illustrated to firms around the world the power of redefining work flows, setup procedures, inventory roles, and other activities associated with shop floor operations. The basic message from JIT was that there was a far better way to run a factory than had been thought traditionally. Furthermore, if adopted, it was likely to close the gap with competitors substantially. A second tool (or perhaps more accurately, an approach) widely heralded and pursued was the quality revolution. Under the guidance of such diverse philosophies as those proposed by Deming, Juran, and Crosby, firms focused on changing their definition of quality, how it was measured, the training provided to support it, and the behaviors adopted to pursue it. Numerous industry and corporate awards were initiated and sub-

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sequently pursued by literally thousands of firms. But again, the primary emphasis was on closing a competitive gap. Another tool of a somewhat different but equally important nature that gained widespread acceptance was benchmarking. Assessing, measuring, and contrasting ones own performance against that of others helped in identifying problem areas, recognizing the magnitude of the effort required to correct them, and suggesting possible solutions that had worked for others. Appropriately, this tool led manufacturing groups to look outside their own four walls and judge their performance not against how hard they had been working or how difficult they perceived their task, but rather based on their capabilities and performance relative to what others-especially those considered best-in-classhad been able to achieve. This tool facilitated a clearer focus on competitive realities that could be translated into measures directly relevant to manufacturing operations. A fourth tool that emerged and gained widespread adoption for fixing manufacturing was that of manufacturing facilities repositioning and restructuring efforts. Given the presence of tools such as JIT, quality improvement, benchmarking, and rationalization as well as the organizations recognition that something in manufacturing was broken and needed fixing, firms quite naturally turned to outsiders for help. Many firms considered insiders too close to the trees to see the forest and politically unable to take the tough steps required (i.e., layoffs, plant closings, and outsourcing) to correct known problems. Because manufacturing historically had most often been in a stage 2 role (defined largely in terms of the domestic rather than the global industry), there were few firms that thought they could turn to their own manufacturing management for leadership in putting in place the magnitude of changes needed. As a consequence of the widespread adoption of these tools and approaches, and, more importantly, of the focus on fixing something that is broken, manufacturing strategy during the past decade was viewed as a means to close a known gap, to catch up with the standards established by industry leaders, and to do so quickly and with clearly measurable results. Often a sequence of such tools was pursued like the flavor-of-themonth, each with a largely single issue focus and relying on outside experts. Seldom was there an overarching system or comprehensive model. Although other long-term issues were not ignored intentionally, steps that had no short-term payoff were considered secondary given the compelling nature of manufacturings current challenges. In fact, those few consultants who sought to sell their services based on the creation of long-term capabilities and the establishment of stage 4 patterns of behavior often were met with blank stares and little interest on the part of potential clients. Senior management was concerned with fixing the current problems now, not worrying about future, largely unspecified opportunities and needs. A second bias characteristic of manufacturing competitiveness efforts of the past decade has been the gradual but clear shift from a concentration on the capital investment and fixed asset categories of manufacturing (such as capacity, facilities, and process technology) to the infrastructural, softer areas (such as quality management, new product development procedures, and human resource policies) as the primary focus of improvement efforts. For example, the tools of JIT, quality improvement, and benchmarking (mentioned above) have been viewed primarily as approaches for addressing infrastructural elements rather than approaches requiring substantial capital investment or the restructuring of fixed assets. Recognizing the pervasiveness of this shift and its impact on manufacturing competitiveness thinking is important for at least two reasons. First, focusing on infrastructural decisions and patterns-while different in kind from focusing on structural decision categories-is not automatically more or less consistent with the overall manufacturing strategy framework outlined at the outset of this paper. It simply represents a different content focus. Second, recognizing this shift is important because structural decisions

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HP

Vancouver-Phases

and Areas

of Focus

in an Improvement

Process

Phase 1: within the factory

Worker involvement l Problem Solving l Statistics QC l Training/rotation l TQC

Production schedule l Linearity (mo/wk/dy) l Smoothed levels l Mix independent l Credible schedules

Process change l Flows (material/ information) l Setup times l Batch sizes l Manufacturing cycle times l Layout of plant l Task definitions l Mixed model balance l Process control l Storage removal l Material accessibility

Phase 2: systems

Phase 3: external to the factory

Vendors l Expectations/standards l Structure/network l Single source design

Systems l Accounting l Inventory tracking l Shop floor control l Performance evaluation Product design l Parts structure l Manufacturability . Process utilization

Advanced manufacturing processes l Capability enhancement l Islands/substitution l Fit with product

typically are viewed as less flexible over time and thus more susceptible to a one-time fix, while infrastructural decisions are viewed as easier to change. Yet, experience suggests that the reverse is more often the case. The fact is that many of the firms we have studied have chosen to seek a one-time fix in areas such as human resources or total quality management, just as they might have with facilities or capacity. Furthermore, while many such organizations might state their goal asbecoming world class, most who see themselves closing the gap with their better competitors end up falling far short even though they make significant improvements. As others in their industry make similar improvements, the result is a redefinition of stage 2 (industry practice) to reflect those new industry-wide patterns, while existing stage 4 competitors continue their own ongoing improvement efforts. The third characteristic pervasive in the vast majority of manufacturing competitiveness programs of the past decade has been that of viewing manufacturing operations as largely separable from the rest of the business. From this perspective, manufacturing can be improved independently, without changing its interaction with other functions or affecting how other functions do their work. This further reinforces the view that manufacturing improvement, once executed, can be considered finished. Thus, while some firms have stated their goal as becoming stage 4, when probed further it becomes clear that they think of stage 4 as a specific point that, once achieved, will represent stage 4 capability into the future. Additionally, they view stage 4 as having world-class factory operations, and not requiring significant integration of a distinctive manufacturing function with the rest of the organization. Achieving a step improvement in manufacturing to a new competitive plateau would constitute a significant improvement for most organizations and result in real performance gains-gains that might show up in inventory reductions, shorter throughput times, higher quality levels, and overall market success. However, on its own, even outstanding man-

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ufacturing is no match for a fully-integrated business where all functions are at stage 4 and all provide distinctive capabilities the other functions can (and do) make use of. One effort currently underway that deserves comment because it appears to be much more in keeping with a stage 4 role for all the functions is that of reengineering. Reengineering often focuses on areas of cross-functional activity that have extremely high potential-for example, new product development or order fulfillment processes. However, while it is true that these activities offer the potential for a truly integrated stage 4 approach, typically that is not how most reengineering projects are tackled. Rather, they are viewed as individual programs, each done largely on its own; they are not viewed primarily, or even significantly, as an area of manufacturing responsibility (although parts of them may be); and, like prior efforts, they are viewed as fixing something that is broken or, in other words, reaching a new competitive plateau that will enable the organization to ignore that area for some years to come. None of the three biases or central tendencies discussed in this section is diametrically opposed to the framework for manufacturing competitiveness summarized in Section A. In fact, it is easy to understand why a firm that finds itself under tremendous competitive pressure in manufacturing would focus on short-term fixes, closing a gap in those decision categories where the shortfall is most apparent, and achieving performance that would put it on the same competitive plateau as it imagines the industry leaders to be. The problem is that a manufacturing competitiveness effort based on these premises falls far short of the basic framework and its potential as illustrated by the results of organizations as diverse as Hewlett Packard in printers, Allegheny Ludlum in stainless steel, Quantum in disk drives, and Toyota in the automotive industry-companies whose efforts and performance are described in more detail in the next section.
3. Illustrations of Stage 4 in Practice

It should be possible to recognize business units that have pursued strategies consistent with the manufacturing competitiveness framework outlined in Section 1 and to contrast their approaches and efforts with those widely adopted in practice, as outlined in the preceding section. In this section, we identify four such businesses, describe their efforts, and summarize their performance results. While none of these four necessarily followed every detail of the framework proposed above, in each case they applied principles largely consistent with those underlying the framework and avoided the pitfalls previously described. We have chosen these four for presentation here because of that similarity. However, each also represents a significantly different organization with regard to the substance of its business strategy, its competitive environment, and its overall corporate setting. Hewlett Packard 5 DeskJet Printer Business The first illustration comes from Hewlett Packards DeskJet printer division located in Vancouver, Washington. As described by Hayes, Clark, and Wheelwright ( 1988, p. 363), the manufacturing function in this printer business set out to improve significantly the competitive contribution it was making to the business unit. It did so by outlining a three-phase approach and then spending almost three years putting it fully in place. As summarized in Exhibit C- 1a, Hewlett Packard began by focusing on improving existing factory operations, a step not unlike that taken by so many others seeking to close a competitive gap in manufacturing. However, it conscientiously followed with a second phase focused on redesigning its systems and procedures so they would support and reinforce the new factory operating environment. It then moved to a third phase aimed at involving vendors, pursuing advanced process automation, and creating a new approach to product development. It sought to change the interaction of manufacturing with the other functions and the surrounding environment. Some of the results achieved by this

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Results (3-Year

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HP Vancouver-Performance

Period)

Metric l PC Board Cycle l Inventory Turns l Floor Space Needs l Labor Productivity l Reject Rate l Reduced Fire Fighting l Product Development Time l Product Designs l Margins l Revenues

Improvement Cut to 1/6th Time Fourfold Increase 50% Decrease 50% Increase Substantial Improvement Pre-empting Questions Cut in Half Better and Manufacturable Double UD bv 50%+

business unit through its efforts to improve its functional strategy and better integrate manufacturing into the remainder of the business are summarized in Exhibit C-lb. As manufacturing made significant progress, other functions in the business also were rethinking their competitive roles and contributions. These combined efforts became and focused when division general management created a crosseven more integrated

functional, colocated team to develop a new generation of the DeskJet printer. That team undertook a number of new approaches to the product development processmost importantly, involving all the functions in monthly prototype builds to test all elements of the system, not just the engineering aspects of the new design (see Chapter 14 in Bowen et al. 1994). Even when the project was considered complete, additional behavior changes were identified as needed, including the assignment of design engineers to manufacturing for the first three months following production start-up. As summarized in Exhibit C-lc the results of this project were indeed impressive. However, even more important than the products success was its impact on the business unit and its competitive capabilities. The project became a demonstration to the entire division of how integration could be accomplished and of the benefits of having all the functions pursuing a stage 4 role. Although Hewlett Packard is a multibusiness corporation that does not report the financial and market results of individual divisions, it is clear that the Vancouver Divisions process has been mirrored by other divisions focused on the LaserJet and InkJet technologies and their multiple product lines. In fact, while it may come as a surprise to many, printers had become Hewlett Packards number one business by the early 1990s. For example, in 1994 Hewlett Packard added approximately $5 billion in revenues and $400 million in after-tax earnings to its impressive 1993 results. The vast majority of these gains were in its printer businesses. Much of the turnaround in the corporations

EXHIBIT
DeskJet

C-lc
Results

Performance improvements . 22-month development (versus traditional 36-60 months) l 17 months to complete manufacturing, testing, and tooling l HP Corporate Award for best R&D design (1987) l Datek (industry) award as printer of the year (1988) l Laser quality printing on plain paper at under $1000 l More than double the margin of prior product generation l Sales volume substantially in excessof forecasts

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performance in the late 1980s and early 1990s also was driven by the accomplishments of these printer business units as they successfully transformed their functional and business strategies to be more reflective of the excellence and integration representative of a stage 4 organization.

Allegheny Ludlum S Stainless Steel Business

A second example of outstanding manufacturing advantage comes from the steel industry. Allegheny Ludlum Corporation, a specialty steel firm with sales in excess of $1 billion (primarily from stainless steel products), has achieved outstanding financial performance over the past decade (Garvin 1994). In its stainless steel business, Allegheny Ludlum has aggressively sought to turn its manufacturing operations from art into science, raising quality standards and consistency, and lowering the costs of its processes throughout the complex set of steps involved in the production of stainless steel. In recent years, it also has reduced inventories dramatically and raised delivery performance to levels far beyond those typical of its competitors. Allegheny Ludlums efforts to apply the principles of stage 4 operations date back to the late 1970s when the business-through the efforts of Richard P. Simmons and others-chose to focus on improving operations at a time when its own parent corporation, Allegheny International (AI), and many other steel companies were looking to diversification, innovative financial moves, and industry restructuring as the primary sources of competitive advantage. Simmons and his colleagues bought the steel business of AI in a leveraged buyout in 1980 and proceeded to focus on implementing a handful of principles, which they have continued to pursue consistently for well over a decade. As reported recently by Hayes and Pisano ( 1994)) some of the Allegheny Ludlum manufacturing decision patterns that stand in sharp contrast to others in the industry include the following: l continued, ongoing investment in the technical skills of its people; l a significant R&D budget focused on products and processes; l a measurement and tracking system that provides detailed cost data for different routings through the production process at the level of individual coils of steel; l systematic experimentation and a constant stream of projects that test new ideas; l significant spending on mathematical modeling and simulation of the manufacturing process in order to make it more scientific and robust; and l selected capital investment in new products and processes and the upgrading of existing activities to expand capacity. By 1987, Allegheny Ludlum Corporation had achieved significant financial success and was able to repay much of its debt and go public. As shown in Exhibit C-2, the pretax operating earnings achieved since that public offering are most impressive. Average return on owners equity during that period has been in excess of 25%, despite the firms being subject to periodic industry downturns ( recessions) in 1986- 1987 and 199 I- 1992. Furthermore, recent advances in products and services at Allegheny Ludlum would suggest that its rate of improvement both continues unabated (particularly as it is now being applied to the service and delivery dimensions of the business) and is directly transferable to additional operating units, such as the stainless plate, plate-mill-plate, and tool steel operations of Jessup Steel, which it recently acquired.

Quantums

Disk Drive Business

A third example that further illustrates the opportunity and achievements associated with the pursuit of stage 4 capabilities in all the functions is provided by Quantum Corporation, a participant in the rigid disk drive business. Quantum was founded in 1980 and immediately began to grow its revenues and expand its market position by designing, manufacturing, and marketing first 14, then 8, and finally 5$ rigid disk drives (see Langowitz and Wheelwright 1994, and Wheelwright and Christensen 1992).

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209

Year ReturnonE (after tax3 87 uity 39%

EXHIBIT C-2.

88 44%

89 48%

90 20%
Superior

91 11%
Performance.

92 18%

93 24%

Allegheny-Ludlum:

In 1984, its fourth year of existence, Quantum set up a separate, wholly-owned subsidiary, Plus Development Corporation, to create a 34 disk drive for the IMB PC after-market. (This product, the Hardcard, enabled owners of IBM personal computers to add a hard drive in an expansion slot of their PC and thus extend the life of their machine and expand its usefulness.) The Plus Development subsidiary, knowing that it would face severe competition and would have to distinguish its product on quality, reliability, and ease of use, acknowledged the need to design products that were far more manufacturable, with a process giving much higher yield and quality, than had been true of earlier generations of disk drives. At this point, Plus Development made a trip to Japan to visit potential manufacturing partners, and as a result decided to partner with MKE, a Matsushita subsidiary with a leading position in VCRs. While MKE did not do any design or marketing, its manufacturing operations and its ability to develop superior new manufacturing processes were considered second-to-none. As Quantum Corporations fortunes in its original OEM business began to wane and the successof Plus Development continued to grow, senior management of both operations concluded they should apply the principles of the Plus business to the entire OEM and mass distribution businesses as well. In 1987, the Plus subsidiary was integrated back into the parent, and MKE became the process developer and production source for the price-sensitive, high volume portions of Quantums entire product line. Furthermore, to take full advantage of MKES capability, it became clear that product development had to be far more integrated across the entire business and much more responsive to customer needs and technical possibilities if long-term success were to become a reality. With the disk drive industry growing rapidly, Quantum management set a number of goals for product development that it felt would enable it to achieve its competitive objectives. These included cutting the time to market by one-third, hitting the market window within plus-or-minus two months on every major new product, leveraging technology across multiple products and generations of products, doing all development work in cross-functional teams, and making sure that every new product thoroughly delighted at least one major customer.

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In the early 199Os, Quantum made the strategic choice to aggressively pursue the rapidly growing, high capacity disk drive market. Because this required even tighter integration of manufacturing-especially with regard to rapid new product introduction and product customization for key customers-the firm chose to greatly expand its U.S. manufacturing base while incorporating much it had learned from its low-end business through interactions with MKE. By 1994, that manufacturing capability was well established and Quantum leveraged it dramatically through the purchase of Digital Equipment Corporations high capacity business. Within six months, analysts estimated Quantum had turned the acquired business around and the company was well on its way to instilling its successful approach to manufacturing in the factories and product lines it had gotten from Digital. While the disk drive industry has continued to be extremely competitive and those at Quantum would never claim to have arrived with regard to competitive advantage, it is clear that its approach to pursuing a stage 4 role for each of the functional areas and focusing on their integration through the product development process has resulted in dramatic growth and financial success, as illustrated in Exhibit C-3. Ongoing price pressure from OEM customers, demanding retail consumers, and new foreign competitors have continued to force application and refinement of the principles of manufacturing competitiveness on both Quantum Corporation and its partner, MKE. However, both agree that the foundation established in the preceding half-dozen years is an excellent one for continuing to build and gain competitive advantage in the coming decade.

Toyota Motors Automotive Business The fourth example of how a company attains a sustainable competitive advantage through manufacturing excellence comes from Toyotas automotive business and its use of a central organizing model-the Toyota Production System (TPS)-to guide its decision making (Toyota Motor Corporation 1992 ) . TPS drives the way the company designs and operates its plants; more important, it drives the design and operation of the total production value chain. Largely due to the superior performance that results from TPS, Toyota has been held up as an example of the lean manufacturing paradigm, the benchmark for manufacturers in the 1990s (Womack, Jones, and Roos 1990). TPS is often described in terms of its tools and procedures, such as andon boards, kaizen teams, error-proofing processes, standardization of work, JIT inventory policies, EXHIBIT C-3
Results of Quantums Integrated Stage 4 Strategy January 1994 segment of the rigid disk drive market Dominate the non-IBM #I producer in units worldwide Stream of recently introduced products Multiple product families Pipeline of next generation products Financial Results (Fiscal Year Ending 3/3 1) 1986 Sales Net Income ROS ROA 1987 8.8 m 7% 7% 1988 -3.2 m -3% -5% 1989 12.9 m 6% 9% 1990 $446 m 44 m 10% 25+% 1991 $878 m 74 m 9% 25% 1992 $1,127 m 48.5 m 4.3% 17% 1993 $1,697 m 93.8 m 5.5% 13%* 1994 $2,131 m 2.7 m -

$121 m
22 m 19% 19%

$121 $189 m %208m m

* ROA would have been l8%, but one month before year end, the company issued a convertible debenture that added $200 million to the asset base.

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and heijunka. Companies that attempt to adopt these tools piecemeal, however, reap only limited, if any, rewards. TPS works for Toyota, and its suppliers and group companies, as a holistic system approach. At the highest level, TPS is designed to optimize the business and create advantage through operations that excel in safety, quality, flexibility within pre-specified boundaries, dependability of delivery, and cost. Subelements of the production system may not be optimized at the expense of the whole system, nor is fanatical adherence to a single principle or tool (e.g., zero inventory) allowed. One way to understand TPS is to structure its associated tools, concepts, and procedures around the questions, What is TPS designed to do? and How is TPS designed to operate? Doing so, we have identified five essential elements that guide the design, operation, and improvement of manufacturing in the TPS approach. l TPS strives to have all critical processes in control and capable, thus creating stability in operations (including business as well as manufacturing processes). Achieving such stability requires discipline, documentation, and standardization of work; thus, safety, quality, dependable delivery, flexibility, and cost are achieved with processes that are statistically validated and repeatable and that have natural tolerances (variations) that more than meet customer requirements (capable). Toyotas emphasis on workplace order and cleanliness, as well as practices to simplify, error-proof, and carry out total productive maintenance, are part of this theme and can be applied not only to individual machines or operators, but to systems of machines, workers, and plants. l TPS systematically improves its in-control and capable processes by re-examining every activity and operation to improve the value each adds to the product (and thus the customer). This relentless elimination of waste (muda) satisfies the objects of lowering costs, increasing productivity and quality, extending the boundaries of flexibility (accommodating increased variety without penalty), and decreasing lead times. Thus, kaizen, for example, reflects the drive to continuously improve methods of doing work; similarly, continuous flow, pull systems, and kanban attempt to minimize inventory (which is seen as wasted resources) and elaborate information factors within the plant and throughout the supply chain. l TPS highlights production problems as close to their source as possible so that their root cause can be identified and eliminated. Even carefully designed production systems will inevitably encounter deviations and problems; TPS emphasizes managing that uncertainty and complexity as it arises. Tools such as jidoka to highlight problems, production control through visual management, and procedures to separate the problem from people (creating a no-blame environment) are examples of this aspect of TPs . l TPS connects the production plane directly to upstream suppliers and downstream customers. Takt time (the rate at which customers are ordering products) is the basic unit for organizing this value chain. The objective is to deliver the right product, in the right volume, at the right time using a principle known as heijunka. Heijunka also strives to distribute work intelligently and efficiently, thereby ensuring level and balanced production. This requires clearly defining each production system element, such as which lines are to be synchronous with JIT feeds and which should have small buffer stores. It also requires minimum changeover and setup times to avoid large batch production, sets out rules for order processing and production control, and defines vendor policies and capability standards. It strives for machines and processes that allow single piece flow. l TPS requires a workforce-from the line worker through management-that focuses on learning and continuous improvement. Because problem identification and elimination are crucial, all levels in the organization, and especially operations managers, must have a deep understanding of the products and processes and be able to walk

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the talk. For example, team leaders-the first level of supervisor at Toyota-must be the best not only at doing the 4-6 tasks in their area, but also at identifying and solving problems and teaching others. These five elements of the Toyota Production System are interdependent and mutually supportive. TPS works to optimize the business and maintain customer satisfaction through innovative products delivered with the highest quality, shortest lead time, and lowest cost. Toyotas success, and its ability to replicate its success in a variety of nations, cultures, and for plants with differing scales and scopes, suggests that TPS is a robust system of production that meets customers needs in one of the most competitive markets in the world. In fact, Toyotas unbroken string of multiple decades of consistently profitable growth is the envy of the worlds auto industry. Its ability to introduce new products, enter new markets, and embrace new technologies while maintaining a global reputation for low cost and high quality is particularly disheartening to its competitors.
4. Essential Elements in the Successful Pursuit of Manufacturing Advantage

As outlined in Section 2, a handful of common practices and approaches have been employed extensively over the past decade as firms have sought to overcome clear deficiencies in manufacturing. In many cases, the impact of these tools has been rapid and significant. However, many firms have also discovered that closing a gap or catching up results in neither a competitive advantage nor a leadership position. In contrast, the four firms described in Section 3 not only have achieved advantage through integrating their manufacturing capabilities with other functions, but their ability to improve appears to offer the promise of becoming a sustainable advantage. Hewlett Packard, Allegheny Ludlum, Quantum, and Toyota have avoided the shortcomings we identified in Section 2; moreover, they have adopted a handful of principles that seem to generate real momentum and provide a base for competitive leadership. Our analysis suggests that three principles are essential (through one or more often is overlooked) for achieving true stage 4 capability and performance. The first essential element is a focus on the rate of change (i.e., the rate of learning and improvement) rather than simply a focus on a step change. While a step change may be needed to make critical short-term improvements and to buy time, once such change has been accomplished there is little momentum or foundation for ongoing improvement. In fact, the opposite is often the case: once significant improvements have been made, senior managements expectation is that no further investments in people, systems, or capital assets will be required in manufacturing for some time to come. Thus, the very act of making a step change improvement becomes a roadblock to making ongoing, continuous improvements. Three things often contribute to this failure to adopt a rate-of-change perspective in manufacturing improvements. First, the impact of a step change is clearly easier to measure and a step change will likely show a faster payoff than a focus on continuous improvement. Even when a capability for rapid, ongoing improvement is instilled successfully within an organization, the first six months on the new trajectory may not result in dramatic, quantifiable payoffs. Second, a step change is much more consistent with the practice of management consulting and the mode in which consultants work-near-term projects for high payback-than are the approaches required for implementing a rate-of-change improvement. It is extremely difficult for an outside consultant coming into a manufacturing competitiveness framework advocates. The consultants skills, approaches, and rewards simply are not set up for it. Consultants must show immediate, significant improvement to justify their fees, and the easiest way to do so is by closing a known gap.

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A third contributing factor is that the foundation for ongoing improvement in manufacturing performance lies in establishing a correct set of principles, making the detailed operating procedures of the organization consistent with those principles, and then using management leadership and other driving forces to build momentum for continuing down that path. Such action plans are difficult to create and implement not only for consultants, but for senior managers as well. Senior managers are more used to management by exception and fixing known problems than to laying a foundation and pursuing the detail needed for such efforts to take full effect. The second of the essential yet often missed elements is a focus on integrating manufacturing operations with other aspects of the business, including other functions, suppliers, and customers. It provides an overarching model and integrated system view of the business into which manufacturing fits naturally and consistently. In some circles, this has been recognized as the capital M (or big M) perspective on manufacturing operations, as opposed to the more traditional little m perspective. It is a holistic, broad-based view of manufacturings potential and how the elements work together, rather than a view of the elements as distinct or separable choices. It enables an organization to shift manufacturing from a function whose role is derived after the business strategy and other functional strategies have been set, to one that makes manufacturing a peer and co-developer of not only its own strategy, but the strategies pursued across the business unit. When this occurs, the skills and capabilities manufacturing has developed in putting its own areas of responsibility on the path of rapid, continuous improvement become highly valued by others in the organization. Thus, in firms such as those identified in the preceding section, operations expertise in continuous improvement is brought to bear in areas as diverse as product development, field service, customer support, and accounts receivable/payable administration. The third of the essential yet often missed elements in achieving stage 4 manufacturing competitiveness is that of leadership. Leadership must be present within manufacturing operations as well as within the business unit. When fully effective, it is likely to be recognized by others in the industry as well. Such leadership plays an essential role in establishing a vision and sense of direction, ensuring that patterns of decisions are aligned with that vision and direction, and maintaining momentum and consistency in followthrough. Unfortunately, in firms where manufacturing operations have been placed traditionally in a stage 2 or stage 3 role and where other functions have been viewed as the primary providers of competitive advantage, it is unlikely that such leadership in operations will have been cultivated or nurtured. Significant doses of leadership are required in achieving a manufacturing edge because a distinctive advantage in manufacturing requires that the firm be out in front of its competitors, not simply catching up or maintaining parity. When one is behind, the target of what is required to become competitive is far easier to identify and articulate than is the case when one is out in front. Leadership is needed to create that target. The challenge of leadership is to reinforce the efforts of manufacturing to be ahead of the game through complementary efforts in all the functional areas. Often times business strategy in such a setting becomes a directional sense and rate of overall improvement, rather than the more traditional view of a clearly articulated, five-year plan with easily measured goals in key product-market areas. This is what Hayes ( 1985) has referred to as strategy based on integrating and directing forces, rather than strategy based on a set of specific, fixed endpoints and controls.
Concluding Comments

In this paper, we have suggested a number of possible explanations for the failure of the manufacturing strategy framework to take full effect in a wide range of firms and

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industries. While there is undoubtedly some truth in each explanation, our conclusion is that the primary reasons for this failure are in the execution, not in the theory. That is, it is the adherence to fixing something that is broken, making one-time improvements to infrastructure patterns, and viewing manufacturing as largely separable from the rest of the business, combined with the absence of one or more of the three primary elements essential to making the theory work in practice, that explains why most firms have not realized the full promise of manufacturing advantage. Furthermore, based on our experience with a handful of firms that have achieved outstanding performance, such advantage can be traced directly to the degree with which those firms possess and pursue these three elements. We recognize that it is far easier to identify critical elements than it is it put them into practice. The challenge for academics and practitioners alike is to expand the collective knowledge and understanding of these elements, and to develop far more powerful tools and techniques for putting them into practice. We hope others will join us in this ongoing effort so that increasing numbers of firms can develop the capabilities of significant ongoing, continuous improvement.
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