IJOPM 17,10 940 A lean and global smaller firm?

IJOPM 17,10 940 A lean and global smaller firm? Christer Karlsson Stockholm School of Economics, Section for Industrial Production, Stockholm, Sweden and Pär Åhlström London Business School, Centre for Operations Management, London, UK Introduction One of the important contributions of the influential book, The Machine that Changed the World, was that it integrated many of the seemingly disparate concepts previously found in the literature under the general heading “lean production” (Womack et al., 1990). The book contains descriptions of lean manufacturing, product development, procurement, and distribution. Furthermore, it describes strategic aspects of lean production – the lean enterprise – which is the focus of this article. Womack and Jones (1994) have developed the lean enterprise concept further. They envisaged it as: “a group of individuals, functions, and legally separate but operationally synchronized companies” (p. 93). The idea is to link breakthroughs of individual companies, in terms of lean techniques, up and down the value chain to form a continuous value stream. Thus, the lean enterprise concept focuses on the external networks of the firm. This view of the lean enterprise is similar to that proposed by Karlsson (1992), who summarizes the concept in three principles: being global, operating in networks, and building knowledge structures together with other actors. Perhaps most important is the organization and building of hierarchies of technological knowledge for the development and production of products. This implies that the network of companies emerges as the unit of managerial control, with a corresponding erosion of firm borders. Regardless of author, there is one common denominator in the studies cited above: their ideas were generated through research in large companies, most commonly the global automobile industry (Karlsson, 1992; Womack et al., 1990). Womack and Jones (1994) use examples from large multinationals such as Chrysler and Sony in their development of the lean enterprise concept. The preponderance of the use of large companies as a database is a feature that these studies share with other studies within the area of operations management (Brown and Inman, 1993). The domination of research into large manufacturing companies risks creating potential limits for the possibilities to develop broadly applicable theory (New, 1996). International Journal of Operations & Production Management, Vol. 17 No. 10, 1997, pp. 940-952. © MCB University Press, 0144-3577 A lean and global smaller firm? 941 Aim of the study It is against the above background that this article addresses the question of whether the lean enterprise concept is applicable to small and medium-sized firms. An important starting point for this endeavour is the view that a lean enterprise is characterized by operating in a global network of leading technological competences. We then analyse whether the lean enterprise concept will have to be different, will entail particular difficulties in its implementation, and will create specific risks or advantages to the small and medium-sized firm. This analysis takes place through exploratory comparing and contrasting the theoretically derived concept with the realities of an empirical case. The case is a medium-sized manufacturing firm working with the implementation of the lean enterprise concept. The remainder of the article starts with an outline of how we view the theoretical concept of the lean enterprise. Second, we discuss the methodology through which data was collected, followed by a presentation of the empirical case. In the analysis that follows we compare and contrast the empirical data with the theoretical framework, in an effort to develop a concept applicable to small and medium-sized firms. Conclusions and managerial implications conclude the article. The lean enterprise – an operationalization The lean enterprise concept describes the strategic aspects of lean production. Focus is on the organized external networks of the firm. Figure 1 contains our interpretation of the concept. The figure is intended to depict the most important principles, which will be defined and interpreted in the following. An important point of departure is that the firm has implemented lean manufacturing. The focus in this article is what is built outside the manufacturing process in terms of lean procurement, lean distribution, and the partner strategy of the firm. Before we discuss the contents of Figure 1 in more detail, it is necessary to distinguish the terms “concept”, “principles”, “practices”, and “techniques” as a Figure 1. Our interpretation of the lean enterprise • Global networks • Process integration • Product development integration Lean distribution The lean enterprise • Organized networks • Knowledge input Lean procurement Partners • Collaboration in networks • Knowledge structure IJOPM 17,10 942 means of operationalization. The lean enterprise is a concept, which contains a number of principles. These principles are found in Figure 1. The principles in turn consist of a set of practices, which are the activities undertaken to change the organization (Dean and Bowen, 1994). In outlining the lean enterprise framework it is the practices that need explanation. In describing the practices underlying the framework’s principles, available theory behind the lean enterprise is used. It is important to note that the practices in turn consist of a wide array of techniques, which contain actions on a quite detailed level (Dean and Bowen, 1994). The specific nature of these techniques is not given. The reason being that it is impossible for a framework to be at the same time general, accurate, and simple (Weick, 1979). There is always a trade-off between these three dimensions. In this study, we have chosen a definition of the lean enterprise framework that is general and yet simple. Thus we need to discuss the practices of the lean enterprise. On the input side of the lean enterprise concept we have lean procurement where the principles of organized networks and knowledge input are important from a strategic perspective. A common practice is that suppliers are organized in networks or tiers, where different layers perform different tasks in the value chain (Imai et al., 1988). Apart from goods, these networks provide their specialized knowledge into the development and transformation process of the focal firm (Lamming, 1993). On the output side of the lean enterprise concept we have lean distribution, where one principle is that the firm is a part of a global network. Important in this network is process integration. This means that actual customer orders trigger the production of goods, not forecasted sales. Production against customer orders is made possible through the implementation of lean manufacturing principles. The implication of this mode of working is lean buffers, that is a low level of finished goods inventory. Through the principle of product development integration, customer viewpoints are integrated directly into the product development function, without passing staff functions. Information is gathered both from customer service functions and from sales staff. The lean enterprise never misses an opportunity to capture information about its customers (Stalk and Webber, 1993). The principle can also imply that product development takes place in the form of close collaboration with selected customers (von Hippel, 1978). Finally, the lean enterprise relies heavily on partners. The ambition is to nurture the specialist competence of the firm (Womack and Jones, 1994). This implies collaboration in networks with specialists in different areas, including competitors. The most appropriate technological knowledge from each node is utilized and a knowledge structure is built up, with a global view of technical competence (Clark, 1989). The lean enterprise specializes on system integration technology, not the different parts of the system (Karlsson, 1992). A car manufacturer has the competence to integrate different technologies into the function “stopping the car”, it does not manufacture brakes. A lean and global smaller firm? 943 Methodology The empirical part of this article comes from a study utilizing the clinical methodology, with active participation of the researcher in formulating and observing organizational change (Stymne, 1970). A case study was conducted, since such research is most appropriate in the early stages of research on a topic (Eisenhardt, 1989). The chief benefit of the clinical methodology is that the psychological contract that arises between the researchers and the organization gives access to data not usually available to research (Schein, 1987). Researching the strategic aspects of small and medium-sized firms, access to type data was considered particularly important It is difficult to find a general definition of small and medium-sized firms, since national definitions vary enormously (Rothwell and Zegveld, 1982). However, since the lean enterprise concept has been developed in large multinational firms, the criterion of size should be less important. It is more the nature of the firm, its business, and access to resources that is relevant. This article uses data collected in a firm with a total of 500 employees, which in this context can be considered as medium-sized. Please note that the term “smaller” will be used in certain places of the text as a synonym for the small and medium-sized firm. The study was performed in a Sweden-based international firm producing mechanical and electronic office equipment, mostly for export. To preserve the firm’s true identity, it will henceforth be termed “Office Machines”. The research collaboration with Office Machines started with the managing director’s interest in the lean enterprise concept as a framework to describe and direct his vision for the company. The managing director of Office Machines wanted to implement the lean enterprise principles following the definitions the researchers were using. This situation provided a perfect setting for the researchers to study the implementation process. Our role in the implementation process was to introduce academic knowledge and theories into the firm, mainly in the form of seminars but also through daily interaction. As a consequence, we spent a total of 150 days at Office Machines, over a period of two and a half years. The whole study has provided a unique opportunity to study the implementation of all aspects of the lean concept. However, the study presented here, focuses only on the external networks of the company. Three different methods were used to collect data: direct observation, interviews, and content analysis of documents, to overcome the weaknesses of a single-method design (Campbell and Fiske, 1959). Interviews provide depth, subtlety, and personal feeling. Documents provide facts, but are subject to the dangers of selective survival. Direct observation gives access to group processes and can reveal the discrepancies between what is said and what is actually done (Pettigrew, 1990). Since the analysis is based on the empirical study of one case, the issue of generalizability is relevant. Single case study approaches cannot offer generalizability in the statistical sense (Yin, 1989). However, they are capable of IJOPM 17,10 944 developing and refining generalizable concepts and frames of reference (Pettigrew, 1985), which is the purpose of this article. The use of the clinical methodology increases the possibility for researchers to gain a fundamental understanding of the phenomenon of interest rather than a superficial establishment of correlation or cause effect relationships (Normann, 1980). In-depth case studies can make up for their lack of generality by greater depth of understanding. Results of studies of single organizations can also be cumulative (Miller and Mintzberg, 1983). Office Machines – strategies and external networks The presentation of the empirical data takes place through a brief display of Office Machines’ strategies and external networks. Comparing these strategies and networks with the theoretically derived principles of the lean enterprise is the task of the next section. Lean procurement Office Machines had a high internal value added and procured mostly raw material and low level parts. Raw material was procured from a country in mainland Europe and plastic components were supplied by local firms. The intention was to go towards the use of a supply network, with single suppliers for individual components and close collaboration with the suppliers in new product development. During the initial phase of the study, Office Machines maintained their own manufacture of electronic circuit boards from electronic components. Partly as a consequence of the development of new products, many of which were using electronics, there was a need to revisit the strategy concerning circuit boards. The strategy that emerged essentially meant that Office Machines did not consider the manufacture of circuit boards one of their core skills. Complete circuit boards were instead bought from a supplier and Office Machines concentrated on the manufacture and assembly of complete products. Several alternative suppliers were investigated, including one located in mainland Europe. The Europe-based supplier was a part of the network of an electronics consultant utilized by Office Machines during the development of their latest range of products. However, owing to quality control problems, the choice fell on a domestic supplier of circuit boards. Lean distribution One principle of lean distribution is product development integration, which means that customer viewpoints are integrated directly into the product development function. Office Machines integrated customer viewpoints in two ways. The first was through close collaboration with an OEM manufacturer in the development of a new product. The product was originally developed by Office Machines, but the customer found it highly suitable for its products. As a part of the collaboration between Office Machines and the significantly larger company, the customer provided vital input to the development process, A lean and global smaller firm? 945 in line with its way of working with suppliers. This input took first of all the form of strong pressure on compliance with schedules. Second, it provided expertise, both on the technical sides of the product, but perhaps most importantly, on how to run a product development project. Office Machines learnt a great deal as a consequence of this collaboration. A second example of product development integration was the advice that Office Machines gained from users of one of its products when specifying the next generation of the product. The old product was taken to professional users, who were instructed to use it as they normally would, but at the same time being observed and video-recorded by representatives from Office Machines. After having used the product, the users were instructed to give their comments on the product in relation to competitors’ products. Several of these sessions were held, in various countries. These sessions proved to be valuable in developing the concept specification for the next generation of products. Related to lean distribution are the developments that took place in Office Machines’ markets. Traditionally, the company sold through distributors in 119 different countries. The reasons distributors were used were historical, coupled with the fact that the firm’s size did not permit active presence in all these countries. However, changes were starting to take place in the European market, with larger retailers forming groups spanning several countries, demanding to buy directly from manufacturers. Office Machines also had sales subsidiaries in four European countries. The first was the result of the acquisition of a foreign competitor, gaining access to the market in that country. The second was the result of an acquisition of a firm producing related products. The third was a new start-up owing to the termination of an existing distributor’s contract. The final sales subsidiary was the result of the acquisition of a distributor. Partners Over the years, Office Machines developed a number of collaborations with different firms and institutions. It had a collaboration with a South-East Asian firm, to gain access to a complementary set of products Office Machines was not prepared to manufacture itself. The inclusion of these products in the product range was seen as important by customers, especially by the newly created pan-European retailers. Together with a competitor, Office Machines developed and manufactured a new product. This collaboration took place because of the high development costs. In developing this product, a specialist firm was involved in the design of the new product. The specialist had competence in the area of ergonomics, which was deemed important for the new range of products. Office Machines also had collaborations with institutions at universities in the development of new products. For instance, the idea and initial concept development of a brandnew type of product was made at a university institution. IJOPM 17,10 946 The lean enterprise concept in the context of a smaller firm After this brief description of Office Machines’ strategies and networks comes the analysis task. The analysis was carried out by comparing and contrasting the theoretical principles of the lean enterprise with the empirical reality in Office Machines. The major aim was to discern the extent to which the theoretical principles of the lean enterprise, derived through research in large companies, can be applied to the small and medium-sized firms. The principles contained within the lean enterprise concept were analysed from two perspectives. First, to what extent they were applicable in the small and medium-sized firms. Second, in what way their interpretation and implementation was distinctive in the small and medium-sized firms compared to the large firm. In this second perspective we asked ourselves four questions: (1) Was there a need for principles different from those derived theoretically? (2) Were the theoretically derived principles difficult to implement in the small and medium-sized firms? (3) Did the principles create disadvantages for the small and medium-sized firms (or at least not the same advantages they were postulated to create for the larger firm)? (4) Could the principles create advantages unique to the small and mediumsized firms? The outcome of the analysis is a framework where we develop specific principles adjusted to the situation and nature of the small and medium-sized firms. Lean procurement On the input side, the theoretical framework of the lean enterprise postulates the inauguration of organized networks of competences. Such networks were relevant for Office Machines as well, despite their size. They used local suppliers of plastic components for their machines, with an intention to use single-sourcing and work closely with these suppliers in the development of new products. A large part of the development work was to be out-sourced to the supplier who would provide vital knowledge input to the development process. The strategy of acquiring complete electronic circuit boards from a supplier was another example of an organized network of competences. This strategy enabled Office Machines to specialize in the manufacture and assembly of complete products. Despite their size, Office Machines did not see the usage of a foreign supplier as a hindrance. It was the nature of the foreign supplier, its performance, and the need for knowledge exchange that made Office Machines choose a local supplier. Thus, although these networks are small, we find that the principle of organized networks of knowledge input is applicable to the small and mediumA lean and global smaller firm? 947 sized firms. However, owing to the specific nature of these firms some modifications might be necessary. This is particularly the case for geographical distance, which might not be a problem in procurement issues except when establishing more complex and knowledge-based relationships. In small and medium-sized firms, the knowledge necessary to maintain these relationships is located near the top of the organization. Conflicts of priority might therefore arise, since the daily running of the business is also a large part of these managers’ responsibility. Lean distribution On the distribution side, the case illustrates the problems small and mediumsizeds firm might encounter in running a global distribution system. The size of the firm necessitates a number of intermediary layers before the end-user. Office Machines’ global distribution was made possible only through the utilization of distributors in different countries. However, the changes that were taking place in Office Machines’ European market necessitated a move towards direct delivery to retailers, past the distributors. To address this issue, Office Machines examined several alternative solutions, among others the utilization of co-distribution with firms in a similar position, but in a different business. Another solution was the inauguration of a central warehouse in a European country. The size of the firm is not the only factor important in determining the issues raised by geographical distance in distribution, the nature of the technology also has an important role to play. Products incorporating advanced technology may require expertise, support, and service, which are only available at the corporate headquarters. Providing such support on a global basis might be difficult for the smaller firm. Products incorporating relatively simple technology are not susceptible to this problem. Office Machines’ product and process technology lies towards the simpler end of the spectrum, hence the case illustrates the potential small- and mediumsized firm have to utilize a network of co-operative relationships in order to reach a global market. Integrating the voice of the customers into the product development process proved to be difficult at Office Machines. First of all, there were problems in defining the customer; was it distributors, retailers, or end-users? Their views did not necessarily coincide. Second, the views of the end-users were difficult to obtain. Distributors were often acting as a filter, being unwilling to disclose information. Finally, Office Machines’ size made it difficult to install elaborate systems for systematic customer and end-user feedback. However, what Office Machines did was to utilize selected end-users in different countries in the concept development for a new product. Through discussions with professional users and observations of them in action, Office Machines gained invaluable input on how to design their next generation of the product. Thus, involvement of the customer in the product development process IJOPM 17,10 948 might be problematic for the small and medium-sized firms. However, size does not exclude the usage of significant end-users for feedback. Utilizing feedback from selected end-users is closely related to the principle of product development integration. At Office Machines such integration took place through the collaboration with an OEM manufacturer, from which Office Machines gained significant benefits. Perhaps it is feasible to argue that such integration is even more important for the small and medium-sized firms, since the integration reduces the need for internal competence in different areas. This competence concerns areas apart from product idea generation. In the case of Office Machines, the competence particularly concerned the art and practices of efficient product development. Partners Theoretically, the lean enterprise concept stresses the use of partnerships and the principle of collaborating with specialists in different areas, including competitors. This was exactly what Office Machines did. Despite their size, Office Machines used different kinds of partners to a large extent: they developed and manufactured a new product together with a competitor and used universities and specialist institutions in development work. Thus, we find that the principle of collaboration is applicable to small and medium-sized firms, although some modifications and extensions are necessary. For one, the size of the firm might exclude it from collaboration with highly prestigious global research institutions. However, this does not exclude it from collaboration with local institutions, able to provide vital knowledge input into the firm. An interesting extension to the knowledge structure principle is Office Machines’ partnership with a South-East Asian firm in possession of a complementary range of products. This indicates the need for a smaller manufacturer to collaborate with firms that possess knowledge of complementary products and skills in order to extend the product range and skills of the focal firm. In doing so, the firm can focus on its own skills and yet build a larger system of products to create value for customers further down the value chain. This should be more important the smaller the firm is. Conclusions Utilizing data from a clinical field study, this article explored the applicability of the lean enterprise concept and its principles to small and medium-sized firms. Our major conclusion is that most of the principles contained in the lean enterprise are applicable to the small and medium-sized firms. Thus, although the principles were developed through research into large multinational companies, they are not restricted to them. Indeed, some principles are perhaps even more important for the small and medium-sized firms that intend to compete globally. It is these differences we highlight in our conclusions. Perhaps most important is strengthening the firm’s position relative its competitors through the building of a position in a A lean and global smaller firm? 949 global network of competences. Network building is generally not seen as something in which the small and medium-sized firms can easily become involved on their own. Building these networks is instead the task for the larger firm, albeit these networks may involve smaller firms. However, based on indications from our study, we would like to argue that it is possible that the benefits of building such networks are comparatively large for the small and medium-sized firms. This argument is based on the assumption that the influence of the individual network member is not necessarily related to the absolute size of the firm. A small or medium-sized firm, with a narrow but unique contribution to a large technological system, can provide considerable value-added to the total system. Hence, the small firm can be an influential player in a complex network of small firms, a network which, through its complexity, can become unique in its total competence. This has implications for procurement, distribution, and partner strategies. We describe these implications below. Procurement strategies On the procurement side, our framework of the lean enterprise proposes the creation of specific relationships for global sourcing. An increasingly global marketplace is rapidly developing opportunities for the small and mediumsized firms. This implies that size as such should not pose an insuperable problem for firms wanting to obtain the best of the components the market has to offer. However, procurement strategies other than for components hold the potential of creating comparatively strong competitive advantage for the small firm. A narrow but unique technology that fits the small firm, acquired from a university department or other advanced source, can make the firm globally outstanding in comparison with other, probably also small, firms in the same product segment. On the other hand, it is in the development of these knowledge-based relationships that we find the perhaps main limitation of the theoretical concept of the lean enterprise. In a small or medium-sized firm, the competence needed to maintain knowledge-based relationships might be scarce and is often placed towards the upper echelons of the organization. Building and maintaining networks with firms at a longer distance is therefore a considerable burden for the firm as a whole and short geographical distances might be preferable. Distribution strategies On the distribution side, our framework of the lean enterprise proposes the creation of a global distribution network. As on the procurement side, an increasingly global marketplace is rapidly developing opportunities for the small and medium-sized firms. These opportunities almost inevitably require the inauguration of networks of co-operative relationships. It is difficult for the smaller firm to act on geographically-spread markets without co-operating with other firms. IJOPM 17,10 950 The principle of direct involvement of customers offers specific advantages to the small and medium-sized firms, compared to the large firm. Wide indirect market research studies are often too costly for the smaller firm. Therefore, direct involvement of significant customers is a powerful method of obtaining information on the needs of the market. Partner strategies Finally, on the partner side of the lean enterprise, there are at least two principles that are not only applicable to the small and medium-sized firms but may create a comparatively high level of competitive advantage. First, the creation of unique offerings through the collaboration with firms in possession of complementary products. By focusing on their own strengths, the small and medium-sized firms can build positions in a global network of product competences that strengthen the firms’ total position relative to their competitors. Second, the opportunity to build unique skills through collaboration with different kinds of organizations in possession of complementary skills, for example local universities and consultancies, need not to be hindered by the size of the firm. Obstacles to these types of relationships might merely be found in the minds of the small firms’ representatives. To summarize the discussion so far, the implications of the lean enterprise for procurement, distribution, and partner strategies can be expressed in terms of the framework that served as a conceptual starting point of the study. This is done in Figure 2, which describes the small and medium-sized firms as lean enterprises. Summary As a summary of the implications of the lean enterprise framework for the smaller firm, three basic ideas that run across the different functional areas can be identified and developed. These ideas can be considered key principles in the lean and global small company strategy: Figure 2. The small and mediumsized firms as lean enterprises • Global distribution • Customers in product system Lean distribution • Global supply • Special sources of development Lean procurement Partners • Complementary product firms The small and medium-sized lean enterprise A lean and global smaller firm? 951 • Building a larger and more comprehensive offer through partnerships. The partner approach has a potential for comparatively significant advantages for the smaller firm through the creation of a total offer with much higher value-added than the individual firm can offer on its own. • Building unique competence through collaboration with a number of smaller and focused businesses. Even narrow unique competences, which can be found in, for example, local universities, consultancies, and other firms, can create knowledge bases which, added to the skills of the firm, are globally unique. • Avoiding large geographical distances when collaborating in more advanced knowledge areas. 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