1 Japanese Production Systems to US Companies 2 October 2007

Strategic Finance Group Presentation2 Question and Answer Question (7) Should Ford and GM have rested their strategies for the 1990s on careful analysis of the sources of advantage in the 1980s? Should they have imitated the Japanese or done something different at plant and company level?  Ford and GM should have not imitated the Japanese but rested on careful analysis of the source of advantage in the 1980s.

Strategic Finance Group Presentation3 Scope of Consideration : How to answer the question? Finance Strategy Value Based Management -Data Interpretation -Lean System -Strategic Factors 1. Competitive Environment 2. Industry Development 3. Business / Corporate Strategy 4. Implementation(7s) Companies need to focus on the value their corporate and business-level strategies are creating.

Strategic Finance Group Presentation4 Advantages and Disadvantages in 80s US Industry structure: Higher value added/sales ratio at company level because of highly vertically integrated (Table 7) Market: Fluctuation in domestic demand (Table 11) Industry structure: Less employment in small firms paying lower wages (Table 10) Productivity: Lower labour productivity not at company level but at plant level (Table 2&3), and less cash flow/vehicle produce at company level (Table 4) Labour costs: Higher wage costs (Table 12) Japan Regulation: Longer working hours (Table 1&8) Market: Rapid domestic market growth in later 1980s (Table 11) Industry structure: More employment in small firms paying lower wage (Table 10) Productivity: Higher labour productivity at plant level (Table 2), and more cash flow/vehicle produced at company level (Table 4) Labour costs: Lower wage costs (Table 12) Dominance in a growing market and productivity were keys to success.

Strategic Finance Group Presentation5 Major Changes in 90s: Exchange Rate and Wage Costs –Since the middle of 80s, the exchange rate had dramatically declined. –As a result, Japanese firms advantage in wage costs was almost cancelled in 1990s. (Table 12) The Japanese advantage in wage costs had been shrinking.

Strategic Finance Group Presentation6 Major Changes in 90s: Rapid Growth of Light Truck –Comparing to a market of passenger cars, that of light trucks had been growing. Additionally, a price of light trucks had been increased while that of passenger cars had been almost same. As a result, light truck share in consumer sales reached about 60%. –Japanese firms didn’t enter the light truck market. Market trend was changed to be advantageous for US firms which were targeting a light truck market.

Strategic Finance Group Presentation7 Lean Production: What Might Make Lean System Successful Manufacturer and supplier location Labour Commitment Automation and modernisation Vehicle specification and types Stable demand Employer-employee relationship Economic growth and stable demand Cyclical peak in mid 80s Wage gradieant (advtg or disadvtg) Stronger cash flow per vehicle More fluctuating market for US than for Japan

Strategic Finance Group Presentation8 Limitation of the Lean production system Weakness of the lean production system -No consideration on demand side -No focus on backward value added services -Difficult in quantum leap for new business and in practice -No short term optimal management in supply -Production stop by a crisis from fragile parts of supply chain -Increasing employee stress Value Cost Competition Company Competitors Customers Value ◈ The Mind of Strategist Focus of Lean Production System

Strategic Finance Group Presentation9 Limitation of the Japanese production system Problems of the lean system to US companies -Different governance (ownership control by capital market) -Business culture and practice is based on the market -Arm’s length management in supply chain Different stories -Nummi case : no unique to Japanese company -DymlerChrysler : problems are in markets -Other segmented car markets : different strategies

Strategic Finance Group Presentation10 Strategies in the automobile market 4 types of Strategy (business/corporate) Stalemated Trench War - Cost reduction, control of supply - Cars Fragmented Jungle War - Geographic customer products - Motorcycles, Aviation, trucks Specialist High Ground -‘Better than the best’ - Luxury Cars Volume Based Mass Market - Market share, financial strength - Compact cars in new markets Lessons from excellent companies in the western world - Leadership, core ideology, people, organization, culture, customer, etc. are key factors by the McKinsey Mid-sized Marvels Study, Built to Last/Good to Great, In search of Excellence, etc.

Strategic Finance Group Presentation11 Evidence: Ford’s Strategies in 1990s Market situation -Less fluctuating demand than did 1980s -Average price per vehicle declined -Passenger car share declines whereas other types increased Successful Factors - Manufacturing Platform sharing Automation Switch production between common sites -Marketing Ride the light truck boom Exploit Ford credit and Hertz Car rental business Evolve as ‘Consumer service company’ 1 1. Jacques Nasser - CEO Ford

Strategic Finance Group Presentation12 Summary There are several factors, not only production system but also market conditions, to succeed. Japanese firms’ success in 80s attributed not only to higher productivity due to lean production system but also to preferable domestic market conditions. Strategic market choice was important to be competitive. In 90s, US firms should have pursued improvement in their production systems, but the lean production system could not have directly applied to US firms.