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Advanced Manufacturing and New Directions for

Competitive Strategy
Theodore W. Schlie
LEHIGH UNIVERSITY
Joel D. Goldhar
ILLINOIS INSTITUTE OF TECHNOLOGY

This study examines the potential contributions that advanced manuJacturing can make to the competitive strategy oj the finn. Porter's
framework Jor describing generic competitive strategies in tenns oJlow-cost leadership, difJerentiation, andJocus is a useful way to begin
looking at this linkage, and several cases oj successful implementation oj advanced manuJacturing in
U.S. companies are examined in this light. A closer examination oj these cases and a deeper understanding oJhow companies are actually
competing, however, lead to some new directions proposed Jor further thinking regarding advanced manuJacturing and competitive
strategy: i.e., dangers oj differentiation and the advantages ojpursuing low-cost leadership at increasingly higher levels oj customer
acceptability; opportunities available in Jocusing on customer valued complexity, which takes advantage oj the strengths oj computer and
infonnation technology; multiple niche competition as an addition to Porter's competitive scope situations, the potentialJor economies oj
scope, the synergy between economies oj scale and scope, and the simultaneous achievement oj both low cost and differentiation; and
finally advanced manuJacturing competing as a service business. J BUSN RES 1995. 33103-114

Este estudo analisa as potenciais contribuições que a fabricação avançadas pode fazer com a estratégia
competitiva da empresa. a concepção de Porter para descrever estratégias competitivas genéricas em
termos da pessoa de baixo custo liderança, diferenciação, andJocus é uma maneira útil de começar a
olhar para esta ligação, e vários casos oj oj implementação bem-sucedida em empresas avançadas
manuJacturing E.U. são examinados sob essa luz. Um exame mais minucioso destes casos e as empresas
mais profunda compreensão oJhow estão realmente competindo, no entanto, levar a alguns novos rumos
propostos Jor pensar mais a respeito de fabricação avançada e estratégia competitiva, ou seja,
diferenciação oj perigos e as vantagens ojpursuing liderança de baixo custo em cada vez maior níveis de
aceitabilidade do cliente oj; oportunidades disponíveis na Jocusing no cliente avaliado complexidade,
que aproveita JO forças computador oj e infonnation tecnologia, concorrência nicho múltiplo como um
complemento para situações competitivas de Porter alcance, ao alcance das economias potentialJor oj, a
escala das sinergias entre as economias oj e no espaço, ea realização simultânea oj ambos de baixo custo
e diferenciação e, finalmente, avançado manuJacturing concorrentes como uma empresa de serviços.
BUSN RES J 1995. 33103-114

he application of Japanese management techniques and computer integrated manufacturing (CIM) technologyi.e., what we
term "advanced manufacturing" in this article-has fundamentally changed the function of manufacturing and the basis of
competition in the industrial world. Today, human intelligence is being replaced by machine intelligence and integrated with
physical machine processes. These changes have been accompanied by an evolution in manufacturing "policy" from task
specialization to mechanization to automation to integration.
In this study, we examine the potential contributions that advanced manufacturing can make to the competitive strategy of the
firm. Most of the literature on advanced manufacturing has focused on the hypothesized or reported benefits derived from its
successful implementation in terms of cost reductions, quality improvements, inventory turns, cycle time compression, or similar
data, without explicit reference to competitive advantage. Likewise, most of the literature on competitive strategy does not
specifically feature the roles that advanced manufacturing can play in achieving competitive advantage. We wish to explicitly
address these linkages between advanced manufacturing and competitive strategy and to illustrate them with examples from u.s.
firms. We further wish to explore some new directions in which these linkages may evolve in the future.
A aplicação de técnicas japonesas de gestão e de Manufatura Integrada por Computador (CIM) da
tecnologia., O que chamamos de "fabrico avançado" neste artigo, mudou fundamentalmente a função de
produção e a base da competição no mundo industrial. Hoje, a inteligência humana está sendo
substituída pela inteligência da máquina e integrada com os processos da máquina física. Estas
mudanças têm sido acompanhadas por uma evolução na produção "política" da especialização de tarefas
para a mecanização para a automação da integração.
Neste estudo, nós examinamos as possíveis contribuições que a fabricação avançadas pode fazer com a
estratégia competitiva da empresa. A maior parte da literatura sobre a fabricação avançada concentrou-
se na hipótese ou relataram benefícios derivados de sua implementação bem sucedida em termos de
redução de custos, melhorias de qualidade, giro de estoque, a compressão do tempo de ciclo, ou dados
semelhantes, sem referência explícita a vantagem competitiva ad ¬. Da mesma forma, a maior parte da
literatura sobre estratégia competitiva não especificamente o recurso papéis que Manu avançada ¬
transformadora podem desempenhar na obtenção de vantagem competitiva. Queremos abordar
explicitamente essas relações entre manu ¬ avançados de fabrico e de estratégia competitiva e para
ilustrá-los com exemplos de nós empresas. Nós ainda deseja explorar novas direções em que essas
relações podem evoluir no futuro.

The traditional factory was built with mechanical technology to achieve economies of scale, and emphasized large size, highvolume
mass production, standardized products, and repeatability of specialized operations. Traditional manufacturing was described as an
evolutionary process, progressing from a jumbled flow job shop to a disconnected line flow/batch process to a connected line
flow/assembly line to a continuous flow process (Hayes and Wheelwright, 1979a, 1979b, and 1984). All too often, however, this
evolution resulted in an inflexible "mechanistic" plant that minimized expenses per unit of output at the strategic cost of an inability
to react to changes in market demand, unforeseen opportunity, or technological change (Abernathy, 1978; Burns and Stalker, 1961).
The end result of "good" process innovation was a factory with high productivity but low response capability that became a barrier
to the next round of product innovation because that innovation would obsolete the existing process investment.
The technolOgical features of traditional manufacturing discussed previously created a set of economic constraints that dictated a
very low limit to the number of products or models of products that could be economically produced to satisfy a given market.
Traditional manufacturing posed an economic trade-off for the manufacturing manager who was focused on unit costs: as product
variety increased, the benefits of economies of scale decreased. Therefore, the traditional manager

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balanced scale and variety around the lowest total cost point, which significantly limited the number of products or models of products
available to customers.
Traditional manufacturing also accepted long cycle times as the "price" of "efficiency." However, if specialization and division of labor
seemed to increase effiCiency in terms of direct labor and equipment utilization, they did so at the expense of the extended cycle time that
was needed to coordinate and integrate the divided manufacturing operations (Lawrence and Lorsch, 1967). Over time, a set of
management "tools" was developed to assist in the coordination and integration of this extended production cycle-e.g., sales forecasting,
production and inventory control systems, scheduling systems, MRP, etc. The utilization of these tools, however, led to significant
increases in middle management and overhead personnel, which themselves added still more time and cost to the operation of the
manufacturing process (Miller and Vollman, 1985). Costs that were embedded in surplus time in the system (e.g., inventory, expediting)
were hiddc:n by the traditional accounting system and allocated in with ( verhead -not the responsibility of the plant manager (Kaplan,
1986). Time is important for the traditional plant manager, but it's the immediacy of meeting today's production schedule within the time of
24 hours per day that is important. In order to "get the product out" in this scale of time, in fact, the quality of product, the maintenance of
the equipment, and the morale of the workers were routinely sacrificed. Because scrap/rework again went into overhead, new equipment
was an investment decision, and worker morale was not considered to be particularly relevant outside of union contract negotiations, this is
not surprising.
As overhead-intensive, economy of scale manufacturing operations in the United States began to be challenged by lower cost foreign
competition, one perceived solution was to reduce costs by eliminating possible sources of complexity and confusion and to simplify
manufacturing processes (Schonberger, 1987). One result of this trend was the focused factory or plantwithin-a-plant, in which smaller-
scale manufacturing systems focus on specific products at different stages in their life cycles, on key elements of production that are
important, and on a limited number of tasks that they can do well (Skinner, 1986; Hill, 1989). Although fOCUSing removed much
complexity and some overhead from manufacturing, at the same time it restricted the variety of products produced and the rate of change in
product design.
Today, much of traditional US manufacturing has been made less competitive by a combination of japanese manufacturing management
techniques and CIM technology, including familiar acronyms such as CAD, CAM, CAE, FMS, CNC, etc. (Society of Manufacturing
Engineers, 1987, 1988). There is much documentation of japanese manufacturing management and its accomplishments available
(Abegglen and Stalk, 1985; Schonberger, 1982; Weiss, 1984), and it need not be repeated here. An important point to note, however, is that
even before World War II, japanese manufacturing was moving in the direction of product variety and process flexibility without CIM
technology as the driving force. What are now known loosely as japanese management techniques were started and developed by Toyota
Motor Company as far back as the late 1930s (Ohno, 1978; Shingo, 1981; Monden, 1983). The 'Toyota Production System," as it is known,
was begun in order to introduce variety into economy of scale production systems. Taiichi Ohno (1978)' developer of the just-in-time
concept for Toyota, says in the preface to his book that:

The Toyota production system was born out of the need to develop a system for manufacturing automobiles of many different kinds in
small volumes with the same process.

Over a 30-year period, Toyota improved its manufacturing process step-by-step, guided by just-in-time and total quality control principles
that continually pushed inventory reductions and prevention of defects at their source.
What japanese manufacturing has done is to make traditional, manual production more flexible without the driving force of ClM
technology. These flexible manufacturing operations have resulted in increased product variety and reduced cycle time. However, this level
of improvement may be only the beginning. IfToyota and other japanese firms have achieved Significant benefits from flexibility without
using ClM technology, what more will they be able to achieve as they increaSingly apply CIM to their manufacturing and business
operations?
In too many instances, we in the United States have been arguing after the fact-for a change in competitive strategies based on the
flexibility inherent in CIM technology. Toyota and other japanese firms illustrate the potential power of the opposite approach -that firms
with competitive strategies already based on fast response and flexibility will find that CIM technology fits more easily and effectively into
their operations and has much greater impact.
Our belief is that the application of japanese management techniques and CIM technology to all aspects of manufacturing, including
physical process control, materials handling, production planning and control, and the entire knowledge work cycle of deSign, production,
and distribution, has begun to change the economics of manufacturing in some industries from economies of scale to include economies of
scope. Goldhar andjelinek (1983), for example, describe an "economy-of-scope" factory that can produce a continuous stream of different
product deSigns at the same (or lower) costs as an equal-size stream of identical products in the traditional technology factory with
economies of scale. The "economy-of-scope" factory derives its competitive advantage from the flexibility it has, and by the variety of
different tasks it can perform and the speed with which it can change product deSigns and production mix. Economies of scope allow a
relaxation of the traditional constraints of manufacturing, and begin to change the trade-offs between volume and variety, and between
costs and flexibility. In the "intelligent factory" of the future, variety and innovation will no longer have to be traded off against
productivity and will become instead the preferred way to compete in the evolving global marketplace for many consumer and industrial
products.
Advanced Manufacturing and Competitive Strategy
In order to compete with the Japanese, u.s. firms are going to have to take advantage of the opportunities that advanced
manufacturing flexibility provides and formulate and implement competitive strategies that are based on or feature advanced
manufacturing attributes. A linkage must be developed between production operations and technology and the competitive strategy
of the firm or business unit.
Many scholars (Christensen et al., 1982; Andrews, 1987; Chandler, 1962; Mintzberg, 1987, 1988) have contributed to the
concept of "strategy," but "competitive strategy" is a concept that is perhaps most closely associated with Michael E. Porter, who
expresses it as follows:
Essentially, developing a competitive strategy is developing a broad formula for how a business is going to compete, what its
goal should be, and what policies will be needed to carry out those goals (Porter, 1980, p.xvi).
Porter organizes the universe of competitive strategies into three generic types-low-cost leadership, differentiation, and focusplus a
dysfunctional "stuck-in-the-middle" category. Competitive strategies are implemented via "poliCies" that direct and govern the
functional activities of the firm such as R&D, manufacturing, marketing, and sales. Porter (1985) organizes all of the firm's
activities in his model of the value chain, and a firm gains competitive advantage by performing value chain activities cheaper or
better or differently than its competitors and by managing linkages among its value chain activities or between its value chain
activities and those of its suppliers or customers.
A framework for linking competitive strategy and advanced manufacturing has been developed and used by Schlie (1985, 1987)
in a number of studies of international competitiveness and a number of cases of successful implementation of advanced
manufacturing in U.s. firms. The linkage is built upon assuming that the generic goal of industrial firms in market economies is
competitiveness, and defining competitiveness as follows:

Competitiveness is the ability to get customers to choose your products or services over competing alternatives on a sustainable
basis.
The competitiveness of a firm is determined then by its customers:

Competitiveness is a collective decision made by the customers of products or services when they choose one product or service
over competing alternatives, for reasons which are satisfied by firms in applying their competitive strategies through the
implementation of functional policies.
The reasons why customers choose one competing product or service over others are competitive advantages, and one means of
achieving competitive advantage is through the manufactur-
J Busn Res 105
1995:33:103-114

ing function and the application of advanced manufacturing management and technology.
Schlie has developed a list of eight generic competitive advantages that can create customer value. In brief, customers choose one
product or service over competing alternatives because:

the price is lower;


the quality is higher, either
• higher reliability at a given level of performance, or
• higher level of performance; availability is sooner or reliably on time; customer service is better; attractiveness is greater;
awareness is greater; long-term relationships are important; or sOciopsychological-political-cultural factors are important.

Porter's low-cost leadership strategy operates through the competitive advantage of price, and differentiation operates through any
of the other seven. Customers usually set parameters for certain of the previous advantages (won't go above a certain price or below
a certain level of quality) and then shop around and decide on the basis of the advantage they value the most.
Schlie has used the above structure to study a number of cases of successful implementation of advanced manufacturing in U.S.
firms. These cases are used here to illustrate some of the above lineages between advanced manufacturing and competitive strategy.
Basic facts about the companies studied are summarized in Table l.
Company A is a large (Fortune 100) public firm involved in many businesses or industries. In this case, advanced manufacturing in
large, heavy defense products was the subject of the case, and the major processes were metal machining and assembly. Company B
is a medium-sized (annual sales in the hundreds of millions), privately held company making consumer products in the home
appliance area. The processes looked at in the case included plastic injection molding, small motor assembly, and final product
assembly. Company C is a small (annual sales less than $100 million), family owned (for most of its life) company making
complex, customized machinery components, and involved in custom metal machining and assembly processes. Company D is
again a large (Fortune 100) public company involved in many businesses. In this case, electronics assembly processes for the
manufacture of small, complex consumer products were the subject of the case study. Company E is a medium-sized, privately held
company making a Single consumer product. The processes examined in this case were metal machining of engine parts and engine
assembly. Company F is a large (Fortune 100) public company involved in a few, distinct businesses. The case dealt with defense
products and included metal machining of large heavy parts and composites structures fabrication and curing. Finally, Company G
is a large (Fortune 200) public company involved in many businesses/industries, including making parts for cer
Table 1. Firm Characteristics

Company Single/Multi Processes Ownership· Size Product Industry Firm

A Public Metal machining and assembly B Private Plastics molding, small motor assembly, and final
product assembly C Private Custom metal machining and assembly D Public Electronic assembly E
Private Metal machining and assembly F Public Metal machining; composites fabrication and
curing G Public Materials processing, forming, and fabrication

Large Medium Defense Multi Consumer Single Machinery


Single Component Consumer Multi Consumer
Single Defense Multi Consumer Multi
Small Large Medium Large Electronic parts

Large

, Two of the privately held companies had recendy gone through leveraged buyouts and are owned or controlled by management.

tain consumer electronics products. The processes studied in


the case included materials processing, forming, and fabrication.
In all of these cases, advanced manufacturing is an integral contributor to the achievement
of the companies' competitive advantages. In at least one case, advanced manufacturing is the
direct source ofcompetitive advantage. The competitive advantages achieved by these
companies are discussed and described later.
The threat of competition, domestic (companies B, C, and F) andjapanese (companies D,
E, and G), was the primary motivator for investing in advanced manufacturing. All of the companies, of course, in entering into their CIM
investments wanted to increase productivity, reduce inventory, reduce direct labor, reduce cycle times, increase quality, and so on, and all
of them achieved significant gains in these areas. Yet, when talking to executives in these companies, it was the threat of competition-
domestic and japanese-that was at the heart of their efforts.
The one possible exception was in the Company A defense products case. Competition does exist in defense contracting, but once a
contract is awarded the awardee has a clear advantage in continuing and enhancing its position as long as the military customer is satisfied
with its performance. In this case, the immediate and primary motivation for Company A investing in advanced manufacturing was to
achieve productivity gains and avoid investment costs otherwise necessary to reach substantial increases in output. The company was not
shy, however, about pointing out its achievements in quality and ontime delivery to its military customer, and in a fundamental sense was
working to preempt any competition.
In the Company B case, which concerned a consumer product in the home appliance area, advanced manufacturing was being used to
lower the cost penalty (and resultant price premium) associated with its focused differentiation strategy based on high product quality
(durability and ease-of-use) and brand name awareness. The strategy included not only the implementation of CIM technology to
significantly lower costs while maintaining/improving quality, but also a complete redesign of the product to both: (1) make it more
manufacturable and
(2) significantly improve it by cutting its weight almost in half and greatly enhancing its ease-of-use.
Company C was also pursuing a focused differentiation strategy based on product availability (lowering custom design and machining
cycle times) and enhanced customer service and responsiveness. Company Cs products are customized machinery components that can be a
critical part of OEM customers' machines. In this market, high quality in terms of dimensional tolerances and reasonable prices are
necessary just to be in the competitive ball game. Company Cs strategy included extensive upgrading, expansion, and integration of the
product design process, including the ability to store, catalogue, and retrieve design features so that not everything had to be designed from
a zero base, real time integration with CNC machining operations on the factory floor, and some integration with parts/materials inventory
and order processing. An additional element that was very intriguing was an expert system that customers could use to help in designing
their own, customized components.
Company D credits its efforts in advanced manufacturing for it being the sole remaining U.S. survivor-and world leaderin a product line
now otherwise dominated by the japanese. An advanced CIM system is simultaneously increasing the reliability of Company D's products
and enabling it to operate with a lot-size-of-one flexibility. In addition, order processing has been electronically integrated with the CIM
scheduling system, allowing production to order and shipment of one-of-a-kind products within 24 hours of the placement of the order The
combination of fleXibility and 24-hour production to order lowers costs significantly through inventory and paperwork reductions and by
preempting the possibility of order changes. Advanced manufacturing has also given Company D many options to pursue in
maintaining or increasing their leadership position in this product line.
Company E has in recent years competed on the basis of focused differentiation, based on the attractiveness of its product design
and its brand name image and allure. Yet, 10 years ago they almost went out of business due to japanese competition and problems
in their own manufacturing operations that were producing products with declining reliability at greater and greater cost. Advanced
manufacturing for Company E included very basic process redesign and control, quality control (SPC), and some new CIM
technology that lowered manufacturing costs and raised product reliability to the point where they now compete very successfully
with the japanese in their market segment.
For Company F, an aerospace major subcontractor, advanced manufacturing is their direct source of competitive advantage, their
differentiating uniqueness. In sum, they are pursuing advanced manufacturing to give them capabilities that no other competitor (or
prime contractor customer) has or can duplicate. These capabilities translate into higher quality (dimensional tolerances, for the
most part) at much lower costs that preempt competitive challenges.
Finally, Company G is pursuing advanced manufacturing just to be able to stay in the competitive ball game with the japanese.
The key to competition in this business at the moment is product reliability (number of defects), which is Significantly affected by
innumerable material and process variables in very demanding material process and forming operations. Advanced manufacturing
technology has lowered labor costs and cycle times, but mostly it has played an essential role in enhanced process understanding
and control-thereby lowering product defects. This saves scrap costs, but its real value lies in keeping very demanding customers
satisfied. At this point, Company G is trying to keep up with japanese product reliability, hoping in the future to be able to surpass
them and achieve differentiation on the basis of product innovation and customer service.
These cases also illustrate both the synergistic syntheSiS that exists between japanese management techniques and OM tech-
nology, and some potential dangers of blindly or superficially copying portions ofjapanese practices and pushing things too far. The
separate treatment ofjapanese manufacturing management techniques and CIM technology has been evident in many conferences
and publications that have addressed advanced manufacturing (Schonberger, 1982, 1986; Ciampa, 1988; Grieco, 1987; Hall, 1987).
Yet both japanese management and OM technology have in common a fundamental reason for being-i.e., flexibility. Moreover,
Ettlie (1988) has shown that the simultaneous adoption of technological and administrative innovation in manufacturing
-"simultaneous innovation" -succeeds to a much greater extent than technological innovation adopted without the accompanying
administrative changes. Most ofEttlie's administrative innovations would be considered japanese management techniques.
Schlie's cases also strongly suggest that U.S. firms which have successfully implemented CIM technology have also implemented
severaljapanese management techniques, either preceding or in parallel with the CIM implementation. In all of the cases, companies
had accepted and were emphasizingjIT, TQC, and various forms of workforce participation to varying degrees. Kanban (pull)
scheduling of production was less utilized, but is complicated by differences in manufacturing to order versus stock, and by
differences in capacity utilization and market demand among the cases (Schlie, 1989). Implementing these management techniques
successfully can lead to significant and immediate benefits in many U.s. companies. Indeed, in two of Schlie's cases where the
implementation of japanese management techniques preceded the implementation of CIM technology, there is the strong belief that
much of the bottom line benefits so far achieved have resulted from the management changes rather than the CIM technology!
When japanese management techniques are pursued blindly or superfiCially, however, some unforeseen problems can result-
particularly in reducing inventory and in raising quality levels. For example, automated CIM systems normally need higher
conformance quality parts/components so that feeders don't jam and parts can be assembled by robots. japanese practices in
"partnering" with vendors have demonstrated how the quality of incoming parts can be significantly raised and at the same time
costs lowered and delivery time improved. Yet some early attempts by U.S. OEM's to blindly implementjIT delivery from suppliers
only resulted injIT warehouses, declining conformance quality, and increased tensions between the would-be "partners."
Inventories do have a purpose. They function as insurance against the pOSSibility of running out of an item or material and the
resultant costs that would be incurred. Like any insurance, a premium in the form of carrying or holding costs must be paid. Surely
American manufacturing has been guilty of holding too much inventory insurance, particularly in WIP, and efforts to reduce this
insurance are prodUcing great benefits not only in premium reductions but also in identifying underlying problems and haVing the
chance to remedy them. But doing away with all insurance in the manufacturing process may be going too far.
What must be remembered is that reducing WIP leaves the process more vulnerable to things that can and will go wrong. The
japanese recognize this and make every attempt to foolproof their systems against disruption, and use warning lights and/or other
mechanisms to focus all attention on a processstopping problem when it does occur. They also, however, schedule their production
below full capacity so that if the process does go down, the day's schedule can still be met if the problem can be resolved.
More fundamentally it seems, the japanese have a "liberated" view of idle time -machine idle time or human idle time. They
accept it in the trade-off against lower WIP and higher quality. They do try to keep their people busy during idle times with routine
maintenance, housekeeping, training, and other skill enhancing activities, but they do not have a fetish for keeping machines or
people operating. Although some u.s. manufacturers may have accepted the wisdom of this approach in their head, it is still very
difficult for them to accept idle time in their gut. But until constructive idle time and scheduling below full capacity become part of
the JIT equation, a handbook approach to WIP reduction may run into problems.
Much the same thing may be true of the wholehearted endorsement of quality that is evident in many U.s. manufacturers today.
Considerable confusion exists between the ideals of defect-free conformance to quality standards and raising performance standards
or design specifications, particularly with respect to dimensional tolerances. In the first instance, quality may indeed be "free" as the
benefits of scrap and rework reductions, warranty cost reductions, and less customer dissatisfaction more than outweigh the added
costs of a zero defects investment. But raising performance standards -particularly dimensional tolerances-is a different matter.
Higher quality performance standards often can be achieved only at greater costs, and therefore must be examined in terms of
customer value. As one executive noted to Schlie, 'The dip stick hole (in an engine block) doesn't need to be drilled to the same
tolerance as the piston cylinders!"
When an unrestrained and unspecified drive for increased "quality" runs rampant however, this type of thing can happen. In one
of Schlie's cases, the company found that tighter dimensional tolerances deSigned by their engineers for a machined part to be
assembled into a product would result in 40 more minutes of machine time on a cutting operation. When they examined the need for
this tighter specification closely from the perspective of customer value and the conformance quality of the assembled product,
however, they found that any increases were irrelevant or negligible. In another of Schlie's cases, the only way in which progress
toward six sigma quality targets on dimensional tolerances of machined parts could be achieved was to redesign the total, assembled
product in such a way that the tolerance requirements of the individual parts could be relaxed!

New Directions for Competitive Strategy


As a result of extensive thinking about these and other cases that relate to interrelationships between advanced manufacturing and
competitive strategy, we offer here four additional considerations to be added to our previous discussion. These four additional
considerations are presented under the headings of: the dangers of differentiation; focusing on customer valued complexity; multiple
niche competition; and manufacturing competing as a service business.
Our thinking has been motivated in part by a set of factors that are related to developments in advanced manufacturing
T. W. Schlie and J. D. Goldhar

but are apart from them -factors that may constitute a discontinuous change in the business environment. Factors such as shorter and
shorter product life cycles, espeCially in high technology products; greater product diversity and variety serving markets that are
fragmenting into unprecedented niches, at the same time that global products and global markets are very popular terms; increasing
worldwide competition from diverse sources using diverse competitive strategies and tactics; widespread and increasingly fast
imitation (sometimes illegal) and improvement of products and processes; and increasingly sophisticated and demanding customers
that may nevertheless need more education and services to effectively use what they purchase.

The Dangers of Differentiation


In a recent article, Kenichi Ohmae (1988) took japanese businessmen to task for continuing to follow low-cost leadership strategies
based on economies of scale, learning curves, market share, and low prices. His basic point was that large parts of japanese industry
had progressed beyond the point where they needed to rely on low-cost-Iow-price strategies; they now had the capabilities and the
resources that afforded them the opportunity to play in the (implied) higher level strategic game of differentiation in which the
higher quality or the faster introduction and delivery ofjapanese products could earn them a price premium and much greater profits.
What causes some discomfort with this argument is the assumption that japanese success is built on a low-cost leadership strategy.
When one looks at the history ofjapanese competition in industry after industry, one sees elements of both low cost and
differentiation. japanese enter the U.S. television market with low price black and white TVs, but are the first to introduce solid
state electronics to color TV and to gain performance recognition in picture quality and product reliability.japanese motorcycle
manufacturers define new market segments in the United States, but they also outperform u.s. competitors and are sold at lower
prices. japanese automobiles enter the U.S. market with both high performance and low cost, win performance awards, and are
noted for their low defect rate, durability, and innovation. In case after case,japanese products appear to exhibit aspects of both
differentiation and lowcost leadership!
According to Porter (1985, p. 13), it is only "rarely possible" for a firm to successfully pursue more than one generic competitive
strategy at a time -Le., to be both a low-cost leader and differentiated. To some extent there may be lOgical explanations for this
seeming inconsistency, but still the nagging question remains: the japanese seem to be able to produce many goods at less cost than
we can, and at the same time they also seem to be continually raising product performance levels (almost always a trade-off with
costs), introdUCing more new products faster, and often supplying better customer service along with the new products! How can
they achieve both low cost and differentiation at the same time?
Several of Schlie's cases raise the same questions. Some of them (Companies B, C, and E) are pursuing strategies that can be
adequately described and explained in traditional Porter terms of focused differentiation. But in other cases (Companies A, D, and
G), Porter's terms do not work so well. (Company F will be discussed later.) In each of these other cases, the companies seem to be
pursuing both low cost and several aspects of differentiation such as higher performance, greater reliability, or faster delivery, either
to preempt or catch up with competition.
This seeming paradox can perhaps be resolved if we pay more attention to two important details about differentiation and low-
cost leadership that Porter mentions but which are often overlooked or underappreciated. The first detail is that a "uniqueness" is the
heart of a differentiation strategy. Uniqueness is probably a little bit like pregnancy-a firm's basis for differentiation is either unique
or it's not; it's hard to be a little bit unique. Moreover, the standard for being unique is rather rigorous-as soon as one other
competitor has the same or a similar uniqueness, it is no longer unique!
It is true that Porter's (1985, p. 37) exact words refer to something that is "perceived ... [by the customer] as being unique."
Nevertheless, with increasingly sophisticated customers and widespread competition, perceptions of uniqueness must be
increaSingly corresponding to reality. (One exception to this may be brand name identity or image as a source of perceived
uniqueness, one aspect of the awareness competitive advantage.)
The second detail that Porter (1985, p. 13) points out is that the successful low cost competitor cannot reduce the differentiation
parameters of competition below a threshold of comparability or acceptability held by customers-i.e., in terms of reliability,
performance levels, availability, customer service, etc. that cannot fall below acceptable levels as perceived by the customer. If they
do, the low-cost competitor becomes regarded as a discount competitor or a manufacturer oflow-quality goods.
Whereas Porter warned against low-cost leaders falling beIowa customer threshold of acceptability/comparability, it is also clear-
particularly in recent years-that US customers' expectations of what constitutes acceptable levels of quality, delivery, service and
other differentiating parameters have been significantly riSing-often being driven up by foreign competition.
Thus a great deal of competition that at first appears to be based on differentiation because it involves higher performance levels
or new features, may actually be low-cost competition at increaSingly higher thresholds of acceptability for differentiation
parameters valued by customers. This interpretation helps to explain how the Japanese and some of Schlie's cases are competing in
terms of competitive strategy. These companies are continuously leaders in offering unique advantages in quality, delivery, service,
and other differentiating features, but instead of competing on the basis of differentiation and seeking a price premium for their
customer-valued uniqueness, they prefer to convert their uniqueness into an ever higher threshold of customer acceptability and
compete on the basis of low cost-low price at that threshold. By continuously raising the customer
J Busn Res 109
1995:33:103-114

threshold of acceptability and competing on low cost-low price, these companies accomplish two things:
1 They preempt any competitor from imitating a differentiating uniqueness and catching up. The competitor must also be
able to do so at low cost or lose money on each transaction. Faced with companies who are continuously offering higher quality,
faster delivery, better service, or other differentiating features at a low price, competitors often give up in despair of ever catching
up to-let alone surpassing-this type of juggernaut.
2 They avoid a key danger of differentiation that occurs as soon as competitors have successfully imitated the uniqueness on
which the differentiation strategy is based. At that point, competition returns to cost-price. When the basis for competition suddenly
changes from differentiation to low-cost leadership in these situations, the pioneer who, for a time, was uniquely differentiated may
be ill-prepared to make the switch. Companies who avoid this danger are not faced with the wrenching change of converting their
corporate culture, their method of operations, their control and reward systems, etc. from those of a differentiated competitor to
those of a low cost competitor.

In reflecting on the dangers of differentiation, it would appear that we in business/management schools have played a part in
perhaps overemphaSizing the importance of differentiation strategies and underemphasizing low cost leadership. For example, in an
earlier article, we (Schlie and Goldhar, 1989,
p. 38) had argued that:
1 ClM technology greatly enlarges the scope of differentiation possibilities -the scope of competitive advantagethat can be
achieved through manufacturing; and at the same time.
2 ClM technology, because of its flexibility, lowers the cost penalty for differentiation achievable through manufacturing-in
some cases may lower it on a par with or below the costs of a large scale competitor pursuing a low cost leadership strategy with
dedicated automation technology.

It is differentiation that has captured most of the attention, the glamour, the creativity of the academic community; low-cost
leadership has a more mundane, grubby quality. Perhaps this article will stimulate new interest in this area.

Focussing on Customer-Valued Complexity


Our second consideration concerns the extreme devotion to Japanese manufacturing management techniques exhibited by some
experts in the field -and in particular the prescription for process "simpliCity." As indicated earlier, the Japanese developed and
implemented their manufacturing management systems over a long period of time. Emulating what they accomplished 20-30 years
ago may be a necessary condition to compete, but is is far from sufficient. Those, in particular, who focus exclusively or primarily
on "simplicity" (Schonberger, 1987) are in danger of fighting the competitive war of the future with the weapons of the battlefield
of 20-30 years ago.
There is much to gain from applying japanese management principles like just-in-time production and total quality control, and
because we can learn from mistakes the japanese made it need not take us nearly as long to put them effectively into practice.
Moreover, the big gains from these techniques undoubtedly occur toward the beginning of their effective implementation. The
japanese may strive for continual improvement in reducing work-in-process or product defects, but the law of diminishing returns
suggests that their marginal gains will be increasingly smaller as they approach zero inventories or zero defects.
The concept of simplification, however, is more problematic and is a two-edged sword. Simplification is necessary for manual
production systems. It is necessary for employees to understand the system and to participate in making it operate more effectively.
It is necessary because the data processing capacity of the human brain is limited in terms of both the amounts of data it can retain in
memory and its speed of processing. The more complex the process, the more the data and the faster that data needs to be processed
in order to keep the process under control. Humans simply can't handle it.
Computers, however, can not only handle large amounts of data and high rates of data processing, that is their strength! It is true
that applying CIM automation to traditional manufacturing processes that are not under control and plagued with waste, long cycle
times, and missing or inaccurate data has been notoriously unsuccessful. As anyone familiar with the GIGO phenomenon can attest
to, in this kind of situation the computer will only get you the wrong answer faster or perform a non-value adding activity more
preCisely. Therefore simplication of the process is often prescribed as being a necessary precondition to CIM automation. This
simplification is not for its own sake, however, but to get processes under control and make them waste-free, timely, and accurate
before applying CIM automation. To argue for Simplification for its own sake ignores perhaps our nation's greatest asset in
manufacturing-our technolOgical strength in computers, software, and information technology in general.
Moreover, a simple manufucturing capability is likely to be able to be simply copied -and gone one better by a competitor who
does take advantage of the strengths of computers and information technology. Focusing on the manufacture of products that
reqUire complex CIM processes in order to make them, however, can be a way to achieve and sustain competitive advantage. As
the President of Rogers Corporation is quoted as saying in a Harvard Business School case (March, 1985):

We don't want to do something anyone can do; we look for things that are complex to make and which require sophisticated
manufacturing methods.
In order for this to happen, of course, we must move from manufacturing engineering to manufacturing science so we
know why and how-in addition to what-fabrication and as sembly phenomena occur. We must also be able to transfer this
knowledge to software code, and to have the sensors and feed back controls, the tooling, the clean rooms, and so forth, that
will enable us to create these systems of the future.
But these are the areas in which we need to be fOCUSing our firms' and our nation's efforts-not on Simplicity. Process complexity,
of course, must be used to produce unique customer value in product form. No amount of high-tech sophistication will work if
customers don't value what is being produced, and if the same customer value can be produced with a simpler process, there is no
advantage in complexity. But some markets appear to be fragmenting and the scope of customer values that can be economically
satisfied through computer controlled complex manufacturing processes is growing ever larger.
Such process complexity, once put into place and operating effectively, may even-in the future-turn around the traditional logiC of
new product development project selection. Traditionally new products have been identified based on the firm's perceived product
design or market strengths. Advanced manufacturing today means designing those new products to be manufacturable. In one of
Schlie's cases, however, the existence of a successfully operating CIM/FMS system had prompted the firm to approach new product
identification from the other direction -i.e., to ask, what other products could we make on our CIM/FMS system that are or would
be difficult to make using traditional manufacturing technology?

Multiple Niche Competition


Although Porter, as indicated earlier, spoke of three generic competitive strategies-Iow-cost leadership, differentiation, and focus-
we argue that the focus strategy is more an element of competitive scope than a strategy in and of itself. The initial two strategies
were actually industrywide low cost leadership and industrywide differentiation, whereas the so-called focus strategy was
subsequently divided by Porter into focused lowcost leadership and focused differentiation. Therefore, Porter's framework of
generic strategies can be more profitably viewed in terms of two generic strategies -low-cost leadership and differentiation -applied
to two competitive scope situationsindustrywide competitive and focused competition -see Figure lA. In this section of the article
we propose to add a third competitive scope situation, that of multiple niche competition (Lei and Goldhar, 1990)-see Figure lB. We
will also argue that flexible CIM manufacturing applied to multi niche competition situations-particularly across product lines or
industriespotentially allows the firm to Simultaneously achieve low-cost leadership and differentiation.
Traditional businesses and factories emphasized mass production economies of scale or batch production/customized job shops with
little or no economies of scale. Economies of scale are well-known. As mentioned earlier, advanced manu
Figure 1. Porter's generic strategies.
A: Porter's Generic Strategies Revised

B: Porter's Generic Strategies and Multi-Niche Competition

Low Cost ~ Scope Leadership Differentiation Industry-Wide Focus facturing-the application ofjapanese management
techniques and ClM technology-potentially enables the
creation of economies of scope which, however, are not
so well-known.
Economies of scope are defined as cost savings that
result from multi product manufacturing systems (Panzar
and Willig, 1977). Advanced manufacturing flexibility
gives firms the ability to produce one-of-a-kind products
within the parameters of the ClM system with little or not
cost or time penalty. If markets are found or created that value one-of-a-kind customization, the flexible manufacturer can strive to
supply such customization more rapidly than any competing supplier and so achieve focused differentiation. Thus ClM flexibility
offers both the competitive advantage of availability
~ Scope Low Cost Leadership Differentiation Industry-Wide Focus Multi-
-haVing a customized, one-of-a-kind product available to
the customer sooner than competing suppliers-and the
Niche Competition lowering of costs through economies of scale and scope.
Economies of scope can be expressed in many
different ways. Because a CIM system can switch from
one product design to another (within the parameters or
envelope of the system) with little or no cost or time
penalty, the risk that an investment in a high volume plant
might be made obsolete by sudden changes in market
demand is considerably reduced. If manufacturing to
order is possible, firms can produce in lot sizes of one,
have
J Busn Res III 1995:33: 1
03-114

zero finished goods inventory, and still meet qUick delivery requirements. The downside of the level scheduling trade-offthe
accumulation of finished goods inventories to handle seasonal fluctuations in demand-can now be avoided by the judicious selection
of a product mix whose individual demand patterns are complementary and can be varied without cost or time penalty.
It is important to note that economies of scope are not necessarily achieved at the expense of economies of scale. Ifthe range or
number of different products made on a flexible ClM system is great enough, even at low volumes per product, the total output of
the system can be quite large. Thus, the broader the variety capability and the faster the response speed of an operation, the greater
the scale economies it is possible to achieve. In other words, high levels of economies of scope can result in higher levels of
economies of scale, as high as would be possible in a traditional factory. In addition, flexibility and speed in themselves may have
scale economies-i.e., more flexible machines and faster information systems combined with more responsive organization structures
may achieve a decreasing cost per "unit of variety." Therefore, a ClM manufacturing system with a high degree of strategic
flexibility may exhibit significant synergy between economies of scale and scope.
Studies in economics have recently begun to show that firms wishing to maintain a strong competitiveness in manufacturing must
plan for economies of scope, economies of scale, and a responsive organization simultaneously to achieve the full benefits of ClM
technology. Milgrom and Roberts (1990) note that:
the "Cluster" of characteristics that are found in technologically advanced manufacturing firms include rapid explOitation of
mass data communications, production equipment with low set-up and changeover costs, versatile design technologies, very low
levels of inventories and short productions cycle times ... "clustering" is no accident. Rather, it is a result of the adoption by
profit-maximizing firms of a coherent business strategy that explOits complementarities, and the trend to adopt this strategy is
the result of identifiable changes in technology and demand.
"Complementarities" in this sense can exist in the ClM environment across product designs.
In multiple niche competition, the full advantages of economies of scope and flexibility can be seen. The flexible multiple niche
competitor will be able to serve a narrow market segment (even perhaps a segment of one!) ata low cost, benefiting from the price
premium that can be obtained when a product is differentiated by most closely fitting its design to the needs of the customer
(especially if designed by that customer!) and availability. By serving many small segments, the ClM-based business will also
benefit from the economies of scale resulting from high cumulative volume, and economies of scope resulting from the variety of
products. The combination of high prices and low production costs could potentially result in very high profitability, sustainable
over an extended period as the fast response part of the equation allows the firm to cater to multiple simultaneous niches and exit from
low profit ones as market conditions dictate. Thus the lack of a boundary line in Figure 1B between low-cost leadership and differentiation
for multiple niche competitive scope.
Strategies based on multiple-niche competition thrive upon the high-quality proliferation of numerous product designs, rather than a
standardized design that is easy for competitors to imitate. Moreover, the creation and possession of a vast range of product families or
groups driven by CIM technology help provide the firm with a competitive buffer from any competitors' incursion into anyone niche. To
some extent, however, the benefits to the multi niche competitor depend on whether the niches are within one business or product line, or
extend across business or industries.
In a recent report to the Center for Innovation Management Studies, Sanderson and Uzumeri (1990) describe an example of the first
kind of multiple niche competition -the Sony Walkman. In 1979, when Sony first introduced its Walkman to the market, there was one
standard product. By 1990, Sony had introduced over 160 different models of the Walkman into the market to appeal to different customer
tastes, requirements, and price ranges! The differentiation advantages of customization in a fragmentable market went hand in hand with
the advantages of flexibility and economies of scope.
The benefits from multi niche competition should increase as the niches are spread across businesses and/or industries, based on core
competencies in markets, products, or technologies. For example, Prahaled and Hamel (1990) describe 3M as being strong in every market
niche that is related to the production and use of adhesives, tapes, films and abrasives. The company consistently invests in new generations
of products and processes to preempt and to meet competitive challenges as well as unforeseen market changes. They also refer to Canon,
whose automated plants are able to produce a wide variety of fax machines, cameras, and personal copiers. The technology base underlying
all three products rests on fine optics and machine design.

A Service-based Competitive Strategy for Manufacturing Firms


This article highlights the extent of the departure from traditional practice that advanced manufacturing management makes possible.
Investment in CIM technology will provide acceptable returns, however, only if flexibility exists throughout the organization embracing
engineering, distribution, and other functions (Stalk and Hout, 1990). Taken together, these changes may constitute a shift from "industrial"
manufacturing to something far more "service based" (Goldhar, Jelinek, and Schlie, 1991). In this new manufacturing environment a
factory is "user transparent" to the product designer, the marketing department, or even the customer (Goldhar, 1985).
From a historical point of view, manufacturing originated as a service business-for example, the cobbler who crafted a pair of shoes for
your feet only. This was, of course, a high-cost way of doing things. So manufacturing-starting with the making of pins-became
"industrialized" with the mass production of standardized products. Customers were willing to accept standard products, either because
there was little value to be had from customization, or the cost advantage was so great as to overwhelm any benefits from customization.
This concept of industrialization is not limited to physical work. Today we see many examples of the industrialization of "services" and
knowledge work with similar problems of failure to respond to change and the loss of flexibility. The constraints of industrialization are not
limited to the factory and the concept of a service business can be applied to physical production as well as knowledge work. This further
emphasizes the power of economies of scope, which can apply to both information work in banks, offices, etc. and to CIM based factories
(Quinn and Gagnon, 1988).
Consider, for example, the industrialized tennis shoe or "sneaker" of 30 or more years ago-a mass-produced, standardized item used for
very specific and limited activities. Today we have moved from this tennis shoe/sneaker to a wide range of high-tech, intenSively marketed
athletic shoes. And consider the potential athletic footwear operation of the future, which supplies customized footwear for basketball,
tennis, hiking, skiing, skating, golfing, football, or soccer. When I go into this store to purchase ski boots, the attentive sales person wants
to know my skill level (expert, intermediate, beginner), my weight, height, and body frame, whether I intend to ski on the East Coast or in
the Rockies (ice vs. snow), and -in the case of the Rockies-whether I will ski on packed snow, powder, or both. The salesperson will then
put me in a simulation room, placed in sensorized boots on a tilting platform, and ask me to ski down a simulated mountain. These data are
all fed into a CAD program-Oh, and what color did I want?-and 20 minutes later my individually customized ski boots come off the CIM
system located in the back room. As I leave, I am reminded that updating my boots on an annual basis is possible through an extended
service plan and that recycling refunds for used boots are available.
As we examine this and other examples we can construct a set of characteristics of service based competition as follows:
1 High variety to the extent of customization of product design for each customer
2 Rapid adoption of new technology and production
3 The integration of physical work with knowledge work and management decision making at a Single point of contact-either
human or machine or combination
4 Fast response time-short production cycles
5 Close linkage between producer and customer-very direct distribution channels
6 Flexible pricing and negotiated (contractual) relationships
7 High-information content transactions between supplier and customer
1 long-term relationships in which both supplier and customer "learn" and become more efficient in their transactions with
each other
2 Customer participation in the design of the product
3 Zero finished good inventory

One could imagine "grading" a business against each of these variables on a scale from 1 to la, from a "pure" service to a totally
"industrialized" business. We argue that the more manufacturing firms compete as a service business, the harder it is to imitate and
the more likely it is that the firm can create and sustain a competitive advantage, thus securing long-term profitability in the global
marketplace.
The service basis of manufacturing competition is a customer-oriented focus that shifts competitive advantage from factor costs
to the firm's ability to innovate and to identify customer needs. CIM technology makes it possible -by enabling high variety and
responsiveness. Competition makes it necessary.
A prototypical example of a manufacturing firm competing as a service business is Schlie's case of Company F, earlier described
as an aerospace major subcontractor for whom advanced manufacturing is the direct source of their competitive advantage, their
differentiating uniqueness. This company competes as a supplier of manufacturing services to their customers-they can produce
parts and subassemblies faster, to higher design standards, and at lower cost than can any competing supplier or their customers
themselves. They compete not only through manufacturing, however, but through very close customer (and the customer's
customer) contact and being able to foresee what the customer will need in the future and taking steps now to be able to supply that
need when the time comes. Company G is moving in a similar direction.

Summary and Conclusions


In this article we have attempted to summarize the changes that are occurring in U.s. manufacturing as a result of the application
ofJapanese management techniques and OM technology. Such changes are resulting in greater process flexibility, product variety,
throughput speed, and customer responsiveness capabilities than have been imagined heretofore. In order to explOit these new
manufacturing capabilities in commercial markets, however, a link must be forged between advanced manufacturing and
competitive strategy.
Porter's framework for describing generic competitive strategies in terms of low-cost leadership, differentiation, and focus is a
useful way to begin looking at this linkage, and several cases of successful implementation of advanced manufacturing in U.S.
companies are examined in this light. A closer examination of these cases and a deeper understanding of how companies are
actually competing, however, lead to some new directions we propose for further thinking regarding advanced manufacturing and
competitive strategy.
Specifically, we point out the dangers of differentiation and
the advantages of pursuing low-cost leadership at increaSingly J Busn Res 113 1995:33:103-114

higher levels of customer acceptability; we point out the opportunities available in fOCUSing on customer-valued complexity that
takes advantage of the strengths of computer and information technology; we propose multiple niche competition as an addition to
Porter's competitive scope situations and point out the potential for economies of scope, the synergy between economies of scale
and scope, and the simultaneous achievement of both low cost and differentiation; and finally we point out how advanced
manufacturing can enable companies to compete as a service business.

The authors gratefully acknowledge the support and cooperation of the WoodPrince Trust, the Automation Forum, and the Center for Innovation Management Studies
at Lehigh UniverSity in furthering their research.

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