La Lettre du GERPISA

no 119 (janvier 1998)

Débat - Takahiro Fujimoto

A Case of the Capability Evolution: Toyota and Japanese Auto Industry

The Japanese auto industry faced a series of problems in the first half of the 1990s, however: labor shortage became a critical issue around 1991; post­bubble recession negatively affected Japanese domestic sales and profitability in 1992; loss of cost competitiveness due to further appreciation of yen, Western "reverse catch­up" and continued trade friction mainly with the U.S.A. decreased exporte of Japanese motor vehicles dramatically, after 1993 (production overseas increased accordingly). After all, the Japanese auto industry was experiencing a transition period from the era of continuous growth to the era of fluctuation in domestic production volume, which would be the basic pattern of competitive environments for the Japanese auto industry toward the next century.

As the 40 years of continuous growth ended, certain problems of the existing growth­oriented system surfaced in the early 1990s. First, employee satisfaction of direct productive work (if not human resource management in general) had not been explicitly pursued by the Japanese auto makers, unlike their tenacious pursuit of customer satisfaction, which resulted in insufficient attractiveness of work places (assembly lines in particular), increase in employee turn over ratio, and difficulty in recruiting young people as permanent workers.

Second, although production­development­procurement systems of the Japanese auto firms remained " lean " (efficient, quick and flexible) in the 1990s, certain inefficient factors (or fat) also surfaced as Japanese competitive advantages shrunk: fat product designs, fat plant designs, fat distribution systems, and so on.

To sum up, the growth­oriented system that the Japanese auto industry had built up until the 1980s created some problems of imbalance, including imbalance between employee satisfaction and customer satisfaction, imbalance between lean elements and fat elements coexisting in the total system, as well as imbalance between ability to handle inter­firm competition, cooperation and conflicts. These problems already existed potentially in the 1980s but did not surface because of the continued growth; they were finally revealed as the growth era ended. Thus, what they need toward the 21th century would be a balance­oriented system that can still maintain the strength of so­called lean system of the 1980s. The author calls this trend "from the lean­on­growth system to the lean­on­balance system" (Fujimoto, 1994a, Fujimoto and Takeishi, 1994).

An Example: "Fat Product Design" Syndrome

The " fat design" problem and the firms' effort toward "lean product design" is one of the most important parts of the Japanese companies' efforts to alleviate the fat­lean imbalance mentioned above. "Fat design," refers to a problem that the Japanese auto makers faced in the late 1980s to the early 1990s, including excessive levels of product variety and model change frequency, as well as too many model­specific parts, over­quality, and overspecification of their products.

Many researchers and practitioners in the Japanese auto industry have regarded "fat design" as a main cause of overload for product engineers and erosion of their cost competitiveness since the beginning of 1990s. Accordingly, design simplification, or "lean design," turned out to be the most effective means for cost reduction of this period. The lean production system needed to be accompanied by "lean product design."

In fact, the Japanese firms of the mid 1990s seem to be moving on this direction. For exemple, a majority of cost reduction at Toyota and other Japanese auto makers in 1993 to 1994 was contributed to by design simplification, as opposed to reduction of overhead, reduction of capital investment, or Kaizen activities. Thus, by the mid 1990s, "lean product design", or design simplification, had in fact become a main source of cost reduction for the Japanese auto makers struggling to regain their cost competitiveness.

However, there have already been some cases in which excessive simplification of the new models, which apparently resulted in loss of product integrity, lack of product differentiation, perceived deterioration of design quality, etc., created customer dissatisfaction and loss in market share, despite their competitive prices. This seems to indicate that lean designs actually involve a subtle balancing and that there is always a risk of overshooting on the other direction, or over­simplification of product design.

What made this challenge of design simplification more difficult to cope with was, as pointed out before, the fact that consumeras expectations on product integrity (i.e., total product quality) and fundamental (not superficial) variety continued, as the evolutionary view predicts. Once the consumers experience a product of high product integrity and design quality, for exemple, they tend to set their reference points based on these products. Thus, consumers' expectations on price tend to fluctuate as their budget constraints changes between booms and recessions, but their expectations on total product quality tend to stay at the high level even after the boom period is over. To sum up, one of the most powerful prescriptions or the Japanese auto makers to overcome their problems of the mid 1990s was "lean design."

Interpretation: An Evolutionary View

How can we interpret what I just described - the fat design syndrome in the early 1990s? Without getting into details, we can examine three different hypotheses: "adaptation to the bubble environment", "mis-adaptation to the post-growth environment", and "over-adaptation to variety and integrity".

While all these hypotheses seem to be able to tell at least a part of the story in a complementary manner, my judgment is that the third "over-adaptation" hypothesis is the most consistent with the above description (for further details, see Fujimoto [1997]).

For exemple, the most effective prescription to the "fat design" problem seems to be neither a simple matter of "going back to normal" as "adaptation to the bubble" hypothesis would prescribe, nor "changing everything" as "mis­adaptation to the post growth" hypothesis would propose. A more subtle balance was needed as the firms had to simplify their product designs without sacrificing fundamental product differentiation and product integrity - the "over­adaptation" hypothesis based on an evolutionary perspective.

The "over­adaptation" hypothesis, just like "mis­adaptation" hypothesis, analyzes the "fat design" syndrome as a long­term problem related to the limit of the growth­oriented system. Unlike the latter, however, the over­adaptation hypothesis does not reject the entire capabilities of the 1980s as totally obsolete. Instead, it argues that the set of product development capabilities that the Japanese auto makers accumulated up to the 1980s (e.g., variety expansion, frequent model changes, unique parts designs, a high level of quality and flexibility, etc.) are still contributing to their competitive advantage in the 1990s, because the market needs that emphasizes fundamental product variety and product integrity still continues despite the end of the continuous growth era. That is, whereas the "mis­adaptation" hypothesis emphasizes discontinuity between the 1980s and the 1990s, the "over­adaptation" hypothesis recognizes their continuity in terms of variety, uncertainty, change, and sophistication of the customer needs (Clark and Fujimoto, 1991): The era of growth ended, but the era of variety and integrity continues. The real problem was, according to this view, that some firms accumulated and utilized the very capabilities that contributed to their competitive advantages excessively, so that its side effects surfaced.

Why does such overshooting happen? This hypothesis argues that there is a certain process through which those firms with relatively high dynamic capabilities tend to over­accumulate or over­use their organizational capabilities. Business firms compete not only by price setting in the short run but also by capability building in the long run. Under intense pressures of such a dynamic competition, a firm tends to accelerate its efforts to outperform its rivals in the pace of capability building. The firm, however, know in advance neither the level of the competitors' capabilities, nor optimal lever of the capabilities that the market calls for. As a result, the firms that outpace the others in the capability building race also tend to suffer from side effects of over­adaptation. We will analyze this dynamic process of overshooting in further details in the next section.

In summary, all of the three perspectives described above seem to be able to explain at least part of the fat design phenomenon. The bubble economy, the post­growth transformation, and the overshooting - all seem to have influenced the fat design syndrome. However, the current paper will focus on the third interpretation, the "over­adaptation" hypothesis backed by resource­capability­evolution perspective.

The "adaptation to the bubble" hypothesis certainly explains part of the story, but it fails to distinguish long­term market evolution toward higher variety and sophistication of customer needs on the one hand, and short­term deviation from the regular evolutionary path (i.e., "bubble") on the other hand, and overlooks the former effect. As a result, this view tends to over­emphasize the negative impact of the "bubble" market and simply reject the fat design as something abnormal. The actual process appears to be more complicated and dynamic than this interpretation, though. It cannot explain why the tendency of the Japanese firms toward higher variety and frequent changes existed prior to the bubble era, either.

The "mis­adaptation to the post­growth" hypothesis is also persuasive in certain aspects, particularly in that it interprets the fat design syndrome in a broader and long­term context of "the limit of the growth-oriented system" in the post­growth. The end of the continuous growth was certainly an important factor that triggered this problem. The sharp dichotomy that this interpretation agues between the growth system and post­growth system may be problematic, though. Such a black­or­white view may be too extreme and too simplistic to explain the complexity of the phenomenon in question. This view, for exemple, cannot explain why the Western auto firms are still trying to catch up with the Japanese firms in both performance and capability even in the mid 1990s (Clark and Fujimoto, 1994; Fujimoto, 1996; Ellison, et alii., 1995). This fact indicates that most of the capabilities of the Japanese auto makers of the 1980s are not still obsolete in the arena of international competition, but the hypothesis that the Japanese system in the 1980s became totally invalid cannot explain such facts.

Thus, the over­adaptation hypothesis, which seems to be most relevant in explaining the apparently complex process through which fat product design emerged.

Evolutionary Capability: A Key for Dynamic Competition in the "Case 1" Industry?

If a pattern of industrial evolution follows "type 1" (e.g., the automobile), with stable and integral product architecture, international competition, Japanese enjoying competitiveness in the 1980s, what is the necessary competence that the companies need to possess in order to cope with the external shocks and crises in the 1990s and beyond? My argument is that a certain dynamic capability of capability­building which I call evolutionary capability, is the key for survival and growth where the pattern of industriel evolution is emergent and muli­path (the following section is based on the discussion in Fujimoto [1997] ).

I have explored evolutionary patterns of the manufacturing development system of the Japanese auto makers (Toyota in particular) in recent years (Fujimoto, 1994b, 1995). The present paper can be regarded as an extension of this historical analysis, which was motivated by the following basic observations:

• Many of the capabilities were gradually acquired by the competing firms throughout the post­war period, particularly between the 1950s and 70s. There was apparently no grand strategies on the sequence of capability acquisition. It was rather a long­term evolutionary process.
• Some aspects of the capabilities of the effective development­production systems were found at the Japanese makers in general. Some other aspects of the capabilities were found only in certain manufacturers known for its high competitive performance, typically Toyota. Still other aspects of the system were generic, or common with automobile mass producers worldwide, in that they all introduced some elements of the standard Ford system directly or indirectly.

Historical analyses on some major components of the system revealed that the development-production capability of the effective Japanese auto makers gradually emerged as a result of complex interactions of entrepreneurial visions, historical imperatives, inter­firm and inter­industriel transfer of resources and practices, pure chances, as well as the firms' own evolutionary capability. The study clarified that the Toyota­style manufacturing system of the 1980s were formed not by ex­ante rational decision makings of the founders-entrepreneurs of the companies, although the resulting system may have been ex­post rational.

Historical Imperatives by Forced Growth and Flexibility: Some of region-specific imperatives that all the Japanese firms faced during the post­war era almost "forced" them to make certain responses, some of which turned out to be contributing to competitive advantages of those firme. Many of such responses were not recognized as competitive weapons when the forms first adopted them. Likewise, the imperative of forced flexibility in the fragmented market also benefited the Japanese firme. This is partly because of the region­specific patterns of industrial growth: a rapid production growth accompanied by rapid product proliferation. The flexibility that the firms acquired tended to be recognized as necessary evil to cope with the fragmented market, rather than a measure for international competition, when the capabilities were first built.

Benefits of Historical Imperatives by Lack of Technology: While excessive use of high­tech automation equipment often became even obstacles against productivity improvement, the effective Japanese makers apparently avoided such problems. This may be partly because they consciously rejected the temptation for over­specialization, but it also seems to be partly because high technology was not there in the first place. To the extent that this was caused by certain region­specific technology gaps, the lack of technology may bring about unintended competitive benefits to firms of a region.

Knowledge Transfer from Ford: Toyota's capability building was consistently motivated, since the 1930s, by perceived competitive pressures from the U.S. mass producers, particularly Ford. Even with strongly protected domestic market between the 1930s and 50s, Toyota's consciousness of the imaginary competitive pressures persisted. Motivated partly by the above consciousness of international competition, Toyota adopted many elements of the Ford system and American mass production system mostly indirectly, including moving conveyers, transfer machines, product and component designs, Taylor system, supervisor training program, and statistical quality control. Pure dichotomy between Ford system and the Toyota system as the post­Ford paradigm is therefore misleading.

Transfer from other Industries: Some of the linkages to other industries, which were technologically advanced in the past, may be firm­specific. For example, Toyota's inherent connection with the textile industry may have facilitated knowledge transfer from it (particularly through Taiichi Ohno) created its competitive advantages in production control techniques

Unintended Transfer: As in the case of engineers from the prewar aircraft industry, who were pushed into the auto industry as the former collapsed after the war, a knowledge transfer, which the receivers did not intend to make, brought about rapid increase in automobile technologies and product development systems of the post­war automobile industry in Japan.

Incomplete Transfer: Although the Japanese auto firms tried to adopt many of the practices and techniques from the US mass producers (i.e., Ford system), some of them were incomplete due to the historical imperatives and lack of the firms' absorption capacities. In this sense, Kanban system may be regarded as incomplete version of the conveyer system, U­shape machine layout as incomplete transfer machine, and Jidoka as incomplete adaptive automation. The very incompleteness of the transfer may have facilitated its subsequent diffusion to the entire system. For exemple, the case of Kanban system may be regarded as complete diffusion of incomplete synchronization technology.

Self­fulfilling Visions: Firm­specific entrepreneurial visions sometimes played an important role in building distinctive development­production capability. This was particularly the case when an apparently unrealistic visions that go against common sense triggered self­fulfilling efforts for achievingt he bold objectives. Kiichiro Toyoda in the 1930s and 40s played a pivotal role in this sense in advocating cost reduction without economy of scale, catch­up with Ford, and Just­in­Time philosophy. Nissan of those days did not have his counterpart.

Ex­post Dynamic Capability: Even when no firms recognized potentiel competitive advantage of the new system when they first tried it, some firms could still create firm­specific competitive advantages by exercising post­trial capability: by recognizing the potentiel competitive advantage of the new system, modifying it to exploit the potentiels, institutionalizing it, and retaining it until the advantages are realized. For exemple, even though all the Japanese auto makers faced similar environmental pressures for adopting black box parts system in the 1960s, only Toyota appears to have created a system that could fully exploit potentiel advantages of this practice. Although all the Japanese auto makers accepted aircraft engineers after the war, Toyota was the only company that institutionalized heavy weight product manager system that was prevalent in the aircraft industry. Thus, even when all the Japanese firms faced certain historical imperatives that facilitated new practices, only a part of them may have materialized this potentiel luck by employing firm­specific evolutionary capability.

An intertwined combination of the logic of system emergence, including historical imperatives, knowledge transfers, entrepreneurial visions and post­trial capabilities, seemed to be able to explain why firm­specific, region­specific and universally adopted capabilities coexisted, as well as how they emerged, in the effective product development and production systems in the Japanese auto industry of the 1980s. As for Toyota's firm­specific capabilities, this historical analysis made the author infer that Toyota's distinctive capability included not only static ones, which have been documented in existing literature, but also a dynamic one. Furthermore, the above­mentioned analysis indicated that the company's dynamic capability included not only competence for performing ex­ante rational problem solving in a linear manner (e.g. continuous improvements through Total Quality Management) but also competence for managing ill­structured problem solving, emergent strategies, or a complex processes of system evolution. The author called the latter the evolutionary capability, or capability of capability building.

My argument is that, as long as the pattern of industrial evolution continues to be an emergent one in the above sense, evolutionary capability that companies like Toyota have possessed for years may still continue to be the key for long­term success of the companies.