Strategic use of computer-integrated

manufacturing in the emerging competitive environment

GERALD I SUSMAN and JAMES W DEAN, Jr

Abstract: Sources of competitive advantage are being transformed in mature industries by recent environmental trends. This paper explores these trends and identifies three strategies for seeking competitive advantage in the environment being created. This paper also explores the criticial role of computer-integrated manufacturing in supporting these strategies as well as the organizational changes necessary to support them. Finally, relationships between the three strategies are discussed.

Keywords: computer-integrated manufacturing, competitive advantage.

W 'e take Porter 's 1'2 view of competitive strategy as a starting point. He identifies three generic strategies for achieving competitive advantage.

The first consists of competing in a broad market on the basis of price and, therefore, cost - keeping costs suffi- ciently low that a firm can gain market share by having lower prices than the competition, or gain greater profits than high-cost competitors that match prices. The second is differentiation, in which a firm competes in a broad market by being different from other firms in the industry on some dimension that is valued by the firm's customers. For example, a firm can differentiate on the basis of its engineering and manufacturing capabilities, e.g. superior quality or fast delivery, or on the basis of its marketing capabilities, e.g. brand recognition, number or conveni- ence of outlets, and customer service. The third involves an attempt to focus on one or more industry segments, and to devote the firm's resources to serving only the segment's customers. This strategy assumes that a firm that concentrates its efforts will be more effective with a

Center for the Management of Technological and Organizational Change, College of Business Administration, The Pennsylvania State University, University Park, PA 16802, USA Paper received: 13 October 1988

particular set of customers than a firm that tries to serve a variety of customers.

The focus strategy has two variations: cost and differen- tiation. In the cost variation, a focuser can serve a particular market segment at lower cost than its broad-based competitors. This is because the focuser has manufacturing or marketing capabilities that are particu- larly suited to customer needs. In the differentiation variation, a focuser serves customers with special needs by providing them with greater value than nonspecialized firms.

A fundamental tenet of Porter's framework is that 'no firm can serve two masters'. Firms must make a decision to pursue one, and only one, of the generic strategies, and make decisions that consistently support this choice. A firm that fails to do this runs the risk of being 'stuck in the middle', with higher costs than those that concentrate on cost, less differentiation than those that concentrate on differentiation, and less focus than those that make a strategic choice. The penalty is that the firm will earn average or below average profits in the industry because it can secure neither a premium price by differentiation nor a large market share by low cost.

Trends in the competitive environment of manufacturing

In this section we identify a number of trends in the competitive environment of manufacturing firms. These trends are beginning to restrict the leeway that firms have in trading off between the dimensions on which they compete. Furthermore, the competitive environment is increasingly turbulent due to increased industry segmen- tation and shorter product life cycles. We believe, how- ever, that there are competitive strategies that can help firms find competitive advantage in these trends.

Cost

American firms manufacturing mature, mass-produced products are finding it increasingly difficult to compete

Vol 2 No 3 August 1 9 8 9 0951-5240/89/030133-06503.00 ,t~ 1989 Butterworth & Co. (Publishers) Ltd 133

solely on the basis of cost. Manufacturing firms in developing countries have grown significantly in the last decade and enjoy substantial cost advantages over American firms in wage levels and currency exchange rates. The recent decline of the dollar against currencies of developed economies, such as Japan and Germany, has not extended to those of developing economies, such as Singapore, Hong Kong, Korea, Taiwan, Brazil etc. 3 Thus, American producers will continue to face cost pressure from these countries for the foreseeable future.

In industries where there is worldwide overcapacity (e.g. clothing, steel, cars, farm and construction machin- ery, semiconductors and consumer electronics), pressure to maintain or lower costs will continue as long as there is weak economic growth 4. For this reason and because many debt-burdened countries have adopted deflationary fiscal policies during the 1980s, there is little opportunity for manufacturing firms to maintain profit margins by raising prices.

Quality

We refer to manufacturing-based quality (e.g. reliability, conformance to standards and durability), rather than product-based (e.g. performance and features), or user-based (e.g. serviceability, aesthetics and perceived quality5). Throughout the 1970s and 1980s, American consumers abandoned domestic suppliers in favour of the higher quality, imported products, notably Japanese. This has been particularly true for cars and consumer electronics. As consumers have come to expect the quality offered by the Japanese and other competitors, Ameri- can firms have had to improve their product quality significantly and, in turn, have put pressure on their suppliers to improve their quality.

Leadtime

The length of time between the receipt of an order and product delivery has increasingly become a competitive issue, especially for firms that produce a variety of products in small batches. Many of these firms supply other firms that increasingly are adopting JIT manufac- turing practices. This requires the supplier to deliver small orders reliably, often at relatively short notice. In a case reported by Dean 6, leadtime to delivery was a major competitive issue for a firm in the aluminium window industry.

The length of time between product conception and market introduction is another competitive issue, es- pecially for firms that produce products that are based on relatively new technologies. Delay of a few months in introducing even a superior product can mean the difference between success and failure 7. The length of the product development cycle will become an increasing- ly important competitive issue as product life cycles shorten, a trend which we believe already exists.

Product customization

Customers are responding favourably to products that are tailored to their tastes and lifestyles, and are

increasingly rejecting products that they perceive as mainstream or 'ordinary '8. Businesses in North America, Europe and Japan expect to be making even more specialized products over the next few years 9'1°

Firms have previously attempted to match increased variety in customer tastes with a broader product line. However, as customer tastes vary more widely and become more transitory, the inventory costs and risks associated with carrying broad product lines become prohibitively high. Firms have also attempted to cater to increased variety in customer tastes by producing to order rather than to stock. While this approach may lower inventory costs, the longer lead times and higher produc- tion costs may discourage customers from buying the firm's products.

Industry segmentation

New industry segments emerge when firms expect to capture and sustain higher profits from competing in these segments than they could from competing in a broad market or in another industry segment. Industry segmen- tation generally has a more pervasive impact on a firm than product customization in terms of the number of organizational functions impacted. Like broad markets industry segments may differ in structural features, e.g. different buyers, suppliers, competitors, potential en- trants and substitute products. As a result a firm may adopt different competitive strategies for each segment. Different strategies place different demands on a firm's functions as well as on the manner in which they are integrated.

Industry segmentation already characterizes industries such as medical products, office supplies and tools T M

Mass producers, which have traditionally treated indus- tries such as chemicals, textiles and semiconductors as homogeneous, are being forced to switch to focused strategies in order to provide acceptable products for these segments, and to avoid competing at a cost disad- vantage against foreign competition in broad markets. Examples of companies that have prospered with focused strategies in such industries include W R Grace (chemi- cals), Golden Needles Knitting and Glove (textiles), Cypress Technology (semiconductors).

Shortened product life cycles

Market dynamics may shorten life cycles in consumer oriented industries if firms continually redefine segments, making specifically tailored products prematurely obsol- ete. Product life cycles may also shorten because of efforts by manufacturers to meet finer distinctions in customer tastes by customizing products, especially if such tastes were created or encouraged by advertising in the first place13, thus leading to less predictable futures for the products that cater for them, e.g. clothing.

Technological change may also shorten product life- spans. Change can be dramatic in new industries such as computers, telecommunications, pharmaceuticals and biotechnology. Firms in these industries compete by developing or improving products, often making existing

134 Computer-Integrated Manufacturing Systems

products rapidly obsolete because of technological break- throughs. Competition of this sort is increasing even in older industries, e.g. cars, leading to a process that Abernathy et al. call 'dematurity '14.

Implications of these trends for competitive advantage

It should be clear from the above that the competitive environment for manufacturing has changed with respect to such dimensions as cost, quality, leadtime, customiz- ation, segmentation, and product life cycles. It is no longer strategically sufficient merely to offer a low priced product that is standardized and of average quality, or to differentiate a product and expect to maintain a secure market share for a long time. We believe that this changing environment for manufacturing re- quires modification of Porter's framework in order to take account of recent trends. We introduce three strategies that recognize competitive opportunities in these trends.

Competing on multiple dimensions

A firm can use its manufacturing capability to differenti- ate a mature commodity-like product on one or more competitive dimensions other than cost. In many indus- tries firms can no longer afford to sacrifice performance on quality, leadtime or customization to achieve low cost, or more generally, to sacrifice performance on any one of these four dimensions to achieve excellent performance on another dimension.

The Japanese have been able to reduce product defects to levels that American manufacturers once thought were unobtainable at an acceptable cost by demonstrating that cost and defect reduction are complementary objectives. Reducing defects by use of statistical process control, quality circles and simplified designs can lower rework and warranty costs. The Japanese have also demonstrated complementarity between lower costs and shorter lead- time; the faster raw materials can be converted into products and shipped to customers, the less work-in-process and finished goods inventory are needed in the factory. Methods such as JIT reduce inventory carrying costs and shorten the period between expendi- tures and receipt of income. Awareness of such practices is spreading quickly around the world and only those firms that learn to use them will survive.

Competing in multiple segments

Firms that have previously produced products for broad markets may adopt a strategy of competing in multiple segments simultaneously. Firms attempting to serve broad markets are becoming increasingly vulnerable to firms that can identify and focus on segments within these broad markets. Focusers may gradually erode the cus- tomer base of their broad-based competitors on a seg- ment-by-segment basis if they are able to meet the needs of some customers better.

A broad-based competitor who adopts a multiple segment strategy can compete successfully against a single focuser on cost because it gains economies of scale and

learning opportunities by serving several segments simul- taneously. It can also compete on differentiation if it can combine an equally focused product with marketing, distribution or other services that single segment focusers cannot provide.

Single segment focusers may also find that the multiple segment strategy offers the most likely path for growth. If no single segment offers the firm enough growth potential, it may target new segments for growth as a proxy for increased market share. The multiple segment firm may have higher profits than a broad-based firm if the sum of premiums paid by buyers of differentiated products in several segments is higher than those paid by buyers of nondifferentiated products in a broad market. Of course, offsetting such profits is the cost of coordina- tion and compromise from competing in several seg- ments. The methods for reducing such costs will be discussed below.

Competing by continuous product improvement

Product improvement can allow a firm to earn a premium price for its differentiated product and reduce the likelihood that competitors can copy the product and sell it at a lower price. Product improvement can also lower production cost. For example, use of new materials can lower production costs and modified product designs can make products easier to manufacture. In mature product markets, such innovation can lead to 'dematurity q4. In emerging product markets, such competition can lead to 'extended product adolescence qS.

Given the shortening of product life cycles, the develop- ment process through which new generations of products are brought to market has become an increasingly important element of manufacturing strategy. Firms have previously had to trade-off improved product perform- ance against the speed with which the product can be introduced. Early involvement of manufacturing in the design and development of products can shorten the time needed to bring products to market without sacrificing performance objectives.

Similarities and differences between strategies

The three strategies are similar in that they are all based on increasing the value added to products, thereby permitting firms that adopt them to earn premium prices for their products. This is desirable for firms producing mature products when revenue begins to decline due to intensified price competition. Richardson et al. 16 provide evidence that firms producing higher value-added prod- ucts earn higher return on sales. Such firms are also less likely to lose current and future business to newly developed countries ~7. The multiple dimension strategy adds value by differentiating an otherwise commod- ity-like product. The multiple segment strategy adds value by specializing products for specific segments, while keeping the cost of variety between segments low. The continuous product improvement strategy adds value by revitalizing a product and making it difficult for other firms to copy it.

The multiple dimension and continuous product im- provement strategies are more appropriate for a

Vol 2 No 3 August 1989 135

broad-based market or a single market segment than for multiple segments. These strategies require superior capa- bility in product development and engineering, while the multiple segment strategy requires superior capability in marketing. Few firms have superior capabilities in both. As a result, the multiple dimension and continuous product improvement strategies may generate such com- plexity and change in product and process technology that the firm needs some relief from complexity and change in its markets. The converse is true for the multiple segment strategy.

Using computer-integrated manufacturing for competitive advantage

Computer-integrated manufacturing (CIM) is ideally suited to facilitate achievement of the three strategies. We view CIM as consisting of a number of technologies which can be classified according to their area of application. These technologies have proven 'standalone' capabilities within their area of application. However, they take on qualitatively superior capabilities when they are integ- rated with each other. Engineering applications include CAD, CAE, group technology (GT), and computer-aided production planning (CAPP). Manufacturing applica- tions include numerical control (NC) machines, FMS, robots, automated materials handling systems (AMHS), automatic storage and retrieval systems (ASRS), etc. Business applications include MRP and decision support systems (DSS). CIM exists when the technologies within these areas of application share databases and can solve a common problem by interacting through a network 18.

Uses of flexibility CIM's manufacturing applications can be programmed to perform a variety of manufacturing activities consist- ently at close tolerances and can be reprogrammed to perform new activities inexpensively. CIM's business applications permit firms to project demand for products and create orders for product parts from inventory or from suppliers, so they will be available when needed. CIM's engineering applications permit firms to design new products and modify existing ones more quickly and inexpensively. These qualities have direct application to the three strategies in that relatively inexpensive and timely changes can be made in product mix, volume and changeover, e.g. product flexibility 19. Such flexibility is essential for firms that seek to create product variety across customers and/or market segments without raising costs substantially or taking an excessive amount of time to create such variety.

Product flexibility permits firms to go beyond the trade-offs that have traditionally characterized choices between lower costs, higher quality, shorter leadtime and product customization. Firms that required product flexibility in the past have achieved it by hiring multi-skilled craftsmen, retaining excess plant capacity, holding inventory, hiring extra workers and paying overtime etc. The problem, of course, is that such methods are costly. Previously, a firm's customers accepted the

cost versus flexibility trade-off and paid a premium for a firm's responsiveness to their needs. CIM can negate the need to face such a trade-off.

CIM can also help firms overcome disincentives to innovate or 'the limits of the learning curve '2° that result from product standardization. Many firms accelerate standardization by freezing the product design so that dedicated process technology can be used to produce the product. Once such technology is used, product improve- ment is inhibited because of the high cost of change. However, fewer products will traverse the product life cycle far enough to become standardized because of efforts to revitalize them through industry segmentation and product innovation, e.g. televisions and personal computers. Such prospects raise the risks of investment in dedicated technology significantly.

CIM can be used for a greater proportion of the product life cycle than can conventional technology. Conventional technology has to be matched to the particular phase of the product life cycle to which it is best suited. For example, general-purpose equipment and multi-skilled workers are used to produce customized or newly developed products in small batches, while dedi- cated equipment and specialized workers are used to produce mature products in large volume.

CIM can adapt to the product changes that typically occur in the product life cycle without sacrificing other standards of manufacturing excellence. Furthermore, such standards may increasingly have to be achieved earlier in the product life cycle than has been the case previously. This is because of intensified competition on cost and quality for all products and the shortening of the life cycle itself.

Even for standardized, high volume products firms may prefer CIM just because it offsets the risk of being stuck with obsolete or 'difficult-to-modernize' technology if 'dematurity' occurs in the industry. CIM can reduce the cost of eventual retooling for new products as well as reduce the total time needed to launch a new product.

Supporting organizational changes

The difficulty of developing product flexibility or the difficulty of enacting any of the organizational changes that are necessary to pursue any of the three competitive strategies successfully should not be underestimated.

Firms may not be able to achieve the product flexibility needed to cope with market uncertainty without first reducing uncertainty and complexity within the factory. CIM does not yet appear able to absorb such internal uncertainty and complexity effectively, i.e. to develop process flexibility, defined by Gerwin and Tarondeau 19 as the ability to route parts and handle variations in materials. Several manufacturing practices can help firms reduce uncertainty and complexity to requisite levels. Statistical process control and JIT inventory methods can improve quality and simplify product planning and control. Design for manufacturability can lead to prod- ucts that are easier to make and contain fewer parts 21. Group technology can reduce the factory parts inventory by designing products that use the same or similar

136 Computer-Integrated Manufacturing Systems

parts 22. Cellular manufacturing can simplify coordina- tion by grouping machines according to the families of parts to be produced by them 23.

Firms that attempt to compete in multiple dimensions cannot expect to approach excellence in all dimensions at the same time. They will have to transcend the trade- offs between cost, quality, leadtime and customization sequentially. The manufacturing practices cited above will help the organization transcend the cost versus quality trade-off. Success in that trade-off may be prerequisite to success in transcending the leadtime versus customization trade-off. CIM can help a firm transcend the latter trade-off, which is essential for product flexibility.

The multiple segment strategy requires that a firm extends change beyond the plant to the interplant and business unit level. The concept guiding such change is economies of scope, i.e. maximizing the range of products that each plant can produce efficiently. Economies of scale and scope are complementary; the former relates costs to volume, while the latter relates cost to variety. A plant can achieve economies of scale by producing the same product in large volume or producing a variety of different products in small quantities. Economies of scope are achieved when the cost of producing two or more products in the same facility is less than the cost of producing them separately 24.

A firm can reduce the costs of coordination and compromise that may result from competing in multiple segments by competing consistently on the same multiple dimensions in every segment. A firm with product-, process- or volume-focused plants can make economies of scale by searching across plants, market segments and business units for products that are made by similar processes or use similar components. Such similarities become the basis for assigning these products to focused plants. A firm can make economies of scope by redesign- ing products and components so that they can be manufactured more easily at one of these focused plants.

All three strategies require a firm to develop strong relationships with suppliers and customers. Terminals can be placed in the facilities of suppliers and customers that are directly linked to databases within the firm. The former can supply new parts and materials to the firm as needed, while the latter can be involved in new product design or in the customization of an existing product 25. Such practices cannot succeed without the trust that comes from building a strong relationship first.

All three strategies will require the firm to strengthen relationships between manufacturing and other organiza- tional functions. The multiple dimension and multiple segment strategies require close coordination between manufacturing and marketing. The continuous product improvement strategy requires close coordination be- tween manufacturing, marketing and R & D. Marketing will have to stay in close touch with customers and work closely with R & D, and manufacturing to design prod- ucts that continually meet the needs of their customers better. In many firms marketing and R & D are not accustomed to treating manufacturing as an equal partner in strategic planning; doing so will require a change in organizational culture.

Enactment of any of the three strategies will shift the nature of the firm's environmental dependencies. For example, firms are likely to locate plants closer to customers and suppliers than to cheap labour. The required strengthening of relationships between suppliers and customers discussed above may necessitate such proximity. Moreover, direct labour will make up such a small portion of total costs that firms are unlikely to make location decisions on this basis. Such a shift in depend- encies has significant implications for the movement of plants from third-world countries back to their home countries or, at least, to where their major markets are located. The location of raw materials could remain important, however, as purchase of such materials will increase as a percentage of total production costs and become the most significant variable cost. The latter consideration may reinforce the movement of plants back to their home countries or major markets, or, depending on the location of raw materials, it may counter it.

A significant portion of the cost of running CIM plants is in fixed capital and labour. Such costs are not supposed to vary with volume, at least under current accounting definitions of fixed costs. Although CIM plants appear to have lower break-even points than conventional plants 26, their high fixed costs may encourage them to produce beyond current industry demand for their products. The temptation exists for plants with a high fixed-to-variable costs ratio to continue producing beyond their break-even points because each additional unit of product provides almost pure profit and the percentage change in profit increases faster than the percentage change in volume. This phenomenon, known as operating leverage, would also accelerate losses if volume were ever lower than the break-even point. The desire to avoid such losses is another reason why CIM plants may be tempted to produce beyond current industry demand.

The risk of overcapacity is exacerbated for CIM plants that are so integrated that parts of them cannot be shut down, as has happened with John Deere's tractor plant in Waterloo, IA, USA 27. Also, temporary overcapacity can become chronic if the costs of exiting the industry or switching segments are high. These risks can be reduced significantly if CIM is implemented within the context of manufacturing and marketing strategies that exploit CIM's potential flexibility.

Relationships between the three strategies

We think the multiple dimension and continuous product improvement strategies are fundamentally compatible. A firm that uses one of these two strategies initially should gain additional competitive advantage by adopting the other as a second strategy. For example, firms that initially adopt the multiple dimension strategy can con- tinue to improve performance on their chosen dimensions through continuous products improvement. Alterna- tively, firms that initially adopt the continuous product improvement strategy can use their manufacturing and engineering expertise to focus improvements on one or more of the multiple dimensions.

Vol 2 No 3 August 1989 137

The multiple segment strategy is not readily compatible with the other two strategies. A firm's organizational and technological capabilities would be severely strained if it were to attempt to compete on multiple dimensions as well as continually improve products for multiple indus- try segments. For example, it would be very difficult to improve a product continually in one segment without affecting many of the components and manufacturing processes that are used for products sold in other segments. A successful multiple segment strategy is based in part on economies of scale from producing common components for a variety of different market segment products. A firm adopting the multiple segment strategy should carefully select the segments on which it competes to assure that such economies exist.

Summary

Environmental trends suggest that manufacturing firms in many industries will face new opportunities for com- petitive advantage. CIM is well suited for the options that remain, mainly competing on multiple dimensions, in multiple segments or by continuous product improve- ment. However, CIM alone cannot generate competitive advantage. Implementation of CIM must be accom- panied by manufacturing practices and organizational changes that can exploit its potential flexibility.

References

1 Porter, M E Competitive strategy: techniques for analyzing industries and competitors The Free Press, New York, NY, USA (1980)

2 Porter, M E Competitive advantage: creating and sustaining superior performance The Free Press, New York, NY, USA (1985)

3 Rowen, H 'Why the dollar declines, but the trade deficit doesn't' Washington Post (November 23, 1986) Business Section, p 1

4 'Glutted markets: a global overcapacity hurts many industries; no easy cure is seen' Wall Street Journal (March 9, 1987) p 1

5 Garvin, D A 'What does quality mean? Sloan Manage- ment Review (Fall 1984) pp 25~,3

6 Dean, J W, Jr Deciding to innovate: how firms justify advanced technology Ballinger Publishing Company, Cambridge, MA, USA (1987)

7 Reinertsen, D G Whodunnit? The search for the new-product killers McKinsey & Company, New York, NY, USA (July 1983)

8 Koten, J 'Upheaval in middle-class market forces changes in selling strategies' Wall Street Journal (March 13, 1987)p21

9 Ferdows, J G, Miller, J, Nakane, J and Volimann, T E 'Evolving manufacturing strategies in Europe, Japan, and North America' Working paper, Boston Uni- versity, MA, USA (1985)

10 'Marketing's new look' Business Week (January 26, 1987) pp 64-69

11 Sabel, C F Work and politics: the division of labour in industry Cambridge University Press, Cambridge, UK (1982)

12 Hirsehhorn, L Beyond mechanization: work and tech- nology in a post-industrial age MIT Press, Cambridge, MA, USA (1984)

13 Galbraith, J K The new industrial state Houghton Mifflin, Boston, MA, USA (1967)

14 Abernathy, W J, Clark, K B and Kantrow, A M Industrial renaissance: producing a competitive future for America Basic Books, New York, NY, USA (1983)

15 Ayers, R U The next industrial revolution: reviving industry through innovation Ballinger Publishing Company, Cambridge, MA, USA (1984)

16 Richardson, P R, Taylor, A J and Gordon, J R M 'A strategic approach to evaluating manufacturing per- formance' Interfaces No 15 (November-December 1985) pp 15-27

17 Ohmae, K Triad power: the coming shape of global competition The Free Press, New York, NY, USA (1985)

18 Savage, C M Fifth generation management for fifth generation technology Society of Manufacturing En- gineers, Dearborn, MI, USA (1987)

19 Gerwin, D and Tarondeau, J 'International compari- sons of manufacturing flexibility' in Ferdows K (Ed.) Managing international manufacturing Elsevier- North Holland, Amsterdam, The Netherlands, to be published

20 Abernathy, W J and Wayne, K 'Limits of the learning curve' Harvard Business Review (September-October 1974) pp 109-119

21 Hales, H L 'Producibility and integration: a winning combination' CIM Technology (August 1987)

22 Suresh, N C and Meredith, J R 'Achieving factory automation through group technology principles' J. Operations Management Vol 5 No 2 (1985) pp 151-167

23 Schonberger, R J Japanese manufacturing techniques: nine hidden lessons in simplicity The Free Press, New York, NY, USA (1982)

24 Baumol, W J, Panzar, J C and Willig, R D Contestable markets and the theory of industry structure Harcourt Brace Jovanovich, New York, NY, USA (1982)

25 Stouffer, R N 'Converting customers to partners at Ingersoll' Manufacturing Engineering (September 1988) pp 41-44

26 Choate, P and Linger, J K The high-flex society: shaping America's economic future Alfred Knopf, New York, NY, USA (1986)

27 Deveny, K 'Thinking ahead got Deere in big trouble' Business Week (December 9, 1986) p 69 []

138 Computer-Integrated Manufacturing Systems