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