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In 1984 General Motors and Toyota began a joint venture in Fremont, California. Both sides wanted something different from the deal: Toyota got a new low-risk way to learn how to manufacture in the US with American workers and suppliers, and GM got an inside view of Toyota’s manufacturing methods.
The NUMMI plant had previously been run by GM alone and was one of its worst for quality, high absenteeism and bitter labour relations and was subsequently closed down in 1982. Under the joint venture, Toyota ran the plant using the Toyota Production System and much of the same unionised workforce. It wasn’t long before the plant was producing cars with quality close to Toyota’s Japanese plants.
But, why would Toyota show their famed quality systems to a competitor?
In my last article we learnt not only what process improvement is—but just how difficult it is to successfully implement across a company. This article wraps up Hamilton Helmer’s 7 Powers framework and is focused on what he describes as the most elusive Power: Process Power.
Not many companies have it—but for those that can attain it—a decades head start and superior operating margins are waiting.
Let’s get into it.
What is Process Power?
A company’s organised collection of activities that are designed to achieve lower costs and/or produce a superior product, that can only be replicated through an extended commitment.
Essentially it’s how well a company produces something, that other companies could not replicate quickly to any amount of accuracy.
All of Helmer’s 7 Powers must produce a benefit and most importantly, a barrier.
The benefit in Process Power enables companies to improve product attributes and/or lower costs through process improvements embedded within the organisation. Decades of implementing the Toyota Production System allowed Toyota to capture quality improvements and cost reduction in the later half of the 20th century, regardless of key employees retiring or new starting fresh.
The barrier is hysteresis. Improvements and advances take time to fruition and can only be achieved with sustained effort. This delay in a competitor achieving the same benefit results from two factors:
Complexity. In Toyota’s case, automobile production combined with logistical supply chains are inherently complex. If process improvements touch many different parts of a chain, this can prove challenging, if not impossible to achieve.
Opacity. Toyota’s TPS was fashioned from the bottom up—not top down. Regardless of Toyota’s willingness to openly promote the system, executives from some of the world’s largest corporations just couldn’t imitate what Toyota were doing. It took Toyota themselves 15 years to transfer TPS to their supply chain. The fundamental tenets were never formally codified, but solidified through years of trial and error. Their knowledge was tacit, not explicit.
Many companies have a benefit; or operational excellence, but Helmer declares operational excellence isn’t itself a Power because it can be arbitraged away.
Why Operational Excellence isn’t Enough
Professor Michael Porter first insisted operational excellence is not strategy. Improvements that are easily copied are not strategic, because they do not transfer to market share or long-term differential margins. Power. A company can be ran great and have a healthy amount of market share, but without a sufficient barrier it will be arbitraged away.
Bottom up improvement is at the heart of operational excellence, which is fairly common among big corporations, but the rarity of Process Power comes from the infrequency of the barrier; a competitor cannot compress the time required for the Power to evolve. Similar to Brand Power. Again, if competitors can hire your managers and bring in consultants to reverse engineer your products in a matter of months—you do not have Process Power.
This is what Porter, and then Helmer meant when they said operational excellence alone is not Process Power.
To summarise: Process Power is operational excellence plus hysteresis.
The NUMMI Plant Paradox
Toyota not only welcomed GM—but thousands of executives and businesses—to tour their plants because they knew process improvement is not easy to replicate. Just because you see and are told how something is done, does not mean that you understand how to do it intuitively. Turnkey solutions rarely work because they are inherently top-down. Understanding how procedures work on an assembly line is one thing—but understanding how the system works as a whole is an entirely different thing. That’s why Toyota’s senior employees were happy to take questions about TPS, Kanban and Andon chords; their knowledge was tacit; bottom-up.
It was under their skin.
Here’s what Ernie Shaefer, manager of the GM plant in Van Nuys, California had to say about the struggles of adopting TPS:
“what’s different when you walk into the NUMMI plant? Well, you can see a lot of things different. But the one thing you don’t see is the system that supports the NUMMI plant. I don’t think, at that time, anybody understood the large nature of this system…. You know, they never prohibited us from walking through the plant, understanding, even asking questions of some of their key people. I’ve often puzzled over that—why they did that. And I think they recognized, we were asking all the wrong questions. We didn’t understand this bigger picture thing. All of our questions were focused on the floor, the assembly plant, what’s happening on the line. That’s not the real issue. The issue is how do you support that system with all the other functions that have to take place in the organization?”
This is why you can’t simply copy procedures from successful companies and expect them to work at another. General Motors struggled to implement TPS—in spite of having first-hand access to it—because GM and Toyota’s physical, social, economic and psychological structures were inherently different.
You could say there was a difference in the two companies business philosophies: Eastern vs Western thought, but there was just more to see than the assembly line and output metrics.
Limits and Decay
Hysteresis is the barrier that stops competitors imitating, but the Power is not bestowed on the incumbent. Detroit manufacturers would eventually close the quality gap on Toyota and the companies 2009-10 recall shows that damage can also come from within.
In August 2009, a family was killed driving a Lexus after the accelerator jammed under the floor mat. It took Toyota until the end of the year to recall millions of vehicles in the US to fix the pedals, and in January 2010 a second problem emerged. Pedals could also stick due to wear in the mechanism, with or without a mat resulting in another 2.3 million recalls. When Toyota realised all pedals were from a single supplier they halted sales and production while they fixed the fault. Just a month later, another albeit separate recall followed for anti-lock brake software in its hybrids. In total between 8-9 million vehicles were recalled depending on who’s numbers you look at.
So how did Toyota, revered for its quality get itself into such a pickle?
Akio Toyoda, president of Toyota admitted the company had grown too fast, too soon which demonstrates the complexity side of the barrier. Not only does complexity ward of competition—but it also makes it difficult to grow and adapt from within—especially when rapidly evolving technology is introduced, as has been the case in the automobile industry this century.
Final Thoughts
Process Power; everybody wants it, many say they have it but few genuinely do. It’s elusive because enormous amounts of concentrated and dedicated effort must be spent on process improvement; something we are inherently poor at as we often choose to deliberately work harder; in spite of fancy software and technology that’s supposed to make work easier.
The benefit is the ability to produce something that’s either better, cheaper or both than what your competition can. The barrier though is where the Power is built through hysteresis; complexity and opacity make it inherently difficult for a competitor to sustain a successful attack.
Operational excellence—although something all businesses should aspire to achieve—itself is not Power if it can be replicated by others hiring your staff, consultants and reverse engineering your processes.
Toyota developed systems that improved quality and limited waste to much success. Corporations from around the world sent executives to replicate what they were doing, books written about the company and its systems and still today they are at the front of peoples mind when “quality” is mentioned in business. But, Toyota showed that Process Power isn’t forever, with the recall calamities in the late naughties.
With the exponential advancements in technology today it’ll be interesting to see how businesses adapt and if Process Power bestows more, or less companies. Knowing what I know about process improvement and our penchant for being easily distracted I think the Power will continue to be elusive, but not extinct.
Until next time,
Karl.
Sources:
7 Powers - Hamilton Helmer