Lean principles and premium brands: conflict or complement?

International Journal of Production Research, Vol. 45, No. 16, 15 August 2007, 3723–3739

Lean principles and premium brands: conflict or complement? NICK OLIVER*y, LEE SCHABz and MATTHIAS HOLWEGz yManagement School and Economics, University of Edinburgh, 7 Bristo Square, Edinburgh, EH8 9AL, UK zJudge Business School, University of Cambridge, Trumpington Street, Cambridge, CB2 1AG, UK

(Revision received January 2007) This paper explores the relationship between lean principles and success in markets for premium products. Drawing on data from two sectors — automobiles and high-end audio equipment — the paper notes that the development of premium brand products is often driven by strong organizational values, such as uncompromising technical excellence. These values can result in product attributes that are far in excess of functional requirements, which in lean terms represent waste. This implies that companies that adhere too narrowly to lean principles may be disadvantaged in niche, premium markets. This paper examines the interplay between product development practices, product attributes and market performance for premium autos and audio products, and discusses why Japanese companies (used here as proxies for lean product developers) are much less successful in premium, compared to mass, markets. Keywords: Lean; Marketing; Product development; Mass markets

1. Introduction Ever since the publication of The Machine that Changed the World (Womack et al. 1990) the benefits of lean principles have been widely recognized. The home of lean production is the Japanese auto industry, and commentators consistently hail Toyota as the virtuoso lean producer, and, more recently, as a lean product developer (Ward et al. 1995). Japanese cars are consistently recommended as best buys by many consumer magazines. Yet despite Womack et al.’s 1990 predictions (described in detail in section 3) that the superior efficiencies of lean producers would lead to the demise of luxury German producers, there is little evidence of this 16 years on. In recent years, sales of Mercedes products have grown more rapidly than those of Lexus in Europe, as figure 1 demonstrates. It is well known that the leanest auto producers are located in Japan, but interestingly Japanese autos, despite being extremely competitive in terms of cost, features and reliability, have not generally commanded the same respect in premium

*Corresponding author. Email: [email protected] International Journal of Production Research ISSN 0020–7543 print/ISSN 1366–588X online ß 2007 Taylor & Francis http://www.tandf.co.uk/journals DOI: 10.1080/00207540701223600

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Unit sales of Lexus & Mercedes in the US 250 000

Unit sales of Lexus & Mercedes in the UK 90 000 80 000

Sales volume

200 000

70 000 60 000

150 000 50 000 40 000

100 000

30 000 20 000

50 000

10 000 0 1990

1995

2000 Lexus

2005

0 1990

1995

2000

2005

Mercedes

Figure 1. Unit sales of Lexus and Mercedes in the UK and US markets. Source: Wards Automotive Yearbook (1990–2005). Mercedes is represented by the unbroken line; Lexus by the dashed line.

segments as their European or US competitors. The same pattern is also seen in other sectors as well, such as high-end audio. In this paper we explore the reasons for this. To do so, we first provide an overview of the literature on brands and consumer value, and then consider how lean principles, as applied to product development processes, interact with these. We then examine the nature of the market in two sectors — automobiles and audio equipment — and assess the position of lean producers in these markets. We conclude with some comments on the interplay between product development practice and product attributes.

1.1 Customer value ‘Value’ carries a variety of meanings. Some consumers may perceive value as low price; others perceive value when they get exactly what they want; and others still perceive value to be a balance between product quality and price (Zeithaml 1988). Perceptions of customer value arise from the balance between benefits and sacrifices in the acquisition and use of a product relative to its competitors (Zeithaml 1988, Monroe 1991, Woodruff 1997). Sacrifices include the cost and time consumed by the product, maintenance, failures and performance shortfalls. Benefits include functions performed by the product, its ability to resolve problems, its function as a means of self-expression, and the provision of pleasure (Sheth et al. 1991, Aaker 1996, Saliba and Fisher 2000, Sweeney and Soutar 2001). Benefits and sacrifices are subjective and different buyers will perceive these differently (Ravald and Gro¨nroos 1996). For example, price is generally perceived as a sacrifice, but for consumers of luxury products whose raison d’etre is conspicuous consumption, higher prices enhance value by signalling quality and prestige (Belk 1988, Aaker 1996, Keller 2003).

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What are consumed are thus benefits, rather than products per se. The most common and visible benefit is the functional utility of the product, which may be enhanced by after-sales service and technical support (Porter 1990, Ravald and Gro¨nroos 1996). Functional benefits emphasise the consumer as rational decisionmaker (Aaker 1996, Keller 2003), but authors such as Gardner and Levy (1955) have identified that products are also purchased for social and psychological reasons. Products provide benefits by fulfilling needs for self-enhancement, role position, group membership or ego-identification (Martineau 1958, Levy 1959, Solomon 1983). Brands can communicate self-image (Belk 1988) and signal association with specific groups (Sheth et al. 1991). Bayley (1986) has observed how car commercials often advertize the characteristics of people who own the cars, as much as they do the cars themselves, in order to tap into people’s desire to project a particular identity.

1.2 Brands Customer value thus comprises a mixture of benefits that can be both functional and psychological, and tangible and intangible (Hoch and Ha 1986, Keller 1993, Kotler 1997, Jobber 1998), and Kahle (1985) has argued that products that support intangible desires will be experienced more favourably than products that deliver only tangible benefits. In recognition of this many firms use brands to communicate tangible and intangible characteristics of their products to the market. A brand can be defined as a name, sign, symbol or design, or a combination of these which represents a collection of attributes, images and ideas associated with a specific producer (Kotler et al. 2002). Brands influence demand for products in several ways. Brands make it easier for customers to identify products and hence reduce the cognitive effort of purchase decisions by providing consumers with a set of product associations — quality, value, reliability and so on (Jacoby et al. 1977). Brand reputation may be used as a proxy for quality when consumers either do not have, or are unable to comprehend, more specific information concerning a product’s attributes (Gardner 1971, Brucks et al. 2000). Brands can also drive demand by projecting images desirable to consumers (Aaker 1991). Brand images result from cumulatively reinforcing information from social interactions, personal experiences advertising, and reviews in newspapers/ magazines or from experts (Keller 2003). This is important, as it emphasises the social construction and reinforcement of product reputation, explaining why companies often find it difficult to build high-value brands if negative memories of past issues and associations linger on in a user community. The social nature of brands also makes brands challenging to establish, requiring consistency and alignment of strategic vision, company culture and external image (Hatch and Schultz 2001). In understanding the value placed on products it is thus important to recognize their multi-dimensional nature. Products can be an expression of values, not just rational-instrumental solutions to particular problems.

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1.3 Lean principles Lean concepts have a long history in manufacturing, even though the term ‘lean’ was only applied to these from the early 1990 s onwards (Sugimori et al. 1977, Schonberger 1982, Monden 1983, Ohno 1988). In manufacturing, lean systems minimize waste (where waste is anything that adds cost, but not value to a product): materials flow continuously through the system on a just-in-time basis; and there is an emphasis on error prevention, rather than detection and post-hoc rectification. In true lean systems these principles are applied along the whole value stream, not just in isolated pockets (Womack and Jones 1996). Lean principles emphasise system-level optimization, where the emphasis is on integration and how the parts work together as a whole, rather than on individual performance and excellence of any one feature or element. There are five key principles of lean thinking (Womack and Jones 1996). These are: 1. The definition of value from the end customer’s perspective in terms of specific product/service capabilities, price and availability. 2. Elimination of waste, that is, all those activities that do not add value and for which the consumer is unwilling to pay. 3. Organisation of the remaining value creating activities so that material and information flow continuously through the system on a just-in-time basis, avoiding batches, waiting, and down time between activities. 4. Control of all activities by customer ‘pull’, producing only what the customer wants when it is wanted. 5. Continual improvement of operational processes, striving for perfection. Although originally derived from manufacturing operations, these principles have subsequently been applied to engineering, product development and service operations (Swank 2003, Hines et al. 2004, Barlow et al. 2005). In manufacturing, various labels have been applied to lean principles, including Japanese manufacturing techniques, the just-in-time system (now generally regarded as just one element of a lean system) and the Toyota Production System (TPS). For various reasons — the absence of a single corporate exemplar, the difficulty in visualizing a product development process compared to a manufacturing process, difficulties in defining ‘success’ in product development — lean product development has not yet attained the same coherence as lean manufacturing principles, though Clark and Fujitmoto’s (1991) model perhaps comes closest to this. In discussing lean product development, we draw on the general literature on lean manufacturing and consider how these principles apply to product development. This is supplemented by the more general literature on Japanese product development (Jacobs and Herbig 1998, Herbig and Howard 1999, Herbig and Jacobs 1999). In product development, the equivalent examples of waste in a factory include lost or slack time in the development schedule; re-working designs because of errors and oversights; and over-engineering, that is, building in features, durability and performance levels considerably in excess of those required for the product to perform its main functions (Morgan and Liker 2006). Elimination of waste also

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implies a balance between competing design trade-offs. Products with strong design features can be inherently difficult to make (and therefore prone to high defect rates) and in the world of lean, may be re-engineered to correct this. For example, Ward et al. (1995) describe how Toyota has a ‘lessons learned’ book for fender design, which identifies the limits of acceptable curvature that can be manufactured with consistent results so that designers do not exceed these. Also, Naveh (2005) shows that the integration of manufacturing concerns into the product development process may lead to an overemphasis on cost and efficiency, at the expense of more ‘emotional’ product features. Various authors have described the characteristics of the Japanese style of product development. Typically, manufacturing and design engineers have equal voices in the development process, and trade-offs are made between product attributes such as appearance and performance, and complexity and production issues such as consistency, reliability and manufacturability. There is typically a much greater willingness to make trade-offs between different features in pursuit of an overall optimum (Jacobs and Herbig 1998, Herbig and Howard 1999, Herbig and Jacobs 1999). This is consistent with the lean principle of system-wide optimization; from a system perspective it is pointless to engineer any one attribute to standards in excess of those of other attributes — to do so is wasteful. Thus, lean principles subtly push towards the ‘good, all-round product’. We have focused thus far on the benefits of lean principles, but potential dysfunctions of lean principles for consumers have also been identified. Piercy and Morgan (1997), Piercy and Rich (2004) and Womack and Jones (2005) have all pointed out how companies, in their quest for leanness within their own operations, can create a profoundly non-lean consumption experience. Piercy and Morgan (1997) argue that the strong focus on waste elimination in lean thinking, coupled with a focus on operational efficiency leads to a definition of value primarily from an engineering perspective, which may be very different to how value is construed by consumers. Our previous discussion of branding recognizes that value is determined by intangible, as well as rational/engineering attributes, but the literature on lean implicitly privileges the latter. Thus, the literature on consumer value demonstrates that conceptions of value vary considerably, and are not limited to tangible attributes such as product cost and functionality. The literature on branding identifies how brands represent meanings attached to products, which develop over time through consistent and repeated reinforcement. Brand identity is thus partly a social construction, and whatever a company does to proclaim its brand values, the actual perception of these will depend on opinions formed by, and exchanged between, actual and potential consumers. Womack and Jones’ (1996) summary of lean principles stresses the need to ascertain customer value, which should encompass intangible as well as tangible aspects of value, but the remaining four lean principles stress waste elimination, implicitly emphasising rational/utilitarian criteria. This leads to the central question of this paper. Do lean principles actually mitigate against the creation of products that appeal to the non-rational values that underlie premium products?

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2. Research approach This is an exploratory paper, whose main intention is to frame issues for further investigation. Data are drawn from two studies, and include a mix of primary and secondary sources. This permits triangulation across sectors and sources of data, but is a limitation in terms of consistency of data across sectors. The auto study draws on independent vehicle test data published by the UK Consumer Association, analysis of items in the specialist automotive media, sales data in the premium segment and interviews with auto industry executives. The audio study has been reported in detail elsewhere (Oliver et al. 2004) and covers product development processes in 38 firms located in Japan, North America (Canada and the US) and the UK. The audio data were collected via face-to-face interviews with product developers in the 38 companies, and the administration of a product development benchmarking questionnaire that gathered data on individual development projects. As with autos, market data for the audio sector were also drawn from independent product evaluations. For each sector we examine: . the market, paying particular attention to issues of segmentation, and the market position of ‘lean’ producers; . the reputations of lean and non-lean producers, drawing on independent evaluations of product attributes and performance; . the patterns of product development, in particular the role of product development trade-offs. We focus explicitly on the application of lean principles in product development, rather than production, as it is here that the character of a product is largely determined. Although independent data exist on the market position of companies, independent measures of leanness are less readily available. In the case of autos, we compare Lexus, the premium brand of Toyota, the archetypical lean producer, with Mercedes. For more general comparisons in both autos and audio we use ‘Japanese’ as a proxy for lean. As successive studies continue to show Japanese producers to be relatively lean (Oliver et al. 1996, 2001) this is a defensible position, but we recognize that not all Japanese producers are equally lean, nor are all Western producers non-lean. In terms of product development, we operationalize ‘leanness’ as: . an emphasis on function and fit with customer requirements; . an emphasis on design for manufacture; . optimization of the product as a system with an emphasis on balancing reliability, cost, performance and other attributes. The focus in this paper is the general application of the principles, rather than the more specific tactics of lean product development that have been outlined in the literature, such as team organization, supplier involvement, over-lapping stages and so on (Clark and Fujimoto 1991, Cusumano 1994, Morgan and Liker 2006).

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3. The case of automobiles In their seminal work on lean, Womack et al. (1990) were critical of the premium German auto producers and their craft methods of production, and made the following observation and prediction: At the end of the assembly line was an enormous rework and rectification area where armies of technicians in white laboratory coats laboured to bring the finished vehicles up to the company’s fabled quality standard [. . .] ‘We’re craftsman, proof of our company’s dedication to quality’ [. . .] Our advice to any company practicing ‘craftsmanship’ of this sort [. . .] is emphatic: Stamp it out. [. . .] Otherwise lean competitors will overwhelm you. Womack et al. 1990: 90–91 Sixteen years later this prediction is yet to be proved to be correct. Whilst the Japanese producers in general, and Toyota in particular, have taken market share from volume Western producers, upmarket German brands such as Audi, BMW and Mercedes continue to dominate the premium sector.

3.1 Nature of markets Table 1 shows the recent ratings of vehicles in various market segments, based on 2005–2006 data from Which?, the journal of the UK Consumers’ Association. Japanese marques comprise more than half of the vehicles that are recommended as ‘best buys’ or ‘worth considering’ in all categories other than the luxury segment, where only one Japanese model, a Lexus, appears. Data on reliability by brand show a similar picture. In 2005 Japanese brands averaged a breakdown rate of 3.7% across all brands, compared to 5.5% for the European and US-owned volume brands and 6.0% for the European premium brands (Which? 2005), consistent with the superior quality of lean Japanese producers (Womack et al. 1990). In Europe, the Japanese expansion has been mainly in the volume car segments and not in the premium segment, though in America the Japanese have fared better at the upper end of the market than they have in Europe. Figure 1 shows sales of Lexus (Toyota’s luxury brand) since 1990 compared to Mercedes in the US and the UK. Not withstanding Lexus’ undoubted strengths and excellent reliability record, Mercedes outsold Lexus by a factor of more than 8:1 in 2004 in the UK. When the Mercedes A-Class (a compact model) is taken out of the picture, the ratio remains near 7:1. Moreover, between 2000 and 2004, Mercedes increased its UK sales by 28%, compared to 12% in the case of Lexus. Thus, despite the inefficiencies identified by Womack et al. the premium German brands have not been overwhelmed by lean competitors, although producers in the high volume segments are under considerable pressure. According to Wards Automotive Yearbooks (1970, 2005) in 1970 Ford, Chrysler and GM combined held 82% of US domestic market share. By 2005, the Japanese producers had

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N. Oliver et al. Table 1.

Top rated cars in the UK Market 2005–2006, by model and nationality.

Market segment Supermini Medium Large Luxury MPV

‘Best buy’ category Honda Jazz Toyota Yaris Toyota Yaris Verso Honda Civic Mazda 3 Toyota Corolla Honda Accord Lexus IS200/IS300 Mazda 6 BMW 5 Series Jaguar S-Type Mercedes-Benz E-Class –

Sports/Coupe

–

Off-roaders

–

Percent Japanese 75% cars in each category

‘Worth Percent Japanese considering’ category across both categories Ford Fusion Mini Suzuki Wagon R Audi A3 BMW 1 Series Renault Megane Jaguar X Type Toyota Avensis Volvo S60 Volvo S80 Lexus LS430

67%

Toyota Previa SEAT Alhambra Nissan Almera Tino VW Touran Mazda MX-5 Jaguar XK8 Toyota Celica Honda CR-V Honda HR-V Toyota RAV4 Volvo XC90 45%

50%

50% 67% 20%

67% 75%

56%

Source: Which Car? (2005). Recommended vehicles are classified as ‘Best Buys’ or ‘Worth Considering’. No models met the ‘best buy’ criteria in the MPV, Sports and Off-Roader categories. Japanese models are in italics.

captured 37% of the US car market largely at the expense of the US producers who saw their combined market share decline to 49%. 3.2 Buying behaviour The reliability and sales data of Mercedes and Lexus show that there is more to being a successful car maker than producing reliable, functional products in an efficient way. While automobiles can be purchased to satisfy basic needs for mobility, the selection of a specific brand is often made for symbolic and emotional reasons (Woods 1960, Grubb and Hupp 1968, Midgley 1983, Keller 2003). Automobiles embody personality attributes and images (Woods 1960) and owning a certain type of car can send messages of sophistication, taste, and refinement and therefore can represent great value to the customer. The views of those who are opinion leaders to the car-buying public, such as motoring journalists, reinforce this point. Analysing Audi’s highly successful move upmarket in the 1980 s, Bayley (1986: 100) describes how this was achieved: Technology combined with imagery to create not transport for salesmen, but intensely desirable costumes to be bought by the eager, young rich.

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The German brands appear to succeed in embodying powerful messages of technological sophistication, driving experience, durability and longevity, reinforced by advertizing slogans such as Audi’s ‘Vorsprung durch Technik’ and BMW’s ‘ultimate driving machine’ (Bayley 1986). Despite the German success in the premium segments, a (European) design manager with a Japanese auto producer described to us how his Japanese colleagues could not understand why a German competitor used real aluminium in a piece of door trim, and not a cheaper, synthetic alternative. This was on the grounds that the function did not merit aluminium; what was overlooked was the look and feel that using ‘the real thing’ conveyed to buyers. A further issue in the brand value of cars, as in many other high identity products, is the role of experts or other intermediaries as opinion formers, such as motoring journalists and consumer associations, in building brand value. The precise impact of the motoring press is hard to assess, but it is clear that they value features such as character, driving experience and performance that are not necessarily the vehicle attributes fostered by lean principles. British TV presenter Jeremy Clarkson (2006), for example, has described Lexus as ‘a reliable car with all the charisma of a golf buggy’ and argues that Lexus vehicles lack ‘soul’. Mainstream consumer reports focus on attributes relevant to a broad crosssection of the population, with more of an emphasis on day-to-day requirements and utilitarian values. Perhaps it is for this reason that the Japanese marques tend to dominate the top rankings in these assessments, as this is consistent with Japanese consumer (and perhaps product developer) values of function, value and reliability: The Japanese idea of marketing is that if a good, quality, lower priced product is produced based on consumer information, people should buy it. Herbig and Howard 1999: 27

3.3 Product development processes A key reason for the continued sales strength of Mercedes, given what in some respects is superior objective quality of Lexus products may be found in the relationship between engineering process and brand values. Mercedes’ propensity to ‘over-engineer’ products — to provide attributes considerably in excess of functional requirements — in rational-instrumental terms is wasteful. However over-engineering may actually deliver product attributes that appeal to people’s desire for self-expression or individuality, in particular by exuding a sense of sophistication. There are clear differences between the way that Japanese and the premium European car manufacturers approach product requirements and specifications. Japanese producers balance functionality, price and other attributes with the aim of receiving consumer satisfaction scores that demonstrate high quality (Johansson and Hirano 1999). Premium European makers are also mindful of customer reactions, of course, but Clark and Fujimoto (1991) noted that the European auto producers tend to differentiate themselves on image, aesthetics, and driving performance. They found that European producers were far more likely to define excellence in

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terms of their own brand values and to market their cars to customers who understood and shared these values: We have always tried to go our own way . . . we are simply doing our best based on our own values . . . no one knows whether our choice will be right. Even experienced engineers have no idea of it. The answer will be known in 5–10 years from now. Daimler-Benz executive cited by Clark and Fujimoto 1991: 57 Such comments, we argue, demonstrate how German auto producers are driven by particular sets of values, in this case engineering sophistication, which give products a distinct character and command premium prices. Japanese producers in contrast are driven more by external considerations (opinions of multiple groups of consumers, benchmarks of other products and so on) and therefore are more likely to enter into compromises that ultimately dilute the character of a product (Bangle 2001). Lowie Vermeersch, the Chief Designer at Pininfarina, the Italian automotive design house expressed it thus: You need people with emotions to inspire emotions. You cannot inspire emotions with something that has been through 10 meetings [..] you need anger, frustration, even tears.

4. The case of audio equipment The audio sector represents an example of a pattern seen in the auto industry and other sectors (e.g. motorcycles) in which many Western producers exited altogether or retreated upmarket as lower cost Japanese products captured market share. In the audio industry, the effect has been dramatic, with nearly all Western audio companies abandoning the high volume consumer electronics markets to Japanese producers, who themselves are now under pressure from ‘unbranded’ East Asian producers at the bottom end of the market. The audio market splits into two main segments, the first comprising complete micro and midi systems that vary from very low cost systems to branded systems costing up to £1000. Japanese dominance in the sector for better quality systems can be seen by a recent consumer test of micro systems which tested 13 systems in the £100–£500 price range, of which 11 (85%) were Japanese. Five of the 13 systems received the top ‘Best Buy’ rating, all of which were Japanese brands (Which? 2004). The second segment of the audio market comprises individual components — CD players, tuners, amplifiers and speakers that are sold separately and mixed and matched by the user. This segment attracts audiophile enthusiasts and sophisticated consumers. Recommended retail prices (RRP) for components such as amplifiers varies from around £50 to over £4000 before discounts with various price points within this range. Table 2 shows the distribution of amplifier products in a recent specialist guide to audio equipment by nationality of ownership, in terms of the total number of products covered and how these products were judged by expert reviewers.

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Lean principles and premium brands Table 2.

Distribution of products by nationality: audio amplifiers. Price: Up to £500

Japan US/Europe Other Number of products

Price: £501 and over

% of total

% of 5
products

% of total

% of 5
products

58% 39% 3% 30

37% 63% 0% 8

6% 92% 2% 54

6% 88% 6% 18

Source: What Hi-Fi? (June 2006).

Table 2 covers 85 models of amplifiers. Of these, 30 have a price of less than £500; the majority (58%) are Japanese. In this category eight amplifiers were given the top rating of five stars. However, Japanese products perform relatively poorly in this market — despite comprising 58% of total products, they attract just 37% of the top ratings. Non-Japanese firms, in contrast, capture 63% of the top ratings with 39% of products. In the category of £500þ per unit the Japanese presence is much smaller — just three out of the 54 products listed are Japanese. Superficially at least, the audio market thus shows a remarkable similarity to that of the automotive sector. The Japanese are generally absent at the very bottom end, a position increasingly occupied by entrants from elsewhere in East Asia, but are very strong in the middle segments of the market, less competitive in the premium segments, and virtually absent at the very top end.

4.1 Nature of markets and buying behaviour It was clear from interviews that the high end of the audio market is not a place where issues of price or functionality are necessarily paramount. Products sell on the basis of a complex set of criteria, including the obvious attribute of acoustic quality, but also appearance, feel and image. We are not only selling the product but the emotion or the image [. . .]. Engineer, Japanese Company The market, particularly in Europe, is very driven by product tests and reviews in the audio press, and there are a variety of specialist on-line and print magazines that test and rate audio equipment. Audio companies often use these ratings in their advertizing, and often frame and display positive reports on the walls of their premises. Irrespective of the actual performance of an audio product, country of origin clearly plays an important part in brand value, with Asian-produced products struggling to match their European or North-American counterparts: If you have, say, high end car speakers, and if you are going sell a pair of speakers for $400 and they’re made in Taiwan, nobody’s going to buy them. It just doesn’t happen. They can be made in Europe, that’s

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acceptable . . . [Products made in Japan are] acceptable, but not as acceptable, there’s still a stigma. Even though some of the coolest things come from Japan, they just don’t get the price for them, because that’s not where they made their name, their name is in main stay stuff [. . .]. Europe has done very well, keeping an image of very cool esoteric products. Manager, US company 4.2 Product development processes Interviewees in the Japanese firms in our study reported how they typically collected substantial data from their main markets through both formal and informal means. During the product development process they then attempted to reconcile competing requirements in order to maximize the market reach (and hence volume) of each product line: We are aiming for an integrated approach, with everyone receiving the same output. [Development make suggestions] and Europe may 100% agree, but the US cannot agree. [. . .] We sometimes have to prepare different products, but if it takes too much to do so, then our efficiencies go down. It is very difficult to decide how to compromise. Product developer, Japanese company This illustrates the Japanese willingness to make compromises and trade-offs identified in the literature. In this case the trade-offs were between different product attributes in order to have single products that served multiple markets; one consequence of this was that production volumes for the Japanese companies in the study were much higher than for non-Japanese firms. Much more development time and attention were devoted to manufacturing engineering in Japan, and for some Japanese firms this comprised nearly half of total development hours, far more than for Western companies. For the Japanese firms, the final product design was thus an outcome of a complex set of trade-offs. Western audio firms, in contrast, placed far more emphasis on a small number of product attributes — quality of the auditory experience being by far the most important — and pursued these with less compromise. As a consequence, non-Japanese products tended to be simpler in appearance, with fewer features and visual displays, and, as table 3 shows, considerably less reliable. Many of the non-Japanese firms in the study were small and run by owner-managers with strong personalities, which clearly contributed to this. As one US company put it ‘there is a huge personality behind this company which makes it stand out from anyone else’. Products were often based on a strong concept or statement originating from within the firm, rather than starting from a set of market-based demands: There are some people in [the Company] who believe that we know better what a consumer really wants than the consumer himself . . . so we come out with some products that no consumer would ever think of. [. . .] So, we are not that driven by any kind of marketing reports, whereas other companies very much are. Product developer, US company

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Lean principles and premium brands Table 3.

Product quality and planning. Japanese firms

Percent of development time spent up to design freeze Percent of development effort after product launch Number of weeks for quality to settle to normal after a product launch Number of warranty claims (ppm)

Non-Japanese firms

37%

29%

9%

17%

2.6

6.9

716

14 694

Source: Adapted from Oliver et al. (2004).

I think we’re perfectionists, or as perfectionist as we can be. The pursuit is not to beat someone else’s products, it’s actually to reproduce music in someone’s home and that’s our benchmark really. Engineer, UK firm At the top end of the audio market, this producer-driven approach could clearly result in attractive products, in part because developers and consumers shared the same values: At the high end engineer’s taste and customers’ taste is so close, it is easy to match for high end products, because always they are able to meet the needs of our special customers. But in the mainstream the market is big we cannot listen to each customer’s voice, so some times a self-satisfied product can be introduced into the market - this is very dangerous. Development manager, Japanese company Table 3 shows that Japanese firms spent more time planning at the beginning of the development processes, consistent with their tendency to try to achieve compromises between the requirements of different markets in order to realize economies of scale. It is also noticeable that Japanese firms spent much less time problem-solving after the launch of new products — about half the time of their Western counterparts, reflecting the close integration between development and manufacturing. This also explains the short time that production quality takes to settle after a new product launch in Japan — less than three weeks compared to nearly seven in the non-Japanese companies. The warranty claim rate of the Japanese firms was just five per cent of that of the Western firms. 5. Discussion and conclusions The starting point of this paper was the observation that lean producers, which in this paper we operationalized in terms of Japanese ownership, are not uniformly successful across all segments of the market. This is particularly noticeable in the premium segments of the auto market, where German premium producers have continued to perform strongly, despite predictions of their displacement by lean producers.

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In this paper, we have focused on the implications of lean principles primarily in the domain of engineering and product development, as this is where much of the character of a product is determined. The data on automobiles and audio equipment indicate some of the consequences of lean product development, used here synonymously with Japanese product development. In the automotive sector, independent evaluations show that Japanese vehicles are highly rated in more or less all segments other than the premium segment, and have class-leading reliability. Despite their alleged inefficiencies, and some recent bad press for product recalls, German producers such as Mercedes have continued to out-sell Lexus, especially in Europe. Our thesis is that it is the very absence of leanness, manifested by a reluctance to make compromises in design and by a propensity to over-engineer the vehicles, that creates the image and brand value that support Mercedes’ position in the premium segment of the market, a position consistent with Bangle’s (2001) description of design at BMW. In the case of the audio sector, there are also clear differences between the strategies and product development processes of Japanese and non-Japanese firms. All high-end audio firms emphasise the acoustic quality of their products, but non-Japanese firms place much more weight on product personality and strength of design statement, even arguing that a major part of the appeal of their products is that they are not market-led. Japanese firms are very attentive to the market, and go to considerable time and trouble to reconcile the needs of different markets in order to achieve economies of scale in production. However, in doing so, they risk diluting the identity of their products. Integration between the development and production departments in audio firms was close in Japan, and a high proportion of engineering attention is devoted to production issues, that is, to something other than acoustic quality. This perhaps accounts for why Japanese firms perform poorly at the top end of the market, while dominating the mass market. This conclusion reinforces Naveh’s (2005) argument, that increased product innovation leads to decreased efficiency in terms of cost, quality and time-to-market. An interesting question is whether this is an issue of capabilities or strategy — are the Japanese absent at the top end because of strategic decisions not to compete there, or because they would like to, but are less capable? The fact that Japanese producers are considerably over-represented in the upper ranks of independent evaluations of mass market products relative to their presence, and under-represented in premium markets suggests a capability-based explanation. If this is so, what are the underlying reasons? One explanation is that lean principles can actually work against success in premium markets. Our data suggest that this is partly true, although whether it is the principles per se, or the way in which they are applied, that is at fault is debatable. Our analysis suggests that it is both. The first lean principle emphasises the identification of customer-defined value and at first sight, this is difficult to argue with. After all, what sensible organization would purposefully not deliver what its customers actually want? However, as Christensen (1997) has pointed out, listening too much to customers, particularly existing customers, encourages the creation of me-too products, risking exclusion from new and growing markets and may stifle more radical innovation. Although not necessarily insensitive to expressed customers’ requirements, a common characteristic of the premium producers is that they were not totally

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driven by customer requirements, but rather by a set of values on the part of the producer. This was most pronounced in the case of audio products, where audiophile values were paramount. For the premium auto producers, engineering-based values of technological novelty and the pursuit of (engineering-defined) perfection shape design choices, resulting in products that are ‘over-engineered’ according to functional standards, but which carry an image and ethos that is attractive and of high value to some consumers. Our interpretation is that the lean principle of identifying customer value encourages definitions of product requirements in terms that customers are easily able to articulate. This contrasts with values-driven product development, which is about striking a common chord with customers, providing a means for consumers to express values of which they may not even be conscious. In this case, consumer needs are discovered through contact with a product, rather than serving as inputs into its development. The risk, of course, is the chord that is only struck with a small number of customers. Values-driven products are likely to be successful in particular niches — essentially consumers who share the same values as the developers — which means that fewer compromises are necessary in order to satisfy the consumers within each niche. Mass markets inevitably mean more preferences have to be accommodated, diluting the ‘purity’ of a product. Strictly applied, the principle of freedom from waste will curtail tendencies to over-engineer products — in lean terms this adds cost, but little additional (functional) value. Devoting ‘too much’ effort and resource to particular product attributes at the expense of others (e.g. ride and handling at the expense of engine technology) is another example of waste, and Japanese firms are more likely to trade-off different aspects of performance (e.g. acoustic quality vs. reliability; attributes attractive to Market A vs. attributes attractive to Market B) in order to arrive at a product that is optimal for a broad section of customers. This, we argue, works against the sense of strong product personality that is often important in the premium segments. It is also clear from our analysis that brand value is partly a social construction; companies may promote certain brand values, but ultimately real brand value emerges from interaction, exchanges and reinforcement amongst the public. Opinion leaders can play a crucial role here, and in the case of both auto and audio products there are substantial specialist media who perform this role, in a sense defining what is and is not ‘cool’. Some segments of these media clearly approach their evaluations from a purist perspective, and therefore subtly privilege strong-personality, valuesdriven products. The social construction of brand value also means that reputation and appeal may only loosely be coupled to actual product attributes, and much more to what is considered to be ‘cool’. Social effects also create brand lag; products that may be good choices according to rational, functional criteria may still be unattractive if owning them is construed as indicative of a lack of taste or sophistication. In this case, our observations of the weaknesses of lean producers in premium auto and audio markets may be a transition phenomenon, as the generations of users who grew up associating Japan with ‘cheap, shoddy goods’ pass on. In the future it will be much easier to see whether lean principles genuinely impede the creation of premium products, or whether the continued strength of European producers in premium markets is merely a hangover of history.

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Acknowledgements Thanks are due to Emma Dewberry and Isabelle Dostaler for their role in the design and execution of the study of audio equipment manufacturers.

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