LEAKING COMPETITIVE STRATEGY AND ...

Journal ofManagemenl Studies 32:2 March 1995 0022-2380

LEAKING COMPETITIVE STRATEGY AND MANUFACTURING PROCESS TECHNOLOGY DEAN M . SCHROEDER College of Business, Valparaiso University STEVEN W . CONGDEN School of Business, Ithaca College C. GOPINATH CoUê of Business and Economics, University of Delaware

ABSTRACT

This paper presents an empirically grounded study of the linkages between competitive strategy and manufacturing technology for 20 small manufacturers. It identifies the nature of strategy-technology linkages, the process by which the two align, the market and customer forces driving this alignment, and the consequences of failing to adopt appropriate new technologies. The paper proposes five propositions which are developed into a dynamic strategy-technology linkage model.

INTRODUCTION

The role of technology in competition has long been recognized (e.g. Andrews, 1971; Ansoff, 1965). Today's growing dominance of Japanese firms in many industries is often credited to their exploiting this linkage through closely integrating manufacturing process technology with their competitive strategies. This has encouraged many to champion such integration (e.g. De Meyer et al., 1989; Dertouzos et al., 1989; Jaikumar, 1986; Meredith and McTavish, 1992; Skinner, 1984; Wheelwright, 1981). Despite these appeals, empirical literature exploring the precise nature of the relationsbip between manufacturing process technology and strategy remains scant. Indeed, the study of technological innovation is too often decoupled from that of competitive strategy (Porter, 1983), even though the advent of computer-controlled technologies promises striking implications for traditional views jelinek and Goldhar, 1983; Voss, 1986). This study explores the links between competitive business strategies and the manufacturing technologies of 20 small to medium-sized manufacturer, using a Address for reprints: Dean M. Schroeder, Schulz Professor of Management, College of Business, Valparaiso University, Valparaiso, Indiana 46383, USA. © BasU BlackweU Ltd 1995. Published by BlackweU Publishera, 108 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142, USA.

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grounded-theory approach (Glaser and Strauss, 1967) to search for patterns of alignment. It then develops empirically grounded propositions based on these observations.

LITERATURE

As it is traditionally conceived, the strategic role of manufacturing technology entails a trade-off between the flexibility to produce wide product variety and cost efficiency. A stream of research initiated by Abemathy (e.g. Abemathy, 1976; Abemathy and Townsend, 1975; Abemathy and Utterback, 1978) found that this trade-off evolves in a predictable pattern over the life cycle of a product. Initially, when competition centres around product innovation, flexible general purpose processes are necessary to accommodate a variety of products and frequent design changes. As standardized products and high volume shifts competition towards cost efficiency, production systems become more integrated, capital intensive and complex. Straying from this normal evolution is risky if not closely associated with a matching competitive strategy (Hayes and Wheelwright, 1979). This stream of research generally emphasizes uniformity in manufacturing technology among competitors. Although firms can lead in pursuing low-cost efficiency or lag in order to retain the adaptability necessaty for differentiation or niche strategies, flexibility versus efficiency is generally the key strategic concern. The manufacturing strategy literature provides a richer and more fine-grained conception of the strategic impact of manufacturing technology. Skinner (1974) advocated a wider variety of strategic priorities including low costs, product quality, dependable delivery, short delivery cycles, flexibility to produce new products qtiickly, flexibility to adjust to volume changes, and low investment. Supporting Skinner's 'focus factory' contentions, others have listed similar sets of priorities while adding product consistency (Hayes and Schmenner, 1978; Kleindorfer and Partovi, 1990; Stobaugh and Telesio, 1983; Swamidass and Newell, 1987; Wheelwright, 1984). Chase's (1990) 'service factory' extended the strategic advantages potentially gained with manufacturing technologies to include information and parts support. This stream of literature generally maintains that trade-offs are needed between competitive priorities because a particular production system (technology) cannot satisfy all priorities. Thus a firm's manufacturing technology and its competitive strategy must fit together. The arrival of computer-controlled 'smart' manufacturing technologies has challenged former notions about trade-ofTs between priorities, especially flexibility versus efficiency (Blois, 1985; De Meyer et al., 1989; Goldhar et al., 1991; Hayes and Wheelwright, 1984; Jelinek and Goldhar, 1983; Meredith, 1987; Meredith and McTavish, 1992; Thompson and Paris, 1982; Voss, 1986). Because the latest technologies are more flexible, making numerous product variations can be almost as efficient as manufacturing large volumes of standardized products. Economies of scope may actually replace economies of scale as the basis of competition moves from a low-priced, commodity orientation to emphasize low-cost special options and customized products (Jelinek and Goldhar, 1983). Several recent conceptual works (Kotha and Ome, 1989; Sweeney, 1991) have integrated business strategy, manufacturing strategy, and the implications of new O BasU BiackwcU Ltd 1995

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technology, by proposing generic manufacturing strategies linked to Porter (1980) generic business strategies of cost leadership and differentiation. Flexible technologies are said to be appropriate for differentiation strategies, while more fixed but efficient technologies are appropriate for cost leadership strategies. Both works also include the possibility of a combination low cost-differentiation strategy using new computer-controlled technologies. These works do propose the link between business strategy and manufacturing technology that is so in need of empirical testing, but because their focus is dispersed over the many facets of manufacturing strategy, this link is much more generalized than the richness suggested by other manufacturing strategy works noted above. Except for case studies, few empirical works have linked strategy and technology. Some (e.g. De Meyer et al., 1989; Schott and Muller, 1975; Zairi, 1993) have identified strategic impacts of manufacturing technology, but focused on competitive strategy peripherally. In a study of strategy-technology linkages in the foundry industry, Schroeder (1990) found no clear link between Porter's generic business strategies and technology, but he did observe that the strategic impact of a new technology changes over time due to the complex interaction of the continuing evolution of the technology, the emergence of complementary technologies, and the widening diffusion of the innovation. This argues for a dynamic or evolving relationship between strategy and tecbnology rather than the traditional static trade-off models. The search for links between strategy and technology appears to be at a transition point. Normatively, many convincing works assert - but do not empirically demonstrate - a strategy-technology connection. Empirically, works either propose the broad, well established strategic implications of a trade-off between efficient and flexible production technologies, or introduce small sample richness that raises new questions related to the dynamic nature of technology's link with strategy. At the same time, the advent of computer-controlled technologies calls into question the traditional trade off between fiexibility and efficiency. As Anderson et al. {1989, p. 142) concluded after their exhaustive literature review: 'Precise theories should be developed and data collected to substantiate or refute some of the assertions which have been made in the literature.' The above review of the literature shows a need to more clearly explore the alignment between strategy and technology. This critical link is inherently dynamic (Schroeder, 1990), and of particular interest of late because the advent of computer-controlled technologies may have changed traditional rules. Consequently, this study not only focuses on the nature of the alignment between the way firms compete (i.e. their competitive strategies) and the technologies they choose to employ, but also the process by which alignment takes place. Is a technology selected to support a given competitive strategy, or is the strategy adapted to better utilize an available technology? And what drives the choices? This study addresses these issues, and does so in the context of computer-controlled manufacturing technologies. METHODS A study intended to capture the dynamic linkages between strategy and technology must be designed to explore richness while simultaneously being able to (D Basil Blackwell Ltd 199.^

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capture patterns across firms. Case-based research provides the richness, but cannot effectively identify the patterns. Large sample multi-industty studies offer generalizations, but at best address only a narrow set of broad concerns. Neither is appropriate for our purposes. Consequently, the method used here involves a mid-range exploratory design involving the in-depth study of 20 firms. This research method provides a wider variation in technologies and industries than single case studies can, yet sustains more sophisticated assertions about linkage patterns than are possible with large sample studies. In this way we can build a foundation for a more comprehensive understanding of strategy-technology linkages. Our paper's research objectives lend themselves best to a grounded theory methodological approach (Glaser and Strauss, 1967). By this, theory is discovered from observational data in a systematic manner, rather than by quantitatively testing hypotheses. Observation is a critical begintiing point when developing theory. -.- . . The Sample

Three industries were chosen for study: job-shop machining, plastic injection moulding, and metal cutting tools. These were selected using the following criteria: highly competitive environments, recent introduction of significant new computerized manufacturing technologies, and importance to the infrastructure of industrial economies. The research required a diverse sample of firms within these industries to include both highly profitable and less profitable firms, and firms using advanced manufacturing technologies as well as those using more traditional processes. These design criteria were given to contact people from five organizations, including industry associations and state and federal agencies that work with manufacturers. Their assistance was required not only in selection, but also in gaining access to tbe sites for research. They recommended the 20 firms constituting the sample. Table I provides overview data on these firms. The firms employed between 14 and 140 workers. Their relatively small size assures a more direct link between the technologies employed and the competitive strategies followed. The firm categorization in table I was based on research findings rather than a priori information. Consistent with our methodology, measures used to determine these categories were developed from the research. They will be discussed later. Data Gathering

Data gathering began uith background industry and technology studies designed to identify the competitive forces within each industry and to learn about critical technologies before field research. The field research included interviews, plant tours, questionnaires and confirmatory synopses. Interviews. The key manager from each participating firm, usually the chief executive officer (CEO) and ovmer, was interviewed. In a few cases, an additional member from the firm's top team assisted with answering specific questions. Interviews began with a request for a brief description of the firm's history, nature of operations, and product market particulars. The majority of time in © Basil BlackweU Ltd 1995

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Table I. Overview of the .sample Compare code

Number of employees

Level of technobgy

140

H M

Performance

Batch size

Market served

H H H L M

HP HP HP M? HP HP HP HP

MP HP HP HP HP LP LP LP

Job-shop machining

Ml M2 M3 M4 M5 M6 M7 M8

M L

H H

LB SB SB LB UB LB SB SB

135 tS8

M H H M L

m

L M

M H H M L L

MB LB MB LB LB LB

n 2b

H

40 50

H H H

M

Plastii injection rmulding

PI

m

P2 P3 P4 P5 P6 P7 P8 Metal cutting tools

Tl T2 T3 T4

m 50

M

MB

L

L

LB

M L L H

U

LB SB SB SB

-•

• 58

14 40 18

.

H L L

MP MP MP MP

Key: H = High, M = Medium, L = Low LB = Large batch size, MB = Medium batch size, SB = Small batch size HP = High precision, MP = Medium precision, LP = Low precision

each interview focused upon issues related to competitive strategy and technology. Questions probed into the specifics of the strategies the firm uses to compete, what technologies were employed, why these technologies were selected, what strategic and operational adjustments were required with these technologies, and how the advantages provided by the technologies were used to support competitive strategies. Two researchers conducted each interview, with the first author responsible for the interview in all cases, and the other responsible for taking notes, filling in gaps, and raising additional issues. Interviews averaged 90 minutes, and all but one were tape-recorded. The interview tapes were subsequently transcribed into 520 single-spaced typed pages. Plant tours. Extensive plant tours following the interviews provided an opportunity to identify and confirm the use of various technologies, and consider issues arising UJ

Key:

M = Machine shop " = Plastic injection moulder T = Culling lotil manufacturer

Figure I. Technology use and performance

Strategp-Technology Ali^ment

Generic strategies. In searching for links between technology and competitive strategy, we began by seeking for patterns using Porter's (1980) generic competitive strategies and subsequent extensions (i.e. Butler, 1988; Jones and Hill, 1988; Murray, 1988; Wright, 1987). As discussed earlier, there has been speculation as to a linkage between generic strategy and technology (e.g. Kotha and Orne, 1989; Porter, 1983; Sweeney, 1991). The variables frequently referred to by the sample firms as critical to the way in which they competed were price, quality, and service. Price was the total cost to the customer. Quality was primarily determined in terms of consistently meeting customer-required levels, product characteristics and level of precision. Service was defined in terms of delivery, design assistance, and value-added. Viewed from Porter's framework oi" generic strategies, all the firms puiûed at least a minimum level of both differendadon and customer focus, which typically positioned them in a market niche requiring specific capabilities. Within these niches, however, all competitors possessed similar capabilities. Consequendy, in most cases, price played a dominant competitive role. As expressed by the president of Tl: BasU Blackwdl Ud 1995


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'Number one, I guess, is capability - can you make the part? Number 2 would be price and delivery and the price better be damn competitive.' Even in shops reported to have the highest quality, price was critical: 'Quality is weC advertised, but you'd better have the lowest price.' (Ml) 'You really have no choice. That's not really an alternative. Nobody's going to come to you if you're a lot more expensive than everybody else, I don't care how good you are.' (P2) 'You must have the lowest price!' (M5) This does not discount the advantages of being able to offer better quality, service, or delivery: 'Price is still a major factor. But not the only factor.' (P5) Once a firm's price matched that of its lowest priced competitor, other factors came into play: 'In our business it's the service that's different and the customer is going to demand the [best] price.' (P2) 'If they like you and you've done a wonderful job and terrific things for them, but you're 2 or 1 per cent high, they'll call you and say "Gary, you're going to lose this job. I got a price here..." of some number. They'll give you a second chance [to bid], that's all.' (P5) An exception to the price rule was observed when shops produced prototype and complex custom one-of-a-kind type of work. 'In this kind of work I think the service end of it is super important because you're working with a product which we sometimes have to take latitude with and understand what it is our customers are trying to accomplish. Knowing what they do is very important.' (M4) In such situations, the distinctiveness of the product means that neither market mechanisms — which protect the buyer - nor production cost histories - which protect the producer - exist (Williamson, 1975). Thus price competition fails. Trust, therefore, becomes critical, and reputation, service, and close customer relations become more important than price alone. The fragmented structure of our industries explains the lack of Porter's 'broadbased differentiation' and 'cost leadership' strategies. This is consistent with Murray's (1988) contingency view that the cost leadership and broad differentiator archetypes are less likely to be found in such industries. What we seem to have found are a variety of 'strategic means' (Murray, 1988) or 'approaches' (Porter, 1980) to the generic strategies of 'focus-low cost' and 'focus-differentiation'. No clear patterns were observed between the use of specific technologies and the generic strategies followed. Technology was more clearly related to matching O BasU BlackweU Ltd 199S

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D.M. SCHROEDER, S.W. CONGDEN AND C. GOPINATH PERFORMANCE Medium

High

Ml

P2

M5

M3

rp3j

M6

Low

O

I s P4

Key:

Large batch size

O

TI

Medium batch size

T3 J

P6

P5

P8

Small hatch size

Fipjrc 2. Producdon batch size

competitive capabilities with the needs of particular market niches or segments. Within these niches, rivals with similar capabilities often resorted to price-based competition. Thus technology is used to match a firm's competitive capabilities with the needs of the market it serves.

Critical strategic dimensions. Although Porter's (1980) generic strategies were found of little use in identifying strategy-technology alignments, other elements of the firms' strategies were quite helpful. We will call these critical strategic dimensions. They are the elements of a firm's strategic options that most clearly highlight process technology differences among companies within the industry. These were: (a) the batch sizes of production, and (b) the level of precision of work. Batch Size: Large batch sizes of work were associated with the profitable use of computer-controlled technologies. Higher performing firms with large order sizes or repeat orders, and hence long production runs, tended to use computer-controlled technologies more than higher performing firms that produced small lotsizes or one-of-a-kind products. Small batch sizes apparenUy could not justify the overhead cost of programming computer-controlled technologies, unless the order was repeated at some future time. As illu.strated in figure 2, the more profitable large-batch manufacturers (MI, M3 and P2) produced more of their work with computer-controlled technologies than the poor performing large-batch firms (P5, BasU BlackweU Ltd 1995


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P6 and P8). likewise, the most profitable small-batch manufacturers (M8 and r2) were using less computer-controlled equipment than two of the three poor performing small-batch firms (M4 and T4). The importance of the fit between batch size and the use of computer-controlled equipment is demonstrated vividly by firms caught out of alignment. The manager/owner of M7 expressed the dilemma quite clearly: *The whole problem is we're marketing for the guys that are in a onesy, twosy business. And we've got these [CNC] production macfiines. So we're always strangers in the production world. [Adopting CNC] just seemed like a good idea at the time... We get more utilization out of our manual machines.' (Ml) M2 demonstrates how such misalignment can occur. They specialized in one-ofa-kind and custom small-batch prototype work. Excellent customer relations with a major defense contractor resulted in a three-year large-volume contract. WTiile this was outside of M2's 'normal' work, the owner determined that such a move could be highly profitable, if new CNC equipment were purchased to manufacture the job. The contract was cancelled one year later because of government cut-backs. Left with a poor fit between the new CNC equipment and its smallbatch work, M2 altered its strategies and began pursuing more larger batch jobs in an effort to utilize the equipment. T4 experienced similar misalignment. Their accountant, sales manager and a zealous equipment salesman convinced the owner/president that state-of-the-art CNC grinding equipment was perfect for the firm's work, which was one-of-akind and .small-batch metal cutting-tool resharpening, tool regrinding (customizing standard tools), and special cutting tool manufacturing. Unfortunately, once purchased, the extensive CNC programming required for the various orders proved impractical. Because the high equipment cost represented a 'bet-thecompany' investment, T4 was attempting to shift its strategic position entirely from a tool sharpener and customizer to a volume tool manufacturer. Thus, the adoption of new technology forced a change in strategy. M3 demonstrated how changes in strategy can require changes in process technology. In 1980, because of several key management and personnel changes, the company shifted its strategy from pursuing short-run prototype and tooling work to large-batch production jobs. M3 quickly discovered its traditional machining equipment was not competitive in this new market. As an experiment, one CNC lathe was purchased. Its success led to a second CNC lathe purchase six months later, followed by CNC machining centres until 90 per cent of all work was produced with computer-controlled equipment. In this case, shifting strategic postures required corresponding shifts in process technology. Although the link between the batch size of jobs and the profitable use of computer-controlled equipment was clear, the relationship is dynamic. The evolution of computer-controlled process technologies toward greater flexibility and user-friendliness makes them increasingly more appropriate for lower volume work. As the president/owner of M5 explained: 'We were a tool and gauge operation where we would make things in quantities from one to five, and of course the [CNC] machinery at the time was C) BasU BlackweU Ltd 1993

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best employed on high quantity because it was so difficult to get it set up and adjusted properly. Now that is changing because the machines are getting smarter and smarter. We're getting to the point where now we can do relatively simple parts in small quantities (as low as 50 units) and do it competitively with a manual setup.' (M5) This movement was most apparent in shops requiring the high level of precision the computer-controlled technologies provide. Preci.sion: Advanced manufacturing technologies proved important for producing high-precision parts. 'High precision' here means the ability to maintain close tolerances and repeatable results. For shops serving customers requiring greater precision, using advanced technologies was simply an issue of capability. Without such equipment, jobs were difficult and sometimes impossible. Plastic injection moulders used computerized process controls to record moulding parameters for customers requiring such data for quality assurance or R&D, and to consistently produce complex jobs. As figure 3 shows, the plastics firms whose customers have highly sophisticated end products (P2, P3 and P4) employed high levels of computer-controlled process technologies. These customers were in the aerospace, computer, photographic equipment, or medical instrument industries, where product applications demand the highest levels of quality and the tightest tolerances. The owner of P3 explained that his customers' demands for quality and precision could not be met efficiently without computerized process controls. Manufacturing these parts with traditional equipment resulted in very high scrap rates and excessive inspection costs. The same pattern held in machining, as the president of M6 explained: 'You can hold tolerances that before you just cotildn't even think. ... To do that [the contour on a missile part] on an old manual machine, it was just almost impossible... So with a four axis [CNC] machine, it just pops out like nothing.' (M6) This extra precision offered some firms a distinct compeddve advantage. Ml manufactured high-precision defense components that typically had sets of specifications for both tolerance and performance. Managers reported that their greatest competitive advantage was their use of CNC equipment to hold twice the already tight tolerance specifications to ensure meeting the performance specifications. Competitors reportedly had more difficulty meeting the performance specifications. Figure 3, however, shows only some of the observations on the precision-technology link. M2, M7 and M8 market to customers with high precision requirements, yet are ranked low or medium in terms of level of technology, primarily because the technology categorizing measure focused on major pieces of computer-controlled manufacturing equipment. While this provides clear and easily documented categories, it misses many subde technology differences. The small-lot firms with high precision requirements could not justify CNC equipment, yet they did employ advanced manufacturing technologies more appro© BasU BiackwcU Ltd 1995

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STRATEGY-TECHNOLOGY UNKAGES PERFORMANCE High

Ml

Medium

Low

P2

M5

M4

P3

M6

M7

M2

M8

Key:

High precision

0

Medium precision

f \^

^ Low J precision

Figure 3. Markets served

priate to their needs. For example, M8, which manufactures one-of-a-ldnd plastic injection moulds, was employing a sophisticated electronic discharge machine (EDM) for precise duplication of mould cavities. This contrast in the appropriate types of technology is highly visible when comparing firms with similar strategic postures, yet opposite performance and technology rankings. Comparing M8 with M4 and T2 with T4 provides such an opportunity. The two pairs of firms have similar products and operate in similar market segments. M8 and M4 both manufacture one-of-a-kind moulds, and T2 and T4 both produce custom cutting tools in small quantities. Interestingly, in each pair, the firm with the least computer-controlled technology, M8 and T2, performed best because they both use other more appropriate ancillary technologies. They have advanced cutting fluid filtering systems to increase precision and quality, and sophisticated dimensional measurement tools for quality control. To increase accuracy and productivity, M8 retro-fitted glass measuring scales with digital read-out displays to their conventional machine tools. This firm also uses an electronic discharge machine for precise duplication of injection cavities. While M4 and T4 were rated high in technology because they had CNC equipment, this technology was not heavily used and, therefore, provided little advantage in their market niche. Basil BlackweU Ltd 1995

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Thus, the critical issue is not simply having CNC equipment, but choosing the appropriate advanced manufacturing technology to fit the strategic position of the firm. Advanced manufacturing technologies provide capability, but the intelligent choice of equipment also depends on factors such as batch size and the level of precision required. Strategy-Technology Alignment Process

Adoption rationale. Many managers reported that they were forced to adopt new technology, either directly by customers or indirecdy through market forces. Direct pressure came from major customers attempting to upgrade their supplier networks and, in some cases, move toward new supplier and quality assurance philosophies. Several of these customers required vendors to supply printouts with detailed manufacturing process parameters. Advanced process control technologies could efficiently provide these reports. Major customers were also beginning to stipulate the new technologies to qualify as a vendor. For example, P4 was in die middle of a five-year programme to upgrade its process technology and shop-floor management practices in response to a report from a Ford Motor Company vendor audit team. As the general manager stated: 'It [adoption of the latest technology] was driven by our market. You know they [P4's customers] are the leading companies in the world and they have to stay on the edge of innovation and we, therefore, have to stay there too - in order to keep that market.' (P4) Other managers reported indirect pressure to adopt new technology when they discovered that competitors who underbid their prices were using such equipment. 'You lose the order, you're not competidve and you want to know why. You find yourself off by 15-20 per cent and you say "Gee, how can I be competitive?" And they'll [customers] say, "Well, your competition figured on putting it on this [advanced CNC] machine." Once you get the insight to that, I guess you have to realize either you jump on the bandwagon and get something just as good or better, or probably you're better off not to waste your time with that kind of work because you're not going to win it.' (M2) Having advanced process technology, whether it was fully exploited or not, provides a highly visible representation of the shop's capabilities, and is sometimes used as a sales tool. While admitting the firm's CNC machining centres and lathes were seldom used, the president of M7 insisted the equipment was worthwhile as a showplace for customers. The CNC equipment is 'the first thing they [customers] want to see on plant tours'. Most managers viewed the adoption of computer-controlled manufacturing technologies as a 'reacdve' requirement. They believed that a company maintains few sustainable financial gains from employing such equipment. Benefits are quickly passed along to the customer. As the owners/presidents of M4 and M5 said: © Basil BUckwcU Ltd 1995


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'CNC definitely works faster. We are holding tolerances closer than we were by the other methods. But by the same token, as that changes, so do the requirements of your customers.' (M4) 'We do more complicated work. Things that wouldn't be economically reasonable to try years ago we do as a matter of course now. The customer is the beneficiary in this, because of competition.' (M5) Adopting new technology was thus required '... simply to stay in business' (M3). One exception to this pattern was observed. From P3's founding, the owner/president was committed to staying on the cutting edge of technology. By serving an exclusive clientele of high technology companies whose work was nearly impossible for other firms to make, P3 competed with less dependence on price. Employees and managers were accustomed to changes in technology as a matter of course. Because of this openness, equipment vendors pitched their new technologies to P3 first, giving the company early exposure to advances and keeping it technologically ahead of its competitors. For example, the company was the first in the region to adopt advanced Japanese moulding machines. Alignment process. The process of alignment between technology and strategy was quite amorphous. Most literature prescribes a product- or strategy-centred view: appropriate technological choices are made to support a given strategy, customer, or product life cycle (e.g. Hayes and Wheelwright, 1979; Hill and Duke-Woolley, 1983; Porter, 1983; Skinner, 1974). The underpinning of Skinner's (1974) focused factory is the efficient matching of manufacturing capability to competitive strategies. Indeed, this pattern appeared to be prevalent, at least as a starting point. M3, for example, found they had to adopt new process technology after changing strategies. Thus technology-follows-strategy. However, there were variations as well as direct counter examples. Computer-controlled equipment comes with a package of capabilities, but only a few of these were the focus of the initial adoption decision. Many firms originally adopted the technology to support existing strategies, then discovered unanticipated new capabilities, and so made opportunistic deviations or additions to their original strategy. 'What Japanese builders are doing with the controls exceed our ability to use them. We buy bells and whistles and we don't ring or blow them.' (M5) Exploiting these newly found capabilities required adjustments in existing competitive strategies. TI discovered that new CNC equipment provided greater flexibility and capacity than anticipated, allowing expansion into more specialized (custom) cutting tools; 'In consistency of parts, in overall production, in ways that we hadn't really thought about when we bought the machine. We bought the machine thinking it's going to achieve certain things and are finding that we can do other things with it' (TI) O BasU BiackwcU Ltd 1995

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Minor strategic adjustments to take advantage of unanticipated capabilities are consistent with Penrose's (1959) impetus for growth: firms continually expand to take advantage of resources and this requires adjusting strategy. There is, however, always concern that such adjustments may incrementally regress into situations in which competitiveness deteriorates as the company loses sight of its primary focus (Hill and Duke-Woolley, 1983; Skinner, 1974). In some cases there was a total mismatch between the new technology and strategy. Three firms, T4, M2 and M8 found themselves in this situation. M8 corrected the problem by selling the new equipment, but T4 and M2 considered the adoption irreversible and radically altered strategies to fit the computer-controlled technology. As discussed earlier, T4 transformed itself from being a tool sharpener and regrinder to a primary tool manufacturer to take advantage of larger batch sizes. In order to use the newly purchased CNC equipment M2 hired a new sales person to search exclusively for work with longer production runs, a market segment M2 tradidonEiUy avoided. This is a form of processcentred strategy (Buggie, 1981; Hughes, 1984): customers and products are changed - in other words, strategy is altered to be compatible with a large investment in process technology. Overall, in light of the impact that manufacturing technology can have on strategy, it is useful to speak of the strategy-technology alignment process as a co-alignment with strong interactive effects. When a technology is new, nobody knows its full capabilities. Once the technology is adopted, greater understanding develops, and the firm's strategy must be adjusted to maximize its advantage. Failure to adopt. The poorly performing firms with low levels of production technology were in deteriorating strategic positions. The four in this situation, T3, P5, P6 and P8, had used the same basic equipment technology for more than a decade. Typically their newest piece of equipment was the photocopier. Each of these firms had at one time occupied strong market positions and enjoyed excellent product reputations. T3 was part of a leading cutting tool company; P5 once 'owned' well over half of a market that it helped create; P6 had been number one or two in its market for years; and P8 had played a strong second in its market. Yet in each case, market share had eroded and was continuing to do so. Each was now producing cheap, low-quality products. Their choice in not updating their technology to meet changing market requirements partially explained their less profitable, low-end market position. Lack of profitability, combined with years of stagnant behaviour, made the successful adoption and integration of new technology more difficult than usual. At P5, for example, a new production manager was hired to inject new thinking into the company and upgrade its technology. This manager started several major modernization initiatives, but when lower-level managers and long-time employees complained to the company president, the programmes were stopped. Our plant tour revealed that the two computer-controlled machines in the plant were not working. The new manager resigned shortly after our study. At P6, the newest injection machine was a rebuilt model almost 20 years old. The company owner/president 'ran the numbers' and claimed there was simply no way new equipment could pay for itself. He argued that a competitor who had moder© Basil BlackweU Ltd 1995


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nized its plant could not justify the investment and would not survive. Yet he admitted that this rival had been capturing market share from P6 for at least four years.

DISCUSSION

The advantage of selecting grounded theory as the methodology for this study is two-fold. First it assists in analysing qualitative data. Second, it helps develop a theoretical account that not only facilitates discussion, but is grounded in the data collected. Thus theory is developed from data, rather than testing existing theories (Martin and Turner, 1986; Turner, 1983). Based upon our observations noted above, we now advance and discuss five propositions. These address: (1) the nature of the strategy-technology linkage; (2) technology adoption rationale; (3) the strategy-technology alignment process; (4) the consequences of failing to adopt; and (5) the risks and rewards of pro-actively adopting new technologies. From these propositions we develop a dynamic strategy—technology alignment model. Strategy- Technology Linkages

Like other empirical attempts (e.g. Schroeder, 1990), we did not find a clear link between manufacturing technology and Porter's (1980) generic strategies. Generic strategies are apparently too generalized. Porter's framework recognizes only two basic positions a firm can take: differentiator or low-cost producer. Since combination strategies are possible, perhaps these two basic strategics might better be thought of as dimensions of strategic positioning rather than distinct strategies (Miller and Dess, 1993). Even so, firms can take many conceivable approaches to low cost and differentiation with respect to technology. For example, a low-cost position can be achieved with either state-of-the-art manufacturing and high volume, or with lower volume and older technologies by taking advantage of extremely low overhead (Schroeder, 1990). Likewise, in our sample, firms difTerentiating on precision tended to use CNG technologies, whereas there seemed to be less of a technology imperative for firms differentiating on customer service. Consequently, the differing technology demands of the various approaches to generic strategy tend to cancel each other out when one searches for a broad correlation between technology and generic strategies. There were, however, elements of strategy that clearly demonstrated meaningful linkages with technology. We found that firms pursuing customers that require relatively large batch size orders and/or great precision tended to use more computer-controlled technologies. Contrary to their much heralded flexibility, CNC technologies proved too inflexible, due to high programming time, for firms focusing on small lot size work. Exceptions were found with companies whose strategies required the precision that could only be provided by computerized technologies. Here the programming costs were justified. Thus, firms competing for like-types of work (i.e. large batch size or high precision) tended to use similar technologies. This finding leads us to propose the strategy construct of 'strategic groups' as most relevant in identifying strategy-technology linkages: i © Basil Blackwell Ltd 1995

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Proposition 1: The appropriateness of a manufacturing process technology for a firm depends upon the strategic group within which the firm competes. Before expanding upon this proposition, a brief discussion of the strategic group construct is in order. Strategic groups are clusters of firms within an industry that follow similar strategies, have like capabilities, and compete primarily with rivals within the same group. Cool and Schendel (1987) propose as a minimum standard that firms within an industry be grouped according to (a) their business domain, and (b) their resource commitments. A firm's 'domain' refers to the specific products, market, or type of customer it targets. 'Resource commitment' addresses the resources (e.g. people, technologies, materials) deployed by the firm to building and maintaining a competitive advantage. Strategies committing to pardcular domains and resources involve specialized investments that, in turn, become barriers when attempting to significantly change strategies. Such 'mobility barriers' have been given as the main reason behind the existence of discrete clusters of firms from the conception of strategic groups (e.g. Caves and Porter, 1977). Recendy, Reger and Huff (1993) found that strategic grouping is more than an academic construct; firms cognidvely group industry competitors based on perceived strategies as a way of organizing and making sense of their environment to facilitate their own strategy formulation. What prompted our exploration of the relevancy of strategic groups was the remarkable correspondence between our observations and the underlying elements of strategic group theory. We first observed that virtually all firms professed to compete on price, but that this was implicitly within a group of competitors with very similar capabilities (i.e. resource commitments) who pursued the same type of customers (i.e. domain commitment). It was not a comparison with their broader industry. Once a firm committed to a major resource like manufacturing technology, switching strategy was difficult (i.e. a mobility barrier). With respect to domain, firms literally categorized customers according to order size (or batch size) and precision requirements, the two strategic dimensions we found most related to technology. That firms in our sample competed primarily within their strategic group and were generally cognitively aware of who tbeir competitors were parallelled the findings of Reger and Huff (1993). Strategic grouping is an industry-specific concept that provides a much needed level of richness. Both strategy and technology are complex concepts that include many components and variations, making direct linkage through typologies or taxonomies impossible at all but the most general level. Exploring their linkages through the use of strategic groups, however, provides strategy-technology gestalts which capture intricate interrelationships and provide promise for greater understanding of their linkage. Adoption Rationale

Among the firms studied, the decision to acquire new process technologies was usuaUy based on customer demands or market forces. Many firms mentioned these demands explicitly. As new technologies were introduced with proven new capabilities, customers began demanding them. Thus, customer expectations and market forces became the primary forces driving technology homogeneity within strategic groups. This leads us to our second proposition. © Basil BlackweU Ltd 1995


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Proposition 2: Customer expectations and market forces exercise the discipline that forces firms within a strategic group to adopt appropriate and like technologies. Market demand can be more important in driving innovation than technological potential (Myers and Marquis, 1969). The strategies and capabilities of firms within a strategic group are closely aligned to the needs of their customers. The specialized skills and knowledge firms develop to serve these customers more effectively also represent mobility barriers. Thus, if customer needs and expectations change because of an emerging new technology, the firm must either acquire the new technology or find new customers who are satisfied with tbe old. -Technology Alignment

The acquisition of a new technology is only the first step in linking a technology with the firm's strategy. New technologies can represent new sets of capabilities and require adjustments throughout the firm (Robinson and Schroeder, 1992), which must be aligned witb strategy. This process was found to be highly iterative. Firms adopted technologies expecting them to provide certain competitive advantages, only to discover that they either failed to do so or that they also provided unanticipated addidonal capabilides. Since new manufacturing technology differed from known technologies, all its capabilities and working requirements could not be anticipated. In either case, firms had to adjust strategies in order to fully exploit the technology. This leads to our third proposition: Proposition 3: The process by which a firm fits its technology to its strategy follows an interacdve co-alignment process as changes in one require adjustments in the other. Co-alignment is the process by which tbe capabilides of a newly adopted technology and a firm's competitive strategies are mutually adjusted to reinforce each other. This process can result in nninor shifts consistent with changing competitive needs within a strategic group or, if tbe technology represents a radical departure from norms, it can require a firm to shift to an entirely new strategic group and to court new customers. The direction of causality for the technologystrategy alignment process is not always obvious. While some authors (Abemathy and Townsend, 1975; Skinner, 1974) argue that strategy drives, or should drive, technology, others (Hughes, 1984) believe that technology may drive strategy. Still others say strategy undergoes incremental adjustments in an effort to take advantage of slack resources (Penrose, 1959) or market opportunities (Hill and Duke-Woolley, 1983). All three alignment patterns occurred. The important point is that alignment must be achieved, and it is most likely to happen by mutual adjustment. Failure to Adopt

Failing to adopt appropriate new technologies, or adopting an inappropriate technology and failing to realign strategy to match it, led to poor financial performance. Four firms (T3, P5, P6 and P8) were weakened when they did not adopt the new technologies appropriate for their strategies. Two others (T4 and © Basil BlackweU Ltd 1995

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M4) were in financial trouble because newly adopted technologies were inappropriate for their strategies, and they had yet to shift strategies that realigned capabilities with customer needs. This leads us to our fourth proposition. Proposition 4: The failure failure to realign strategy technology) weakens the move into a new strategic

to adopt appropriate new process technologies or the with installed technology (old or inappropriate new compeddve position of a firm and can force it to group in an effort to survive.

The failure to stay current technologically is a form of organizational entropy that leads to a natural and gradual decline in competitive viability. Total collapse can be temporarily averted by realigning the firm with a different strategic group in which customers can be served with the firm's ageing technology. The critical issue here, as in the case of adopting inappropriate new process technology, is in realigning strategy. J ' An Integrated Strategy- Technology Model

The four propositions presented above can be integrated into the strategy-technology process model presented in figure 4. In this model, a hypothetical firm 'A' begins with a given strategic group with all the appropriate technologies for that group in place (Proposition 1). A new process technology is introduced. Market forces and customer expectations prove this to be an appropriate technology for competitors in A's strategic group; thus there is pressure to adopt (Proposition 2). If A adopts the new technology, and successfully co-aligns it with competitive strategies (Proposition 3), the company's posidon within its strategic group remciins largely unchanged. The firm is merely matching competitor moves and meedng market expectadons (Proposidon 1). Thus simply maintaining one's posidon requires the adopdon of appropriate new technologies. If firm A doesn't adopt, its strategic posidon is weakened and the company may eventually have to change strategic groups to realign with new markets or customers whose expectadons can be met with the installed technology base (Proposidon 4). To this point, the model deals only with reacdve adoptions, forced on companies by new developments. These are common, but one firm in our sample (P4) deviated significantly from this pattem and employed a proacdve mode. It successfully created a strong strategic posidon, and essendally a new strategic group, by adopdng the latest technologies and targedng new customers requiring its sophisdcated capabilities. The company thus established barriers for compedtors by being a first mover and remaining technologically ahead of rivals. This enabled rapid grovîh and compeddon on service and expertise rather than price alone: 'We are never the lowest bidder' (P4). Speculadon on the incorporadon of proacdve adopdon into the model introduces addidons as presented in figure 5. Firms can select a technology proacdvely before market forces and customer pressure require it. This is a risky strategy because the technology is neither fully developed at first, nor has its need been clearly demonstrated in the market. The experiences and compeddve impact of early adopters becomes part of the market test that reveals the true value of the technology. If the technology is not appropriate, the firm suffers and can find its strategic posidon weakened. Should the firm choose to keep the new process equipment, it may be necessary to move to © Basil BUclnveil Ltd 1995


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Market iotces

New technology Market rules technology appropriate Yes

New strategic

group No

No

Figure 4. Dynamic strategy^technology linkage model

a different strategic group or create an entirely new group, depending on the nature of the technology and the market. On the other hand, appropriate proactive adoption leads to a stronger strategic position within the current strategic group, or the creation of a new strategic group defensible by a first mover strategy. Evidence of this leads to our fifth proposition. Proposition 5: Proactive adoption is risky but, if successful, can greatly enhance a firm's strategic position. Although research documents the risks of adopting technology early (Rogers, 1983), first mover advantages (Porter, 1985) can be significant. In summarizing and integrating works espousing a resource-based view of competitive advantage, Peteraf (1993) identifies four conditions necessary for sustained competitive advantage: (1) ex post limits to competition (e.g. imperfect resource imitability); (2) ex ante limits to competition (achieving some kind of advantage due to absence of competition in obtaining the resource); (3) imperfect resource mobility; and (4) superior resources remain in limited supply. Our observations satisfy the first two conditions, and the later two with qualification. il BlackweU Ltd 1995

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Market forces

Market rules technology appropriate New strategic group

Yes!

Figure 5. Dynamic strategy-technology linkage model II

Imperfect imitability can be based on learning advantages and the organization skills and processes of integrating a new technology (Porter, 1983). Ex ante advantages consist of things such as reputation, customer good will, and lower technology purchase prices for being an early adopter and aiding technology producers in the technology development and debugging. With respect to general purpose manufacturing technologies available for purchase, the imperfect mobility and limited supply conditions are more difficult to argue. Specialized adaptations and additions to purchased manufacturing technologies do make them less mobile. In addition, fuUy utilizing the multiple capabilities of a technology would make it competitively less valuable to other adopters who did not fully utilize a given technology. Nevertheless, the magnitude and duration of these two sources of immobility are debatable, and the supply of a successful new technology is not typically limited for very long. However, the dynamics of new technology development can contribute to a sustainable advantage. A proactive firm that becomes proficient at adopting and exploiting new technologies may repeatedly reap higher profits, as they continually get the jump on competitors with each succeeding generation of technology. Additionally, a short window of competitive advantage may still be Basil Blackwdl Ltd 1995


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significant, if the interim profit margins are large and the adopter uses the opportunity to establish a more permanent advantage by moving rapidly down the learning curve. The sustainability of competitive advantage of a particular technology in a specific industry should be evaluated on a case-hy-case hasis. None the less, even off-the-shelf computerized manufacturing technologies provide strong short-term strategic positions to proactive adopters that can be sustained through learning and subsequent adoptions.

CONCLUSION

This study linked competitive strategy and manufacturing process technology by identifying patterns between the way firms compete and the technologies they use. Furthermore, it examined how those patterns emerge. The research advances our understanding beyond normative assertions and progresses toward building a meaningful, empirically based, model of the dynamic strategy-technology linkage. The 20-case research design overcame the disadvantages of studying too wide a variety of industries and technologies, yet provided sufficient diversity to observe patterns among firms with different competitive strategies. Because this was a focused, exploratory study aiming to develop empirically grounded propositions rather than to test hypotheses, care must be taken when generalizing from the research observations. However, several key propositions emerge from the research. First, the strategic groups concept of strategy helps identify, assess, and compare the specific types of technologies appropriate for competing within specific market environments by providing a robust construct encompassing a strategy-technology gestalt. This allows researchers to go beyond the idiosyncratic linking of strategy and technology on a case-by-case basis, while providing information more useful to managers than general caveats such as 'choose a technology to fit your strategy'. Given the complexity of both strategy and technology variables and the contexts in which they operate, attempting to directly link more generalized concepts of strategies and technologies remains tenuous and does not fully explain the alignment dynamics. Second, the appropriate technologies for a firm to adopt within a given competitive situation are often dictated by customer demands and market forces. Firms often find themselves in a reactive adoption mode. Third, the pattern by which a firm fits its technology to its strategy follows an interactive, co-alignment process as changes in one require adjustments in the other. Although a new technology is generally adopted to support a given strategy, the technology's full capabilities are often unknown prior to their use. Consequently, exploiting the technology's complete competitive advantages requires adjustment in the firm's strategy. Fourth, the failure to adopt an appropriate new technology, or the failure to realign the firm's strategy to the new technology, weakens the competitive position of the firm. Performance suffers, and the loss of capabilities relative to rivals may force the company to seek less desirable work (i.e. move into a less attractive strategic group). TTiese four propositions, along with a fifth addressing O Basil BlackweU Ltd 1995

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DM SCHROEDER, S.W. CONGDEN AND C GOPINATH

proactive early adoption, were used to develop a dynamic strategy-technology linkage model. These propositions and model require investigation for both validity within the industries studied and generalizability beyond them. The strategy-technology alignment processes observed are especially important for further research given its competitive consequences. This issue, as well as the model as a whole, is dynamic and could benefit from longitudinal investigations. Research progress in this area has been laborious because we are working with complex, dynamic constructs for which there are few standard definitions. While a strategic groups perspective illuminates many of the complexities, there are difficulties with uniform and meaningful measures of both strategic groups and process technologies. The challenge of defining and classifying manufacturing process technology is complicated by its multifaceted nature. It is difficult to assess where a firm's 'manufacturing process' technology ends and its other technologies begin. Gerwin (1981) sees organizations as a hierarchy of many task-technology combinations. 'Manufacturing technology' can be used narrowly to mean hardware and machines, or more broadly to include procedures and human activities. Though intertwined, the nature of capital equipment and the nature of procedures and human know-how result in quite different strategic implications in terms of cost, diffiision, changeability and defensibility. While this study has focused on major hardware technologies, researchers should also explore contingent relationships between such technologies and appropriate human and procedural technologies. These and many other questions critical to the relationship between strategy and technology require more empirical investigation. The shortage of empirical literature in the area may be partially attributable to the puzzle presented by the complex character of both concepts. More research is required to build and test the theoretical and empirical base necessary to develop the mosaic from which a richer understanding of the linkages between technology and competitive strategy can be gained.

APPENDIX

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'

•

The questionnaire was divided into seven parts. Goals: The respondents were asked to describe, on a seven-point scale ranging from unimportant to important, the goals of profitability, long-term growth, diversified product/market base, etc. to their firm. Business environment- Here, the respondents were asked to describe their perception of the environment on seven characteristics, each on a seven-point range. They included: more certain/less certain, less competitive/more competitive, more opportunities/fewer opportunities, etc. Products: The products currently being manufactured were to be described on eight criteria, such as related/unrelated, short production runs/long production runs, low precision/high precision, simple/complex, standard/custom, etc. Each was on a seven-point scale. © Basii Biackwcll Lid 1995


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Customers: The questions here were to gather information in terms of percentage of total firm revenues being provided on eight dimensions including the single large customers, products new within the last three years, customers new within the last three years, repeat johs for existing customers, proprietary products, etc. Strategics: The importance of seven characteristics to the firm's competitive strategy on a seven-point range from not important to very important was requested. The characteristics included low prices, high product quality, unique manufacturing capability, added services, etc. Fourteen statements were also provided for their response on a seven-point scale ranging from 'definitely does not apply' to 'definitely applies'. These included 'we actively seek products that require expanding our areas of manufacturing expertise', 'we purchase state-of-the-art manufacturing equipment shortly after its introductions', etc. Eguipment technology: Here information on their current production equipment was sought on five dimensions including basic versus state-of-the-art, standard versus custom, general purpose versus specialized, etc. Each was on a seven-point scale. Information on the stage of adoption of new technologies, the reasons for adoption, and constraints on further adoption was cilso obtained by providing statements requiring their concurrence on seven-point scales. Performance: Here specific informadon on the size of the firm over the last four years in terms of numbers of employees and sales volume was requested. They were also asked to rank the firm's performance relative to other firms in the industry on four criteria, namely, after tax return on total assets, after tax return on sales, sales growth over the last five years, and overall firm performance.

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