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From mass production to mass customization: The case of the National Industrial Bicycle Company of Japan
European Management Journal Vol. 14, No. 5, pp. 442-450, 1996
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Copyright © I990 Elsevier Science Ltd Printed in Great Britain. All rights reserved
Pergamon S02 63-2 3 73(96)0003 7-0
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From Mass Production to Mass Customization: The Case of the National Indust:rial Bicycle Company of Japan SURESH KOTHA, Assistant Professor of Business Policy and Operations Management, Stern School of Business, New York University
By means of a detailed study of the National Industrial Bicycle Company of Japan (NIBC), Suresh Kotha examines the dynamics of implementing mass customization in a firm that pursues both mass production and mass customization in two different factories. NIBC reaps superior returns by employing a 'system' which increases interaction between the mass production and mass custom factories and encourages knowledge creation. The author then considers the most important external (industry level) and internal (firm level) conditions which are necessary to successfully pursue mass customization, and points out that the interactions and interrelationships between them are important to a successful outcome too. Copyright © 1996 Elsevier Science Ltd
Introduction Mass customization as a viable approach to competitive strategy is capturing the imagination of both managers and business academics. The term 'mass customization' has been described as 'a world of paradox with very practical implications' (Davis, I987). The concept is based on the notion of 'economies of scope' where advances in manufacturing and information technology, as well as new management methods (e.g. JIT and lean production), enable firms to provide product variety and customization through flexibility and quick responsiveness in many industries. Employing mass 442,
customization, firms can produce enough variety in products and/or services so that nearly everyone finds exactly what he or she wants at a reasonable price (Pine, 1993). According to Kotler (1989) the concept of 'mass market' is dead and market segmentation has now progressed to the era of mass customization. Kotler and others argue that firms operating in the current competitive landscape can no longer produce standardized products or services for homogenous markets and still command superior returns. In this context, mass customization represents the 'new frontier' in a world of increasingly saturated markets and sluggish growth in demand for many manufactured products 0Nestbrook and Williamson, 1993). The growing interest in mass customization has led researchers to suggest that firms that shift from mass production to the emerging paradigm of mass customization will gain a competitive advantage. Emerging literature on the topic suggests that mass production and mass customization are fundamentally different and incompatible paradigms. Pine et aI. (1993), the key proponents of this view, note that mass production and mass customization approaches require different organizational structures, values systems, learning methods, and ways of relating to customers (see also Kotha, 1994). Although this emerging literature on the topic is helpful in enumerating differences between mass production and EuropeanManagementJournalVo114No 5 October 1996
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mass customization, we know little about the dynamics of implementing mass customization in a firm that is heavily dependent upon mass production. Based on an in-depth study of the National Bicycle Industrial Company (NBIC), I examine the dynamics of implementing mass customization in a firm that pursues both mass production and mass customization (Kotha and Fried, 1993). By simultaneously pursuing both mass production and mass customization, NBIC has developed a 'system' that it then exploits to reap superior returns. I discuss NBIC's competitive strategy and illustrate the mechanisms the firm has instituted to link the two approaches. In doing so, the following question is addressed: What are the important external (industry-level) and internal (firm-level) conditions necessary for successfully pursuing mass customization?
NBIC and its Approach to Competition NBIC was Japan's second largest manufacturer of bicycles in 1992, with sales of nearly ¥20 billion. The firm manufactures and markets bicycles under three different brand names: Panasonic, National, and Hikari. NBIC targets each brand at a unique market segment, and together these three brands cover a wide spectrum of bicycles sold by the firm in the Japanese Bicycle Industry (JBI). Two of these brands, National and Hikari, form the bulk of NBIC's production and sales. The firm's most expensive line, Panasonic, accounted for slightly less than 20 per cent of total production in 1992. The executives at NBIC recognize that the firm is heavily dependent upon the mass market for the bulk of its revenues and profits, and that this situation is unlikely to change dramatically in the near future. The firm has two factories, one for mass production and the other for mass customization, located adjacent to each other. Initially conceptualized as a pilot plant, the mass-custom factory was built in 1987. Here the highend, custom-made Panasonic bicycles are produced and shipped to dealers for delivery to individual customers. In 1992, NBIC produced 700,000 bicycles, 90 per cent of which were produced by the mass-production factory and shipped to Matsushita's (NBIC's parent corporation) sales subsidiaries. In contrast, only about 12,000 of these bicycles were produced at the firm's mass-custom factory. The majority of the firm's 470 workers worked in the mass-production factory. Of these, slightly more than 66 per cent are classified as direct or line workers and the rest as indirect workers. Only a few (about 18 workers in 1989) of NBIC's best skilled line workers produce the custom-made Panasonic bicycles at the mass-custom factory. Operating on a single-shift basis throughout the year, these highly skilled workers produce a small fraction of the firm's total bicycle production. To better appreciate the conditions under which the firm developed its approach to customization, it is necessary EuropeanManagementJournalVo114 No 5 October 1996
to understand the industry conditions that NBIC faced during the 1980s and early 1990s.
Changing Industry Conditions Bicycle producers in Japan can be subdivided into two groups: manufacturers and assemblers. As their name denotes, the assemblers purchase all their components from outside parts suppliers and only assemble the bicycles in their facilities. In contrast, manufacturers design and manufacture important structural components that include the bicycle frames and front forks, but buy other components (e.g., pedals, wheels, and tires) from external suppliers. Historically, manufacturers accounted for most of the bicycles produced in Japan. Starting with the 1980s, bicycle shipments were evenly split between the manufacturers and assemblers. Bicycles in Japan are distributed through wholesalers, retailers, supermarkets, and department stores. There were approximately 1,600 wholesalers and about 38,000 retailers in 1990. Whereas many wholesalers were subsidiaries of leading manufacturers, such as Bridgestone, Miyata, and NBIC, retail outlets, for the most part, were small family-owned stores. Approximately 60 per cent of bicycles sold were transferred from wholesalers to retailers, while the remaining were distributed through supermarkets and department stores located throughout the various islands that constitute Japan. In the past, large company-owned wholesalers dominated the distribution of bicycles. Recently, supermarket chains and household superstores or 'home centers' have started selling bicycles, thus enabling assemblers to gain an increasing share of the industry. During the late 1980s, the bicycle industry in Japan was maturing rapidly. Demand was sluggish, and the average unit price the customer was willing to pay for a 'standard' bicycle was falling. As the demand for bicycles plateaued, there was increasing competition among the manufacturers. To gain market share, manufacturing firms such as Bridgestone and NBIC introduced numerous new models. Although the average prices of sporting bicycles, the high-end market segment, were increasing, even this segment was not experiencing any substantial increase in growth.
Mass Customization at NBIC It was under such industry conditions that NBIC's Managing Director, Hata, along with the firm's president, decided that it was time to rethink NBIC's strategy. The firm then embarked on the path to conceptualize, develop and implement an innovative approach to competition. Among other things, NBIC's managers wanted a 'system' that would help the firm increase its market share in the high-end market segment (Panasonic bicycles in this case). More importantly, they wanted to devise a 'system' of production and delivery that clearly differentiated NBIC's Panasonic brand from competitors' products, and 443
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fulfilled the customers' growing need for variety. In other words, they wanted to customize bicycles to individual customer specifications. 1
Figure 1 illustrates the process steps involved in producing a custom-Panasonic bicycle at NBIC's masscustom factory.
The project leader, Hata, working with a multi-functional team (e.g., product designers, process engineers and production workers), devised the firm's approach to 'mass customization'. Under his stewardship, the team completed the project in a mere four months. The new system that was devised was named the Panasonic Ordering System (POS) and unveiled to customers in Japan. Under POS, Japanese consumers were guaranteed that custom-made 'Panasonic' bicycles will be delivered in two weeks. Moreover, the custom-made Panasonic bicycles were priced at about 20 to 30 per cent higher (depending on the particular model and features selected) than 'comparable' Panasonic bicycles produced in the mass-production factory.
Not an
'Either/Or' A p p r o a c h
Recognizing that the mass-production and mass-custom factories can serve different segments, NBIC is pursuing both approaches simultaneously. The firm does not view the paradigms of mass customization and mass production as an 'either/or' proposition. The recognition of this fact is critical for managers interested in mass customization, because the emerging literature has focused mainly on highlighting the differences between the two approaches, thereby suggesting that they are incompatible.
Pursuing Both Mass Production and Mass Customization
In an effort to pursue both approaches, NBIC's managers have intentionally created two separate manufacturing facilities. The mass-production factory caters to a large market segment and is organized along traditional lines of effciency. Here, the emphasis in manufacturing is driven by efficiency considerations such as achieving economies of scale through long production runs. Bicycles are produced to inventory based on predetermined forecasts. This factory is indirectly linked to the final customers: information on customer preferences for popular bicycle models and colors or patterns is gathered at various retail outlets and fed back via sales and marketing to manufacturing. In other words, NBIC is pursuing a low-cost strategy using its different product lines at the mass-production factory.
A careful study of NBIC's approach to mass customization illustrates many of its distinctive aspects.
The mass-custom factory, in contrast, attempts to target a smaller segment of the market via a differentiation
The introduction of custom-made bicycles caught NBIC's major competitors, Bridgestone and Miyata, by surprise. In response, these manufacturers scrambled to develop and implement their versions of masscustomization. Within a year, these two firms offered their versions of a mass-customized bicycle, only to find that their entry into this segment was not as effective as NBIC's.
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strategy. In this approach, the factory is directly linked to customers via retail outlets. For example, under the POS, it is the mass-custom factory that assumes responsibility for communicating with customers. A customer's selection of options, colors, patterns and models is directly received by the factory. The firm estimates that a customer can choose from about 8 million possible variations, based on model types, color, flame size, and other features, when ordering a custom-made bicycle. In this factory, the production process begins after the arrival of the customer's order and specifications. Once the individualized bicycle order is produced, the bicycle is shipped the same day. Not only is NBIC pursuing both approaches simultaneously, the Panasonic product line includes both mass-produced and mass-customized bicycles. At first glance, such duplication seems unwarranted and wasteful. However, given that one of the objectives for introducing the POS was to increase their market share of the high-end product line (Panasonic bicycles), it appears that NBIC's managers have implicitly recognized that the benefits of attempting mass customization transcends that market segment. In order to benefit the firm as a whole, they have instituted a centralized structure that enhances the sharing of information between the facilities and across market segments. More importantly, to promote information exchange NBIC's senior managers have instituted several simple mechanisms that increase the interaction between the mass-production and mass-custom factories. Much of the discussion regarding the dynamics of European Management Journal Vo114 No 5 October 1996
pursuing both mass-production and mass-customization strategies simultaneously is presented in Figure 2. Figure 2 also delineates the different organizational mechanisms instituted to link the two different production facilities. By linking the two factories, NBIC's managers have created a dynamic 'system' for knowledge creation as discussed below.
A System for Knowledge-creation Not unlike other Japanese workers, NBIC's factory employees belong to the company union and actively participate in 'quality circle' programs. They meet once a month to discuss quality and safety issues. Additionally, the workers are periodically tested and ranked based on their skills by the senior management. The highest ranked workers are provided with the opportunity to work at the mass-custom factory where the wages are higher. Since the process employed in the production of custom-made bicycles requires a blend of human skills and computer-integrated manufacturing, a higher skill base is necessary to function in the mass-custom factory. Therefore, NBIC's managers have established a system where top-rated workers are rotated between the two factories. This process of rotating workers appears insightful when we consider Nonaka's (1991) arguments that creating new knowledge in a firm involves more than mechanically 'processing' objective information. He argues that it requires the tapping of tacit knowledge and often highly subjective insights, intuitions, and 445
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ideals of employees. Many of the process-related skills required in complex manufacturing situations fit Nonaka's definition of tacit, rather than explicit, knowledge. However, in order for the firm as a whole to create new knowledge, its individual workers' tacit knowledge must be tapped and made explicit, z Thus, as Nonaka (1991: 99) puts it: Indeed, because tacit knowledge includes mental models and beliefs in addition to know-how, moving from tacit to explicit is really a process of articulating one's vision of the world what it is and what it ought to be. When employees invent new knowledge, they are also reinventing themselves, the company, and even the world ... [Thus] articulation (converting tacit knowledge into explicit knowledge) and internalization (using that explicit knowledge to extend one's own tacit knowledge base) are the critical steps in this spiral of knowledge.
It is apparent that managers at NBIC recognize this insight when they institute policies that require masscustom factory workers to train mass production workers. The rotation of workers between factories also has the effect of further broadening the knowledge and skill base of already skilled workers. This constant rotation, in conjunction with a centralized group of product designers and process engineers, enables the firm to develop new manufacturing capabilities in both advanced custom-made bicycles (based on unique customer requirements) and mass-produced bicycles (see Figure 2). For example, NBIC was the first bicycle manufacturer in Japan to introduce robots for painting in mass production. With minor modifications, such robots were then adopted in the mass-custom factory. Since the requirements of the mass-custom factory are driven by individual customer specifications (based on body measurements and preferences), each bicycle flame and fork manufactured has to be checked to insure that it corresponds to the customer's original specifications. The firm's engineers and skilled line workers, in conjunction with managers from NBIC's parent corporation, have devised a 3-dimensional automatic measuring machine to automate this verification task and reduce the time involved in completing this process. This machine is now employed for quality control inspections in the mass-production factory. Furthermore, much of the software required to operate the advanced information and computer-aided manufacturing systems used in the mass-custom factory was developed inhouse.
Exploiting the Information Differences Between Segments By creating an organizational structure that enhances the interaction between the product and process engineers, the firm also exploits the information differences that arise from competing in different segments of the bicycle industry. For example, using the information gathered 446
directly from consumers in the custom segment, product designers identify certain customer trends, such as popular color combination and patterns, and unique customized-features that are likely to appeal to customers of the broader mass-production segment of the industry. In the mass-custom factory, it is the customer who, by choosing from thousands of potential combinations, becomes directly involved in the new product development process. In this sense, the consumer becomes the prosumer, because he or she initiates the process of design and production rather than choosing among pre-manufactured alternatives (Womack, 1993). Armed with direct customer feedback regarding choices from among the numerous alternatives, the product designers, in conjunction with the process engineering group, create new product designs for the massproduction factory. Based on the forecasts provided by the marketing department, the mass production factory then manufactures the new design and introduces the product ahead of NBIC's leading rivals. Thus, the masscustom factory acts as a conduit for new product ideas, as the customer chooses from the numerous combinations offered. This gathering and exploitation of information from a segment of 'innovative' users helps the firm to dynamically manage the proliferation of new product designs. By continually analyzing marketing information and by rotating very highly skilled workers between the two production facilities, the firm continually updates its competencies and the organizational routines that it employs. The lessons and the manufacturing skills the firm acquires in the custom-factory are readily transferable to the mass production factory. Consequently, the massproduction factory has undergone slow, but significant, changes. For example, lot sizes employed in mass production have steadily decreased from 50, a few years ago to a mere 20 units in 1993.
Performance Implications NBIC's customized bicycles manufactured under the POS system only accounted for two per cent of total production. Prior to POS, NBIC's market share was languishing behind its two major competitors in the high-end segment, but within a few years of introducing POS, the firm's total high-end (Panasonic) market share increased dramatically. For the first time in its history, NBIC became the industry's second largest manufacturer of high-end bicycles. Furthermore, the contribution of the high-end Panasonic brand has more than doubled to 27 per cent of total revenues (Kotha and Fried, 1993). Despite repeated attempts by competitors to offer customized bicycles, the 'Panasonic' name is increasingly viewed as the only 'truly' mass customized bicycle in Japan. According to industry experts, the firm is currently viewed as the leader and innovator in the industry. The 'halo effect', resulting mostly from the European ManagementJournalVo114 No 5 October 1996
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successful implementation of POS, enables the firm to charge a slightly higher price for its mass produced Panasonic line.
the importance of having reliable suppliers close by, in order to avoid the cost of carrying large inventories and increase the speed required to meet custom orders (The Economist, 1995).
Necessary Conditions for Success
The industry needs to be characterized by increased product proliferation and new product introductions In the late 1980s, demand for bicycles in the JBI had plateaued and prices were falling. Manufacturers in the JBI found that there were continually introducing new models in an effort to maintain market-share. For example, NBIC offered over 250 different models during 1987, and within each model type, customers had a choice of color and other options. NBIC's management changed about 80 per cent of models yearly. Similarly, the industry leader, Bridgestone, offered over 300 models during the same period. Thus, just prior to the introduction of POS, NBIC and others in the industry were faced with increased product proliferation.
Having discussed the dynamics of pursuing massproduction and mass-customization approaches at NBIC, I now address the question posed earlier: What are the important external (industry-level) and internal (firm-level) conditions necessary for successfully pursuing mass customization?
External Conditions
Success is more likely if there is no well entrenched competitor already pursuing mass customization Earlier I mentioned that NBIC's leading competitors, Bridgestone and Miyata, introduced mass-customized Pursuing the concept of mass customization may require the bicycles in response to NBIC's POS. Unlike NBIC, development of an inter-connected information network with a Japanese bicycle customers never really considered either select group of trained retailers of these two firms to be a 'true' leader in this massGiven that custom-made procustom segment. As Yamazaki, a ducts are manufactured to senior manager at Bridgestone, specifications of a unique cusA m~ss~c~sto m iz~tio n puts it (Kotha and Fried, 1993): tomer, errors in processing the st:r~:~hGy . . . ~nvol~ es order and in manufacturing the Since NBIC was the first firm to product can be extremely costly developi~.~ ~~ system theft introduce this idea, they have because such a product is rew~:~'ds ~ t t e ~ t i o , to deh~fts established a strong image in the unlikely to be sold. More customer's mind. When you importantly, mistakes and errors a~~d st~e.~ses ~he import~nce mention customization, the concan undermine the customers' 7~ f sumer only thinks of Panasonic. confidence in the concept of Also, National's parent company, mass customization. A massMatsushita, is famous for its marketing savvy, and it is customization strategy, therefore, involves developing difficult for us to match them. a system that rewards attention to details and stresses the importance of 'zero mistakes' in all activities of the It appears that there can be significant 'first mover' value-creation process. Hence, retailers responsible for advantages in pursuing mass-customization. Being a first collecting customers' information need to be properly mover in implementing mass customization can be educated and trained in processing customer orders. important, because the market for customized products can experience less than expected growth, as occurred in In the case of NBIC, only a few select retailers offer the case of the JBI. custom-made Panasonic bicycles. Although this number has gradually increased since the introduction of POS in Access to a supplier network in close proximity is vital for 1987, such a gradual increase has enabled the massSuccess custom factory to adapt, incrementally, to growing NBIC, located in Osaka, is closely linked with its complexity resulting from the increased influx of custom suppliers, none of whom are more than 40 minutes away orders. Also, from a marketing perspective, permitting (Westbrook and Williamson, 1993). The frequent and only a select group of retailers to offer customization reliable delivery of bicycle components from suppliers creates the notion of exclusivity. It is unlikely that all of enables NBIC to build 'truly' custom bicycles without NBIC's Panasonic retailers will be permitted to offer carrying excessive inventories. As the firm's managing custom-made Panasonic bicycles. director, Hata, puts it, 'There is little need for us to hold large inventories of finished frames and other parts To create an 'information network' by which Panasonic unlike others [competitors] outside the Kansai region'. POS retailers can communicate with the mass-custom Unlike NBIC, Bridgestone and Miyata have simply factory, NBIC managers depend upon simple increased their inventories of frame types and model technologies such as facsimile machines. The sizes to accommodate customization demands by their employment of relatively inexpensive and well diffused customers. This approach has added to their overall facsimile technologies suggests that, in pursuing mass costs. Recently, firms such as Compaq, who offer customization, a firm does not necessarily have to rely customized PCs in the United States, have recognized on advanced communication and network technologies. European Management JournalVo114 No 5 October 1996
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Internal Conditions The strategy of mass-customization requires long-term investments in advanced-manufacturing technologies and human resource development The NBIC example makes clear the importance of advanced manufacturing technologies for the pursuit of mass customization. The recent attempts by Levi Strauss & Company to offer 'custom fit' blue jeans for women in the United States was made possible due to a computer information network system (Rifkin, 1994). Also, Pine et al. (1993), in their discussions of Bally Engineered Structures Inc., a mass customizer for refrigeration products, points out that a sophisticated informationmanagement system called a 'computer-driven intelligence network' was at the heart of this firm's approach to mass customization. However, NBIC's managers clearly recognize that human resource development is also critical. At NBIC it is humans, in conjunction with advanced technology, who create the new knowledge required for refining existing skills and developing manufacturing capabilities essential for the pursuit of their approach to customization. It is another example of how Japanese firms leverage the manufacturing capabilities that result from a blending of advanced computer-based technologies and human expertise. The firm recognizes that information technology and computer-integrated manufacturing are necessary, but not sufficient, for achieving the flexibility and responsiveness critical to mass customization (Garud and Kotha, 1994).
Access to substantial in-house engineering expertise and manufacturing capabilities is necessary for successfully implementing the concept Much of the process technology and computerized information systems (e.g., numerical control machines, robotics, interfactory local area networks) installed by NBIC's mass-custom factory were an outgrowth of inhouse engineering and manufacturing expertise accumulated over many years. Such competence is important because, although mass customization has obvious market appeal, it can easily become a manufacturing and logistics nightmare without a high degree of manufacturing competence (Westbrook and Williamson, 1993). Therefore, it appears that firms contemplating this approach to competitive strategy will be forced to rely heavily on in-house expertise in order to implement their versions of mass customization. Each plant's manufacturing tasks and competitive priorities need to be matched to its product~market environment In an effort to pursue both approaches, NBIC managers have intentionally created two separate manufacturing facilities. This separation of the two factories is akin to what Skinner (1974) has termed as 'factory focus'. According to Skinner, no single factory can do all things (e.g., quality, cost, flexibility, and delivery) equally well and hence, factories that are more focused outperform those that attempt to fulfil a diverse range of competitive priorities. This is because of the inherent 448
complexity involved in pursing multiple and sometimes conflicting objectives (Skinner, 1974). Therefore, firms contemplating pursuing both mass production and mass customization may consider adopting a focused factory approach at the plant level.
Instituting mechanisms to foster interactions among the focused plants may be necessary for new knowledge creation and for attaining flexibility Earlier I discussed how NBIC's establishment of organizational mechanisms has fostered interactions between the factories. NBIC's managers have implicitly recognized that the benefits of pursuing masscustomization transcends the small segment for customized bicycles in the JBI. The mechanisms such as worker rotation, the sharing of process ideas through such rotations, and the centralization of engineering personnel can be employed by other firms interested in the concept. The centralization of the design and process engineering function enhances NBIC's ability to capture novelproduct ideas from the innovative-lead users in the custom segment and then exploit them in the massproduction arena. Doing so enables the firm to introduce new products rapidly and avoid the mindless product proliferation characteristic of many Japanese firms (Stalk and Webber, 1993). This practice also helps overcome the disadvantages associated with worker skill limitations and promotes the diffusion of the best practices among the factories. Rotating workers also results in the establishment of a 'system' that enables the conversion of tacit knowledge to explicit knowledge. Taken together, such mechanisms enable a firm to create new knowledge and attain greater strategic flexibility.
Mass customization requires a culture that focuses on knowledge creation and the development of manufacturing capabilities The effective use of mass customization hinges on promoting an attitude that is conducive to continuous improvement, organizational and individual learning, the development of new capabilities, and the diffusion of the best practices among a firm's plants. NBIC's case vividly illustrates the need to focus on all of these elements simultaneously. Moreover, it clearly fits Florida and Kenney's (1990) observation that, perhaps, the key element of the Japanese industrial system lies in its ability to directly harness the workers' knowledge at the point of production. Therefore, the promise of mass customization through advanced technology is not the lights-out factory, but a tool or an approach that more effectively taps all the diverse capabilities of employees to serve customers (Pine et al., 1993). The strategy requires a savvy marketing group that can excite customers about individualized product offerings According to the general manager of sales at NBIC, customer service, 'appropriate' pricing, and extensive communication with the customer are all integral parts of NBIC's approach to mass customization. As he put it, 'We could have made the [delivery] time shorter, but we EuropeanManagementJournalVo114No 5 October 1996
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wanted people to feel excited about waiting for something special.' Additionally, to create customer excitement, the marketing group at NBIC has implemented some creative solutions. For example, shortly after the factory receives the customer's order, a personalized computergenerated drawing of the bicycle is mailed to the customer with a note thanking him or her for choosing the POS. This is followed by a second personal note, three months later, inquiring about the customer's satisfaction with his or her bicycle. Finally, a 'bicyclebirthday' card is sent commemorating the first anniversary of the bicycle. Table I summarizes the external and internal conditions that are necessary for the successful pursuit of mass customization. Although each of the conditions discussed is necessary individually, it is the interactions and interrelationships among them that may enable a firm to successfully adapt the concept. 3
Conclusion In highlighting NBIC's unique approach to mass customization, this paper provides a useful framework for a mass-production firm contemplating entry into the era of mass customization. It illustrates the dynamics of pursuing both mass-production and mass-customization approaches simultaneously and highlights many industry- and firm-level conditions that are necessary for successfully exploiting mass customization. In today's competitive landscape, the issue is not whether the 'mass market' is dead, but finding unique ways of fulfilling changing customer demands. In that sense, the emerging concept of mass customization is an important option, among many, available to a firm seeking a competitive advantage.
Acknowledgement I thank Mr. Hitori Hata, Managing Director of the National Bicycle Industrial Company for providing me with access to important information about the firm's mass production and mass customization strategies. I also thank Andrew Fried of Andersen Consulting, Tokyo Office, for his participation and assistance in researching this topic in Japan. I have also benefited greatly from discussions with students at both the Stem School of Business and the International University of Japan. Last, but not least, I thank Gabrielle Gerhard, Arun Kumaraswamy, and Anil Nair for their thoughtful comments on an earlier version of the paper.
Notes 1.
The original idea for customizing bicycles originated when the firm's president visited a famous department store in Osaka. The president noticed that women could customorder dresses which were then delivered by the store in two
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Table 1 External and Internal Conditions Necessary for S u c c e s s External Conditions Success is more likely if • there is no well entrenched competitor already pursuing mass customization • the firm has access to a supplier network in close proximity • the industry is characterized by increased product proliferation and new product introductions • the firm develops an inter-connected information network with a selected group of trained retailers Internal Conditions Success is more likely when a firm • has made long-term investment in advanced manufacturing technologies and information technologies and human resource d e v e l o p m e n t • has access to substantial in-house engineering expertise and manufacturing capabilities • focuses its manufacturing tasks and competitive priorities at each plant to its p r o d u c t / m a r k e t environment • institutes organizational mechanisms that foster interactions among focused plants • creates a culture that emphasizes knowledge creation and the d e v e l o p m e n t of manufacturing capabilities • has a savvy marketing group that can excite customers about individualized product offerings
2.
weeks. He wondered if it were possible for NB1C to produce bicycles in this way, According to some senior executives, many of the firm's managers had doubts about the feasibility of such an approach. However, despite their skepticism, they were willing to try and see if this project might work (Kotha and Fried, 1993). Explicit or codified knowledge refers to knowledge that may be transmitted in formal, systematic language. In contrast, 'tacit' knowledge has a personal quality, which makes it hard to formalize and communicate because it is deeply rooted in action, commitment, and involvement in a specific context (Nonaka, I991). Although there are many strategic advantages in pursuing mass customization (and mass production simultaneously), there are costs associated with pursuing mass customization. When the difficulty of quantifying a priori the benefits associated with intangible benefits (e.g. worker motivation, new knowledge creation) and tangible benefits (e.g. reputation, strategic flexibility, etc.) are recognized, a comparison of potential costs and benefits suggests that the benefits outweigh the costs (see Kotha, 1995 for a detailed discussion of costs and benefits).
References Davis, S. (1987). Future Perfect. Reading Ma: Addison Wesley. EconomisL The (1995). The Outing of Outsourcing. November 25, pp. 57-58. Florida, R. and Kenney, M. (1990). Break Through Illusion. New York: Basic Books. Garud, R. and Kotha, S. (1994). Using the Brain as a Metaphor to Model Flexible Productive Units. Academy of Management Review, 19, 4, pp. 671-698. Kotha, S. (1994). A Book Review of Mass Customization: The New Frontier in Business Competition by B. J. Pine II, Academy of Management Review, 19, 3, 1994. Kotha, S. (I995). Mass Customization: Implementing the 449
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Emerging Paradigm for Competitive Advantage. Strategic Management .Journal, 16, pp. 21-42. Kotha, S. and Fried, A. (I993). National Bicycle Industrial Company: Implementing a Strategy of Mass Customization. New York University/International University of Japan Case Series. Kotler, P. (1989). From Mass Marketing to Mass Customization. Planning Review, 17, pp. 10-13. Nonaka, I. (1991). The Knowledge Creating Company. Harvard Business Review, 69, 6, pp. 96--104. Pine II, B.J. (1993). Mass Customization: The New Frontier in Business Competition, Boston: Harvard Business School Press. Pine II, B.J., Victor, B., and Boynton, A.C. (1993). Making Mass Customization Work. Harvard BusinessReview, 71, pp. 108119. Rifkin, G. (1994). Digital Blue Jeans Pour Data and Legs into Customized Fit. The New York Times, November 8, p.1, column 6, section A. Skinner, W. (1974). The Focused Factory. Harvard Business Review, May-June, pp. 113-121. Stalk, Jr. G. and Webber, A.M. (1993). Japan's Dark Side of Time. Harvard Business Review, 71, pp. 93-102. Westbrook R. and Williamson, P. (1993). Mass Customization: Japan's New Frontier. European Management Journal, 11, I, pp. 38-45. Womack, J.P. (1993). A Book Review of Mass Customization. Sloan Management Review, 34, pp. 121-122.
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SURESH KOTHA, Leonard R. Stern School of Business, New York University, 40 West 4th Street, Room 7-10, New York, New York State, 10012-II26, USA. Suresh Kotha is an Assistant Professor of Business Policy and Operations Management at the Stern School of Business, New York University. He has also taught at the International University of Japan, Graduate School of Management. His teaching and research interests are in the areas of business strategy, manufacturing strategy, and US~Japan comparative practices. Dr. Kotha serves on the editorial board of the A c a d e m y of M a n a g e m e n t Journal and the Strategic Management Journal and is an Associate Editor of the Journal of Operations Management. He is currently conducting a study, with colleagues from many different universities, that focuses on determining the environment and strategic correlates of performance in the Japanese automobile, steel and machine tool industries.
European Management JournalVo114 No 5 October 1996
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Copyright © I990 Elsevier Science Ltd Printed in Great Britain. All rights reserved
Pergamon S02 63-2 3 73(96)0003 7-0
0263-2373/96$I5.00+ 0.00
From Mass Production to Mass Customization: The Case of the National Indust:rial Bicycle Company of Japan SURESH KOTHA, Assistant Professor of Business Policy and Operations Management, Stern School of Business, New York University
By means of a detailed study of the National Industrial Bicycle Company of Japan (NIBC), Suresh Kotha examines the dynamics of implementing mass customization in a firm that pursues both mass production and mass customization in two different factories. NIBC reaps superior returns by employing a 'system' which increases interaction between the mass production and mass custom factories and encourages knowledge creation. The author then considers the most important external (industry level) and internal (firm level) conditions which are necessary to successfully pursue mass customization, and points out that the interactions and interrelationships between them are important to a successful outcome too. Copyright © 1996 Elsevier Science Ltd
Introduction Mass customization as a viable approach to competitive strategy is capturing the imagination of both managers and business academics. The term 'mass customization' has been described as 'a world of paradox with very practical implications' (Davis, I987). The concept is based on the notion of 'economies of scope' where advances in manufacturing and information technology, as well as new management methods (e.g. JIT and lean production), enable firms to provide product variety and customization through flexibility and quick responsiveness in many industries. Employing mass 442,
customization, firms can produce enough variety in products and/or services so that nearly everyone finds exactly what he or she wants at a reasonable price (Pine, 1993). According to Kotler (1989) the concept of 'mass market' is dead and market segmentation has now progressed to the era of mass customization. Kotler and others argue that firms operating in the current competitive landscape can no longer produce standardized products or services for homogenous markets and still command superior returns. In this context, mass customization represents the 'new frontier' in a world of increasingly saturated markets and sluggish growth in demand for many manufactured products 0Nestbrook and Williamson, 1993). The growing interest in mass customization has led researchers to suggest that firms that shift from mass production to the emerging paradigm of mass customization will gain a competitive advantage. Emerging literature on the topic suggests that mass production and mass customization are fundamentally different and incompatible paradigms. Pine et aI. (1993), the key proponents of this view, note that mass production and mass customization approaches require different organizational structures, values systems, learning methods, and ways of relating to customers (see also Kotha, 1994). Although this emerging literature on the topic is helpful in enumerating differences between mass production and EuropeanManagementJournalVo114No 5 October 1996
FROM MASS PRODUCTION TO MASS CUSTOMIZATION
mass customization, we know little about the dynamics of implementing mass customization in a firm that is heavily dependent upon mass production. Based on an in-depth study of the National Bicycle Industrial Company (NBIC), I examine the dynamics of implementing mass customization in a firm that pursues both mass production and mass customization (Kotha and Fried, 1993). By simultaneously pursuing both mass production and mass customization, NBIC has developed a 'system' that it then exploits to reap superior returns. I discuss NBIC's competitive strategy and illustrate the mechanisms the firm has instituted to link the two approaches. In doing so, the following question is addressed: What are the important external (industry-level) and internal (firm-level) conditions necessary for successfully pursuing mass customization?
NBIC and its Approach to Competition NBIC was Japan's second largest manufacturer of bicycles in 1992, with sales of nearly ¥20 billion. The firm manufactures and markets bicycles under three different brand names: Panasonic, National, and Hikari. NBIC targets each brand at a unique market segment, and together these three brands cover a wide spectrum of bicycles sold by the firm in the Japanese Bicycle Industry (JBI). Two of these brands, National and Hikari, form the bulk of NBIC's production and sales. The firm's most expensive line, Panasonic, accounted for slightly less than 20 per cent of total production in 1992. The executives at NBIC recognize that the firm is heavily dependent upon the mass market for the bulk of its revenues and profits, and that this situation is unlikely to change dramatically in the near future. The firm has two factories, one for mass production and the other for mass customization, located adjacent to each other. Initially conceptualized as a pilot plant, the mass-custom factory was built in 1987. Here the highend, custom-made Panasonic bicycles are produced and shipped to dealers for delivery to individual customers. In 1992, NBIC produced 700,000 bicycles, 90 per cent of which were produced by the mass-production factory and shipped to Matsushita's (NBIC's parent corporation) sales subsidiaries. In contrast, only about 12,000 of these bicycles were produced at the firm's mass-custom factory. The majority of the firm's 470 workers worked in the mass-production factory. Of these, slightly more than 66 per cent are classified as direct or line workers and the rest as indirect workers. Only a few (about 18 workers in 1989) of NBIC's best skilled line workers produce the custom-made Panasonic bicycles at the mass-custom factory. Operating on a single-shift basis throughout the year, these highly skilled workers produce a small fraction of the firm's total bicycle production. To better appreciate the conditions under which the firm developed its approach to customization, it is necessary EuropeanManagementJournalVo114 No 5 October 1996
to understand the industry conditions that NBIC faced during the 1980s and early 1990s.
Changing Industry Conditions Bicycle producers in Japan can be subdivided into two groups: manufacturers and assemblers. As their name denotes, the assemblers purchase all their components from outside parts suppliers and only assemble the bicycles in their facilities. In contrast, manufacturers design and manufacture important structural components that include the bicycle frames and front forks, but buy other components (e.g., pedals, wheels, and tires) from external suppliers. Historically, manufacturers accounted for most of the bicycles produced in Japan. Starting with the 1980s, bicycle shipments were evenly split between the manufacturers and assemblers. Bicycles in Japan are distributed through wholesalers, retailers, supermarkets, and department stores. There were approximately 1,600 wholesalers and about 38,000 retailers in 1990. Whereas many wholesalers were subsidiaries of leading manufacturers, such as Bridgestone, Miyata, and NBIC, retail outlets, for the most part, were small family-owned stores. Approximately 60 per cent of bicycles sold were transferred from wholesalers to retailers, while the remaining were distributed through supermarkets and department stores located throughout the various islands that constitute Japan. In the past, large company-owned wholesalers dominated the distribution of bicycles. Recently, supermarket chains and household superstores or 'home centers' have started selling bicycles, thus enabling assemblers to gain an increasing share of the industry. During the late 1980s, the bicycle industry in Japan was maturing rapidly. Demand was sluggish, and the average unit price the customer was willing to pay for a 'standard' bicycle was falling. As the demand for bicycles plateaued, there was increasing competition among the manufacturers. To gain market share, manufacturing firms such as Bridgestone and NBIC introduced numerous new models. Although the average prices of sporting bicycles, the high-end market segment, were increasing, even this segment was not experiencing any substantial increase in growth.
Mass Customization at NBIC It was under such industry conditions that NBIC's Managing Director, Hata, along with the firm's president, decided that it was time to rethink NBIC's strategy. The firm then embarked on the path to conceptualize, develop and implement an innovative approach to competition. Among other things, NBIC's managers wanted a 'system' that would help the firm increase its market share in the high-end market segment (Panasonic bicycles in this case). More importantly, they wanted to devise a 'system' of production and delivery that clearly differentiated NBIC's Panasonic brand from competitors' products, and 443
FROM MASS PRODUCTION TO MASS CUSTOMIZATION
fulfilled the customers' growing need for variety. In other words, they wanted to customize bicycles to individual customer specifications. 1
Figure 1 illustrates the process steps involved in producing a custom-Panasonic bicycle at NBIC's masscustom factory.
The project leader, Hata, working with a multi-functional team (e.g., product designers, process engineers and production workers), devised the firm's approach to 'mass customization'. Under his stewardship, the team completed the project in a mere four months. The new system that was devised was named the Panasonic Ordering System (POS) and unveiled to customers in Japan. Under POS, Japanese consumers were guaranteed that custom-made 'Panasonic' bicycles will be delivered in two weeks. Moreover, the custom-made Panasonic bicycles were priced at about 20 to 30 per cent higher (depending on the particular model and features selected) than 'comparable' Panasonic bicycles produced in the mass-production factory.
Not an
'Either/Or' A p p r o a c h
Recognizing that the mass-production and mass-custom factories can serve different segments, NBIC is pursuing both approaches simultaneously. The firm does not view the paradigms of mass customization and mass production as an 'either/or' proposition. The recognition of this fact is critical for managers interested in mass customization, because the emerging literature has focused mainly on highlighting the differences between the two approaches, thereby suggesting that they are incompatible.
Pursuing Both Mass Production and Mass Customization
In an effort to pursue both approaches, NBIC's managers have intentionally created two separate manufacturing facilities. The mass-production factory caters to a large market segment and is organized along traditional lines of effciency. Here, the emphasis in manufacturing is driven by efficiency considerations such as achieving economies of scale through long production runs. Bicycles are produced to inventory based on predetermined forecasts. This factory is indirectly linked to the final customers: information on customer preferences for popular bicycle models and colors or patterns is gathered at various retail outlets and fed back via sales and marketing to manufacturing. In other words, NBIC is pursuing a low-cost strategy using its different product lines at the mass-production factory.
A careful study of NBIC's approach to mass customization illustrates many of its distinctive aspects.
The mass-custom factory, in contrast, attempts to target a smaller segment of the market via a differentiation
The introduction of custom-made bicycles caught NBIC's major competitors, Bridgestone and Miyata, by surprise. In response, these manufacturers scrambled to develop and implement their versions of masscustomization. Within a year, these two firms offered their versions of a mass-customized bicycle, only to find that their entry into this segment was not as effective as NBIC's.
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strategy. In this approach, the factory is directly linked to customers via retail outlets. For example, under the POS, it is the mass-custom factory that assumes responsibility for communicating with customers. A customer's selection of options, colors, patterns and models is directly received by the factory. The firm estimates that a customer can choose from about 8 million possible variations, based on model types, color, flame size, and other features, when ordering a custom-made bicycle. In this factory, the production process begins after the arrival of the customer's order and specifications. Once the individualized bicycle order is produced, the bicycle is shipped the same day. Not only is NBIC pursuing both approaches simultaneously, the Panasonic product line includes both mass-produced and mass-customized bicycles. At first glance, such duplication seems unwarranted and wasteful. However, given that one of the objectives for introducing the POS was to increase their market share of the high-end product line (Panasonic bicycles), it appears that NBIC's managers have implicitly recognized that the benefits of attempting mass customization transcends that market segment. In order to benefit the firm as a whole, they have instituted a centralized structure that enhances the sharing of information between the facilities and across market segments. More importantly, to promote information exchange NBIC's senior managers have instituted several simple mechanisms that increase the interaction between the mass-production and mass-custom factories. Much of the discussion regarding the dynamics of European Management Journal Vo114 No 5 October 1996
pursuing both mass-production and mass-customization strategies simultaneously is presented in Figure 2. Figure 2 also delineates the different organizational mechanisms instituted to link the two different production facilities. By linking the two factories, NBIC's managers have created a dynamic 'system' for knowledge creation as discussed below.
A System for Knowledge-creation Not unlike other Japanese workers, NBIC's factory employees belong to the company union and actively participate in 'quality circle' programs. They meet once a month to discuss quality and safety issues. Additionally, the workers are periodically tested and ranked based on their skills by the senior management. The highest ranked workers are provided with the opportunity to work at the mass-custom factory where the wages are higher. Since the process employed in the production of custom-made bicycles requires a blend of human skills and computer-integrated manufacturing, a higher skill base is necessary to function in the mass-custom factory. Therefore, NBIC's managers have established a system where top-rated workers are rotated between the two factories. This process of rotating workers appears insightful when we consider Nonaka's (1991) arguments that creating new knowledge in a firm involves more than mechanically 'processing' objective information. He argues that it requires the tapping of tacit knowledge and often highly subjective insights, intuitions, and 445
FROM MASS PRODUCTION TO MASS CUSTOMIZATION
ideals of employees. Many of the process-related skills required in complex manufacturing situations fit Nonaka's definition of tacit, rather than explicit, knowledge. However, in order for the firm as a whole to create new knowledge, its individual workers' tacit knowledge must be tapped and made explicit, z Thus, as Nonaka (1991: 99) puts it: Indeed, because tacit knowledge includes mental models and beliefs in addition to know-how, moving from tacit to explicit is really a process of articulating one's vision of the world what it is and what it ought to be. When employees invent new knowledge, they are also reinventing themselves, the company, and even the world ... [Thus] articulation (converting tacit knowledge into explicit knowledge) and internalization (using that explicit knowledge to extend one's own tacit knowledge base) are the critical steps in this spiral of knowledge.
It is apparent that managers at NBIC recognize this insight when they institute policies that require masscustom factory workers to train mass production workers. The rotation of workers between factories also has the effect of further broadening the knowledge and skill base of already skilled workers. This constant rotation, in conjunction with a centralized group of product designers and process engineers, enables the firm to develop new manufacturing capabilities in both advanced custom-made bicycles (based on unique customer requirements) and mass-produced bicycles (see Figure 2). For example, NBIC was the first bicycle manufacturer in Japan to introduce robots for painting in mass production. With minor modifications, such robots were then adopted in the mass-custom factory. Since the requirements of the mass-custom factory are driven by individual customer specifications (based on body measurements and preferences), each bicycle flame and fork manufactured has to be checked to insure that it corresponds to the customer's original specifications. The firm's engineers and skilled line workers, in conjunction with managers from NBIC's parent corporation, have devised a 3-dimensional automatic measuring machine to automate this verification task and reduce the time involved in completing this process. This machine is now employed for quality control inspections in the mass-production factory. Furthermore, much of the software required to operate the advanced information and computer-aided manufacturing systems used in the mass-custom factory was developed inhouse.
Exploiting the Information Differences Between Segments By creating an organizational structure that enhances the interaction between the product and process engineers, the firm also exploits the information differences that arise from competing in different segments of the bicycle industry. For example, using the information gathered 446
directly from consumers in the custom segment, product designers identify certain customer trends, such as popular color combination and patterns, and unique customized-features that are likely to appeal to customers of the broader mass-production segment of the industry. In the mass-custom factory, it is the customer who, by choosing from thousands of potential combinations, becomes directly involved in the new product development process. In this sense, the consumer becomes the prosumer, because he or she initiates the process of design and production rather than choosing among pre-manufactured alternatives (Womack, 1993). Armed with direct customer feedback regarding choices from among the numerous alternatives, the product designers, in conjunction with the process engineering group, create new product designs for the massproduction factory. Based on the forecasts provided by the marketing department, the mass production factory then manufactures the new design and introduces the product ahead of NBIC's leading rivals. Thus, the masscustom factory acts as a conduit for new product ideas, as the customer chooses from the numerous combinations offered. This gathering and exploitation of information from a segment of 'innovative' users helps the firm to dynamically manage the proliferation of new product designs. By continually analyzing marketing information and by rotating very highly skilled workers between the two production facilities, the firm continually updates its competencies and the organizational routines that it employs. The lessons and the manufacturing skills the firm acquires in the custom-factory are readily transferable to the mass production factory. Consequently, the massproduction factory has undergone slow, but significant, changes. For example, lot sizes employed in mass production have steadily decreased from 50, a few years ago to a mere 20 units in 1993.
Performance Implications NBIC's customized bicycles manufactured under the POS system only accounted for two per cent of total production. Prior to POS, NBIC's market share was languishing behind its two major competitors in the high-end segment, but within a few years of introducing POS, the firm's total high-end (Panasonic) market share increased dramatically. For the first time in its history, NBIC became the industry's second largest manufacturer of high-end bicycles. Furthermore, the contribution of the high-end Panasonic brand has more than doubled to 27 per cent of total revenues (Kotha and Fried, 1993). Despite repeated attempts by competitors to offer customized bicycles, the 'Panasonic' name is increasingly viewed as the only 'truly' mass customized bicycle in Japan. According to industry experts, the firm is currently viewed as the leader and innovator in the industry. The 'halo effect', resulting mostly from the European ManagementJournalVo114 No 5 October 1996
FROM MASS PRODUCTION TO MASS CUSTOMIZATION
successful implementation of POS, enables the firm to charge a slightly higher price for its mass produced Panasonic line.
the importance of having reliable suppliers close by, in order to avoid the cost of carrying large inventories and increase the speed required to meet custom orders (The Economist, 1995).
Necessary Conditions for Success
The industry needs to be characterized by increased product proliferation and new product introductions In the late 1980s, demand for bicycles in the JBI had plateaued and prices were falling. Manufacturers in the JBI found that there were continually introducing new models in an effort to maintain market-share. For example, NBIC offered over 250 different models during 1987, and within each model type, customers had a choice of color and other options. NBIC's management changed about 80 per cent of models yearly. Similarly, the industry leader, Bridgestone, offered over 300 models during the same period. Thus, just prior to the introduction of POS, NBIC and others in the industry were faced with increased product proliferation.
Having discussed the dynamics of pursuing massproduction and mass-customization approaches at NBIC, I now address the question posed earlier: What are the important external (industry-level) and internal (firm-level) conditions necessary for successfully pursuing mass customization?
External Conditions
Success is more likely if there is no well entrenched competitor already pursuing mass customization Earlier I mentioned that NBIC's leading competitors, Bridgestone and Miyata, introduced mass-customized Pursuing the concept of mass customization may require the bicycles in response to NBIC's POS. Unlike NBIC, development of an inter-connected information network with a Japanese bicycle customers never really considered either select group of trained retailers of these two firms to be a 'true' leader in this massGiven that custom-made procustom segment. As Yamazaki, a ducts are manufactured to senior manager at Bridgestone, specifications of a unique cusA m~ss~c~sto m iz~tio n puts it (Kotha and Fried, 1993): tomer, errors in processing the st:r~:~hGy . . . ~nvol~ es order and in manufacturing the Since NBIC was the first firm to product can be extremely costly developi~.~ ~~ system theft introduce this idea, they have because such a product is rew~:~'ds ~ t t e ~ t i o , to deh~fts established a strong image in the unlikely to be sold. More customer's mind. When you importantly, mistakes and errors a~~d st~e.~ses ~he import~nce mention customization, the concan undermine the customers' 7~ f sumer only thinks of Panasonic. confidence in the concept of Also, National's parent company, mass customization. A massMatsushita, is famous for its marketing savvy, and it is customization strategy, therefore, involves developing difficult for us to match them. a system that rewards attention to details and stresses the importance of 'zero mistakes' in all activities of the It appears that there can be significant 'first mover' value-creation process. Hence, retailers responsible for advantages in pursuing mass-customization. Being a first collecting customers' information need to be properly mover in implementing mass customization can be educated and trained in processing customer orders. important, because the market for customized products can experience less than expected growth, as occurred in In the case of NBIC, only a few select retailers offer the case of the JBI. custom-made Panasonic bicycles. Although this number has gradually increased since the introduction of POS in Access to a supplier network in close proximity is vital for 1987, such a gradual increase has enabled the massSuccess custom factory to adapt, incrementally, to growing NBIC, located in Osaka, is closely linked with its complexity resulting from the increased influx of custom suppliers, none of whom are more than 40 minutes away orders. Also, from a marketing perspective, permitting (Westbrook and Williamson, 1993). The frequent and only a select group of retailers to offer customization reliable delivery of bicycle components from suppliers creates the notion of exclusivity. It is unlikely that all of enables NBIC to build 'truly' custom bicycles without NBIC's Panasonic retailers will be permitted to offer carrying excessive inventories. As the firm's managing custom-made Panasonic bicycles. director, Hata, puts it, 'There is little need for us to hold large inventories of finished frames and other parts To create an 'information network' by which Panasonic unlike others [competitors] outside the Kansai region'. POS retailers can communicate with the mass-custom Unlike NBIC, Bridgestone and Miyata have simply factory, NBIC managers depend upon simple increased their inventories of frame types and model technologies such as facsimile machines. The sizes to accommodate customization demands by their employment of relatively inexpensive and well diffused customers. This approach has added to their overall facsimile technologies suggests that, in pursuing mass costs. Recently, firms such as Compaq, who offer customization, a firm does not necessarily have to rely customized PCs in the United States, have recognized on advanced communication and network technologies. European Management JournalVo114 No 5 October 1996
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FROM MASS PRODUCTION TO MASS CUSTOMIZATION
Internal Conditions The strategy of mass-customization requires long-term investments in advanced-manufacturing technologies and human resource development The NBIC example makes clear the importance of advanced manufacturing technologies for the pursuit of mass customization. The recent attempts by Levi Strauss & Company to offer 'custom fit' blue jeans for women in the United States was made possible due to a computer information network system (Rifkin, 1994). Also, Pine et al. (1993), in their discussions of Bally Engineered Structures Inc., a mass customizer for refrigeration products, points out that a sophisticated informationmanagement system called a 'computer-driven intelligence network' was at the heart of this firm's approach to mass customization. However, NBIC's managers clearly recognize that human resource development is also critical. At NBIC it is humans, in conjunction with advanced technology, who create the new knowledge required for refining existing skills and developing manufacturing capabilities essential for the pursuit of their approach to customization. It is another example of how Japanese firms leverage the manufacturing capabilities that result from a blending of advanced computer-based technologies and human expertise. The firm recognizes that information technology and computer-integrated manufacturing are necessary, but not sufficient, for achieving the flexibility and responsiveness critical to mass customization (Garud and Kotha, 1994).
Access to substantial in-house engineering expertise and manufacturing capabilities is necessary for successfully implementing the concept Much of the process technology and computerized information systems (e.g., numerical control machines, robotics, interfactory local area networks) installed by NBIC's mass-custom factory were an outgrowth of inhouse engineering and manufacturing expertise accumulated over many years. Such competence is important because, although mass customization has obvious market appeal, it can easily become a manufacturing and logistics nightmare without a high degree of manufacturing competence (Westbrook and Williamson, 1993). Therefore, it appears that firms contemplating this approach to competitive strategy will be forced to rely heavily on in-house expertise in order to implement their versions of mass customization. Each plant's manufacturing tasks and competitive priorities need to be matched to its product~market environment In an effort to pursue both approaches, NBIC managers have intentionally created two separate manufacturing facilities. This separation of the two factories is akin to what Skinner (1974) has termed as 'factory focus'. According to Skinner, no single factory can do all things (e.g., quality, cost, flexibility, and delivery) equally well and hence, factories that are more focused outperform those that attempt to fulfil a diverse range of competitive priorities. This is because of the inherent 448
complexity involved in pursing multiple and sometimes conflicting objectives (Skinner, 1974). Therefore, firms contemplating pursuing both mass production and mass customization may consider adopting a focused factory approach at the plant level.
Instituting mechanisms to foster interactions among the focused plants may be necessary for new knowledge creation and for attaining flexibility Earlier I discussed how NBIC's establishment of organizational mechanisms has fostered interactions between the factories. NBIC's managers have implicitly recognized that the benefits of pursuing masscustomization transcends the small segment for customized bicycles in the JBI. The mechanisms such as worker rotation, the sharing of process ideas through such rotations, and the centralization of engineering personnel can be employed by other firms interested in the concept. The centralization of the design and process engineering function enhances NBIC's ability to capture novelproduct ideas from the innovative-lead users in the custom segment and then exploit them in the massproduction arena. Doing so enables the firm to introduce new products rapidly and avoid the mindless product proliferation characteristic of many Japanese firms (Stalk and Webber, 1993). This practice also helps overcome the disadvantages associated with worker skill limitations and promotes the diffusion of the best practices among the factories. Rotating workers also results in the establishment of a 'system' that enables the conversion of tacit knowledge to explicit knowledge. Taken together, such mechanisms enable a firm to create new knowledge and attain greater strategic flexibility.
Mass customization requires a culture that focuses on knowledge creation and the development of manufacturing capabilities The effective use of mass customization hinges on promoting an attitude that is conducive to continuous improvement, organizational and individual learning, the development of new capabilities, and the diffusion of the best practices among a firm's plants. NBIC's case vividly illustrates the need to focus on all of these elements simultaneously. Moreover, it clearly fits Florida and Kenney's (1990) observation that, perhaps, the key element of the Japanese industrial system lies in its ability to directly harness the workers' knowledge at the point of production. Therefore, the promise of mass customization through advanced technology is not the lights-out factory, but a tool or an approach that more effectively taps all the diverse capabilities of employees to serve customers (Pine et al., 1993). The strategy requires a savvy marketing group that can excite customers about individualized product offerings According to the general manager of sales at NBIC, customer service, 'appropriate' pricing, and extensive communication with the customer are all integral parts of NBIC's approach to mass customization. As he put it, 'We could have made the [delivery] time shorter, but we EuropeanManagementJournalVo114No 5 October 1996
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wanted people to feel excited about waiting for something special.' Additionally, to create customer excitement, the marketing group at NBIC has implemented some creative solutions. For example, shortly after the factory receives the customer's order, a personalized computergenerated drawing of the bicycle is mailed to the customer with a note thanking him or her for choosing the POS. This is followed by a second personal note, three months later, inquiring about the customer's satisfaction with his or her bicycle. Finally, a 'bicyclebirthday' card is sent commemorating the first anniversary of the bicycle. Table I summarizes the external and internal conditions that are necessary for the successful pursuit of mass customization. Although each of the conditions discussed is necessary individually, it is the interactions and interrelationships among them that may enable a firm to successfully adapt the concept. 3
Conclusion In highlighting NBIC's unique approach to mass customization, this paper provides a useful framework for a mass-production firm contemplating entry into the era of mass customization. It illustrates the dynamics of pursuing both mass-production and mass-customization approaches simultaneously and highlights many industry- and firm-level conditions that are necessary for successfully exploiting mass customization. In today's competitive landscape, the issue is not whether the 'mass market' is dead, but finding unique ways of fulfilling changing customer demands. In that sense, the emerging concept of mass customization is an important option, among many, available to a firm seeking a competitive advantage.
Acknowledgement I thank Mr. Hitori Hata, Managing Director of the National Bicycle Industrial Company for providing me with access to important information about the firm's mass production and mass customization strategies. I also thank Andrew Fried of Andersen Consulting, Tokyo Office, for his participation and assistance in researching this topic in Japan. I have also benefited greatly from discussions with students at both the Stem School of Business and the International University of Japan. Last, but not least, I thank Gabrielle Gerhard, Arun Kumaraswamy, and Anil Nair for their thoughtful comments on an earlier version of the paper.
Notes 1.
The original idea for customizing bicycles originated when the firm's president visited a famous department store in Osaka. The president noticed that women could customorder dresses which were then delivered by the store in two
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Table 1 External and Internal Conditions Necessary for S u c c e s s External Conditions Success is more likely if • there is no well entrenched competitor already pursuing mass customization • the firm has access to a supplier network in close proximity • the industry is characterized by increased product proliferation and new product introductions • the firm develops an inter-connected information network with a selected group of trained retailers Internal Conditions Success is more likely when a firm • has made long-term investment in advanced manufacturing technologies and information technologies and human resource d e v e l o p m e n t • has access to substantial in-house engineering expertise and manufacturing capabilities • focuses its manufacturing tasks and competitive priorities at each plant to its p r o d u c t / m a r k e t environment • institutes organizational mechanisms that foster interactions among focused plants • creates a culture that emphasizes knowledge creation and the d e v e l o p m e n t of manufacturing capabilities • has a savvy marketing group that can excite customers about individualized product offerings
2.
weeks. He wondered if it were possible for NB1C to produce bicycles in this way, According to some senior executives, many of the firm's managers had doubts about the feasibility of such an approach. However, despite their skepticism, they were willing to try and see if this project might work (Kotha and Fried, 1993). Explicit or codified knowledge refers to knowledge that may be transmitted in formal, systematic language. In contrast, 'tacit' knowledge has a personal quality, which makes it hard to formalize and communicate because it is deeply rooted in action, commitment, and involvement in a specific context (Nonaka, I991). Although there are many strategic advantages in pursuing mass customization (and mass production simultaneously), there are costs associated with pursuing mass customization. When the difficulty of quantifying a priori the benefits associated with intangible benefits (e.g. worker motivation, new knowledge creation) and tangible benefits (e.g. reputation, strategic flexibility, etc.) are recognized, a comparison of potential costs and benefits suggests that the benefits outweigh the costs (see Kotha, 1995 for a detailed discussion of costs and benefits).
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Emerging Paradigm for Competitive Advantage. Strategic Management .Journal, 16, pp. 21-42. Kotha, S. and Fried, A. (I993). National Bicycle Industrial Company: Implementing a Strategy of Mass Customization. New York University/International University of Japan Case Series. Kotler, P. (1989). From Mass Marketing to Mass Customization. Planning Review, 17, pp. 10-13. Nonaka, I. (1991). The Knowledge Creating Company. Harvard Business Review, 69, 6, pp. 96--104. Pine II, B.J. (1993). Mass Customization: The New Frontier in Business Competition, Boston: Harvard Business School Press. Pine II, B.J., Victor, B., and Boynton, A.C. (1993). Making Mass Customization Work. Harvard BusinessReview, 71, pp. 108119. Rifkin, G. (1994). Digital Blue Jeans Pour Data and Legs into Customized Fit. The New York Times, November 8, p.1, column 6, section A. Skinner, W. (1974). The Focused Factory. Harvard Business Review, May-June, pp. 113-121. Stalk, Jr. G. and Webber, A.M. (1993). Japan's Dark Side of Time. Harvard Business Review, 71, pp. 93-102. Westbrook R. and Williamson, P. (1993). Mass Customization: Japan's New Frontier. European Management Journal, 11, I, pp. 38-45. Womack, J.P. (1993). A Book Review of Mass Customization. Sloan Management Review, 34, pp. 121-122.
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SURESH KOTHA, Leonard R. Stern School of Business, New York University, 40 West 4th Street, Room 7-10, New York, New York State, 10012-II26, USA. Suresh Kotha is an Assistant Professor of Business Policy and Operations Management at the Stern School of Business, New York University. He has also taught at the International University of Japan, Graduate School of Management. His teaching and research interests are in the areas of business strategy, manufacturing strategy, and US~Japan comparative practices. Dr. Kotha serves on the editorial board of the A c a d e m y of M a n a g e m e n t Journal and the Strategic Management Journal and is an Associate Editor of the Journal of Operations Management. He is currently conducting a study, with colleagues from many different universities, that focuses on determining the environment and strategic correlates of performance in the Japanese automobile, steel and machine tool industries.
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