Brand or bland?
What is the relationship between lean principles and brand value?
Japanese cars are consistently recommended as best buys by many consumer magazines. For example, Table 1 shows the 2005-06 ‘best buys’ as viewed by the UK’s Consumer Association, based on testing and analysis of the vehicle’s performance across a range of attributes – safety, security, running costs, depreciation rates, as well as consumer reactions. Japanese brands show a substantial penetration of the ‘best buy’ and ‘worth considering’ categories in all segments, apart from the luxury segment.
Fig 1 shows reliability by brand, with Japanese brands showing a strong performance, averaging a breakdown rate of 3.7% across all brands, compared to 5.5% for the European and US-owned volume brands and 6.0% for the European premium brands, consistent with patterns of leanness in the auto industry. Of course, not all Japanese producers are equally lean – and reliability performance varies considerably across the Japanese brands – but studies continue to show manufacturing excellence and world-leading levels of ‘leanness’ on the part of Japanese producers. Consequently, we use Japanese ownership as a proxy for whether a carmaker is a lean producer.
A Conflict at the Heart of Lean?
In the face of substantial evidence of the benefits of lean principles, there is something that we find puzzling. In common with many of our colleagues, lean ideas recur in our presentations and we consider ourselves as lean enthusiasts. Yet, when we are asked the inevitable question in class discussion – ‘What car do you drive?’ – neither of has ever been able to answer ‘a Japanese brand’. Herein lies a serious issue – we, and many of our colleagues, are enthusiastic proponents of lean production systems, yet remarkably few of us provide the ultimate endorsement of any production system by actually buying the products that the system produces.
If the true mark of respect for a production system is for its promoters to buy the products that come from it, then one might conclude that the most admired auto production systems are located in Germany, Sweden or even Italy, but certainly not in Japan. Profitability is a further puzzle – companies such as BMW and Porsche have consistently been two of the world’s most profitable car producers (apart from the period of BMW’s ill-fated adventure with the now-defunct Rover car company), yet few observers would consider BMW as an archetypical lean producer.
All of this supports the rather obvious conclusion that there is more to being a successful car maker than simply developing and manufacturing reliable, functional products in an efficient way. As Quentin Wilson, a presenter on BBC’s ‘Top Gear’, put it: ‘People are only interested in three things: how fast it goes, how much it costs, and whether you can pull in it’.
We suspect that the problem goes deeper than this, and that lean principles actually work against the creation of products designed to stimulate desire, as opposed to those fulfilling purely functional needs and requirements. What is the relationship between lean principles and brand value? How are the Japanese faring in the premium segments, and why are they finding it hard to enter the premium market? How do established premium producers compare? Most importantly, do lean principles actually work against premium brand values?
Lean Principles in Design and Manufacture
The essential elements of lean are generally well understood. Lean systems aim to reduce waste (where waste is anything that adds cost, but not value to a product); materials flow continuously through the system on a just-in-time basis; and there is an emphasis on error prevention, rather than on detection and post-hoc rectification. In true lean systems these principles are applied along the whole value stream, not just in isolated pockets. First and foremost, lean principles emphasise system-level optimisation. The emphasis is on how the parts work together, rather than in the individual performance and excellence of any one feature or system component. Indeed, this may be one of the reasons why lean principles first evolved most fully in Japan, rather than elsewhere in the world. The collectivist nature of Japan, where there is a high awareness of interdependencies, is a natural environment for lean principles to flourish. Lean principles were first applied in factories, but increasingly have also been applied to engineering and product development activities, as well as to service operations.
Freedom from waste is a central element of the lean philosophy, but one person’s waste may be another person’s value, and sometimes what may look like waste to a design or manufacturing engineer may be a key feature of a product to a user or customer. In practice, this may lead to lean principles being applied by manufacturing or engineering functions to reduce cost, without a counter-balancing sense of what constitutes customer value.
Waste in manufacturing is easy to spot. Implementing lean means reducing anything that is superfluous to the transformation process – movement, rework, inventory and so on, as outlined by Taiichi Ohno in his ‘Seven Wastes’ some 30 years ago. In engineering, the same principles apply. Examples of waste are: lost or slack time in a development schedule; re-worked designs due to errors and oversights; and over-engineering – that is to say, building in features, durability and performance levels considerably in excess of those required for the product to perform its main functions. In the engineering domain ‘freedom from waste’ also implies a balance between competing trade-offs. For example, lean principles dictate that highly designed products should be re-engineered, to avoid inherent production difficulties and the resulting increased risks of defects. In lean systems, manufacturing and design engineers are likely to have equal say in the process. This is the principle of design-for-manufacture (DFM), in which trade-offs are made between product attributes (appearance, performance, complexity, etc) and production issues (consistency, reliability and so on). This ethos of system optimisation also means a balance between different features. From a system perspective there is little point in engineering one function or attribute to a standard that is considerably in excess of other functions and attributes as to do so is wasteful. Thus, lean principles subtly push towards the good, all-round product.
From a customer’s point of view, reducing waste is clearly a good thing, as the result is lower cost. However, a second and easily overlooked aspect of maximising value lies in the merit of the proposition to the customer in the first place. Fig 2 shows the cost-value balance. The cost of a product is shown on the horizontal axis, and the value the customer assigns to it on the vertical. If both are equal, then the production costs of the product are as much as the customer is willing to pay for it. The further above the cost-value equilibrium a product lies, the ‘better value for money’ the product is, and thus the more attractive, as the gap between cost and value is maximised. The two ways to achieve this are to reduce costs by reducing waste, and to drive up value. The value dimension of many products often includes intangible product features such as brand perception, product image, and social recognition.
Lean Thinking and Premium Brands
The strength of the German auto producers such as Audi, BMW, Mercedes, and Porsche in the premium sector has been enduring, notwithstanding some of the bad press Mercedes has received since its merger with Chrysler in 1998 and, more recently, since its recall of more than one million E and CLS-Class vehicles in 2005. Yet these are the producers derided in the ‘Machine that Changed the World’ for taking as long to correct the faults in a typical finished car as it does for Toyota to make a near-perfect car in the first place. Despite such inefficiencies, the premium German brands clearly succeed in sending powerful messages of technological sophistication, driving experience, durability and longevity, reinforced by clever advertising slogans such as Audi’s ‘Vorsprung durch Technik’ and BMW’s ‘ultimate driving machine’.
Thus far, the Japanese expansion in Europe has been mainly in the volume car segments, and not in the premium segment, though in America the Japanese have fared better at the upper end of the market than they have in Europe. Tables 2a and 2b show Toyota’s sales since 1990 compared to those of Mercedes and Lexus in the US and the UK. We compare Lexus (Toyota’s luxury brand) with Mercedes, as Lexus is the only Japanese premium brand offered in both the US and European market.
Notwithstanding the undoubted strengths of Lexus and excellent reliability record as shown in fig 1, Mercedes outsold Lexus by a factor of more than 8:1 in 2004 in the UK. Even when the A-Class (a compact segment model) is taken out of the picture, the ratio remains close to 7:1. Between 2000 and 2004, Mercedes increased its UK sales by 28%, compared to 12% in the case of Lexus. What is the explanation of this?
Adding Value or Adding Waste?
We suggest that a key reason for Mercedes’ continued strength given what in many ways is a superior objective performance by Lexus products lies in the relationship between over-engineering and premium brand values. We defined over-engineering as the provision of attributes considerably in excess of functional requirements, such as, for example, designing vehicles so they are safe to drive at speeds in excess of 150mph; thanks to traffic congestion this is not practical any more even in Germany, though it is at least legal there. Another example of over-engineering is the engineering of components, fixtures and fittings to standards of longevity far greater than are likely to be required by most users. In a narrow definition of lean these are all examples of waste. However, in a world of brands and identities, owning such products can send messages of potency, sophistication, taste, and refinement and therefore represent great value to the customer.
So, on one hand over-engineering represents waste but on the other, may increase brand value. In the auto industry, the tendency for waste and brand value to be in conflict is mediated by segment. For example, in entry-level/ commodity segments, leanness is an advantage because of the cost (and hence price) competitiveness fostered by higher productivity in the factory. Also, the product reliability is better because of better quality of parts and greater manufacturing accuracy in assembly. Many of these benefits stem from robust design, achieved through compromise and multiple trade-offs. In lower segments cars are more likely to be commoditised, and purchased on the basis of factors such as price, value for money, reliability, practicality and so on. In these segments it is acceptable for product attributes that might enhance character and performance – stiffness of suspension, acceleration and top speed – to be traded-off against others – comfort of ride, reliability and fuel consumption.
We observed this process in the case of engine valve springs. Japanese producers show strikingly lower failure rates than their European counterparts. Why? European makers are much more prone to push the edge of the envelope of performance further than their Japanese counterparts, the net result of which is to achieve a modest increase in top end performance, but at the price of a huge increase in failures.
Premium producers in most segments are more likely to focus on features and attributes that are subject to the same forces of compromise – handling, performance and so on. If products are to exude brand values of technological sophistication, durability and so on, then over-engineering – in the sense of complexity, detail and specifications that are superfluous to functional requirements – is an important way of conveying those values. In a purely rational, lean world, over-engineering a product is wasteful. In a world where having too much of a feature sends an important message about the identity and values of the owner, this can be a huge source of value to the customer, and hence profit to the producer. The trick is to know when functional waste adds customer value – and this is by no means easy to see.
A further issue in the case of cars, as in many other identity products, is the role of experts or other intermediaries as opinion formers, such as motoring journalists and consumer associations in building brand value. A TV programme such as ‘Top Gear’, for example, leaves one in little doubt of the priorities of the reporters, whose verdicts show scant mercy to dull, albeit worthy, cars. The precise impact of the motoring press is hard to assess, but it is clear that they place a premium on features such as character, driving experience and performance that are not necessarily the vehicle attributes fostered by lean principles. Consumer reports are more balanced, and perhaps it is for this reason that the Japanese marques tend to dominate the top rankings in these assessments.
A stretch too far?
So, what can we conclude from all this? Well, lean principles have been tried and tested, and there is little doubt that if you are in a market segment where price and functionality are key drivers of purchasing decisions, then cars that have been produced by lean product development and manufacturing are the ones for you. Toyota’s exemplary journey from a producing 11,706 units per annum in 1950, when Ford was making 8000 units per day, to becoming the world’s largest vehicle manufacturer leaves no doubt as to the efficacy of such systems. In this segment of the market lean is all about system-wide optimisation and balancing trade-offs, and the customer value proposition reflects this. Minimising waste necessarily involves compromise on individual features. Therefore, lean principles encourage reliable, good all-round cars – but by mitigating against undue strength in any particular area, they can also undermine character. This is then amplified by opinion leaders such as motoring journalists, who place a high value – some might say undue value – on the more colourful aspects of vehicle character and performance. Thus lean actually serves to undermine certain types of brand values, especially in the premium segments of the market.
Providing product features that are in a sense out of balance with the whole is an anathema to lean, but is very important to the feel and the image of a vehicle and therefore to brand. And if these attributes appeal to sufficiently large sub-sections of society – those who have sufficiently deep pockets – then the benefits in terms of sales and profit margins will follow. This is not to say that lean has no place in premium segments, and lean manufacturing at Porsche is a case in point. Porsche has taken steps to become a lean producer, but has not allowed this to infiltrate their product design and identity.
The story so far may read as a celebration of waste and over-engineering; readers might conclude that the premium German auto producers can safely be complacent. This would be a mistake. The German producers are clearly strong in traditional premium segments, and if our analysis is correct, will remain so for some time to come, precisely because of the relationships between non-lean practices, product attributes and customer value. However, in the new and exciting niche of hybrid cars it is Toyota, the arch lean producer, who is the unquestionable leader. Aside from the obvious benefits in terms of fuel economy, hybrid cars make a strong, non-mainstream statement about their owners. They also require a complex and novel integration of multiple technologies. Who would you most trust to do this? Exactly.