Monterrey, Nuevo León a
Lic. Arturo Azuara Flores:
Director de Asesoría Legal del Sistema
Por medio de la presente hago constar que soy autor y titular de la obra titulada
", en los sucesivo LA OBRA, en virtud de lo cual autorizo a el Instituto Tecnológico y de Estudios Superiores de Monterrey (EL INSTITUTO) para que efectúe la divulgación, publicación, comunicación pública, distribución y reproducción, así como la digitalización de la misma, con fines académicos o propios al objeto de EL INSTITUTO.
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De la misma manera, desligo de toda responsabilidad a EL INSTITUTO por cualquier violación a los derechos de autor y propiedad intelectual que cometa el suscrito frente a terceros.
Nombre y Firma AUTOR (A)
Evaluation of the Financial Performance of Value Creating
Strategies vs. Cost Reduction Strategies in Mexican Firms: An
Title Evaluation of the Financial Performance of Value Creating Strategies vs. Cost Reduction Strategies in Mexican Firms: An Empirical Study
Authors Alvarado Martínez, Elizabeth
Issue Date 01/05/2004
Abstract Tesis presentada para obtener el grado de Maestro en ciencias especialidad en Sistemas de calidad y productividad
Discipline Negocios y Economía / Business & Economics
Item type Tesis
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Dr. Nicolás J. Hendrichs Troegeln
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Ingeniería y Arquitectura
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Rights Open Access
INSTITUTO TECNOLÓGICO Y DE ESTUDIOS
SUPERIORES DE MONTERREY
DIVISIÓN DE INGENIERÍA Y ARQUITECTURA PROGRAMA DE GRADUADOS EN INGENIERÍA
EVALUATION OF THE FINANCIAL PERFORMANCE OF VALUÉ CREATING STRATEGIES VS. COST REDUCTION STRATEGIES
IN MEXICAN FIRMS: AN EMPIRICIAL STUDY
T E S I S
PRESENTADA COMO REQUISITO PARCIAL
PARA OBTENER EL GRADO ACADÉMICO DE:
MAESTRO EN CIENCIAS CON ESPECIALIDAD EN
SISTEMAS DE CALIDAD Y PRODUCTIVIDAD
ELIZABETH ALVARADO MARTÍNEZ
SUPERIORES DE MONTERREY
DIVISIÓN DE INGENIERÍA Y ARQUITECTURA PROGRAMA DE GRADUADOS EN INGENIERÍA
EVALUATION OF THE FINANCIAL PERFORMANCE OF VALUÉ CREATING STRATEGIES VS. COST REDUCTION STRATEGIES
IN MEXICAN FIRMS: AN EMPIRICAL STUDY
PRESENTADA COMO REQUISITO PARCIAL PARA OBTENER EL GRADO ACADÉMICO DE:
MAESTRO EN CIENCIAS
ESPECIALIDAD EN SISTEMAS DE CALIDAD Y PRODUCTIVIDAD
DIVISIÓN DE INGENIERÍA Y ARQUITECTURA PROGRAMA DE GRADUADOS EN INGENIERÍA
Los miembros del comité de tesis recomendamos que el presente proyecto de tesis presentado por la Ing. Elizabeth Alvarado Martínez sea aceptado como requisito parcial para obtener el grado académico de:
Maestro en Ciencias
Especialidad en Sistemas de Calidad y Productividad
Comité de Tesis:
Dr. Nicolás J. Hendrichs Troegel Asesor
Dr. Federico Viramontes Brown
A mi familia: gracias por apoyarme
y permitirme cumplir este sueño...
Al Dr. Nicolás Hendrichs, por darme la oportunidad de trabajar en este tema tan fascinante, orientándome siempre y ayudándome a enfocarme cuando me perdía entre tanta idea e información, ¡gracias por toda su paciencia, Doc! Fue un placer trabajar con usted.
Al Dr. José Manuel Sánchez y al Dr. Luis GarcíaCalderón, por aceptar ser mis sinodales, por su disposición y sus valiosos comentarios, ¡mil gracias!
Al Dr. Fernando Mata, por aquella retroalimentación que tanto me ayudó, ¡gracias por su tiempo y sus atenciones!
Al Dr. Miguel Ángel Narro, porque su clase me ayudó a centrar y enfocar mi investigación.
Al Dr. Humberto Cantú y al Ing. Heriberto García, por la oportunidad de pertenecer al Centro de Calidad y por todas las atenciones que tuvieron conmigo.
A todos y cada uno de los maestros de los que aprendí tanto en cada materia de la maestría.
A Karina, Adriana, Lucero, Carlos, Paloma, Paty, Sergio y Romel, porque estando cerca o lejos, todos me apoyaron y animaron durante la realización de esta investigación, y aguantaron cada acierto o tragedia que les platicaba...¡y vaya que les platicaba! ¡Los quiero mucho! Y muy especialmente, gracias a mi hermano Armando, por todo tu apoyo en cada momento, ¡te quiero mucho Tiburoncín!
excelente amigo, gracias por tu confianza. AC, que buenos recuerdos de esas interminables jornadas de trabajo ambientadas siempre musicalmente jajaja, y donde pudimos comprobar tu tesis jajaja. Yari y Yoanna, gracias comis por tanta confianza y tantos momentos padres. Lizeth, que bonita amistad encontré en ti. En fin, no quiero que se me escape nadie, nunca terminaría de mencionar a cada uno y lo que aprendí de ustedes. Tú sabes lo mucho que aprecio que hayamos coincidido. Fue una etapa padrísima, espero que sigamos en contacto siempre. ¡Muchas gracias a todos!
A todos, familiares y amigos, porque cada uno de ustedes ha dejado una huella en mi que me hace ser quien soy.
TABLE OF CONTENTS
1 INTRODUCTION 1 1.1 INVESTIGATION IDEA 1 1.1.1 PROBLEM DEFINITION 1 1.1.2 OBJECTIVES 1 1.1.3 QUESTIONS OF THE INVESTIGATION 1 1.1.4 JUSTIFICATION 2 2 LITERATURE REVIEW 3 2.1 STRATEGIES 3 2.1.1 Core Concepts 3 2.1.2 Valué Creating Strategies 7
INNOVATION PROCESSES THROUGH KNOWLEDGE MANAGEMENT 10
KNOWLEDGE MANAGEMENT 12
THE THREE STAGES OF KNOWLEDGE 16
Knowledge Acquisition 16
Knowledge Integration 17
Knowledge Deployment: stocks and flows of organizational knowledge... 17
ORGANIZATIONAL CAPABILITIES AND CORE COMPETENCES 19
2.1.3 COSTS REDUCTION STRATEGIES 23
LEAN THINKING AND UNDERSTANDING WASTE 25
IDENTIFYING WASTE IN THE FIRM 27
USING TOOLS AND METHODOLOGIES FOR WASTE ELIMINA TION 30
Quality Costs 32
Response Time 36
OPERATIONAL PERFORMANCE 37
2.2.3 CUSTOMER RETENTION 41 3 METHODOLOGY OF RESEARCH 42 3.1 HYPOTHESIS 42 3.2 SAMPLE 42 3.3 DEFINITION OF VARIABLES 43 3.4 PATH ANALYSIS, STRUCTURAL EQUATION MODELING 47 3.5 RELATIONSHIP OF LATENT VARIABLES 49 NONOBSERVATIONAL HYPOTHESIS 49 3.6 FIT ÍNDICES FOR EVALUATION OF A PLS MODEL AND ASSESSMENT OF RESULTS 50 3.7 MODEL PARAMETER STABILITY ANALYSIS: THE BOOTSTRAP 51 3.8 INSTRUMENT DEVELOPMENT AND ASSESSMENT 52 3.8.1 MEASUREMENT OF LATENT VARIABLES 52 3.8.2 MEASUREMENT INSTRUMENT 52
GENERAL QUESTIONS 52
VALUECREATING STRATEGIES 53
Technology Área 53
Portfolio of Products 53
Volume of Sales 54
COST REDUCTION STRATEGIES 54
Response Time 56
Operational Performance 56
FINANCIAL PERFORMANCE 57
4.1.2 COMPLETE MANIFEST VARIABLE INNER MODEL 63 4.2 ANALYSIS AND INTERPRETATION OF A REDUCED LVPLS MODEL (FINAL RESULTS) 66
LIST OF TABLES
Table 1 Principies of Lean Approach 26
Table 2 Seven Wastes of Toyota Production System (Shingo, 1986, taken from
Womack & Jones, 1996) 28
Table 3 The Seven Wastes Classified in the Three Criteria 31
Table 4 Types of Quality Costs (Barfield, Raiborn and Kinney, 2003) 33
Table 5 Firm's Sector Distribution 43
Table 6 Definition of Latent Variables and their Corresponding Manifest Variables 43
Table 7 Nonobservational Hypotheses of the Proposed Model 49
Table 8 Latent and Manifest Variables 58
Table 9 Market Knowledge Complete Measurement Model Results 59
Table 10 Technology Knowledge Measurement Model Results 59
Table 11 Portfolio of Products Measurement Model Results 60
Table 12 Geographies Measurement Model Results 60
Table 13 Volume of Sales Measurement Model Results 60
Table 14 Quality Measurement Model Results 61
Table 15 Flexibility Measurement Model Results 61
Table 16 Response Time Measurement Model Results 62
Table 17 Operational Performance Measurement Model Results 62
Table 18 Costs Measurement Model Results 62
Table 19 Financial Performance Measurement Model Results 63
Table 20 Complete Inner Model 63
Table 21 Reduced Manifest Variable Outer Model 66
Table 22 Reduced Inner Model 69
Table 23 Bootstrapping Resampling Results 72
Table 24 A verage and Standard Error of the Bootstrap Estimates 72
Table 25 Bootstrap 90% Confidence Interval for the Reduced LVPLS Model 73
Table 26 Bootstrap 95% Confidence Interval for the Complete LVPLS Model 73
LIST OF FIGURES
Figure 1 The Hierarchy of Information (Amidon, 1997) 13
Figure 2 The Three Stages of Knowledge (González, 2002) 19
Figure 3 Mobilizing Company Resources to Produce Competitive Advantage 21
Figure 4 Analysis Model of the Research Hypothesis (Latent variables) 48
Figure 5 Nonobservational Hypotheses Linked to the Proposed Model 50
Figure 6 Path Analysis Results (Complete Model) 64
Figure 7 Path Analysis Results (Reduced Model) 70
Figure 8 Clearness of Goals and Objectives 74
Figure 9 Specific Plans and Projects for the Achievement of each Goal 75
Figure 10 Competitive Advantages coming from AddedValue of Products/Services. ...75
Figure 11 Competitive Advantages coming from Costs of Products/Services 76
Firms face an intensified competition, where gaining and maintaining competitive advantages becomes essential for having a performance that allows them increase their revenues, either increasing sales, reducing cost or both.
The investigation idea is defined in this chapter.
1.1 INVESTIGATION IDEA
1.1.1 PROBLEM DEFINITION
What is the difference between the impact of applying lean thinking as a cost reduction strategy and developing innovation processes through knowledge management as a value creating strategy on the financial performance of a firm located in the Monterrey metropolitan area?
• To find empirical evidence that shows that to improve the financial performance of a firm is necessary to apply valuecreating strategies as well as to apply strategies that reduce costs.
• To evaluate the impact that waste elimination as a cost reduction strategy and process innovation through knowledge management as a value creating strategy have on the financial performance of firms. Evaluate which of them has a greater business impact. • To find empirical evidence that shows that firms which manage their improvement
processes through the three stages of knowledge acquisition, integration and deployment properly applied have a greater business impact than those which concentrate only on cost reduction strategies.
1.1.3 QUESTIONS OF THE INVESTIGATION
• What is a strategy?
• What is an innovation process? • What is knowledge management? • How do firms manage their knowledge? • What is a cost reduction strategy? • How do firms usually reduce their costs? • How is Lean Thinking used to reduce costs?
• How can firms measure their operational performance? • How can firms measure their financial performance?
• How firms can decide which strategies to emphasize to improve their financial performance?
This chapter presents the concept of strategy and how it is shaped by the competitive forces, in order to evaluate the impact that they have on the financial performance of the firm. The focus in on two types of strategies: value creating and cost reduction.
The use of innovation processes through knowledge management as value creating strategy and the understanding of waste through criteria such as quality, flexibility and response time as costs reduction strategy are explored.
2.1.1 Core Concepts
Definitively competition has intensified dramatically over the last decades, in virtually all parts of the world. Very few industries remain in which competition has not intruded on stability and market dominance. No company can afford to ignore the need to compete. Every company and every country must try to understand and master competition (Porter, 1998). To create a competitive, worldclass organization, firms must realize they can not stand still. They must continuously improve all aspects of their business to cope with existing and new competitors and everincreasing customers expectations (Brunt and Butterworth, 2001 in Taylor and Brunt, 2001).
Most businesses are already facing new challenges to their traditional strategies. Each one of these challenges requires executives to make strategic decisions. And each such decision requires effective action. Each challenge requires strategic management to identify the strategies that fit a particular challenge, to identify the one that is right for the specific business at this specific time, and to convert the strategy chosen into effective action (Drucker, 2003). The goal is to focus that action to improve the financial performance of the firm, either increasing sales or reducing costs using strategies according to the needs of the firm and the changing market.
As market changes, managers have had the need to learn how to play by a new set of rules so that companies can be flexible to respond rapidly to those competitive and market changes. As Porter (1998) describes, managers must benchmark continually to achieve the best practice. They must outsource aggressively to gain efficiencies. And they must nurture a few core competencies in the race to stay ahead of rivals, because a competitive advantage does not last forever, as rivals can quickly copy any market position.
Differences in operational effectiveness among companies are pervasive. Some companies are able to get more out of their inputs than others because they eliminated wasted effort, employ more advanced technology, motivate employees better, or have greater insight into managing particular activities or sets of activities. Such differences in operational effectiveness are an important source of differences in profitability among competitors because they directly affect relative cost positions and levels of differentiation (Porter, 1998). Managers have been worried with improving operational effectiveness; through different tools and programs they have changed how they perform activities in order to eliminate inefficiencies, improve customer satisfaction, and achieve best practice. They make all this in order to get the maximum value that a company delivering a particular product or service can create at a given cost. Doing so may require capital investment, different personnel, or simply new ways of managing. The problem is that this maximum value is constantly shifting outward as new technologies and management approaches are developed and as new inputs become available.
for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers' needs (Porter, 1998). That is why the development and establishment of an appropriate strategy is needed. Strategy is the creation of a unique and valuable position, involving a different set of activities. The clue is in activities: they are the basic units of competitive advantage; overall advantage or disadvantage results from all a company's activities, not only a few. If there were only one ideal position, there would be no need for strategy. De Kluyver and Pearce II (2003) define strategy as the act of positioning a company for sustainable competitive advantage by focusing on unique ways to create value for customers. Its primary goal is to create value for shareholders and other stakeholders by providing customer value.
According to Porter (1998), there is a problem to distinguish between operational effectiveness and strategy. The quest for productivity, quality and speed has spawned a remarkable number of management tools and techniques: total quality management, benchmarking, timebased competition, outsourcing, partnering, reengineering, change management. Although the resulting operational improvements have often been dramatic, many companies have been frustrated by their inability to translate those gains into sustainable profitability. And bit by bit, almost imperceptibly, management tools have taken the place of strategy. It has to be understood the difference between operational effectiveness performing similar activities better than rivals perform them and strategic positioning performing different activities from rivals or performing similar activities in different ways.
According to Repenning & Sterman (2001), the performance of any process can be increased by dedicating additional effort to deliver greater value to customers or to create comparable value at a lower cost. However, the two activities do not produce equivalent results. Time spent on improving the capability of a process typically yields the more enduring change. While it often yields the more permanent gain, time spent on improvement does not immediately improve performance. It takes time to uncover the root causes of process problems and then to discover, test, and implement solutions. Moreover, no improvement in capability lasts forever. Machines wear, processes go out of control without regular attention, designs become obsolete, and procedures become outdated. The decline of any capability that is not regularly maintained is inevitable. Similarly, the lifetime of improvements in capability will be shorter in organizations with high rates of change in its products and people.
2.1.2 Value Creating Strategies
In a constant process of improvement, companies must transform while they are successful, not when they reach the point of decline. Therefore, strategy should focus on creating value for shareholders, partners, suppliers, employees, and the community by satisfying the needs and wants of customers better than anyone else (De Kluyver and Pearce II, 2003). Therefore, value creating strategies focused on choosing different sets of activities that can not easily be imitated provide a basis for an enduring competitive advantage.
If a company can deliver value to its customers better than its rivals can over a sustained period of time, that company, most likely, has a superior strategy. This is not a simple task. Customers' wants, needs and preferences change, often rapidly, as they become more knowledgeable about a product or service, as new competitors enter the market, and as new entrants redefine what value means (De Kluyver and Pearce II, 2003). So, this is a process of continuous improvement because the value of a particular product or service, unless constantly maintained, erodes with time. Therefore, firms need to find ways to create value according to the environment changes.
more than it's a human resources problem or a leadership problem. Instead it is a systemic problem, one that is created by the interaction of tools, equipment, workers, and managers. Firms need to learn the basis of innovation processes, and how to do systematic innovations through management of their knowledge to deploy it through the entire firm and make this process part of their organizational culture.
A study by Repenning & Sterman (2001), pointed out that it's rare to find a process performing above expectations. Instead, managers, workers, and engineers usually faced high and rising demands, sometimes despite downsizing and cuts in resources. They are constantly searching for ways to improve and close the performance gap existing between their goal and their actual performance. Since most organizations are reluctant to increase plant and equipment or hire more staff, managers hoping to close a performance gap have only two basic options:
1. First, they can try to increase the amount of time people actually spend working. Managers facing a performance gap are under great pressure. They, in turn, pressure people to spend more time and energy doing work. As a direct result, an increase in the time spent working increases the performance of the process and closes the performance gap. This structure is called a balancing feedback loop because it constantly works to balance desired and actual performance. Pressure to do work includes, most obviously, direct measures such as telling people to work faster or put in overtime, setting more aggressive targets for throughput, and imposing more severe penalties for missing those targets. Pressure also includes more subtle actions designed to extract greater effort from employees. These include the frequency with which performance is reviewed, the detail with which the reviews are conducted, and the seniority of those doing the reviewing.
improvement may improve the productivity of every subsequent hour dedicated to production. Yet, despite its obvious and documented benefits, working smarter does have limitations. There is often a substantial delay between investing in improvement activities and reaping the benefits. Further, the greater the complexity of the process, the longer it takes to improve. Second, investments in capability can be risky. Improvement efforts don't always find the root cause of defects, new tools sometimes don't produce the desired gains, and experiments often fail. While investments in capability might eventually yield large and enduring improvements in productivity, they do little to solve the problems managers face right now.
Repenning & Sterman (2001) also observed, thus, it is not surprising that managers frequently use the Work Harder to both, accommodate variations in daily workload and solve pressing problems created by unexpected breakdowns or defects. What is repeatedly observed, and what is more difficult to understand, are organizations in which working harder is not merely a means to deal with isolated incidents, but is instead standard operating procedure. This is the situation in many Mexican firms. Rather than using the work harder to occasionally offset daily variations in workload, managers, supervisors, and workers all come to rely constantly on working harder to hit their targets and, consequently, never find the time to invest in improvement activities. What starts as a temporary emphasis on working harder quickly becomes routine. They do not pay attention at the opportunity of develop innovation processes in order to improve capabilities and growing as a firm having a better performance. They need to learn how to manage the knowledge they have in order to improve and create value for the firm (Flores, 2000).
work pressure and minimal levels of process capability. Not surprisingly, such a vicious cycle quickly drives out meaningful improvement activity.
The Reinvestment loop means a temporary emphasis on one option at the expense of the other is likely to be reinforced and eventually become permanent. Organizations that invest in improvement will experience increasing capability and find that they have more time to allocate to working smarter and less need for heroic efforts to solve problems by working harder. In most of the organizations in Repenning & Sterman (2001) and Flores' studies (2000) the reinvestment loop worked as a vicious cycle and prevented improvement programs from getting off the ground. Even when improvement programs yielded initial results, cost and schedule pressures soon tempted many organizations into downsizing or higher performance goals that drained resources away from improvement, weakening the reinvestment loop and causing capability to stall or even fall.
Though no matter what kind of value creating strategy the firm is using, to be successful in meeting its objectives, a shared vision must flow from top management through middle and lower management down to individual members of the entirely organization. It has to be a global strategy. Among the varieties of value creating strategies, this study will focus in the use of knowledge management as a process innovation tool.
INNOVATION PROCESSES THROUGH KNOWLEDGE MANAGEMENT
The development and implementation of a value creating strategy is a continuous process, that has to be constantly questioned about the value that is contributing to all the involved, and so, continuously reinvented. As Schumann (1994) asseverates, an innovation strategy is only good for a finite amount of time. One of the worst mistakes an organization can make is to assume that because an innovation strategy was successful it will always be successful. It must be clear for organizations that innovation can not stagnate; actually, innovation needs to reinvent itself so it never ends.
innovation. As a result, we are in a time of rapid, revolutionary change. Organizations must anticipate this and innovate in ways that allow them to take advantage of change. An organization's culture is the ultimate governor of the amount and type of innovation that will take place. The organization therefore must have a way to link its culture to its market (Schumann, 1994). A continuous commitment to change has become essential to business success and primarily to firms survival. De Kluyver and Pearce II (2003) mention two critical attributes of successful firms in dynamic industries: speed and innovation.
Smart infrastructures provide the freedom to come and go, capacity to accelerate the flow of information, ability to speed the use of technology, capability to reduce development time and flexibility to allow for a culture and environment that encourages and rewards innovation (Kozmetsky, 1991).
Innovation is the art of convert ideas and knowledge in products, processes or services that the market admits and assesses, to convert them into wealth (De Kluyver and Pearce II, 2003 and Abetti, 1986). Therefore, innovation doesn't mean to add greater technologic sophistication to the products or services, it means that they are better adjusted at the needs of the market. As Schumann (1994) points out, innovation is the process of implementing new ideas, of turning creative concepts into realities; is the basis of all competitive advantage. Organizations need innovation to stay in business, delight customers, establish competitive advantage, deliver quality products and services, be more productive, meet business goals, attract and keep the best people.
is innovation, which, when properly focused, creates wealth as defined in the broadest sense. And, naturally, the creation of wealth benefits all.
Successful entrepreneurs try to create value and to make a contribution. Innovation can cause change or it can exploit change; systematic innovation which exploits change is generally the most effective (Schumann, 1994). Drucker (1985) has defined systematic innovation as the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation. The purpose of any innovation implemented by a firm should be to help the organization itself to make better decisions in order to improve its performance.
Drucker (1985) emphasizes knowledgebased innovation is the "superstar" of entrepreneurship. Its characteristics give knowledgebased innovation specific requirements, and these requirements differ from those of any other kind of innovation:
1. It requires careful analysis of all the necessary factors, whether knowledge itself, social, economic, or perceptual factors. The analysis must identify what factors are not yet available so that the entrepreneur can decide whether these missing factors can be produced.
2. A clear focus on a strategic position. It cannot be introduced tentatively.
3. The knowledgebased innovator needs to learn and to practice entrepreneurial management.
Actually, this knowledge in which innovation is based, has to be innovated itself, constantly. Amidon (1993) defined the concept of knowledge innovation as the creation, evolution, exchange and application of new ideas into marketable goods and services for the excellence of an enterprise, the viability of a nation's economy and the advancement of society asawhole.
information, it remains noise. With structure and methods it is possible to develop the information into data that can be used to make decisions. However, even better decisions can be made if knowledge and wisdom can be extracted (Schumann, 1994). Data are element of analysis, information is data with context, knowledge is information with meaning, and wisdom is knowledge plus insight (Amidon, 1997). This is why knowledge management becomes essential to organizations, as knowledge can be used and must be exploited as a source of innovation.
Figure 1 The Hierarchy of Information (Amidon, 1997)
Knowledge and intellectual capital are major drivers of competitive advantage. A firm's competitive advantage comes from the value it delivers to customers. Competitive advantage is created and sustained when companies continue to mobilize new knowledge faster and more efficiently than their competitors (De Kluyver & Pearce II, 2003). In an economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge (Nonaka and Takeuchi, 1995).
Today it is the knowledge age, the economy of the intangible. Knowledge has become the preeminent economic resource more important than raw material, more important, often, than money (Stewart, 1997). In this new era, wealth is the product of knowledge. It is must be understand why managing intellectual capital should be business's first priority. It is hard pressed to find a single industry, a single company, a single organization of any kind that has not become more "informationintensive" dependent on knowledge as a source of what attracts customers and clients and on information technology as a means of running the place. To maintain a leading position, firms need to know their organization technical, economical and human resources, the technology available and the market and their competitors; and, mostly, they need to learn how to manage this knowledge.
According to Cagan & Vogel (2002), there are a number of challenges that make it difficult for companies to maintain a leading position in a particular product category. These challenges are forcing companies to redefine the bottom line and the path to get there. The goal is to increase profits while simultaneously maintaining a healthy internal structure that balances innovation and continuity. So, while companies are trying to realize their stated goals in sales and profit projections, they are also trying to resolve the following issues:
1. Finding the right opportunities for new products and appropriate innovation to improve existing products.
2. Designing products and services that customers perceive as tpuly valuable by appropriate integration of style and technology.
3. Reducing cycle times without reducing innovation and quality.
4. Integrating design, marketing and engineering by reducing "perceptual gaps" and producing products that are considered useful, usable, and desirable by the customer.
5. Appropriately positioning the role of technology in product development. 6. Attracting, preparing, and retaining the best people who work to create a
product or service that meets the needs, wants, and desires of the customer.
and maintenance of manufacturing standards are still intrinsic parts of developing successful products. But if, however, a product does not connect with the values of consumers, it will fail (Cagan & Vogel, 2002).
Intellectual capital is the sum of everything everybody in a company knows that gives it a
competitive edge (Stewart, 1997). That's why organizational intelligence smart people working in smart ways has moved from a supporting role to a starring one. Intellectual capital is intellectual material knowledge, information, intellectual property, experience that can be put in use to create wealth. It is collective brainpower. It is hard to identify and harder still to deploy effectively. But once you find it and exploit it, you win. Intellectual capital has contributed to the creation of whole new types of business and ways of doing business. In facts, many companies rely almost completely on intellectual assets for generating revenues (Shaikh, 2004).
The largest part of a company's intellectual capital base it is not patentable. According to De Kluyver & Pearce II (2003) it represents the total knowledge accumulated by individuals, groups, and units within an organization about customers, suppliers, products and processes, and is made up of a mixture of past experiences, values, education and insights. As an organization learns, it makes better decisions. Better decisions, in turn, improve performance and enhance learning.
When markets shift, technologies proliferate, competitors multiply, and products become obsolete almost overnight, successful companies are those that consistently create new knowledge, disseminate it widely throughout the organization, and quickly embody it in new technologies and products. These activities define the "knowledgecreating" company, whose sole business is continuous innovation. And yet, despite all the talk about "brainpower" and "intellectual capital", few managers grasp the true nature of the knowledgecreating company let alone know how to manage it (Nonaka and Takeuchi, 1995). The reason: they misunderstand what knowledge is and what companies must do to exploit it.
The dissemination of knowledge has to take place continuously and at all levels of the organization. According to Nonaka and Takeuchi (1995) making personal knowledge available to others is the central activity of the knowledgecreating company.
Knowledge becomes an asset when it is managed and transferred. To effectively develop knowledge as an asset, a company must encourage individual and organizational learning, knowledge creation, codification and sharing. It also must combat the "knowledge is power" syndrome and identify and eliminate disincentives to knowledgesharing through changes in incentives, accountability and corporate culture (De Kluyver & Pearce II, 2003).
Before people and companies can improve, first they must learn, because in the absence of learning, companies and individuals simply repeat old practices (Inkpen, 1996). A learning organization is an organization skilled at creating, acquiring and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights. It is skilled at five main activities: systematic approach to problem solving, learning from their own experience, from past history, from best practices of others, and transferring knowledge quickly and efficiently throughout the organization.
Learning is an essential component of strategy development. As soon as a company begins to implement a chosen direction, it starts to learn about how well attuned the chosen direction is to competitive environment, about how rivals are likely to respond, and about how well prepared the organization is to carry out its mission. Creating and preserving options for adapting to change therefore are keys to effective strategy formulation (De Kluyver and Pearce II, 2003).
THE THREE STAGES OF KNOWLEDGE
Hedlund (1994) argues that notions of change, dynamism and innovation become more important. Therefore firm specific capabilities that really make a difference are "dynamic capabilities". Dynamic capabilities that enable firms to introduce new products and processes and adapt to changing market conditions play an important role (Helfat and Reubitscheck, 2000). Knowledge acquisition involves two types to be considered: tacit and articulated knowledge. Tacit knowledge is defined as indicating knowledge which is nonverbalized or even nonverbalizable, intuitive, unarticulated. Articulated knowledge is specified either verbally or in writing, computer programs, patents, drawings or the like.
Firms can have knowledge but if they do not learn how to integrate it and exploit it, they will not grow as organizations. Gonzalez (2002) points out that due to the forces of competition and changes in consumer wants, the firm longrun survival and growth depend on its ability to develop new products and new methods of organization. Yet, what is frequently underemphasized is that the expansion of an innovation rests upon the capacity to replicate the capability of the production and sale of the new service or product. Particularly important, is the degree to which firms share common manufacturing capabilities, and on the other hand, the degree to which they differ in their distinctive abilities to recombine their knowledge to improve the innovation. Therefore, the primary role of the firm is the integration of knowledge.
The critical source of competitive advantage is knowledge integration rather than knowledge itself. The characteristics of knowledge integration associated with the creation and sustenance of such an advantage are the efficiency of integration, the scope of integration and the flexibility of integration (Gonzalez, 2002).
Knowledge Deployment: stocks and flows of organizational knowledge
accumulated knowledge in the firm and flows of knowledge into and through the firm (Decarolis and Deeds, 1999).
One of the recent contributions of strategic management to the theory of the firm has been the resourcebased view which proposes that the firm is a bundle of unique capabilities. Within this perspective, it is the manager's role to cultivate these capabilities and deploy them in productmarket strategies to achieve competitive advantage. The resourcebased view suggests that firm capabilities which are valuable, rare and inimitable will determine long term competitive advantage (Decarolis and Deeds, 1999). By highlighting the importance of firm specific capabilities, the resourcebased view has focused significant attention on intangible resources which play a critical role in competitive advantage. In fact, the focus on intangible resources has led to an extension of the resourcebased view the knowledgebased view of the firm. In this perspective, knowledge is the most strategically important of the firm's resources. The knowledgebased view provides a new lens through which we may view and understand the primary rationale for a firm's existence the creation, transfer and application of knowledge.
The underlying knowledge of firms may be conceptualized by both stocks and flows of knowledge which contribute to superior firm performance. Stocks of knowledge are accumulated knowledge assets which are internal to the firm. Flows of knowledge are represented by knowledge streams into the firm or within various parts of the firm which may be assimilated and developed into stocks of new knowledge (Gonzalez, 2002).
The objective of deploying knowledge in a firm is creating, developing and strengthening organizational knowledge, which is a firm specific asset which is not easily imitated and nontradeable. People are endowed with firmspecific skills and values, which are accumulated through on the job training and learning. Innovation then, is the result of both internal knowledge development and the acquisition and application of external knowledge; it depends on the ability to absorb and manage information from the environment.
stage. The cylinder can be compared to the inventory of any balance sheet. Intellectual capital is an inventory of competences and endowments that helps to produce something better and different company from the competition. The cylinder and the cones include three important aspects. Knowledge acquisition is derived from the corporate strategy. The firm decides which generic technology to invest in for the future. The knowledge acquisition process is known today as organizational learning. The functional strategy has to do with the construction of core competencies or capabilities through the greatest asset of the company: Intellectual capital. The business strategy finds the way to ground the capabilities and core competencies of the company through innovation in order to impact business.
Acquisition KnowledgeIntegration DeploymentKnowledge
And Flows Innovations Businessimpact
Inbounding Knowledge Intellectual Capital
Unique Competences Outbounding Knowledge
Figure 2 The Three Stages of Knowledge (Gonzalez, 2002)
ORGANIZATIONAL CAPABILITIES AND CORE COMPETENCES
that create a uniquely high value for customers at bestinclass levels. To qualify, such skills or systems should contribute to perceived customer benefits, be difficult for competitors to imitate, and allow for leverage across markets. Core competencies should be focused on creating value and be adapted as customers requirements change. Targeting a carefully selected set of core competencies also benefits innovation (De Kluyver & Pearce II, 2003).
Hamel and Prahalad (1990) suggest three tests for identifying core competencies. First, core competencies should provide access to a broad array of markets. Second, core competencies should help differentiate core products and services. Third, core competencies should be hard to imitate because they represent multiple skills, technologies, and organizational elements.
Formulating a sound strategy requires both analysis and synthesis, and therefore is as much a rational act as it is a creative one. Successful strategies reflect a clear strategic intent and a deep understanding of an organization's core competencies and assets (De Kluyver & Pearce II, 2003). A firm must know where it wants to go and has to find creative ways of getting there by the development of a successful strategy.
If the strategies most important resource is knowledge, and if knowledge resides among individual, organizational capability is the integration of individuals' specialized knowledge. Organizational capability is defined as a firm's ability to perform repeatedly a productive task which relates either directly or indirectly to a firm's capacity for creating value through effecting the transformation of inputs into outputs. Attention has been focused upon resources and organizational capabilities as the principal source of sustainable competitive advantage and the foundation for strategy formulation. At the heart of this theory is the idea that the primary role of the firm and the essence of organizational capability is the integration of knowledge (Gonzalez, 2002). Hamel and Prahalad (1990) argue that sustainable competitive advantage is dependent upon building and exploiting "core competences" those capabilities which are fundamental to a firm's competitive advantage and which can be deployed across multiple product markets.
specific knowledge, competencies, processes, skills and cultural aspects of the organization. Analyzing a company's internal strategic environment, therefore, has two principal components. (1) cataloging and valuing current resources and core competencies that can be used to create a competitive advantage and (2) identifying internal pressures for change and forces of resistance (De Kluyver & Pearce II, 2003).
The clue is learning how to build a competitive advantage based on the knowledge of firm's resources, capabilities, competences and assets, and, mostly, learn to manage this knowledge. Thompson and Strickland (2001) suggest that, taken together, a company's skills and expertise, its intellectual capital, its competitive capabilities, its uniquely strong competencies, its collection of strategically valuable assets, and its market achievements determine the complement of resources with which it competes. The caliber of its resources and its ability to mobilize them in a manner calculated to result in competitive advantage are the biggest determinants of how well the company will be able to perform in light of the prevailing industry and competitive conditions (Figure 3).
Strategic Assets and Market Achievements
Core and Distinctive Competences
Figure 3 Mobilizing Company Resources to Produce Competitive Advantage (Thompson and Strickland, 2001)
According to De Kluyver & Pearce II (2003), to evaluate the relative worth of a company's strategic resources, four specific questions should be asked:
1. How valuable is a resource; does it help build and sustain competitive advantage? 2. Is this a unique resource or do other competitors have similar resources? If
3. Is the strategic resource easy to imitate? This is related to uniqueness. The more expensive it is for rivals to duplicate a strategic resource, the more valuable it is to a company.
4. Is the company positioned to exploit the resource? A strategic resource that has little value to one company might be an important strategic asset for another. The issue is whether a resource can be leveraged for competitive advantage.
In De Kluyver & Pearce II (2003) experience, only a few companies have the resources to develop more than a handful of core competencies. Picking the right ones, therefore, is the key. "Which resources or capabilities should we keep inhouse and develop into core competencies and which ones should we outsource?" is a key question to ask. Generally the development of core competencies should focus on longterm platforms capable of adapting to new market circumstances; on unique sources of leverage in the value chain; on areas where the firm thinks it can dominate; on elements that are important to customers in the long run: and on key skills and knowledge, not on products.
2.1.3 COSTS REDUCTION STRATEGIES
There are two ways for a firm to improve its financial performance: increasing sales or reducing its costs, or both. Following Porter's (1980) delineation of basic strategic choices, a business can compete either by having lower costs or by offering superior products. In any case, the firm must build competitive advantages that allow it to improve its performance.
As it was mentioned before, the goal of any firm is to achieve a better business performance as a result of the competitive advantages it could develop. These competitive advantages can be focused in delivering greater value to customers or creating comparable value than competitors at a lower cost, or both. Delivering greater value allows an organization to increase its sales, or charge higher prices, or both, with the result of increasing their profit margin; reducing cost means the firm is getting more efficient in its processes, so, the profit margin can get bigger. The decision of which of these kind of strategies is going to be followed depends of the circumstances of the firm and its priorities. This strategy's orientation depends on the analysis of the situation of the firm SWOT Analysis can be used and, at the end, contribute to the accomplishment of its mission.
In the previous section it has been showed that innovation processes through knowledge management can be used by a firm as a value creating strategy. The present section will focus on costs reduction strategies. Nowadays, in firms located in Mexico, it is common to see how costs reduction strategies implementation is mainly related with cuts in resources such as personnel reductions, change of suppliers or raw materials, and other expenses reductions in order to achieve lower costs. Typically overlooked, is that most of the times the best savings come from the way they have performed internal processes. According to Repenning & Sterman (2001), cutting investments in maintenance and improvement in favor of working harder erodes process capability and hurts performance. Of course this doesn't mean that implementation of costs reduction strategies is not important, only that sometimes the potential of this strategies is misunderstood and they are not used to get the greatest business impact.
the most telling sings of whether a company's business position is strong or precarious is whether its prices and costs are competitive with industry rivals. It is important, then, to analyze what reasons for these cost differences are. According to Porter (1998), a firm achieves superior profitability in its industry by attaining either higher prices or lower costs than rivals; the sources of these price or cost differences among competitors can in turn be divided into two types: those due to differences in operational effectiveness, or attainment of best practice, and those due to differences in strategic positioning.
Ultimately, all differences in cost or price between companies derive from the hundreds of activities required to create, produce, sell, and delivered their products or services, such as calling on customers, assembling final products, and training employees. Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Similarly, differentiation arises from both the choice of activities and the way they are performed (Porter, 1998).
Competitors usually don't incur in the same costs of supplying their products to end users. The cost disparities can range from tiny to competitively significant, and Thompson & Strickland (2001) named several factors for this:
1. Differences in the prices paid for raw materials, components parts, energy, and other items purchased from suppliers.
2. Differences in basic technology and the age of plants and equipment. . 3. Differences in production costs from rival to rival due to different plant
efficiencies, different learning and experience curve effects, different wage rates, different productivity levels, and the like.
4. Differences in marketing costs, sales and promotion expenditures, advertising expenses, warehouse distribution costs, and administrative costs.
5. Differences in inbound transportation costs of purchased items and outbound shipping costs on goods sold.
6. Differences in forward channel distribution costs the cost and markups of distributors, wholesalers, and retailers associated with getting the product from the point of manufacture into the hands of end users.
where competitors have operations in different nations with different economic conditions and governmental taxation policies.
For a firm on its way to develop and strengthen its competitive advantages, it has to be clear that to be competitively successful its costs must be in line with those of close rivals (Thompson & Strickland, 2001). While some cost disparity is justified so long as the products or services of closely competing companies are sufficiently differentiated. A highcost firm's market position becomes increasingly vulnerable the more its costs exceed those of close rivals. Competitors must be ever alert to how their costs are comparing with rivals. Therefore, firms must know their internal cost structure.
Every business consists of a collection of activities undertaken in the course of designing, producing, marketing, delivering and supporting its product or service. Each of these activities gives rise to costs. The combined costs of all these various activities define the company internal cost structure. Further, the cost of each activity contributes to whether its overall cost position relative to rivals is favorable or unfavorable. According to Shank & Govindarajan (1993), a sophisticated understanding of a firm cost structure can go a long way in the search for sustainable competitive advantage.
LEAN THINKING AND UNDERSTANDING WASTE
There are many issues that can be analyzed in order to develop a costs reduction strategy. The present work will focus in the rationale behind Lean Thinking which is waste removal. According to Mines and Taylor (2001), lean is a consumer focused approach to the provision of effective solutions involving the consumption of a minimum of resources. Lean productions methods were pioneered by Toyota in Japan. Womack & Jones (1996) captured the essence of the lean approach into five key principles, which are:
1. Specify what does and does not create value from the customer's perspective and not form the perspective of individual firms, functions and departments. 2. Identify all the steps necessary to design, order and produce the product across
the whole value stream to highlight non value adding waste.
4. Only make what is pulled by the customer.
5. Strive for perfection by continually removing successive layers of waste as they are uncovered.
These five principles, along with ideas to address them, are presented in Table 1.
Table 1 Principles of Lean Approach
2 3 4 5
Understanding customers and what they value.
Define the internal value stream.
Eliminate waste; make information & products flow, pulled by customer needs. Extend the definition of value outside your own company.
Continually aim for perfection.
Setting the direction, targets and checking results.
An internal framework for delivering value.
Appropriate methods to make necessary change.
Externalize the value focus to the whole value stream.
Strive for perfection in the product and in all processes and systems.
These principles are fundamental to the elimination of waste. Mines and Taylor (2001) define waste or muda the Japanese term for waste as any activity which consumes resources but adds no value. Due to the huge amounts of waste that occur on most Mexican firms, both in operations and administrative issues, this research will focus in the understanding of this waste and its impact on the firms' costs.
Ohno (1988) realized that only activities that the customer is willing to pay for are "value adding" and that when firms actually analyze the activities they perform, a large proportions of them add no value to the eyes of the customer.
systematic attack on waste is also a systematic assault on the factors underlying poor quality and fundamental management problems.
In order to discover waste, firms must define the value streams inside themselves all the activities which are needed to provide a particular product or service. To satisfy customers, firms will need to eliminate or at least reduce the wasteful activities in their values streams that their customers would not wish to pay for (Hines and Taylor, 2001).
Monden (1993) suggests, when identifying the steps required to create, order and produce a specific product, it is possible to categorize each step into three areas: firstly, those that actually create value as perceived by the customer value adding activity; secondly, those that create no value but are currently required to produce the product necessary non value adding activity; and thirdly those activities that do not create value as perceived by the customer non value adding activity. According to Hines and Taylor (2001), necessary non value adding activities as waste are more difficult to remove in the short term and should be a target for longer term or radical change; non value adding activity are clearly waste and should therefore be the target of immediate or short term removal.
In a physical product environment manufacturing or logistics flow, the ratio between the three types of activities for the total value stream of a common but not world class company is around 5% value adding activity, 60% non value adding and 35% necessary but non value adding. This does not sound too good until the same figures are seen in an information environment e.g. office, distribution or retail where a common ratio of total value stream is 1% value adding, 49% non value adding and 50% necessary but non value adding. These suggest that in most companies there is considerable scope for reducing waste. The clue to make waste elimination easier is creating an organizational culture that helps employees to be constantly aware of the waste and encourages them to eliminate it once it has been identified (Hines'and Taylor, 2001).
IDENTIFYING WASTE IN THE FIRM
importance of the concept. Frequently we hear that managers and workers are too busy to allow people time to plan and implement improvement activities, but as customers, most of us would not want to pay for the activities they currently do.
Seven wastes were identified by Shingo (taken from Womack and Jones, 1996) as part of the Toyota Production System. They are a framework of seven types of activity that does not add value.
Table 2 Seven Wastes of Toyota Production System (Shingo, 1986, taken from Womack &
Waste Description 1 Overproduction
3 Unnecessary inventory
4 Inappropriate processing
5 Excessive transportation
7 Unnecessary motion
Producing too much or too soon, resulting in poor flow of information or goods and excess inventory
Frequent errors in paperwork, product quality problems, or poor delivery performance
Excessive storage and delay of information or products, resulting in excessive cost and poor customer service
Going about work processes using the wrong set of tools, procedures or systems, often when a simpler approach may be more effective
Excessive movement of people, information or goods, resulting in wasted time, effort and cost
Long periods of inactivity for people, information or goods, resulting in poor flow and long lead times
Poor workplace organization, resulting in poor ergonomics, e.g. excessive bending or stretching and frequently lost items
A more detailed explanation of each of the seven wastes is given by Mines and Rich (1997): 1. Overproduction. This is regarded as the most serious waste as it discourages a
2. Defects. These are direct costs. The Toyota philosophy is that defects should be regarded as opportunities to improve rather than something to be trade off against what is ultimately poor management. Thus defects are seized on for immediate kaizen activity.
3. Unnecessary inventory. Excessive inventory tends to increase lead time, preventing rapid identification of problems and increasing space, thereby discouraging communication. Thus, problems are hidden by inventory. To correct these problems, they first have to be found. This can be achieved only by reducing inventory. In addition, unnecessary inventories create significant storage costs and, hence, lower the competitiveness of the organization or value stream wherein they exist.
4. Inappropriate processing. This occurs in situations where overly complex solutions are found to simple procedures such as using a large inflexible machine instead of several small ones. The overcomplexity generally discourages ownership and encourages the employees to overproduce to recover the large investment in the complex machines. Such an approach encourages poor layout, leading to excessive transport and poor communication. The ideal, therefore, is to have the smallest possible machine, capable of producing the required quality, located next to preceding and subsequent operations. Inappropriate processing occurs also when machines are used without sufficient safeguards, such as pokayoke and jidoka devices, so that poor quality goods are able to be made. 5. Excessive transportation. Transportation involves goods being moved about.
Taken to an extreme, any movement in the factory could be viewed as waste and so transport minimization rather than total removal is usually sought. In addition, double handling and excessive movements are likely to cause damage and deterioration with the distance of communication between processes proportional to the time it takes to feed back reports of poor quality and to take corrective action.
7. Unnecessary motion. Unnecessary movements involve the ergonomics of production where operators have to stretch, bend and pick up when these actions could be avoided. Such waste is for the employees and is likely to lead to poor productivity and, often, to quality problems.
In order to have a competitive advantage as a consequence of designing an effective strategy of costs reduction, the first thing to do is reviewing the way the operations are measured, and whether the seven wastes are being measure in order to be sure what the present situation of the firm is. Only then can waste be attacked and eliminated. These performance measures must be objective and quantifiable. And when these effectiveness measures improve systematically, the fixed unit costs will be impacted because a direct cause effect relation has been improved.
USING TOOLS AND METHODOLOGIES FOR WASTE ELIMINATION
Factors which affect the competitive position of manufacturing companies can be classified into five major areas: cost, quality, delivery dependability, flexibility and innovation (Scully and Fawcett, 1993). Focusing on cost, this study will consider the following factors: quality, flexibility and delivery as response time. Innovation will be included, as explained in previous sections, as a differentiation factor.
This section will focus on the minimizing or eliminating of nonvalueadded activities though identification of the seven wastes in criteria such as quality, flexibility and time response selected to encompass the main areas in which a company has to be oriented to in order to eliminate wastes and build a strong costs reduction strategy. It must not be forget that waste is more a symptom than a cause of a problem.
Table 3 The Seven Wastes Classified in the Three Criteria
Criteria 7 Wastes Quality
• Unnecessary inventory • Inappropriate processing • Unnecessary motion • Excessive transportation • Waiting
The meaning of quality is directly related to customer satisfaction. As Hagan (1994) explains, quality is not what the planning and producing individuals may think or whish it to be. It is exactly what exists in the mind of the customer when he or she receives and personally appraises the product or service. This includes the internal customer, recipient of internal support service or work in process, as well as the external customer.
Based on the seven wastes, defects correspond to the criterion quality. Firms must have conscience that defects are not for free. Someone makes defects, and it is being paid for making them (Deming, 1982). Obviously, defects will not satisfy customers, and if the firm can notice the defect and do not allow it to reach the client, it already represent a cost for the firm for producing it wrong and having to amend the mistake and prevent it from occurring again through nonvalueadding activities as reworking, replacing and repairing the items that did not match to specifications, and even the nonvalueadding activity of inspection due to poor material yield, employee mistakes, machinery failures, or high customers complaints, supplier quality problems: having to inspect incoming components (Barfield, Raiborn and Kinney, 2003).