Business Performance Improvement

Until the late 1980s, a low cost strategy was commonplace among automotive suppliers, and for many, the most advantageous. The number-one core competency required of them was manufacturing, and they concentrated on how to build to print most efficiently. The 1990s brought about a fundamental change to the automotive industry. As competition intensified and cost pressure increased, automakers demanded more responsibilities from suppliers such as design, engineering, R&D, global support, and financing of tooling and equipment.

These increased responsibilities had a two-fold impact on automotive suppliers. First, suppliers had to somehow develop or acquire capabilities in order to fulfill new responsibilities, which by itself has been a formidable task. Second, gaining those capabilities meant adding engineering centers, overseas facilities, additional administrative staff, R&D expenditures, and associated financial charges, which contributed to a much higher level of operating leverage for automotive suppliers. An often-neglected impact of increased outsourcing by automakers is that it has fundamentally changed the very structure of the automotive industry.

The industry structure also constrains the feasibility of the strategy options. In general, companies that operate under relatively low fixed costs, such as commodity suppliers, tend to pursue the low cost strategy through high sales volume and efficient asset utilization, while system suppliers have to achieve high profitability through value-added products or services.

Automotive suppliers must recognize that the new environment requires them to reevaluate their positioning strategy. This strategy shift will be better understood in conjunction with the evolution of production systems in the automotive industry.

Henry Ford's mass production transformed automobiles from a luxury item for the rich to a commodity for the masses. It also marked a shift in positioning of the industry from a high degree of differentiation with the craft production to the low cost strategy. Under the mass production system, companies seek high sales volume and low cost through simple but efficient operations. The North American automotive industry had operated in this mode until the 1980s.

Lacking the vast market volume which American automakers enjoyed in early days, Toyota and other Japanese automakers had to innovate a way to be cost competitive at the same time accommodating limited but diversified consumer needs. A remarkable fact about the Toyota Production System, or the lean production system, is that it seeks out both differentiation and low cost.

Business performance characteristics of low performing automotive suppliers – emphasis on sales growth and asset utilization at the cost of profit margin – indicate that they are still at the mass production stage. However, their inability to contain costs and achieve high return on investment indicates a simple low cost strategy does not work effectively as the industry moves toward lean production.