Case Scenario: Boosting Efficiency at Matsushita

In 2000, when Kunio Nakamura became CEO of the venerable Japanese electronics giant, Matsushita, it was a company in deep trouble. Earnings had been going south for years, and the company's market capitalization had shrunk to less than half of that of long-time rival Sony. Employees were frustrated and moral was poor. By the time he retired in June 2006, Matsushita was delivering its best financial performance in more than a decade. After losing $3.7 billion in 2002, in 2006 the company registered profits of $1.37 billion. Moreover, earnings grew 20% to $1.7 billion in 2007. For a long time, the policy at Matsushita had been to allow different divisions to develop identical products, although at the end of the day typically only one division was granted the right to market a product. Early in his tenure, Nakamura put an end to this internal competition, believing that it would produce efficiency gains. He also effectively ended the long-standing practice at Matsushita of lifetime employment.

He slashed the domestic workforce by 19% and reduced the number of layers in the management hierarchy. He pushed factory managers to do everything possible to raise productivity, giving them challenging productivity goals, and tying bonuses to the attainment of those goals. Matsushita's factory in Saga, Japan, exemplifies the obsession with productivity improvements. Employees at the factory, which makes cordless phones, faxes, and security cameras, doubled productivity between 2000 and 2004 by introducing robots into the assembly line, but factory managers were not happy. An analysis of flow in the production system showed that bottlenecks on the assembly line meant that robots sat idle for longer than they were working. So the plant's managers ripped out the assembly line conveyer belts and replaced them with clusters of robots grouped into cells. The cells allowed them to double up on slower robots to make the entire manufacturing process run more smoothly. Then they developed software to synchronize production so that each robot jumped into action as soon as the previous step was completed. If one robot broke down, the workflow could be shifted to another to do the same job. The results were impressive.

The time that it took to build products was drastically reduced. It formerly took two-and-one-half days into a production run before the first finished products came off the assembly line; now it takes as little as 40 minutes. Phones, for example, can now be assembled in one-third of the time, doubling weekly output from the same plant with the same number of employees. Shorter cycle times enabled the factory to slash inventories. Work in progress, such as partly finished products, along with components such as chipsets, keypads, and circuit boards now spent far less time in the factory. The Saga factory is known as a "mother plant" within Matsushita. Once process improvements have been refined at a mother plant, they have to be transferred to other plants within the group as quickly as possible. There are six other plants in the Saga group in China, Malaysia, Mexico, and Britain. Most were able to quickly copy what was done at Saga and saw similar cuts in inventory and boosts in productivity. Despite the faster pace of work, the factory employees paid close attention to product quality. The short cycle times helped employees to identify the source of defective products and quickly fi x any errors that led to quality problems. Consequently, at less than 1% of output, by 2006 defect rates were at an all-time low in every factory. The reduction in waste further boosted productivity and helped the company to strengthen its reputation for producing high-quality merchandise.

Case Discussion Questions

1. What are the benefits of eliminating the longstanding policy at Matsushita that different divisions should be allowed to develop the same basic product? Are there any potential drawbacks of such a policy change?

2. What do you think were the benefits of lifetime employment at Matsushita? Why then did Nakamura effectively end this practice? What benefits did he realize for Matsushita by doing so?

3. What does the example of the Saga factory at Matsushita tell you about the benefits of optimizing workflow for (a) work in progress, (b) the productivity of both employees, and (c) the capital invested in plant and equipment?

4. What are the benefits to Matsushita of a reduction in defect rates?

5. What does the Matsushita example tell you about the importance of functional-level strategies for competitive advantage?

6. Matsushita is a manufacturing company. Do you think that the principles discussed in the case are as important for a service enterprise?