Impact of Digitization and Human Capital

Part 5: Toyota Production System is the Strategy Needed

CHUMA Hiroyuki
Faculty Fellow, RIETI

Inter-business collaboration involving both upstream and downstream companies has a significant, positive byproduct, enabling the parties concerned to reduce future uncertainty by deferring decision-making. This is because strategic options available for each company in making business decisions increase as collaboration expands in scope and depth. In economics, options in decision-making for addressing future uncertainty are called "real options." The concept of real options comes from that of financial options in the futures market, drawing an analogy between the former as decision choices about investments in real assets and the latter as decision choices about investments in financial assets.

A vast variety of real options is available today thanks to the digitization of information, which has made it possible for businesses to communicate detailed information quickly with one another. Analog information is subject to constraints attributable to the three-dimensional structure of real-world objects as symbolized by the key-lock relationship, whereby communication tends to take place only locally. In contrast, in the case of exchanges of digital information, interfaces, which are an essential tool for communication, are freely scalable. Furthermore, further progress in the standardization of interfaces will lead to speedier and more efficient information transmission and response thereto in broader areas.

In an era characterized by the frequent occurrence of multi-level competition, enormous risks are involved in setting and working toward a specific goal, as the pace of market and technological changes accelerates. Furthermore, the greater complexity of products and systems translates into a larger scale of investment and an increase in sunk costs, whereby securing real options becomes vitally important. That is, the strategy that businesses should be pursuing is to defer decisions up until the last minute to maintain a degree of strategic flexibility but to put decisions into action quickly once taken.

While there is no question that real options strategies are indispensable in navigating an environment filled with uncertainty, a less known fact is that they are, in essence, identical to the Toyota Production System (TPS). We can see this from six principles cited by Mary and Tom Poppendieck, famous for software development methodologies, as constituting the essence of the TPS: (1) eliminate waste, (2) amplify learning, (3) decide as late as possible, (4) delivery as fast as possible, (5) empower the team, and (6) see the whole. Among them, principles (3) and (4) directly concern real options strategies. In Toyota terminology, they are referred to as a "pull system of manufacturing" and "shortening of takt time (average time between the commencement of production of one unit and that of the next unit)," respectively corresponding to "decide as late as possible" and "delivery as fast as possible (once decided)." In other words, the TPS, which originated in Japan, captured essential requirements in the era of digitization ahead of time.

>> Original text in Japanese

* Translated by RIETI.

May 23, 2017 Nihon Keizai Shimbun

March 5, 2018

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