Nummi in Today\'s Modern Business

NUMMI

In today's modern business world that is quickly becoming truly 'global' in its scope, it is important that individuals who wish to succeed in business understand and be able to adapt to a variety of business relationships. Those relationships can include working for companies that form alliances and joint venture agreements, and when those alliances are formed, the individuals involved should be able to recognize the advantages of these types of business relationships.

This paper will attempt to define and analysis the joint venture agreement and business alliances in general, while including in that analysis a specific look at the New United Motors Manufacturing Inc. (NUMMI) alliance between Toyota and General Motors.

The analysis will include specifics on the why and how this alliance was created, what each party expected to gain by entering into the alliance, what each party actually gained, and a to-date conclusion on the alliance's success or lack thereof.

Discussions of the importance to business and individuals who participate in the business world will also be undertaken in this paper. Understanding joint ventures and strategic alliances could make the difference between being hired or not being hired, being promoted or not being promoted and even being successful or not being successful in a business career.

There are a huge variety of business relationships in a global community. These relationships can take the form of strategic alliances, joint ventures, mergers, acquisitions and hostile takeovers, to name but a few.

Since a primary purpose of this paper is to discuss strategic alliances and joint ventures it might be best to start with a definition of the terms.

An alliance can best be described in the following manner:

the state of being allied or confederated connection based on kinship or marriage or common interest; "the shifting alliances within a large family"; "their friendship constitutes a powerful bond between them" an organization of people (or countries) involved in a pact or treaty formal agreement establishing an association or alliance between nations or other groups to achieve a particular aim confederation: the act of forming an alliance or confederation (Definition 2006) business alliance could be described as a formal agreement between two companies that establish an association or alliance between them to achieve a particular business objective. A strategic alliance is even a bit more specific and can be defined as; "an agreement between two or more individuals or entities stating that the involved parties will act in a certain way in order to achieve a common goal. Strategic alliances usually make sense when the parties involved have complementary strengths." (Strategic 2005)

In other words, a strategic alliance entered into by two business entities will usually be done so in order for both entities to benefit from the alliance. So it was with the creation of NUMMI.

NUMMI was formed between Toyota and General Motors in 1982 as a strategic alliance. Their joint goal was to re-open a plant that had been shut by General Motors due to a number of negative factors. At the time of closure, it was considered (and numbers proved) to be GM's worst run auto production facility. The facility had opened in Fremont, California in 1963, and in 1978 employed over 7,200 employees. Just four short years later, the plant was closed.

The plant was characterized by high sick-leave counts, slowdowns, wildcat strikes, and even sabotage. First-line managers were known to carry weapons for personal protection." (O'Reilly 1998-page 4)

The closure of the plant was understandable when seen through the eyes of General Motor's management. The year following closure, GM signed a letter-of-intent with Toyota to re-open the facility.

Toyota wished to enter the United States market in order to compete with its rivals Honda and Nissan and also wished to see if the system employed by Toyota in Japan would work as well as it did there, here in America with American workers.

GM, on the other hand, knew of Toyota's production system and GM's motive was a desire to learn as much as possible concerning the intricacies of such a system, as well as fulfill the company's need for production of a small car (the Chevy Nova). Both Toyota and GM were to invest approximately $100 million in the venture and agreed to raise an additional $200 million for the venture as well.

What one must remember when considering this type of venture was the business environment at that time. Unions were strong and did not mind flexing their muscle, employees were very leery of management and vice versa, and many employees (management, hourly and salaried alike) were especially leery of foreign firms entering the United States marketplace. Yet, despite the obstacles and attitudes, GM and Toyota moved ahead with their plan to re-open the plant.

Toyota would be the operating partner, taking full responsibility for the day-to-day operations of the plant. GM would attempt to take advantage of the information, system and advances Toyota had made while also having the responsibilities of marketing, selling and servicing the GM cars which Toyota would be producing. GM was especially interested in learning more about Toyota's manufacturing system. It was a very highly rated system and GM figured that once they learned the system it could be implemented at all the GM facilities worldwide.

The primary goal of the Toyota manufacturing system was to reduce costs and maximize profits through the systematic identification of waste. At NUMMI, this goal was broadened to not only reduce the cost per vehicle but to continually improve quality and secure safety." (O'Reilly pg 5)

This goal would be accomplished through a Japanese system called kaizen. Kaizen is a system that concentrates on continuous improvement and is a system that Toyota has used in its plants in Japan for many years. Evidence of the system's efficiency is the fact that Toyota has been consistently ranked as among the world's most efficient producers of automobiles. The system is also very worker friendly. Worker friendly means the individuals who are employed on the production line itself, not just the company management or supervisors.

With kaizen, there was an unrelenting emphasis on the identification and elimination of waste in all its various forms - inventory, buffer stocks, equipment, material flow, manpower, and work design." (O'Reilly pg 32)

Before re-opening the plant, Toyota met with the union management who represented the employees. This was a key step in moving ahead with the re-opening because without the union's support the plan would be stopped dead in its tracks. Union officials agreed to the plan wholeheartedly even though Toyota was requesting from them a number of key concessions that were radically different from what the union (and the employees it represented) were used to.

The officials may have believed that half a barrel was better than no barrel at all (ie; the plant wasn't open and now it would be even if there were fewer employees working there).

One of the key strategies accepted by the union was that of respect for the worker, the team member.

The Japanese know that to make things more waste-free and streamlined, they have to work with the people on the line. They have to work with their people, to listen to them for ideas, and to work with them to support theirs...they trust their team members are doing their best." (O'Reilly pg 9)

Therefore, the strategy of the alliance was to open the plant, employee fewer employees, build higher quality automobiles at a lower cost, share technology and systems and together create a profitable business relationship between the two companies.

Implementing this strategy seemed to work well for Toyota, but not as well for General Motors. The reason for this could be that Toyota knew exactly what it wanted to get out of the relationship before it was even established, while General Motors took almost a decade to figure out what it wanted from the alliance, and therefore got exactly what it wanted for the first ten years, which was nothing at all. Management knew what they hoped to get out of the alliance, but did nothing towards gaining that information once the alliance had been created.

Successful people understand the incredible value of becoming a good listener." (Maxwell 2003-page 41)

GM sent a wide variety of individuals to the Toyota plant during the first ten years after the alliance was created, but it was not until 1992 before any of the gathered information was taken seriously by the management of General Motors. GM management knew that there was value in the alliance, which was why it was created in the first place, but the business environment at that time was such that no one wished to 'rock the boat'.

Alliances can provide a window into the skills and knowledge of other firms and create a powerful tool for learning. By working closely together, partner firms can gain access to the best practices of their partners and then transfer the practices back to the parent organization." (Inkpen 2005-page 114)

Some of the factors that caused the alliance to develop as it did included the fact that it took time before GM became effective at listening to their partners in the alliance.

Over time, GM put a variety of learning mechanisms in place and a systematic approach to alliance learning and knowledge transfer emerged. These mechanisms include managerial assignments to NUMMI, visits and tours to NUMMI, a technical liaison office for managing learning activities, leadership commitment and involvement in the learning process, and a learning network to articulate and spread the knowledge." (Inkpen 2005-page 115)

The absence of these mechanisms early in the alliance was a key factor affecting how the alliance developed. Many of the individuals in management at GM throughout the early years of the alliance felt that it was a waste of time, and that environment did not change until the early 1990's when Jack Smith (one of the individuals responsible for the initial agreement between Toyota and GM) achieved a high enough level at GM to begin to implement some of the changes spoken about earlier in this paper. This was eight years after the alliance was formed and began to operate.

Smith was, and remains, a strong advocate for the alliance. He is probably the catalyst for all the good that has happened for GM through participation in the alliance.

A management's role in organizational learning should be one of catalyst and architect. While multiple advocates are important, there must be at least one strong champion of learning in a leadership position." (Inkpen pg 116). Jack Smith was that champion at GM.

Beginning early in his career at GM, Smith was quite adept at establishing networks and by belonging to a variety of networks both in and out of the workplace was able to facilitate many changes that he believed would be beneficial to GM's long-term survival and growth.

Although many people may not recognize it, anyone who works in an organization belongs to a network." (Bork 1991-page 91)

This statement was true at GM before Jack Smith took charge and even more so after he had done so. Before the alliance had a champion like Jack advocating for the usage of the information gleaned from the alliance, the networks were able to continue as they had before, with no special emphasis or recognition placed on those managers and employees who had attended the training or who had learned from their experiences at NUMMI. Those networks all changed perceptibly after Smith took control.

He let it be known from the start that he was very interested in learning and assimilating the knowledge gained into the GM environment. When it was perceived that career advancement and enhancement could be earned or gained by studying NUMMI and its effects on GM, there were more individuals who were likely to volunteer to gather and disseminate such knowledge. These same individuals were also much more likely to be more focused and intent about their learning because it would affect them individually.

To learn through alliances it is not sufficient to merely expose individuals to new knowledge; the intensity of efforts applied to the learning is also critical. Unfortunately, many companies are unwilling to incur the expense of setting up learning-oriented systems." (Inkpen pg 116)

This was especially true of GM in the early years after the alliance's formation. Management knew and believed that there was knowledge to be garnered from the alliance, but had no clue as to how to gather such knowledge.

Management also did not know how to implement the knowledge (when gained) into the GM culture in any effective manner.

Inkpen states that the cost of learning is sometimes quite heavy, but that most the time it is well worth the cost. Inkpen compared Toyota's willingness to pay the cost of learning compared to GM's reluctance to pay the price.

In one case, the Japanese partner sent dozens of engineers to the joint venture for short-term assignments with no clearly defined tasks, leaving the American partner wondering how the Japanese partner could afford it. From the Japanese partner's perspective, the value of the learning more than compensated for the cost of the engineers." (Inkpen pg 116)

Initially the Japanese placed a higher value on the learning side of the alliance equation, while GM did not. This could be because of the two vastly different cultures in which the companies operated, both in a business sense and in society's environment.

Japanese society has been around for thousands of years and has learned to value abstract as well as concrete thinking abilities. Americans are still learning about learning.

Americans to a great extent are also much more impatient concerning accomplishments (or at least what they deem as accomplishments) than the Japanese, who take a decidedly more long-term approach. Experiencing the different cultures is something else that can be gained from the forming of the alliances.

Wherever the companies are headquartered, founded and maintained is always going to have some bearing, some effect, on the alliance and how each partner is perceived by the other. This perception, or lack of perception as the case may be, can also be the root of some dissension and discontent with the alliance.

It is highly recommended therefore an effective communication plan be put in place by the companies in order to guide their efforts through the duration of the alliance.

A communication plan can establish what is to be learned, who is to learn it, how the information will be disseminated (and by whom) and what duties are going to be assumed by what individuals. A communication plan can also be both short- and long-term in nature and can act set the guideposts for verifying whether the goals and objectives of the company are being met, or are being left on the wayside.

With a communication plan in place, the alliance becomes a cooperative alliance rather than a competitive alliance. With NUMMI, GM looked askance at giving out any more information than was absolutely necessary to the Japanese. GM management viewed that as giving information to a competitor. The Japanese, on the other hand, were more than happy to conduct guided tours through the plant, and to demonstrate how the system worked. The Japanese looked on the alliance as a cooperative venture wherein both parties could benefit.

What is ironic about the different attitudes displayed by both parties, is that while GM was (through the first eight years) very reluctant, very reticent in regards to providing information to the Japanese and the Japanese were just the opposite, the Japanese probably ended up learning more during those years than did the Americans.

Many experts believe that alliances can produce more effective learning on the soft side of business issues (ie; ideals, relationships, management philosophies, culture etc.) than on the hard side (finance and operational issues).

The soft side refers to the development and management of relationship capital in the alliance. Relationship capital consists of the socio-psychological aspects of the alliance that are positive and beneficial to the alliance. Two important areas of relationship capital are mutual trust and commitment." (Cullen 2000-page 223).

In the NUMMI relationship, at least initially and for the first decade, there was a definite lack of trust, especially from GM, and the commitment may have been made to put forth the hard capital that was needed to ensure the alliance's success, but the commitment from the soft side of the issues was definitely lacking.

Commitments from both sides of a strategic alliance are important and both sides should be aware of the partner's motivation(s) for entering into the strategic alliance in the first place.

Many experts believe that a knowledge-based formula should be used to decide if an alliance makes sense to both parties before the alliance is formalized.

We argue that firms can build alliance capability and enjoy greater alliance success by implementing organizational processes that facilitate the accumulation and sharing of alliance management know-how embedded in prior and on-going alliance experience." (Kale 2003-page 1).

Kale expresses the belief that firms who engage in more alliances naturally gain a portion of the necessary know-how to apply what they have learned through the alliance experiences. He also states that many times that know-how is not enough to garner the most beneficial parts of the same experience. He writes that, "knowledge can arise from the firm's own experience (experiential learning) or from similar experiences of other organizations (vicarious learning)." (Kale pg 2). He goes on to clarify his beliefs by saying; "Though vicarious learning is useful, given the attendant complexity of managing an alliance the knowledge underlying this capability has to be nurtured and developed through direct experience." (Kale pg 2).

That direct experience (at least on GM' behalf) was sorely lacking in the early 1980's when the NUMMI alliance was created. Throughout the years, as the GM managers who were sent to NUMMI to work and observe, did so, they gained valuable knowledge and information, that could have been, and probably should have been, converted into a potentially viable form.

GM, did not however, realize just how important, and valuable this type of information could be. They did not have a vast amount of experience with alliances of this kind and it showed.

Though both parties in the NUMMI alliance performed their respective jobs quite well, it was truly a matter of discernment, and lack of discernment, that governed who gleaned the most from the alliance. Initially, that discernment was heavily weighted in favor of the Japanese.

During the early 1990's that slowly began to shift in GM's favor. With a man at the top like Jack Smith, who had been touting the alliance benefits from the very beginning, attitudes around GM began to change. Now the managers and employees who had been to NUMMI, who had worked there and seen the mighty changes wrought at the plant, were beginning to speak up, and perhaps, even more importantly, were starting to be heard by senior management. No longer was there a stigma attached to working for the alliance that there had been earlier.

There was also the undeniable fact that GM was becoming more efficient by implementing some of the changes at all the GM plants that had been implemented by the Japanese at NUMMI.

Over the past few years, GM has significantly improved its quality and productivity. In 2002, GM surpassed Ford for the first time in the 13-year history of the influential Harbour Report's annual study of North American auto-plant productivity." (Inkpen pg 118).

Many GM executives and management point the finger of praise directly at NUMMI as the reason for their overwhelming improvement. "According to one executive, NUMMI has become the centerpiece of GM's efforts to adopt lean manufacturing, the practice of reducing inventory and other costs to minimal levels." (Inkpen pg 118)

Its obvious that GM has learned something from the NUMMI alliance, although it took them quite a while to do so. GM has made a number of changes to the way it currently approaches alliances, having learned from its more than 20-year experience(s) with NUMMI. GM, like a number of other firms, has established a position within the firm for a Strategic Alliance Director.

Some firms like Xerox and Hewlett-Packard has established the position of Strategic Alliance Director, who individually or with a team, oversees many of the firm's alliances. Existence of such a capacity will also enable a firm to pursue systematic implementation of the knowledge management processes." (Kale pg 4)