Lean archetypes were not found to have significantly different performance than non-lean firms when tested with respect to business-level financial performance measures in the sample database (i.e. ROE, sales growth, and stock return). However, individual lean practices were found to be significantly related. Employee involvement demonstrated a positive relationship to above-competitive-median ROE, while the practice of supplier communication demonstrated a negative relationship (Figure 5.5). This indicates a weak relationship between business financial performance and lean strategy in general but a strong relationship with specific aspects of lean.
Compared to previous studies, the results of this study are interesting in two respects.
The first is in not finding a significant relationship between lean manufacturing management practices and stock return. All of the cited JIT and TQM studies that examined stock performance found a positive correlation (Easton et al., 1998; Hendricks et al., 1996; Howton et al., 2000). The Hendricks and Singhal (1996) and Howton et al.
(2000) studies looked at short-term effects on stock price preceding and following JIT and TQM announcements (-200 to -11 days versus announcement) and can be attributed to the perceived stock market valuation of those practices. The Easton and Jarrell (1998) TQM study is more in line with the current study by examining the performance over a similar five year period. Both positive stock performance results of the Easton and Jarrell (1998) and positive ROE results of this study could be based on the underlying
mechanism of employee involvement fundamental to both successful TQM implementation and lean (Flynn et al., 1995; MacDuffie, 1995).
The second difference occurs in the finding of a significant relationship between lean practices and ROE. The other study to look at ROE was Boyd et al. (2002). Unlike this study, they did not find a significant relationship between JIT and ROE; however, the sample size was small and did not control for industry and size. It also is possible that studies of “only JIT” overlook the importance of employee teams and problem-solving to achieve sustained financial results. It is significant that the human resource aspects of lean seem to be of most significance in moving financial measures. This emphasizes that it is the “soft,” cultural side of lean that really makes continuous improvement possible in that lean becomes an employee commitment rather than an abstract philosophy. The importance of employee involvement as a crucial infrastructural element in successful lean implementation is supported in studies by Flynn et al. (1995), MacDuffie, 1995), and Sakakibara et al. (1997). It is noted that both this study and Shah (2002) found the
presence of employee involvement to be a differentiator between lean and non-lean firms.
The importance of having both technology practices (such as JIT and group technology)
and human element practices (such as employee involvement) is supported by other empirical studies in technology implementation where human resource management and technology together lead to further advantage (Boyer, Leong, Ward, & Krajewski, 1997).
The lack of a significant result for sales growth in this study was disappointing. The quality and delivery improvements attributed to lean implementation by previous studies (Table 2.5) would lead one to expect an increase in sales in comparison to non-lean firms.
This did not occur. A possible explanation could be in the tight profit margin
characteristic identified for lean firms in this study. Without a clear costs advantage, lean firms must compete on speed and quality alone. Price reductions are never an attractive competitive option when costs are high. It is possible that lean firms lose out by
competing with firms that offer lower prices, poorer quality and delivery and customers simply choose price as the primary selection criteria. The requirement for only profitable growth may be limiting criteria for lean firms with tight margins. It may be that lean firms with higher levels of effective implementation do have higher sales growth rates, but the sample size in this study is too small to detect it.
There are three general managerial implications of the relationships found between lean manufacturing management practices and high-level business financial performance:
1. Expectations of direct short-term impact on sales growth and stock performance should be conservative. The evidence does not support a strong direct connection.
2. Over the long term, ROE should be considered a primary measure of lean practice implementation effectiveness at the business financial performance level.
3. Investing in employee involvement is a likely avenue for increasing firm value and laying a foundation for effective lean implementation.