Re-energizing a regional small manufacturing company throughmetamorphosis into autonomous business from a subcontractor- A case study of a technology oriented enterprise
Osamu Tomisawa * and Kuniaki Yamanaka**
Kochi University of Technology*
Kochi Toyonaka Giken Inc.**

ABSTRACT: Subcontracting is a modern form of manufacturing and the subcontractors have played an
important role in the value chain. However, many of these small manufacturing companies, locatedspecifically in regional area, depend heavily on their parents company or their super-ordinate companies invariety of management functions and strategic marketing activities. In the slow economic situation, thesesmall companies had difficult time to manage their own business. It is crucial to start a new independent
business and to establish some autonomy to handle their business for corporation sustainability.
If we take a look at product architecture, modular architecture is getting popular over integral one due togeneralization of standard open interface and hierarchical structure. This tendency will not cease because of
globalization of the value chain. This resulted in decreases of numbers of small regional subcontracting
manufacturers. On the other hand, it is also true that the skill set to deal with integral architecture provides
competitive advantage for small manufactures to differentiate performance or function.
We have investigated in detail a manufacturing company which had fabricated mass flow controllers as a
subcontractor and changed to autonomous business with new green laser beam pointers independent from its
parent company. We found that the subcontractor had accumulated tacit knowledge with respect to integral
architecture, which resulted in competitive advantage for the small manufacturing company to start a new
business. In the process of business creation, there were several failures in management and technology, but
finally they were successful to do business in the green laser beam pointer. It was also shown that these small
manufactures can start a new business with new products in a new market, if they have competence like
integral architecture capability which was established through subcontracting business.
KEYWORDS: small business, subcontracting, integral architecture
1. Introduction

performance. In the meantime, integral architecture
providesagood

opportunity

for

a

small

Recently, a lot of products have been implemented

manufacturing company to establish competitive

with modular architecture instead of integral one

advantage. Typical Japanese big manufacturing

This change has been realized by standard open

enterprise constructs business networks with smallinterface specification and hierarchical structure

manufacturing companies as subcontractors. New[1],[2]. The modular architecture clearly has an

manufacturing

advantage in quick development with reasonable

outsourcing, cooperation and agility has been muchparadigm

thatemphasizes

discussed on the general level. Ulla Lehtinen

fabricates products and modules. Typically, theinvestigated subcontracting as a modern form ofsuper-ordinate issues order and provides raw

manufacturing and clarified the phenomena ofmaterial and some parts to the KTG. Then, the KTG

subcontracting as a part of supply chain management

fabricates modules and assemble to final products

concept [3]. He also classified subcontractors into

based on the production plan.

four basic strategies: part supplier, component

The mass flow controller is constructed from a

supplier, specialist supplier and system supplier. The

bypass pipe, a flow sensor, a valve and electronics

growth of the subcontractors was analyzed and it

control circuits as shown in Fig.1. Gas flow rate insuggested that the evolution was caused by

the mass flow controller is very small. It is in a range

increasing their span of operation and adding new

Power supply

kind of process and material purchasing.

Output signal Setting signal

These subcontractors have played an important rolein the value chain, specifically in the area of
fabrication.

However,

many

of

these

small

AdjustcircuitComparator
control
circuit

Amplifier

Valve driver

manufacturing companies depended heavily on theirparents company or their super-ordinate companies

SensorBridgedcircuitControl valve

in variety of management functions and strategic
marketing activities. In the slow economic situation,these small companies had difficult time to manage

Bypass
Inlet

Outlettheir own business and it was crucial to start a new
business and to establish some autonomy to handle
their business.

Fig. 1

Structure of a mass flow controller

When a small subcontracting

manufacturer tries to start new business, there aremany issues to be resolved. We have investigated amanufacturing company which changed businessmodel from subcontracting to autonomous business.
We will address following three points in this paper
to discuss the issues.
1) Skill set of integral architecture as potential corecompetence2) Scheme of tacit knowledge transfer andorganization learning3) Innovation opportunity and integral architectureof a few cubic centimeters per minutes. Diameter ofthe pipe to the sensor is around 10 micron and it
requires preciseness in the order of one micron. The
valve has to control gas flow from a few % to 100%of maximum flow rate keeping the stroke of thevalve in several 10 microns. This means that very
precise manufacturing and adjusting technology are
required in the assembly process. Since every
component

has

some

dispersion

inphysicaldimension, selecting optimized combination ofcomponents

andsophisticatedadjustment

areimportant in order to obtain certain accuracy of the
2. A case study of a Japanese small subcontractor
2.1 Manufacturing of the mass flow controller
Kochi Toyonaka Giken, (The KTG) is a small
company founded in 1990, which fabricates mass
flow controllers as a subcontractor, shipping theseproducts to its super-ordinate company. The KTG

products.
The KTG had enjoyed stable business relying on its
parent company. The KTG was able to focus on
fabrication and to put almost all resources toaccumulate knowledge and know-how for precise
manufacturing process without having any othermarketing and sales function inside the corporation.

So the KTG had exactly played a role ofdeveloped control circuits and produced using

manufacturing step in the value chain shown in Fig.2. oversea manufacturing service company. There was
However, the KTG had a difficult time whenno specific regulation in terms of output power at

economy was slow. In order to get over the recession, that time. So the LBP product can be fabricated by
it attempted to change the business model andassembling

investigated the new business creation.

structure.

components
Major

which

applications

have
of

modular

LBPs

were

production equipment. In addition to the embedded
2.2 Launching of LBP businessapplication, there was a business opportunity of

The KTG decided to enter into new LBP (laser beam

standalone green LBP too, but the KTG could not

pointer) business using its experience on LBP

see successful future in this business.

products in the past. The company used to develop

Innovative

opportunity

came

when

legal

an instrument to measure height of trees in the forest.

regulation was imposed on laser specification.

In order to point a target tree to be measured, a LBP

Authorities announced that output power of LBP had

had to be installed in the measurement instrument. It

to be regulated down to 1mW from typical 5mW
power. This meant that brightness of LBP decreases

Firm Infrastructure
HR Management
Technology Development
Procurement
Operation

Marketing& Sales

Service

MarginInbound
Logistics

to almost one fifth. But this regulation provided an
excellent opportunity to green LBP as opposed toconventional red LBP. Since green laser has good
relative luminous efficiency, almost 8 times better
than the red laser, the green LBP clearly has
advantage over the red LBP. So the KTG decided tostart development of green LBP with output power

MarginOperation

smaller than 1 mW, and which also satisfy safety
regulation. The development team was organized toFig. 2

Subcontractor’s role in the value chain

turned out that conventional red LBP did not work in
the forest because of weak visibility of red color in
the forest with full of green color. It also turned outthat it would have problem in safety if LBP power
was increased to solve the visibility issue. It was
clear that green laser was a optimal device, but there
was no green laser product manufacturer in Japanand very few companies overseas provided green
laser products at that time. The KTG imported green
laser oscillators and embedded into manufacturingmachines as a light source.
Considering excellent performance of the green
laser, very few players in Japan, and potentiallypromising niche market, the KTG decided to start
the green LBP business. The KTG designed anddevelop new technology and a new product for a
new market creation. However, this project failed
after a half year. Problem was that the project teammember was not dedicated to the new project but
they had another exiting assignment at the same time.
The new task was too much to be done as a part time
job because of technological difficulty. This wasclearly failure of project management.
Next action taken was to outsource the productdevelopment.

The

KTG

pickedup

two

manufacturers. One company had an experience toproduce green LBPs before output power regulation
started. But this company did not accept the offer
because of technical difficulty to fulfill specification
defined by the law. The other manufacturer accepted
to fabricate test samples. The sample showedunstable laser output, thus this did not meet the

product required precise adjustment of optical path,

specification and had reliability problem. Bothfine tuning of physical alignment of lenses andcompany

oscillator

mirrors, and optimization of controller. Finallytechnology but they did not have capability todevelopment of the green LBP was successful andhadexperience

in

laser

integrate into a LBP with controller which wasdeveloped and provided by the KTG.

808 nm532 nm1064 nmBased on this unsuccessful experience, the KTG

Collimator

finally decided to develop the green LBP by itself.

SplitterThis time the management organized dedicated
Nd:YVO4

development team with the clear objectives to create
new market. Most appropriate team members were

Laser
diode

KTP

selected out of all employees. The management

FilterCavitymirrorFocusing
opticsPD

Stabilizer

announced to public the decision of green LBPdevelopment which satisfies the new regulation. This

Fig. 3

The green laser pointer structure

brought in many responses from potential customers

the product passed the certification test regarding

and the management had a confidence of projecthome appliance safety regulation. Initially the KTG

success. However, the product was not able to meetsold the products directly through web site, andthe standard specification because of stability issue

eventually expanded sales channel utilizing dealer

since the controller utilized a circuit which isnet. The revenue of this new business increased up to

appropriate for a red laser oscillator. Cleary required

40% of total business in five years.

specification was not able to be realized by justconnecting

a

green

laser

oscillator

anda

3. Implication from the case study

state-of-the-art controller. It was required to have a

3.1 Integral Architecture

controller which is optimized to the green laser

The success of green laser pointer product businessoscillator and also it was required fine tuning

can be analyzed from several aspects, one of which

between the two components. Without precise tuning, is capability or skill set for integral architecture.
the green LBP had big transient peak power when

New business can be categorized by two dimensions,the devise power supply was turned on. This peakmarket and products [4]. When a company tries topower exceeded the specification of 1mW even if the

expand its business, there are three directions. One isaddition to that, precise control of optical alignmentof laser diode, lens, mirrors, laser crystal wasnecessary. Fig. 3 shows the green laser pointerNew
Products

stationary output was within specification. In

diode is irradiated to the laser crystal (Nd:YVO4),
which converts the wavelength up to 1064nm.This

Exiting
Products

structure. Light of 808nm emitted from the laser

laser light is modulated to 532nm laser light byresonance between laser crystal and the mirror.
Small amount of light which was reflected by the
splitter was fed back to the stabilizer. Integration to a

Product
development

Diversification

MarketPenetration

MarketDevelopment
Integral architecture
Capability(core competence)

Existing Markets

Fig. 4

New Markets

Three options for new business creation

to enter a new market utilizing existing products,

knowledge is transferred to other people who shared

Second option is to do a business in current market

the same “Ba” which is a shared space forwith new products. The last option is to start aknowledge creation. This “ba” can be physical,

business in a new market with new products. Thisvirtual, mental, or any combination of them. In thislast option provides a completely new opportunity to“ba”, people shared the same experience and transfer

the company, but probability of success is relatively

tacit knowledge like knowhow, technical skill,

low unless the company has some strength whichmentality and so on, each other. This tacit knowledge

relates to existing business.

is clearly the knowledge which can not be

In the case of the green LBP development, common

documented like explicit knowledge.

core competence of the KTG was considered to be

The KTG and the super-ordinate company worked

skill set of integral architecture which wastogether from early stage of development andaccumulated though the working experience withproduction. This is a typical cooperation of two

super-ordinate company for the mass flow controller.

companies in vertical integrated corporation family.

The mass flow controller has a flow sensor and a

From the initial contract of order acceptance,

bypass pipe as mentioned earlier. This product cancooperation between two companies started. The

notsub-contractorbeimplemented

simplybyassembling

involved

intest

fabrication,

components, but it rather required sophisticateddevelopment of mass production process and it also

adjustment of components. For example, thermal

contributed to production engineering. Fig.5 showsmass flow sensor composed of a pair of resistive coil

the two value chains, one is for super-ordinate, theplaced around the thin tube and sensing smallother for subcontractor. Employees of the KTG

temperature difference between two coils arising

worked on test fabrication, production engineeringfrom gas flow. This temperature difference is

and

mass

detected electrically by bridge circuit. The flow

production

while

peoplefrom

R&D to Production

control valve has to be finished mechanically in the
preciseness of micron meter. So, the mass flow
controller

product

requiresadjustment both electricallyfinetuningandSuper-ordinate company
R&D

Test Fab.

and mechanically
Sharing tacitknowledge between
two organizations

considering dispersion of components. This is skill
set of integral architecture and most of the skill is atacit knowledge.

Test Fab.

3.2 Transfer and accumulation of tacit knowledge
Nonakashowedknowledge

ProductionEng.

creation

ProductionEng.

ProductionEng. &
Production

Sub-contractor

spiralinteracting between individual and the team, andFig. 5“Ba” for knowledge creation

converting tacit knowledge to and from explicit

super-ordinate worked for test fabrication andknowledge with the SECI model which stands for ,production engineering. Typical Japanese small

Socialization, Externalization, Combination andsubcontractor works jointly with parent company inInternalization [5]. In this model, we will justa specific step in manufacturing process. Employees

address the, “Socialization”. This is tacit knowledge

from both companies worked together as if they

sharing

worked for the same company. They communicatedprocess.

A

person’s

individual

tacitinteractively day by day. Their collaboration was so

advantage over red LBP because of higher spectral

close that this process provided a “Ba” which was aluminous efficiency. In this figure, dotted line indicatesplace where tacit knowledge was shared and created.

conventional red LBP. Solid line and dashed line show

The advantage of the small subcontractor was that itthecould accumulate knowledge, specifically tacitarchitecture, respectively for the green LBP. Whenknowledge which was obtained from the parents

modular architecture was applied to a green LBP

company through the job. In addition, the level ofsystem design, the performance saturated at level A andthe accumulated tacit knowledge of subcontractor

level B, which were worse than conventional red LBP

sometimes exceeded the super-ordinate company.

and which did not meet the specification for existingThis accumulated tacit knowledge learned throughmarkets. This corresponds to two unsuccessful result of

long job experience as a subcontractor of mass flow

development mentioned earlier. However, performance

controller production played an important role forof the green LBP could be improved by adopting

the green LBP development and production. Thereintegral architecture for design methodology, which

was a similarity between mass-flow controller andresulted in higher performance than a red LBP. Output

green LBP in integration of components and fine

power regulation was imposed at the timing t0 andtuning skill to the final product.

actual performance of a conventional red LBP

case

decreased.

3.3

Innovative

opportunity

andintegralofintegralarchitectureandmodular

In addition to that, the green LBP has

better spectral luminous efficiency and the spectrum

architecture

distribution is appropriate for the people who haveBusiness opportunity for the green laser pointerinability to see certain colors. As a result, the green

emerged when regulation law with respect to consumer

LBP was not only appropriate to existing market but

appliance safety was legislated and when LBP was

also it was able to create a new market segment for

specified to one of the products which are regulated bylaser beam pointer which meets “color universal

the law. Until the time, output power of 5mW wasdesign”

allowed but the specification was suddenly reduced

4. New business creation process for small

down to 1mW. Figure 6 shows conceptual relationshipmanufactures

between LBP performance and time for green LBP and

Change to a new autonomous business from a

New products

New business
New productNew technology

New market (color universal design)

Performance

Existing markets

Green LBP

Architecture
Conventional
red LBP

Integralarchitecture
ModulararchitectureA

t1

MarketingCore competenceB

t0

Innovation

time

Businesscollaboration

Organization
Business strategy

Change of market andenvironment

Regulation by law

Fig. 6 Conceptual relationship of red and green
LBPs and the architecture
conventional red LBP. The performance reflects
luminous efficiency, so the green LBP has potential

Strength
Opporandtunity and
SWOT analysis
weakThreat
nessesEntrepreneurship and leadership

Fig. 7 New business creation process for small
manufacturers

subcontractor

positionissomethinglikeestablished through subcontracting experience.

metamorphosis and it is crucial to re-energize thecompany. The process can be drawn based on analysis

Acknowledgementof the case study for the KTG as shown in Fig. 7.

This work was supported in part by The Special

Cleary the base are understanding of strength andSubsidies in Subsidies for ordinary expenses of

weakness of the company and sensitivity to external

private schools from The Promotion and Mutual Aid

environmental changes. For small subcontracting

Corporation for Private Schools of Japan.

manufacturer, the top management plays major role fornew business creation. This action requires drastic

Referenceschange in strategy and thus entrepreneurship and[1] T. Fujimoto, “Architecture based Comparative

leadership of the top management are definitively

Advantage in Japan and Asia” MMRC Discussion

important. The top management only can utilize

Paper, No.94, Aug. 2006

opportunity arising from, for examples, any regulation
or deregulation of law if the management is prepared[2] H. Chesbrough “Open Innovation – The new

and ready to change by completing its SWAT analysis.

imperative

When the top management understand its resource

technology”, Harvard Business School Press, 2006.

forcreating

andprofitingfromcompetitive or lacking based on the analysis, he or she
can define new product concept and technology target.

[3] Ulla Lehtinen, “Changing Subcontracting – a

He or she also can organize new team and implement

study on the evolution of supply chains andthe new business plan. Small company has advantage

subcontractors”, Academic Dissertation, University

in terms of organizational flexibility and agility.

of Oulu, Nov. 2001.

Conclusion[4] Ansoff

Tendency toward modular architecture will not cease

Management Science, Vol 4, No4. pp392-414, 1958.

“A model for diversification “,

because of globalization of value chain. This will
resultindecreases

subcontracting

of

of

small

[5] I. Nonaka and H. Takeuchi, “The knowledge

These

small

creating company”, Oxford University Press, 1995.

numbers

manufacturers.

subcontractors are required to change its businessmodel to autonomous one for their sustainability.
Based on a case study of a green laser pointermanufacturer, the process to autonomous businesswasclarified.

subcontractors

Our

understanding

potentially

have

is

that

integrativecompetency and this strength is a key to new
business expansion. Tacit knowledge or skill set of
integration can be accumulated in subcontracting
manufacturer. It was also shown that these small
manufactures can start a new business with new
products and new market, if they have competence
like integral architecture capability which was