Module 4 Assignment 2: Designing Value-Based Service
As the rate of innovation increases, companies face expanding product/service lines, shorter product and service lifecycles, and more frequent product/service transitions. All of these can bring tremendous value but also pose enormous challenges and risks.
The article “The Art of Managing New Product Transitions” by Erhun, Gonclave, and Hopman from the readings for this module includes a matrix titled “Product Factors and Risk Drivers” which focuses on Intel, a company that manufactures high-tech products. Based on your readings and research, address the following issues:
- Redesign the product risk factor matrix so that the factors are appropriate for a services firm that delivers traditional tax accounting and audit services. For example, among the supply risks, assume that the company relies on individuals with specific knowledge of the tax law in the jurisdictions where its clients operate, be it state, federal, or foreign.
- Now, assume that the firm wants to develop a management consultancy practice. (Alternatively, you may choose to add a legal services line instead.). Create a separate new matrix that summarizes the additional risk factors for this firm launching a management consultancy or legal services line. What additional risk factors are you adding to your matrix?
- Explain how the business risks differ between traditional tax and audit services and management consulting services. In your opinion, what are the three biggest risks the firm faces if it diversifies into the new service line?
- Recommend whether the firm should organically grow into a consultancy service or acquire a third party to achieve new goals. Justify your recommendations.
Develop a 10-slide presentation in PowerPoint format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M4_A2.ppt.
Be sure to include the following in your presentation:
- A title slide
- An agenda slide
- A reference slide
- Headings for each section
- Speaker notes to support the content in each slide
16
12
12
12
8
60
Assignment 2 Grading Criteria |
Maximum Points |
Redesigned the product risk factor matrix for a services firm that has traditionally provided tax and audit services and now wants to develop into a management consultancy. |
|
Created a new matrix that summarizes the additional risk factors for this firm launching a management consultancy or legal services line. Identified additional risk factors to add to the matrix. |
|
Explained how the business risks differ between these two types of services. Listed and ranked the three biggest risks if the firm diversifies into the new service line. |
|
Made recommendations with appropriate justification on whether the firm should organically grow itself into a consultancy or acquire a third party to achieve its goals |
|
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation. |
|
Total: |
Module 4 Assignment 2: Designing Value-Based Service
As the rate of innovation increases, companies face expanding product/service lines, shorter product and service lifecycles, and more frequent product/service transitions. All of these can bring tremendous value but also pose enormous challenges and risks.
The article “The Art of Managing New Product Transitions” by Erhun, Gonclave, and Hopman from the readings for this module includes a matrix titled “Product Factors and Risk Drivers” which focuses on Intel, a company that manufactures high-tech products. Based on your readings and research, address the following issues:
· Redesign the product risk factor matrix so that the factors are appropriate for a services firm that delivers traditional tax accounting and audit services. For example, among the supply risks, assume that the company relies on individuals with specific knowledge of the tax law in the jurisdictions where its clients operate, be it state, federal, or foreign.
· Now, assume that the firm wants to develop a management consultancy practice. (Alternatively, you may choose to add a legal services line instead.). Create a separate new matrix that summarizes the additional risk factors for this firm launching a management consultancy or legal services line. What additional risk factors are you adding to your matrix?
· Explain how the business risks differ between traditional tax and audit services and management consulting services. In your opinion, what are the three biggest risks the firm faces if it diversifies into the new service line?
· Recommend whether the firm should organically grow into a consultancy service or acquire a third party to achieve new goals. Justify your recommendations.
Develop a 10-slide presentation in PowerPoint format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M4_A2.ppt.
Be sure to include the following in your presentation:
· A title slide
· An agenda slide
· A reference slide
· Headings for each section
· Speaker notes to support the content in each slide
Assignment 2 Grading Criteria
Maximum Points
Redesigned the product risk factor matrix for a services firm that has traditionally provided tax and audit services and now wants to develop into a management consultancy.
16
Created a new matrix that summarizes the additional risk factors for this firm launching a management consultancy or legal services line. Identified additional risk factors to add to the matrix.
12
Explained how the business risks differ between these two types of services. Listed and ranked the three biggest risks if the firm diversifies into the new service line.
12
Made recommendations with appropriate justification on whether the firm should organically grow itself into a consultancy or acquire a third party to achieve its goals
12
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.
8
Total:
60
Using Supplier Networks
to
L
earn Faster
SPRING 2004 VOL.45 NO.3
REPRINT NUMBER 45311
Jeffrey H. Dyer and
Nile W. Hatch
MITSloan
Management Review
Please note that gray areas reflect artwork that has
been intentionally removed. The substantive content
of the article appears as originally published.
SPRING 2004 MIT SLOAN MANAGEMENT REVIEW 57
ast year, Toyota Motor Corp. posted profits that exceeded the combined earnings of
its three largest competitors. In today’s world of hypercompetition, how did
Toyota
accomplish this? In searching for the answer, many business gurus and researchers have
overlooked — or have not fully understood — the importance of knowledge-sharing
networks. Certainly, knowledge management has become a hot topic. But how exactly do
firms learn, and why do some companies learn faster than others? Furthermore, does
learning go beyond the boundaries of the organization?
Many companies keep their suppliers and partners at arm’s length, zealously guarding
their internal knowledge. In sharp contrast, Toyota embraces its suppliers and encourages
knowledge sharing with them by establishing networks that facilitate the exchange of
information. By doing so, Toyota has helped those companies retool and fine-tune their
operations, and the results have been stunning: 14% higher output per worker, 25% lower
inventories and 50% fewer defects compared with their operations that supply Toyota’s
rivals. Such improvements have provided Toyota with a significant competitive advantage,
enabling the company to charge substantial price premiums for the enhanced quality of
its products. As Koichiro Noguchi, a Toyota director and former
purchasing head, puts it, “Our suppliers are critical to our suc-
cess. We must help them to be the best.”
Toyota is not alone. More and more, companies are recog-
nizing the competitive advantage that springs from the manner
in which they work with their partners. Even powerful
Microsoft Corp. has to rely on companies around the world to
localize and translate its products in markets as diverse as those
of China, Chile and the Czech Republic. Ultimately Microsoft’s
speed to market and even the quality of its offerings in those
countries depend directly on how well it works and shares
knowledge with those firms. For computer-systems company
Dell Inc., suppliers are the very lifeblood of its business, and
effective knowledge sharing with those partners is crucial for
the company’s success (see “
Knowledge Sharing at Dell
,” p. 59).
Other firms like Boeing, Harley-Davidson and Xilinx, a semi-
Using Supplier Networks
to Learn Faster
Many companies keep
their suppliers at arm’s
length. But partnering
with vendors — sharing
valuable knowledge with
them through organized
networks — can be a
sustainable source of
competitive advantage.
Jeffrey H. Dyer and
Nile W. Hatch
Jeffrey H. Dyer is the Horace Beesley Professor of Global Strategy
and Nile W. Hatch is assistant professor of strategy at the Marriott
School, Brigham Young University, in Provo, Utah. They can be reached
at jdyer@byu.edu and nile@byu.edu.
L
58 MIT SLOAN MANAGEMENT REVIEW SPRING 2004
conductor manufacturer headquartered in San Jose, California,
have also realized the importance of knowledge sharing with
partners, and they are looking at strengthening those processes.
As Xilinx vice president Evert Wolsheimer states, “I think our
partnership relationships will evolve in a similar direction over
time to look like what Toyota has done.”
Learning at Toyota
So what exactly has Toyota done? To answer this, we performed an
in-depth study of Toyota and its suppliers (see “About the
Research”) and found that the company has developed an infra-
structure and a variety of interorganizational processes that facili-
tate the transfer of both explicit and tacit knowledge within its
supplier network. (See “
Two Types of Knowledge
,” p. 60.) The
effort, headed by the company’s purchasing division and its oper-
ations management consulting division (OMCD), consists of three
key processes: supplier associations, consulting groups and learn-
ing teams. (See “How Toyota Facilitates Network Learning,” p. 61.)
Supplier Associations In 1989, Toyota started an association for
its U.S. suppliers. Named the Bluegrass Automotive Manufac-
turers Association (BAMA), the group was modeled after Toy-
ota’s supplier association in Japan (called kyohokai). The initial
objective was to provide a regular forum for Toyota to share
information with and elicit feedback from suppliers. Member-
ship was voluntary, but word gradually spread about the value
of joining the association. By 2000, BAMA had grown to 97
suppliers from an original membership of just 13. According to
Toyota’s Chris Nielsen, general manager for purchasing plan-
ning, “We really didn’t know if this would work in the U.S. …
Before BAMA, it was not very natural for supplier executives to
talk and share information. … Over the years, that has changed
as suppliers have built relationships at senior levels.”
Details of the kyohokai reveal the various mechanisms
through which knowledge is shared. The supplier association
holds both general-assembly meetings (bimonthly) and topic
committee meetings (monthly or bimonthly). The former
enable high-level sharing of explicit knowledge regarding pro-
duction plans, policies, market trends and so on within the sup-
ply network. The latter allow more frequent interactions on four
specific subject areas — cost, quality, safety and social activities
— which are generally of benefit to all members of the network.
The quality committee, for example, picks a theme for the year,
such as “eliminating supplier design defects,” and meets
bimonthly to share knowledge with regard to that particular
topic. The quality committee also sponsors various activities,
including basic quality training for more than 100 engineers
each year, tours of “best practice” plants both inside and outside
the automotive industry, and an annual conference on quality
management that highlights in-depth supplier cases of quality
improvement selected by a panel. Such efforts, in conjunction
with those of the other committees, not only provide a forum for
sharing valuable knowledge, they also help develop relationships
among the partici
pating suppliers.
Consulting/Problem-Solving Groups As early as the mid-1960s,
Toyota began to provide expert consultants to assist its suppli-
ers in Japan. To that end, the company established the OMCD
for acquiring, storing and diffusing valuable production knowl-
edge residing within the Toyota Group. The OMCD consists of
six highly experienced senior executives (each of them has
responsibility for two Toyota plants and approximately 10 sup-
pliers) along with about 50 consultants. About 15 to 20 of those
consultants are permanent members of the OMCD, while the
rest are fast-track younger individuals who deepen their knowl-
edge of the Toyota Production System (TPS) by spending a
three- to five-year rotation at the OMCD. Toyota sends these in-
house experts to suppliers, sometimes for months at a time, to
help those companies solve problems in implementing the TPS.
Interestingly, Toyota does not charge for its consultants’ time,
instead making the OMCD a resource available to all members
of the Toyota Group. Our survey of 38 of Toyota’s largest first-
Toyota has long excelled at transferring productivity-
enhancing knowledge throughout its network of suppliers.i
From 1965 to 1992, for example, the company and its sup-
pliers increased their labor productivity by roughly 700%.
In contrast, during the same time period U.S. automakers
and their vendors achieved productivity increases of 250%
and less than 50%, respectively.
To examine the mechanisms that Toyota and its suppli-
ers have successfully employed to share knowledge with
each other, we conducted an extensive study, consisting of
more than 100 hours of interviews with more than 30 Toy-
ota executives. We also surveyed more than 80 of Toyota’s
suppliers in both Japan and the United States, and we con-
ducted interviews with dozens of their senior executives.
The investigation looked not only at how Toyota trans-
ferred knowledge to its suppliers but also at how the com-
pany was able to tap into the potential of knowledge
located outside the organization. Further, we examined the
ways in which that system of knowledge sharing had cre-
ated superior competitive advantage and profits for both
Toyota and its suppliers.
i. T. Nishiguchi, “Strategic Industrial Sourcing” (New York: Oxford Univer-
sity Press, 1994); and M. Lieberman, “The Diffusion of ‘Lean Manufactur-
ing’ in the Japanese and U.S. Automotive Industry,” presented at the
New Imperatives for Managing Revolutionary Change Conference in
Shizuoka, Japan, Aug. 29, 1994.
About the Research
SPRING 2004 MIT SLOAN MANAGEMENT REVIEW 59
tier suppliers in Japan revealed that, on average, they received
4.2 visits per year, each lasting 3.1 days.
In 1992, Toyota established the U.S. version of the OMCD.
Originally called the Toyota Supplier Support Center (now TSSC
Inc.), the group has since grown to more than 20 consultants and
is headed by general manager Hajime Ohba, who is a former
OMCD consultant. Like the OMCD, the TSSC requires that par-
ticipating suppliers share their project results with others. This
policy allows Toyota to showcase “best practice” suppliers that
have successfully implemented various elements of the TPS, and
it encourages the suppliers to open their operations to one
another. This is critical because the ability to see a working tem-
plate dramatically increases the chances that suppliers can suc-
cessfully replicate that knowledge within their own plants.
Companies can, however, designate certain areas of their plants
— where Toyota hasn’t provided any assistance — as off-limits to
visitors in order to protect their proprietary knowledge.
To date, transfers of TPS know-how have been difficult and
time-consuming. Although the goal is to achieve success in six
months, no project in the United States has been completed in
less than eight months and most consume at least a year and a
half. “It takes a very long time and tremendous commitment to
implement the Toyota Production System,” says Ohba. “In many
cases it takes a total cultural and organizational change. Many
U.S. firms have management systems that contradict where you
need to go.” Consider Summit Polymers Inc., a manufacturer of
plastic interior parts, based in Kalamazoo, Michigan, which was
one of the first U.S. suppliers to use the TSSC. According to Tom
Luyster, who was vice president of planning at the time, “The
TSSC sent approximately two to four consultants to our plant
every day for a period of three to four months as we attempted to
implement TPS concepts in a new plant.” And after that initial
phase, Toyota continued to provide ongoing support to Summit
Polymers for more than five years.
But the results have been impressive. On average, the TSSC
has assisted suppliers in increasing productivity (in output per
worker) by 123% and reducing inventory by 74%. These
improvements clearly demonstrate that, although the TSSC’s
Knowledge sharing with partners is the
foundation of Dell Inc.’s efforts toward
“virtual integration.” According to CEO
Michael Dell, “‘Virtual integration’ means
you basically stitch together a business
with partners that are treated as if
they’re inside the company.”i To achieve
that, Dell has implemented a variety of
measures.
First, Dell has taken minority equity
stakes in a few key vendors. Second, it
encourages its top suppliers to locate
their resources inside or near Dell’s
design centers and factories. Third, it has
implemented a certification program
that is unique among major PC manufac-
turers. According to Scott Perry, senior
director of global sales at Maxtor Corp.,
a manufacturer of computer hard drives,
“Dell’s certification process teaches our
engineers the language, processes and
metrics used by Dell. In short, it teaches
them how to think like Dell. This is criti-
cal because Dell wants our engineers to
monitor processes both in our factories
and at Dell factories using the tools,
processes and metrics preferred by Dell.”
Fourth, Dell engineers routinely visit sup-
plier plants to monitor performance,
share process knowledge for improving
quality and yields, and encourage the
better vendors to share their know-how
with others. Fifth, Dell has worked on its
own internal operations to facilitate
greater and faster knowledge transfer.
For example, the company returns defec-
tive parts much more quickly than its
competitors do, providing suppliers with
valuable data earlier on. “Returned parts
on Dell’s products usually reach us in 30
days versus 90 days for competitors,” says
Maxtor’s Perry. “As a result, we can work
together to fix problems quickly, which
keeps warranty costs low.” Sixth, suppli-
ers’ engineers visit Dell plants to help
both Dell and the suppliers improve
product quality and process capabilities.
These engineers conduct failure analyses
at Dell’s factories, after which they trans-
fer the resulting knowledge to their own
facilities for corrective and preventive
actions. Seventh, Dell coordinates its
knowledge-sharing activities by meeting
weekly with key suppliers and by holding
quarterly business reviews with their top
executives. Lastly, Dell is one of the first
PC makers to establish a Web portal for
supplier collaboration, providing vendor
partners with access to Dell systems and
key information regarding product
design and engineering, cost manage-
ment and quality. This system is part of
a greater effort to share important infor-
mation with suppliers, including detailed
data regarding product demand, back-
logs, pipelines and inventories.
The importance of such knowledge-
sharing practices at Dell should not be
underestimated. “Our business model is
based on direct relationships, not only
with our customers but also [with] our
partners,” notes Dell President and COO
Kevin B. Rollins. “Close supplier relation-
ships influence everything from planning
and forecasting to improved quality,
pricing, inventory management, produc-
tion and fulfillment. We’re constantly
looking for ways to integrate our suppli-
ers and partners more closely into our
business through substituting informa-
tion for inventory and cost.”
i. J. Magretta, “The Power of Virtual Integration: An
Interview With Dell Computer’s Michael Dell,” Har-
vard Business Review 76 (March-April 1998): 72-84.
Knowledge Sharing at Dell
60 MIT SLOAN MANAGEMENT REVIEW SPRING 2004
knowledge-transfer processes require considerable effort, they
can dramatically improve supplier performance.
Take, for example, Continental Metal Specialty (CMS), a sup-
plier of metal stampings, such as body brackets. The consulting
process began with Toyota sending people to teach the TPS to
CMS personnel, after which the two companies jointly examined
CMS’s production process to identify each step, flagging those
that were value-added versus those that were not. Out of 30 steps,
four were designated as value-added: blanking, forming, welding
and painting. Toyota and CMS then reconfigured the production
system to eliminate as many of the non-value-added steps as pos-
sible. One important change brought welding into the plant and
placed it next to the forming process, thereby eliminating 12 non-
value-added steps. Over time, CMS has eliminated a total of 19
non-value-added steps, reducing setup times from two hours to
12 minutes. In addition, inventories on most parts have been
reduced to almost one-tenth of previous levels. Then CMS chair-
man George Hommel described the benefits: “We wouldn’t be
where we are now if we hadn’t worked with Toyota. I’d say that
75% to 80% of all that we’ve learned from customers has come
from Toyota.”
It should be noted that Toyota does not ask for immediate
price decreases or a portion of the savings from the improve-
ments. Suppliers keep all of the initial benefits, in contrast with
the General Motors Corp. (GM) typical practice of asking for a
price decrease after offering assistance at a supplier’s plant. As
one supplier executive declared, “We don’t want to have a GM
team poking around our plant. They will just find the ‘low-hang-
ing fruit’ — the stuff that’s relatively easy to see and fix. … We’d
prefer to find it ourselves and keep all of the savings.” Of course,
Toyota does eventually capture some of the savings through its
annual price reviews with suppliers, but the company is careful to
keep activities that create value completely separate from those
that appropriate value. For example, Toyota has typically used a
“target-pricing” system by which the company lets suppliers
know the prices it thinks are fair for certain parts for the duration
of a contract.1 This motivates suppliers to cut costs continually to
reap higher profits on those parts.
Voluntary Learning Teams In 1977, the OMCD organized more
than 50 of its key suppliers in Japan into voluntary study groups
(called jishukenkyu-kai, or jishuken) to work together on produc-
tivity and quality improvements. With the help of an OMCD
consultant, the teams determined a theme and spent three
months addressing the problems of each of its members’ plants.
Jishuken are an advanced knowledge-sharing mechanism
through which members learn as a group, exploring new ideas
and applications of TPS. The team then transfers any valuable
lessons to Toyota and throughout the supplier network.
In 1994, Toyota replicated the jishuken concept in the United
States by establishing three plant development activity (PDA)
core groups among 40 suppliers. As with the supplier association,
membership was voluntary. For the first year, the theme was
quality improvement because, as Toyota’s Chris Nielsen noted,
“everyone agrees that they can improve quality.” Each PDA mem-
ber was asked to select a demonstration line within a plant as a
place to experiment with implementing certain concepts.
Our interviews with U.S. plant managers revealed the value of
the PDA projects. According to one manager, “When you bring a
whole new set of eyes into your plant, you learn a lot. … We’ve
made quite a few improvements. In fact, after the [PDA] group
visits to our plant, we made more than 70 changes to the manu-
facturing cell.”
A key reason that PDA transfers of tacit knowledge have been
particularly effective is that they involve learning that is context-
specific. The plant manager from Kojima Press Industry Co. Ltd.,
a supplier of body parts, describes an example: “Last year we
reduced our paint costs by 30%. This was possible due to a sug-
Most scholars divide knowledge into two types: explicit
and tacit.i The former can be codified easily and transmit-
ted without loss of integrity once the rules required for
deciphering it are known. Examples include facts,
axiomatic propositions and symbols that provide informa-
tion on the size and growth of a market, production sched-
ules and so on. In contrast, tacit knowledge is “sticky,”
complex and difficult to codify,ii and it often involves expe-
riential learning. One example is the know-how required
to transform a manufacturing plant from mass production
to flexible operation. Because tacit knowledge is complex
and difficult to imitate, it is most likely to generate com-
petitive advantages that are sustainable. In fact, in The
Knowledge Creating Company, researchers Ikujiro Nonaka
and Hiroyuki Takeuchi make the case that the really power-
ful type of knowledge is tacit because it is the primary
source of innovative new products and creative ways of
doing business.iii
i. B. Kogut and U. Zander, “Knowledge of the Firm, Combinative Capa-
bilities, and the Replication of Technology,” Organization Science 3, no. 3
(1992): 383-397; R. Grant, “Prospering in Dynamically-Competitive Envi-
ronments: Organizational Capability as Knowledge Integration,” Organi-
zation Science 7, no. 4 (1996): 375-387; and G. Ryle, “The Concept of
Mind” (Chicago: University of Chicago Press, 1984): 29-34.
ii. R. Nelson and S. Winter, “An Evolutionary Theory of Economic
Change” (Cambridge: Belknap Press, 1982); B. Kogut and U. Zander,
“Knowledge of the Firm” (1992); and G. Szulanski, “Exploring Internal
Stickiness: Impediments to the Transfer of Best Practice Within the
Firm,” Strategic Management Journal 17 (1996): 27-43.
iii. I. Nonaka and H. Takeuchi, “The Knowledge Creating Company”
(New York: Oxford University Press, 1995).
Two Types of Knowledge
SPRING 2004 MIT SLOAN MANAGEMENT REVIEW 61
gestion to lower the pressure on the paint sprayer and adjust the
spray trajectory, thereby wasting less paint.”
The Evolution of a Knowledge-Sharing Network
The successful structures and collaborative relationships of the
three knowledge-sharing processes — the supplier association,
consulting groups and learning teams — did not appear by hap-
penstance. Rather, Toyota established these institutions in the
same order in both the United States
and Japan. The intent was first to create
weak, nonthreatening ties that could
later be transformed into strong, trust-
ing relationships. As each structure
evolved and the relationships matured,
the processes became a vehicle for a
shared identity among Toyota suppli-
ers. As one supplier executive put it, “We’re a member of the Toy-
ota Group. That means we are willing to do what we can to help
other group members.”
In the initiation phase of Toyota’s U.S. network (roughly from
1989 to 1992), the network structure was a collection of dyadic
ties with Toyota as a hub that heavily subsidized activities. (See
“
Evolution of Toyota Network
,” p. 62.) Toyota’s help came in two
forms: financial (for instance, funds for planning and organizing
meetings) and valuable knowledge. It was important for Toyota
to subsidize network knowledge-sharing activities early on to
motivate members to participate. The supplier association was
the vehicle through which links to suppliers were established and
explicit knowledge was transferred. In that early stage, the con-
nections between suppliers were weak, and there were numerous
holes because most suppliers did not have direct ties to each
other. Companies were motivated to participate in the supplier
association primarily to demonstrate their commitment to Toy-
ota with the hope that they would then be rewarded with addi-
tional future business. At this point, the network was just
beginning to develop an identity, and suppliers did not yet per-
ceive a strong sense of shared purpose with other members.
Next, Toyota gradually increased the strength of its bilateral
relationships with suppliers by sending consultants to transfer
valuable knowledge at minimal cost. Consequently, suppliers
increasingly participated in the network not only to demonstrate
their commitment to Toyota but also to learn from the company.
Although the supplier association facilitated the exchange of
information that was primarily explicit, the personal visits of
consultants were effective in transferring tacit knowledge of
greater value. And the consultants created an atmosphere of rec-
iprocity: Suppliers began to feel indebted to Toyota for sharing
knowledge that significantly improved their operations.
In the final phase, the PDA learning teams developed and
strengthened multilateral ties between suppliers and facilitated
the sharing of tacit knowledge among them. Today, suppliers
have two primary motivations for participating. First, they now
appreciate how important it is, as a Toyota supplier, to keep up to
pace. They are aware that the profit-creating potential of past
productivity enhancements declines steadily, and they know they
are in a learning race with rival suppliers because business from
Toyota is allocated based on relative performance improvements.
This creates strong incentives for suppliers to learn and improve
as quickly as possible. Second, suppliers now strongly identify
with the network and feel obligated to reciprocate in the infor-
mation exchange so they begin to share knowledge more freely
with other members. This strengthens multilateral ties among
suppliers and creates subnetworks for knowledge sharing within
the larger system. In this mature stage, multiple pathways exist
for transferring both explicit and tacit knowledge, and the
amount of tacit knowledge being transferred is substantial
(whereas in the initiation phase it was almost nonexistent).
The Competitive Advantages
For manufacturing in the United States, Toyota now buys more
than 70% of its parts from U.S. companies. Consequently, the
company is increasingly using the same suppliers as its U.S. com-
petitors, which raises an interesting question: How can Toyota
•On-site sharing
of know-how
within small
groups of 6 to
12 suppliers
Toyota
Supplier
Associations
•General sharing
of information,
including Toyota
policies and
widely applicable
best practices
•Intensive on-site
assistance from
Toyota experts
•Workshops and
seminars
Consulting
Groups
Learning
Teams
Toyota relies on three interorganizational processes — supplier
associations, consulting groups and learning teams — to facili-
tate the transfer of knowledge within its supplier network.
How Toyota Facilitates Network Learning
As each structure evolved and the relationships matured, the processes
became a vehicle for a shared identity among Toyota suppliers.
62 MIT SLOAN MANAGEMENT REVIEW SPRING 2004
achieve a competitive advantage through these vendors? Tradi-
tional economic theory suggests that the only possible way is by
extracting lower unit prices based on greater relative bargaining
power.2 In the United States though, Toyota has lower unit vol-
umes than its U.S. competitors, placing the company at a disad-
vantage. But Toyota has been able to overcome that handicap and
has instead achieved competitive advantages with its U.S. suppli-
ers by providing them with knowledge and technology to
improve their productivity for just their operations that are ded-
icated to Toyota. The results of our survey of those vendors help
illuminate the reasons for Toyota’s success.
Compared with the Big Three (GM, Ford and Daimler-
Chrysler), Toyota has engaged in significantly more knowledge-
sharing activities with its U.S. suppliers. Toyota sent personnel to
visit the suppliers’ plants to exchange technical information an
average of 13 days each year versus six for the Big Three. As one
plant manager noted, “We have received a great deal of knowl-
edge from Toyota. … We have learned about in-sequence ship-
ping, kanban [a system for reducing inventory], one-piece
production and standardized work. We have even learned some
of Toyota’s HR-related training philosophy and methods.” The
plant managers surveyed were unanimous in their opinion that
Toyota provided more valuable assistance than their largest U.S.
customer despite the fact that they sold an average of 50% less
volume to Toyota.
The greater knowledge sharing has had a substantial effect.
From 1990 to 1996, the suppliers reduced their defects (in parts
per million) by an average of 84% for Toyota versus 46% for their
largest Big Three customer. Similarly, the average supplier slashed
its inventories (as a percent of sales) by 35% in its operations
devoted to Toyota versus only 6% for its largest Big Three cus-
tomer. And suppliers increased their labor productivity (sales per
direct employee) by 36% for Toyota versus just 1% for their
largest Big Three customer. Furthermore, by 1996 the suppliers
had achieved 10% higher output per worker, 25% lower invento-
ries and 50% fewer defects in their manufacturing cells for Toy-
ota, as compared with what had been achieved for their largest
U.S. customer. These results are all the more amazing given that
the suppliers were manufacturing a similar component for a U.S.
customer within the same plant!
Sustaining the Advantages
If suppliers have achieved such significant improvements by
sharing knowledge with Toyota, why then don’t they utilize that
know-how for their other customers? In fact, one-third of the
U.S. suppliers in our study reported that they did transfer the
knowledge acquired from Toyota to manufacturing cells devoted
to their largest U.S. customer. But the remaining two-thirds did
not. Many plant managers reported that even when they wanted
to transfer knowledge to other manufacturing cells in the same
plant, they often couldn’t because of two types of barriers: net-
work constraints and internal process rigidities.
Network Constraints In some instances, plant managers reported
being unable to transfer knowledge because of a particular cus-
tomer’s policies or other constraints. For example, one supplier
was required by its Big Three customer to use large containers,
approximately 4 feet by 6 feet and weighing 200 to 300 pounds
when filled. By comparison, Toyota had the supplier use smaller
containers, about 2 feet by 3 feet and weighing 40 pounds when
filled. This had a number of important ramifications. The man-
ufacturing process using large containers required more floor
space, and the supplier needed to purchase forklifts and hire
forklift operators to move the containers. Not only were the large
containers unwieldy, they were also tougher to keep clean, which
affected product quality. Furthermore, the large containers made
it more difficult to label and sort products into a particular
sequence for production at the assembler’s facility. But the large
containers fit well into the Big Three assembler’s system (which
also used forklifts and a lot of floor space), so the customer
wouldn’t allow a change to a smaller size. Thus, the supplier was
unable to replicate the processes that it was using for Toyota.
Internal Process Rigidities Suppliers were much less likely to trans-
fer knowledge from Toyota to one of the Big Three when the
manufacturing cells for that customer had a high level of
automation or a large capital investment in heavy equipment.
Such internal process rigidities — large machines bolted or
Initiation
Suppliers
Mature
Suppliers
Toyota Toyota
In the early stages of a knowledge-sharing network, Toyota
establishes bilateral relationships with suppliers (left). At this
point, the supplier network resembles a hub (Toyota) with
many spokes. Later, the suppliers begin to form ties with each
other in nested subnetworks (right). These multilateral rela-
tionships greatly facilitate the flow of knowledge so that
members are able to learn much faster than rival, nonpartici-
pating suppliers.
Evolution of Toyota Network
SPRING 2004 MIT SLOAN MANAGEMENT REVIEW 63
cemented in place, trenches in the floor, utilities hardwired to
equipment and so on — increased the costs of transferring
knowledge. As one plant manager reported, “When you invest in
automation, you do everything you can to run that job for as long
as you can. When you have to change a highly automated process,
you have a devil of a time. It just never works.” Internal process
rigidities help explain why suppliers had relatively low rates of
productivity improvement for their U.S. customers. Plant man-
agers could not make the changes they
wanted, or they were forced to wait
until the customer terminated a vehi-
cle model before they could imple-
ment a new process. Thus, at the very
least, internal process rigidities created
a significant time lag. In contrast, Toy-
ota’s production network has been
designed as a dynamic system with flexibility built directly into
the manufacturing processes. Most machines, for example, are on
rollers so they can be moved easily to new locations.
Other factors can also impede the transfer of knowledge to
production cells dedicated to Toyota’s rivals. A number of plant
managers refrained from even requesting a major change from a
U.S. customer because they perceived the approval process to be
time consuming and difficult. Furthermore, significant changes
to a manufacturing cell often require considerable down time,
which a customer might be unwilling to endure. Or the customer
might refuse to accept the possibility that the new processes
might initially have bugs. According to the president of one sup-
plier,“Sometimes it’s just not worth the risk to try something new
if the customer isn’t supportive and involved. If you cause a
recall, or even if they think you caused a recall, it could put you
out of business. And if you shut down their plant, they charge
you $30,000 a minute.
In summary, taking know-how learned from one customer
and applying it to another can be extremely difficult, mainly
because knowledge is so context-dependent. But the ability to
transfer and adapt knowledge can, in and of itself, be a competi-
tive advantage. As Michio Tanaka, the general manager in pur-
chasing at Toyota, asserts, “The ideas behind the [TPS] have
basically diffused and are understood by our competitors, but the
know-how regarding how to implement it in specific factories
and contexts has not. Toyota Group companies are better at
implementing the ongoing … activities associated with the
[TPS]. … I think we are better at learning.”
The Bottom Line
The trickle-down benefits of knowledge sharing can be substan-
tial. By transferring its know-how to suppliers, Toyota has helped
those firms greatly improve their performance, and this in turn
has generated tremendous competitive advantages for Toyota.
Consider the significant price premiums that Toyota vehicles
enjoy (relative to U.S. cars in the same class): an average of 9.7%
for new cars and 17.6% for used ones.3 Higher quality is a major
reason why Toyota vehicles can command such prices. The J.D.
Power and Associates Initial Quality studies have found that
between 1990 and 2000 Toyota cars had roughly 40% fewer prob-
lems (per 100 vehicles) than did autos from the Big Three.4 The
total cost of the knowledge-sharing activities that have con-
tributed to the enhanced quality of Toyota vehicles was between
$50 million to $100 million for the United States and Japan. That
amount might seem considerable, but it was relatively small for a
$100 billion company like Toyota, and it was certainly a wise
investment that has more than paid for itself in increased profits
for the Japanese automaker.
The experience of Toyota strongly suggests that competitive
advantages can be created and sustained through superior
knowledge-sharing processes within a network of suppliers. We
believe those principles have broader applicability, for example,
in other types of alliance networks, including those with partners
in join ventures. In fact, establishing effective interorganizational
knowledge-sharing processes with suppliers and partners can be
crucial for any company trying to stay ahead of its competitors.
As one senior Toyota executive observes, “We are not so con-
cerned that our knowledge will spill over to competitors. Some of
it will. But by the time it does, we will be somewhere else. We are
a moving target.”
Indeed, Toyota’s dynamic learning capability, enabled through
a network of knowledge sharing, might turn out to be the com-
pany’s one truly sustainable competitive advantage.
REFERENCES
1. L. Chappel, “Toyota: Slash — But We’ll Help,” Automotive News 77
(Sept. 16, 2002): 4.
2. M. Porter, “Competitive Strategy” (New York: Free Press, 1980).
3. J.H. Dyer and N. Hatch, “Network-Specific Capabilities, Network
Barriers to Knowledge Transfers, and Competitive Advantage” (paper
presented at the Strategic Management Society Conference, Orlando,
Florida, Nov. 7-10, 1998).
4. J.H. Dyer, “Collaborative Advantage” (New York: Oxford University
Press, 2000).
Reprint 45311. For ordering information, see page 1.
Copyright Massachusetts Institute of Technology, 2004. All rights reserved.
“We are not so concerned that our knowledge will spill over to
competitors. By the time it does, we will be somewhere else.”
MITSloan
Management Review
PDFs ■ Reprints ■ Permission to Copy ■ Back Issues
Electronic copies of MIT Sloan Management Review
articles as well as traditional reprints can be purchased
on our Web site: www.sloanreview.mit.edu or you may
order through our Business Service Center (9 a.m.-5
p.m. ET) at the phone numbers listed below.
To reproduce or transmit one or more MIT Sloan Man-
agement Review articles by electronic or mechanical
means (including photocopying or archiving in any
information storage or retrieval system) requires written
permission. To request permission, use our Web site
(www.sloanreview.mit.edu), call or e-mail:
Toll-free in U.S. and Canada: 877-727-7170
International: 617-253-7170
e-mail: smrpermissions@mit.edu
To request a free copy of our reprint catalog or order
a back issue of MIT Sloan Management Review,
please contact:
MIT Sloan Management Review
77 Massachusetts Ave, E60-100
Cambridge, MA 02139-4307
Toll-free in U.S. and Canada: 877-727-7170
International: 617-253-7170
Fax: 617-258-9739
e-mail: smr-orders@mit.edu
- box: