Module 4 Assignment 2: Designing Value-Based Service

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.
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

· 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.

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:

Using Supplier Networks
to

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.

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).

“We are not so concerned that our knowledge will spill over to
competitors. By the time it does, we will be somewhere else.”

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