mit_sloan2 - Homework Market

SPRING 2004 VOL.45 NO.3
Management Review
Jeffrey H. Dyer and Nile W. Hatch
Using Supplier Networks
to Learn Faster
Please note that gray areas reflect artwork that has
been intentionally removed. The substantive content
of the article appears as originally published.
Using Supplier Networks
to Learn Faster
Many companies keep
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 success. We must help them to be the best.”
Toyota is not alone. More and more, companies are recognizing 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-
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 and
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 infrastructure and a variety of interorganizational processes that facilitate
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 operations
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 Manufacturers Association (BAMA), the group was modeled after Toy-
About the Research
Toyota has long excelled at transferring productivityenhancing knowledge throughout its network of suppliers.i
From 1965 to 1992, for example, the company and its suppliers 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 suppliers 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 Toyota executives. We also surveyed more than 80 of Toyota’s
suppliers in both Japan and the United States, and we conducted interviews with dozens of their senior executives.
The investigation looked not only at how Toyota transferred knowledge to its suppliers but also at how the company 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 created superior competitive advantage and profits for both
Toyota and its suppliers.
i. T. Nishiguchi, “Strategic Industrial Sourcing” (New York: Oxford University
Press, 1994); and M. Lieberman, “The Diffusion of ‘Lean Manufacturing’ in
the Japanese and U.S. Automotive Industry,” presented at the New
Imperatives for Managing Revolutionary Change Conference in Shizuoka,
Japan, Aug. 29, 1994.
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. Membership
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 planning, “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 participating suppliers.
Consulting/Problem-Solving Groups As early as the mid-1960s,
Toyota began to provide expert consultants to assist its suppliers
in Japan. To that end, the company established the OMCD for
acquiring, storing and diffusing valuable production knowledge
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 suppliers) 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 knowledge
of the Toyota Production System (TPS) by spending a three- to
five-year rotation at the OMCD. Toyota sends these inhouse
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 first58 MIT SLOAN MANAGEMENT REVIEW SPRING 2004
Knowledge Sharing at Dell
Knowledge sharing with partners is the
plier plants to monitor performance, share
PC makers to establish a Web portal for
foundation of Dell Inc.’s efforts toward
process knowledge for improving quality
supplier collaboration, providing vendor
“virtual integration.” According to CEO
and yields, and encourage the better
partners with access to Dell systems and
Michael Dell, “‘Virtual integration’ means
vendors to share their know-how with
key information regarding product design
you basically stitch together a business
others. Fifth, Dell has worked on its own
and engineering, cost manage-ment and
with partners that are treated as if
internal operations to facilitate greater and
quality. This system is part of a greater
they’re inside the company.” i To achieve
faster knowledge transfer. For example,
effort to share important infor-mation
that, Dell has implemented a variety of
the company returns defective parts much
with suppliers, including detailed data
more quickly than its competitors do,
regarding product demand, backlogs,
providing suppliers with valuable data
pipelines and inventories.
First, Dell has taken minority equity
stakes in a few key vendors. Second, it
earlier on. “Returned parts on Dell’s
The importance of such knowledge-
encourages its top suppliers to locate
products usually reach us in 30 days
sharing practices at Dell should not be
their resources inside or near Dell’s
versus 90 days for competitors,” says
underestimated. “Our business model is
design centers and factories. Third, it has
Maxtor’s Perry. “As a result, we can work
based on direct relationships, not only
implemented a certification program that
together to fix problems quickly, which
with our customers but also [with] our
is unique among major PC manufacturers.
keeps warranty costs low.” Sixth, suppli-
partners,” notes Dell President and COO
According to Scott Perry, senior director
ers’ engineers visit Dell plants to help both
Kevin B. Rollins. “Close supplier relation-
of global sales at Maxtor Corp., a
Dell and the suppliers improve product
ships influence everything from planning
manufacturer of computer hard drives,
quality and process capabilities. These
and forecasting to improved quality,
“Dell’s certification process teaches our
engineers conduct failure analyses at
pricing, inventory management, produc-
engineers the language, processes and
Dell’s factories, after which they trans-fer
tion and fulfillment. We’re constantly
metrics used by Dell. In short, it teaches
the resulting knowledge to their own
looking for ways to integrate our suppli-
them how to think like Dell. This is critical
facilities for corrective and preventive
ers and partners more closely into our
because Dell wants our engineers to
actions. Seventh, Dell coordinates its
business through substituting informa-
monitor processes both in our factories
knowledge-sharing activities by meeting
tion for inventory and cost.”
and at Dell factories using the tools,
weekly with key suppliers and by holding
processes and metrics preferred by Dell.”
quarterly business reviews with their top
Fourth, Dell engineers routinely visit sup-
executives. Lastly, Dell is one of the first
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 participating 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 template
dramatically increases the chances that suppliers can successfully
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
i. J. Magretta, “The Power of Virtual Integration: An
Interview With Dell Computer’s Michael Dell,” Harvard Business Review 76 (March-April 1998): 72-84.
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-transfer processes require considerable effort, they
can dramatically improve supplier performance.
Take, for example, Continental Metal Specialty (CMS), a supplier 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 possible. One important change brought welding into the plant and
placed it next to the forming process, thereby eliminating 12 nonvalue-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 chairman
George Hommel described the benefits: “We wouldn’t be
Two Types of Knowledge
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 improvements. 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-hanging 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.l 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 productivity 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 member 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
manufacturing cell.”
A key reason that PDA transfers of tacit knowledge have been
particularly effective is that they involve learning that is contextspecific. 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.' The former can be codified easily and transmitted
without loss of integrity once the rules required for
deciphering it are known. Examples include facts,
axiomatic propositions and symbols that provide information on the size and growth of a market, production schedules and so on. In contrast, tacit knowledge is “sticky,”
complex and difficult to codify, ii and it often involves experiential 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 competitive
advantages that are sustainable. In fact, in The Knowledge
Creating Company, researchers Ikujiro Nonaka and
Hiroyuki Takeuchi make the case that the really powerful
type of knowledge is tacit because it is the primary source
of innovative new products and creative ways of doing
business. '''
i. B. Kogut and U. Zander, “Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology,” Organization Science 3, no. 3
(1992): 383-397; R. Grant, “Prospering in Dynamically-Competitive Environments: Organizational Capability as Knowledge Integration,” Organization 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).
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
other. Companies were motivated to participate in the supplier
association primarily to demonstrate their commitment to Toyota with the hope that they would then be rewarded with additional future business. At this point, the network was just
beginning to develop an identity, and suppliers did not yet perceive 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
The successful structures and collaborative relationships of the
three knowledge-sharing processes — the supplier association,
consulting groups and learning teams — did not appear by happenstance. 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
As each structure evolved and the relationships matured, the processes
later be transformed into strong, trusting relationships. As each structure
became a vehicle for a shared identity among Toyota suppliers.
evolved and the relationships matured,
the processes became a vehicle for a
shared identity among Toyota suppliers. As one supplier executive put it, “We’re a member of the
valuable knowledge at minimal cost. Consequently, suppliers
Toyota Group. That means we are willing to do what we can to
increasingly participated in the network not only to demonstrate
help other group members.”
their commitment to Toyota but also to learn from the company.
In the initiation phase of Toyota’s U.S. network (roughly from
Although the supplier association facilitated the exchange of
1989 to 1992), the network structure was a collection of dyadic ties
information that was primarily explicit, the personal visits of
consultants were effective in transferring tacit knowledge of
with Toyota as a hub that heavily subsidized activities. (See
“Evolution of Toyota Network,” p. 62.) Toyota’s help came in two
greater value. And the consultants created an atmosphere of reciprocity: Suppliers began to feel indebted to Toyota for sharing
forms: financial (for instance, funds for planning and organizing
knowledge that significantly improved their operations.
meetings) and valuable knowledge. It was important for Toyota to
subsidize network knowledge-sharing activities early on to motivate
In the final phase, the PDA learning teams developed and
members to participate. The supplier association was the vehicle
strengthened multilateral ties between suppliers and facilitated the
through which links to suppliers were established and explicit
sharing of tacit knowledge among them. Today, suppliers have
knowledge was transferred. In that early stage, the connections
two primary motivations for participating. First, they now
appreciate how important it is, as a Toyota supplier, to keep up to
between suppliers were weak, and there were numerous holes
pace. They are aware that the profit-creating potential of past
because most suppliers did not have direct ties to each
productivity enhancements declines steadily, and they know they
are in a learning race with rival suppliers because business from
Ho w To yota Fac il itates Netwo r k Lea rn ing
Toyota is allocated based on relative performance improvements.
This creates strong incentives for suppliers to learn and improve
Toyota relies on three interorganizational processes — supplier
as quickly as possible. Second, suppliers now strongly identify
associations, consulting groups and learning teams — to faciliwith the network and feel obligated to reciprocate in the infortate the transfer of knowledge within its supplier network.
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).
al sharing of
including Toyota
policies and
widely applicable
best practices
sive on-site
assistance from
Toyota experts
shops and
Onsite sharing of
within small
groups of 6 to
12 suppliers
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. competitors, which raises an interesting question: How can Toyota
Evoluti on of Toyota Net wor k
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.
achieve a competitive advantage through these vendors? Traditional economic theory suggests that the only possible way is by
extracting lower unit prices based on greater relative bargaining
power.z In the United States though, Toyota has lower unit volumes than its U.S. competitors, placing the company at a disadvantage. But Toyota has been able to overcome that handicap and
has instead achieved competitive advantages with its U.S. suppliers by providing them with knowledge and technology to improve
their productivity for just their operations that are dedicated 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 DaimlerChrysler), Toyota has engaged in significantly more knowledgesharing 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 knowledge from Toyota.... We have learned about in-sequence shipping, 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 customer. 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
inventories and 50% fewer defects in their manufacturing cells for
Toyota, 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 twothirds 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: network constraints and internal process rigidities.
Network Constraints In some instances, plant managers reported
being unable to transfer knowledge because of a particular customer’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 manufacturing 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
transfer 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
Consider the significant price premiums that Toyota vehicles
cemented in place, trenches in the floor, utilities hardwired to
enjoy (relative to U.S. cars in the same class): an average of 9.7%
equipment and so on — increased the costs of transferring
for new cars and 17.6% for used ones.3 Higher quality is a major
knowledge. As one plant manager reported, “When you invest in
reason why Toyota vehicles can command such prices. The J.D.
automation, you do everything you can to run that job for as long
Power and Associates Initial Quality studies have found that
as you can. When you have to change a highly automated process,
between 1990 and 2000 Toyota cars had roughly 40% fewer probyou have a devil of a time. It just never works.” Internal process
lems (per 100 vehicles) than did autos from the Big Three.4 The
rigidities help explain why suppliers had relatively low rates of
total cost of the knowledge-sharing activities that have conproductivity improvement for their U.S. customers. Plant managers could not make the changes they
wanted, or they were forced to wait
until the customer terminated a vehicle
“We are not so concerned that our knowledge will spill over to
model before they could implement a
new process. Thus, at the very least,
competitors. By the time it does, we will be somewhere else.”
internal process rigidities created a
significant time lag. In contrast, Toyota’s production network has been
designed as a dynamic system with flexibility built directly into
tributed to the enhanced quality of Toyota vehicles was between
the manufacturing processes. Most machines, for example, are
$50 million to $100 million for the United States and Japan. That
on rollers so they can be moved easily to new locations.
amount might seem considerable, but it was relatively small for a
$100 billion company like Toyota, and it was certainly a wise
Other factors can also impede the transfer of knowledge to
production cells dedicated to Toyota’s rivals. A number of plant
investment that has more than paid for itself in increased profits
for the Japanese automaker.
managers refrained from even requesting a major change from a
U.S. customer because they perceived the approval process to be
The experience of Toyota strongly suggests that competitive
time consuming and difficult. Furthermore, significant changes
advantages can be created and sustained through superior
to a manufacturing cell often require considerable down time,
knowledge-sharing processes within a network of suppliers. We
which a customer might be unwilling to endure. Or the customer
believe those principles have broader applicability, for example, in
other types of alliance networks, including those with partners in
might refuse to accept the possibility that the new processes
might initially have bugs. According to the president of one supjoin ventures. In fact, establishing effective interorganizational
plier,“Sometimes it’s just not worth the risk to try something
knowledge-sharing processes with suppliers and partners can be
new if the customer isn’t supportive and involved. If you cause a
crucial for any company trying to stay ahead of its competitors. As
recall, or even if they think you caused a recall, it could put you
one senior Toyota executive observes, “We are not so con-cerned
out of business. And if you shut down their plant, they charge
that our knowledge will spill over to competitors. Some of it will.
you $30,000 a minute.
But by the time it does, we will be somewhere else. We are a
moving target.”
In summary, taking know-how learned from one customer
Indeed, Toyota’s dynamic learning capability, enabled
and applying it to another can be extremely difficult, mainly
through a network of knowledge sharing, might turn out to be
because knowledge is so context-dependent. But the ability to
transfer and adapt knowledge can, in and of itself, be a
the com-pany’s one truly sustainable competitive advantage.
competitive advantage. As Michio Tanaka, the general manager
in purchasing at Toyota, asserts, “The ideas behind the [TPS]
have basically diffused and are understood by our competitors,
1. L. Chappel, “Toyota: Slash — But We’ll Help,” Automotive News 77
but the know-how regarding how to implement it in specific
(Sept. 16, 2002): 4.
factories and contexts has not. Toyota Group companies are
2. M. Porter, “Competitive Strategy” (New York: Free Press, 1980).
better at implementing the ongoing ... activities associated with
3. J.H. Dyer and N. Hatch, “Network-Specific Capabilities, Network
Barriers to Knowledge Transfers, and Competitive Advantage” (paper
the [TPS]. ... I think we are better at learning.”
The Bottom Line
The trickle-down benefits of knowledge sharing can be substantial. 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.
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).
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