Interorganizational knowledge management and competitive advantage in automotive manufacturing

Knowledge Management in the Automotive Industry

The Current and Potential Use of Knowledge Management within the Automotive Industry

Automotive Industry Analysis

Current Use of Knowledge Management in Automotive

Potential Future

The automotive industry's use of knowledge management is progressing from creating and sustaining knowledge systems designed to support the major phases of product development, supplier management, production and service to a more strategic approach of supporting interorganizational learning strategies and knowledge transfer. The resulting impact on it-based strategies is the development of Enterprise Content Management (ECM) platforms that are specifically developed to enable greater interorganizational learning and foster the growth of learning ecosystems between auto manufacturers, their suppliers, customers, and services organizations. Global leaders in automotive manufacturing have progressed beyond the life cycle approach of knowledge management and are executing strategies for making interorganizational learning a competitive advantage, leading to the development of entire learning networks that encompass suppliers, dealers, distributors and customers. Knowledge management in the auto industry is increasingly be relied on as the foundation for the diffusion of lean production and strategic sourcing initiatives through supply networks. In addition, the greater the interorganizational knowledge sharing, transfer and management of knowledge-based processes, the greater the level of innovation being accomplished by automotive manufacturers as the multiplicative benefits of including all members of the value chain in key strategies yields greater time-to-innovation relative to competitors. In addition, auto manufacturers are relying knowledge management as the unifying aspect of their supplier, dealer, distributor and services organizations, increasingly looking to interorganizational knowledge transfer and the development of learning systems as fueling long-term competitive advantage from both a cost reduction and innovation perspective.

Introduction

For automotive manufacturers knowledge management has progressed to enabling a series of interorganizational processes that enable knowledge management to serve as the impetus of lasting competitive advantage and differentiation. Automotive manufacturers attaining best practices in both interorganizational collaboration and the creation of their own learning ecosystems, knowledge management plays a much more foundational and less of an archival or referenceable, role in their strategies. There admittedly needs to be a balance, yet top performing auto manufacturers including Toyota for example are able to use interorganizational knowledge management as the foundation for the growth and strengthening of key strategic initiatives.

The overall objective of this report is to analyze and recommend which knowledge management processes those auto manufacturers who are attaining best practices levels of performance are relying on. Critical to this analysis is examining how Japanese auto manufacturers specifically are structuring their production systems to encompass suppliers much earlier in the sourcing, quality, and procurement process than American or European auto manufacturers. The extension of knowledge management frameworks, both highly structured with taxonomies specifically aligned to quality management strategies, and loosely coupled to promote high levels of collaboration, trust and reciprocity in the sharing of knowledge are profiled in this paper. As Toyota Motor Corporation and their Toyota Production System exemplify best practices in the area of knowledge management within automotive manufacturing, their approach to using knowledge management as both a foundation for interorganizational learning and the development of learning systems globally serve as the foundation for this paper.

In completing an analysis of the knowledge management best practices in the automotive industry, several key concepts serve as the framework of this research effort. First and foremost, there is a growing recognition that the processes and approaches companies rely on for ensuring knowledge management transforms their and their supplier organizations is a lasting competitive advantage, and as a result the depth of academic research being completed in this area is expanding rapidly (Cohen & Levinthal, 1990; Teece et al., 1997; Kogut & Zander, 1992; Spender, 1996; Grant, 1996). In addition, many scholars argue that despite manufacturers producing goods and enabling the development of entire sub-industries of accompanying services, the greatest contribution of goods producers is actually knowledge generation. In fact Toyota has found that the enabling of their suppliers for on-ramping and support of Toyota Production System standards, while rigorous and requiring continual learning, transforms the cultures of suppliers to enable greater knowledge capture, sharing and retention. In short, best practices in automotive industry knowledge management arena is now exemplified by the development of networks of companies that learn from each other and from the many collaboration requirements of making their value chains work. Scholars have begun to move away from the specific firm or manufacturer as the center of analysis and expanding the focus of research to include the network of companies and their accumulated learning both from each other and from the tasks of ensuring collaboration (Powell et al., 1996; Dyer and Singh, 1996).

Taking this network concept as the foundation of comparative analysis of innovation, it becomes clear that scholars are finding that the greater the level of integration between suppliers, manufacturers, customers, and channel partners, the greater the levels of innovation present in each organizations' products, processes, and services (Levinson & Asahi, 1996; March & Simon, 1958:188; Powell et. al, 1996). The higher the level of integration and therefore the higher the level of reciprocal knowledge sharing, the greater the level of innovation as manufacturers, suppliers, channel partners and services organizations find new processes for streamlining shared transactions, and this finding is supported by the work of Mueller, (1962, 23). Marsden, P.V. (1990, 435) argues in much of his research that the strength of integrative ties, and the "well worn paths" of knowledge sharing and eventual learning have an experiential effect on the overall growth of the learning network. What is often missed in a discussion of the strategies companies use in creating a knowledge management network, and as will be seen later in the paper, a knowledge management framework, are incentives. Szulanski (1996, 27) who states that the approaches that Toyota specifically uses in the TPS system, which he considers to be a highly taxonomy-specific knowledge management system that both applies incentives and disincentives to supply chain performance, are what differentiate this system from all others. The combination of highly structured content, well-defined process workflows, and incentives for performance all contribute to the high levels of performance attained.

Von Hippel (1998) has found that the greatest innovations have come from suppliers, looking to streamline the development of new products and therefore provide greater visibility to their own supply chain dependencies, and from customers whose unmet needs form the foundation for next generation products in those organizations that are customer-oriented and customer-centric. In the case of the automotive industry specifically it is common knowledge that as much as 70% of the value of the automobile is directly attributable not to production or assembly, but to the efficiency and synchronization of the supply chain and partnerships it is comprised of. Automobile manufacturers then are increasingly becoming integrators over highly vertically-oriented manufacturers; this integrator role is further forcing automobile manufacturers to rely on knowledge management over transactional approaches to collaboration. Taking this a step further, the quality, differentiated value and long-term cost advantages of an auto manufacturer are more of a function of the effective use of knowledge management as an interorganizational foundation for learning. The greater the dispersion of suppliers, the higher percentage of the time an auto manufacturer acts as an integrator, the more critical knowledge management be used as a platform for interorganizational learning. Toyota's dominance in global production is attributable to their best practices in sharing and enabling its production plants to use productivity-enhancing knowledge through its network Nishiguchi, T. (1994; et. al) and Lieberman; (1994; et.al.).

These scholars looked to the adoption of lean manufacturing throughout American and European auto manufacturers, and concluded that on a per-plant basis there were modest improvements in performance, yet due to the lack of knowledge management being used as a foundation for greater synchronization of efforts and integration of processes, a limit of benefits accrued from lean manufacturing resulted. Tables 1 and 2 compare the transformations Toyota has been able to make towards lean manufacturing as a result of their approach to knowledge management fostering interorganizational learning networks.

Table 1: Characteristics of a Lean Production System

Lean Production Process

System change initiative

Focus

Production line (tasks, activities and cells)

Single Organization (departments, processes, suppliers and customers)

Practices

Cellular Manufacturing; Quality Circles; Supplier Relationship Management; Pull Production; Re-engineering Setups

TQM, JIT, Six Sigma, Process Re-engineering;

Measures

Takt time, on Time Delivery, First time through, Safety Performance, Production Rate

Quality, Delivery, Process Time, Cost, Flexibility, Customer Satisfaction

Performance Measurement System

Visibility - Real Time Reporting

Causal Relationships (production tasks and activities).

Use of single version of the truth and single information

Balanced set of strategic metrics (Financial and non-financial).

New methods of cost accounting (ABC, Target Costing).

-down communication

Internal vs. External Focus (Benchmarking and Self-Assessment).

Process Management and Measures (value delivery).

Source: Lieberman; (1994; et.al.).

Table 2: Comparing Lean Production and Lean Enterprise Characteristics

Lean Production Process

System Change Initiative

The Lean Enterprise

Focus

Production line (task, activities and cells)

Single Organization (departments, processes, suppliers and customers)

Extended Enterprise (value streams and all stakeholders)

Practices

Cellular Manufacturing; Quality Circles; Supplier Relationship Management; Pull Production; Re-engineering Setups

TQM, JIT, Six Sigma, Process Re-engineering;

Seamless information flow, Integrated product and process development, Process capability and Maturation, Identify and Optimize enterprise flow, maintain stability in changing environment, Align and involve all stakeholders to achieve lean vision, Relationship based on mutual trust and commitment across the extended enterprise, make decisions at the lowest levels, optimize capability and utilization of people, focus on external and internal environment, Nurture a learning environment

Metrics

Takt time, on Time Delivery, First time through, Safety Performance, Production Rate

Quality, Delivery, Process Time, Cost, Flexibility, Customer Satisfaction

Stakeholder value (effectiveness),

Overall efficiency, System availability, System level Flexibility

Performance Measurement System

Visibility - Real Time Reporting

Causal Relationships (production tasks and activities).

Use of single version of the truth and single information

Balanced set of strategic metrics (Financial and non-financial).

New methods of cost accounting (ABC, Target Costing).

Internal vs. External Focus (Benchmarking and Self-Assessment).

Process Management and Measures (value delivery).

Stakeholder value measures

Uniform set of measures

Causal relationships between measures across all levels.

Source: Lieberman; (1994; et.al.).

Automotive Industry Analysis

Entering 2007 it is clear that Japanese firms, lead by Toyota, will be at parity with and potentially surpass the Big Three automakers' market share in the U.S. And globally. The Big Three automakers, all in various phases and strategies of restructurings today, will continue to look towards significant cost reduction strategies over time. General Motors and Ford specifically are offering early retirements and incentives to further decrease payroll, pension and healthcare costs. It is anticipated Ford will consider selling Land Rover, as the sales of Austin Martin is pending. General Motors' efforts to integrate their production systems and processes with Toyota's Production System have had limited success, as GM continues to push for an 18% reduction in the number of suppliers per year.

Chrysler's approach to a turn-around is to sell the remaining part of the company to Daimler-Benz and exit the U.S. market completely as a result. Daimler-Benz has shown interest in acquiring the remainder of the Chrysler assets, and re-vamping the product strategy to focus more on global car unmet demands in the Pacific Rim nations. GM has expressed an interest in Chrysler's plants that can produce minivans and light trucks, the two areas of the GM product strategy that are performing at production quota today. With all these cost reduction strategies in progress, it appears Toyota will potentially emerge with the leading market share in the U.S. At the close of 2007.

The exacerbating factor in the cost reduction strategies of the auto manufacturers however is the role of the United Auto Workers (UAW), and their negotiation points in the event of a potential 10% GM layoff and 5% reduction in force at DaimlerChrysler. The UAWs' wage and pension negotiation points have become more focused on limiting the number of layoffs and less on trying to increase wages by the high single-digit and double-digit growth gains in the 1980s and 90s.

To many industry experts and analysts, the restructuring of the Big three automakers was overdue, and is now all the more costly due to the lack of focus on cost efficiencies earlier in the decade. American auto manufacturers have been on average spending between 2% to 10% of a Sport Utility Vehicle (SUV) price on dealer and customer incentives alone, which in effect takes their gross contribution margin per vehicle down by 50% or more. General Motors specifically has been taking this strategy on their top-selling SUVs in the U.S. And elsewhere. Demand for SUVs, the flagships of the GM line, has proven to be highly inelastic however and as a result the auto manufacturer is facing challenges to growth.

Countering the many financial challenges the Big Three auto makers have are their new model line-ups including the broader availability of hybrid vehicles, an area Toyota has been able to dominate to this point through the use of their Toyota Production System (TPS) integration strategy with suppliers. The acceptance or rejection of the new model year will be a direct indicator whether Toyota will become the market share leader in the U.S. And globally. Figure 1, from Value Line Investment Surveys (2007, 47) shows the composite statistics for the Automotive Industry based on the firm's financial analysis.

Figure 1: Automotive Market Financial Analysis

Figure 2 provides an overview of the global car market as of 2007, according to Standard and Poor's Research organization. From this graphic it is clear the majority of growth is in the Asian countries, a clear indication that Chinas' emerging growth is significantly changing global demand. Table 1, Passenger Car Sales by Asian Region, shows the historical growth in sales specifically in China, to the exclusion of the other nations in that region.

Figure 2: World Car Sales Analysis and Forecast (Standard & Poor's)

Table 1: Passenger Car Sales in Asian Region

Units -- "

Country 2003 2004 2005 Growth in 2004 (%) Growth in 2005 (%) Japan 4,714,003 4,768,625 4,745,267 1.2 (0.5) China 2,171,312 2,478,911 3,293,382 14.2-32.9 South Korea 1,020,130 879,816 944,073 (13.8) 7.3 India 704,902 868,323 920,551 23.2-6.0 Australia 592,921 593,463 611,235 0.1-3.0 Taiwan 331,896 388,745 418,944 17.1-7.8 Malaysia 337,536 387,795 414,079 14.9-6.8 Thailand 178,086 207,247 182,207 16.4 (12.1) Others 335,218 374,110 433,710 11.6-15.9 Sources: Global Insight, Standard & Poor's survey of industries -- "auto and auto parts, August 2006.

The European demand for automobiles however has been mostly flat, with Germany experiencing solid growth of 3.8% according to Standard & Poor's (2007, 1), while sales in France fell by 3.3%. The U.K. auto sales market continued to be weak with a 3.9% decline in sales, with slow sales anticipated through 2009 when replacement demand is anticipated to begin. Spain also experienced a 2% reduction in market growth, while Italy experienced a modest 1.4% increase in auto purchases.

Current Use of Knowledge Management in Automotive

Managing, organizing and making available the many types of content that comprise automobile manufacturers' knowledge management systems require the creation of enterprise-wide frameworks. Auto manufacturers vary in their approach to managing these frameworks, yet many share common characteristics which are defined here. As these frameworks are designed for agility and responsiveness to business strategies and the development of interorganizational knowledge management and learning systems development, integration between content systems is critical. The basis of these systems is specifically a reliance on Enterprise Content Management (ECM), and within that framework, Digital Asset Management (DAM), has lead to the development of Product Data Management (PDM) and Product Lifecycle Management (PLM) systems that deliver significant value to auto manufacturers' design and production teams. As the automotive field specifically relies on both structured content the need for a content framework is clear.

It's critical to keep in mind that selectively layering in of technologies to the process workflow areas of automobile design, production, and service is leading to the significant growth of ECM platforms and frameworks within the automotive industry. Growth is not happening due to the technology itself; growth is happening because the technologies inherent in it are now progressing to the point of being able to meet the unmet needs of the automotive manufacturers who require faster time-to-market strategies, relying on their years of accumulated content and knowledge.

Potential Future

The implications of ECM frameworks specifically being created for the purpose of supporting knowledge management strategies must first begin at a very process-centric level, where the many sources of content and knowledge are aligned to organizational objectives. The use of ECM frameworks to enable greater knowledge management is becoming pervasive as a result of this process-centric view. From this process-centric foundation, the potential future of knowledge management, and further, learning systems, will greatly impact the auto industry. Instead of just focusing on costs or driving down material pricing, or trimming back suppliers as GM is doing today, the focus becomes more on how to create an organization that can learn both from interactions with suppliers and customers, but also about efficiencies based on process workflows being more focused on goals and objectives.

The potential future then of knowledge management in the auto industry is revolutionary in that it is going to re-align how the most fundamental of tasks is completed. One of the most pronounced areas of change will be in the area of knowledge transfer. Figure 3, from Rupert (36) shows the influence and impact on process workflows and knowledge transfer of knowledge management strategies.

Figure 3: Knowledge Transfer Modeling

Clearly with this dynamic, auto manufacturers must re-think their core competencies and see the capturing and effective use of knowledge as their long-term differentiator, not merely cost reduction and lean manufacturing techniques. Lean manufacturing specifically needs to be seen as a result of effective knowledge management strategies first and foremost, and the integrative aspects of interorganizational knowledge management being the foundation for lasting competitive strength. In the case of General Motors, Ford and Chrysler, their approaches to creating ECM frameworks have centered on the design and development functions, looking to the 2008 model year for a rejuvenation of growth. The use of isolated or piloted approaches to ECM Frameworks in their financial reporting and supplier management organizations has led to greater efficiencies in accomplishing process-centric goals, yet these are relatively new strategies for these larger manufacturers. Toyota's use of the Toyota Production System as an approach to modifying how their suppliers interact, learn and contribute knowledge continues to deliver results from a process-centric view however. Toyota's approach to auditing those suppliers that do not meet minimum TPS criteria is being stepped up in 2007 as the result of several embarrassing recalls in 2006 which showed that even with auditing processes and an entire organization of Toyota dedicated to this task, there are still quality issues on specific components. For the Toyota culture, is unacceptable and is changing through first at the leadership level.

In summary, the future potential of knowledge management within the automotive industry is going to force a process-centric change to how company-wide strategies are fulfilled. These developments will also make a major impact on the myopic nature of manufacturing in general, forcing those companies seeking to accomplish the benefits of lean production processes to look first to how they manage knowledge. As has been well-researched by scholars in the field, the isolation of lean production principles within just a single production plant or even worse, department, is ineffective compared to a lean production standard that is based on a stable and growing knowledge management strategy. The shift away from costs and production to knowledge and learning as the new platform for innovation and continued growth is changing the auto industry today.

Conclusions

At the intersection of unmet needs in the automotive industry for enterprise-wide knowledge management platforms on the one hand, and the advances being made in content management, digital asset management, security, collaboration technologies including portals and knowledge management on the other, is the growth of ECM Frameworks. These Frameworks are critical to transforming knowledge management into an active platform specifically focused on making processes between internal departments and suppliers, distributors, dealers and service organizations capable of managing interorganizational knowledge transfers, and the eventual creation of learning systems. For the auto industry to foster innovation, knowledge management must become a priority.

The key process areas of knowledge management performance gains are coming in the following areas. First, supplier associations are critical to knowledge management functioning as a corporate strategy in the automotive industry as is exemplified by the examples from the Toyota Production System examples. Second, the role of operations management and consulting as it relates to creating stronger links between manufacturers and suppliers, and between suppliers themselves is also shown in the effects of interorganizational knowledge transfer dynamics as shown by the body of research referenced in this document. The role of the Toyota Supplier Support Center (TSSC) in the U.S. And its counterpart, the Operations Management Consulting Division (OMCD) in Japan also highlights this specific role in fostering knowledge management strategies. Third, the advent of voluntary learning teams and the development of problem solving teams as part of the Quality Assurance Division (QAD) specifically within Toyota set the foundation for knowledge management and the development of learning systems on a broader, more long-term scale. Fourth, the role of interfirm employee transfers, not so much practiced in westernized nations, but prevalent in Japan for both ensuring employment in the same industry and most importantly, the same supply chain, has a secondary effect of promoting stronger knowledge management integration strategies (Lincoln et al., 1992; Gerlach, 1992). This strategy of employee transfers also assists suppliers shed employees not needed for projects yet also brings the culture of the assembler-manufacturers to the suppliers and provides insights not available from ordinary series of meetings and discussions. Fifth the development of performance and feedback monitoring systems provides quantitative and highly focused feedback relating to the applicability and development of knowledge management interconnections and integration points throughout a supply network. In the works of Gouldner, a.W. (1960, 2) the reciprocity present in social networks is a direct enabler of innovation being created through trust. This is a byproduct of the levels of cross-organizational knowledge management present in supplier, manufacturing and distribution networks..