The work being undertaken at the CBSP is devoted essentially to the view that the supply chain concept has both a strategic as well as an operational importance. To understand this point of view one has to recognise that the supply chain has two dimensions. The first can be referred to as the operational supply chain; the second can be referred to as the entrepreneurial supply chain.
The operational supply chain refers to the series of primary and support supply chains that have to be constructed to provide the inputs and outputs that deliver products and services to the customers of any company. All companies have operational supply chains, and these supply chains are normally unique to the company creating them, because they have choices about the input and output supply chains that they create operationally, when they position themselves strategically to provide a particular product and service within a specific primary supply chain.
This notion of companies positioning themselves strategically within a primary supply chain is an under-developed aspect of thinking in business strategy. It is true that Porter (1980) was well aware of the importance of buyer-seller relationships in the development of his famous five forces model. It can be argued, however, that strategic management thinking has systematically under-estimated the importance of these types of vertical business-to-business relationships as the basis for a proper understanding of entrepreneurial action and sustainable business success. Furthermore, it is clear that supply chain thinking can provide a significant insight into the conduct of business strategy, and that it is not merely an operational tool or technique. The reasons for this are set out in more detail elsewhere (Cox, 1997a). Suffice it to say here that the Toyota model must be understood not just in terms of operational efficiency through lean production and supply, it must also be understood as a completely different way of thinking about business strategy.
In recent years the idea of companies focusing on their core competencies has been much-promulgated (Hamel and Prahalad, 1990). Indeed, one could say that it has been the dominant thinking in strategic management in the 1990s. Although there is no evidence that the Toyota model informed Hamel and Prahalad's (1990) thinking about the core competencies of the firm, it would appear that what Toyota actually achieved is based on a similar (if subtly different) way of thinking about strategy and operational alignment. The core competence paradigm is based on companies understanding what internal skills and resources they should own and control through internal contracts in order to sustain their business success. The Toyota approach to business strategy and operational alignment appears to have been based on a similar view, but one that was extended to the total primary supply chain in which they were positioning themselves. It is also based on the understanding that the key strategic decision within the company ± the entrepreneurial make-buy decision ± is always a supply chain management one.
When companies decide to become involved in any supply chain they have to make decisions about how they will control and manage the primary supply chain itself. They face decisions about where they should position themselves in the chain. At one extreme, they can decide to vertically integrate the whole chain from raw materials to end customer, as Ford and GM tended to do historically in the automotive supply chain. At the other, they can decide to own only one or two of the resources that exist in the chain, as most car assemblers now do. How should companies make these decisions, and which are the resources that a company needs to retain internally, and which are those that a company can safely outsource to others through external contracts? Clearly, these two questions are of immense strategic importance to all companies if they are interested in appropriating value for themselves and their shareholders from participation in a supply chain (Cox, 1997a).
It is clear that in an ideal world companies ought to position themselves strategically to own those supply chain resources that are difficult to imitate, and around which they can build defensible barriers to market entry. Only by possessing supply chain resources that have a low propensity for contestation is it possible for superior performance to be achieved by companies over the long term. It follows, therefore, that ideally companies must only outsource those supply chain resources that are highly contested and which have low barriers to market entry. In this way it is likely ± if the company also understands how to limit its dependency on suppliers and how to continuously monitor any threats to its own supply chain position from suppliers ± that the company will be able to maximise its ability to appropriate value for itself.
This is what strategic or entrepreneurial supply chain thinking means. It is a way of thinking that recognises that, for whatever is produced for customers, it will always require the construction of an entrepreneurially defined, generic supply chain. Within this chain there will be resources around which there is a variable scope for contestation and market closure. Historically, strategy has tended to concentrate on horizontal competitive rivalries around particular supply chain resources, rather than on knowing entrepreneurially where to position the business to own and control particular resources within a specific supply chain in order to appropriate the maximum share of value for oneself.
As companies are always embedded in entrepreneurial primary supply chains for the generation of their revenue, it is somewhat surprising that the bulk of supply chain thinking has tended to focus on the operational aspects of the process, rather than those that are of strategic importance. This can only be because commentators have failed to understand that the Toyota approach to supply chain management was both operationally innovative (in terms of lean production and supply) as well as strategically innovative. Toyota ± probably out of necessity rather than foresight ± was forced to recognise that it could not replicate the Western vertically integrated approach to supply chain management. It, therefore, appears to have made a strategic decision to concentrate only on those resources that were of critical importance to its participation in the supply chain. Lacking the resources to be able to undertake total control of the supply chain, necessity was turned into a virtue. Already possessing dependent suppliers, working in close proximity to their factories as part of the keiretsu structure, Toyota was able to outsource those aspects of the supply chain that were not critical to its ability to appropriate the maximum share of value for itself. This was because Toyota was able to control its suppliers effectively because they were relatively dependent upon them and normally operating in highly contested markets.
Toyota could create an assembly-based, demand-pull and JIT system because it had a dominant power relationship with its suppliers, which allowed it to force through the innovations it desired from supply chain supplicants. Toyota also seems to have recognised that, with effective control over external quality, cost and innovation, it was possible to compete strategically by passing more value to the customer than its direct competitors were doing. This is an important insight because Toyota recognised that it was operating in a primary supply chain in which market closure is difficult because of the number of horizontal competitors who can quickly replicate whatever supply innovation is undertaken. In this circumstance, Toyota had the good sense to recognise that the only way for it to compete was to turn necessity into a virtue. Toyota's lean production and assembly system is focused, therefore, on providing the highest level of quality to the customer, given whatever amount of money the customer is able to pay.
In other words, Toyota's lean approach is both its strategy and its operational practice. Because it operates within a contested supply chain and market place, the only way in which Toyota (or any other car assembler) can achieve sustained business success is by operating on low margins and delighting the customer in order to achieve high volume market share. The strategic goal then is to place all competitors on an operational innovation treadmill that passes value to the customer. This can be referred to as a strategic and operational treadmill to oblivion for those who cannot keep up the pace. In the short to medium term, the major beneficiaries of this approach are the customers, and those companies that survive the market consolidation that this approach makes inevitable. In the end, the result will ultimately be consolidation and oligopoly, at which point the survivors can focus on leveraging their relative market and supply chain power aggressively against customers, and those suppliers who survive the treadmill.
It is clear that the Toyota model is, therefore, a strategic approach to competition based on passing value to customers through supply chain to supply chain competition. But is this approach to strategy what all companies should seek to do? The answer must surely be no. The problem for Toyota is that it operates within what is still a relatively highly contested entrepreneurial supply chain, in which no company is able to win for itself undisputed control over supply chain resources to effectively close the market to others. There are, however, clearly supply chains in which companies are able to construct strategies that allow them to obtain dominant control over particular supply chain resources. Once this is achieved, this ownership allows them to satisfice rather than delight customers, and also to aggressively leverage their