ean Enterprise Theory: Lean Represents a"Hybrid Approach to Value Organizing Interfirm Relationships “ Market Firm Input Pric∈ a"Hierari coordina Firm Input and」 Lean efficient Firm buys both customized standardized inputs Customized inputs often involve dedicated investments Partnerships strategic alliances provide collaborative advantage Dominant conventional approach: Vertical integration, arm's length relationships with suppliers 3-Bozdogan -Lean Supplier Networks, September 2002 @2002 Massachusetts Institute of Technology3 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Theory: Lean Represents a “Hybrid” Approach to Organizing Interfirm Relationships ƒ “Markets” (Arm’s Length): Lower production costs, higher coordination costs ƒ Firm buys (all) inputs from outside specialized suppliers ƒ Inputs are highly standardized; no transaction-specific assets ƒ Prices serve as sole coordination mechanism ƒ “Hierarchies” (Vertical Integration): Higher production costs, lower coordination costs ƒ Firm produces required inputs in-house (in the extreme, all inputs) ƒ Inputs are highly customized, involve high transaction costs or dedicated investments, and require close coordination ƒ “Lean” (Hybrid): Lowest production and coordination costs; economically most efficient choice-- new model ƒ Firm buys both customized & standardized inputs ƒ Customized inputs often involve dedicated investments ƒ Partnerships & strategic alliances provide collaborative advantage Dominant conventional approach: Vertical integration, arm’s length relationships with suppliers