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Analysis of Toyota’s Business Strategy
Toyota Motor Company was founded in 1937, in 1950 Toyota Motor Sales was created and finally they merged into Toyota Motor Corporation in 1982. The headquarters of the company are located in Toyota City, Nagoya of Aichi Prefecture and Tokyo, Japan. Later on, in 1984 General Motors (NUMMI—the New United Motor Manufacturing Inc.) made a joint venture with Toyota, which was the first step for production of vehicles in the USA as well as the creation of new brand “Lexus” in 1989. Later on, the production was also established in the UK in 1992. This sort of internalization of the company influenced the company to start production of large variety of new types of cars, for example compact and luxurious cars, sport cars, huge pick-ups that were targeting American consumers, SUVs for eco-friendly consumers and lastly “Prius”, which is the one of the most famous and popular hybrid cars. In 2002, Toyota took part in “Formula One” championship.
Toyota are mostly famous for their automobile industry; however, the company actually provides are high range of products and services:
- Cars manufacturing – production of cars that are recognized their comfortability and safety.
- Environmentally protective technologies – as Toyota shows its concerns about environment it creates hybrid cars that use new types of engines, fuels as well as recycling technologies.
- Robots – production of robots under the concept of “harmony with people”.
- Financial Services – provision of crediting, leasing, insurance and other financial services.
Already by 2009 Toyota managed to have manufacturing plants all over the world, including counties such as Vietnam, Mexico, Japan, Columbia, USA, Czech Republic, Russia, Pakistan, UK and so on (overall in 28 counties by 2009). Same year in 2009 Toyota was recognized by Forbes (“The Global 2000”) as the third leading company in the world.
Nevertheless, despite so many outstanding achievements, Toyota as many other companies in the world had suffered from the financial crisis and as a result its global production fell by 39.1 percent (The Guardian, McCurry 2009). Moreover, in comparison with fiscal period of the previous year, in 2009 Toyota’s net revenue decreased by 31.3 percent; 137 billion yen fall in operating income and decline in 56 billion yen decrease in net income. Despite struggles mentioned above Toyota managed to have 17.2 billion yen increase in segment operating income (FY2010 2Q Financial Results 05/11/2009 in Toyota Motor Corporation, 2009).
Toyota Way
The company’s values and business style in terms of management are known as the Toyota Way, also known as “The Toyota Way 2001”, which aims to present fundamental values and features of the management style of the company (Hoseus and Liker, 2008). It includes: continuous Improvement and respect for people. Continuous improvement stands for: 1) challenge (long-term thinking, encountering various problems and risks, making up new ideas, and looking for solutions); 2) kaizen (permanent evolution, making innovations, continuous improvement of all aspects of the company); 3) genchi genbitsu (seeking for ways to make right decisions, agreements and doing your best to achieve organization’s purposes). Respect for people stands for: 1) respect (respect all people who surround you, try to avoid any misunderstandings, accept responsibilities and form mutual trust); 2) teamwork (motivate personal and professional improvement and development, work as a team).
Toyota’s global vision reflects its intentions to lead the way to the future of mobility via enriching lives around the world with the safe and responsible ways of moving people. They seek to achieve the mentioned above through commitment to quality, constant innovation and respect for the planet, exceeding expectations with a smile as a reward from customers. The company also emphasizes on involvement of those who are talented and passionate who seek better ways of achieving corporate goals. Tracing back to its foundation, the Toyota Company has changed the course of its products and services.
Industry Overview and Analysis
The demand for cars mostly depends on vehicle prices, disposable income, fuel prices as well environmental issues. Because of environmental problems, more and more consumers are shifting away from fuel-guzzling pickup to more fuel-efficient small cars. Even during the oil crisis in 1970s, many companies tried to respond to customer demand for small cars with better fuel economy, however, the Toyota produced cars of much better quality. Some companies saw in increasing fuel prices over last decade as opportunity to expand their small-car production as well as the production of hybrid electronic cars. After economic crisis in 2008, the total industry revenue fell around 15 percent in 2009. Throughout next years, income growth in the BRICS countries supported automobile industry due to increase in the demand from these countries. In addition, many Western brands decided to locate its factories and production facilities in the BRICS counties because of the low-cost production (mostly labor costs). In 2018 1Q the cumulative profit of top 23 automobile firms is around 223 billion dollars, which was much higher than previous expectations, however, expectations for 2019 period are not so great. For example, Toyota is expected to have increase to its revenue by 2.5 percent compared to previous year, meanwhile having a fall in production by 5.8 percent comparing to previous year.
On the supply side, vehicles prices mostly depend on the raw materials and equipment cost. Higher steel and plastic prices will lead to a raise in retail prices of cars. According to Nikkei Asian Review, due to the ongoing economics war between China and the USA, the price of hot-rolled steel coil, used in cars and industrial machinery fell by 10 percent over the year. ABS plastic, which is used in electronics, suffered even worth by dropping by nearly 30 percent from a year earlier. China is consuming nearly a half of global steel consumption – its crude steel production is extremely high and excess product being exported. As the result, steel imports from China to Japan felt by 73% in comparison to year 2008. This can explain fall in total production of Toyota cars.
Porter’s Five Forces of the Automobile Industry
Threat of New Entry (Weak): a) products are mainly differentiated by design and engineering quality; b) high import taxes to protect home markets and producers; c) legal barriers protect existing companies from new entrants; d) high level of capital required; e) all existing companies have established brand image and reputation; f) it is very hard to achieve economies of scale for small companies.
Supplier power (Weak): a) suppliers do not pose any threat of forward integration; b) companies use different type of material; c) large number of suppliers; d) some suppliers are large but the most of them are pretty small; e) raw resources are very accessible.
Buyer power (Strong): a) there are many buyers; b) most of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets and can bargain for lower prices; c) buyers can start using other type of transportation; d) buyers can easily choose alternative car brand; e) buyers are price sensitive and their decision is often based on how much does a vehicle cost.
Threat of Substitutes (Weak): a) there are many alternative types of transportation, such as bicycles, motorcycles, trains, buses or planes; b) substitutes can rarely offer the same convenience; c) alternative types of transportation almost always cost less and sometimes are more environment friendly.
Competitive Rivalry (Very Strong): a) high number of competitors; b) industry is already matured; c) size of competing firm’s vary but they usually compete for different consumer segments; d) customers are loyal to their brands; e) threat of being acquired by another firm is moderate.
Toyota analysis
Strengths
- Strong market position and brand recognition. Across the world Toyota has a strong market position in Central and South America, Africa, Oceania, the Middle East region as well as all around the world. For instance, according to Toyota FY2012 report combined share of Lexus and Toyota was around 45.5% in Japan, Asian market share was around 13.4% (excluding China), 12.2% and 4.3% in North America region and Europe respectively, however Toyota market share in China was around 7%. Nevertheless, Toyota managed to quickly catch up and already became 3rd largest automobile company in China. In the end, Toyota is one the most famous car producer company in the world and in 2018 Toyota had the largest market share in the globe at around 9.5 percent. The competitive advantage and the high economies of scale enables Toyota remain its strong market position and constantly expand in international markets.
- Strong focus on R&D. Toyota is well recognized for its productions of high-quality cars with low cost, therefore providing best possible goods at a low price to consumers. This high quality was achieved by constantly improving and innovating production methods. R&D focus allows company constantly develop new products and improving the capabilities of already existing one. There are overall 14 R&D facilities worldwide. Moreover, every time entering new national market Toyota always make a deep market research in order to have better understanding of consumer preferences, law and environmental regulations and so on, constantly seeking for better strategies and methods. Toyota implements “right cars for the right markets” policy (Direction, 2008), for instance, hybrid cars were specifically invented for the customers who are concerned with the environmental issues. “Tundra” and “Highlander” were on the other hand targeting American consumers who prefer pickups (Direction, 2007). Overall, Toyota target every time entering new market is to make best possible product based on consumers preferences and low products cost without any decrease in quality.
- Extensive production and distribution network. Toyota distribution and production networks are extremely wide and spread. Toyota production system (also known as TPS) is based on such innovative practices such as “Just in Time”, “Kaizen”, “Jidoka” and etc. Such production style helped Toyota to get competitive advantage as no other firm is enabled to use the as well as Toyota, which provided Toyota with recognized brand name. Toyota managed to surpass such companies as Ford and GM in production and costs. While Ford and GM can produce around 10 vehicles per employees, Toyota has around 15 vehicles per employee, which means that Toyota has lower fixed cost. Basically “Just in Time” is a concept, where all raw materials and other equipment are delivered on the same day they are being planned to use. Such system even more underlines for employees the importance of efficiency, forcing them to minimize wasted resources and decreasing the chance of slack resources as well. Moreover, consumers are being more satisfied, because the lead time is reduced and as the result response to customer demands is quicker. Jidoka is measure to detect any problems that occurs in the assembly line, if detected, the line stops and any problems will be fixed in order to prevail it from occurring again. The target is to make sure that fewer defective goods are produced, as the result, assembly line becomes more reliable, products have higher quality, the chance to receive defective goods by consumers fall and consumer satisfaction increases. Kaizen method is to generate ideas first, after tests them and if successful to apply ideas to the already existing production process. It allows methods of production constantly improve and for consumers get even higher quality goods.
- Benefit from growing partnerships. In 2012 Toyota and BMW made a strategic agreement for collaboration in technology development, such as development of components for sport cars, fuel cell system, power-train electrification and R&D in lightweight technologies. This agreement helped to raise the technological equipment, production of new products and boosted revenues. In 2005 Toyota and Subaru made business collaboration, which enabled Subaru and Toyota factories to produce some vehicles of both companies. Such agreement helped both companies to better use their resources and quicker react to market changes and reducing costs in the end. Also, this partnership helped to develop new Toyota 86 and Subaru BRZ sports car models. In 2019, business and capital alliance between Subaru and Toyota was even more strengthened. Companies made agreement to jointly develop new battery electric vehicles, which going to use Toyota’s electrification technologies and Subaru’s AWD technologies. Lastly, Toyota’s equity stake in Subaru will be increased and that Subaru will buy more shares in Toyota.
- Human Resources. One the many strong sides of Toyota is its human resources management, which aims to make employees to follow the principles of lean production and quality. In order to achieve this goal, all local managers and employees in the subsidiary companies are being taught by send kaizen instructors. This helps employees to better understand Toyota’s culture and get experience, the transfer of technology and skills and etc. It’s all part of the Toyota’s plan for continuous improvement and learning (Elsey and Fujiwara 2000). Fujiwara and Elsey made a questioner among kaizen and made some interesting facts. First, most of the employees worked for more that 10 years and that shows that firm has been successful in inspiring firm’s employees. 15% of employees were over 50 and the majority was in the age group from 30 to 50. In addition, working period in the firm directly affected the work position. In other words, experience and age are directly corelated with the promotions and work status. Second, most of the employees were enjoying their work in Toyota and were extremely proud of the quality of their work done. Another strategy implemented by Toyota is to retain its retired workers and employees and offer them a new overseas’ job. The experience gained by these managers is enormous and they will be very useful for training and teaching new workers overseas. That way helped Toyota retain professional staff as well as helped to reduce costs of finding new managers whose performance is questionable. Lastly, that creates more incentive for the employees to be loyal to the company and work in the company for a long time (Direction, 2008).
Weaknesses
- Effects on brand image from product recalls. Toyota made a number of recalls in the past, which strongly affect the brand image and sales. When in 1989 some defects were found in new Lexus model and forced Toyota to made recalls and in some cases even come to customer’s homes to collect the cars. Another recall happened in 2011, over 111,000 Toyota and Lexus cars were recalled, because of the defects in elements of substrate and flaws in hybrid system (possible shutdown). Next year another recalls in Japan, the oil leakage and some abnormal noises in the vehicles, overall 181,000 cars were recalled. Moreover, the investigation by the National Highway Traffic Safety Administration in 2012 made a lot pressure on RAV4 and year 2007 Camry models, which all together combined resulted in significant financial losses to Toyota.
- Declining sales in key geographic segments. The FY2019 report indicates that Toyota faced with a declined sale in some key geographic areas. Sales in Latin America decreased by 13.5%, which was caused by fall in sales of Toyota Yaris model. In Asia sales dropped by 6.3 percent. Despite of the successful sales of new Corolla Sedan and Lexus ES, sales in Chinese market fell by 3.8 percent. In Oceania regions sales dropped by nearly 8 percent. Even the sales in European market dropped by 0.4 percent and they can drop even more in the future due to the BREXIT. Overall, continuous decline in sales in some key geographic segments could greatly affect Toyota’s total revenue.
- Natural disasters impact’s on production structure. Toyota’s operations and manufacturing facilities are located in Japan, which is one of the regions with high earthquake chance in the world. There had been many devastating earthquakes in Japan that affected Japanese economy. In 2011, Japan experienced one of worst earthquakes in history. Year 2011 Tohoku earthquake was that strong that it greatly impaired Japanese and Toyota auto manufacturing facilities. Unfortunately, same year floods in Thailand occurred and also halted Toyota operations and production (around 150,000 cars). Such natural disasters could severely damage the production of Toyota and revenues as well.
Recommendations
- ROE and ROA data indicated a sharp decline in 2017 that indicates need for a better allocation of resources, which is highly important for high shareholders value.
- Diversification of products. Toyota is financially secured and as the competition for consumers raises, Toya should try to look for new aspects and markets for faster growth. New markets provide good opportunity to increase sales and revenue.
- Concentrate on Asian markets: over the last decades the Asian region economic growth is the fastest, and despite economics growth slowdown in this region, Toyota must concentrate on Chinese, Indian, Indonesian and Thailand markets as a chance for faster growth. Especially Toyota’s presence in Indian market is not too high and it’s an excellent opportunity.
- Modern day Chinese preferences is going through some changes. More and more customers in China give preferences to luxury cars. Toyota could have a good chance to increase in sales in China by concentrating on production and marketing of Lexus cars. Also increase in manufacturing facilities in China will provide Toyota with cheaper delivery as well as provide employees more options to correspond consumers’ preferences.
- More and more consumers are aware of environmental problems and their preferences are shifting towards goods with low or zero effect on environment. Between homogenous products consumers will start to prefer the eco-friendly ones, even if sometimes they have higher cost or lower quality. As the result, there is need to increase image of Toyota as environmentally friendly firm by not only producing more electrified cars, but also by focusing on and developing eco-friendly value chain.
- One the main priorities should be risk reduction and safety. There are many factors such as BREXIT, USA and China economic factors, Eurozone political instability that are affecting Toyota’s performance in different markets. One the tasks for Toyota is to reform business and cost structures. That enables to get better management platform and increase it responsiveness to the economic and political market changes.
Overall, over last year’s Toyota showed an outstanding growth worldwide and increased its market share in all main regions. Toyota’s early shift towards the production of more fuel-efficient vehicles and HUV’s provided it strong competitive advantage nowadays. Toyota should strengthen its focus on improving and producing such types of vehicles, which will provide company with future growth.
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