Essay on Toyota: Analysis of Global Industry and of the Company

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Introduction/Executive Summary

1.1 Description of context

Since its inception, Toyota Motor Corporation has built its success around the core philosophies of its production system. The company has obsessed over innovation and efficiency throughout all its business processes (Hill, 2011). Presently many of Toyota’s direct and indirect competitors have adopted similar processes and have been able to close in on Toyota’s competitive advantage significantly (Hill, 2011). Due to this, these competitors are prompting Toyota to change or adjust its strategy to deal with this problem.

1.2 Identification of Subject matter

This report takes a close look at the global industry of automobile manufacture. As well as using the case study, ‘Toyota: The Rise of a Global Corporation’ for a company analysis, with specific focus on the revolutionary lean production system used by Toyota and a comparison with the traditional mass production process. Through a SWOT analysis this report identifies weaknesses and problems that the company faces and in conclusion hopes to offer possible solutions and recommendations.

2. The Global Industry

2.1 Global Industry analysis

Toyota Motor Corporation is a major player in the vehicle manufacture industry. The industry is in better place than it was five years ago, over that time the industry has grown by 4.5% to reach the $3 trillion revenue it’s acquires today. In this timeframe the number of businesses has declined by -0.6% and employee rate has grown by 4.4% (Statista, 2019). In this time the automobile industry has been turbulent, seeing fuel prices rise steadily and environment concerns have shifted consumer preferences away from high fuel consuming vehicles to more eco-friendly cars. Global initiatives such as the Paris Agreement has shaken up the automobile market and several companies have embraced the change in order to comply with the stricter emission laws on new vehicles. These companies have worked on diversifying their small car productions with electric vehicles. While there are still automakers that are resistant to change as they are still anticipating that the cost of fuel will inevitably contract. Fuel prices did drop in 2008 after the US financial crisis, forcing many western nations to follow the US into recession (Krauss, 2008). The industry has seen large declines in revenue, such as the production and revenue fall in 2009, however the industry has seen an average growth of 2.2% per year (Statista, 2019). Through the last five years, Brazil, Russian, India and China have all experienced growth that has enabled the manufacture of vehicles. A rise in the standard of living in these country’s has facilitated an increase in disposable income which in turn has led to a surge in demand for automobiles. Many manufacturers have set up plants in these developing countries to gain a foothold in these markets and benefit from lower production costs. By 2020, almost a 50 percent rise in global profits for automotive OEMs is expected (McKinsey & Company, 2013). The new profits will come mainly from growth in emerging markets. Soon, internet connected car technologies and driverless cars are set to stir up another revolution in the motor vehicle sector and manufacturers will be faces with a variety of new challenges.

2.2 Demand Determinants in the Automotive Industry

Global vehicle demand is strongly connected to the prices of fuel and automobiles, the disposable income per capita, the availability of public transport, economic development and product innovation. In contrast, the factors that determine supply can be, the cost of inputs and raw materials, technological advancements and taxes. Raw materials are hovering at a six-year high, and automakers are wrestling with the volatile cost of steel and plastics (Sedwick, 2018). Thus, increasing product prices. However, on the demand side where disposable income determines customer demand. Major economies such as the U.S, Japan and China are experiencing all-time highs of increased disposable income (Trading Economics, 2019), thus the tendency to purchase luxury goods such as motor vehicles increases as they are now more affordable. Fuel price fluctuations also influence the demand for vehicles by type, for instance during times of high fuel prices more fuel-efficient vehicles are sought after.

2.3 Competitors and Market Share

Market share concentration in the automobile industry is low as the largest automakers are estimated to account of about a third of the total global revenue. Toyota to date are leading in the market share for automobiles holding 9.46% of the market, followed by Volkswagen (7.38%), Ford (5.83%), Nissan (5.42%), Honda (5.39%) with 66.52% being held by various other smaller car makers (Statista, 2019). (See appendix 1).

Competitors –
Competitor: Volkswagen Group
Founded in: 1937 (81 years)
Location: Headquarters is in Wolfsburg, Germany
Size: Volkswagen own 100 production facilities across 27 countries
Product/service range: Automobiles, commercial vehicles, internal combustion engines, motorcycles and turbomachinery.
Production Output: 11,018,000 units per year
Market Share: 7.38%
Competitor: Ford Motor Company
Founded in: 1903 (115 years)
Location: Headquarters in Michigan, U.S.
Size: Ford have 62 plants worldwide
Product/Service range: Automobiles, Luxury vehicles, commercial vehicles, automotive parts, pickup trucks and SUVs.
Production Output: 6.6 million units per year
Market Share: 5.83%
Competitor: Nissan Motor Co., Ltd.
Founded in: 1933 (85 years)
Location: Headquarters in Yokohama, Japan
Size: Nissan have 45 facilities across 28 countries
Product/service range: Automobiles, luxury vehicles, commercial vehicles, outboard motors, forklift trucks.
Production Output: 5,556,241 units per year
Market Share: 5.42%
Competitor: Honda Motor Company, Ltd.
Founded in: 1948 (70 years)
Location: Headquarters is in Tokyo, Japan
Size: 31 plants in across 16 countries
Product/service range: Automobiles, commercial vehicles, luxury vehicles, motorcycles, scooters, electric generators, water pumps, lawn and garden equipment, rotary tillers, outboard motors, robotics, jet aircraft/engines, thin-film solar cells and telematics.
Production Output: 5 million units per year
Market Share: 5.39%

3. Company Analysis

3.1 Summary of Toyota

The Japanese company Toyota Motor Corporation is a major player in the vehicle manufacture market that designs, produces, assembles, both commercial and consumer vehicles and their associated parts. Toyota has a strong distributing presence in many developed countries and is currently the most controlling vehicle manufacturing corporation internationally.

3.2 Brief History of Toyota

Toyota began in 1933 as a small motor vehicle division of the notable Toyoda Automatic Loom Works. Due to the Japanese war with China, automobile production was endorsed by the government and in 1934 (Hill, 2011) the company produced the engine that would power its first vehicle. Not long after the conclusion of the conflict in 1937 TMC split from its parent company. During World War 2 Toyota was contracted to produce trucks for the Imperial Army. Following WW2, Toyota experienced significant economic strife and was near bankruptcy but was revived by an order from the US in Korea (Hill, 2011). The next notable advance was the development of a separate sales subsidiary, aptly named the Toyota Motor Sales Co. Within the same decade, the Crown became the first vehicle Toyota sold on the United States Market. During 1957 Toyota built both an American and a Brazilian plant. The company’s focus changed to global expansion during the 1960’s, penetrating the European market in 1962 (Upathamwaranon, Guo, 2016), and within the decade Toyota had built a strong foothold in the global motor vehicle market. Toyotas global presence continued to rise in the next few decades, with plants being built throughout America and Europe. In 2008 Toyota experienced a slump largely due to the US economic recession. Recently Toyota has recalled and stopped production of multiple models over its lifetime, in 2012 Toyota declared a settlement of over US$1 Billion to settle a lawsuit due to mechanical problems in some of its vehicles.

As of 2018, Toyota Motor Corporation boasts a net revenue of USD$263 Billion, a production output of 8,964,394 units, and 369,124-member strong workforce (Toyota Motor Corporation, 2018).

3.3 Analysis of Toyota’s production process

The Toyota Production System (TPS) is a business system invented by Toyota that is centered around the smoothing of processes and the institution of a constantly improving atmosphere. It is structured as a set of tools that are used in all facets of Toyota. It controls everything from the design of new products and their manufacture, company logistics, to how the company interacts with suppliers and clients. Some of these tools include, Kanban, Autonomation, and Jidoka. The core philosophy of the system is the optimal allocation of resources and the identification and steady elimination of waste in order to improve the flow of work. By improving production flow and efficiently applying resources, Toyota can produce higher quality goods in a shorter time.

TPS as two main philosophical bases. The business theories of ‘Just in time’ and Jidoka. Just in time refers to the efficient use of allocated resources and the manufacture of only what is required, and when. Jidoka, means Autonomation, a cost-efficient form of automation where the machine facilitates the detection correction of production abnormalities. It is a quality control process that prevents the manufacture of defective products.

The TPS can be understood as a systematic augmentation of the production process with the goal being to reduce the cost of production per vehicle. These resource management activities start at the product design stage and permeate throughout the entire development process. Each department endeavors to attain set times and then to reduce them enacting improvement activities. The process is all inclusive, involving everyone from the engineers to the chief leaders.

3.4 Comparison of Toyota’s Lean production Process and traditional mass production

Strengths

One of the main strengths of the TPS is the JUST IN TIME model. Built on the two opposing philosophies of providing fast and flexible response, and yet building mechanisms and systems that are efficient and waste-free. The concept is to use resources where and when they are needed, while maintaining high standards of efficiency and cost control. The minimization of waste is arguably one of the most significant benefits of the TPS and JIT. Compared to mass production, where long traditional production runs create a massive inventory and tie down significant amounts of capital in storage, with TPS there is almost no inventory required which frees up that capitol. This is another critical advantage of the lean production system and JIT. Toyota has an incredibly strong focus on R&D, operating one of the largest facility networks among the automotive companies, with 15 research facilities in 8 different countries. The efficiency and capital savings from the lean production system allowed Toyota to spend upwards of 1.08 Trillion Yen or A US$10 Billion in the research sector during the 2018 fiscal year (Trefis, 2018). Where the TPS saves money through efficiency, traditional mass production aims to gain massive economies of scale by spreading fixed costs out over large production runs (Hill, 2011). There is a significant risk in mass production, as if the initial machine settings are incorrect long production runs may result in many defects.

Another Innovation of the TPS was the overhaul of the workforce. A short fall of traditional mass production was the poor distribution of labour and the inefficiencies that it caused. Each assembly worker was only given a single task, compared to the variety of tasks members of the TPS workforce were trained to do. The theory behind this was the that worker would gain experience with their task and become more proficient at it (Hill, 2011). Another problem with this system was the vast amount of additional manpower that was required for maintenance. Due to this division in the work force, foremen who have no role in assembly are employed. In TPS the workforce is grouped into teams that are given multiple tasks. Each team has a leader who coordinates the team and performs their role as an assembly line worker. The team also performs non-assembly operations, such as housecleaning and minor tool repair (Hill, 2011). This reduces the need for specialists and fosters a supportive culture for solving problems (Johnston, 2001). In the TPS problems are a deviation from the standard and not the result of any individuals mistake, the cause of the defect is identified, and a long-lasting solution is found that prevents the problem from reoccurring.

Weakness’

With TPS and lean manufacturing in general, little to no inventory Is kept on hand. the TPS depends heavily on the suppliers to reliably provide materials for the manufacturing process. External factors that disrupt this chain e.g., employee strikes and transportation delays can create manufacturing holdups that can cause critical problems for the company. Suppliers may be unable to deal with the demand for products and this can significantly and negatively affect the manufacturing process. Due to this supplier dependency, any disruption along this delicate supply chain can be detrimental to Toyota.

Just in Time allows for no margin of error and vilifies any deviance from optimal process for both the equipment and the workforce. This can significantly affect the motivation and mental health of workers (Mehri, 2006). While this efficiency has led to better performance maintaining such levels may not always be possible. Equipment or labour failure can lead to major inconsistencies within lean and can make the entire operation fall behind. In mass production facilities, there is a backlog/ storage of components, materials and parts housed onsite. If a supply pathway is disrupted, employees can just move over to another machine if one fails or they can retrieve a replacement part/component from storage. Not only does the TPS rely heavily on a possibly volatile source for almost all supplies, the efficient philosophy of lean production means Toyota loses out the benefits of an economy of scale (Sean Ross, 2019).

Opportunities

Mass customisation has recently appeared as a strong source of competitiveness in the motor vehicle market (Blecker and Friedrich, 2006). It is the ability of the firm to quickly design, produce, and deliver products that meet specific customer requirements at close to mass production prices (Dollarhide, 2019). Just in time production is based on producing in small lot sizes which is enabled by set-up time reductions allowed by the kaizen philosophy at Toyota. Just in time provides the ideal situation to implement a mass customization system into the TPS (Abdallah, Matsui, 2009), as JIT can deal with the demand uncertainty associated with offering customized products. It is an opportunity for the TPS more-so than for traditional mass production because despite the advantages of economies of scale and supplier flexibility, it is difficult to move materials and information between departments in a mass production system.

There is a significant opportunity for Toyota Motor Corporation to diversify both in the conglomerate and concentric sense to invest in other areas of technology and machinery.

Threats

The dominant automotive firms compete in terms of technological advancement to further improve their products and gain an increasing control of the market. If Toyota were to miss these opportunities, it could reduce their performance compared to firms like General Motors, Volkswagen and Tesla. These companies are technologically competitive and have the brand power, resources, and systems to continue the technological advancement of their products and processes. These companies compete directly against Toyota through aggressive innovation and marketing to increase their market share. Rapid technological innovation among these competitors also increases their competitive advantages. As the current most valuable car brand in the global industry (Padeanu, 2018), Toyota has the potential to utilize technologies that present new and unique opportunities for the multinational business.

Another threat to Toyota is the price of oil and how it is continuing to rise over time (DiChristopher, 2019). This is causing customers to look for increasingly economical options from the automotive industry. The International Energy Agency states the projected number of electric vehicles on the road will increase to 125 million by 2030 (DiChristopher, 2018). Toyota must continue to develop cars that are either hybrid, electric or with better fuel economy. Else, they could lag behind other competitors that satisfy customers’ preferences regarding fuel economy and environmental impact.

4. Discussion of Problems and Challenges facing the TPS

Despite Toyota developing the incredibly efficient TPS and being the highest rated automobile manufacturer in the world, Toyota still faces difficulties and challenges today. One such issue is sustainability, sustainability is a problem that affects all industries, and in the automotive industry, the topic focuses on fuel economy and the environmental impact of current business practise. Climate change and global warming is an ever-present and rising issue that the world is having to face. High-profile influencers across the globe are calling for urgent action in the form of political, economic, and social reform (Walker, 2019). A 2010 Nasa study declared that motor vehicles were the strongest cause of climate change in the world (Atkin, 2018). Toyota is in the position to make significant, positive change due to the TPS. Both the Just in Time method and the Kaizen model are perfect for implementing new eco-friendly and efficient technologies, as the penultimate philosophy of lean manufacturing is efficiency. The TPS also allows for the quick adoption and implementation of new designs and engines that improve the fuel economy of its products. Toyota can utilise the technological advances in some of its existing models, such as the Prius and Camry, and implement them across their entire range, specifically on its trucks/ large vehicles. This will help address environmental concerns and exploiting this opportunity will help the improve brand image, customer perception, and customer loyalty.

While Toyota is undoubtedly making progress with its TPS and refining its manufacturing efficiency, the gap between competitors in the global car manufacturing market is narrowing (Hill, 2011). Firms such as Volkswagen and General Motors have invested heavily into improving their productivity and the quality of their products and Volkswagen actually invests more capital into research and development than Toyota (Casey, Hackett, 2014). Toyota has recently suffered setbacks in the American market, where they have suffered from the perception that their products “lack design flair” (Hill, 2011). This poses an opportunity for the TPS in the form of mass customization. Firms usually adopt mass customization strategies as a response to market turbulence and customer demand for variety and uniqueness. This implies that customer relationship management is a focal point for mass customization success. Therefore, the first step for firms considering mass customization should be the creation of a system that allows the firm to work closely with its customers. Such a system is expected to assure that customers could be involved at any stage of the production process starting from the design and ending with the postproduction customization. Fortunately, the TPS has incredibly short set up times (Hill, 2011), this allows for a much wider range of possible products and is perfect for the adoption of mass customization. This coupled with the incredible database of customer preferences (Hill, 2011), provides the perfect bedrock for a mass customization system to be set up in the TPS.

This system can address both the threat of new entrants creating market opposition and the aggression of existing competition. The systems allow for better productivity. This system would augment existing efforts and ensure manufactured products have some form of competitive advantage. These changes can increase Toyota’s appeal through increased efficiency and greater customer approval. through this, the company can deal with the threats facing the vehicle manufacturing industry.

5. Conclusions and Recommendations

5.1 Possible recommendations for the company and summary of findings

With the premier innovation and production system Toyota possesses, the focus of their endeavours should now be on the development of new technologies. With the issues of today, such as dwindling fossil fuels and severe climate change technological advances are required to maintain Toyotas market control. Having already mastered lean production, Toyota needs to maintain the philosophy of Kaizen, to produce the highest quality products as efficiently as possible. A more permanent reward system for employees could be implemented to maintain employee motivation and incentivise workers to uphold the quality brand image Toyota has come to be known for. This will also focus workers to detect defects quicker and to avoid mistakes. Another recommendation for Toyota is the adoption of a mass customization system, as discussed in the case study Toyota suffers from poor product perception and a lack of customer satisfaction (Hill, 2011). A mass customization system would be easily implemented using the TPS due to its inherent modularity and efficiency. A recommendation for Toyota is to implement a product-oriented management system that satisfies the requirements for all business areas (Berkel, Kampen, & Kortman, 1999). This endeavour augments any customization operations and services to help better address customers’ preferences and desires, leading to increased customer satisfaction.

5.2 Implications drawn from the report

From this paper, it is evident that Toyota is one of the top corporations in the vehicle manufacturing industry. This report is an external analysis of the threats and opportunities the company must face in order to maintain and improve its current market position. Some of Toyota’s decisions are direct responses to the current threats. However, if Toyota is to really address the issues, more action is needed to exploit the opportunities identified in this report.

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