Toyotas Competitive Advantage In The Automotive Industry Marketing Essay

In the years following World War II., government industry cooperation, a strong work ethic, and mastery of high technology helped Japan advance with extraordinary speed to the rank of the second most technologically powerful economy in the world after the US. Today, measured on a purchasing power parity basis, Japan is the third-largest economy in the world after the US and China, and measured on the basis of GDP, it is the second largest economy after the US.

Without a doubt, this impressive economic development can to a large extent be attributed to the exceptional growth of the Japanese automotive industry since the early 1960s. Since several decades now, Japanese automobiles have enjoyed an excellent reputation for being of superior grade and for their long-lasting quality, in additon to being fuel efficient, and the country’s major automakers including Honda, Mitsubishi, Nissan and Mazda are among the leading OEMs in the world. Nevertheless, there is one major player that even outperforms its national rivals and is today widely considered as the epitome of an automotive success story – the Toyota Motor Corporation.

At the turn of the year 2005 to 2006, Toyota reached the peak level of its corporate history up to then, and has managed to become the highest rated automobile manufacturer of the world, with a market value amounting to 150 billion US dollars (Becker, 2006). In addition, Toyota has been ranked as the automobile manufacurer with the highest overall productivity, the highest average quality, the highest profit margin (as mass manufacturer), and the highest profit, amounting to around ten billion US dollars – more than the combinded profits of all German automobile manufacturers in the year 2005 together.

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Even in recent years, at a time when the global automotive industry is as competitive as it has never been before, Toyota can still be called the most successful carmaker in the world. For almost 15 years consistently rated among the top automotive brands in terms of reliability, initial quality, and long-term durability, the company was able to earn a profit of 13.7 billion US dollars in FY 2006/2007, whereas other major OEMs like GM and Ford reported losses of 1.97 billion US dollars and 12.61 billion US dollars, respectively, in 2006 (Stewart and Raman, 2008). In fact, Toyota’s market capitalization on May 2007 – of 186.71 billion US dollars – was more than one and a half times GM’s (16.6 bilion), Ford’s (15.7 billion) and DaimlerChrysler’s (81.77 billion) combined.

Given these impressive facts and figures, one question arises: Why is Toyota so successful, and in which way does it differ from all the other automobile manufacturers?

Is it perhaps a design issue? Does Toyota meet the spirit of the time through its rather conservative design, in contrast to its more progressive oriented European competitors? Is it due to the legendary Toyota Production System which has often been copied by Toyota’s rivals but has never been achieved to the same level of perfectness? Or is Toyota just a Japan-specific phenomenon which success factors lie in the highly efficient, culture-based leadership and organization methods in the combination of people, machinery, and suppliers? Perhaps it is just a question of fortune that Toyota has had with regard to its production, investment and location decisions over the last seventy years.

To get to the heart of the matter, the aim of the following research paper is to closely analyze the Toyota Motor Corporation in order to identify potential success factors and competitive advantages which could represent the foundation of Toyota’s impressive rise, beginning as a textile manufacturer in the mill town of koromo – now toyota city – to the global market leader within only seven decades.

II. Toyota at a glance

1. A brief historic overview

The story of the Toyota Motor Corporation began in September 1933 when Toyoda Automatic Loom, a leading manufacturer of automatic looms, created a new division devoted to the production of automobiles under the direction of the founder’s son, Kiichiro Toyoda. The reason for this was that after having visited the USA in 1929, Kiichiro Toyoda was so excited and impressed by the upcoming motorization that he started to develop prototypes of passenger cars and freight vehicles by himself. Finally, in the year 1937, the Toyota Motors Industry Co. Ltd. was founded as an independent subsidiary of Toyoda Automatic Loom. [2] During the pacific war, the company mainly produced commercial vehicles for the Japanese military. Nevertheless, although initially being a prosperous company recording high annual growth rates, Japan’s defeat in World War II. brought the flourishing business to an abrupt end. Just like for the country’s overall industrial sector, overcoming the ill effects of the postwar period – with the war having destroyed almost the whole national economy – was not an easy process for the Japanese car makers as well. Since the early 1960s, however, the country’s auto industry started to grow constantly, in particular because car manufacturers belonging to the Japanese auto industry were commissioned to supply army trucks to South Korea by the U.S. Federal Government during the Korean War between 1950 and 1953. This commission was an important precondition for the industry’s recovery, and in particular for the quick revival of the Toyota Motor Corporation. [3] 

2. Toyota – The company today

As mentioned before, the Toyota Motor Corporation today is the largest automobile manufacturer of the world and also Japan’s largest corporation. [4] Besides its activities in the area of automobile manufacturing – which account for more than ninety percent of the company’s overall business – Toyota also operates in the areas of industrial trucks, financial services, prefabricated houses, boat engines, IT and telecommunications as well as in biotechnology and forestry (Becker, 2006).

Over the last six decades, the company was able to increase its production of automobiles under the brand of Toyota from 155.000 in 1960 to 9.23 million cars in the year 2008. [5] 

During the 1980s, Toyota clearly turned away from its traditional export strategy, starting to build manufacturing plants and R&D centers all over the world. Since that time, production and sales increases have mainly taken place outside of Japan. Today, Toyota follows a strategy of strong regional diversification with distribution channels in more than 140 countries and models and distribution channels differing from country to country. At present, Toyota’s key market is North America, representing more than thirty percent of total sales (see figure 1).

(Figure 1: Toyota Sales by Region; Own illustration according to illustration source A)

III. Analysing Toyota’s recipe for success – The Toyota Way

The fundamental reason for Toyota’s success in the global marketplace lies in the so called “Toyota way”. The Toyota Way is not only about technology and efficiency, it is about “Doing the right thing for the company, its employees, the customer and the society as a whole” (Liker, 2004).

In other words, the incredible success of the Toyota way is a direct result of operational excellence (Liker, 2004). Toyota has turned operational excellence into a strategic weapon. This operational excellence is only in part based on tools and quality improvement methods made famous by Toyota in the manufacturing world, such as JIT, Kaizen, and one-piece-flow. Although such techniques helped spawn the “lean manufacturing” revolution, tools and techniques are no secret weapon for transforming a business (Liker, 2004). Toyota’s continued success at implementing this tools stems from a deeper business philosophy based on its understanding of people and human motivation. Its success is ultimately based on its ability to cultivate leadership, teams and culture, to devise strategy, to build supplier relationships, and to maintain a learning organization (Liker, 2004). In summary, the Toyota way can be described by using the following 4 P model – Philosophy, Process, People & Partners, and Problem solving (see figure 2). These four points will be analyzed in detail in the following chapters.

(Figure 2: A “4 P” model of the Toyota Way; Own illustration according to illustration source B)

1. Key success factors – The Toyota philosophy

“A corporate philosophy is the umbrella policy that guides all of the decisions and activities of the organization”

(Fred J. Borch, former CEO of General Electric) [6] 

One of the fundamental reasons for Toyota being so successful in the global marketplace lies in its corporate philosophy. The corporate philosophy of a company can be defined as the set of rules and attitudes that govern the use of the companies resources [7] . In the Japanese culture, long-term orientation and long-term thinking plays an important role. This is shown in a very impressive way by Konosuke Matsushita’s famous 250-year plan for the growth of his company, Matsushita Electric Industrial Company Ltd., which he expressed in the year 1932. [8] 

At Toyota Motor Corporation, this basically means that management decisions are based on a long-term philosophy, even at the expense of short-term financial goals. To be more specific, the main ideas of Toyota’s philosophy are to base management decisions on a “philosophical sense of purpose”, to think long term, to have a process for solving problems, to add value to the organization by developing its people, and to recognize that continuously solving root problems drives organizational learning (Liker, 2004).

2. Key success factors – Processes

Besides this long-term oriented corporate philosophy, another success factor that enabled Toyota to become the world’s most successful automobile company is its famous manufacturing method, the so called Toyota Production System (TPS). Both elements, Toyota’s corporate philosophy and its special manufacturing method, are the double helix of Toyota’s DNA. They define its management style and what is unique about the company (Liker, 2004). Nevertheless, one important question still remains: What makes the TPS so unique?

2.1 The Toyota Production System (TPS)

The evolution of the Toyota production system approach can be traced to the period immediately following the second world war when the economic outlook was uncertain and human, natural and capital resources were in limited supply. Against this background, the most important objective of the Toyota System has been to increase production efficiency by consistenly and thoroughly eliminating waste (Ohno, 1988). This concept developed between 1948 and 1975 by Toyota’s former president Toyoda Kiichiro and later by Ohno Taiichi and Eiji Toyoda represents a highly efficient production system that is similar to that of Henry Ford several decades earlier, although Toyota’s approach to both product development and distribution proved to be much more consumer-friendly and market-driven.

The main objective of TPS is to produce goods synchronously to customer requirements, thus designing out overburden (muri) and inconsistency (mura) and eliminating waste (muda) for instance caused by overproduction, unnecessary transports and waiting times (Ohno, 1988). In order to achieve these goals, the Toyota Production System makes use of five different methods that are illustrated in figure 3.

(Figure 3: The Toyota Production System; Own illustration according to illustration source C)

2.1.1 Synchronization and standardization of processes – Lean manufacturing

One of the greatest advantages of TPS is its strong focus on lean production. Lean production is aimed at the elimination of waste in any area of production including customer relations, product design, supplier networks and factory management. Its goal is to incorporate less human effort, less inventory, less time to develop products, and less space to become highly responsive to customer demand while producing top quality products in the most efficient and economical manner possible (Ohno, 1988).

In order to achieve these goals, Toyota pioneered and implemented several highly efficient strategies. For instance, during the 1970s Toyota invented Just-in-Time (JIT), an inventory strategy that strives to improve a businesses’s return on investment by reducing in-process inventory and associated carrying costs, following the simple philosophy that inventory is waste. To meet its objectives, one of the primary tools of a JIT system are signals (jap. Kanban) between different points in the process, which tell production when to make the next part. Such signals maintain an orderly and efficient flow of materials throughout the entire manufacturing process, improving a manufacturing organization’s return on investment, as well as quality and efficiency.

Closely linked to Toyota’s JIT principle is the company’s outstanding supply chain management, as the high efficiency and effectiveness of a JIT inventory system is heavily dependent upon the smooth co-ordination of a company’s supplier network. Toyota as well as other Japanese car manufacturers are able to ensure such a smooth co-ordination and close and trustful cooperation with their suppliers through the so called keiretsu. A keiretsu is a traditional Japanese institution and can be defined as a set of companies with interlooking business relationships and shareholdings. In general, there are three different types of keiretsu (Miwa and Ramseyer, 2002):

Kigyo shudan – Horizontally diversified business groups

Seisan keiretsu – Vertical manufacturing networks

Ryutsu keiretsu – Vertical distribution networks

Today, Toyota is widely considered the biggest of the vertically-integrated keiretsu groups, with companies like the Denso Corporation – the world’s second largest automotive components manufacturer – as well as 300 other component suppliers being more or less directly linked to the company.

In addition to JIT and an outstanding supply chain management, the high efficiency of Toyota’s manufacturing plants is also due to a high level of standardization. For Toyota, standardized tasks and processes are the foundation for continuous improvement and employee empowerment. In this context, one of the most important principles for Toyota is to visualize standards to ensure that no problems are hidden. Included in this principle is the so called 5S Program comprising five steps that are used to make all work spaces efficient and productive, help people share work stations, reduce time looking for needed tools and improve the work environment (see figure 4).

(Figure 4: The 5S Program; Own illustration according to illustration source D)

2.1.2 Avoiding errors

One of the most important aspects when working with a minimum stock of materials and JIT inventory systems is to ensure that each part entering the next step of the production process meets the highest possible quality standards. To meet this requirement, it is not enough to take samples. In fact, all employees working in production and logistics must be trained and sensibilized for this set of problems.

At Toyota, this is ensured by the so called Total Quality Management (TQM) approach. TQM is an integral management concept coined in the 1940s by W. Edwards Deming, an American statistician, professor and consultant. It can be defined as a set of management practices throughout the organization, geared to ensure the organization consistently meets or exceeds customer requirements. TQM places strong focus on process measurement and controls as means of continuous improvement. One of the principal aims of TQM is to limit errors to 1 per 1 million units produced (Hakes, 1994).

2.1.3 Improvement of the production lines

Another fundamentally important pre-condition for a highly efficient and effective production is the continuous improvement of the production line and the facilities. Only if the machinery and the equipment are at the forefront of technology and are working reliably without any defects and failures, it can be ensured that the machine uptime is predictable and the process capability is sustained, avoiding that the process must keep extra stocks to buffer against any uncertainties and that the flow through the process will be interrupted.

At Toyota, this in ensured through the application of Total Productive Maintenance (TPM). TPM is a proactive approach that essentially aims to prevent any kind of slack before occurrence and has been the first methodology Toyota used to improve its global position in the 1950s. According to the motto “zero error, zero work-related accident, and zero loss”, in TPM the machine operators perform much, and sometimes all, of the routine maintenance tasks themselves. This auto-maintenance ensures appropriate and effective efforts are expended since the machine is wholly the domain of one person or team (Nakajima, 1995).

2.1.4 Employee training and qualification

At Toyota’s production factories, the workpeople are seen as the most important factor within the whole production process. Toyota has understood better than anybody else that investing into employee training and qualification is the critical success factor in the battle for quality and costs. According to the understanding that continuous process improvement means continuous employee qualification, Toyota for instance offers trainings for its assembly-line workers in its own training centers to ensure that they are able to meet the company’s standards before they start working at the actual assembly line. This procedure is aimed at avoiding frustration among the employees due to excessive performance requirements, thus guaranteeing a high level of commitment and motivation among the workforce.

2.1.5 Continuous improvement through Kaizen

Finally, the Toyota Production System is famous for the strict implementation of a continuous improvement process (CIP) referred to as Kaizen (jap. “improvement” or “change for the better”). In general, the term Kaizen describes the philosophy or the practices that focus upon continuous improvement of processes in manufacturing, engineering, supporting business processes, and management. Its core principle is the self reflection of processes through intensive feedback with the purpose of identifying, reducing and eliminating suboptimal processes in order to raise overall efficiency. In addition, the emphasis of continuous improvement is on incremental, continuous steps rather than giant leaps.

Used in the context of the Toyota Production System, CIP has some sort of workshop character, describing an environment where all individuals – from the CEO to the individual assembly-line worker – work to improve all functions within manufacturing and all related processes. In addition, of fundamental importance is senior management’s willingness to implement the findings of the CIP as well as to empower all employees to enable them to implement suggestions for improvement by themselves (Liker, 2004).

In summary, the outcome of Toyota’s remarkable production system, based on a careful analysis of its own resources and competencies, in addition to the strict orchestration of these resources and competencies over time, can be clearly seen in the measures of productivity for lean versus non-lean automotive companies, as shown in figure 5.

(Figure 5: Output lean/ non-lean automobile manufacturers; Own illustration according to illustration source E)

2.2 The concept of re-engineering

In addition to the famous Toyota Production System, the concept of re-engineering has been another major factor for the success of Toyota. Re-engineering can be defined as the process of the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance such as cost, service, and speed (Hammer and Champy, 1993). It combines a strategy of promoting business innovation with a strategy of making major improvements to business processes so that a company can become a much stronger and more successful competitor in the marketplace.

In the case of Toyota, one must just consider a Toyota model which is newly introduced into the market, but fails to impress the market. In this case, Toyota’s next strategic step will be to re-engineer the model, which means completely altering the failed model using the same production facility, learning from the mistakes they made in the past. This method is for instance not practiced at General Motors and Ford. Once a GM or Ford model fails to reach market expectations, the whole manufacturing facility for producing the model will be scrapped and the employees are often pushed out of the company. However, this approach results in loosing the knowledge gained at great costs.

3. Toyota’s key success factors – People and Partners

Besides its long-term corporate philosophy and state-of-the-art processes like TPS and the concept of re-engineering, another major success factor of Toyota is its highly effective and efficient human resource management system (Liker, 2004). For Toyota, human resources is the cornerstone for a high level of employee loyalty and commitment to quality. The underlying principle is that a workplace with high morale and a high level of job satisfaction is more likely to produce reliable, high-quality products at affordable prices.

In contrast to other car manufacturers like GM or Ford, Toyota has managed to create an organizational culture that strengthens employee motivation and encourages their participation, which is an essential precondition for the functioning of the TPS. For instance, in Toyota factories group activities are promoted among the shop-floor team members. In addition, the knowledge base of all employees is used to improve equipment reliability and productivity, thereby lowering maintenance and operating costs.

In general, Toyota’s human resource management aims at growing leaders who live the Toyota philosophy and to respect, develop and challenge its people, teams and partners (e.g. suppliers).

4. Toyota’s key success factors – Problem Solving

Finally, the top of the pyramid of Toyota’s success is characterized by the willingness for problem solving and continuous improvement and learning which is deeply-rooted in the Toyota culture (Liker, 2004). And this does not only imply the process of continual organizational learning through Kaizen as mentioned before under point 2.1.5. In fact, this also results in the belief that one always has to see for himself in order to thoroughly understand the situation (jap. Genchi Genbutsu), and that making decisions slowly by consensus, thoroughly considering all options, is the key for sustainable problem solving and long-term business success.

IV. Identifying Toyota’s competitive advantages in the automotive industry

1. The VRIO framework

In the previous remarks, the aim was to take a closer look at potential factors that enable Toyota to be as successful in the global automotive industry by analyzing several famous and much-admired aspects of the company’s operations. Nevertheless, the question still remains whether these described factors can really be identified as competitive advantages and can therefor be seen as the underlying drivers for Toyota’s long-term success.

In order to answer this question, the VRIO framework, an internal tool of analysis in the context of businesses, can be applied. VRIO is an acronym for a four question framework that can be asked about a resource or capability to determine its competitive potential: The question of value, the question of rarity, the question of imitability, and the question of organization (Barney and Delwyn, 2007). In this context, valuable means that the resource or capability enables a company to implement strategies that improve its efficiency and effectiveness. Rare means that the resource or capability is valuable and not typical for the other competitors in the industry. The question of imitability asks whether the resource or capability is difficult to imitate, and whether there will be significant cost disadvantages to a company trying to obtain, develop, or duplicate it. Finally, the question of organization means whether or not a company is organized, ready, and able to exploit the resource or capability.

Considering this theoretical background of the VRIO framework and the fact that a competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors, it can be concluded that Toyota’s philosophy, its unique continuous improvement process as well as its highly effective and efficient HR management system and the deeply-rooted problem solving culture are truly sustained competitive advantages and for that reason essentially contribute to Toyota’s leading position in the global automotive industry (see illustration provided by figure 6).

(Figure 6: The VRIO Framework; Own illustration according to illustration source F)

2. Conclusions for Toyota’s Corporate Strategy

Based on its strong resources and capabilities, Toyota has managed to become the most efficient automobile manufacturer in the world, with the highest overall productivity. In addition, these competitive advantages allowed Toyota as one of only very few automobile manufacturers to successfully implement a strategy that may in fact be the true basis for Toyota’s global success: The strategy of the best-cost provider.

According to Michael Porter, a company can choose one of four generic business strategies that can be adopted in order to outperform rivals within an industry: The overall low-cost provider strategy, a broad differentiation strategy, a focused low-cost strategy, and the focused differentiation strategy. In addition, according to the prevailing view, companies have a fifth strategic option by choosing the so-called best-cost provider strategy (Thompson, Strickland and Gamble, 2007) (see figure 7).

(Figure 7: Generic Competitive Strategies; Own illustration according to illustration source G)

The five strategies relate to the extent to which the scope of a businesses’ activities are narrow versus broad and the extent to which a business seeks to differentiate its products. In this context, the differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry. Finally, the best-cost provider strategy strives to give customers more value for the money by combining an emphasis on low cost with an emphasis on upscale differentiation (Thompson, Strickland and Gamble, 2007).

In this context, the Toyota Motor Corporation has successfully managed to combine a cost leadership and a differentiation strategy, creating superior value by meeting or beating customer expectations on product attributes and beating their price expectations. As mentioned and analysed before, Toyota’s production is reportedly the most efficient in the world, and that efficiency allows the company to follow a strict low cost strategy in the global car industry. At the same time, over the last decades Toyota has also started to differentiate its cars from those of rivals on the basis of superior design and quality. This superiority allows the company to charge a premium price for many of its popular models, with the Toyota Prius representing only one of many other examples.

V. Final Conclusions

Although the Toyota Motor Corporation and its incredible success story over the past seventy years have very often been subject to excited discussions and analyses in the press and in academic literature, at the present time the company rather makes negative headlines. Having suffered from the impacts of the global financial and economic crisis, in May 2009 the company reported an operating loss of 461 billion Yen (4.7 billion US dollars) for the fiscal year 2009 that ended 31 March 2009, expecting a further operating loss of 850 billion Yen (8.6 billion US dollars) for fiscal year 2010 (ending 31 March 2010). In addition, Toyota reported that its consolidated car sales in fiscal year 2009 totaled 7.57 million units, a decrease of 1.34 million units (or minus 17.7 percent) from the last fiscal year. [9] 

However, besides these financial challenges, Toyota recently also faces severe quality problems: In January 2010, the company had to recall more than 2.3 million cars in the USA and about 1.8 million cars in Europe due to problems with locked accelerator pedals. In addition, the US-based production and sale of popular Toyota models like the Auris, Avensis, the Corolla and the Camry had to be stopped temporarily. According to estimations, the recall might cost Toyota about 150 million Euro, not including potential punitive damages as a consequence of the present flood of lawsuits, which finally may cause costs amounting up to three billion US dollars. Furthermore, in February 2010 Toyota had to announce another global recall of more than 437.000 units of its Prius model due to technical difficulties with the breaking system. Without doubt, this will cause additional costs and will further damage Toyota’s tarnished quality image.

Some experts say that one reason for Toyota’s present problems might be that the company is growing more quickly than its ability to transplant its unique culture to foreign markets. According to these experts, Toyota, which has expanded into a vast international group within the last two decades, often simply exports its manufacuring and management methods to its 200.000 workers at 27 plants overseas without always taking the time to explain the ideas behind them. In this context, Hirofumi Yoko, a former Toyota accountant who is now an auto analyst at CSM Worldwide in Tokyo, stated: “If Toyota can’t infuse its philosophy and its obsession for craftmanship into its workers all over the globe, these quality problems will keep happening.” [10] 

Nevertheless, besides these present problems, Toyota is still clearly the epitome of an automotive success story. Reacting to the recent problems, the company has established additional global training centers for its workforce and managerial staff to ensure that the “Toyota Culture” is lived in the same way all over the world. For that reason and based on its unique corporate philosphy, its impressive production system as well as its highly efficient and effective supply chain and human resource management resulting in sustained competitive advantages, it is without doubt that Toyota will