1

Strategic Management

International Strategy

Case Study “Toyota”

Attached to this file, you get a case study on “Toyota”. Use also further readings and

additional company information.

Strategic Management Tools & Processes: 4,000 words

Please prepare an introduction and a conclusion.

Part 1: Strategic Management Tools & Processes

1. How does the Toyota Production System fit with strategy theories that lay stress on

the market aspects of corporate strategy? If you believe operations to be relatively

unimportant, then how do you explain the remarkable success of Toyota globally

since the 1950s?

Things also to be included when answering question 1:

Discuss the market and resource based view on Toyota.

SWOT analysis

Especially lessons 3 & 5 of the lecture emphasize on this topic.

2. Using the material, tools and any other case studies discussed in class, analyze the

global automotive environment to present the arguments for and against Toyota trying

to achieve its ambition to be the biggest global car manufacturer without resorting to

major network alliances or acquisitions.

Things also to be included when answering question2: (in this order)

Key Factors of Success (Toyota)

Porters Five Forces Analysis (Toyota)

Competitor Analysis (only General Motors and Volkswagen)

The following aspects of the competitor’s organization need to be explored:

o Objectives

o Resources

o Past record of performance

o Current Products and services

o Present strategies

Especially lesson 2 of the lectures emphasizes on this question.

2

Resources (given):

Toyota annual report: www.toyota.de/about/unternehmensinfos/downloads.tmex Case Study: “Toyota” Lecture Slides: Slides are built on the basis of the Book Strategic Management by Richard lynch

Case study

Toyota: does it rely too heavily on production for world leadership?

Over the past 30 years, Toyota Motor Corporation has become the world’s leading car company. Much of its

success has come from its highly respected manufacturing systems. But the company found itself in trouble

in 2010 from quality issues related to production. Has the company relied too heavily on the Toyota

Manufacturing System?

To understand this case fully, it needs to be read in conjunction with

the main cases on the global car industry published in Richard Lynch,

Strategic Management, 6th Edition

Background

In the year to end-June 2004, Toyota produced and sold over 6.5 million vehicles around the world.i The

company had only started car production in the 1930s. Even in the early 1950s, it was still only averaging

18,000 vehicles per annum. ii The increase in production and sales between 1950 and 2004 was, by any

standards, remarkable – Figure 1 shows the data for 2004. Toyota’s strategic problem was that it was a tiny

company competing against large competitors. The only

way that it could survive was by finding new, flexible

production methods that could be used by smaller

companies. ‘The Toyota Production System originated as

a means of achieving mass production efficiencies with

small production volumes’ (Toyota Annual Report and

Accounts 1998). Importantly, even in 2004, the major

Toyota production location was Japan – from a strategy

perspective, this raises important questions about how

long its Japanese factories can remain low-cost centres of

production.

Many of the production successes between 1950 and 1980 have been accredited to the Toyota Production

System and its chief engineer during that time, Taiichi Ohno. He started experimenting to improve production

in the late 1940s, but it took many years to develop the systems described below, such as kaizen and

kanban, and to have them widely adopted across the company. Even in the 1990s, experimentation and

change were still taking place to improve production. Indeed, such change was by definition an integral part

of the process of achieving production improvements: it was called ‘continual improvement’iii or kaizen in

Japanese.

During the same period of time, Toyota operated a separate

marketing company that essentially sold Toyota production. It was

headed by Shotaro Kimaya, who had trained in US marketing

methods after the Second World War. He is credited with many

marketing innovations in the company during the 1960s and 1970s.

They slowly propelled Toyota to market leadership in Japan, with

over 40 per cent of the market. Among other initiatives, he set up

dealer networks, cheap car finance for customers and a strong,

dedicated salesforce. He also developed Toyota exports so that by

the 1970s around 40 per cent of all production was being sold

outside Japan, especially in the US.iv Toyota’s Camry model is

today the biggest single-selling car in the US.

Operations initiatives at Toyota between 1950 and 1980

During this period, Toyota introduced a whole series of operations initiatives that assisted car and truck

production – essentially a repetitive, mass-manufacturing process. The new procedures were designed to

achieve three main objectives:

1 to reduce costs;

2 to increase quality;

3 to control the production process more tightly, thus reducing the inputs needed and making the

company more responsive to market demand.

The first two objectives had an immediate impact on added value in the plant; the last had an indirect

influence on added value. To achieve these objectives, Toyota had a number of key operations strategies:

Design. More costs can be taken out at the design phase of operations than at any other stage. For

example, Toyota has consistently used research and development to undertake such tasks as combining

components so that they can be produced by one process rather than two.

Kaizen. This means ‘continuous improvement’ across every aspect of production. Toyota’s engineers

invented this approach to operations strategy.v It is reflected in Toyota’s attention to detail, which is

legendary.vi The result of one stage in kaizen is shown in Figure 2.

Kanban system. This was originally a system of coloured cards on the factory floor that were associated

with the amount of stock available for production. These were used to signal when stock needed to be

replenished and provided a simple but extremely effective visual system, both to tell operatives when to

reorder and to keep stocks controlled and low up to that time.

Layout. Instead of long, linear layouts for production lines, cellular layout arrangements of plant

machinery were designed. They allowed workers to operate a number of machines and allowed them to

work in teams to provide support and back-up more effectively. The teams had to be flexible in their

willingness to operate any machinery in the layout and needed to be highly trained to complete the varied

range of tasks. Some other Japanese companies, such as Nissan, have had difficulty in achieving the

same results,vii probably because of the sophistication needed to operate this system.

Supplier relationships. Close co-operation was obtained and maintained with a small group of leading

suppliers to Toyota. It was used to work jointly on cost reduction schemes and seek higher quality from

bought-in components. This was particularly important in the value-added process at Toyota because the

company had a higher proportion of bought-in items from suppliers than its main international rivals. This

arrangement applied to other companies in Japan but was extended when Toyota opened its plants

overseas – for example, in 1993 at Burnasten in the UK.viii

Just-in-time systems. Toyota pioneered the arrival of stock from suppliers using methods which involve

close contacts with suppliers. When stocks in the factory run low, they are replaced by stocks from

suppliers very rapidly, using computer linkages and daily or even more frequent deliveries – just in time for

production. The clear advantage to companies such as Toyota is that their capital investment in stock is

permanently kept lower than otherwise. The company is not unique in the use of such systems.

Each of these developments was equally important at Toyota. All contributed to the general improvement in

the production efficiency of the company.

By the early 1980s, the Toyota Production System was being described and recommended for introduction

into Western companies.ix Japanese rivals such as Nissan and Honda also attempted to introduce the same

or similar schemes. During the 1990s, the Toyota plant at Takaoda was compared as a model of production

with the worst North American plant.x Toyota was used as a pointer to the changes required in the USA.

However, there are cultural and industry structure problems that make complete adoption of the Toyota

system difficult: for example, team working and flexibility may be closer to the Japanese model of society

than to Western cultures.xi Toyota itself saw the techniques it had developed as being a set of evolving

production strategies with no single ideal solution: kaizen meant what it said.xii

Production at Toyota into the new millennium

Over the past ten years, Toyota experienced real problems in the macroeconomic environment. They

were:

a downturn in worldwide demand for cars, including for the first time ever a drop in demand in its key

Japanese home market;

a significant rise in the value of the Japanese yen, making exports from Japan more expensive.

These developments prompted a major reappraisal of its production methods at the company and a

redoubling of efforts to achieve new, lower costs. All Japanese car manufacturers, including Toyota, were

forced to shift in a major way the focus of their operations strategy from rapid model changes to cost

reductions.xiii Toyota responded to the pressures by setting up a major cost reduction programme.

By 1994, the company was claiming that it had found savings at an annual rate of US$1.5 billion.xiv But it

was still not satisfied. By 2004, this had risen to US$ 2.1 billion.xv Here are two recent examples of Toyota’s

production strategy:

1. In 2001, Toyota announced a totally new programme called ‘Construction of Cost Competitiveness

for the 21st Century’ or CCC21, for short. The relentless drive for improvement would be renewed.

The company was looking again at every aspect of design, manufacturing, procurement and fixed

costs. This was expected to lead to better utilisation rates for manufacturing equipment and less

‘expenditure on human resources’. But this will not necessarily mean sacking workers, which is

against the Toyota tradition. It may mean that some of the workers on temporary contracts will not

have their contracts renewed, but the company was keen to avoid even this, if possible.

2. In 2004, Toyota began its new UMR (Unit & Material Manufacturing Reform) Strategy. ‘This project

sets and innovates toward production engineering targets on a different order of magnitude from

anything tried before,’ claimed Toyota. The company gave the example of the simplification of the

moulds used in manufacturing car parts. All car production is centred on moulding – die-casting

moulds, forging moulds, plastic injection moulds, etc. If it is possible to simplify moulding techniques,

then it is possible to simply the entire production process. Toyota was able to re-engineer its

moulding techniques so that moulds were reduced to between one-third and one-tenth their former

sizes. UMR was also used to shorten the machining and assembly lines for some of the Toyota

engines. UMR also had benefits for overseas plants. ‘Through UMR, we are creating a production

system for overseas plants that overcomes differences in experience, location and language and

enables highly efficient production of in-house components of the same quality the world over. By

implementing the UMR initiative, we aim to strengthen our global competitiveness.’

Some would question how Toyota could have been so efficient during the 1990s if it was still able to

generate such massive savings in recent years. Toyota has always had problems transferring its production

system beyond its factories to other areas of the value chain. It had some success with its immediate

suppliers but struggled both with raw material suppliers and with the marketing/selling end of the value

chain.xvi These difficulties were then compounded as the Toyota Production System was subjected to the

pressures of worldwide demand, the implications for production at its factories and a slump in Japanese

domestic demand in the late 1990s. Nevertheless, personal and team motivation remain an important part of

the Toyota system.

Toyota’s global vision on production and vehicle development

According to the 2010 Global Vision Toyota document released in April 2002,xvii

the company aimed to

increase its production by 50 per cent over the next nine years. It was also seeking to increase its market

share by the same percentage. If it was successful, it would increase its market share from 10 to 15 per cent

and would challenge General Motors for the title of the largest car company in the world. The company

would seek to grow its share, particularly in North America, while retaining its dominance in Japan. It was

also seeking major growth in India and China, possibly through joint ventures. It had already entered into

technical co-operation alliances with rival companies such as PSA Peugeot Citroën to produce a new small

car in the Czech Republic. It had also made a similar agreement with two local car companies in China, FAW

Group Corporation on cars and Guangzhou Automobiles on car engines.xviii

In 2005, Toyota’s president became concerned that ‘the real meaning of Global Vision 2010 is often not fully

understood . . . I originally put the 15 per cent target forward as a common ambition that would unite

employees worldwide as they pursued it and give them the impetus to win out in fiercely competitive

markets. In my view, companies that lose their appetite for growth stagnate.’xix

One production and marketing strategy that Toyota has embraced is the development of more

environmentally friendly vehicles. Its Hybrid-Vehicle Strategy over the past 10 years has led to the Prius, one

of the first cars to have an engine that switches between petrol and electric power depending on the road

situation. In its first year 1998, the Prius sold 50,000 units. By 2004, this had risen to 300,000 units per year

and sales were still growing fast. To encourage wider use of the technology (and arguably to establish it as

the industry standard), Toyota was offering its patented hybrid systems to rival car manufacturers. It claimed

to be a world leader in environmental engine technology: ‘We are convinced that hybrid technology will

become the core technology in the creation of the ultimate eco car.’

The one strategy that Toyota remained totally against was acquisition of a rival car company.xx The reason

was simple: it would be impossible to introduce and gain the benefits of the Toyota Production System that

was the main competitive advantage of the company.

Toyota 2010: disadvantages of the Toyota Production System?

In 2010, Toyota was still world market leader, but it had taken quite a battering. It all started with the

extensive publicity surrounding some alleged performance issues with its cars in many countries around the

world. The company itself undertook major recalls of various models to rectify the problems. Importantly, it

recognised that Toyota had slipped from its own high quality standards. The Toyota President Akio Toyoda

explained, “Over the past several months, I have been involved in a variety of meetings to explain our

ongoing commitment to safety and customer satisfaction. These included public hearings in the United

States and explanatory meetings in Japan and other countries with the support of related personnel from

across the Company. During this time, I received constructive suggestions for improvement as well as words

of encouragement and support from many people. I am very grateful to those who took the time to help us

through this difficult time.”

Toyota went on to explain that, “In the past, Toyota’s quality standards focused more on technical issues.

Now, we are incorporating an awareness of the customer’s perspective as suppliers and dealers work

together to alleviate customer concerns.” It was setting up new quality assurance systems to realize safety

and security from the customers’ point of view. These included a special committee for global quality that

would have the power to act worldwide and quickly to identify and solve issues.

Importantly, the above comments seem to suggest that Toyota has come to recognise that its focus on

technology and, by implication, the Toyota Production System may have harmed the company as well as

providing benefits. The company explained that it was moving from a linear model that began with the

manufacturer, then to the car dealer and then to the customer to a new model. The new approach would be

to have a three-way, long-term relationship directly between Toyota, its dealers and customers using new

electronic networks that would feedback rapidly on quality and technical issues. As part of this process,

Toyota continued to pursue its global ambitions. It was strengthening its activities in two growing markets,

China and India. It was re-building its relationships with its customers through new systems.

Toyota Green Car Strategy

Importantly, Toyota was continuing to develop new car models that were more environmentally friendly.

These included a new joint venture with the American electric car manufacturer, Tesla, that was announced

in May 2010. "I’ve felt an infinite possibility about Tesla’s technology and its dedication to monozukuri

(Toyota’s approach to manufacturing)," commented the Toyota President Akio Toyoda. "Through this

partnership, by working together with a venture business such as Tesla, Toyota would like to learn from the

challenging spirit, quick decision-making, and flexibility that Tesla has. Decades ago, Toyota was also born

as a venture business. By partnering with Tesla, my hope is that all Toyota employees will recall that ‘venture

business spirit,’ and take on the challenges of the future."

In response, the Tesla CEO and co-founder Elon Musk said, “Toyota is a company founded on innovation,

quality, and commitment to sustainable mobility. It is an honour and a powerful endorsement of our

technology that Toyota would choose to invest in and partner with Tesla. We look forward to learning and

benefiting from Toyota’s legendary engineering, manufacturing, and production expertise.”

From this endorsement, it would seem that Toyota’s legendary Toyota Production System was still alive and

well.

© Copyright Richard Lynch 2012. All rights reserved. This case was written by Richard Lynch from published sources only.

Case questions

1. Using the definition of corporate strategy in Chapter 1, identify which of the operations strategies

undertaken by Toyota (kaizen, kanban, design, etc.) have a corporate strategy perspective and

which are mainly the concern of operations management alone.

2. Examining the Toyota Production System overall, to what extent do you judge this to be critical to the

company’s strategic success? If you believe it to be critical, then how does this fit with strategy

theories that lay stress on the market aspects of corporate strategy? If you believe operations to be

relatively unimportant, then how do you explain the remarkable success of Toyota globally since the

1950s?

3. Some commentators argue that it is relatively easy for market leaders such as Toyota to undertake

the investment in machinery and training programmes to achieve strategic success but more difficult

for smaller organisations. Do small companies have anything to learn from Toyota? If so, what?

4. The case describes how Toyota remains ambitious to keep its global market leadership after its

2010 problems. Do you believe that the company will really be able to do this? Why?

Notes

Three useful articles here from Tim Burt and David Ibison on Toyota, Parts 1, 2 and 3: Financial Times, December 2001,

p16, 13 December 2001, p13 and December 2001, p15. The 2004 data on car production is taken from the Toyota

Annual Report and Accounts 2004 published in English. ii Williams, K, Haslam, C, Johal, S and Williams, J (1994) Cars: Analysis, History and Cases, Berghahn, Providence, RI,

p108. See also the graphic account of the early Toyota years in Womack, J P and Jones, D T (1996) Lean Thinking,

Simon & Schuster, New York, Ch10. Riveting story, well told. iii Toyota (1994) Annual Report and Accounts, p11 (English language version).

iv Williams, K et al. (1994) Op. cit., p118.

v Gourlay, J (1994) ‘Back to basics on the factory floor’, Financial Times, 4 January, p7. vi Griffiths, J (1993) ‘Driving out the old regime’, Financial Times, 20 August, p8.

vii Williams, K et al. (1994) Op. cit., p115. viii Griffiths, J (1995) ‘£200m Toyota expansion may create 3,000 jobs’, Financial Times, 17 March, p9. ix Hartley, J (1981) The Management of Vehicle Production, Butterworth, London.

x Womack, J, Jones, D and Roos, D (1990) The Machine that Changed the World, Rawson Associates, New York. xi Williams, K et al. (1994) Op. cit., p115.

xii Sobek, D K, Liker, J K and Ward, A K (1998) ‘Another look at how Toyota integrates product development’, Harvard

Business Review, July–August, pp36–50. A good description of the import-ance of management and human resource

strengths that make Toyota so difficult for other companies to copy. xiii Butler, S (1992) ‘Driven back to basics’, Financial Times, 16 July, p16.

xiv Toyota (1994) Annual Report and Accounts, p1 (English language version). xv Toyota (2004) Annual Report and Accounts, p27 (English language version).

xvi Womack, J P and Jones, D T (1996) Op. cit., p241. xvii Ibison, D (2002), ‘Toyota plans to challenge US dominance’, Financial Times, 2 April, p24. xviii Burt, T and Ibison, D (2001) ‘PSA welcomes Toyota as latest co-driver’, Financial Times, 9 July, p29. Toyota (2004)

Annual Report and Accounts, pp29 and 119. xix Toyota (2004) Annual Report and Accounts, p13.

xx Burt, T (2001) ‘A pace-setter gears up for growth’, Financial Times, 24 September, p15. Interview with Toyota

company chairman, Hiroshi Okuda.