Business Strategy of Toyota - Case Study Example

Business Strategy of Toyota Introduction: To begin with, it is important to understand the meaning of strategy in the context of business. Strategy is generally seen as how management decides and plans various alternative paths in order to achieve its objectives. That is, how it plans to accomplish its goals by gaining competitive advantage. Since every organization strives to survive in an environment characterized by stiff competition within the domestic economy or elsewhere internationally, there is a need to have unified and comprehensive plans. Such plans are known as strategies. Johnson and Scholes define strategy as “the direction and scope of an organization over the long term which achieves advantage for the organization through its configuration of resources within a changing environment and to fulfill stakeholder expectations” (Johnson and Scholes, 2002, p. 10). The concept of strategic management is an extended and a new version of strategy. In a nutshell, it deals with “… a pattern in a stream of decisions or actions” (Mintzberg, 1978. pp. 934-948). This helps an organization to have an effective long-term as well as short-term plans to achieve its goals. It is thus dynamic in nature so that the organization earns above average returns (Hitt, Ireland and Hoskisson, 2001, p. 6). Strategy management provides long-term direction as to which way the corporation should head in order to achieve its objectives over a long period. Since every organization faces still competition from rivals in the market, strategy provides enough resources to ward it off. For overcoming competition, a firm has to have some advantage over its rivals and strategic management helps an organization to achieve such advantages. Mintzberg's 5P's: For formulating strategies, it is essential to understand various components of strategy. Mintzberg outlines five Ps that constitutes strategies. They are plan, ploy, pattern, position and perspective. Plans are sets of actions points that a company decides in advance purposefully and consciously. The actionables emerge from this. Ploy aims to come out certain scheme of things that aims to outwit the rivals in the market place. Pattern is an outcome of what has been practiced. Position is the contact between internal and external environment. And, finally, perspective binds employees together with a purpose. In what follows, the recent recall of Toyota has been discussed with respect to each of the aforementioned concepts of strategy. This will be followed by a competitive analysis in terms of Porters five forces. Brief history of the company: Toyota Motor Corporation is a Japanese multinational operation with worldwide presence. In the recent year, it has become second in the world car market replacing Ford. This genesis of Toyota group could be traced to its original concentration on manufacturing of weaving machinery under Toyoda Automatic Loom Works, which was established in 1937. Sakichi Toyoda, who was also popularly known Japan’s “Kings of Inventors”, then headed the company. In a move towards becoming automobile producer, Sakichi Toyoda sold the patent rights to Platt Brothers and used the fund for developing automobiles. However, it was in 1997, that Toyota Motor Corporation was founded, Kiichiro Toyoda, the son the group founder, to mark the 60th anniversary of establishment of the group. Since then, Kiichiro Toyoda continues the steer the growth of Toyota. Application of Mintzberg's 5P's Plan: Toyota has introduced many innovations in its production and there is lot that goes to its credit as pioneer of improved production process. It will be argued that its human resource made a vital contribution to this process. It was in 1950, there was one labor strike. Perhaps the only strike that Toyota had to face in its history. From the work stoppage, Toyota had learned that it has to commit towards labor if it wanted to prove its mettle in the global market. Having realized that fact, its management continues to commit to the principle of mutual trust and dependence of each other, and the principle has been made the corporate philosophy. There is an overwhelming support from its labors to this corporate philosophy. Ploy: Despite this, Toyota has in recent time faced problem with respect to its product quality. In January 2010, the company decided to recall its Lexus cars which had variable gear ratio steering. Since it caused wheel-off problems and risking the safety of passengers, it was forced to call back. As a strategy it can be considered as ploy to outwit its rivals. In fact, the recall would cost the company billion of dollars. At the same time, such recalls would only reinforce the commitment of the company to its customers, the key stakeholders. While the rivals may assure better safety to its customers, it is the customers’ faith that matters. Had they not recalled, it would have given the rivals an opportunity. But the recall had acted as a ploy to the rivals strategies. Pattern: The overseas production of Toyota came little late. To start with, Toyota had concentrated in its domestic market of Japan for a very long time. Though it rolled out its first car in 1947, it started its operation in a modest scale in Brazil in 1959. This has to be appreciated that this was the period when the major companies in Japan were working closely with Japan in order to ‘catch up with the west’, as a consequence of their defeat in World War II. With that, it continued to have its presence now in almost all major countries. Its overseas operation is guided by a simple philosophy of customizing the car to the local needs, which is possible only if it had localized its production operation. Thus they have hired people from the local market and developed a very strong and binding relationship with local suppliers. Toyota has also realized that to operate successfully in local market, it is important to develop a mutual commitment towards the local society too and thus has developed strong interface with local community. To this end, it has made substantial contribution to local level development programs of the local community. Thus it has proved itself as a responsible citizen even to the local community where it has set up its production plants. Position: Toyota, though has its production plants located in many emerging economies like Brazil, India and so on, it still focuses on the major markets for car such as its own home, North America and Europe. Thus its ‘Research and Development’ initiatives are driven by the tastes and preferences of customers from these major markets. Thus to reach the second position as the manufacturer of automobiles in the world market, there has been a long history of struggle – inventing and innovating new methods of production, focusing on the local community, and research and development. It is easy to appreciate that these process requires a complete involvement and commitment on the part of human resources. Perspective: This new working relationship between labor and management has given fillip to the introduction of new method of production. Its innovative method has become popularly known as ‘Toyota Production System’. Amongst its various character, the properties of Just-in-time and Kaizen, pioneered by the principles of Jidoka, are the most important ones. Essentially, these new system has reduced the inventory cycle period quite substantially and ensured a proper supplier networks. It is important to note that these methods are not only followed in Japan but also carried over to their operations elsewhere internationally. Porters Five Forces Model: A major problem faced by Toyota is the stiff competition in the market place. Most of the automobile manufacturers, faced with the problem of losing of market share, embed new features into their cars that become unique in the minds of customers. No doubt that Toyota has marginally performed better than all other major car makers such as Ford and General Motors. In order to sustain the existing market share and improve upon the performance, it is important to enhance the relative competitiveness of Toyota. This however calls for a diagnosis of existing competitiveness. The question is whether the recall can serve this purpose. To examine this Porters five forces has been used. According to Porter (1985), there are five competitive forces, which determine the competitiveness of a product in a market. These forces are industry competitions, potential entrants, substitutes, buyers, and suppliers. Each of these forces in connection with Toyota has been discussed below. Bargaining power of suppliers: Here, the supplier is essentially the company who provide components to Toyota. Being a major player in the industry, it can be assumed that it will employ global sourcing agency for this purpose and procure the components at cheaper cost. These agencies could affect competitiveness of Toyota in several ways. By virtue of its control over supply chain, these suppliers could also enter the market and influence the price. The second one is that sourcing agencies could withhold from entering into contract with Toyota, as a result the company would have to find alternative source of supply at a higher cost. This affects product pricing too and consequently the profitability. Bargaining powers of the buyers: Buyers here constitute the customers. These customers include existing customers and potential customers. For the time being, Toyota need not worry so much because of higher customers’ retention. However, they need to worry in the long run. Entry of better and attractive models would give them more bargaining power in the sense after becoming technology savvy and aware of various products offered by rivals, there is a possibility of shifting their loyalty to new players. Threat of Substitutes: New model car is certainly a substitute for a customer. The advantage offered by Toyota is that a customer need not worry on account of safety because Toyota itself is capable of finding how safe its cars are. In particular, its solid focus on research and development facilitates this process at relatively easy terms and so there is a possibility of retaining its existing customer and attracting potential customers. Threat of new entrants: In fact, car industry had a high level of entry barriers till the 1980s. This has facilitated many domestic companies in the US to compete among them. With entry of low cost producers, mostly based in Japan, including Toyota, there has been still competition. However, there has been a change with a sharp shift in the tastes and preferences to small and medium car. Such change has indeed eased the entry barriers. As a result, there has been threat of entry from other automobile manufacturers from countries like India, China, South Korea and so on. With safety assured to customers, new entrants may not be a serious concern. Industry Rivalry: This refers to existing rivalries within the same market segment. The entrants from India, China and so on impose one type of competition, vying for the market share by incumbents is another type of competition that Toyota has to often face. Yet, another type of rivalry is from the intense competition from the substitutes, that is, increased shift to other mode of transport such as metro railways. Conclusion: The competitive analysis within the Porters five forces model reveals that Toyota enjoys relatively better competitiveness. In other words, their existing competitiveness is being strengthened by with the recall of its cars, though it cost the company. In fact, entries of new players of both domestic and foreign rivals, and change in the preferences for substitute mode of transport have forced the company to remain focused on the quality. Substitute mode of transport has gained increasing currency due to raising awareness of environment. Though customers do not pose a big threat for the time being, they are potent to shift their loyalty in the long run. However, the recent recall would go a long way in assuring safety to its customers and this may help to retain its customers. References Hamel. G and Prahalad. C.K. Competing for the Future. Harvard: Harvard Business School Press. 1994. Hitt. A.M, Ireland. R.D and Hoskisson, E.R. Strategic Management Competitiveness and Globalization. Ohio: South-Western College Publishing. 2001. Johnson. G. and Scholes. K. Exploring Corporate Strategy. New Jersey: Pearson Education. 2002. Mintzberg. H. “Patterns in Strategy Formulation”. Management Science, 24. 1978. Porter, E. M. Competitive Advantage. New York: The Free Press. 1985. Yip, G. Total Global Strategy. New Jersey: Prentice Hall. 1995. Read More