Strategic Analysis - Toyota Motors Corporation - Case Study Example

Contents Introduction 3 The Five Forces that Shape Competitive Strategy 3 Threat of New Entry 3 Supplier Power 4 Buyer Power 5 Threat of Substitutes 6 Rivalry among Standing Contenders 7 Business Strategy of TMC 7 Corporate Governance System 7 Transparency in Governance 8 Key Performance Indicators (KPI) 9 KPI in Sales Department 10 Recommendations 10 Challenges 11 References 13 Appendices: 15 Toyota Motor Corporation (TMC) Introduction Toyota Motor Corporation was founded in 1937 and it has its roots in Japan. The purpose of the company lays in the design, manufacture, assembly and sale of vehicles and their accessories. The major establishments are in Japan, Asia, Europe and North America. The firm has grown to become the prime auto manufacturer in the globe with the most recent annual report of 2013 recording a $213 billion revenue returns. The article will evaluate the company’s performance and the trends followed to the realization of its goals (Toyota Industries Report, 2013). The Five Forces that Shape Competitive Strategy These forces are shaped by the type of industry and they work to determine the profitability of an entity. They are therefore essential in defining the strategy that the company adopts (Appendix 1) Threat of New Entry New players in the market translates to a boosted aspiration to gain market share. This aspect brings about a financial demand on investment requirements for a firm to be part of the competition and price adjustments so as to retain customers. Companies have to strategically take steps that will counter the new threat to revenue prospects (Slater, S. et al. 2002). Such moves could be: holding down prices or raising the level of entry barriers financial wise. New entrants limit profitability and that is why they have to be deterred. A market that is easy to venture into is less competitive (Michael, E. 2008) Entrants are deterred by: Supply side economies of scale-In the case of TMC, this is one such advantage that the firm has over new entrants. The company is able to produce at a lower cost per unit volume due to the bulk of production. TMC applies a fixed cost over a given number of units due to the efficiency of its technological structure. The company makes cars depending on the geographical location of their clientele. The firm has a goal to inspire, excite and create happiness; therefore all vehicles receive the same attention with regard to design, ergonomics, quality and safety. With each model that TMC brings out, there is an improvement reflected from the previous make. Such improvements are on various parts of the vehicle but mostly on the engine. The engines face adjustments on: fuel consumption, horse-power and drivetrain. Adjustments on the exhaust systems are dependent on different countries’ environmental stipulations (Annual Report, 2013) Supplier Power Major suppliers of labor and raw materials have a tendency to take control of the market through limiting of services or their quality, shifting costs or levying higher prices. A firm that is unable to control the cost of its commodities due to the influence of its competitors is likely to fall victim to suppliers who will maximize their revenue collections from such players. This is a common phenomenon to all industries because they are interdependent on supply needs. Monopoly of a given industry gives a supplier the upper hand in dictating the availability of its services or goods and their quality and prices. Suppliers try to maximize their profit on each industry that they are serving and depending on the level of investment that an entity has put into a given supplier, changing suppliers may prove to be a costly undertaking (Porter Michael, 1998) Technological novelty in the modern world is one such illustration of supplier power. The investments by suppliers are shifting to internal combustion engines (ICE). A survey in the motor industry showed that 46% of the respondents picture their prospective investments following the direction of rationalizing and optimization of ICE. This being a principal technology presently and in the foreseeable future, TMC has adopted smaller petrol-fueled engines which is in line with the 88% response from Japanese car manufacturers who have opted to prioritize on ICE. In a bid to regulate supplier power, they have also ventured into alternative novelties so as to create a balance and minimize their dependence on one supplier (KPMG, 2014) TMC has ventured into the manufacture of hybrid vehicles that are also beneficial to the eco system (Stefanovic’, I. et al. 2010). In order to make these innovations attractive, the company is finding ways of boosting their performance levels by putting their focus on technological innovations like the manufacture of eco-cars that are attuned with other fuels (Appendix, 2, Toyota Industries: Financial Summary, FY 2013) Buyer Power The buyer power lies with the customers who from time to time demand better quality products and it is this demand that pushes up costs of production. Buyers evaluate the market and if the competition is monopolized, they use this standardization of the product to play the firms against each other. Unlike in the case of industries, changing of suppliers has minimal cost to the buyers. Buyers are always in search of a better bargain for the same quality of product (Sustainability Report, 2013) According to the most recent survey by KPMG of 2014, fuel consumption and durability of vehicles are the main factors that influence the purchase of automobiles by today’s buyers. However, fuel efficiency takes prevalence being motivated by the continuously increasing fuel prices. 70% of the respondents to the survey, cited this as the most influential aspect. The other minor traits are styling and size. Styling is however, gaining popularity over time. In countries like China, Brazil and Russia, the demand for eco-friendly vehicles cannot be overstated. This is in line with the rise in pollution in their megacities. With the various demands from the buyers, the feature is in-car technology solutions which TMC has readily adopted, (Toyota Global Vision) An example of TMC’s vehicle is the latest Crown model which is in line with the firm’s “ReBORN” campaign. TMC had a sales goal of 4000 cars a month with this particular model but the outcome exceeded their expectations when the sales doubled with its release (Annual Report, 2013). The design of the vehicle was a collaborated effort of the engineers and the designers who were keen on the aesthetic values of the vehicle. This was a new approach to car manufacture since it involved Powertrain Development and Production Engineering Building, (Motor Trends, 2013). In the purchase of undifferentiated goods, vehicle performance (in the automobile industry) plays a minimal role in the decision to acquire the commodity. In the case of TMC however, they have major competitors regardless of their huge share of the market and they are therefore pushed to improve the quality of their engines and reduce cost of purchase, to set themselves apart from the competition, (Forbes, 2013) Threat of Substitutes The presence of substitutes is essential for eliminating monopoly in the market and creating stiff competition. For the buyers and suppliers it provides a wide range of choice but for the industry players it is a game changer because there is an alternative for their products. In this case, customer preference and loyalty comes into play. The orientation of a customer to purchase a vehicle based on the brand name is dependent on the reputation of the firm which is developed over its existence period (Hult Tomas, et al. 2007). In the case of Toyota, this is an advantage due to its long existence and global branding. All that the company is tasked with from a general view is consistency on the reliability of its vehicles and improvement on performance (Toyota Motor Corporation) Rivalry among Standing Contenders Rivalry is in different forms: advertising, discounts or introduction of new products. It is basically any move by the players to outdo their competition. When the competitiveness is high, it is detrimental to profitability. This effect is dependent on two factors: the intensity of the rivalry and the root for competition. If the competitors are roughly similar in size and influence on the customer base, the competition is as a result very stiff. For TMC, the advantage of size tunes down the rivalry and the firm is instead viewed as a trend setter. Another characteristic that stiffens rivalry is slow technological advancements and novelty. TMC has a five year prospect on ICE and is customizing its hybrid eco-friendly vehicles to match environmental policies in the world and that is how it has managed to stay ahead of its competition (Sustainability Report, 2013) Business Strategy of TMC Corporate Governance System Corporate governance is driven by corporate policy. For TMC to attain long-standing and steady growth. Corporate Social Responsibility (CSR) comes into play as the firm strives to fulfill the expectations of all its stakeholders, customers, local communities and personnel. A reflection of this is in the Guiding Principles of Toyota and the CSR policy on Contribution towards Sustainable Development. With these initiatives in mind, there is an online platform for offering feedback to Toyota’s management that guides future management decision. Toyota is therefore able to evaluate the take of its customers and the public on its management decisions. The execution of business at TMC is evaluated by its board of governors, outside directors and Audit and Supervisory Board Members who also include foreign audit members. This is a system that enables the management to have all expert views on company strategies and initiatives. The Toyota Global Vision was unveiled on March 2011 and was sequentially followed by a vision management protocol which is also founded on the Guiding Principles of Toyota and the Toyota Way. In April of the same year, the company cut down the layers that guided the decision making process of the firm and set up a system of communication through which the challenges faced at the operational level and customer relations are relayed to the heads of the firm. Exactly two years after the April adjustments, TMC made other altercations intended on further hastening the decision making process and they did this by dividing the automotive entity into four sectors. This aided in defining the roles of each operating sector. The four divisions are: Lexus International, Toyota No. 1 which is located in Japan, North America and Europe; Toyota No. 2 serving: China, the Middle East, Oceania, Africa, Latin America and Caribbean and Unit Center that handles engines, transmissions and other correlated set-ups. These organizational change required that each of these units to be headed by vice-presidents to foresee the sequential change and take charge of the earnings from their respective divisions. To further dynamic development and viable progress in car manufacture, TMC set up the Toyota New Global Architecture (TNGA) Planning Division which is immediate to Toyota’s top management. Transparency in Governance In the selection of individuals to take up managerial positions, the company evaluates them on their strengths and commitment to manufacturing with emphasis on their problem solving techniques and hands on approach to the job. Even board decisions have to reflect the company’s transparency values; a depiction of this is in the 109th Ordinary General Shareholders’ Meeting on June 2013 where alien directors were engaged in the meeting so as to reflect the expectations of those outside the firm on decision making. The stipulations that guide these alien appointments are stock exchange regulations. These outside directors are from various industrial fields and they aid in providing their consul with regard to their various fields of proficiency. TMC also has an International Advisory Board whose role is to give advice on market trends since its members represent each geographical region across the globe. These global perspective that he firm employs gives it the international orientation it requires to take the lead in the international market. TMC has several committees that bring forward the views of all of its stakeholders. Some of these committees are: Labor Management Council, Toyota Environment Committee and CSR Committee whose sole purpose is to meet the social obligations of the entity. The members of the CSR Committee are the four vice presidents of the company’s divisions and the officials above them as well as agents from the Audit & Supervisory Board. TMC has embraced an auditor mechanism named: Seven Audit & Supervisory Board Members. Four of those members are foreign. They carry out the stipulations laid out by the Audit & Supervisory Board. These board members provide counsel to Toyota from a neutral view; the outside participants ensure that there is fairness in the board’s assessments. Key Performance Indicators (KPI) In order for a company to examine the progress it has made in accomplishing its long-term goals, KPI are essential. These are monetary and non-monetary procedures that organizations apply to measure their success rate (Dragana Velimirovi, 2011). This system requires the company to standardize all of its operations and define them as is evident with TMC when it split into four main units. Such arrangements of business processes are essential because the running of industries is based on such processes therefore the functioning of the entity is dependent on process management (Skrinjar, et al. 2007) KPI in Sales Department The vehicle gross profit is the difference in cost between invoice price of the vehicle and its cost price. Gross return conveyed as a percentage is: Gross Revenue (%) = (Vehicle Sales Value–Vehicle Price Worth)/ (Vehicle Sales Value) x100 Automobile traders are tasked with the challenge of maintaining the GR at a positive value even with economic crisis. Market slowdown is however, the main challenge. Sales persons in TMC are evaluated using KPI. It examines the units a worker sells annually and this information is in turn relevant in determining the team performance. The expectation is 200 units per year although it is expected to be less in poor years (those of economic crisis). Consequently, each individual’s contribution to the team is determined. Another KPI is vehicle stock turn which allows for the regular checking of the stock. Greater gains are recorded when the turns are faster and therefore the investment funds lower. In this way, KPI speeds up the circulation of moneys thus resulting into profitability (Appendix 2: Skrinjar, et al. 2007) In the service sector of TMC, KPI is useful in determining the Productive Ratio and this is done by comparing the productive employees to the un-productive ones. The results have been at an aggregate value of 3:1 and this influences the technical efficacy of the firm which is a relation between the hours sold and hours worked. Recommendations 1. The gains made from the firm’s operations are examined by relating them to the turnover: Operating gains = Gross Profit/Turnover (x100) The gains that each sector makes are the operating profits. It is expressed as a relation to the turnover and is therefore a percentage. This value should be above 30%. It is followed by the absorption value of the budgets. The absorption percentage is the risk extent. Since the values that are reflected show how much of the overheads are surpassed by the earnings, they should be well above 100%. 2. When the stock turn is poor, the heads should improve on their advertising methods and take their personnel through new training on sales expertise. 3. In evaluation of technical efficiency (TE), the manufacturer needs to have a proper assessment structure for this pointer. 4. There should be an appraisal system for technicians who demonstrate exceptional skill levels. 5. For TE to be furthered, any equipment that can improve efficiency should be put to use. 6. TMC should continue to take on resolute efforts to fortify its management systems and procedures and nurture CSR values. 7. The company should promote its business in mature markets and minimize fixed costs so that it can maximize on fast turnovers. 8. For TMC to uphold its global positioning in the market, it should strive to surpass the expectations of their clientele through incorporation of dynamic social infrastructures. That way their customers will have a quality standard that only TMC can meet. Challenges The frameworks outlined by Porter, despite their many benefits in detailing the forces that shape the market, have their limitations. From their time of formulation it has been a decade since and this has been followed by numerous changes in market trends globally. Evaluating a dynamic company like Toyota Motors Corporation forces one to carry out the evaluation within the five scopes laid out by Porter. In the modern world, there is the influence of the internet on all globalized businesses. The internet has played a major role in the shaping of market entry since prospective business people gather information from this source (Stanley F. et al). In advertising the value of the internet cannot be understated. In such a case, the Porter theory has outlived its mandate. In the case of TMC and other firms in the automobile industry, a key segment that is absent in Porter’s Five frameworks is the assembly. This segment links the supplier and the buyer. It became significant way after the formulation of the Porter’s theory. The use of this phenomenon to evaluate the market at this date and time has proved to be a challenge because one essential player; the assembler, is left out and their effect on market trends and competitive approaches is overlooked. Regarding the five forces according to Porter, all the key components like: supplier and buyer are always in competition. They fail to show the key industrial players in collaboration which is a trait that is common in the modern world. Currently, organizational structures are based on both competition and collaboration in order to achieve greater success (Hult Tomas, et al. 2005). In the analysis of today’s markets Porter’s outline is not an accurate tool. Another factor that has had its impact on today’s markets is government policy. Governments universally have set policies to regulate how business is carried out in their regions; some policies are across all borders. Judging competitive strategies using Porter’s stipulations limits the analysis because there are cases where the government directly dictates how business is carried out (Olson Eric, et al. 2003). One such example is the enforcement of environmental policies which monitor businesses and their impact on the environment. References Dragana, V. 2011, Role and Importance of Key Performance Indicators Measurement, Serbian Journal of Management, SJM, pp.63 – 72. Forbes, Toyota Eyes Big Growth Ahead in Emerging Markets, Available from: http://www.forbes.com/sites/greatspeculations/2013/04/04/toyota-eyes-big-growth-ahead-in-emerging-markets Hult T. et al. 2005. The Performance Implications of Fit among Business Strategy, Marketing Organization Structure and Strategic Behavior, Journal of Marketing, 69. Hult T. et al. 2007. The Importance of Matching Strategic Behavior and Target Market Selection to Business Strategy in High- Tech Markets, Journal of the Academy of Marketing Science. Michael, E. 2008, The Five Competitive Forces that Shape Strategy, Harvard Business Review. Motor Trends, 2013, Available from: http://www.motortrend.com/features/auto_news/1202markets_share_for_the_top_five_automakers/ Olson, M. et al, 2003, Effectiveness of Government Restrictions on Marketing Activities: The Aftermath of the 1998 Master Settlement Agreement, Center for the Study of Government. Porter, M.E. 1998. Michael Porter on Competition. Boston, MA: Harvard Business School Press. Skrinjar, R. 2007, The Impact of Business Process Orientation on Organizational Performance, Proceedings of the: 2007 Informing Science and IT Education Joint Conference. Stefanović, I. et al. 2010. The Analysis of the Contemporary Environmental Impact upon Organizational Operations, Serbian Journal of Management 5 (1), pp. 97 – 109. Slater, S. et al. 2002, Fresh Look at Industry and Market Analysis, Journal of Business Horizons 45, No. 1 pp.15–23. Stanley F. et al. Creating and Exploiting Market Knowledge Assets, Journal of Business Strategy. Strategies for a Fast Evolving Market, KPMG’s Global Automotive Executive Survey 2014, Available from: www.kpmg.com/automotive Toyota Global Vision, Toyota Annual Report 2011, Available from: www.toyota-industries.com Toyota Industries Corporation, Toyota Industries Report 2013, Available from: www.toyota-industries.com Toyota Industries, Financial Summary, FY 2013. Toyota Motor Corporation, http://www.toyota-global.com/company/vision_philosophy/toyota_production_system/ Toyota Motor Corporation, Sustainability Report 2013, Available from: www.toyota-global.com/sustainability/report/sr/ Toyota Motor Corporation, True Competitiveness for Sustainable Growth, Annual Report 2013. Appendices: Appendix 1 Threat of new entrants Bargaining Indu Bargaining power Power of suppliers of buyers Threat of alternative goods or services. Appendix 2 Read More