Analysing the External Environment for Toyota - Case Study Example

Analysing the External Environment for Toyota Name Course Tutor’s Name Date: Executive summary In this report, the external environment of Toyota Motor Corporation (TMC or Toyota) has been investigated. Using Porter’s five forces, the report observes that Toyota faces low threats from new entrants, mediums threat from substitutes, high rivalry among competitors, low bargaining power from suppliers, and high bargaining power from suppliers. The report further indicates that Toyota has evidently scanned its external environment for political/legal, economic, socio-cultural, technological, and environmental factors. The 2009-2010 product recall for Toyota however revealed that Toyota may have missed the implications that low supplier bargaining power may have had on the company. Additionally, the report notes that Toyota may have ignored the external threat posed by the media especially to its corporate image. The report ends by recommending that Toyota needs to understand that scanning the external environment is just as important as analysing the information gathered and understanding the implication that each factor in the external environment has. Introduction The external environment of a firm is generally its macroenvironment, which is shaped by many influences key among them societal values, lifestyles, demographics, technology, legislation and regulation, and the competitive environment in the industry. As noted by Thompson, Strickland, and Gamble (2010, p. 56) the external environment of a firm includes “all relevant factors and influences outside the company’s boundaries”. The word ‘relevant’ as indicated in the above cited text is deliberately used by Thompson et al. (2010) to refer to the fact that such factors are important, and because of that, the company has to consider them when making decisions about objectives, strategy, business model and direction. Car makers like Toyota, which will be used in this report, are for example affected by external factors such as high fuel prices, competition from multiple car makers, consumers’ needs and preferences, and the clamour for environment-friendly vehicles among other things. According to Thompson et al. (2010 (see appendix A for illustration), the external environment is layered into the inner layer, which consists of suppliers, substitute products, buyers, rival firms and new entrants; and the outer layer, which consists of: population demographics; societal values and lifestyles; legislation and regulations; technology; and general economic conditions. According to Thompson et al. (2010), a company needs to have its focus on both the inner and outer layers of the external environment. However, the authors admit that the “biggest strategy-shaping impact typically pertains to the company’s immediate industry and competitive environment – the actions of rival firms, buyer behaviour, and supplier-related considerations” (Thompson et al. 2010, p. 57). Toyota Motor Corporation (TMC) Toyota Motor Corporation (TMC) has been informally dubbed as the King of Automakers in reference to its relentless pursuit of market dominance. In 2007 for example, Toyota sold 966 million vehicles, and was only surpassed by General Motors (GM), which sold 969 million vehicles (Ireland, Hoskinsson & Hitt 2009). Despite its efforts however, TMC was ranked as the third-largest vehicle manufacturer in 2011. GM was in first position, while the Volkswagen Group was second as indicated in the OICA Correspondents survey (2011) TMC is exposed to several macroeconomic factors that are unfavourable to its business. They include: Unfavourable exchange rates: The strengthening of the yen has placed TMC at a disadvantage especially because it relies heavily on production and supplies from Japan. The stronger yen places more pressure on the costs of production, hence making it tougher for TMC to attain competitiveness through pricing (TMC 2011). Increasing oil prices: The Energy Information Administration (2013) predicts that though oil prices may have fallen slightly in the 2008-2011 period, higher prices should be expected in future as the demand for oil increases. Pressure from emerging markets: The emerging markets (especially China) are presenting mixed fortunes for TMC and other car manufacturers. On one hand, the emerging markets are presenting new markets, but on the other hand, they are challenging car manufacturers to engage even more in cheap manufacturing. The emerging markets are also presenting new competitive forces with the likes of China already venturing into vehicle manufacturing and assemblage. Analysis of TMC’s external environment using Porter’s 5 forces Threat of new entrants TMC does not face an immediate threat of new market entrants especially considering the high capital requirements needed to venture into the market, and the risky nature of car manufacturing. The combination of high costs and high risks reduces the attractiveness of an industry and by so doing, dissuades potential new entrants from the market (Feng 2010). Even if new entrants were to brave the twin disadvantages presented by the high costs and risks, Feng (2010) notes that Toyota’s well-known brand, market presence and dominance in some car segments would give the automaker a competitive advantage over them. Threat of substitutes In addition to the threat caused by its industry rivals, industry trends indicate an increasing preference for used cars in some of the markets that TMC would have expanded into in future. The trend of used-car preference was also seen in TMC’s traditional markets especially during and after the 2008/09 economic crisis. Analysts however predict that the trend will change as economies recover and people’s spending power increases. Considering the aforementioned, TMC’s threat of substitutes is medium. In a strategic move meant to appeal to customers, Toyota has used its ability to cut costs to narrow the price gap between new and used cars in its car range (Magee 2007). Effectively, the narrower price gap means that consumers would prefer purchasing new vehicles. Rivalry among competitors The car manufacturing industry especially in the United States is described as an oligopoly. The competition for industry dominance and market share is therefore prevalent. The rivalry among competitors is fuelled by consumer expectations often for superior vehicles and relatively low prices. For Toyota, the struggle for market share and industry dominance has led the company to adopt a cost-cutting strategy, which is described as effective. Notably however, the occurrence natural disasters such as the 2009 earthquake imply that the company is exposed to costs that were not suffered by its competitors. The need to compete on a price advantage therefore means that the company has to design and use effective cost-cutting strategies. Suppliers’ bargaining power Due to the high number of suppliers targeting a relatively smaller number of vehicle manufacturers, their bargaining powers are rated as low. Additionally, vehicle manufacturers engage suppliers for long-term contracts, in which the quality standards are indicated. Failure to abide by indicated standards may force a car manufacturer to change supplier. A similar thing can also happen if the supplier charges too much, and especially at a time when the manufacturers are targeting cost reduction as a way of attaining competitiveness. In Toyota’s context, Medeiros (2007) notes that the company has over the years established a strong relationship with its suppliers, and has also developed an efficient way to monitor its supply chains. Buyers’ bargaining power Due to the high number of competing car models, and the possibility that buyers can access substitute products, their bargaining power is high. The external monitoring system used by TMC According to the Economic Administration University of China (EAUC) (2012), TMC uses external monitoring systems that consider the global, technological, demographic, socio-cultural, political/legal and economic conditions. According to EAUC (2012), reviewing the political/legal external environments by TMC managers enables them to determine the political stability and regulations in the different countries where the organisation operates. Most notably, TMC managers are aware that the local, state and federal governments can influence business operations in all countries. In one of Toyota’s largest markets – the US, it is estimated that the company spends approximately $5 million annually for lobbying reasons only (de Lorenzo 2011). By so doing, the company understands the political environment and is also able to influence policies that affect it (albeit indirectly). However, Toyota is well aware that it cannot compete on the premise of being an authentic American car maker. Critics like de Lorenzo (2011, p. 227) are quick to point out to the American consumer that Toyota’s profits ultimately end up in another country. While such information to consumers may end up dissuading patriotic buyers from purchasing Toyota cars, the company notably uses its public relations to convince Americans that it does indeed help the American economy by creating employment, engaging dealers and suppliers, and contributing to numerous charities across the US. The socio-cultural analysis is on the other hand conducted by TSM managers in recognition of the fact that the values, tastes and customs in a society often change (EAUC 2012). The managers therefore have a responsibility of identifying any such changes and communicating the same to the decision makers, who then decide how best to design and manufacture cars that satisfy any changes in expectations by the consumer market. Notably, Toyota has a guiding principle that underscores its intention to “respect the culture and customs of every nation and contribute to economic and social development through corporate activities in their respective communities” (Lavanya & Anbalagan 2012, p. 10). The technological conditions are analysed by the TMC managers for purposes of identifying any new developments that can be used to enhance the production or product design and quality. Often, and as noted by EAUC (2012), TMC surprises its customers with new technology developments in its cars. Understandably, one of Toyota’s guiding principles seeks to “create and develop advanced technologies and provide outstanding products and services that fulfil the needs of customers worldwide” (Lavanya & Anbalagan 2012, p. 10). In an apparent use of technology to develop cars that the public were demanding for (i.e. environmentally friendly cars), Toyota developed the Prius Hybrid, which by 2010, had sold more than 2 million units since it was launched in 1997 (AFP 2010). Through an analysis of the economic conditions, EAUC (2012) notes that TMC is able to identify factors such as inflation rates, interest rates, stock market fluctuations, changes in the consumers’ disposable income and the business cycle. The economic analysis of target markets is especially an essential undertaking by car manufacturers because as Deloitte (2011) observes, it determines the rate of market activity (in terms of sales) that companies are able to attain. For example, tight monetary policies in a country, a rise in interest rates, slow economic activity, and inflationary pressures in a specific market should be indicative of an impending slow-down in car sales. On the other hand, if a government in a specific market offers tax incentives, has comparatively lower interest rates, has a well-performing economy, and does not suffer inflation pressures, this would be indicative that the market has the potential for increased demand for cars. Analysing demographic conditions is identified by EAUC (2012) as being an important part of the TMC competitive strategy since it enables the organisation to understand the characteristics of the population. Specifically, the company is able to understand the gender, age, education level, income levels, geographic location and family composition in specific market. By so doing, the company is able to analyse and identify the demographic segments to target with specific car models in view of the needs, preferences, purchase abilities, and existing competition. Recommendations on how best Toyota can respond to environmental forces Gathering information about the external environment is not of any use to a company if the same information is not analysed, interpreted and used in a manner that benefits the organisation (Pride & Ferrell 2010). In Toyota’s case, the company appeared to have scanned the external environment for political/legal, economic, socio-cultural, technological and environmental factors as indicated above. One thing that the company appeared to have overlooked is the media and specifically the media’s role in times of potential crisis in the organisation. As indicated by Smuddle (2001), a corporate crisis is an ever-present threat to any organisation, and it potentially affects critical aspects of the company which include reputation, brand equity, financial viability and credibility. Greyser (2009) further notes that corporate reputation has to be stable and consistent even when a crisis situation occurs. In Toyota’s case, the bad stint with the media started when a fatal crash involving a Lexus ES 350 occurred in August 2009 killing four people onboard the vehicle. The crash was traced to an incompatible floor mat, which according to a Los Angeles Times report written by Bensinger and Vartabedian (2009), interfered with the accelerator pedal. Widely publicised, the 2009 crash, and subsequent products recalls for the ill-fitting floor mats and later for problematic gas pedals severely dented Toyota’s brand reputation. Even more damaging was the allegation by the media that Toyota’s product recalls were not an internal initiative; rather, the reports alleged that the National Highway Traffic Safety Administration (NHTSA) had insisted that Toyota issues the recalls (Linebaugh, Mitchell & Wakabayashi 2010). While the Toyota recalls were based on incidents whose importance cannot be understated (see appendix B for an illustration of problems, incidents and remedies for Toyota), Greyser (2009) indicates that considering media as a relevant player in the external environment is of great importance. Tucker and Melewar (2005) specifically note that the news media (including the Internet) pose a substantial threat to corporate organisations. In future therefore, it would be advisable for Toyota to have a dedicated approach to scanning and analysing the media as an essential player in the external environment, and developing strategies that will avoid or minimise damage caused on a company’s reputation in case of crisis situations. As indicated by Welch (2010), Toyota had perhaps ignored the implication that suppliers’ low bargaining power could have on its business. Notably, Toyota had demanded for cheaper parts from suppliers in an effort to save costs and compete on a price advantage. The sticky accelerator pedals were for example manufactured by CTS Corp., a major supplier to Toyota, which admitted to having revised the pedal’s designs (ostensibly in a manner that would save costs further). In the effort to save costs however, it would appear that the quality of the pedals was compromised, with neither CTS Corp. nor Toyota identifying the faults until when the same was highlighted in the media. To Toyota, the yearning for growth made it abandon its traditional philosophy of lean manufacturing, based on customer needs and quality, especially through its engagement with suppliers. In future, and following suggestions made by Urde (2003), Toyota needs to remain true to its core values. Specifically, the company should pursue lean manufacturing technologies (and perhaps even demand the same from its suppliers) without compromising the quality of its products. For Toyota, and in consideration of Pride and Ferrell’s (2010) sentiments that analysing the external environment is just as important as scanning is, it would also be important to consider the different shapes that rivalry with its competitors would take and the implications they would have on the organisation. While the quality management issues in the faulty floor mats, accelerator pedal, and anti-lock braking system as illustrated in Appendix 1 represented genuine concerns, Feng (2010) indicates that the highly sensational form of reports it generated were to some extent fuelled by rivalry from Toyota’s competitors. The varying approaches of competitor rivalry is also reflected by de Lorenzo’s (2011) analysis regarding Toyota trying to pass itself as a genuinely American car maker. In conclusion, it is worth noting that Toyota knows its external environment extremely well; however, and as illustrated in the 2009 incident that triggered the product recalls, the most under looked or underestimated factor may be the source of the worst corporate woes for a company. In Toyota’s case, it was the effect of negative publicity generated by the media, and the company’s inability to strategically manage and execute crisis communication effectively. The Toyota case is also an illustration that companies need to understand the different scenarios that can emerge from an external environment and put mechanisms and strategies in place to handle such scenarios effectively. For example, Toyota may have known that the cost-cutting measures by its suppliers may have compromised quality. However, the company did not put in place measures that would effectively ensure that all components and parts delivered to it were of top-notch quality and that they had been utilised in a manner that would ensure that customers have fool-proof products. Arguably, such should be an indication that although Toyota may have succeeded in getting information about its external environment, it failed (in some ways) to analyse and understand the implications that factors present in the same environment would have on the company. References AFP 2010, ‘Toyota: over two million Prius sold since launch’, viewed 08 April, 2013, Bensinger, K & Vartabedian, R 2009, ‘New details in crash that prompted Toyota recall’, Los Angeles Times, October 2009, viewed 08 April 2013, . de Lorenzo, P M 2011, With Hunt: Essays on the U.S. auto industry and the blithering idiots who almost killed it, Octane Press LLC, Austin, TX. Deloitte 2011, ‘Driving through BRIC markets- Lessons for Indian car manufacturers’, December 2011, viewed 06 April 2011, . Economic Administration University of China (EAUC) 2012,’Chapter 2 Understanding management’s context: constraints and challenges’, Management Principles and Methods, viewed 6 April 2013, < http://www.eauc.hk/show.asp?id=303> Feng, Y 2010, ‘Toyota crisis: management ignorance? – A Swedish case of consumer perceptions’, viewed 08 April 2013, < http://hh.diva-portal.org/smash/get/diva2:349746/FULLTEXT02>. Greyser, S A 2009, ‘Corporate brand reputation and brand crisis management’, Management Decision, vol. 47, no. 4, pp. 590-602. Ireland, R D, Hoskisson, R E & Hitt, M A 2008, Understanding business strategy: Concepts and cases, Cengage Learning, London. Lavanya, B & Anbalagan, M 2012, ‘Corporate environmental responsibility with special reference to Toyota Motor Corporation’, IOSR Journal of Business and Management, vol. 4, no. 4, pp. 8-15. Linebaugh, K, Mitchell, J & Wakabayashi, D 2010, ‘Focus now turns to Toyota’s fix’, Wall Street Journal (Eastern editions), February 2, 2010, p. B1. Magee, D 2007, How Toyota became #1: leadership lessons from the world’s greatest car company, Penguin Group US, New York. Medeiros, J 2007, ‘Toyota Motor Corporation: strategic analysis- a comprehensive review of what drives a successful vehicle manufacturer’, viewed 06 April 2013, . OICA Correspondents survey 2011, ‘World motor vehicle production’, viewed 06 April 2011, Pride, W M & Ferrell, O C 2010, Marketing, Cengage Learning, London. Smuddle, P 2001, ‘Issue or crisis: A rose by any other name’, Public Relations Quarterly, Vol. 46, no. 4, pp. 34-36. Thompson, A A, Strickland, A J & Gamble, J E 2010, Crafting and executing strategy: Concepts and cases, 17th edition, McGraw-Hill Companies, New York. Toyota Motor Corporation 2011, ‘Special story 1: the quality issue: background and future prospects- seeing quality issue as an opportunity for renewal and improvement/firm action throughout its operations in each field’, viewed 08 April 2013, . Tucker, L & Melewar, T C 2005, ‘Corporate reputation and crisis management: the threat and manageability of anti-corporatism’, Corporate Reputation Review, Vol. 7, No. 4, pp. 377-387. Urde, M 2003, ‘Core value-based corporate brand building’, European Journal of Marketing, vol. 37, no. 7/8, pp. 1017-1040. Welch, D 2010, ‘Oh, what a (hideous) filling’, Business Week, New York, 15 February 2010, no, 4166, p. 21. Appendix A: The layered external environment that a company needs to consider Source: Thompson et al. (2010). Appendix B: The problems, incidents and remedies for Toyota Source: Toyota Motor Corporation (2011) Read More