Industry Analysis - Term Paper Example

? Industry Analysis: Toyota’s Position in the Automobile Industry 0 Introduction An industry consists of a number of firms which produces goods that are close substitutes for each other. The structure of the automobile industry is that of an oligopoly with a few firms showing dominance. Toyota Motor Corporation is one of those firms. The other top firms are Ford Motor Company, General Motors Company and Honda Motor Company. The automobile industry has been through a number of revolutions starting with standardized mass production which was instigated by Henry Ford; the second which was designed by Alfred Sloan included the organizational ‘creation of the Corporation with multi-product divisions emphasizing marketing and branding;’ the third revolution was created by Eiji Toyoda of Toyota Motor Corporation which focused on lean manufacturing and the development of quality (Maxton and Wormald 2005). The automobile is one of the most important industries in the world in terms of its contribution to GDP; it uses large steel and glass and consumes a high percentage of the world’s oils (Maxton and Wormald 2004). In addition to the transportation of people to various locations in order to facilitate various activities, it has also contributed to the flexibility of the human race in terms of the transportation of goods for consumption and production. However, automobiles have lead to million of casualties on our roads, pollution of the environment, depletion of natural resources and global warming (Maxton and Wormald 2004). These have gained significant attention and have led to increasing legislation. The automobile industry is also very capital intensive due to the complex nature of the automobile. According to Hoover’s Nancy Daniels (2011) Toyota Motor Corporation which is a Japanese company is the world’s largest automotive manufacture. The company overtook General Motors (GM) an American company in 2008. Approximately 40% of the company’s business comes from Asia. The company designs and manufactures a wide range of vehicles including subcompacts, luxury, sports, SUVs, minivans, buses and trucks. These vehicles are either hybrid engines or combustion engines (Hoover 2011). Toyota’s subsidiaries – Daihatsu and Hino produces small vehicles; and trucks and buses respectively (Hoover 2011). Some of Toyotas well known models are the Corolla in the compact range; Camry in the sedan range; Land Cruiser in the SUV category; the Lexus line in the luxury line; Celica in the sports line; the Tundra in the truck line; and the Coaster in the bus line. The Toyota Camry has been the best selling motor vehicle in America for 13 of the last 14 years (Toyota Motor Corporation). The Camry has won a number of awards 2.0 Analysis of the Industry Porter’s Five Forces model can be used to analyze the environment in the automobile industry. Porter indicates that there are five forces in an industry environment which work together to determine profitability and attractiveness in the long run. The five forces will assist firms like Toyota Motor Corporation determine their strength and competitive position. Walton (1999) indicates that a firm can be effective strategically once it can manipulate the forces in a way that is favorable to it. The more it does so the more it will achieve its goals. The five competitive forces in Porter’s Five Forces model are: the threat of substitutes; barriers to entry; rivalry in the industry; bargaining power of suppliers; and bargaining power of customers. The model is shown in Figure 1. Figure 1 – Porter’s Five Forces Model 2.1 Threat of new substitutes A substitute is anything that is able to serve as replacement. In this case it specifically relate to anything that will help in transporting goods and people. There are a number of options available to customers who want to move from one place to another. They include bicycles and bikes for people travelling short distances. Bicycles are cheaper as they do not require fuel. However, they take a lot of energy to move and so by the time an individual moves from one place to the next it may result in tiredness. There are also limitations with bikes that also apply to bicycles including the fact that it exposes people to the vagaries of the weather. Trains can serve as substitutes for both the movement of goods and people over both short and long distances. Airplanes also serve as substitutes over long distances but they are associated with various inconveniences in relation to scheduling and reliability. Additionally, customers have little or no control over how they are operated and so they would rather have their own private transportation rather than even using the bus which is an even more cost effective means of transportation. Trains, buses and the subway are only convenient for people who live in cities. For people who live on the outskirts it can be very inconvenient. In the case of luxury and sports vehicles there are no real alternatives as they are associated with a higher standard of living and a pleasure. They are status symbols and so nothing else is really there to replace them except for a yacht. For the most part these means of transportation are not as flexible and convenient as it is when the means of transportation is at one’s disposal. However, some companies like Honda and Toyota have made an indelible mark on the automobile mass market with their Honda Accord and Toyota Camry respectively. However, this does not mean they can sit back and relax as the number of competitors as well as increasing levels of technology and innovation may result in surprises in the industry. 2.2 Barriers to entry The objective of all businesses is to be profitable and so it is not a surprise that firms are attracted to industries that are not only profitable but also yield high returns on investments. The automobile industry has seen many new entries as well as exits. Some companies have managed to remain competitive because of their emphasis on research and development. The cost of entry is very high and so the threat of new entrants is low. This is especially so with the innovations taking place in the industry. New legislations in relation to carbon emissions and safety also serve as a barrier. However, firms that already have high levels of capital may find the barriers to be only moderate. If the entry of new firms cannot be prevented then the above normal returns will fall significantly thus driving the less competitive firms out of the market or will result in them becoming targets for acquisitions. Over the years various mergers and acquisitions have consolidated the positions of some firms in the industry. Brand loyalty is also a factor that sometimes discourages new entrants to the market. 2.3 Competitive rivalry in the industry The level of rivalry is the major determinant of competitiveness in an industry and this s so for the automobile industry. The competition is based on the price of the product, the features that it offers, the presumed quality that it possesses, and innovation. The level of competition in the industry at this time is very high and each and every firm, through research and development R&D) seeks to find ways of satisfying customers needs. Toyota Motor Corporation has managed to withstand the competition by being the world’s number 1 manufacturer of automobile. The firm’s presence in the market for a wide range of vehicles is indicative of its competitive edge and its ability to satisfy a wide range of customers and therefore tastes. Honda Motors led the market in the early 1990’s with the Honda Accord but Toyota was able to stamp its presence with its Toyota Camry. Since the late 1990’s the Toyota Camry which is known for its efficiency, reliability and power and therefore its ability to satisfy customers have won a number of awards and accolades. The latest customer reviews carried out by Kelly Blue Book indicates that customers have rated the Toyota Camry 8.5 out of a possible 10 marks in allowing the model to capture the ‘2012 Best Resale Value’ award (Toyota Motor Corporation 2012). The Toyota Camry has also captured a 5 star overall safety rating which indicates that it is considered very safe. This is so despite the massive recalls in 2009 as a result of faulty gas pedals, faulty floor mats and problems with braking software in the past which affected the company’s business for only a short time and thus managing to hold the number 1 selling car in its class for 13 out of the last 14 years in the United States (Toyota Motor Corporation 2012). The exception was in 2001 when it was outdone by the Honda Accord. Additionally, the Toyota Camry was voted the ‘Top Safety Pick 2012’ by the Insurance Institute of Highway Safety (Toyota Motor Corporation). Ron Kino (2007) writing in the Motor Trend magazine indicated that the rivalry between the Honda Accord and the Toyota Camry is very significant with both selling in the 400,000 range each year in the United States. 2.4 Bargaining power of suppliers The bargaining power of suppliers in the automobile industry is very low. The reason for this is that there are a large number of suppliers and so most of them rely on specific manufacturers to buy their products. It means that in order for them to qualify they have to produce goods that are of a high standard of quality at competitive prices. They also have to possess a high level of reliability as most automobile manufacturers operate on a just-in-time system in order to reduce their cost of operating and so enable a lean manufacturing process. Additionally, many of the leading automobile manufacturers through a process of vertical integration also manufacture some of the parts that they need. They do this in order to protect their patents and to prevent their competitors from gaining too much knowledge about their products. This limits the number of suppliers that some suppliers deal with and places pressure on them to keep prices down. 2.5 Bargaining power of customers The bargaining power of customers in the automobile industry is very high as customers have a lot of brands to choose from. Aside from attractiveness and design there are certain things that customers look for in an automobile. The level of comfort that it provides which is normally demonstrated in the number of features that the vehicle carries in comparison to others in its class is very important. Additionally, the reliability of the vehicle is even more so important as no customer wants a vehicle that will breakdown when they least expect it to. Durability of the vehicle; cost of maintenance and spare parts are some of the issues that customers consider in choosing a vehicle. Thus, Sieper and Swan (1973) indicate that durable products such as automobiles are valued based on the services that they yield. This is especially true for automobiles which ensure a high level of convenience for customers. Apart from the cost of repairs and maintenance fuel efficiency is also a major consideration for customers. This was so during the recession when some customers started to sell or trade in their SUVs and other vehicles for more fuel efficient ones. This is one of the factors that have allowed Toyota to gain market share over its competitors. In fact, Hoovers (2011) indicates that in the fuel crisis of the 1970’s Toyota was able to win market share from Volkswagen in the United States with its fuel efficient vehicles. However, this is not the only reason why customers want to own their own means of moving around. For some it is a status symbol and so they look for certain features that will ensure their satisfaction with the product. Toyota has managed to maintain customer satisfaction with its Toyota Camry. However, it was affected temporarily by massive recalls of over 8 million vehicles in 2009. Although, this has had its repercussions it has served as a basis for Toyota to work even harder to improve its brand image. Oliver Wyman (2003) indicates that contact with customers along with brand image is destined to be the fundamental factors for the success of any brand in a competitive environment. Oliver Wyman (2003) further states that brand differentiation will be sought through brand image and experience as the high levels of international production standards along with increasing rates of obsolescence of technology due to increasing levels of innovation allows for a reduction in the levels of differentiation that is possible. 3.0 Macro-environmental factors affecting the industry In addition to factors within the industry there are also factors in the macro-environment which affects the way the firms in the industry function. These are described as PESTEL factors. PESTEL is the acronym for political, economic, social, technological, environmental and legal. These factors provide threats as well as opportunities for firms in the industry. 3.1 Political factors Countries have various policies in place in relation to the importation of motor vehicles. Motor vehicle manufacturers are always looking for ways to expand their market. It therefore means that they have to move into other markets overseas. These countries have various policies in place for setting up manufacturing plants. These relate to environmental factors as well as to location. Toyota was able to penetrate the American market from as early as the 1970’s. The company has also set up manufacturing plants which are some of the conditions of selling goods in a country. The company was also able to enter other European markets and has also gained a foothold in China and other parts of Asia. Globalization has also served as a means of increasing markets in some countries where foreign products were not generally allowed to compete with local products due to protectionist polices. Taxation policies, the ability to transfer profits, and the stability of governments in certain countries are some of the threats affecting expansion of automobile firms. 3.2 Economic factors The economic environment is now recovering from the recession which started in 2008 and resulted in bankruptcy of a number of automobile companies. This resulted in a reduction in profits for most firms. Hoover (2011) indicates that Toyota suffered its first losses since the 1950’s which was reduced in 2009. Since then the company has rebounded. Economic activity has picked up and the company is looking forward to opportunities in emerging markets in Asia and South America. Toyota’s renowned ability to produce fuel efficient cars saved the company from bankruptcy in the last recession. 3.3 Social factors During the recession a number of persons not only lost their homes but also their jobs. Economies are recovering and more people are going out to work as the employment situation improves, especially in the United States which is one of its major markets. This will serve to improve the prospects in the automobile industry and therefore Toyota’s prospects. Some countries in Europe have still not recovered and so employment is still down. The recent Tsunami in Japan has also affected its production and this is always a continuing threat that the company faces. 3.4 Technological factors Technological factors have played a role in the demand for new vehicles with additional features, improvements in design, fuel efficiency and reduction in CO2 emissions. However, technology may also decrease the need for some families requiring more than one vehicle. The internet has led to more people working from home. This has affected the demand for vehicles as it lessens the need to travel on a daily basis. 3.5 Environmental/Ecological factors The need to protect the environment is becoming even more important as the effects of global warming are becoming a cause for concern. Automobiles contribute to global warming as they are a source of carbon emission in the environment. The need to reduce the level of greenhouse gases in the environment has resulted in environmental agencies in countries all over the world developing standards to protect their environment. The Environmental Protection Agency (EPA) in the United States (2005 ) has indicated that the automobile is the single greatest polluter as the emissions from each vehicle adds up. The calls for less carbon emission have resulted in more fuel efficient cars. Toyota has produced cars that are capable of using both combustible fuel and electricity. These vehicles are known as hybrid vehicles and Toyota has entered this market with its Prius model (Hoover 2011). 3.6 Legal factors There are various legislations affecting the automobile industry. Some of these relate to safety and the protection of the environment. The Clean Air Act of the 1970’s have given the US EPA the authority to regulate motor vehicle pollution and the agency’s emission control polices are becoming more and more stringent as time goes by (US EPA 2005). Increases in the number of motor vehicle casualties have increased the need for safety and this has resulted n even more stringent requirements for manufacturers. 4.0 Conclusion Weihrich (1993) indicates that when manufactures are making projections in relation to the volume of products to manufacture they take into consideration their customers and what they want. Customers want value for their money and they are willing to pay for it. Value is a function of quality. Plunkett et al (2007) defines quality as ‘meeting and exceeding customers’ expectations.’ Toyota will need to continue to provide value to customers if it wants to continue its long reign of success. The company has moved from being the fourth largest manufacturer of automobiles in the 1970’s to being the largest in the world. This is a major feat and one that only few firms can boast about. However, it must be prepared to sudden and dramatic change. Fahey (1999) indicates that it is of critical importance that firms prepare for sudden and dramatic changes in the industry as this is the nature of rivalry among competitors. Toyota is the dominant competitor right now and the firm has to find ways to maintain its competitive advantage. Pearce & Robinson (1997, p.248) states that the cost structure of a business and the ability to differentiate products from competitors is the most prominent sources of competitive advantage. References Fahey, L. (1999). Outwitting, Outmaneuvering, Outperforming Competitors. USA: John Wiley and Sons Hoover. (2011). Toyota Motor Corporation. Retrieved from: http://www.hoovers.com/company/Toyota_Motor_Corporation/crxxsi-1-1NJHW5.html. Last accessed 14 April 2012 Kiino, R (2007). Head to Head: 2008 Honda Accord vs. 2007 Toyota Camry. Retrieved from: http://www.motortrend.com/roadtests/sedans/112_0710_2008_honda_accord_vs_2007_toyota_camry/viewall.html#ixzz1sAWIUH8C. Last accessed 15 April 2012 Maxton, Graeme P and Wormald, John (2004). Time for a Model Change: Re-engineering the Global Automotive Industry. USA: Cambridge University Press Oliver Wyman (2003). Future Automotive Industry Structure. Retrieved from: http://www.oliverwyman.com/pdf_files/9_en_PR_Future_automotive_industry_structure_-_FAST_study.pdf. Last accessed 14th April 2012 Pearce, J. A & Robinson, R. B. (1997). Strategic Management: Formulation, Implementation, and Control. 6th ed. USA: Irwin/McGraw-Hill. Plunkett, W.R., Attner, R. F and Allen, G.S. (2007). Management: Meeting and Exceeding Customers Expectations. 9th ed. USA: Thomson South-Western Sieper, E and Swan, P.L (1973). Monopoly and Competition in the Market for Durable Goods. The Review of Economic Studies, 40(3), p. 333 - 351. Toyota Motor Corporation. Toyota Camry. Retrieved from: http://www.toyota.com/camry/. Last accessed 14th April 2012 US Environmental Protection Agency (2005). Automobile Emissions: An Overview. Retrieved from: http://www.epa.gov/oms/consumer/05-autos.pdf. Last accessed 15th April 2012 Walton, J. (1999). Strategic Human Resource Development, UK: Pearson Prentice Hall Weihrich, H. (1993). Daimler-Benz's Move towards the next century with the TOWS Matrix. European Business Review. 93 (1), p4-11. Read More