Toyota Motor Corporation Microeconomic Analysis - Coursework Example

Micro & Macro Economics Economics work Assignment The company selected for the purpose of this report is Toyota Motor Corporation, the Japan-based multinational automaker which is one of the largest and most successful automobile manufacturers in the world. This report shall carry out the microeconomic and macroeconomic analysis of one of its most popular product lines- cars, with a focus on passenger sedans that include Toyota Yaris- a subcompact car, Etios-a low range saloon, Corolla- a compact sized car, Camry- a midsized one and Avalon-the full sized version. MICROECONOMIC ANALYSIS: The Microeconomic analysis takes into view the decisions and behavior of individual households and firms in allocating limited resources.First to be considered are the demand drivers of the Toyota sedan.Toyota Motor Corp.s sedans have remained in high demand all over the world owing to the effective quality, design, pricing and reputed brand name of the company. The Camry remains the best-selling car in the United States for 13 out of the past 14 years and has effectively beaten competition from Hyundais Sonata, Kias Optimum and Fords Fusion. One major demand determinant is the price of the product and the prices of its competitor products. Toyota, through its effective lean management policies manages to price its sedans at competitive prices in the world market and through Total Quality Management, enforces high quality and safety standards in its cars that keep the demand high.Another demand driver is the rapidly growing population of the world and the even faster growing middle class as a result of increased income, resulting in rise in demand for normal goods such as cars. For example, in India, the middle class enjoys a 4.9% increase in its annual income.Toyota Etios sedan sales in India are expected to go up by 32% in 2012. Moreover, the changing consumer tastes and preferences also determine the profitability of Toyota sedans.Consumers today demand fuel-efficient and eco-friendly cars accompanied with a more streamlined, comfortable andluxurious design. Toyota has launched sedans that cater to its customers demands. However, the global economic recession of 2008 adversely affected the sales of all automobile companies including Toyota since the depression hit the economies and the pockets of the public(Ball et al. 2012). Among supply factors, environmental conditions are significant. The 2011 Japan Tsunami wiped off 650 of Toyotas suppliers bringing the car production to a standstill and causing it to lose its sales by 7.8% in the U.S. market. Also, the recent Thai floods have caused parts shortages and will result in a loss of $1.55 billion.Costs of production also affect the supply of cars. Toyota employs Lean Automation in its production process that focuses on eliminating waste at all levels of production, hence increasing productivity. Toyota also has an impressive supply chain management in place which delivers cars effectively to the end consumers through timely shipments and order processing in the absence of natural catastrophes The market structure describes the level and forms of competition in the market, determined by the relative number and strength of buyers and sellers. Toyota operates in the automobile industry governed by monopolistic competition, facing stiff competition from General Motors, Ford, Honda, Peugeot and many other carmakers. With theseseveral auto firms occupying the market share and slight differentiation in their products, in a market comprising a large number of buyers, neither the sellers nor the consumers are able to influence prices and hence, a healthy competition exists (Morden, 2004). In such a market structure ruled by fierce competition, Toyota has to maintain a competitive edge over its rival sedansby competitive pricing and more importantly, using differentiation and innovation strategies in its car design and performance. Within the same market structure, Toyota uses market penetration strategy by improving its sales distribution and focusing on effective advertising to increase its sedan sales volume. Toyota is also leading innovation by introducing greener models of cars in the developed world that will help the automaker move into a more sustainable structure and increase profits. Already, its Prius sedan which uses latest fuel technology is the best-selling electric hybrid car in the world, and picking up demand owing to rising fuel prices. The elasticity concepts include price elasticity of demand, which measures the percentage change in quantity demanded as a result of a percentage change in prices. For most goods, including cars, this elasticity is negative.Also, for cars, it is greater than 1, meaning the demand is elastic. If Toyota suddenly increased its car prices, the quantity of its cars demanded will drop since buyers will likely shift to other, more reasonably priced cars. Demand’s income elasticity for normal goods like cars results in demand and income moving in the same direction. Higher income of the consumers will increase demand of all normal goods, including cars. Toyota has witnessed a peak in its sedan sales in Asian countries particularly India and Pakistan due to the growing upper and middle classes.Cross-price elasticity of demand refers to percentage change in demand of a car as a result of a percentage change in price of the competitor car. Cars serve as a substitute for each other such as if Toyota sedan prices were to hike, the consumers will shift to buying GM or Ford sedans, hence positive elasticity. Firms are also sensitive to changes in the pricing, strategies, and advertising of competitors because of the impact on their relative market shares. This is known as cross elasticity of demand between firms ( Macdonald, 1999). Toyota is world renowned for its efficient production of cars. As mentioned earlier, its lean automation technology minimizes bottlenecks in production processes and its adoption of Six Sigma practices as part of total quality management keeps cost of production as low as possible by employing latest technology, improving employee productivity and using inputs efficiently. MACROECONOMIC ANALYSIS: On a macroeconomic level, economy contraction of Japan by 2.1% annualized rate in 2011 has put Toyota growth in stagnation. Its stocks fell by 28% in aftermath of the earthquake and global sales were overtaken by GM and Volkswagen. Its foreign and local currency issuer default ratings were also downgraded from A+ to A. Toyotas commitment to preserving Japanese jobs has also overburdened its profitability in the face of global and local economic crisis. The unemployment rate in Japan has surged to 4.6% as of January 2012 and Toyota is struggling to maintain its competitiveness in world markets(Kitamura et al. 2011). Inflation weakens the purchasing power of the consumers. Double digit growthin inflation of necessity goods since 2008 has dented the future financial security expectations of people, lowering demand of luxury goods like cars. Rise in prices of imports has also sapped Toyotas profits by increasing its costs of production. The stronger yen has reduced exporters profits; to 75.95 to the dollar in August 2011 from 95 the previous year, the rate change has cut Toyotas operating profits by 50 billion yen. The struggling balance of payments as a result as well as power shortages and financial crisis in Japan are likely to induce the company to shift more of its production to other countries. Periodic fluctuations in economic activity such as inflation, unemployment, currency rates and economy growth rate significantly impact the profitability of Toyota cars.With the GDP of Japan expected to rise 2.9% this year, Toyota sales prospects have improved. Also, its sedans are regainingtheir old market share in the world and especially in U.S (Tabuchi, 2012). The pent-up demand is beginning to release, and Toyota plants are running overtime to cater to the rising demand. In the end, it can be seen how the interplay of the various microeconomic and macroeconomic factors affects the performance of Toyota Motor Corporation and ultimately its sales and profitability; and how these in turn impact it’s standing and positioning in the world markets. Toyota, although having struggled with some unforeseen unfavorable circumstances in the past year, is now re-emerging to capture back its market share by challenging its competitors through launching its latest model sedans and innovating in a greener way by introducing eco-friendly sedans to cater to the now increasingly environment-conscious population. Bibliography BALL, M. K., & SEIDMAN, D. (2012). Supply and demand. New York, Rosen Pub. ISIDORE,C. (2010). August Auto Sales. [online]. CNN Money. Available at: http://money.cnn.com/2010/09/01/news/companies/august_auto_sales/index.htm.[Accessed 17 March 2012] KITAMURA, M., OHNSMAN, A. & ITO, A. (2011).Toyota Losing Market No. 1 Makes Prius Vehicle to Escape Fading Japan Inc. [online] Bloomberg. Available at: http://www.bloomberg.com/news/2011-09-11/toyota-losing-no-1-makes-prius-priority-to-escape-fading-japan.html[Accessed 17 March 2012] MACDONALD, N. T. (1999). Macroeconomics and business: an interactive approach. London, International Thomson Business Press MORDEN, T. (2004). Principles of management. Aldershot, Hants, England, Ashgate. TABUCHI, H. (2012).Brisk American Sales Lift Toyota’s Profit Estimate. [online]. The New York Times. Available at:http://www.nytimes.com/2012/02/08/business/global/08iht-toyota08.html?_r=2 [Accessed 17 March 2012] Read More