Toyota Operations Abroad - Essay Example

Toyota Operations Abroad Research on the way TNCs operate has demonstrated that they do overcome the liability to foreignness by adapting to the local country’s information networks. Yildiz and Fey (2012) noted that foreign companies have to incur additional costs that local companies do not incur to survive in the business environment. They go on saying that of late, legal obstacles have diminished, but the much talked about cultural and social borders are still a hindrance. These companies do not have roots and reputation as the local competitors’ do, hence creating frictional loss when interacting with customers and regulators. In the case of a minor mistake done by a multinational, it will become more of an issue unlike when done by a local company (Kaiser and Sofka, 2010). The TNC will invest resources to understand the local communication networks, which includes government regulations, understanding existing distribution channels, recruitment of employees, and ways of handling company operations in the foreign country. According to Seth and Judge (2009), companies cite market imperfections rationale as the main reason they open operations abroad. Such imperfections could give the company unfavorable trading environment encouraging the company to open its branches abroad. In such cases, the company will resort to open a branch in that country it sees an opportunity but the company will incur additional costs compared to local companies in the local market. Seth and Judge (2009) have documented such costs to include costs due to spatial distance, firm-specific costs, host country environmental costs, and home country environmental costs. The lack of a deep entrepreneurial experience among Japanese nationals has been a challenge when setting foreign operations. Naturally, Japanese are not talkative, and majorities prefer knowing just their language. This becomes a challenge when investing abroad given that the company will want to have a few of its nationals at the top management levels. In such cases, the foreigners will start learning the local and some national language; they shall also learn the highly sophisticated legal systems in the western countries in order for the company to manage its operations effectively without offending the legal system. The company shall incur additional costs of training its staff though this shall aid the company to run its branches effectively (Seth & Judge, 2009). In addition, the company may be forced to hire host nationals in top management positions or as advisors to its nationals. The better way of handling such a scenario is if the company could employ locals in positions that involve frequent interaction with outsiders while its nationals can handle policy implementation duties. On the other hand, Japanese culture has a number of deeply motivational terms like gokuhi, gaijin, which work well to boost employee morale at home. In the American market, the locals translated the terms to mean secrecy and suspicion of foreignness. The locals believed that these foreigners were proud yet they conducted secretive transactions, a thing that spoilt public relations of the foreign operations. Whenever there was an issue with the cars, for instance, some error in transmission, people were more likely to buy other models instead of Toyota, the reason being, officials were using some foreign terms to make informed communications even in the presence of buyers. As a result, Toyota barred its foreign nationals from exporting terms, which the host nations did not appreciate. Such measures led to an improved public relations exercise between the locals and the expatriates. On the issue of using motivational terms, the foreigners should employ use of terms and explain them to the locals to eliminate elements of suspicion. Toyota has largely employed aspects of differentiation and low cost as generic strategies for penetrating foreign markets. The differentiation strategies have been successful in most markets since the company adapted vehicles to the local market and manufactured or assembled them there at the host nation. The aspect of designing vehicles locally, sourcing labor there, and building them there, gave the company an easy entry point to gain a competitive advantage. For instance, in 1967, Toyota designed, manufactured, and sold corona and crown models to the tastes of the Americans. The challenge with this strategy is that the products may not move fast enough if exported since they are custom made for a specific market. The company will incur additional costs to research other markets and produce customized vehicles, and this aspect shall eat into the companys revenue. Toyota did not come near to sell as many units as American companies did, notes Nkomo (2013), so the company undertook research and found out that customers preferred luxury brands, and it offered them Lexus and Amazon brands, both designed and manufactured in America for the locals. The good side of this strategy is that the company sold many units given that the market could afford the vehicles. Kaiser and Sofka (2010) said that foreign companies have a challenge winning customer acceptance when the company is new but this problem fades out as the company understands how the perceive its products and it adjusts its operations accordingly. As a result, the forces behind liability of foreignness fade leaving behind a persistent layer of relative disadvantage. To handle this disadvantage, management may introduce loyalty programs for the host customers. In addition, the company may employ defensive strategies. In the American market as an example, Toyota opted for brands that disguise their origin to dissolve legitimacy-induced effects of liability of foreignness by introducing Toyota Scion that targets young American clients. The Scion is relatively cheap with powerful features that compete with other vehicles in the market like six-speed automatic transmission for quick engagement of gears, and four-cylinder engine that produces enough power to move long distances (Nkomo, 2013). With the Scion, market reception was good, and the company sold many units. Fig 1: Brand prevalence in the USA market Source: Nkomo 2013 Unlike local firms, foreign firms incur an additional cost arising from the distance of cultures, perceptions, institutions, and regulations. Geographical distance brings about the first challenge since the TNC will import machinery and technology to set base in the host nation (Cazura, Maloney & Manrakhan, 2007). The advantage of this strategy is that such new technology is not available locally, an aspect that will enable the company to produce unique products at cheaper prices. Different cultures pose different challenges to the TNC that may translate to higher costs of training management, mostly done in the home country. When Toyota opened its operations in America, it had challenges with rewarding good performance while reprimanding offenders. In Japan, it is normal for a supervisor to reprimand a staff in public for doing something wrong and praise one who has outstanding performance. The supervisors found out that in America, people emphasized on human rights hence you could not reprimand someone publicly. The supervisor had to call the staff to a private place, tell him what he had done wrong, and possibly show the person the better way of doing that task. The rewarding system of praising staff was not working either because some staff members could criticize a person who was commended for doing a great work, so the company adopted a different approach of rewarding staff financially through giving the person an envelope containing a few dollars for the great job done (Cazura, Maloney & Manrakhan, 2007). Nachum (2003) has said that Toyota entered the American market in 1958 in style by adopting the Japanese popular philosophy of know your customer. The company re-invented its products every time leaving its customers satisfied. The just-in-time technology enabled Toyota to be the favorite of motor vehicle enthusiasts. A number of the Americans embraced the philosophy of Japanese of ‘always strive for perfection’ since they could see it delivering many vehicles at a reasonable price. The pride got Toyota the wrong way in the last decade, but this resulted from the bargaining power of clients and suppliers who are demanding more at the same or reduced prices. To survive in the market that is becoming exceedingly turbulent, the company decided to pursue cost saving strategies and lenient production at the expense of reliability (Buckley, 2002). The company has incurred a number or recall cases; the highest compared to other players. A number of organizations started associating the problems experienced with Toyota vehicles to cheap Japanese culture, and even went ahead advising people to stop buying Toyota owing to the culture of secrecy. They based their arguments on the fact that Toyota management is always aware of many causes of accidents, and the company should recall its vehicles before there is a public outcry. Toyota lost its market share by 12.4 % in the year 2009 – 2010 over vehicle recalls. The know your customer philosophy works well when a company incorporates customer feedback into its vehicle designing process just as Toyota does. Where Toyota goes wrong is when it incorporates the strategy of being the product leader with cost leadership. These two strategies conflict and the company ended up making some parts that were substandard. The cost of such a mistake was a mass recall of cars, and it lost its market share. The beneficiaries of the decline in the market share are as follows. Fig 2: Beneficiaries of Toyota lost market share 2009-2010. Source: Rajasekera 2013 Toyota had taken over 50 years to build a very good reputation of which the company damaged in a short period owing to the large number of vehicle recalls. All defects in Toyota were dangerous since they resulted in serious accidents. In the year 2009, the company recalled 3.9 million vehicles and in January 2010, 2.9 million as represented in the figure below. Fig 3: Number of Toyota vehicle recalls globally Source: Rajasekera 2013 Toyota became more successful by adopting a more global approach to setting operations in regional markets where demand was high. As a result, the company supported an active internalization of its branches by signing bilateral investment treaties with the host government as a way of protecting its assets and foreign operations. The company came up with this measure because most markets forced it to export full operations hence it invested heavily in each branch as a way of enabling the locals to have a feeling that the company is local and by buying its products, they are promoting their company (Birkinshaw, 2000). This aspect of internalizing branches is important in that it entrenches virtues of the local culture into the company operations, which boosts morale among staff and it shall make clients comfortable when they make purchases given that they consider the company to be just as any other local company. TNCs have challenges joining markets where the local government advocates for consumers to buy locally manufactured commodities. Such has been the case in America where the local governments advice the locals to always promote their local industries. In the 1980s and 1990s, when such campaigns were at the peak, most people preferred American Manufactured products thus forcing the TNC to produce goods of better quality that are cheaper compared to local commodities. This forced Toyota to incur additional costs to do research and provide more security features, extra airbags and produce durable vehicles to compete with the likes of Ford, GM among others. American market had been dogged with a lot of controversies repeatedly, like in the mid-1990s when vehicle buyers started looking for cars made more American than others did. When governments enforce strategies of forcing people to buy local, they force TNCs to incur additional marketing costs and may be change in product quality so that the company can compete with locals that may have an inferior product. Alternatively, the TNCs may be forced to export most of the manufacturing functions to America as Toyota did so that it can compete with local brands given the large potential as shown in the following figure. Fig 4: Toyota vehicle sales market share by region Source: Nkomo 2013 A local company has advantages of starting operations while adhering to the local rules and regulations. Such rules shall determine levels of operations, how to handle employees, and manufacturing products that meet locally set standards. In Japan, Toyota had concentrated on producing low-cost vehicles while not taking aspects of safety into consideration. Most of its units had basic safety features like two front airbags, but the majority of the vehicles did not have protective shock absorbing features that guarantee safety of passengers in case of an accident. On entering the western markets, the company hand to adhere to the strict regulations that specify safety features, each unit should have. Such features go as far as defining fuel consumption as a way of reducing emissions to the environment. Toyota had to conduct more research to develop comfortable vehicles that were light enough to reduce fuel use by up to 65%. The figure below shows carbon emissions from various sectors in USA. Assuming each vehicle reduces fuel consumption by 65%, and then instead of transportation contributing 33% waste products, it shall produce 11.55%. Fig 5: Producers of carbon dioxide emissions in the USA Source: Nkomo 2013 Policies that require the company to meet certain safety standards are good for the economy but expensive for the company. The good part of it is that the American economy applied the rules uniformly such that even local companies had to comply with the rules. Implementation meant more costs at the research and development phase that had the possibilities of transferring the additional costs to the clients. For a company to be successful, it will adopt a number of favorable strategies, and one of the most common is cost leadership. Along with differentiation, Toyota has employed low cost to gain a competitive advantage in the vehicle manufacturing industry. The company has adopted a number of measures to achieve this strategy including lean production, a proper selection of suppliers, a great distribution network, and low pricing. In cases where the foreign nations require the TNC to source for parts from any country, most TNCs enter into contracts to get parts from cheap manufacturers in Asian markets. In the event, that one part has malfunctioned, and it needs replacement, the locals shall associate that problem with the origin of the TNC. An example is the many vehicles recalls the world has witnessed in the last decade (Ghemawat, 2010). The case in point is the year 2012, some Toyota vehicles developed a problem with air conditioning condensers where water from the condenser can leak into the airbag control module, an issue that may make the airbag to activate accidentally, flash airbag light, or in some cases, the airbag failed to activate in case of an accident. Investigations revealed that the condenser was not manufactured in America, and the government insisted on such critical parts be manufactured in America or by some reliable manufacturers to avoid loss of lives. By that, the TNC had to incur an extra cost of sourcing for a part locally instead of talking with the supplier to research on what caused the problem, and handle the problem in future productions. If a similar issue were to occur with a part made in America, the authorities could not have directed that it be sourced from abroad. Instead, they were to direct the manufacturer to solve the problem. For TNCs to compete effectively, Nachum (2003) says that they should offer something better on top of what the local companies offer, and this means more enhanced features. On the contrary, the TNC will price its products somehow cheaper than the locals do as a way of gaining market share. In other words, the foreign operations should have a comparative advantage against the locals as a way of fizzling out disadvantages of operating away from home. In order for the company to exploit these firm-specific advantages, it must have the ability to transfer the advantages to its foreign operations but the locals at the host nation should not be in a position to acquire such advantages fast enough. This aspect shall enable the TNC to compete in the local market and acquire a significant market share before the others start utilizing such technology. These advantages have the characteristic of a public good in that anybody within the company can utilize them without any extra cost (Nachum, 2003). Such was the case with Toyota Company when it opened foreign operations where it studied the market and provided vehicles that perform as per the local environment. The idea of KAIZEN, which means continuous improvement, has played a big role to ensure that all employees do join efforts to make each new product better than the previous one at a minimal cost. Every company has a way of creating effective ways of communicating with its various branches. Toyota has higher levels of knowledge diffusion as compared to its competitors. By that, the company has always created foreign operations that function as the home operations do. This network level knowledge sharing has resulted in production efficiencies, and they have enabled the company to spot opportunities faster than competitors have. The company has all along benefitted from this unique method of operation in that it encourages stakeholders to share openly any valuable knowledge, which the company shall use to make its operations better and prevent free riders while cutting down on costs of research and innovation. To penetrate foreign markets faster, Toyota always informs its clients to provide both positive and negative feedback without fear. In most cases, the company undertook repairs on any reported issues or modifications for the clients, but interestingly, the company in incorporated the changes in its new models (Dyer & Nobeoka, 2000). This discussion has demonstrated that setting up foreign companies is not as easy as it appears. A lot goes into studying the local market to familiarize the management with the local environment, cultural habits, and the regulations. Armed with the right information, the company shall have a smooth transition to the local market where it will offer competitive products at friendly prices. In addition, with the correct entry, the TNC will not be regarded as a harmful competitor but rather as a company with a unique strategy and product if is offering to the local market. Toyota had had a great time with the western markets, where it has offered a number of both high quality and standard products while mixing with average vehicles but in return, the company has sold and it has its market share. Reference List Birkinshaw, J. (2000). Entrepreneurship in the Global Firm. Sage. London. Buckley, P. (2002) Is the international business research agenda running out of steam? Journal of International Business Studies, 33(2): 365-373. Cazura, A.C., Maloney, M.M., & Manrakhan, S. (2007). Causes of Difficulties in Internationalization. Journal of International Business Studies. 38, 709-718. Dyer, J.H., & Nobeoka, K. (2000). Creating and Managing a High Performance Knowledge- Sharing Network: The Toyota Case. Strategic Management Journal, 21, 345-367. Ghemawat, P. (2010). Semi globalization and international business strategy, Journal of International Business Studies, 1(2), 2-7. Kaiser, U., & Sofka, W. (2010). The Pulse of Liability of Foreignness: Dynamic, Legitimacy and Experience Effects in the German Car Market. Discussion Paper no. 06-070. 6-14. Nachum, L. (2003). Liability of Foreignness and the Superior Advantages on MNEs. Institute of Global Management Studies, 2-18. Nkomo, T. (2013). Analysis of Toyota Motor Corporation. 6-10. Rajasekera, J. (2013). Challenges to Toyota Caused By Recall Problems, Social Networks and Digitization. Asian Academy of Management Journal, 18(1), 3-7. Seth, D., & Judge, W. (2009). Reappraising Liabilities of Foreignness Within an Integrated Perspective of the Costs and Benefits of Doing Business Abroad. International Business Review, 18, 405-414. Yildiz, H.E., & Fey, C.F. (2012), The Liability of Foreignness Reconsidered: New Insights from the Alternative Research Context of Transforming Economies. International Business Review, 21: 269-280. Yu, J., & Kim, S.S. (2012). Understanding Liability of foreignness in an Asian Business Context: A Study of the Korean Asset Management Industry. Springer Science + Business Media, 1192-1213. Read More