A Strategic Plan for Toyota Motors - Term Paper Example

Strategic Analysis For Toyota Motors of 12 January 2008 Introduction: This paper seeks to prepare a strategic plan for Toyota Motors using the case study: ‘The Global Car Industry: Preparing for the 21st Century’ (Porter, 2005) and other secondary research in order to collect additional data to gain an updated understanding of the relevant challenges and opportunities of the automotive industry. Task One is therefore about the external environment of the automotive industry while Task Two is about the internal environment of Toyota Motors. Task Three will make use of the findings of task one and task two in designing strategies for the company. Corporate strategies are made to attain corporate objectives and this paper assumes that objectives are set which are either economic or non-economic. The same strategies will be prepared using the SWOT model. SWOT means strengths, weaknesses, opportunities and threats. Strategies for this paper must make use of companies identified strengths and weaknesses by tapping of those strengths and neutralizing, avoiding or correcting its weaknesses while taking advantage of the industry opportunities and protecting the company from industry threats. 2. The Tasks and Their accomplishments 2.1 Task One This part of the papers seeks to analyse and critically evaluate the competitive terrain under consideration in order to identify the prevailing conditions in the wider environment and the dynamics of the specific industry that can potentially impact and affect the company. The immediate purpose for this part is to determine the industry opportunities and threats using Porter’s five forces model (Porter, 1980). Industry opportunities are characteristics of industry based on five forces which promises to players with greater profitability (Brigham and Houston; 2002: Droms, 1990). They must however be taken advantage by a wise industry player. Conversely industry threats makes the situations bad by industry players, but wise player must be able to avoid or go around these threats in order to be successful or to even to survive in the industry. Industry opportunities and threats must be viewed from the point of view of the present players of the industry. 2.1.1 Opportunity: Low Threat of New Entrants Prospective new entrants would most likely be discouraged to come in into the automobile industry because the industry may be made to be very mature having reached productively reached economies of scale. Incapacity to mass produce vehicles bars new comers into the industry since this is the only way to make the product affordable to the consumers. This is also brought by the fact that industry requires a big amount capital being capital specially evolving trends in the industry as brought about by changing technology and the demand for more environment-friendly products. Hence, the requirement for large budget for research and development which is necessary for the innovation requirements. Another fact that is causing difficulty of entry is the access to distribution channels which a new comer must have to hurdle. This must be so in the light of need for more spaces to keep possible varieties of inventory. 2.1.2 Opportunity: Low Bargaining Power of Suppliers The low bargaining power of suppliers in the industry is caused by numerous parts needed to produce cars thus many suppliers are required to accomplish this reality thus enabling car manufacturers to switch to suppliers as necessary. 2.1.3 Threat: Moderately high Bargaining Power of Buyers The moderate high bargaining power is brought by the large number and scattered buyers all over the world. They could be individuals or institutions and they reason why the industry still exists thus making customer or buyers happy is the concern of every car manufacturer. This also results to low switching cost as buyer could change brands anytime. 2.1.4 Opportunity: Low Threat of Substitute Products The absence of ready substitute products for automobiles makes it favourable for industry players. Although walking and riding bikes may good for the health as being promoted by sports people, the same substitutes to car cannot bring people to place where there really want to go. Of course people can take the mass transport like a train or a bus but the same would normally be influenced by the geographic location of the consumer the location of the consumer which are basically geographical. 2.1.5 Threat - Very Strong Intensity of Rivalry among Competitors A strong rivalry in the industry is brought the presence of few big players like GM, Ford, and Honda which may be considered so closely balanced thus their rivalry become great. Because of the difficulty of the entry, the remaining players are undergoing very strong competition as one player tries to take market share from the existing players. Although they have their own brands differentiation is not so readily materials that according to Porter their products are becoming more similar (Porter, 2005). Customer may easily make comparison of the price, quality, durability, and many other aspects of different manufacturers of the products from existing players and this practice is being encouraged by the players as they advertise their products to the market. Industry players are into huge expansion of third-generation hybrid car production including Toyota, and BMW which has joined forces with both Daimler and General Motors to develop hybrids in a bid to catch up (The Thinking CEO, n.d). 2.2 Task Two This part carries out the required internal environmental analysis in order to complete your overall analysis. This paper will use of the combination of following models of value chain and value systems, core competencies and capabilities and financial analysis to attain the objective of getting the company’s strengths and weaknesses. Strengths make the company deliver good performance to its customer while weaknesses would restrain or restrict the company from doing the same as against competitors. 2.2.1. Strength – Toyota’s three major brands under Toyota, Lexus, and Scion reach large extent of customers around the world. By these brands the company can reach many sectors of the globe by targeting specific global regions, such as the Carina E of the European Segment. Compared with competitors, the company had developed its own growth organically. (Porter, 2005) Having introduced its latest hybrid power car called Toyota Pirus, in 2003 at New York the company was able to sell more that 17,000 units which is five times more than its target 3,000. Hybrid cars were actually produced in response to the requirements of environmental laws and in order to live with increasing price of gasoline and oil 2.2.2 Strength - The Company lives by kaizen and kaikaku. Kaizen is defined as continuous pursuit of incremental improvements while Kaikaku is defined as revolutionizing for benefits on a bigger scale. The President of the company admitted that these two approaches are helping the economy (Samuelson and Nordhaus, 1992) to continuously and dramatically strengthen its competitiveness. This is strength for the company since it has helped the company to become as one of the leaders in the car manufacturing industry. This philosophy is also helping company build vehicles where the demand for its products is found. By manufacturing so in regions where demand exists, the company claims to shorten “lead time from order to production while creating local employment and contributing to the development of local economies.” It also helps the company to pursue “innovation in production engineering technologies and systems to achieve efficient production while ensuring uniform quality worldwide. Toyota now has production bases around the world as a result of this strategy. Widespread operations have two significant advantages; they steadily supply Toyota vehicles to various markets and they hedge.” 2.2.3 Strength: Speed and capacity in production The company is characterized by a combination of speed and flexibility which can be considered world class given its 30 plants around the world and which is enabling the company to produce up to eight models of on the same line (Business Week, 2003). 2.2.4 Weakness – Less horsepower found in its vehicles compared with competitors. Toyota Motor Company compared with Hundai has weaker horsepower in the former’s vehicles on the average yet Hundai cost cheaper against comparably segmented Toyota vehicle (Amherst). Toyota is performing less also under the luxury line where Lexus is competing with BMW sedan performing better in SUV sales (Business Week, 2003). In conducting financial analysis for Toyota, the following information is necessary. 2007 2006 2005 2004 2003 Toyota Net Profit Margin 0.07 0.07 0.06 0.07 0.05 Gross Margin 0.20 0.19 0.20 0.20 0.20 Inventory turnover 1.06 1.07 1.03 1.06 2.00 Fixed Asset Turnover 1.23 1.28 1.32 1.40 2.69 Total asset turnover 0.78 0.79 0.80 0.82 1.54 Quick ratio 0.85 0.91 0.99 1.02 1.08 Current Ratio 1.00 1.07 1.15 1.16 1.22 EBITDA Coverage NA NA NA NA NA Times Interest Earned NA NA NA NA NA Debt ratio 0.64 0.63 0.63 0.63 0.65 Debt equity ratio 1.75 1.72 1.69 1.69 1.83 Return of Assets (Dupont No.1) 0.05 0.05 0.05 0.05 0.04 Return on Equity (Dupont No.2) 0.14 0.13 0.13 0.14 0.11 Source: MSN Money (2008) Based on the above table, the following are the company’s strengths: 2.2.5 Strength – Consistent Profitability for the past years. The company’s profitability ratios of Toyota are higher than its competitors. To compute profitability ratios, which are used to measure company’ performance for given periods, there is a need to get revenues and expenses and the revenues must exceed the expenses to show profits (Bernstein, 1993). As could be observed above. Toyota Motors has very high revenues for the year ended March 31, 2007 reaching a level of ¥23.9 trillion or US $209.09 billion. From its high revenues cost of goods sold are deducted to get the gross profit and by dividing the latter figure to the total revenues, the gross margin is derived. Specifically, the gross margins for Toyota Motors are Gross Margin 0.20, 0.19, 0.20, 0.20 and 0.20 for the years 2007, 2006, 2005, 2004 and 2003 respectively which are normally higher than competitors. To reflect further deduction of operating expenses and taxes from the gross margin it to arrive at net profit margin. As expected the company’s Net Profit Margin 0.07, 0.07, 0.06, 0.07 and0.05 for the years 2007, 2006, 2005, 2004 and 2003 respectively were indeed proof of consistent and continuing profitability of the company. 2.2.6 Strength- Generally Good Liquidity A business is not only interested in its profitability but also in its liquidity which indicates is capacity to meet its currently maturing obligations. Short term creditors particularly the suppliers of goods and services to the company demand that their services and/or deliveries must be paid on time. The salaries of employees are also included in this kind of short term obligations. If the company cannot meet its short term obligations, it may find itself unable to pay these short-term interested claims and the organization may suffer. Quick assets (Helfert, 1994; Meigs and Meigs ,1995) therefore include basically cash and cash equivalents, marketable securities and other short term investments and receivables, and other current liabilities except inventories. Getting the total of these assets and dividing the said total to current liabilities would therefore indicate a company’s quick asset position in terms of quick ratio. In instant case, quick ratios of Toyota are 0.85, 0.91, 0.99, 1.02 and 1.08 for the years 2007, 2006, 2005, 2004 and 2003 respectively which indicate that the company could still meet its currently maturing obligations. This is further confirmed by its greater than 1.0 average current ratios at 1.00, 1.07, 1.15, 1.16 and 1.22 for the years 2007, 2006, 2005, 2004 and 2003 respectively. 2.2.7 Strength - Very Good Solvency Toyota debt to equity ratios are 0.64, 0.63, 0.63, 0.63 and 0.65 for the years 2007, 2006, 2005, 2004 and 2003 respectively and one could see that it is very good considering that on the average the company was able to maintain the same through out the five year period and this shows the company’s long term health.. Debt ratio is used to measure the ratio of debt total assets (Van Horne, 1992; Weston and Brigham, 1993). Hence the greater the result of the formula, the greater is the exposure the firm debts. While creditors prefer low debt ratios due to greater cushion against creditor’s losses in case of liquidation by the stockholders may want more leverage because it signifies higher earnings. 2.3 Task Three – Competitive Strategies Based on the industry’s opportunities and threats as well company’s strengths and weakness this part aims to “develop appropriate competitive strategies for the next 5 years for Toyota with “with particular emphasis on the first three years.” The following business models are used: General Electric Matrix, Directional Policy Matrix, Ansoff Matrix and Relevant numerical analysis 2.3.1 Strategy No 1. -- Continue to invest in research and development to improve on their vehicles and to be attuned with the latest technology. Basis 1: Strength - The company lives by kaizen and kaikaku. Pursuing greater R & D is not new to Toyota and hence it can use its philosophy which is also one its strengths - living by kaizen and kaikaku. The company would be making use of its great strength and many things could be achieved including sustaining present situation. Basis 2: Threat: Moderately High bargaining power of buyers. The high bargaining power of buyers could be reduced by trying to address really what they demand as products from car producers. The best was to meet customers who are increasingly incorporating the impact of climate change into their purchase decisions is to be able to address that specific need by readily available information that could be obtained through its R &D Efforts. Its production of is Toyota’s hybrid is already the best proof of the R & D efforts but the rules of competition are highly influenced by fast changing condition, thus to get there ahead there is a need for strong R & D. In an interview with the company president, it was said that for the company to build a solid foundation for sustainable growth, there is need to focus on three areas which include: quality, cost competitiveness, and personnel training. To attain this, there is a need to have a strong and continuous R & D efforts and investments (Toyota, 2007). Basis 3. Weakness – Less horsepower found in its vehicles compared with competitors. Investing in R & D would at least neutralize or correct this weakness as this would put the company at par if not better compared with competitors. 2.3.2 Strategy No 2: Continuously launch products that will stimulate market demand The company claims to have launched the new Corolla—a core global model—in Japan during fiscal 2007, and they are not now introducing it in markets worldwide. It further claims to have made great gains in selling in Japan and in Europe it’s strategic about its Auris model (Toyota, 2007). Basis 1. Strength: Speed and capacity in production This strategy will allow the company make the most from its strength of speed and capacity in production. Compared with its creditors who had expanded via the acquisition, Toyota had usually grown organically that had eventually having about thirty plants around the world which the company can make full use by an industry that is characterized by fast changing technology. If it will not do this strategy, the company may just be wasting the big investments that it has made for these plants. This speed and capacity has actually already enabled the company to cater to regional characteristics by watchfully fine-tuning strategies across all of its operational stages which include those of developing the product to producing and selling the same in response of customer needs and wants on a per region basis around the world (Toyota, 2007). Basis 2 - Strengths – Profitable Operation, Generally Good Liquidity and Very Good Solvency The company is into the business of car manufacturing and it continues to live as long as customers exist to buy them. The need to adjust to these needs is not only a duty on the part of the company but a well crafted strategy to be able to survive the industry and making use of its profitability , liquidity and solvency are only expected since the same must also be sustained, thus the need to satisfy customers. Continuously launch products that will stimulate market demand would be making use of the company’s profitable operation and the same is expected to generate further profitability because there would be more revenues. The same may be said of the use of the company’s liquidity. A company may make of its funds to serve a greater number of customers and the same could be a better option than giving the extra funds to stockholders as dividends more as the company has already given to stockholders good dividends. Moreover, customers are very reason why the company is in business, hence it is only expected that these customer would be continuously served by giving them the products that they deserve. 2.3.3 Strategy No. 3: Joint venture or strategic alliance with suppliers Basis 1: Opportunity: Low Bargaining Power of Suppliers Adopting this strategy would help the company to take advantage of low bargaining power of suppliers in the industry which is caused by numerous parts supplied. This will shorten lead time and will help the company to deliver products ahead of its competitors. Basis 2 Threat: Moderately high Bargaining Power of Buyers The moderately high bargaining power caused by the large number and scattered buyers all over the world would at least be defended upon and this would place the company to be better than competitors in delivering products or services faster to discourage customers or buyers who could easily switch brands. Basis 3: Opportunity: Low Threat of Substitute Products The absence of readily available substitute products for automobiles would be taken advantage as customers would be more glued into purchasing company’s products instead of scouting for product substitutes. Basis 4: Threat - Very Strong Intensity of Rivalry among Competitors Toyota would be place better than competitors that would help the company to at least avoid the very strong intensity of rivalry. While competitors would be switching to other suppliers, the company would be hastening the process in going faster to customers in terms of faster delivery of products or services due reduced lead times. 2.3.4 Strategy No. 4: Make more customized cars that fit the demand in the local markets as planned in Indonesia to Argentina plants. This strategy is basically related with the proposed second strategy of continuously launching products that will stimulate market demand. This is however more focused on a per region basis which is within the capacity of the company. Basis 1 - Strengths – Profitable Operation, Generally Good Liquidity and Very Good Solvency Since basically the company would be spending its resources to accomplish this strategy, it essentially has almost the same basis as strategy 2. Being therefore in the business of car manufacturing and being obligated to serve its customers continuously the company will have to consider its global standing in the context of different needs and culture of its customer across the globe. Making use of its profitability , liquidity and solvency (Ross et. al .1996) would be doing justice to its customer and at the same time promises to the company further sustained profitability , liquidity and solvency which it will need in the future according to its mission. Basis 2 - Opportunity: Low Threat of Substitute Products This strategy will also take advantage of the opportunity of low substitute products since products that are customized will further strengthen relationships with customers since they would convinced customers not to go with substitute products. Basis Threat - Very Strong Intensity of Rivalry among Competitors A strong rivalry in the industry may be neutralized by customizing products. This strategy would therefore create differentiation that would be very beneficial for the company. As competitors would normally advertise by comparing price, quality, durability, and many other aspects, the company would be protected by having customized its products according to what is demanded by the market. 3. Conclusion This paper was able to prepare strategic plans for Toyota Motors for the next five years using the given cases and other secondary research. Industry opportunities and threat were identified after analyzing the external environment using Porter’s five forces model. The company’s strengths and weakness were also identified using value chain and financial analysis. The third part were devoted to the preparation of corporate strategies bases on identified industry opportunities and threats as well us company’s strengths and weaknesses. From the strategies prepared there seems to be no consistent taking advantage of the industry opportunities that would sustain the company’s apparently long term health over the years. As compared with its competitors, Toyota appeared to have chosen to grow more organically than its competitors who have chosen acquisition and mergers to grow. The historical past of Toyota confirms it valuing of the total quality management which it has introduced in to way of doing of business and which it has integrated into its culture. Choosing also to grow organically appear to teaching Toyota’s management to value the learning and experience which it wants to pass on it employees as it continued to develop its human resource as primary source of its competitive advantages. Although it is continuing to invest in research and development so to ahead in technology as against competitors, Toyota still gives more importance to its people who will manage the ever- changing technological advances. 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