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Current Economic Global condition and its impact on Toyota Motor Company


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  • 1. CONTENTS1. Introduction......................................................................................22. Analysis of Toyota current Global economic situation.....................3-8 Divorce of ownership......................................................................3-4 Perfect/Imperfect Competition........................................................4 Price elasticity of demand...............................................................4-5 Trade Blocs.....................................................................................5-6 Theories of International trade........................................................6-7 Potential effects on climate change................................................7 Porters 5 Forces and Structure Conduct Performance……….......7-8Conclusion............................................................................................9References...........................................................................................10-11IEE-MBA STUDENT ID: KIM07225275 Page 1
  • 2. IntroductionIn this assignment student will analyze the current economic global condition and itsimpact on Toyota Motor Company as my chosen organization.Toyota Motor Corporation is an automobile company operating Worldwide(Multinational) with headquarters in Japan, with US as the largest market for Toyota.Toyota have 14.5% of market share in US in Jan-May 2012 led by GM with 17.8%followed by Ford Motor Co. with 15.6% of market shares according to Zacks (2012).Toyota‟s net profit for fiscal year 2011-2012 ending Mar 31, 2012 plummeted by 30.5%and amounted to 283.56 billion Yen (3.54 billion dollars) compared to 408.18 billion yenfrom a year earlier (Zacks, 2012).The company was founded in 1937 and it comprises of 317,716 consolidatedworkforces as of much 31, 2011 (Toyota, n.d). Toyota was leading in units of carproduction which is its main business in 2010 (OICA, 2010) followed by G.M andVolkswagen.Toyota became world‟s largest automaker by units sold from 2008 to 2010 as the USmarket collapsed and G.M slid toward its 2007 bankruptcy (Ohnsman and Tudell, 2012).In 2011 Toyota ceding its title as the world‟s largest automaker to G.M following anatural disaster in Japan i.e. Earthquake/Tsunami and flooding in Thailand which saw anumber of plants closed. Currently General Motors a USA automobile company amongthe “big three” is number one after three years out of the top. Its comeback was officiallyon Jan 19, 2012 after 2011 final financial statement.Following this disaster which was the worst since World war II to bridge the gap Toyotaconcentrate in manufacturing Prius and luxury-brand Lexus hybrids according toKitamura et al. (2012), other cars which introduced with a cutting edge technology areHydrogen fuel-Cell vehicles until 2020, this year battery-powered RAV4 and Scion IQmodels which are hoped to bring Toyota back to a leading position Kitamura et al.(2012).Toyota operates Worldwide with manufacturing factories in Asia including Thailand, inAmerica including USA with six major factory and Canada, In Africa including S.A, andGhana, In EU including France and UK, IT also have joint venture and under licensefactories in Ghana, China, Zimbabwe, US, India etc.IEE-MBA STUDENT ID: KIM07225275 Page 2
  • 3. ANALYSIS OF TOYOTA’S CURRENT GLOBAL ECONOMIC CONDITIONSDivorce ownership from controlToyota Motor Company is a conglomerate company with huge economies of scale, thismade Toyota to gain advantage over its rivals Krugman (1979). This has been possiblefollowing a wide operation of the company with a number of productive operatingfactories worldwide as explained in introduction. Toyota has capacity to manufacturehundreds of thousands of units, this gives economies of scale which occurs when costper unit of output fall as the scale of production increases. The economies of scale hasbeen possible due to lower TPS which embrace division of labor with increasesproductivity due experienced staff concentration on fewer number of tasks Vasigh et al.( 2008 ).Toyota success has its roots in its leadership style which is expressed in itsmanufacturing system known as Toyota Production System (TPS). Toyota doesn‟toperate by „divorcing ownership from control‟, managers are responsible for everysingle step in production system regardless of title, seniority or tradition. Toyota lostdirection in manufacturing process to ensure quality of its product when it had a bigblow following accelerator pedal problem which damaged the firm reputation and fell ofU.S market share from 17% at the end of 2009 to just more than 15% in Dec 2010, thisforced Toyota to discount price to attract buyers and regain trust Seethaaman andCrawley (2011). The problem can be easily prevented from happening in future ifToyota can go back to its “Go and See” style of working by avoiding „divorce ofownership from control‟.Team leaders (Supervisors), in Toyota plays their part in encouraging production lineworkers to actively think about quality improvement and quality control (Kaizen).There ismanagerial technological transfer whereby managers/senior staff transfer technicalinformation and know-how and technique (Sedgwick, 1996).In Kaizen philosophical practice the continuous improvement of activities involves allemployees from CEO to the assembly line workers. Toyota CEO and other leaderspractices what is called “Genchi Genbutsu” which means “go and see” which is the keyin TPS this was introduced by Taichi Ohno creator of TPS who claimed the only way tounderstand what is happening on the floor was to go there, it is there where the value isadded and is here where the waste could be observed (Toyota, n.d). The approach iskey in solving problem it is compared with “Management by wondering about” ratherthan the distant giving of orders Morden (2004). Genchi Genbutsu style of monitoringand control is very important for Toyota especially at the moment as is struggling tobridge the gap following lost of faith from its customers due to gas pedal mechanicalproblem which led to recall of a number of cars which will ensure quality assurance andconstant improvement.IEE-MBA STUDENT ID: KIM07225275 Page 3
  • 4. Perfect/Imperfect CompetitionToyota operates in imperfect competition, which prevails in an industry wheneverindividual seller can affect the price of their input. However the imperfect competitiondoes not absolute control over the price of its product (Samuelson, 2010). Due to thisimperfect competition demand a finite elasticity this has a serious effect on pricing ofproduct, Toyota need to be “price markers” and not “price takers” by deciding on theprice of their cars, in perfect competition perfect competitors take the price as given.This imperfect competition automobile Industry where Toyota operates is oligopolistic innature dominated by large automobile companies‟ with significant power. Oligopolymeans few sellers, this can be from 2 or as large as 10 to 15 firms (Samuelson, 2010).However the oligopoly nature of automobile industry can be further argued, as Toyotacars are distinguishable from other cars although they are all cars but it is different fromHondas, Chevy‟s etc especially those designed for green technology are purely non-homogenous product with differentiation and of its own brand image, due to this onecan say Toyota sometimes can be monopolistic competitor who is automaticallybecomes “price setter”. The main feature in oligopoly is that an individual firm can affectprices of other firm i.e. If BMW prices is reduced other automobile companies carprices go down, the decision of price in one firm set off price war which lower down thecost of cars by other competitors.Price elasticity of demandPrice and demand of a product is crucial aspect which has to be considered by Toyotain marketing economy as price and demand influence consumer what to buy.Consumers‟ demands more in lower price and less at higher price. Price elasticity ofdemand is a measure of the magnitude by which consumers alter the quantity of someproduct that they purchase in response to change in the price of that product Boyes andMelvin (2012).Price elasticity of demand will help Toyota to determine how much a unit should cost inline with present economy and other factors which determine price elasticity i.e.Availability of substitute- whenever there is high level of substitute there is high level ofelasticity as customer can easily switch from one product to another. This is likely tohappen in automobile industry due to different players with different car model Michaelet al. (2001). In a pure competitive market where there are a number of substitute forany one product, the demand curve for that product is perfectly elastic (McConnell andBrue, 2004).Percentage of income can also affect elasticity of demand, the more the percentage ofincome the more the elasticity. Toyota marketing survey can help to determine the levelof income of its prospective customers (customer segment) hence setting price andIEE-MBA STUDENT ID: KIM07225275 Page 4
  • 5. model of the car accordingly especially at the current time when customer are very priceconscious following economic uncertainty.Brand loyalty is another important factor, Toyota need to maintain its image of quality,reliable and safe cars yet cheaper, this can easily override price sensitivity mind of itscustomers to make products into more inelastic demand Andrew (2007). Other factorswhich need to be considered are duration it takes for the price of goods to be displayed,necessity of goods, who will pay for the product etc. Andrew (2007).Toyota‟s price and income elasticity is likely to have two faces, which would not affectits net income due to demand, quality, price and brand, these are inelasticity for itsnormal cars which will attract more customers due to its longstanding reputation butalso will have premium priced cars for the cutting edge environmentally friendly cars,which for sure there is customer segment for it especially the emerging market by 2014in the four BRIC as predicted by Boston Consulting Group Eisenstein (2010). InTOYOTA the turnover of customer (“marketing churn”) is relatively small and this isbecause of brand loyalty.Trade BlocsFor Toyota to have access to different market it is important to have regional economicintegration with other countries, to facilitate this. Trade blocs is the economic integrationamong countries which where the regional barriers i.e. tariff are reduced or eliminatedamong member countries Schott (1991). Toyota has a number of International andregional integration which assisted to widen its market shares hence increases inmarginal profit. Japan is a member of Asian-Pacific Economic Cooperation (APEC)which is a forum comprises of 21 member countries with the objectives of promotingfree trade environment and economic integration throughout the region APEC (n.d).This kind of cooperation is very important for any business success whenever one goglobal, some of the trade blocs are the bilateral free trade agreement called ASEANwhich comprise Australia, Newsland, China, India, Korea and Japan. Anotheragreement is European Union Free Trade Agreement with Japan. Example ofimportance in economic integration can be found in UK when the government protectedthe market by initiating scrappage scheme following Global recession, the scheme wasgiving some incentive to customer to replace old vehicle with a brand new one. Thescheme aimed removing /reducing old cars high emission from the road but also aimedto stimulate the automobile industry which was shambling, the scheme provided vitalstimulus to the automotive sector and was jointly financed by manufacturer andGovernment by giving £2000 discount to customer when they scrap a car older than 10years BBC (2010). The scheme helps Toyota to stand on its toe and to continue with itscurrent operation which is not doing badly.IEE-MBA STUDENT ID: KIM07225275 Page 5
  • 6. However this kind of integration has a serious impact especially when among membercountries are/is economically shambling. The genuine example is the global economiccrisis which caused poor sales of Toyota cars in EU, US and other regions, the crisiseven caused slow growth in emerging market (BRIC), this effect is not over there isongoing financial crisis in EU which prevailing in Spain, Italy and Portuguese, theEurozone crisis has a serious effect on Toyota‟s sales hence production.In Great Britain for Japanese car importers are required to adhere for a „voluntary‟ limitof 11% penetration of the market Ajami et al. (2006), this is how trade bloc can hinder aswift trading.Theories of International TradeAccording to Ajami et al. (2006), “Theory of International Trade” attempts to provideexplanations for trade motives, underlying trade patterns, and the ultimate benefits thatcome from trade. An understanding of these basic factors enables a firm to determinehow to act for their own benefit within the trading system.Trade theories answer the following questions: Why does trade occurs, is it because of price differentials, supply differentials or different in individual tastes? Do trade flows relate to a countrys specific economic and social characteristics? What are the gains from trade, and who realises these gains What are the effects of restrictions put on trading activity?These theories includes: Theory of Comparative advantage, Mercantilism theory,Theory of Absolute Advantage, Factor endowment theory, New trade theory, Factorproportional theory, International product theory and National competitive advantagetheory. In this report I will go through every theory.Theory of Comparative advantage suggests that trade between countries take placebecause one country is able to produce a product at a lower price than is possibleelsewhere. According to Gilligan, et al. (1986) genuine examples here are Japanesecompanies such as Sony and Hitachi came to dominate British Television market in1970s. Their strategy was based on higher product quality, better design and lowerprices.Coming to Toyota they are enjoying the same, the lower prices that were made possibleby far greater economies of scale and better manufacturing technology than wascurrently being achieved by domestic producers. The relatively cost of TOYOTA cars iswhat underpins this comparative advantage over those of other countries. Anotherfundamental reason for Toyota comparative advantage is its corporate philosophy withIEE-MBA STUDENT ID: KIM07225275 Page 6
  • 7. sets of rules and attitude that govern the use of its resources, this is TPS whichdepends on human resources and supply networks.Potential effects of climate changeFor some years there is growing awareness of climate change from environmentalorganisation and activists including Friend of Earth. Following pressure from theseorganizations different manufacturers have been aware and responding to the call,Toyota is among those companies which are committed toward environmental issuesfacing the World. The concern has taken a huge capital and committed from Toyota witha number of R&D projects. Despite of these projects being costly to Toyota but theyworth on the other side, as Toyota has become more innovative especially in greentechnology, this increases its reputation and competitive advantage. Some of the projectToyota is doing is designing and manufacturing Full Cell Technology cars (FCVs) whichare powered by fuel which generates electricity from Hydrogen, another technology isthat of Hybrid cars, these have a combining hybrid and fuel cell technology Toyota (n.d).Toyota has also created a „Toyota Earth charter‟ claiming is aiming to become a leaderin the efforts to create a recycling based society using cutting edge technology Toyota(n.d).Porter’s five forces and Structure Conduct PerformanceIn this last section of the report I will look at Porter‟s analysis, and Structure –Conduct-Performance model in a nutshell as other aspect relating to SCP has been discussedabove. For porter business strategy (he terms “competitive strategy”) is all about dealingwith the competition and completion is industry based. These five forces as identified byMichael Porter are Degree of Rivalry, Threat of Substitute, Barrier of Entry, Power ofBuyers and Power of Suppliers.According to porter Ideal Industry is very attractive in terms of growth and profitabilitybut with high barriers to entry.In view of automobile industry let‟s see how Porter‟s Five Forces can be helpful inunderstanding the forces at play. The analysis will determine the competitive intensityand attractiveness of the Industry where Toyota is in.Degree of rivalry globally there is intense competition currently among the topautomobile manufacturers. As said earlier Toyota was at the top for three successfulthree year, now has lost its top post and taken by GM. The big three and Japanese carmakers i.e. Honda and Toyota have gone globally into US and Western Europe, thisIEE-MBA STUDENT ID: KIM07225275 Page 7
  • 8. further increase competition. However as said earlier there is still a room for newemerging market in BRIC countries this is a good news for Toyota.Threat of substitutes in automobile is fairly mild. Regardless of other forms of transportavailable but none of them offer the utility, convenience, independence and valueoffered by automobiles. The emerging means like motorcycle, fast train, coaches stillcannot offer the convenience cars can offer.Barrier to entry into the automobile industry are stiff and has make the industry lessattractive. Before firm enter industry must be aware of attractiveness of the industry interms of profitability, growth etc. The barriers to entry can be due to technology, legallocation, the loyal customers, switching costs, competititors reaction etc. It is not easyfor a new company to open automobile plant, due to enormous start-up capital andcomplication of the technology in the current economic uncertainty.Buyer and Supplier have less power, suppliers are many and normally lack bargainingpower. However customers/buyer sometime has a huge effect on the product and theycan determine the demand and supply.IEE-MBA STUDENT ID: KIM07225275 Page 8
  • 9. CONCLUSIONIn general the economic situation at the moment is uncertain not only for Toyota but thewhole automobile Industry due to instability of economy. However still there is as hugechance for Toyota to bounce back to World number one. By sticking to its culture ofdoing things i.e. Kaizen and TPS including examining price and income elasticitydemand Toyota can carry the Company through the current economic downturn.Technological innovation including R&D on hybrid cars can enable Toyota to gainadvantage in these rare opportunities. Toyota need to adjust with the changing of tastesand environment concern as it is doing now to maintain its position in the industry, itssound financial muscle and expertise of its workforce can make this possible.IEE-MBA STUDENT ID: KIM07225275 Page 9
  • 10. REFERENCESAjami, R.A., Cool, K., Goddard, G.J., and Khambata, D. (2006) International Business:Theory and practiceAndrew, G. (2007). Foundations of Economics. Oxford University PressBBC (2010) Scrapage scheme comes to an end, Available from: , (accessed 18 Jul 2012)Boyes, W. and Melvin, M. (2012) MicroeconomicsEisenstein, P.A. (2010) Building BRICs: The four markets that could soon dominate the automotive world, Available from: could-soon-dominate-the-automotive-world/ , (accessed 18 Jul 2012)Elsey, B. & Fujiwara, A. (2000),"Kaizen and technology transfer instructors as work- based learning facilitators in overseas transplants: a case study", Journal of Workplace Learning, 12, (8) pp. 333 – 342Gillespie, A. (2007) Foundations of economicsGilligan, C. and Hird, M. (1986) International marketing: Strategy and managementIsidore, C. (2012) GM back on top in global sales race, Available at: , (accessed: 17 Jul 2012)Krugman, P. (1979), “Increasing Returns, Monopolistic Competition, and International Trade,” Journal of International Economics, 9, 469–479.Masaaki, I. (1986). Kaizen: The Key to Japans Competitive SuccessMcConnell, C.R., and Bruce, S.L (2004) Economics: Principles, Problems and PoliciesMichael, P., Melanie, P., & Kent, M. (2002) Economics. Harlow: Addison-WesleyMorden, T. (2004) Principle of ManagementOhnsman, A. & Trudell, C., (2012) Toyota Tops GM in Global Auto Sales in First Quarter, Available at: gm-in-global-vehicle-sales-in-year-s-first-quarter.html , (accessed: 17 Jul 2012)IEE-MBA STUDENT ID: KIM07225275 Page 10
  • 11. OICA (2010) World motor vehicle production: OICA correspondents’ survey without double counts World ranking of manufacturers, Available at: , (accessed: 19 Jul 2012)Seetharaman, D. & Crawley, J. (2011) Toyota recalls 2.2 million more autos as U.S. ends probe, Available from: recalls-idUSTRE71N3IU20110224 , (accessed: 15 Jul 2012)Schott, J.J. (1991) "Trading blocs and the world trading system". World Economy 14 (1) 1–17Toyota (n.d) Fuel cell Technology, Available from: , (accessed: 13 Jul 2012)TOYOTA (n.d) Company Profile, Available at:, (accessed: 20 Jul 2012 13:23:08)Vasigh, B., Tacker, T. & Fleming, K. (2008) Introduction to Air Transport Economics: From Theory to ApplicationsZacks (2012) Auto Industry Stock Outlook, Available from: ,(accessed: 19 Jul 2012)IEE-MBA STUDENT ID: KIM07225275 Page 11