Current Economic Global condition and its impact on Toyota Motor Company

CONTENTS

1. Introduction......................................................................................2

2. 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……….......7-8

Conclusion............................................................................................9

References...........................................................................................10-11

IEE-MBA STUDENT ID: KIM07225275 Page 1

Introduction

In this assignment student will analyze the current economic global condition and its
impact 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 yen
from a year earlier (Zacks, 2012).
The company was founded in 1937 and it comprises of 317,716 consolidated
workforces as of much 31, 2011 (Toyota, n.d). Toyota was leading in units of car
production which is its main business in 2010 (OICA, 2010) followed by G.M and
Volkswagen.
Toyota became world‟s largest automaker by units sold from 2008 to 2010 as the US
market 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 a
natural disaster in Japan i.e. Earthquake/Tsunami and flooding in Thailand which saw a
number of plants closed. Currently General Motors a USA automobile company among
the “big three” is number one after three years out of the top. Its comeback was officially
on Jan 19, 2012 after 2011 final financial statement.

Following this disaster which was the worst since World war II to bridge the gap Toyota
concentrate in manufacturing Prius and luxury-brand Lexus hybrids according to
Kitamura et al. (2012), other cars which introduced with a cutting edge technology are
Hydrogen fuel-Cell vehicles until 2020, this year battery-powered RAV4 and Scion IQ
models 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, in
America including USA with six major factory and Canada, In Africa including S.A, and
Ghana, In EU including France and UK, IT also have joint venture and under license
factories in Ghana, China, Zimbabwe, US, India etc.


ANALYSIS OF TOYOTA’S CURRENT GLOBAL ECONOMIC CONDITIONS

Divorce ownership from control

Toyota Motor Company is a conglomerate company with huge economies of scale, this
made Toyota to gain advantage over its rivals Krugman (1979). This has been possible
following a wide operation of the company with a number of productive operating
factories worldwide as explained in introduction. Toyota has capacity to manufacture
hundreds of thousands of units, this gives economies of scale which occurs when cost
per unit of output fall as the scale of production increases. The economies of scale has
been possible due to lower TPS which embrace division of labor with increases
productivity 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 its
manufacturing system known as Toyota Production System (TPS). Toyota doesn‟t
operate by „divorcing ownership from control‟, managers are responsible for every
single step in production system regardless of title, seniority or tradition. Toyota lost
direction in manufacturing process to ensure quality of its product when it had a big
blow following accelerator pedal problem which damaged the firm reputation and fell of
U.S market share from 17% at the end of 2009 to just more than 15% in Dec 2010, this
forced Toyota to discount price to attract buyers and regain trust Seethaaman and
Crawley (2011). The problem can be easily prevented from happening in future if
Toyota can go back to its “Go and See” style of working by avoiding „divorce of
ownership from control‟.
Team leaders (Supervisors), in Toyota plays their part in encouraging production line
workers to actively think about quality improvement and quality control (Kaizen).There is
managerial technological transfer whereby managers/senior staff transfer technical
information and know-how and technique (Sedgwick, 1996).
In Kaizen philosophical practice the continuous improvement of activities involves all
employees from CEO to the assembly line workers. Toyota CEO and other leaders
practices what is called “Genchi Genbutsu” which means “go and see” which is the key
in TPS this was introduced by Taichi Ohno creator of TPS who claimed the only way to
understand what is happening on the floor was to go there, it is there where the value is
added and is here where the waste could be observed (Toyota, n.d). The approach is
key in solving problem it is compared with “Management by wondering about” rather
than the distant giving of orders Morden (2004). Genchi Genbutsu style of monitoring
and control is very important for Toyota especially at the moment as is struggling to
bridge the gap following lost of faith from its customers due to gas pedal mechanical
problem which led to recall of a number of cars which will ensure quality assurance and
constant improvement.


Perfect/Imperfect Competition

Toyota operates in imperfect competition, which prevails in an industry whenever
individual seller can affect the price of their input. However the imperfect competition
does not absolute control over the price of its product (Samuelson, 2010). Due to this
imperfect competition demand a finite elasticity this has a serious effect on pricing of
product, Toyota need to be “price markers” and not “price takers” by deciding on the
price of their cars, in perfect competition perfect competitors take the price as given.
This imperfect competition automobile Industry where Toyota operates is oligopolistic in
nature dominated by large automobile companies‟ with significant power. Oligopoly
means 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 Toyota
cars are distinguishable from other cars although they are all cars but it is different from
Hondas, 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 one
can say Toyota sometimes can be monopolistic competitor who is automatically
becomes “price setter”. The main feature in oligopoly is that an individual firm can affect
prices of other firm i.e. If BMW prices is reduced other automobile companies car
prices go down, the decision of price in one firm set off price war which lower down the
cost of cars by other competitors.

Price elasticity of demand

Price and demand of a product is crucial aspect which has to be considered by Toyota
in marketing economy as price and demand influence consumer what to buy.
Consumers‟ demands more in lower price and less at higher price. Price elasticity of
demand is a measure of the magnitude by which consumers alter the quantity of some
product that they purchase in response to change in the price of that product Boyes and
Melvin (2012).
Price elasticity of demand will help Toyota to determine how much a unit should cost in
line 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 of
elasticity as customer can easily switch from one product to another. This is likely to
happen in automobile industry due to different players with different car model Michael
et al. (2001). In a pure competitive market where there are a number of substitute for
any one product, the demand curve for that product is perfectly elastic (McConnell and
Brue, 2004).
Percentage of income can also affect elasticity of demand, the more the percentage of
income the more the elasticity. Toyota marketing survey can help to determine the level
of income of its prospective customers (customer segment) hence setting price and


model of the car accordingly especially at the current time when customer are very price
conscious 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 its
customers to make products into more inelastic demand Andrew (2007). Other factors
which 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 affect
its net income due to demand, quality, price and brand, these are inelasticity for its
normal cars which will attract more customers due to its longstanding reputation but
also 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 2014
in the four BRIC as predicted by Boston Consulting Group Eisenstein (2010). In
TOYOTA the turnover of customer (“marketing churn”) is relatively small and this is
because of brand loyalty.

Trade Blocs

For Toyota to have access to different market it is important to have regional economic
integration with other countries, to facilitate this. Trade blocs is the economic integration
among countries which where the regional barriers i.e. tariff are reduced or eliminated
among member countries Schott (1991). Toyota has a number of International and
regional integration which assisted to widen its market shares hence increases in
marginal profit. Japan is a member of Asian-Pacific Economic Cooperation (APEC)
which is a forum comprises of 21 member countries with the objectives of promoting
free trade environment and economic integration throughout the region APEC (n.d).
This kind of cooperation is very important for any business success whenever one go
global, some of the trade blocs are the bilateral free trade agreement called ASEAN
which comprise Australia, Newsland, China, India, Korea and Japan. Another
agreement is European Union Free Trade Agreement with Japan. Example of
importance in economic integration can be found in UK when the government protected
the market by initiating scrappage scheme following Global recession, the scheme was
giving some incentive to customer to replace old vehicle with a brand new one. The
scheme aimed removing /reducing old cars high emission from the road but also aimed
to stimulate the automobile industry which was shambling, the scheme provided vital
stimulus to the automotive sector and was jointly financed by manufacturer and
Government by giving £2000 discount to customer when they scrap a car older than 10
years BBC (2010). The scheme helps Toyota to stand on its toe and to continue with its
current operation which is not doing badly.


However this kind of integration has a serious impact especially when among member
countries are/is economically shambling. The genuine example is the global economic
crisis which caused poor sales of Toyota cars in EU, US and other regions, the crisis
even caused slow growth in emerging market (BRIC), this effect is not over there is
ongoing financial crisis in EU which prevailing in Spain, Italy and Portuguese, the
Eurozone 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‟ limit
of 11% penetration of the market Ajami et al. (2006), this is how trade bloc can hinder a
swift trading.

Theories of International Trade

According to Ajami et al. (2006), “Theory of International Trade” attempts to provide
explanations for trade motives, underlying trade patterns, and the ultimate benefits that
come from trade. An understanding of these basic factors enables a firm to determine
how 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 country's 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, Factor
proportional theory, International product theory and National competitive advantage
theory. In this report I will go through every theory.

Theory of Comparative advantage suggests that trade between countries take place
because one country is able to produce a product at a lower price than is possible
elsewhere. According to Gilligan, et al. (1986) genuine examples here are Japanese
companies such as Sony and Hitachi came to dominate British Television market in
1970s. Their strategy was based on higher product quality, better design and lower
prices.
Coming to Toyota they are enjoying the same, the lower prices that were made possible
by far greater economies of scale and better manufacturing technology than was
currently being achieved by domestic producers. The relatively cost of TOYOTA cars is
what underpins this comparative advantage over those of other countries. Another
fundamental reason for Toyota comparative advantage is its corporate philosophy with


sets of rules and attitude that govern the use of its resources, this is TPS which
depends on human resources and supply networks.

Potential effects of climate change

For some years there is growing awareness of climate change from environmental
organisation and activists including Friend of Earth. Following pressure from these
organizations different manufacturers have been aware and responding to the call,
Toyota is among those companies which are committed toward environmental issues
facing the World. The concern has taken a huge capital and committed from Toyota with
a number of R&D projects. Despite of these projects being costly to Toyota but they
worth on the other side, as Toyota has become more innovative especially in green
technology, this increases its reputation and competitive advantage. Some of the project
Toyota is doing is designing and manufacturing Full Cell Technology cars (FCVs) which
are powered by fuel which generates electricity from Hydrogen, another technology is
that 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 leader
in the efforts to create a recycling based society using cutting edge technology Toyota
(n.d).

Porter’s five forces and Structure Conduct Performance

In 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 discussed
above. For porter business strategy (he terms “competitive strategy”) is all about dealing
with the competition and completion is industry based. These five forces as identified by
Michael Porter are Degree of Rivalry, Threat of Substitute, Barrier of Entry, Power of
Buyers and Power of Suppliers.
According to porter Ideal Industry is very attractive in terms of growth and profitability
but with high barriers to entry.
In view of automobile industry let‟s see how Porter‟s Five Forces can be helpful in
understanding the forces at play. The analysis will determine the competitive intensity
and attractiveness of the Industry where Toyota is in.

Degree of rivalry globally there is intense competition currently among the top
automobile manufacturers. As said earlier Toyota was at the top for three successful
three year, now has lost its top post and taken by GM. The big three and Japanese car
makers i.e. Honda and Toyota have gone globally into US and Western Europe, this


further increase competition. However as said earlier there is still a room for new
emerging market in BRIC countries this is a good news for Toyota.

Threat of substitutes in automobile is fairly mild. Regardless of other forms of transport
available but none of them offer the utility, convenience, independence and value
offered by automobiles. The emerging means like motorcycle, fast train, coaches still
cannot offer the convenience cars can offer.
Barrier to entry into the automobile industry are stiff and has make the industry less
attractive. Before firm enter industry must be aware of attractiveness of the industry in
terms of profitability, growth etc. The barriers to entry can be due to technology, legal
location, the loyal customers, switching costs, competititors reaction etc. It is not easy
for a new company to open automobile plant, due to enormous start-up capital and
complication of the technology in the current economic uncertainty.

Buyer and Supplier have less power, suppliers are many and normally lack bargaining
power. However customers/buyer sometime has a huge effect on the product and they
can determine the demand and supply.


CONCLUSION

In general the economic situation at the moment is uncertain not only for Toyota but the
whole automobile Industry due to instability of economy. However still there is as huge
chance for Toyota to bounce back to World number one. By sticking to its culture of
doing things i.e. Kaizen and TPS including examining price and income elasticity
demand Toyota can carry the Company through the current economic downturn.
Technological innovation including R&D on hybrid cars can enable Toyota to gain
advantage in these rare opportunities. Toyota need to adjust with the changing of tastes
and environment concern as it is doing now to maintain its position in the industry, its
sound financial muscle and expertise of its workforce can make this possible.


REFERENCES

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Boyes, W. and Melvin, M. (2012) Microeconomics

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