As the leading auto manufacturing company, Toyota is not only the symbol of Japan, but also the one of the best business models for MNCs expansion overseas. Since the company was established in 1937, it has experienced many changes and challenges. However, depending on the distinguished competitive advantages in quality of cars and perfect management, ultimately, Toyota achieved huge success worldwide. In 2010, for example, Toyota sold 8.42 million vehicles in the global market that exceeded GM total sales (Theguardian Inc, 2011).
The aims of this paper is to analyze how Toyota keeps its sustainable competitive advantages by applying different strategies and try to find out what potential threats behind its brilliant success. The analysis is based on the Dunning’s Eclectic (OLI) paradigm, which including three specific perspectives of ownership, internalization and locational advantages.
2.1 Toyota Production System (TPS) and Just-In-Time (JIT) management
According to Akio Toyoda - the president of Toyota corporation, the company’s success is mainly attributed to two factors: Toyota Production System (TPS) and Customer Focus (Toyota annual report, 2011). Clearly, production process is an essential part not only in Toyota, but also in all-manufacturing companies that could directly affect the firm’s profitability. Hence, to highly improve the effectiveness of production system is the main project for all automakers. TPS is a typical lean manufacturing model, which could effectively avoid waste during the production process.
Moreover, due to the key feature of TPS is producing in large economic scale with highly standardized and high effectiveness, thus, any products under this system could keep low production cost (Lander & Liker, 2007). In other words, when such finished products enter into the market, they usually could gain more competing advantages by lower price. In addition, by applying the JIT tools, such as kanban-card pull system, JIT inventory management and small batch production could offer flexibility for the organization to more quickly response the changes of market in order to further reduce the cost in value chain management (Spear, 2002).
2.2 Resource – based view: core competencies of Toyota Before to deeply analyze the Toyota’s ownership advantages, it is necessary to identify its core competence based on the VRIO model: value, rarity, inimitability and organization. Table 1 – VRIO model matrix
Resource – based view| Ability| Value| Rarity| Inimitability| Organization| Marketing activity| √| ×| ×| √| Production process| √| ×| ×| √| Research & Development| √| √| √| √| Value chain management| √| √| √| ×| Corporate Culture| ×| ×| √| ×| Product differentiation| √| ×| ×| √| It has been widely argued that the Toyota’s core competence is TPS. However, due to the fact that TPS has become a standard model for many car manufacturers today, in other words, it is no longer a rare source among the fierce competing market. As a result, based on the above VRIO analysis (see Table 1), it is clear that the core competence of Toyota is their R&D ability.
As an automaker that highly requires technological and innovative inputs to match customer’s needs, the company has to pay more attention on R&D. This is not only a vital area of improving the quality, safety and environmental compatibility for existing products, but also the essential sector of providing opportunities and guarantees for Toyota’s future development.
For instance, Toyota spent over 730 billion to establish new R&D labs and develop its existing R&D centers in 2011 (Toyota annual report, 2011). In addition, based on the outstanding corporate culture of customer-focus, which is embedded at everywhere of the company, Toyota has successfully built a R&D system to get more accurate information about their customers, known as ‘Continuous Improvement’ (see Appendix - figure I). Depending on the sufficient knowledge of customers’ preference under this system, Toyota could make satisfied products to keep long-term relationship with existing customers and attract more potential consumers.
It is a fact that car manufacturing usually requires thousands of components to assemble together; particularly for the cross-national companies those are facing more complex outsourcing environment and more challenges from CAGE distance.
Hence, quality control during the production process is a decisive factor that immediately influences the automotive performance. There is no doubt that suppliers act a crucial role to determine the quality of end products. Same as other carmakers, Toyota cannot keep its distinguished advantages among competitors if the production process was contracted to third party (Anastasova & Nenovski, 2011).
Therefore, for Toyota, the best way is to have the absolute right to filter and control the global suppliers to strictly control the quality of supply. Also it is the core strategy of keeping its ownership advantages, such as TPS and JIT system. In fact, many first- tier suppliers are involved into the Toyota R&D activities; the purpose is attempting to form an invisible alliance with suppliers to pursuit the common goals of quality control in order to improve performance of final products.
Thus, Toyota must internalize the production activities and as a quality standard for foreign branches and subsidiaries through FDI, which could provide all of such necessary conditions in international operations. Moreover, depending on the core technology transfer and production internalization, Toyota could keep its sustainable competitive advantages and get the strong property rights to protect their products in developing countries that the intellectual property protection laws is usually not integrated.
According to the Toyota official announcement, currently, there are four main markets Toyota operates: Japan, Europe, North America and China (see Appendix - figure II). Relying on this global segmentation strategy, Toyota could get two obvious advantages： a. Toyota could utilize the large market and advanced technology in industrialized countries in order to keep its long-term competing advantages in the market by enhancing its core competencies. For example, Toyota established subsidiaries of Motor Engineering & Manufacturing Inc. and Calty Design Research Inc. in Europe and the United States.
The aim is to improve their R&D abilities. b. Compare to industrialized nations, emerging/developing countries have unique conditions in cheaper labor forces, abundant natural resource and huge potential market. Take China as an example, in 2008, the hourly average wage of Chinese worker only occupied 4.2 percent of American’s (Bureau of Labor Statistics, 2011) (see Appendix – figure III). The greatest population provides sufficient workforce that car industry needed. Therefore, Toyota could greatly reduce the production costs to achieve pricing advantage in the market. Furthermore, political and legal factors also could support the company enter into such markets.
Low tariff rate, political stability, deregulations, all of these elements potentially laid out a strong foundation for Toyota’s success. For example, the U.S. could absolve tax up to $4000 for each BEVs (Battery Electronic Vehicles). As similar as the U.S. does, Chinese government also has special treatments for environmental-friendly manufacturer, such as reduce income tax and financial assistance. Overall, Toyota benefits from these markets. Especially during the period of financial crisis in 2008; its revenue was mainly attributed to the fast and steady economic growth in emerging countries.
Based on the previous analysis, it is clear that the ownership, internalization and location advantages are three basic motivators for Toyota global expansion and may continuously help Toyota to achieve future success. However, due to the rapid growth in both internality and externality, Toyota is facing many threats in global production and multi-national management. In 2009, for example, the total numbers of vehicle recalls of Toyota was nearly 10 million.
The main reason is that the cross-national management leads to Toyota could not effectively communicate and coordinate with global suppliers and employees. Hence, the headquarters’ core competencies of the company cannot be completely internalized and transferred globally. In other words, the basic principle of Toyota’s vehicle – ‘Quality’ is being abandoned by the global outsourcing strategy (Minhyung, 2010). As a result, how to re-organize its supply-chain management and rebuild the brand image though reasonable global extension strategies is the main task for Toyota in the near future.
- Anastasova N. & Nenovski M. (2011). Foreign Investments in The Chinese Automobile Industry: Analysis of Drivers, Distance Determinants and Sustainable Trends. Research journal, MSc in Finance and International Business, 75-79
- Bureau of Labor Statistics (2011). International manufacturing comparasions: manufacturing in China. United States department of labor. Retrieved on 22nd, June 2012 from：http://www.bls.gov/fls/china.htm
- Lander, E. E., & Liker, J. K. (2007). The Toyota Production System and art: making highly customized and creative products the Toyota way. International Journal Of Production Research, 45(16), 3681-3698. doi:10.1080/00207540701223519
- Minhyung, K. (2010). Risks of Global Production Systems: Lessons from Toyota's Mass Recalls. SERI Quarterly, 3(3), 64-71.
- Spear S. J. (2002). Just-in-Time in practice at Toyota: Rules-in-Use for building self-diagnostic, adaptive work-systems. Assistant Professor of Harvard Business School, Working paper: 02-043
- Theguardian Inc. (2011). Toyota holds top spot as world's number one carmaker. guardian.co.uk, Monday 24 January 2011. Retrieved on 20th, June 2012 from: http://www.guardian.co.uk/business/2011/jan/24/toyota-world-number-one-carmaker
- Toyota annual report (2011). Reward with smile by exceeding your expectations. Retrieved on 20th, June 2012 from: www.toyota-global.com/investors/ir_library
- Appendix Figure I – Continuous Improvement Circle
- Figure II – Toyota net revenue by region in 2011 (sourced from: Toyota annual report, 2011)
- Figure III – Hourly compensation costs of manufacturing employees in China Year| National Currency Basis (Yuan)| U.S. dollar basis(US $)| Index(US =100)| 2003| 5.17| 0.62| 2.2| 2004| 5.50| 0.66| 2.3| 2005| 5.59| 0.73| 2.4| 2006| 6.44| 0.81| 2.7| 2007| 8.06| 1.06| 3.4| 2008| 9.48| 1.36| 4.2| (sourced from: http://www.bls.gov/fls/china.htm)