The financial deficit

After its establishment in the car industry, TOTO seemed to have some success in its luxury sector, but its internal inefficiencies inevitably constituted the financial deficit in the end. Opportunities for TOTO IN the beginning, TOTO entered the car industry, focusing the luxury and upper medium sector of the market of affluent drivers from 25 or over. Attracted by the high gross margin from it, no doubt they produced high quality and distinctive cars and set a far higher selling price than the others.

At the same time, they have also differentiated their cars with 4 models for 3 sectors in the luxury market, which are Cheeta (for the 25-40 age group), Leopard and Lion (41-55 age group) and Panther (over 55 age group). During the 5 years, marketing research and data were collected as a secondary source taken from research agents to know the moves of competitors so as to make adjustments in facing competition.

Threats from competitors Competition mainly comes from 3 car companies – Magnificient Motors, General Motors, and BRM. They are also new companies established in the same year as TOTO. BRM is the biggest threat as they also targeted the luxury segment of the market. They produced 3 car models – Fetish, Adiktion and BRM X, which exactly hit at the same segments as TOTO, focusing the same 3 age-group buyers. Next, General Motors and Magnificient Motors started to join in the battlefield with 2 models such as Sakura for the former company, and 1 model from the latter, all tried to compete with TOTO over the buyers from 41 years old onwards.

What's going on with TOTO? We are going to look at its internal factors: operation process and human resources to find out what brought about the negative deficit. There had been a rather fluctuating amount of investment into automation. They first invested 30m; and reached 100m in the second and fourth year; and then a cease to invest in the fifth year. For the unsold goods, TOTO decreased its selling price to decrease stock storage and keeping them if they are still unsold. We can look at the productivity of its production; the productivity per worker was an increasing figure from one worker could make 6.75 cars per year in the first year, to the highest of 8.25 in the fourth year. These are not very handsome figures as compared with the obvious distance with other competitors as they have a 20-50 cars per worker to produce.

The salary of workers are high, it was raised each year from �410 by two pounds due to the high reward to staff out of very good profit to ease absenteeism and strikes. There were about 4 strikes in average each year. Comparing with other car companies, TOTO had a more stable figure of strikes, as companies such as CRU and BRM had up to 44 and 17 strikes respectively. However CRU had a higher wage than TOTO but had a higher number of strike, it is because of the productivity of both was an extreme (CRU produced 6 times more cars in average in year 3 than TOTO). Workers were wage-sensitive, and that is why TOTO stick to the trend and evaluate the wage with the industry norm.

Performance of TOTO

Holistically, it was a quite unsatisfactory performance as its outstanding debt was over 369m even it was a lowered figure in the past 2 years. The return on assets was a severe deficit of -54.85% in the fifth year. Gross margin dropped from its highest of 23.40% in the second year to 5.8% in the fifth year. There was hardly any cash at hand as its liquidity ratio always reached 0%. There was a loss of business as the post-tax profit/sales is one digit only, and at last it was a -10.30% and the profit over employee was a tremendous �-43249.36. TOTO's financial condition is very bad due to debt burden. It is prone to a close down sooner or later.

Management team The company had not created an effective management team. "It was a loose team." Toto Chan commented, as one of the team member of TOTO. The problem lied in structure of the team and competencies of team members. There were several team roles appeared in the team (Belbin, 1981). In the team, 5 members possessed 5 different roles; Amanda and Louise were team worker and implementer, Steven was a coordinator, Kirsty was a shaper and Toto was a monitor evaluator. The problem was obvious, "Kirsty always insisted in her own suggestion which the rest did not agree with, and I just don't have enough knowledge in car making business." said Toto.

Since Toto did not have enough knowledge in that area, no doubt she could not help much in the decision making of the parts to be added in each car model. However, knowledge management was undertaken as Louise and Amanda had a brief teaching on car knowledge to Toto explicitly each year when producing a car but this was inadequate. Therefore, this management team could have only reached to the second stage -Storming as referred from Tuckman's Four Team Development Stage (1965), where false consensus became inevitable.

The management team had decided to use automation in production since the start but they cut investment in the growing stage of market (Year 3), therefore they could not raise productivity to meet customers' demand as there were still out of stock situation for Cheeta and Lion. Their decision over research and development, human resources and marketing added value (Porter, 1985) to their distinctive luxurious cars.

R & D: They had invested in research on Anti Noise System, Ceramic Engine, Drowsiness Detection and Infra Red Night Vision, and developed all the above except ceramic engine. Human resources: Gradual increase in wage raised motivation and incentive of labors, that's why there was just 5 or 6 strikes per year, and which is quite satisfactory. Marketing: They used TV, radio, sponsorship all kinds of medium to promote their cars and invested particularly to periodic and reviews for its greater popularity. These helped to make TOTO sustain its competitive advantage in the luxury sector.

However, due to the urgency of making decisions, the management team could not consider all aspects such as price setting. They could not look at the interrelation of demand and supply accurately and make good use of the data given in the cash floor and profit and loss accounts to determine the amount to loan, and the repay ability. Limitation of the simulation was that it could not imitate real life business situation. The inflation rate, depreciation rate and stock costs were predefined and restricted.

Different companies may not have the same capital e.g.500m capital in real life. Material price are all fixed is not realistic since there maybe different bargaining power (Porter, 1980) of car companies towards different supplier. The automation productivity may not be exactly the same in different companies, so the example of adding 1 unit of automation will be equivalent to an increase of 10 workers for every 5000 workers. Factories may not have a fixed number of capacity (5000 workers) for all companies. There's only a choice of secondary source of market research. Distribution channel and after sale service were neglected in the simulation.

Hindsight of the course

I believe benchmarking would be very useful to the company. TOTO should adopt internal, external, particularly includes the best-in-class benchmarking. Internally, prestigious cars are of very good in quality. We have to invest a lot into the production line as the components cost is quite high (around 5000 per car) and wage. Therefore, to match with our final goal of obtaining high premium profit, we have to set a socially acceptable price yet minimize the production costs to its lowest. To achieve this, we have to adjust manufacturing costs, maintain the least level of human resources required, or make a forecast of customer demand or even further compare the individual productivity of each worker to adjust wage and create motivation.

Externally, benchmarking can help TOTO to compare its performance with competitors and see the strengths and weakness of them, so that this company can analyze and build its competitive advantage and excel. Also, it can compare broadly with the whole industry to help predict future trends or innovation to give a breakthrough to the whole industry.

The most important method of all is the best-in-class method since it is a comparison of companies in their function, activity or process across different industries. If TOTO can set aside their usual business process and look into other companies in unrelated industries may give it inspiration to innovate new idea in production or operation of the whole organization and bring a breakthrough to the whole car industry and add a more superior competitive advantage to itself.