T O Y O T A: Cost Production Strategy vulnerability

Adapted from the article published in Journal of Marketing dated August 20, 2006
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Summary of the Article
Toyota has a large market share in the United States and Africa and is the market

leader in Australia. It has significant market shares in several fast-growing Southeast

Asian countries. Toyota has factories all over the world, manufacturing or assembling

vehicles for local markets. The company invests a great amount of research into

cleaner-burning vehicles. It has developed a reputation for reliability and quality

customer service. Consumer ratings firm has named Toyota the most reliable

automotive company for twelve consecutive years. The Company was also named the

most reliable vehicle company in its survey of over one million vehicle users and

Toyota customers frequently give their dealerships high ratings for customer’s

service. Toyota's presence in Motor sport can also be a good source for its success.

Toyota has long been recognized as an industry leader in manufacturing and

production. It has a core competence in the production of cars. It is able to produce

high quality, well design cars at a lower delivered cost than in any other company in

the world. The competencies that enable Toyota to do this seem to reside primarily in

the company’s production and logistics functions.

Another notable key factor for Toyota’s success in the automobile industry is

its guiding principles and philosophy namely:

1. Base management decisions on a long-term philosophy, even at the expense of

short-term goals

2. Create continuous process flow to bring problems to surface

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 3. Use “pull” systems to avoid overproduction

4. Level out the workload

5. Build a culture of stopping to fix problems, to get quality right the first time

6. Standardized tasks are the foundation for continuous improvement and employee

empowerment

7. Use visual control so no problems are hidden

8. Use only reliable, thoroughly tested technology that serves your people and

processes

9. Grow leaders who thoroughly understand the work, live the philosophy, and teach

it to others

10. Develop exceptional people and teams who follow your company’s philosophy

11. Respect your extended network of partners and suppliers by challenging them and

helping them improve

12. Go and see to thoroughly understand the situation

13. Make decisions slowly by consensus, thoroughly considering all options;

implement decisions rapidly

14. Become a learning organization through relentless reflection and continuous

improvement

Evaluation of the article

In spite of Toyota’s success in motor vehicles global market, some financial set

backs might be Toyota’s vulnerability. I don’t agree that because Toyota is adept with the

global standardization strategy it tries not to customize its car offering strategy to local

conditions because customization involves shorter production runs and duplication of

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functions, which tends to raise cost. Toyota is more vulnerable to strong pressures for

cost reduction when the demands for local responsiveness in a certain country are

minimal. This means that local responsiveness implies that Toyota may not be able to

realize the full benefits from economies scale, learning effects, and location economies.

I firmly believe that Toyota should consider that it may not be possible for the

company to serve the global market from a single low cost location, producing globally

standardized car products, and marketing their cars worldwide to attain the cost

reductions associated with their experience effect. The need to customize their product

offering to local conditions usually does not render positive result and oftentimes work

against the implementation of cost reduction strategy in the global context. Consumer

demands for vehicles are different from one country to another. It would mean that car

manufacturer like Toyota must come up with a vehicle that are customized for the local

market.

I would like to recommend a strategy of establishing a top to bottom design and

production facilities of Toyota for each region in the world so that they can serve better

the local demands. Although my recommendation for customization of the local market

may limit the ability of Toyota to realize significant scale economies and location

economies, there is the possibility of profitability and profit growth. Pursuing my

recommendation will eventually add value to Toyota’s cars which would enable the

company to raise its prices in the future.