GROUP ASSIGNMENT

STMB13-3

Industry Analysis
with
Porter’s Five Forces & VRIO Framework

TOYOTA MOTOR CORPORATION

AUTHORED BY

GROUP NO. 6

AJAY KHAITAN – B13126 ARCHIT SINGH – B13137

AMITABH VAJPAYEE – B13131 HIMANSHU DOVAL – B13150
ANANYA RAY – B13133 KARTHIK MOORTHY – B13152
ANIRBAN CHAKRABORTY – B13134 RANJANI IYER – B13166
ANUP JOSHI – B13136 SHUBHDA KAUSHIK – B13173
Industry Analysis - STM Toyota Motor Corporation

TABLE OF CONTENTS

I - EXECUTIVE SUMMARY ................................................................................................................... 3

II - INTRODUCTION ............................................................................................................................... 4

III - PORTERS FIVE FORCES ANALYSIS FOR AUTO INDUSTRY ........................................................ 5

IV- ANALYSIS OF THE VRIO FRAMEWORK ........................................................................................ 7

V - DISCUSSION ON THE OVERALL BUSINESS STRATEGY............................................................... 9

VI - LIMITATIONS OF THE STUDY ..................................................................................................... 11

VII - CONCLUSION............................................................................................................................... 12

VIII - REFERENCES .............................................................................................................................. 13

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Industry Analysis - STM Toyota Motor Corporation

I - EXECUTIVE SUMMARY

In this assignment paper, we have attempted to understand the impact of choices, decisions and
strategies of ‘Toyota Motor Corporation’ by analyzing them under the context of various strategy
frameworks through a process involving searching, processing, analyzing and finally interpreting
relevant data.

From modest beginnings in 1926, it has gone on to become the 4th largest automaker in the world.
Along the way it has earned the distinction of being one of the most admired and respected companies
of the world and is at the fore front in embracing and adapting to change. Enriching lives,
commitment to quality, constant innovation and respect for the planet are some of the qualities with
which one would normally associate The Toyota Motor Corporation.

The emergence of Toyota had far reaching implications for the auto industry – not just in Japan or
Asia, but across the world. We show how this emergence and subsequent growth was precipitated by
years of carefully thought out choices, decisions and strategies and go on to analyze the repercussions
of these on the way business was done – not just by the auto industry but also by other industries that
adopted ‘The Toyota Way’. We then show how the subsequent actions of the company led to the
rebuilding of the auto industry which stood temporarily hampered during the crisis years, thereby
underlining the importance of well thought out strategies for the stability and growth of the company
itself and the auto industry.

The paper has been organized into different sections. We start off by introducing the Toyota Motor
Corporation and analyze the reasons which led to its meteoric rise, central among which are the
decisions and strategies of the Company.

Further, Porter’s Five Forces Analysis is performed to develop strong insight into the functioning of
the company and the industry. The Porter’s Five Forces Analysis reveals that Toyota has been quite
adept in managing and warding off its threats and competition whilst constantly being able to exploit
opportunities.

The VRIO framework was also used to identify the causes and reasons for the growth and continued
dominance of the company and to understand the potential of profitability. VRIO framework is the
tool used to analyze firm’s internal resources and capabilities to find out if they can be a source of
sustained competitive advantage. We identified that Toyota's strength does not lie in a single core
competency. It rises from a complex, interlocking set of extraordinary skills. These include working
closely with suppliers, continually finding ways to innovate and improve, and constantly challenging
itself to cut costs. The VRIO framework analysis throws light on the fact that it is a combination of
the below 3 aspects that has led to the sustained competitive advantage for Toyota:

1. Toyota Production System

2. R&D and focus on “green” cars
3. Company Culture- The Toyota Way

An analysis of the various business strategies adopted by Toyota only goes to reinforce the above
findings. Toyota would not have been where it is today if it had not been for its years of collective
wisdom, astute decision making and its responsiveness to change.

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Industry Analysis - STM Toyota Motor Corporation

II - INTRODUCTION

The Toyota Group is comprised of a group of companies wherein there is no particular company that
controls the group entirely. These 13 core companies share the Toyota brand name. The Toyota Group
started out with Toyota Industries founded in 1926 which is in the business of manufacturing textile
machinery, materials handling equipment and is the world’s largest manufacturer of forklift trucks.
The automobile department of Toyota Industries was established as a separate company, known today
as the Toyota Motor Corporation, in 1937 by Kiichiro Toyoda.

The Toyota Motor Corporation today produces automobiles, both luxury and commercial vehicles and
engines. The company also provides banking, financing and leasing services. Currently led by Akio
Toyoda as its President and CEO, it earned a profit of 962.1 Billion Yen in the FY 2013. The Toyota
Motor Corporation is currently the world’s 14th largest company in terms of revenue earned (22
Trillion Yen). It also has the largest market capitalization amongst all companies listed in Japan.
There are 5 brands under which Toyota Motor Corporation produces automobiles. These are Toyota,
Hino, Scion, Ranz and Lexus. The TMC is also owns several subsidiaries including one in India
named the Toyota Kirloskar Motor Private Limited.

As Japan’s largest, TMC is also the world’s 4th largest automaker, preceded only by GM, Ford and
DaimlerChrysler. There are 52 overseas manufacturing companies owned by Toyota spread across 27
countries. Vehicles manufacturer by Toyota are sold globally in over 160 countries.

A mission statement defines the purpose of the company’s existence. Toyota Global does not state a
particular mission but elaborates on its Global Vision Statement instead. Toyota America however
does provide a mission statement that says “To attract and attain customers with high-valued products
and services and the most satisfying ownership experience in America” accompanied by the vision
statement “To be the most successful and respected car company in America”.

The vision statement by Toyota Global states “Toyota will lead the way to the future of mobility,
enriching lives around the world with the safest and most responsible ways of moving people.
Through our commitment to quality, constant innovation and respect for the planet, we aim to exceed
expectations and be rewarded with a smile. We will meet our challenging goals by engaging the talent
and passion of people, who believe there is always a better way.”

While the statement connects to its customers and the market, it does not mention its products. The
statement is customer-oriented however it lacks mention of values like excellence. However,
innovation and quality are emphasized and makes for a good way of envisioning what the company
aims to be like in the long term. In comparison, the Toyota America vision statement fails to link its
ambitions with the customers and does not incorporate the values it intends to operate with into the
statement.

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Industry Analysis - STM Toyota Motor Corporation

III - PORTERS FIVE FORCES ANALYSIS FOR AUTO INDUSTRY

1. THREAT OF NEW ENTRANTS

We can use the following parameters to check the threat of new entrants in the automobile
industry:
 Amount of capital required: Automobile industry require significant capital
investment. Therefore this will be a factor that will work in favor of automobile
companies and discourage new entrants.
 Legal Barriers: Safety Regulations (seatbelts, crash tests, and airbags) and other
legislations also restrict entry into the automobile industry. Companies need to spend
billions of dollars and invest several years before bringing a new car into the market.
 Brand Reputation: Brand plays an important role in the auto industry. Toyota is one
of the best global brands and enjoys an excellent reputation for quality and
performance.
 Patents/Technology: Innovation acts as a barrier for new entrants since patents do not
allow company to come to speed with the already existing technologies.
 Economies of scale: The capital intensive automobile industry depends on greater
production volumes to lower costs and thus increase the market share. Therefore
small or newer firms find difficult to break in and struggling firms have taken the
path of mergers and acquisitions as well.

2. BARGAINING POWER OF SUPPLIERS

 Companies usually have a lot of suppliers. In some cases, suppliers are subsidiaries of
companies who have gone on to become independent
 Companies place their former executives at key suppliers, further strengthening the
relationship between the two.
 Thus with a large number of suppliers and other factors mentioned above, the
bargaining power of suppliers is definitely low.

3. BARGAINING POWER OF BUYERS

 There are a large number of automobile buyers – mostly individuals and these buyers
have plenty of options available in the market.
 The switching cost for buyers is thus low.
 Buyers are also sensitive to vehicle costs as well cost of gas.
 The buyers therefore definitely exert a strong bargaining power in case of
automobiles. Hence automobile companies need to innovate and compete
continuously to stay ahead of the curve.

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Industry Analysis - STM Toyota Motor Corporation

4. THREAT OF SUBSTITUTES

 There are various substitutes available to automobiles. These include trains, planes,
public transport buses etc. However they do not pose a significant threat to the
automobile manufacturing industry with vehicle sales increasing rapidly each year.
 Public transport does offer cheaper alternative but personal vehicles offer flexibility
and convenience and with improved standards of living in many developing countries
as well, sales of cars is on the rise.

5. RIVALRY AMONG EXISTING COMPETITORS

 There are plenty of existing competitors in the industry

 Some of the major players include Toyota, Ford, GM and Chrysler. Others are
Volkswagen, Honda, Nissan, Hyundai, and Mercedes –Benz etc.
 There have also been many mergers and acquisitions in the industry, thus companies
face continuous threat of being acquired by competitors.

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Industry Analysis - STM Toyota Motor Corporation

IV- ANALYSIS OF THE VRIO FRAMEWORK

VRIO framework is a tool used to analyze firm’s internal resources and capabilities to find out if
they can be a source of sustained competitive advantage. Toyota's strength does not lie in a single core
competency. It rises from a complex, interlocking set of extraordinary skills. These include working
closely with suppliers, continually finding ways to innovate and improve, and constantly challenging
itself to cut costs.

We shall focus on the following strengths of Toyota, and shall apply the VRIO framework to analyze
which amongst these is a source of potential sustained competitive advantage:

1) Toyota Production System

2) R&D and focus on “green” cars
3) Company Culture- The Toyota Way

TOYOTA PRODUCTION SYSTEM

The first question of the framework asks if a resource adds value by enabling a firm to exploit
opportunities or defend against threats. The Toyota Production System (TPS) is an integrated socio-
technical system, developed by Toyota that comprises its management philosophy and practices. This
system, more than any other aspect of the company, is responsible for having made Toyota the
company it is today. The Toyota production paradigm is a valuable resource as it a major cost
reduction driver and at the same time increases the product quality.

Next, we come to the question of rarity. Rare and valuable resources grant temporary competitive
advantage. Toyota is the innovator of this new production management which is popularly known as
TPS. TPS is more a philosophy than a set of rules or guidelines. It's a mind-set that extends into all
areas of Toyota's business. It is very deep rooted into the company’s culture. Hence, it is a rare
resource. Perhaps Toyota's most defining characteristic is its obsession with eliminating waste, or
muda in Japanese. It is a mind-set that goes well beyond the cost-cutting espoused by other
carmakers.

We then move to the question of imitability. A firm that has valuable, rare and costly to imitate
resources can achieve sustained competitive advantage. Resources that were developed due to
historical events or over a long period usually are costly to imitate. Toyota’s production system is one
such resource. Additionally, TPS is a result of the company’s culture and complex interpersonal
relationships. Many manufacturing organizations including GM, Ford, and Chrysler have
independently created major initiatives to develop Toyota-like production systems. Companies that
have tried to adopt the system can be found in fields as diverse as aerospace, consumer products,
metals processing, and industrial products. But very few companies have managed to imitate Toyota
successfully. Hence, it is very difficult and costly to imitate TPS, if at all that is possible.

A firm must organize its management systems, processes, policies, organizational structure and
culture to be able to fully realize the potential of its valuable, rare and costly to imitate resources and
capabilities. Throughout the company, there is a deep respect for monozukuri. The Japanese term
literally means "making things." The term connotes a craftsman's devotion to manufacturing, whether

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Industry Analysis - STM Toyota Motor Corporation

by traditional or high-tech methods. One byproduct of that manufacturing culture is a rabid devotion
to solving problems.

RESEARCH AND DEVELOPMENT AND FOCUS ON “GREEN” CARS

Innovation is the core strength of Toyota. It created the first hybrid car, and was there to meet
consumer demand when oil prices skyrocketed, while US manufacturers like GM got caught behind
the curve, still building gas guzzlers. Toyota is one of the largest companies to push hybrid electric
vehicles in the market and the first to commercially mass-produce and sell such vehicles, with the
introduction of the Toyota Prius in 1997. Toyota understands that environmental friendly cars are the
necessity nowadays. Consumers are more selective in terms of CO2 emissions and fuel-efficiency of
the cars they buy and Toyota’s early move towards selling hybrid and efficient cars is the strength few
competitors can match. Innovation, R&D prowess and technological expertise is a valuable resource.

Coming to rarity, R&D is not a rare capability per se. German automakers like Mercedes and BMW
and Toyota’s own homegrown rival Honda are known for their technologically advanced cars. But
where Toyota scores, is its culture for continuous innovation, and the way the product development
cycle works. GM and Ford tend to renew their vehicles on a six- to seven-year product cycle. Toyota
never lets its lineup get all that old. Steady investments in plants, equipment and R&D support a
regular cadence of new models. Especially compared to American carmakers' lineups, Toyota's are
always fresher and newer - which means they can charge higher prices and get higher profits, which
get turned into more new products.

Talking of imitability, Toyota has the first mover advantage in the hybrid vehicle segment. The key to
imitability of its R&D prowess is the culture at Toyota. Technological innovations cannot be imitated
easily as they are protected by patents and social structures. Although companies like BMW are
equally competent with respect to technology, but the internal processes relating to product
development can hardly be matched by any competitor. This makes the resource hard to imitate.

Toyota’s organization structure is geared towards fast response to changing market trends, and helps
develop new products with very low lead times. Toyota’s company culture, which has developed over
so many decades, is such that it supports innovation and continuous improvement.

COMPANY CULTURE

Toyota always encourages new ideas and concepts from the employees so as to always lead the
industry. The culture always motivates its employees to strive for excellence in every activity that
they pursue. Ethics is one of the main beliefs of Toyota as an organization. Minorities are well
represented at Toyota because the company believes in diversification. As a forward looking company
it portrays a positive image which breeds talent across the hierarchy. Now this respect for people ‘The
Toyota Way’ is a unique identity of Toyota which makes it valuable. Since this culture has taken
years to develop and nurture, it is a rare resource which Toyota has acquired in the industry and it is
very difficult for other companies to imitate it in the near future although this culture is known to
everyone. Toyota has designed its structure in such a way that its management can truly take
advantage of its culture.

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Industry Analysis - STM Toyota Motor Corporation

V - DISCUSSION ON THE OVERALL BUSINESS STRATEGY

Toyota's overall corporate strategy is to enhance its corporate value by maintaining its position as a
market leader in the automotive industry, continuing its growth through global operations and through
products reflecting Toyota's advanced technology that target the local demand in each market. Toyota
strives to further enhance its technology, supply capability and marketing.

The business strategy, people and the organization is very closely aligned to the vision and mission of
the company: Pursuit of harmonious growth and enhancement of profitability.

PORTER’S GENERIC STRATEGY

Toyota uses low cost and differentiation both as generic strategies for gaining and maintaining
competitive edge over its competitors in the automotive industry. Scope of the company is broad
based, because they have a vehicle for every kind of customer, be it the four wheel drive trucks and
SUVs for the outdoor kind of customers who prefer all-terrain vehicles, to customers who are
environmentally conscious and prefer eco-friendly cars like the Prius. Also, Toyota has cars for
virtually every price segment from the lower price point Corolla to the Lexus for the elite. All in all,
Toyota has a vehicle for everyone.

The firm differentiates from its competitors on various levels. First and foremost, the build quality and
innovative designs helped Toyota in creating a brand image of strong, high quality and long lasting
cars manufacturer. Another huge differentiating factor is technology which helps Toyota in claiming
the global leadership position. Toyota Prius was the most successful mass production of the hybrid car
and the Prius customers continue to deepen their connection to Toyota portfolio. Due to the numerous
subsidies and tax benefits given to the cleaner car the Prius portfolio continues to grow.

Porter's Generic Strategy for Toyota

Advantage
Target Scope
Low cost Product Uniqueness

Cost Leadership Strategy Differentiation Strategy

Broad

Integrated

Narrow Focus Strategy Focus strategy

(Low Cost) (Differentiation)

*We can see that Toyota lies in both the Low Cost and Product Uniqueness dimensions for a broad target.

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Industry Analysis - STM Toyota Motor Corporation

Toyota’s overall spending is among the lowest in the industry and that is due to its exemplary product
development system – Toyota Production System (TPS) which is also popularly known as “The
Toyota Way”. Toyota’s employees are trained in the TPS and religiously pay attention to cost
minimization and product quality in their everyday life. By adopting lean production, carefully
choosing suppliers, having an efficient distribution system in place and low servicing costs, Toyota
achieved its low cost leadership in the market. Also, Toyota makes sure that their low cost strategy
doesn’t compromise with their differentiating strategy that is coming up with the superior, high
quality and innovative designs.

Toyota’s success can also be attributed to the fact that although it is a market leader, Toyota follows
an offensive strategy. As has been written in the Marketing Warfare book, the best defensive strategy
is to play it offensive. Toyota pays huge attention to product development and keeps coming up with
fresh ideas periodically in the automotive industry. Being the industry leader, Toyota enjoys a huge
bargaining power with its suppliers and keeps them under control and contractual bindings. Toyota
defends its market share by always being on a lookout for offensive strategies, be it capitalizing on the
competitors weaknesses or developing something better than the competitors and staying ahead of
them.

BLUE OCEAN STRATEGY

Toyota, in exploring a Blue Ocean Strategy, ventured into creating the Prius Hybrid, with an
innovative environmental preservation technology, which due to global warming issues became quite
popular. This came about after a lot of forward thinking by the management team which predicted that
someday our oil reserves will get depleted. They positioned the Prius Hybrid as the car of the future
that would save generations from global warming. This created a new market in the form of
environmentally conscious customers while simultaneously education existing ones on the
environment. Toyota has managed to get the Prius name associated with environmentally friendly cars
and hence has captured the lion’s share of the market.

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Industry Analysis - STM Toyota Motor Corporation

VI - LIMITATIONS OF THE STUDY

In our study of Toyota Motor Corporation, we have not included any data from the company’s annual
reports, and have not deep dived into any sort of financial analysis of the company. Comparison of
financial ratios with those of competitors has also not been undertaken.

In light of the recent recall controversies surrounding Toyota, there has been a shift in the overall
business strategy, from being one over reliant on cost saving and focused on growth, to one that puts
renewed focus on innovation in production and design methods. The impact of these recalls on the
business strategy and the industry dynamics has not been captured in our study.

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VII - CONCLUSION

In conclusion, we summarize our various findings, comment on them individually and then try and
incorporate it all into some final words.

The Porter’s Five Forces Analysis clearly suggests that developing strategies that deal with the
existing competition is of primary importance. This could include investing more in R&D, using
which Toyota can innovate and thus, differentiate itself from other brands. Also, there could be
strategies aimed at acquiring competition, which increases both market share and technological
prowess. From the analysis, we observe that the bargaining power of the buyers is high. There could
be some strategizing on this front, which might include enhancing the experiential aspect of
purchasing a car, which will add an edge to the technological innovation that all companies are
involved in.

Having identified the strategies that would further push the profitability of Toyota, we use the insights
from the VRIO framework and the overall strategy to try to understand how they might be achieved.

TPS or the ‘Toyota Way’ is the rare and inimitable resource which allows Toyota to stand out in the
industry by producing high quality at lower prices. It also falls in line with Toyota’s strategy of cost
leadership.

Although, TPS is the most unique resource Toyota has in its possession, R&D is also a core
competency for them. Toyota’s strategy has been to produce a diversified range of products to
differentiate itself from competition. As identified before, Toyota can invest further into this to try to
replicate the success of the Prius. This would help the offensive strategy employed by Toyota, by
always staying a step ahead of the competitors.

The company culture at Toyota puts strong emphasis on excellence in every activity performed.
Employees and their ideas are well-respected here. If Toyota could ingrain providing a unique
purchase experience into the company’s culture and invite ideas from the employees as to how they
feel the customer could be serviced better, it has a potential of a creating a unique differentiator for
Toyota.

****

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VIII - REFERENCES

- http://www.toyota.com.au/toyota/company
- http://www.toyota-global.com/investors/ir_library/sec/pdf/20-F_201303_final.pdf
- http://www.toyota-global.com/investors/financial_result/2013/pdf/q4/summary.pdf
- http://www.toyota-global.com/company/profile/
- http://www.yamasa.org/acjs/network/english/newsletter/japan_guide_16.html
- http://toyota.custhelp.com/app/answers/detail/a_id/7654
- An Industry Lost: High Entry Barriers Strangle Auto Industry, Daily Journal, May 1, 2012
- Toyota Builds Thicket of Patents Around Hybrid To Block Competitors, The Wall Street
Journal, July 1, 2009
- Toyota: No. 1 U.S. automaker in patents filed, USA Today, July 26, 2013
- Whatever happened to industrial concentration? Automotive World, 19 April 2010
- Key Toyota execs headed for supplier posts? Automotive News, May 1, 1999
- The automobile industry in and beyond the crisis, OECD Economic Outlook, Volume 2012
Issue 2
- Toyota and its Component Suppliers, Elsmar.com
- http://www.mcafee.cc/Classes/BEM106/Papers/UTexas/351/Toyota.pdf
- http://www.123helpme.com/view.asp?id=121682
- http://en.wikipedia.org/wiki/Toyota_Prius
- http://en.wikipedia.org/wiki/Toyota
- http://www.interbrand.com/en/best-global-brands/2013/Toyota

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