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Strategic Advantages of Toyota

Introduction

The present report aims at analyzing the strategic position of Toyota in comparison with its competitors, such as General Motors, Volkswagen, and Ford Motor Company. The paper uses Porter’s Five Forces analysis, PESTLE framework, and benchmarking to evaluate Toyota’s strategic strengths and weaknesses. After, the report identifies three strategic options to improve the current position and critically evaluates these options using the Suitability, Acceptability, and Feasibility framework.

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Current Strategic Position of Toyota

Company and Industry Overview

Toyota Motor Corporation is a well-known automobile company established by Kiichiro Toyoda, a humble carpenter from Japan. The company’s total market capitalization is ¥205.16 billion, with ¥29.9 billion in revenues in 2020 (Yahoo Finance, 2021). Currently, the company employs almost 360,000 people, which makes it one of the largest employers in the industry (Toyota, 2020). The company operates in a highly-competitive industry, which experiences a significant decline due to the COVID-19 pandemic. According to Automotive Industry Outlook, the sales in the industry were expected to fall by 14% in 2020 in comparison with 2019 (Report Linker, 2020). This will mean that the companies will focus on preserving internal capital short-term and explore robust online selling strategies (Report Linker, 2020a). Deloitte claimed that the automotive market experienced a considerable decline in 2020 due to the pandemic (Vitale, 2020). However, the projections for the future are optimistic, as the industry is expected to grow from $20,321 million in 2020 to $25,719 million in 2025 (Report Linker, 2020b). However, the success of the companies will depend entirely on how they will be able to adjust to the changes in the external environment.

Porter’s Five Forces

Competitive Rivalry: High

Porter’s Five Forces model suggests discussing competition in the industry as the first step (Scott, 2020). Toyota is a pioneer in the application of uniquely designed management techniques, which makes it resistant to competition (Fane et al., 2003, p. 54). The company actively encourages an atmosphere of reciprocal trust and respect, creating a higher level of competitiveness (Liker and Hoseus, 2010). Toyota’s product range and distribution channels form an advantageous strategic position in the market, raising problems for its competitors to survive. Nevertheless, it has to face an extended number of competitors, many of which are large firms. Therefore,

Threat of New Entrants: Low

In Toyota’s case, there is little possibility of the appearance of new competitors according to several factors. The great entry barriers are the high costs of growing, maintaining, and establishing a new automobile firm (Marksberry, 2011). Brand development and supply chain costs are expensive. Therefore, the threat of new entrants is one of Toyota’s least concerns.

Bargaining Power of Suppliers: Moderate

One of the sources of superior performance is the company’s attitude towards suppliers, whose force is one of Porter’s Five Forces. It is evident that Japan lacks natural resources, which puts Toyota in a vulnerable position. However, the corporation applies the make-or-buy decision technique, by which the cheapest way of production is utilized (Guiding principles at Toyota, 1997). Using this method, the company imports critical materials such as coking coal and iron ore from abroad, increasing the cost of manufacture. The outsourcing technique, which is “the transfer of operations to an external party,” is exploited by Toyota as a cost-minimization tactic (Mishra et al., 2018, p. 26). As there is a limited number of suppliers, it creates a moderate force that negatively impacts the company.

Bargaining Power of Buyers: High

In the automotive industry, the threat that its customers can change from this firm to any other is high because of low switching costs (Jothi and Kalaivani, 2015). What is more, the buyers are provided with an opportunity to find relevant information about the available options when purchasing a new car. Since the companies are expected to employ new strategies for developing online sales, the bargaining power of buyers is expected to increase. Thus, Toyota should make sure that it respects and addressed its target customers’ expectations and preferences.

The threat of Substitutes: Moderate

The threat of substitutes is moderate because of the combination of switching costs, availability of substitutes, and convenience of using the substitutes. As mentioned above, the switching cost is low, which makes it a strong force. However, the substitutes for Toyota’s products, such as public transportation, bicycles, and motorbikes, have limited convenience. At the same time, the availability of the substitution is moderate, as public transportation may be unavailable in smaller cities. In summary, the threat of substitution is moderate.

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PESTLE Analysis

Political Government has an impact on business operations by imposing restrictions, granting subsidies, or encouraging international trade. At present, Japan has been actively stimulating global commerce by concluding extensive “cooperation agreements” on a worldwide scale (Majoros, 2019, p. 146).
Economic Majoros (2019, p. 143) emphasizes that their mutual connections “have intensified” lately, which is evident in the dynamic dialogue between them. Japan tries to focus on the EU market, supporting further progression and development of trading activities, which maintains up to date (Suzuki, 2017, p. 877). Thus, the economic factor is expected to be favorable in the nearest future.
Social Consumers today are becoming more environmentally friendly, which implies that Toyota needs to make a shift toward a sustainable supply chain and electric vehicles (EVs). Currently, Toyota is only starting to join the EV market, which may require significant investments in R&D and transformation of operations (Baldwin, 2020).
Technological The company invests significant amounts in research and development (R&D), which makes it one of the top 20 leading companies in the number of patents registered and new technologies utilized (Wagner, 2020).
Legal There were no significant legal issues detected that could heavily affect Toyota’s performance long-term.
Environmental Currently, environmental sustainability is one of the major driving forces of international business. However, Toyota actively exploits green marketing, which helps it increase its sales and relationships with customers (Simão and Lisboa, 2017).

Table 1: PESTLE Analysis. (Source: Created by Self).

Benchmarking

Benchmarking is crucial for comparing the performance of the company in comparison with its rivals. One of its major competitors of Toyota is Volkswagen AG, which is currently one of the leaders in the industry. Volkswagen actively exploits green marketing and aggressively trades in the EV market (Volkswagen AG, 2020). The comparison of financial performance is provided in Table 2 below.

Toyota Volkswagen
2020 2019 2019
Liquidity (current ratio) 1.04 1.04 1.12
Profitability (Net profit margin) 0.07 0.06 0.06
Debt (D/A ratio) 0.61 0.61 0.75
Efficiency (Asset Turnover) 0.57 0.59 0.46

Table 2: Financial Performance Analysis. (Source: Created by Self).

In summary, Toyota’s performance is comparable to that of Volkswagen. However, Toyota has higher efficiency, and its profit margin increased in 2020 during the time of recession, which is a considerable advantage. At the same, Toyota uses less debt, which is crucial during the COVID-19 pandemic.

Organizational Culture

Toyota’s organizational culture has been a matter of increased discussion among scholars and entrepreneurs around the world due to its distinctiveness. According to Sosnovskikh (2016), the company can be characterized as family-type, as there are close relationships between employees and high expectations. The core values of the organizational culture are continuous improvement, learning, respect for people, trust, and teamwork (Sosnovskikh, 2016). The company’s corporate culture supports management effectiveness and decreases turnover (Sosnovskikh, 2016).

Strategic Position Summary

  1. Toyota is actively exploiting its strategic advantage of green marketing, which is crucial based on the PESTLE analysis.
  2. The company is exploiting its strategic advantage of investment in R&D.
  3. The company has high efficiency of capital use and low dependence on debt in comparison with its competitors.
  4. The company has high profitability due to cost control.
  5. Toyota has no presence in the EV market, which is a weakness.
  6. The organizational culture is the source of continuous improvement and low turnover of employees.

Available Strategic Options

Building strategic options include setting aims, determining specific policies to achieve them, and further evaluating their effects, benefits, and challenges. Factors such as the competition level, availability of funds, and political circumstances must be taken into consideration. Planning of strategies involves long-term results and, therefore, should be done from such a perspective (Steiner, 1979). Strategic options will depend upon the general strategic direction selected by the company.

Option 1: Differentiation through Entering the EV Market

One of the options for Toyota is aiming at the differentiation of the products to capture all the segments of buyers. According to Islami, Mustafa, and Latkovikj (2020), differentiation supposes the creation of a unique product that can help to achieve a competitive advantage over rivals. Differentiation assumes the dominance of quality over cost (Islami, Mustafa, and Latkovikj, 2020). This implies that customers develop high loyalty to the company, as customers start to value the distinct quality o the new product (Islami, Mustafa, and Latkovikj, 2020). Differentiation can be achieved by using the resources of the company effectively. Differentiation also highly depends on R&D, as it requires unique technologies to achieve distinctiveness from the competitors.

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In Toyota’s case, the strategic direction of differentiation can be achieved by entering the EV market. Currently, Toyota is only planning to make their first electric vehicle, which is a high-quality SUV (Baldwin, 2020). Toyota is one of the last entrants in the EV market, which makes it a very risky step. However, Toyota had significant success with hybrid cars, as Prius has gained worldwide acknowledgment due to its high quality. The company can utilize the experience of its competitors to learn from their mistakes and make a smart entry into the market. Toyota can afford to enter the market, as it invests much money in R&D and efficiency of production and distribution to make high-quality EVs with the lowest possible cost. This option is in line with growing environmental concerns and social pressures identified in the PESTLE analysis. In summary, the option is consistent with identified strategic advantages.

Option 2: Cooperative Expansion through Acquisition

Cooperative expansion can be achieved using various strategies, including mergers, acquisitions, joint ventures, and strategic alliances. Expansion is a corporate-level strategy, which aims at extending market presence using the resources of another company. The most appropriate strategy for corporate expansion for Toyota is the acquisition, as many companies in the automotive industry are experiencing a considerable decline in sales, which may potentially incline them to sell their businesses (Wagner, 2020). Toyota has a low D/A ratio in comparison with its rivals, which can allow them to use additional debt for purchases of smaller companies. Additionally, according to Russel Investments (2020), central banks in the US, Europe, and the UK are expected to implement unprecedented stimulus measures, which often include reducing interest rates. Toyota can use low-interest rates to pay for acquisitions.

Toyota should select the candidate for acquisition carefully, as they need to comply with certain criteria. First, the acquired company should have the potential to bring value (Salter & Weinhold, 1981). Second, the potential candidate should address the individual needs of the company (Salter & Weinhold, 1981). Finally, the acquired company should help to achieve strategic goals (Salter & Weinhold, 1981). One of the current strategic goals of the company is to enter the EV market, as was mentioned earlier. This can be achieved by purchasing an automotive company in China, such as BYD, Geely, BAIC, SAIC, or JAC Motors. These companies have been demonstrating steady performance in the EV market over the past five years (Bullard, 2019). The acquisition of one of these companies will also help to penetrate the Chinese market.

Option 3: Stability Strategy through Paying off Long-Term Debt

Stability strategy supposes that the company aims at the functional improvement of its current operations with considerable changes in the corporate strategy. There are three ways to implement the stability strategy: no change strategies, pause/proceed with caution strategy, and profit strategy (Avishitka, no date). In Toyota’s case, the pause/proceed with caution scenario is preferable, as it allows one to understand the current situation and adapt to the quickly changing external environment.

At present, the global automotive market experiences a significant recession, as was mentioned in Section 1.1 of the present report. The recession is associated with the COVID-19 situation, which has a significant effect on the demand for automobiles. Even though the projections for the future are optimistic, the situation will depend upon how the pandemic develops. At present, the development of the new variants of COVID-19 is worrying, which may cause additional disturbances in the automotive industry. Thus, it may be considered appropriate to take a pause in corporate development and identify future strategies when the risks decrease.

The strategy can be implemented by decreasing the long-term debt to lower susceptibility to changes in the external environment. While Toyota’s current D/A ratio is lower than that of its competitors, it is not balanced. The company can consider reducing the costs by eliminating long-term debt. This strategy is acceptable, as the company demonstrates stable financial performance, which is superior to its rivals. Toyota managed to have stable revenues and profits due to effective marketing strategies, improved efficiency, and stable market share (Yahoo Finance, 2021). This performance can continue to improve by paying off long-term debt.

Evaluation of Strategic Options and Final Suggestions

Sustainability, Acceptability, and Feasibility of the Available Options

One of the most effective methods for evaluating strategic options is an assessment of the sustainability, acceptability, and feasibility of every strategy. The analysis of the three options is provided in Table 3 below.

Option 1: Entering the EV Market Option 2: Acquisitions Option 3: Paying off Long-Term Debt
Suitability 10/10
  • Exploits its green marketing;
  • Uses R&D potential;
  • Preserves focus on quality over cost;
  • Helps to enter the EV market based on high quality.
9/10
  • Can help to penetrate the EV market;
  • Emphasizes the focus on R&D by the potential acquisition of new technology;
  • Exploits green marketing;
  • Does not prioritize quality over cost.
6/10
  • Does not support or contradict green marketing;
  • Emphases efficiency;
  • Does not exploit R&D potential;
  • Does not help to enter the EV market.
Acceptability 7/10
  • Can improve customer relations (Baldwin, 2020);
  • Helps to diversify the product lines, which can make the company less dependent on one particular line of products;
  • Preserves cultural integrity;
  • Can decrease profit margins in the short-term;
  • The relationships with investors may become volatile due to decreased financial performance.
8/10
  • Can help to strengthen the company’s position in China;
  • Will have a small negative effect on profitability due to low-interest rates of loans and fast payback period;
  • Damages cultural integrity (Deeb, 2016);
  • The relationships with investors may be unpredictable, as they may both like and dislike the strategy.
6/10
  • Can improve the relationships with investors if the situation with COVID-19 continues to impact the global economy negatively (Toyota, 2020);
  • Preserves cultural integrity (Deeb, 2016);
  • Decreases the susceptibility to changes in the external environment;
  • Stagnates the financial performance, as the benefits of the low cost of debt will be offset by decreased growth of sales;
  • The company may miss the chance of using current low-interest rates to acquire a competitive advantage (Russel Investments, 2020);
  • The company will have decreased financial performance in comparison with its rivals if the pandemic ends soon.
Feasibility 6/10
  • Cannot be achieved in the short-term;
  • Requires significant capital investments in R&D and modification of operations (Baldwin, 2020);
  • The company has enough internal capital to invest in the option (Toyota, 2020);
  • Additional capital can be acquired due to the low D/A ratio (Toyota, 2020).
  • The payback period of capital investments will be long;
  • The success is questionable, as it has a high degree of uncertainty.
8/10
  • Low cost of debt due to the supportive measures associated with the COVID-19 pandemic;
  • The cost of acquisition is predictable (Allahar, 2015);
  • The current situation with the COVID-19 pandemic may put smaller companies out of business, which can be used to negotiate the price of acquisition favorably for Toyota;
  • Even though success is not guaranteed, the risks are lower in comparison with Option 1.
9/10
  • The option does not require any investments;
  • The option may cause inconsiderable resistance from the stakeholders, as it is not in line with the current strategy of the company (Sosnovskikh, 2016).
Total Score 23 25 21

Table 3: Analysis of Options Available to Toyota. (Source: Created by Self).

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Option Selection

According to the analysis provided in Table 3 above, the most appropriate option for Toyota is the expansion strategy based on direct acquisitions of smaller automotive companies. This option has the highest score, as the combination of suitability, acceptability, and feasibility is optimal. It allows to increase the company’s market share, improve its presence in international markets, utilize the possibilities associated with the COVID-19 situation, and exploit low dependence on debt. Additionally, the option has lower uncertainty in comparison with Option 1, which is crucial in the rapidly changing outside environment.

The primary concern associated with this option is damage to corporate culture integrity. Acquisitions will require significant investments and close control over corporate culture in the acquired companies due to possible conflicts, which can make the corporate culture dysfunctional. According to Tedla (2016), a lack of corporate culture integration is associated with decreased financial performance and poor organizational performance.

Another concern that should be mentioned is the possibility of decreased quality of products produced in China if Toyota chooses to acquire a company in this country. According to Shih (2018), the myth that Chinese automakers produce low-quality vehicles no longer holds true. Chinese carmakers are developing rapidly, especially in the EV market. Thus, quality control will only be a moderate problem.

Possible Implementation Problems

There are several risks associated with the implementation of the selected option that should be considered. First, Toyota can miscalculate the acceptable price for the acquisition, which may result in long payback periods (Allahar, 2015). Second, the acquisition may cause legal problems due to poor protection in China. Third, Toyota will need to hire a strong post-sale team that has significant experience in resolving post-sale issues (Allahar, 2015). Finally, the company might miss the final targets, as the key employees may choose to abandon the acquired company (Deeb, 2016). It is crucial to address all the risks mentioned above to ensure the success of the implementation process.

Conclusion

Toyota is a large player in the automotive industry that has significant resources it can use for future growth. The assessment of these resources helped to identify three possible options for the development of the company. The analysis of these options revealed that the acquisition of a smaller Chinese EV manufacturer is the most appropriate strategic option, as it has the optimal combination of suitability, acceptability, and feasibility. However, this option is associated with implementation and cultural integrity concerns that should be addressed to ensure success.

References

Allahar, H. (2015) An overview of key issues in mergers and acquisitions: A case of Trinidad and Tobago, International Journal of Economics, Commerce and Management, 3(8), pp. 40-425.

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Guiding principles at Toyota (1997) Web.

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Majoros, P. (2019) ‘Japan’s integration efforts, with particular attention to the Japan-EU free trade agreement’, Linked together for 150 Years: Hungary and Japan Analyses of Recent Economic and Social Trends in Japan and Their Effects on Hungary, pp. 141-174.

Mishra, D. et al. (2018) ‘Outsourcing decision: do strategy and structure really matter?’, Journal of Organizational Change Management, 31(1). pp. 26-46.

Report Linker (2020a) Global Automotive Industry Outlook, 2020. Web.

Report Linker (2020b) The global automotive motors market size is projected to grow from USD 20,321 million in 2020 to USD 25,719 million by 2025, at a CAGR of 4.8%. Web.

Russel Investments (2020). Global market outlook – Q2 update. Web.

Salter, M. and Weinhold, W. (1981) Choosing compatible acquisitions. Web.

Scott, G. (2020) Porter’s 5 forces. Web.

Simão, L. and Lisboa, A. (2017) Green marketing and green brand–The Toyota Case, Procedia Manufacturing, 12, pp. 183-194.

Shih, W. (2018) Don’t underestimate Chinese automakers. Web.

Sosnovskikh, S. (2016). Toyota motor corporation: Organizational culture, Philosophy Study, 6(7), pp. 442-454.

Steiner, G. A. (1979) Strategic planning. New York: The Free Press.

Tedla, T.B. (2016) The impact of organizational culture on corporate performance [Doctorate dissertation]. Web.

Toyota (2020) Annual report 2019. Web.

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Volkswagen AG (2020) Annual report 2019. Web.

Wagner, I. (2020) Toyota’s research and development (R&D) expenses from FY 2007 to FY 2020. Web.

Yahoo Finance (2021) Toyota Motor Company. Web.

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