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Toyota Strategy

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Toyota Motor Corp: Launching Prius

Vardhan Kamat

Executive Summary: Toyota Motor Corporation (Toyota or TMC) is currently working on the first mass produced hybrid car in the world, Prius and is aiming to launch it by end of 1998. Toyota’s new President Hiroshi Okuda wants to advance the launch to 1997 to ensure they are the first to market. Toyota needs to choose between the following choices: (i) Target an aggressive global launch in 1997 (ii) Launch in end 1998 as per the original plan (iii) Target a smooth launch in 1998 allowing for any unforeseen delay till 1999. I recommend that Toyota Motor Corporation (Toyota or TMC) target a smooth launch for end 1998 and allow for any unforeseen delay to push the launch till 1999. Analysis: Traditionally, the market has been dominated by gasoline and diesel powertrains. Electric and fuel cell powertrains have not broken through as mass-consumer vehicles. With the hybrid technology, Toyota hopes to combine the traditional gasoline/diesel power source with electric source to combine the best of both. The modern hybrid car is estimated to cost nearly 20% more than a regular car. If we consider a 100% increase in the fuel efficiency, the buy advantage is $400 (see Exhibit A. Therefore we can see that the buy advantage is not primarily in the cost (value) proposition of the car. The current buyer of this car would be someone who (i) puts a high value for the environment, (ii) is willing to pay a premium over conventional cars in the same luxury bracket (iii) is an early adopter of modern technology. This is the current target market of the hybrid powertrain segment and it is currently a narrow segment. Toyota needs to expand the segment to make the Prius a car that competes with mainstream cars by addressing the following (i) Compete on value by i.a) demonstrating kaisan or incessant improvement to bring down costs i.b) Leverage TPS to improve productivity and reduce production cost i.c) improving proximity to global/American markets (ii) Build an attractive product that targets younger buyers (iii) Lobby regulatory laws such as QRWR to incorporate hybrid technology. A compete SWOT analysis of Toyota has been performed in exhibit B. Toyota has been broadly successful in following a competitive scope giving cost leadership and a broad perceived uniqueness. While marketing the Prius, it must bring focused differentiation with a high perceived uniqueness. Toyota’s valuable resources are TPS (Toyota Production System) and Reliability (see exhibit C for VRIN analysis). If Toyota launches the Prius without addressing all known issues in the car, then the company would damage its reputation and weaken its most valuable resources. Additionally, fear of competition should not push Toyota to release a product which does not match their internal standards. The odds are in favor of Toyota that other car manufacturers are not going to beat Toyota in launching a hybrid car in the market (i) No car manufacturer has launched a successful mass-market alternate energy powertrain till date (ii) Most companies initially developing hybrids dropped out of the race after the CARB refused to consider hybrids under Zero Emission Value (ZEV) (iii) Few companies are working on producing a battery capable of

Toyota Motor Corp: Launching Prius

Vardhan Kamat

generating the adequate amount of power (iv) Other technological challenges for building a hybrid such as overheating of cells, regenerative breaking require innovation and do not have known solutions. Recommendation: I recommend that Toyota should not advance the launch of the Prius to 1997. Instead it should invest the necessary resources in the project and expand the team to ensure a quality, reliable product which can ultimately be mass-produced is prepared by 1998, or take additional time if necessary. This is because (i) it can address the known technical issues (ii) build a superior quality product compared to any competition that is working on hybrid technology (iii) use the time to improve its brand image in the younger generation (iv) address factors such as creating a left-hand drive, improving acceleration as per preference of American consumers and improving resistance to harsher temperatures to make it competitive and attractive to the regular consumer (v) Toyota has a long standing concern with environmental issues and competition launching a hybrid car will not cut into Toyota’s positioning. (v) Innovations built from scratch can require time significantly more than the average and we should look to invest more time than just 33% over the company average of 30 months to market (33% considering a Dec 1998 launch). Cons: (i) Toyota is losing market share in the local market and revenues and net profit is declining. This will impact investment in long term projects such as Prius (ii) Market may change and competition may launch hybrid cars (iii) Costs will increase with the duration of the project and the project may look less and less attractive based on the delay Conclusion: The negatives that Toyota is facing with the Prius project are more focused on the internal rate of return of the project. Given that (i) Toyota has a higher time to market than its competition, (ii) a weak brand image in the younger generation, (iii) short term targets such as improving marketing for ‘Lexus’ (iv) absence of an American production facility, it should focus on these so that the company can strengthen financially. So far, it has approached the Prius in the right manner focusing on producing the best technology using the best internal resources and setting a very high quality standard. Environmental regulations such ZEV need lobbying to include the Prius while Toyota as an organization needs to adhere to its principles of ‘The Earth Charter’ and its ‘Guidance Principles’ to provide clean and safe products. Sacrificing this, at this point will also compromise the ethos of the project and send wrong signals to the G21 challenging themselves to a new standard of engineering. Toyota is well placed as the largest selling foreign car manufacturer in the United States and it should continue to build the strength of its value proposition and commit to kaizan.

Toyota Motor Corp: Launching Prius

Vardhan Kamat

Appendix: Exhibit A: Avg. Distance (miles) Gasoline Price ($) Traditional Car Running Costs (32.9 mi/gallon) USA Japan Germany 12809 6648 8047 1.13 3.91 3.35 439.94 790.08 819.38 219.97 395.04 409.69 Prius Running Costs (65.8 mi/gallon) Buyer Cost Savings per year ($) 219.97 395.04 409.69

Exhibit B: SWOT Strength Toyota (1) Competitiveness through Toyota Production System (developing scientific knowledge and improvement in all employees) (2) Reliability (lowest number of problems per 100 cars) (3) Value for money (Corolla – Toyota’s largest selling car had value as its USP) (1) Improve competitiveness and proximity to global markets (2) Reduce time to market from the current average of 30 months (3) Change brand image from a trend follower to trend setter (1) Develop a modern technology before competition (2) Compliance with future environmental laws (3) Double the efficiency of other car manufacturers (4) Enter the luxury market with Lexus and create a new personal brand (1) American brands - Top three brands in the American market are domestic brands which sell more cars, have a bigger budget (2) Foreign brands such as Honda, VW which are successful selling cars at a higher premium and therefore are attracting the customers bracket that wants to pay more per car (3) Failure to mass-produce cars with new hybrid technology which will have tangible and intangible losses

Weakness

Opportunity

Threat

Toyota Motor Corp: Launching Prius

Vardhan Kamat

Exhibit C: VRIN analysis Toyota Production System Valuable Rare Inimitable Sustainable Y Y Y Y Reliability Y Y Y N Marketing Y Y N Y…...

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