By Mark C. Coleman, Senior Associate AHC Group, Inc.
December 18, 2006
The November 8th 2006 New York Times business article headline read, “Toyota Profit Jumps 34%; Sales Forecasts Are Raised” (Toyota Profit Jump).
In this age of global competitiveness Toyota seems to be not only a leader, but leading the way. How is it that this Japanese company has come to dominate the automobile industry in the U.S. and globally? How have they also navigated their way to leap frog their ‘Big 5’ competitors in the rankings with regard to total number of automobiles sold and market share? In fact 2007 is the year in which Toyota is expected to advance to #1 in both categories globally.
We believe the November 8th NYTimes article put’s it best, “It (Toyota) grabbed market share from Detroit’s struggling auto companies with strong sales for its fuel-efficient vehicles like the RAV-4 sport utility vehicle, the Yaris subcompact and its Prius hybrid-electric vehicle.”
Toyota has 3 elements of success:
1. First they have a competitively priced product.
2. Second they have a quality product (and corporate commitment to quality).
3. Third, Toyota has what we call ‘social response’, a process & system for understanding customer needs, market trends and forces, and transacting new products and innovations to address those needs.
We view Toyota’s timing, placement, and growth of its hybrid-electric vehicles as a ‘social response product development’. Toyota’s social response was really born in the mid-90’s when other automakers were focusing on high margin SUVs. Toyota, recognizing a shift in consumer appeal for SUVs and high gas consumptive vehicles began developing their hybrid-electric Prius. With a launch in 1999 the Prius was inconspicuous to the market and to Toyota competition. Consumers did not believe the car had the right amenities for their needs – and it could not compete at that time on its fuel-saving hybrid technology alone. So, Toyota engineered, added amenities, improved the hybrid-drive train and issued Prius version 2.0. The result was greater consumer appeal, more consumer buzz, and increased sales for the alternative fueled vehicle. But, sales were still low in 2001, two years after the launch of the initial Prius.
Since September 11th 2001 the world has changed in dramatic ways. Oil prices, like weather patterns, began to be more volatile. By 2006 prices peaked just below $80/bbl. Consumers were paying more than $3/gallon at the pump in some locations in the U.S. – as consumer sentiment toward big oil and big cars waned. Between 2001 and 2006 the demand for hybrid-electric vehicles surged. Driven by oil and gas price volatility – as well as increased public and private dialog on climate change – Toyota hybrid-electric sales skyrocketed. In fact, in January 2002 Toyota reported U.S. Prius sales of 15,556 in 2001, up 180% from 2000. By 2005 Toyota was reporting that their year-end Prius sales reached 107,897 units, up 100.5 percent over 2004 and more than a 593% increase (2005 Prius Sales).
For recent sales statistics on hybrid vehicles see the December 13th Specialty Equipment Market Association SEMA article on “High-Selling Hybrids”.
Between 2001 and 2006 Toyota carefully watched the market, leading to a timed launch of its hybrid technology into its extended product families including the Hybrid Camry, the Lexus luxury brand SUV and sedan (Lexus GS 450h), and its Highlander SUV model. The popularity of Toyota’s hybrid and alternative fueled vehicles has even spun web-sites where Toyota owners can talk about their vehicles and learn more. One notable site is (Prius Chat), which states that it is the “#1 online source for Toyota Prius & Hybrid Automotive news, information, & discussion”.
By launching its proven, respected, and desired hybrid platform into some of its most prized and best selling vehicles, Toyota opened consumer demand for vehicles they needed – and wanted – where other automakers were left with dinosaurs in the sales lots. While competitors were offering incentives on dinosaurs, Toyota earned margins on quality, affordability, diversity of vehicles, and consumer desire to pay for something different.
And, during a time when U.S. sentiment on globalization is questionable, Toyota seems to be appealing to U.S. workers. On October 12, 2006 the company announced that its Georgetown, Kentucky manufacturing facility would produce the Camry Hybrid, the first hybrid vehicle to be produced in North America (Kentucky Hybrid Facility). The Georgetown, Ky facility is Toyota’s largest manufacturing facility employing 7,000 workers. While Toyota is expanding manufacturing capacity, GM and Ford are simultaneously announcing layoffs and the closure of North American production.
Toyota has also gained market share by leveraging its intellectual knowledge. The company has earned revenue from other auto manufacturers, like Ford, as they began to use technology similar to Toyota’s hybrid platform for use on their models (e.g., the Ford Escape hybrid uses similar technology the Toyota platform). As a result, Ford has been licensing patents from Toyota. It appears as if Toyota’s commitment to innovation and quality led to its market position as early-adopter, now also leading to a terrain advantage as other auto makers step in and want to commercialize hybrid vehicles.
The story of Toyota and its search for the ‘Superior Car’ is told in the forthcoming book, “World Inc.: How the Growing Power of Business Is Revolutionizing Profits, People and the Future of Both” by Dr. Bruce Piasecki (World Inc.). The chapter on Toyota is intriguing to the corporate researcher, strategist, and general public because it outlines the progression on how this Japanese company has taken classical management tactics like quality management to build a quality car, but also how it has innovated based on a new and complex form of capitalism – what Pisaecki calls “social response capitalism”.
I think we will see more social innovation from Toyota in 2007 and beyond. The November 8th NY Times articles stated that in an effort to remain competitive and innovative in alternative-fuel and diesel engines Toyota announced that it intends to purchase just under a 6% stake in the smaller Japanese carmaker Isuzu for an undisclosed price.
Toyota is clearly the leader in the global automobile market. They will be interesting to watch grow, and whether or not they can remain innovative and focused on quality. It will also be interesting to see if other auto’s follow suit by extending alternative fuels and technology platforms across their product families.
Let us know what you think, reply to this blog by sending an email to: Mark@ahcgroup.com.
Mark C. Coleman is a Senior Associate with the AHC Group, Inc. and was a major trend and corporate researcher for the book, “World Inc.: How the Growing Power of Business Is Revolutionizing Profits, People and the Future of Both” written by corporate strategist and expert Dr. Bruce Piasecki. As a Senior Associate of AHC Group, Inc. Mark served Fortune and Global 500 firms on corporate social and environmental strategy. For more information see, www.ahcgroup.com.
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