Case study Toyota does it rely too heavily on production for world leadership? Over the past 30…

Case
study

Toyota: does it rely
too heavily on production for world leadership?

Over the past 30 years, Toyota Motor
Corporation has become the world’s leading car company. Much of its success has
come from its highly respected manufacturing systems. But the company found
itself in trouble in 2010 from quality issues related to production. Has the
company relied too heavily on the Toyota Manufacturing System?
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To understand this case
fully, it needs to be read in conjunction with

the main cases on the global
car industry published in Richard Lynch,

Strategic Management, 6thEdition

Background

In
the year to end-June 2004, Toyota produced and sold over 6.5 million vehicles
around the world.i The company had only
started car production in the 1930s. Even in the early 1950s, it was still only
averaging 18,000 vehicles per annum.ii The
increase in production and sales between 1950 and 2004 was, by any standards,
remarkable – Figure 1 shows the data for 2004. Toyota’s strategic problem was
that it was a tiny company competing against large competitors. The only
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way that it could survive was by finding new,
flexible production methods that could be used by smaller companies. ‘The
Toyota Production System originated as a means of achieving mass production
efficiencies with small production volumes’ (Toyota Annual Report and Accounts
1998). Importantly, even in 2004, the major Toyota production location was
Japan – from a strategy perspective, this raises important questions about how
long its Japanese factories can remain low-cost centres of production.

Many
of the production successes between 1950 and 1980 have been accredited to the
Toyota Production System and its chief engineer during that time, Taiichi Ohno.
He started experimenting to improve production in the late 1940s, but it took
many years to develop the systems described below, such as kaizen and kanban,
and to have them widely adopted across the company. Even in the 1990s,
experimentation and change were still taking place to improve production.
Indeed, such change was by definition an integral part of the process of
achieving production improvements: it was called ‘continual improvement’iii or
kaizen in Japanese.

.gif”>During
the same period of time, Toyota operated a separate marketing company that
essentially sold Toyota production. It was headed by Shotaro Kimaya, who had
trained in US marketing methods after the Second World War. He is credited with
many marketing innovations in the company during the 1960s and 1970s. They
slowly propelled Toyota to market leadership in Japan, with over 40 per cent of
the market. Among other initiatives, he set up dealer networks, cheap car
finance for customers and a strong, dedicated salesforce. He also developed
Toyota exports so that by the 1970s around 40 per cent of all production was
being sold outside Japan, especially in the US.iv
Toyota’s Camry model is today the biggest single-selling car in the US.

Operations initiatives at Toyota between 1950
and 1980

During this period, Toyota
introduced a whole series of operations initiatives that assisted car and truck
production – essentially a repetitive, mass-manufacturing process. The new
procedures were designed to achieve three main objectives:

1
to reduce costs;

2
to increase quality;

3
to control the production process more
tightly, thus reducing the inputs needed and making the company more responsive
to market demand.
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The
first two objectives had an immediate impact on added value in the plant; the
last had an indirect influence on added value. To achieve these objectives,
Toyota had a number of key operations strategies:

.jpg”> Design. More costs can be
taken out at the design phase of operations than at any other stage. Forexample,
Toyota has consistently used research and development to undertake such tasks
as combining components so that they can be produced by one process rather than
two.

.jpg”> Kaizen. This means ‘continuous
improvement’ across every aspect of production. Toyota’s engineersinvented
this approach to operations strategy.v It
is reflected in Toyota’s attention to detail, which is legendary.vi The
result of one stage in kaizen is shown in Figure 2.

.jpg”> Kanban system.
This was originally a system of coloured cards on the factory floor that were
associatedwith the amount of stock available for production.
These were used to signal when stock needed to be replenished and provided a
simple but extremely effective visual system, both to tell operatives when to
reorder and to keep stocks controlled and low up to that time.

.jpg”> Layout. Instead of long,
linear layouts for production lines, cellular layout arrangements of plant
machinery were designed. They allowed workers to operate a number of
machines and allowed them to work in teams to provide support and back-up more
effectively. The teams had to be flexible in their willingness to operate any
machinery in the layout and needed to be highly trained to complete the varied
range of tasks. Some other Japanese companies, such as Nissan, have had
difficulty in achieving the same results,vii
probably because of the sophistication needed to operate this system.
.jpg”>
Supplier
relationships. Close co-operation was obtained and
maintained with a small group of leadingsuppliers to Toyota. It
was used to work jointly on cost reduction schemes and seek higher quality from
bought-in components. This was particularly important in the value-added
process at Toyota because the company had a higher proportion of bought-in
items from suppliers than its main international rivals. This arrangement
applied to other companies in Japan but was extended when Toyota opened its
plants overseas – for example, in 1993 at Burnasten in the UK.viii

.jpg”> Just-in-time systems.
Toyota pioneered the arrival of stock from suppliers using methods which
involveclose contacts with suppliers. When stocks in the factory
run low, they are replaced by stocks from suppliers very rapidly, using
computer linkages and daily or even more frequent deliveries – just in time for
production. The clear advantage to companies such as Toyota is that their
capital investment in stock is permanently kept lower than otherwise. The
company is not unique in the use of such systems.

Each
of these developments was equally important at Toyota. All contributed to the
general improvement in the production efficiency of the company.

By the early 1980s, the Toyota Production System was
being described and recommended for introduction into Western companies.ix
Japanese rivals such as Nissan and Honda also attempted to introduce the same
or similar schemes. During the 1990s, the Toyota plant at Takaoda was compared
as a model of production with the worst North American plant.x
Toyota was used as a pointer to the changes required in the USA. However, there
are cultural and industry structure problems that make complete adoption of the
Toyota system difficult: for example, team working and flexibility may be
closer to the Japanese model of society than to Western cultures.xi
Toyota itself saw the techniques it had developed as being a set of evolving
production strategies with no single ideal solution: kaizen meant what it said.xii

Production at Toyota
into the new millennium

.jpg”> Over the past ten years, Toyota experienced
real problems in the macroeconomic environment. They were:

.jpg”> a downturn in worldwide demand for cars,
including for the first time ever a drop in demand in its key Japanese home
market;

.jpg”> a significant rise in the value of the
Japanese yen, making exports from Japan more expensive.

These developments prompted a major
reappraisal of its production methods at the company and a redoubling of
efforts to achieve new, lower costs. All Japanese car manufacturers, including
Toyota, were forced to shift in a major way the focus of their operations
strategy from rapid model changes to cost reductions.xiii Toyota responded to
the pressures by setting up a major cost reduction programme.

By 1994, the company was
claiming that it had found savings at an annual rate of US$1.5 billion.xiv But
it was still not satisfied. By 2004, this had risen to US$ 2.1 billion.xv Here
are two recent examples of Toyota’s production strategy:

1.
In 2001, Toyota announced a totally new
programme called ‘Construction of Cost Competitiveness for the 21st Century’ or
CCC21, for short. The relentless drive for improvement would be renewed. The
company was looking again at every aspect of design, manufacturing, procurement
and fixed costs. This was expected to lead to better utilisation rates for
manufacturing equipment and less ‘expenditure on human resources’. But this
will not necessarily mean sacking workers, which is against the Toyota
tradition. It may mean that some of the workers on temporary contracts will not
have their contracts renewed, but the company was keen to avoid even this, if
possible.

2.
In 2004, Toyota began its new UMR (Unit &
Material Manufacturing Reform) Strategy. ‘This project sets and innovates
toward production engineering targets on a different order of magnitude from
anything tried before,’ claimed Toyota. The company gave the example of the
simplification of the moulds used in manufacturing car parts. All car
production is centred on moulding – die-casting moulds, forging moulds, plastic
injection moulds, etc. If it is possible to simplify moulding techniques, then
it is possible to simply the entire production process. Toyota was able to
re-engineer its moulding techniques so that moulds were reduced to between
one-third and one-tenth their former sizes. UMR was also used to shorten the machining
and assembly lines for some of the Toyota engines. UMR also had benefits for
overseas plants. ‘Through UMR, we are creating a production system for overseas
plants that overcomes differences in experience, location and language and
enables highly efficient production of in-house components of the same quality
the world over. By implementing the UMR initiative, we aim to strengthen our
global competitiveness.’

Some would question how
Toyota could have been so efficient during the 1990s if it was still able to
generate such massive savings in recent years. Toyota has always had problems
transferring its production system beyond its factories to other areas of the
value chain. It had some success with its immediate suppliers but struggled
both with raw material suppliers and with the marketing/selling end of the
value chain.xvi These difficulties were then compounded as the Toyota
Production System was subjected to the pressures of worldwide demand, the
implications for production at its factories and a slump in Japanese domestic
demand in the late 1990s. Nevertheless, personal and team motivation remain an
important part of the Toyota system.

Toyota’s
global vision on production and vehicle development

According to the 2010 Global Vision Toyota document
released in April 2002,xvii the company aimed to
increase its production by 50 per cent over the next nine years. It was also
seeking to increase its market share by the same percentage. If it was
successful, it would increase its market share from 10 to 15 per cent and would
challenge General Motors for the title of the largest car company in the world.
The company would seek to grow its share, particularly in North America, while
retaining its dominance in Japan. It was also seeking major growth in India and
China, possibly through joint ventures. It had already entered into technical
co-operation alliances with rival companies such as PSA Peugeot Citroën to
produce a new small car in the Czech Republic. It had also made a similar
agreement with two local car companies in China, FAW Group Corporation on cars
and Guangzhou Automobiles on car engines.xviii

In 2005, Toyota’s president became concerned that ‘the
real meaning of Global Vision 2010 is often not fully understood . . . I
originally put the 15 per cent target forward as a common ambition that would
unite employees worldwide as they pursued it and give them the impetus to win
out in fiercely competitive markets. In my view, companies that lose their
appetite for growth stagnate.’xix

One production and marketing strategy that Toyota has
embraced is the development of more environmentally friendly vehicles. Its
Hybrid-Vehicle Strategy over the past 10 years has led to the Prius, one of the
first cars to have an engine that switches between petrol and electric power
depending on the road situation. In its first year 1998, the Prius sold 50,000
units. By 2004, this had risen to 300,000 units per year and sales were still
growing fast. To encourage wider use of the technology (and arguably to
establish it as the industry standard), Toyota was offering its patented hybrid
systems to rival car manufacturers. It claimed to be a world leader in
environmental engine technology: ‘We are convinced that hybrid technology will
become the core technology in the creation of the ultimate eco car.’

The
one strategy that Toyota remained totally against was acquisition of a rival
car company.xx The reason was simple: it would
be impossible to introduce and gain the benefits of the Toyota Production
System that was the main competitive advantage of the company.

Toyota 2010:
disadvantages of the Toyota Production System?

In 2010, Toyota was still world market leader, but it had
taken quite a battering. It all started with the extensive publicity
surrounding some alleged performance issues with its cars in many countries
around the world. The company itself undertook major recalls of various models
to rectify the problems. Importantly, it recognised that Toyota had slipped
from its own high quality standards. The Toyota President Akio Toyoda
explained, “Over the past several months, I have been involved in a variety of
meetings to explain our ongoing commitment to safety and customer satisfaction.
These included public hearings in the United States and explanatory meetings in
Japan and other countries with the support of related personnel from across the
Company. During this time, I received constructive suggestions for improvement
as well as words of encouragement and support from many people. I am very
grateful to those who took the time to help us through this difficult time.â€

Toyota went on to explain that, “In the past, Toyota’s
quality standards focused more on technical issues. Now, we are incorporating
an awareness of the customer’s perspective as suppliers and dealers work
together to alleviate customer concerns.†It was setting up new quality
assurance systems to realize safety and security from the customers’ point of
view. These included a special committee for global quality that would have the
power to act worldwide and quickly to identify and solve issues.

Importantly, the above comments seem to suggest that
Toyota has come to recognise that its focus on technology and, by implication,
the Toyota Production System may have harmed the company as well as providing
benefits. The company explained that it was moving from a linear model that
began with the manufacturer, then to the car dealer and then to the customer to
a new model. The new approach would be to have a three-way, long-term
relationship directly between Toyota, its dealers and customers using new
electronic networks that would feedback rapidly on quality and technical
issues. As part of this process, Toyota continued to pursue its global
ambitions. It was strengthening its activities in two growing markets, China
and India. It was re-building its relationships with its customers through new
systems.

Toyota Green Car
Strategy

Importantly, Toyota was continuing to develop new car
models that were more environmentally friendly. These included a new joint
venture with the American electric car manufacturer, Tesla, that was announced
in May 2010. “I’ve felt an infinite possibility about Tesla’s technology
and its dedication to monozukuri (Toyota’s approach to manufacturing),”
commented the Toyota President Akio Toyoda. “Through this partnership, by
working together with a venture business such as Tesla, Toyota would like to
learn from the challenging spirit, quick decision-making, and flexibility that
Tesla has. Decades ago, Toyota was also born as a venture business. By
partnering with Tesla, my hope is that all Toyota employees will recall that
‘venture business spirit,’ and take on the challenges of the future.”

In
response, the Tesla CEO and co-founder Elon Musk said, “Toyota is a company
founded on innovation, quality, and commitment to sustainable mobility. It is
an honour and a powerful endorsement of our technology that Toyota would choose
to invest in and partner with Tesla. We look forward to learning and benefiting
from Toyota’s legendary engineering, manufacturing, and production expertise.â€

From
this endorsement, it would seem that Toyota’s legendary Toyota Production
System was still alive and well.

© Copyright Richard
Lynch 2012. All rights reserved. This case was written by Richard Lynch from
published sources only.

Case questions

1.
Using the definition of corporate strategy in
Chapter 1, identify which of the operations strategies undertaken by Toyota
(kaizen, kanban, design, etc.) have a corporate strategy perspective and which
are mainly the concern of operations management alone.

2.
Examining the Toyota Production System
overall, to what extent do you judge this to be critical to the company’s
strategic success? If you believe it to be critical, then how does this fit
with strategy theories that lay stress on the market aspects of corporate
strategy? If you believe operations to be

relatively
unimportant, then how do you explain the remarkable success of Toyota globally
since the

1950s?

3.
Some commentators argue that it is relatively
easy for market leaders such as Toyota to undertake the investment in machinery
and training programmes to achieve strategic success but more difficult for
smaller organisations. Do small companies have anything to learn from Toyota?
If so, what?

4.
The case describes how Toyota remains ambitious
to keep its global market leadership after its 2010 problems. Do you believe
that the company will really be able to do this? Why?

Notes
.gif”>
Three useful articles here from Tim Burt and David Ibison
on Toyota, Parts 1, 2 and 3: Financial Times, December 2001, p16,
13 December 2001, p13 and December 2001, p15. The 2004 data on car production
is taken from the Toyota Annual Report and Accounts 2004 published in English.

ii Williams,
K, Haslam, C, Johal, S and Williams, J (1994) Cars: Analysis, History and
Cases, Berghahn, Providence, RI, p108. See also the graphic account
of the early Toyota years in Womack, J P and Jones, D T (1996) Lean Thinking,
Simon & Schuster, New York, Ch10. Riveting story, well told.
iiiToyota (1994) Annual
Report and Accounts, p11 (English language version).

ivWilliams,
K et al. (1994) Op. cit., p118.

v Gourlay, J (1994) ‘Back to basics on
the factory floor’, Financial Times, 4 January, p7.
viGriffiths,
J (1993) ‘Driving out the old regime’, Financial Times, 20 August, p8.

viiWilliams,
K et al. (1994) Op. cit., p115.

viiiGriffiths,
J (1995) ‘£200m Toyota expansion may create 3,000 jobs’, Financial Times,
17 March, p9.

ixHartley,
J (1981) The Management of Vehicle Production, Butterworth, London.

x Womack, J, Jones, D and Roos, D (1990)
The Machine that Changed the World, Rawson Associates, New York.
xiWilliams,
K et al. (1994) Op. cit., p115.

xiiSobek,
D K, Liker, J K and Ward, A K (1998) ‘Another look at how Toyota integrates
product development’, Harvard Business Review, July–August,
pp36–50. A good description of the import-ance of management and human resource
strengths that make Toyota so difficult for other companies to copy.
xiiiButler, S (1992)
‘Driven back to basics’, Financial Times, 16 July, p16.

xivToyota (1994) Annual
Report and Accounts, p1 (English language version).

xvToyota
(2004) Annual Report and Accounts, p27 (English language version).

xviWomack, J P and Jones,
D T (1996) Op. cit., p241.

xviiIbison,
D (2002), ‘Toyota plans to challenge US dominance’, Financial Times, 2
April, p24.

xviiiBurt, T and Ibison, D
(2001) ‘PSA welcomes Toyota as latest co-driver’, Financial Times, 9
July, p29. Toyota (2004)

Annual Report and Accounts, pp29 and 119.

xixToyota (2004) Annual
Report and Accounts, p13.

xxBurt,
T (2001) ‘A pace-setter gears up for growth’, Financial Times, 24
September, p15. Interview with Toyota company chairman, Hiroshi Okuda.

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