Company Overview Of Toyota Management Essay

Published: November 30, 2015 Words: 2728

It has been well-established that Singapore Airlines (SIA) is one of the leading airlines in the world today, being voted second place for the Airline of the Year Award (Skytrax, 2010a) and voted Best Airline in Southeast Asia at the 2010 World Airline Awards (Skytrax, 2010b).

SIA's success in executing a dual strategy of differentiation and cost leadership is unusual. This duality in SIA's strategy goes against what Michael Porter, who has been regarded as one of the most influential management experts, proposed in his generic competitive strategies model (Wheelen & Hunger, 2010, pp.233-35) as duality incorporates both of the opposing strategies of the model. Michael Porter argues that it is impossible to do so for a sustained period of time as dual strategies entail contradictory investments and organizational processes (Heracleous & Wirtz, 2010, p.145). However SIA, and a few other companies, including the automobile manufacturer Toyota, view the dualities as opposites that make up a whole (Heracleous & Wirtz, 2010, p.146).

SIA executes its dual strategy by managing four paradoxes: Achieving service excellence cost-effectively, fostering centralized and decentralized innovation, being a technology leader and follower, and using standardization to achieve personalization (Heracleous & Wirtz, 2010, p.146). As a result, SIA has delivered healthy financial returns, has never had an annual loss, and except for the initial capitalization, it has funded its growth itself while paying dividends every year (Heracleous & Wirtz, 2010, p.146).

It has been identified in the case that similar to SIA, Toyota is one of the companies that operate using dual strategies. The industry in which Toyota operates is obviously different from that of SIA as SIA is in the service industry and Toyota in manufacturing, specifically automobiles. Hence, it is worth to look at what are the factors within the industry that can allow automobile manufacturing firms to adopt dual strategies, and whether Toyota used these factors in order to adopt their dual strategy.

2. Analysing the Industry

In order to obtain a clear picture of the industry and to find out potential opportunities and threats within it for adopting dual strategies, it is necessary to conduct an industry analysis. This can be done using the Five Forces model which was developed by Michael Porter (Hill & Jones, 2010, p.42) which analyses the five forces that shape industry competition. Figure 1 depicts the model which briefly analyses the automobile industry. A high force can be regarded as a threat as it is likely to reduce profits, and a low force can be viewed as an opportunity as it may allow the company to earn greater profits (Wheelen & Hunger, 2010, p.158).

Figure 1: The Five Forces That Shape Industry Competition - The Automobile Industry

Source: Adapted from (Ahlstrom & Bruton, 2010, p.137; Porter, 2008, p.4)

2.1 Threat of New Entrants

The automobile manufacturing industry, or automobile industry, is considered to have high economies of scale which make it difficult for potential new entrants to produce automobiles profitably without major investments (Ahlstrom & Bruton, 2010, p.137). The high economies of scale is usually either due to advantages gained by spreading fixed production costs over a large production volume, discounts on bulk purchases of raw material inputs and component parts from suppliers (Porter, 2008, p.9; Hill & Jones, 2010, p.44), employing more efficient technology (Porter, 2008, p.9), cost reductions gained through mass-producing a standardised output, or cost savings associated with spreading the marketing and advertising costs over a large volume of output (Hill & Jones, 2010, p.44).

2.2 Bargaining Power of Suppliers

The bargaining power of suppliers is considered low as parts required for the manufacturing of automobiles are easily obtainable and also due to the fact that some of the raw materials are commodities (Ahlstrom & Bruton, 2010, p.137). Therefore, manufacturers would not need to be too dependent of any one supplier for their raw materials and the switching costs for the manufacturer would be low as well. Additionally, as less than 10 automobile manufacturers worldwide dominate the industry resulting in an "oligopsony" market structure, suppliers have little opportunity to broadly diversify their customer base (Gillette, 2003) and so their bargaining power is decreased.

2.3 Bargaining Power of Buyers

Big-fleet buyers such as rental cars and police departments have high bargaining power as they buy in large numbers (Ahlstrom & Bruton, 2010, p.137), which allows them to leverage their purchasing power to bargain for price reductions (Hill & Jones, 2010, p.51). However, taking into consideration the individual consumer, their bargaining power is considerably lower as they never purchase huge volumes of automobiles. Still, the switching cost for individual buyers is low as they can always sell the car they own and purchase a new one (Highfill et al., 2004).

2.4 Threat of Substitute Products or Services

Looking at the threat of substitute products or services to the products of the automobile industry, there are only a few including walking, cycling, or taking a train (Highfill et al., 2004; Ahlstrom & Bruton, 2010, p.137). The existence of substitutes means that customers can switch to these substitutes in response to a price increase (Henry, 2008, p.75). Although the subway train is the most effective means of transportation in some cities such as New York or Chicago, in most places a person must have access to an automobile in order to get around (Highfill et al., 2004). Hence, the threat of substitutes can be considered as low.

2.5 Rivalry among Existing Competitors

As mentioned before, the industry suffers from high capital costs (Ahlstrom & Bruton, 2010, p.137). Additionally, there is worldwide overcapacity and the firms compete fiercely for each other's customers (Highfill et al., 2004; Ahlstrom & Bruton, 2010, p.137). Competitors are also compared to one another constantly (Highfill et al., 2004) and so the rivalry is very high. Opportunities for firms to surpass each other is also less as there is lack of differentiation opportunities, owing to the fact that all the companies make cars, trucks, or SUVs (Highfill et al., 2004).

Through analysis of the industry forces that shape competition, it is understandable that there are opportunities for companies to adopt a low-cost strategy. There are also forces that push manufacturers to be more differentiated either in terms of quality or innovation than their competitors in order to surpass their competition. Hence, it can be concluded here that being able to produce on a mass scale resulting in lower costs can be one of the factors that can allow manufacturing firms to adopt dual strategies. The other factor can be that due to the high industry rivalry, firms need to be competing on the basis of quality and innovation.

3. The "Toyota Way" - An Internal Analysis

Toyota is considered to be the world's largest automaker (Ohnsman & Naughton, 2010; The Associated Press, 2010) with a U.S. market capitalisation of 17% in 2009, albeit dropping to 16.7% in 2010 due to the recent global recalls of 8 million vehicles (Ohnsman & Naughton, 2010; Green, 2010). The Toyota Way incorporates 14 principles divided into four sections (Please see Appendix 1 for an Executive Summary of the 14 Toyota Way principles) (Liker, 2004, p.6). The Toyota Way, the source of Toyota's major strengths, along with the Toyota Production System (TPS) makes up Toyota's "DNA" (Liker, 2004, p.7). Figure 2 illustrates a model of the Toyota way which categorises the 14 principles into four principle categories.

Figure 2: A "4 P" model of the Toyota Way

Source: Adapted from (Liker, 2004, p.6)

3.1 The Toyota Production System (TPS)

The TPS, also known as Lean production (Dennis, 2007, p.13), was established with concepts designed to maximise flow, eliminate waste, and respect people, with the foundation based on efficient use of resources to produce materials with a repetitive, reliable system (Fang & Kleiner, 2003). Lean production means doing more with less - less time, less space, less human effort, less machinery, less materials - while giving customers what they want (Dennis, 2007, p.13). The system eliminates non-value added physical activity with automation and a multi-task workforce. TPS is accomplished by the use of Jidoka, Just-in-Time (JIT), Kanban inventory system and Kaizen (Fang & Kleiner, 2003).

The system is also based on the vertical disintegration of manufacturing. Major car components are purchased from "first tier" suppliers, who it turn purchase the constituent parts from smaller parts suppliers (Winfield, 1994). Subcontracting agreements are usually with one supplier only and are usually for a considerable length of time, labelled as "obligational contracting" (Winfield, 1994; Winfield & Kerrin, 1994).

In the TPS, the plant produces a car only after it receives an order from the dealer resulting in a flow-type production that set the tone for the JIT system that keeps inventory at a minimum (Fang & Kleiner, 2003). The JIT system eliminates inventory build-up, storage and makes better use of capital (Fang & Kleiner, 2003). A work request is delivered to the preceding processor through the use of a card and behaves as a "pull" system (Kanban) (Fang & Kleiner, 2003; Black, 2008, p.23). Each group of workers is instructed to assemble a complete component of a car just at the time when the part-assembled car arrives, ready to receive it (Winfield, 1994). The use of robotics in assembly processes varies from plant to plant depending on the abilities of the workforce to maintain them, but their use relative to other car manufacturers is minimal (Winfield, 1994).

Through the internal analysis of Toyota's operations, it can be clearly seen that the TPS is one of the greatest strengths that they possess. Their obsession with eliminating waste, or Muda in Japanese, is a mind-set that goes beyond the cost-cutting used by other manufacturers (Treece, 2006).

3.2 HRM Policies and Practices

HRM policy and practice are geared to maintaining nothing less than a totally co-operative and committed workforce. Assembly workers are expected to sort out production problems themselves rather than to work round them (Winfield, 1994). Worker suggestions are implemented to improve the work process, with a focus on raising quality and efficiency of the production line through continuous improvement (Kaizen) (Fang & Kleiner, 2003).

Toyota also practises visibly charting the successes or failures to meet work targets of individual workers, not to humiliate them, but to alert co-workers and enlist their help in finding solutions (Fackler, 2007). Also, in the development of their personnel, Toyota ensures that even their new executives (and especially those recruited from elsewhere in the automobile industry) are comprehensively exposed to "real" life style within the company (Spear, 2004 cited in Towill, 2010). Hence, for a period of months it is customary for such newcomers to participate in a companywide acclimatisation course where they work and actually solve problems (as distinct from merely watch) on a number of Toyota and associated factory floors (Towill, 2010). It is also perceived at Toyota as being too expensive to eradicate traditional attitudes, allegiance to traditional job descriptions, and adversarial "demarcation mentalities" and to replace with new habits of working (Winfield, 1994). Hence, their preference in hiring is towards young, well-educated but inexperienced people as they are impressionable and easier to indoctrinate (Fang & Kleiner, 2003).

Workers are also expected to halt the line when defects are suspected which prevents defects from traveling any further into the system (Black, 2008, p.27). Calling attention to problems and fixing them before the product is finished is the basic essence of Jidoka (Black, 2008, p.27). But the task of quality inspection is also built-in into the system, thereby creating product quality within the process (Toyota, 1987 cited in Fang & Kleiner, 2003). Thus, workers are free to move from one job to another, hence they are trained to be multi-functional (Fang & Kleiner, 2003), and they are free for more value-added activities such as solving problems and finding new ways to improve productivity and eliminate waste (Black, 2008, p.27).

The workforce of Toyota, being empowered to take action to maintain quality and to provide suggestions for continuous improvement, is another great strength of the company. The analysis of the HRM policies and practices show that commitment and co-operation is created within the Toyota teams and would hence result in a greater commitment to the Toyota Way.

4. The Approach to Duality

Toyota has been noted as a company that competes using a dual strategy (Heracleous & Wirtz, 2010, p.146; Jeffs, 2008, p.51) whereby it follows a cost leadership strategy, allowing them to maintain a healthy profit and provide a competitive price, and at the same time maintaining a differentiation strategy, allowing them to provide a high product or service quality (Jeffs, 2008, p.51; Morgan & Liker, 2006, p.11). It also launches more new vehicles annually than most of its competitors, creating a steady flow of high quality new products to meet customer demand (Morgan & Liker, 2006, p.11).

Figure 3 below shows a partial view of a TOWS Matrix (Wheelen & Hunger, 2010, pp.230-31) for Toyota based on the opportunities and threats identified from the industry analysis and the strengths of the company identified through the internal analysis. The figure also illustrates how each of the strategies being practiced by Toyota results in the company's ability to achieve both a low-cost and differentiation strategy.

Figure 3: Partial view of a TOWS matrix for Toyota

The lean production system enables Toyota to minimise waste and save cost on time, space, human effort, machinery, and materials. Its effective use of this system has enabled it to maximise the opportunities presented by the industry for achieving cost effectiveness. The obligational contracting with suppliers, most probably made possible due to the low supplier power in the industry, creates a long-term relationship with suppliers allowing Toyota to exert considerable leverage on the suppliers in terms of driving down costs (Winfield, 1994). It is also able to achieve exacting quality, reliability and delivery standards from their suppliers (Winfield, 1994) which add to the quality of their production itself.

Opting not to adopt mass production which can be available through the high economies of scale in the industry, the TPS approach is based on confirmed orders ("pull" system) and is geared to a market that demands fast delivery of models, each produced in small quantities resulting in small lot sizes and synchronised one-piece flow production which shortens delivery times considerably (Shingo, 1989, p.84). The one-piece flow operations result in shorter cycles, reduced finished goods inventory, and reduced work-in-progress (Shingo, 1989, p.94). Coupled with small lot sizes owing to order-based production and adjustments to changes in customer needs owing to the mixed flow of many models (Shingo, 1989, p.94), Toyota is able to achieve cost reductions and is also able to effectively meet the needs of the market.

On an HR perspective, the activities, connections, and production flows in Toyota factories are enormously flexible and adaptable (Spear & Bowen, 1999 cited in Towill, 2010). Tasks and processes are constantly being challenged and pushed to a higher level of performance, hence enabling the company to continually innovate and improve (Kaizen) (Spear & Bowen, 1999 cited in Towill, 2010). With the practice of Jidoka by the workforce complementing the practice of Kaizen, product quality is improved on a continuous basis.

5. Conclusion

Although a fully detailed analysis of Toyota and its industry forces are beyond the capacity of this report, the aspects covered throughout shows an overall view of how the company practices a dual strategy of cost-leadership and differentiation, given the opportunities and threats from the automobile manufacturing industry that it operates in.

Industry forces propose that in order for an automobile manufacturing company to adopt dual strategies, it must compete primarily on the basis of differentiation which may be achieved through quality and innovation and that it also must operate on the basis of mass production in order to reduce costs per unit produced owing to the high fixed costs in the industry.

As Toyota has been found to be very focused on continuously improving the quality of their products and on continuously innovating, it can be concluded that Toyota does adhere to one of the industry factors that can allow automobile manufacturing companies to adopt dual strategies. However, the concept of mass production to reduce its costs goes against the principles of the Toyota Way which is heavily focused on reducing waste. Therefore, it can be concluded here that Toyota practices a different approach than what the industry presents in terms of achieving cost-leadership.