Toyota Motor Corporation Launching Prius

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Executive Summary

Toyota has long relied on its competitive advantages in product development, cost efficient production, and corporate culture. However, Toyota’s lack of innovation and inability to appeal to a broader demographic have resulted in slumping domestic sales and shrinking profits. Demand for smaller, environmentally friendly, fuel-efficient cars presents the opportunity for Toyota to leverage its strategic resources and introduce its first hybrid vehicle – The Prius.

The introduction of the hybrid powertrain creates buyer value through both fuel efficiency and environmental sustainability. With car production predicted to increase by as much as 50% in 2010, and gasoline accounting for 30% of global demand for oil, continued growth could put significant upward pressure on oil prices. Gas prices were already $1.13 in the US and 3.91 in Japan. The Prius offered an expected 100% increase in fuel economy over the similarly-sized conventionally-powered car. Savings due to fuel efficiency are coupled with the Prius’s contribution to reduced pollution. As international leaders began to recognize climate change and governments introduced vehicle emission regulations, the importance of this eco-friendly aspirational value with consumers increased. The Prius appealed to both younger and older generations who saw the automobile as offering aspirational value in addition to a basic mode of transportation.

The automobile industry as a whole is reasonably attractive. While intense rivalry exists, both supplier and bargaining power are moderate, and the threat of substitutes and new entrants are low. Furthermore, the introduction of the hybrid powertrain segment furthers the industries attractiveness. Most automakers were engaged in modest research efforts, at best, on hybrid systems. Huge capital requirements, technological challenges, and the feasibility of moving from a prototype, to a concept, to production – all at a reasonable cost – proved too much of an undertaking for most automakers. With increased consumer interest in environmental sustainability, and alternative powertrain technologies failing to take off, fewer options meant buyer bargaining power was reduced. As hybrid engines relied little on gasoline, the threat of substitutes during periods of high oil prices was lowered as well. With government support, and a culture shift in environmental awareness, the hybrid powertrain segment shows great promise; particularly to the company capturing the first movers advantage.

Toyota’s strategically valuable resources are both physical (production) and intangible (human capital). Toyota’s organization capability -- low-cost, lean manufacturing; high-quality production; and fast product development -- were far superior to U.S. and European automakers. Labor hours per vehicle for Toyota were 29-31, compared to 43-49 for competitors. Product development took roughly 45 months for Toyota compared to 60 months for counterparts. Just-in-time production was developed to overcome the inefficiency associated with small production volume. Toyota was a master in cost-cutting and reorganization, allowing the company to withstand even the hardest of economic times. Toyota’s prowess in marketing and sales contributed significantly to its penetration into the North American market – 7% in 1994. But as Collins and Montgomery illustrate, “the best strategic resources are often intangible – the culture the technology, and the transformational leader.” At Toyota, management firmly believed that people were the most significant corporate asset and that investments in their knowledge and skills were necessary to build competitiveness. Employees committed to kaizen or incessant improvement. The Toyota Production System (TPS), which emphasized collective problem solving, was often imitated by U.S. manufacturers with little success.

Product development, cost efficient production, marketing, and corporate leadership are resources required to compete in the powertrain segment. It is two long steps from a concept to a prototype that showed technical feasibility and from such a prototype to a marketable production car that can be built at a reasonable cost. Significant investments in product development are needed since the technology was new and most of the components had to be developed from scratch. Efficient product development is vital, as a meaningful first movers advantage exists in the hybrid market. A technology must be created that is inimitable, that will not be replaced by superior technology later. Equally important is the development work needed for mass production, which was critical for determining the overall profitability of a new powertrain vehicle – accounted 85%-90% of the development work for the Prius. Furthermore, high variable costs meant economics of scale must be achieved to become profitable. Post production required a strong sales and marketing to push the benefits of a fuel efficient, environmentally friendly hybrid vehicle. Surveys showed the consumer were willing to pay at most 20% more for hybrid cars, but surveys were often unreliable. Toyota can leverage its TPS system and kaizen approach to overcome any technological challenges that arise in product development. Expertise is cost-efficient production and reorganization will seamlessly integrate product development with mass productions. Prowess in sales and marketing will assure acceptance in the marketplace. Finally, Okuda’s commitment to the Car of 21st Century and strong corporate leadership will be crucial in guiding the project.

The long-term strategic benefits of introducing the Prius far outweigh the risks. Okuda should accelerate the development of the hybrid powertrain, but do so in a manner that challenges the engineers but does not push them to the brink. While the first movers advantage would capture the early adopters market, there is risk of producing an inferior technology could be easily replaced.

Action Plan to Hybrid Production

• Halt all other product development and allocate resources to the G21 team until hybrid launch is complete.
• Create marketing campaigns for geographical regions. Create awareness for hybrid technology. Educate the consumer. Deploy and differentiation strategy in the event a competitor releases a similar technology.

•  N.A. – Target environmentalists, highlight fuel efficiency  
• Europe – Highlighting fuel efficiency first, environmental sustainability second. (Higher gas prices)
• Japan – Target younger demographic. Fuel efficiency and environmental sustainability
• Non-OECD countries. – Stress potential environmental concerns over rapid growth. Prius is the solution. (Potentially largest demographic)

• Introduce the Prius in the U.S. market initially, positioning as the world’s first mass production hybrid car which provides a powerful driving experience along with advanced design -- targeting young executives and small families.

The introduction, and ultimate success of the Prius, not only signifies Toyota’s commitment to environmental sustainability, it repositions the brand as an innovative pioneer in the automobile industry.