Firms today operate in a business environment that is frequently changing and very competitive. This is mostly true of the external environment, which has forces and conditions that provide opportunities and pose threats to the companies. These include shifts in economic and business cycles, political realignments as well as changes in cultural values. Governments have also changed their policies and regulatory programs Williams & Green (1997). Therefore businesses that want to achieve and sustain growth must keep an eye on those forces to determine their effects when planning both for long- and short-term. To make effective strategic decisions, management will need to capture the whole picture of what is happening in the market. Therefore analysis tools are important in getting the information required and the whole picture of the situation (Nimmo, 1980).
Toyota Motor Corporation is one of the companies that have relied on these tools to develop their strategies. This has enabled it to relatively be one of the most successful companies in the automobile industry. Toyota is a Japan-based multinational automaker with its headquarters in Toyota, Aichi, Japan and was founded in 1937 by Kiichiro Toyoda, then known as Toyota industries. The company entered the American market in 1957 and is also found in European countries, such as the UK and France. It also operates in Asia, such as China and Hong Kong and Australia, and has operations in Africa in countries such as South Africa and Egypt. The company sells a variety of cars such as luxurious cars, trucks, motorsports and hybrid. In the 1st quarter of 2008 the company was leading globally in automobile sales and on the Forbes 2000 list of 2005, ranking the world-leading companies, Toyota was ranked fifth (Toyota Motor Corporation, n.d).
Toyota SWOT analysis
SWOT is an analysis tool that offers the foundational data that all other business strategy steps can build on. It is divided into four categories; strengths weaknesses, opportunities and threats. Strengths refer to the strong capabilities that the organisation has (Pahl and Richter, 2009. This company is currently the world’s largest automobile manufacturer based on production and sales. This has been achieved by coming up with a range of vehicles that attract both commercial and private users. Secondly, the company is committed to lean manufacturing and ensuring quality, a key operating principle embedded in its production system (Chapman, 2006).
The corporation has production plants set up throughout the world in all continents whereby it had 51 manufacturing companies overseas which helps it developing highly market targeted products. Coupled with strong financial muscle from Toyota financial services, the company has expanded its global market to over 170 countries as the end of 2009 (Toyota Motor Corporation, n.d). This also can be attributed to its strong distribution coupled with aggressive market efforts. The company also has a committed workforce due to its policy of employee empowerment, whereby it moulds leaders to have a thorough understanding of their area of specialisation. Lastly, the company has developed up-to-date technologies superior to most of its competitors, such as the hybrid vehicle, whereby the company is the first to produce hybrid vehicles in bulk (Nieman and Pretorius, 2004).
Weaknesses refer to the areas that organisation experiences lack, they refer to deficiencies that an organisation has that hamper its progress (Böhm, 2009) One of Toyota’s weakness is that it over relies on car sales to meet its cost such that if the industry goes through a downturn, then the company can be affected severely. The company also depends on export sale to countries such as the US, where it is regarded as a foreigner, putting hurdles on its expansion program. The vehicle industry is also a capital-intensive venture whereby high costs are incurred in setting up manufacturing plants. The company mostly sells in Japan and US markets as opposed to its competitors worldwide. It then lacks a global advantage(Toyota Motor Corporation, n.d).
Opportunities; entering into a strategic relationship can be an ample opportunity for a firm to enter a market that cannot be easily penetrated. For instance, in 2002 the company entered into a joint venture with Peugeot and Citroen which are France manufacturing companies and as a result was able to produce for the market (Toyota Motor Corporation, n.d). Increase in fuel ability served as an opportunity for the company, particularly because of its innovative ability. It has managed to mass-produce vehicles that are a hybrid of gas and electricity. Toyota mostly produces vehicles with low fuel consumption; therefore, as the fuel prices are sky-rocketing, the American market is shifting to the fuel-efficient vehicle, which puts Toyota in pole position. The company’s development of vehicles which are environment friendly has increased its popularity with environment conservation activists. Therefore with increased campaigns and regulations against environment pollution and carbon emission, the company stands a chance of making a good fortune (Andersen & Poulfelt 2009).
Threats refer to situations that affect negatively the company’s attempt to meet its objectives. Therefore, such situations undermine the company’s position in the market. Competition is one of the major threats that face companies today. Toyota has been facing increased competition, as well (Wylie, 2009). New entrants are getting into the market, mostly in Asian countries such as South Korea and China. Some have also set up plants in Eastern Europe. There is also an upsurge of raw material costs such as steel and rubber, key in the car making industry. Also, slow down in key economies, such Europe the US is also a threat in that these serve as its major markets. Furthermore, an increase in fuel costs and inflation have led many families to stop purchasing large vehicles or even stop using vehicles completely (Toyota Motor Corporation, n.d).
Toyota PESTEL analysis
PESTLE analysis is a tool that an organisation can use to detect and monitor the forces that are in its industry and its effects. The acronym refers to the general environment factors, which include political, economic, social, technological, legal and environmental. While SWOT analysis focuses on the organisation, Pestle focuses on the industry as a whole and the general environment (Henry, 2008). The factors can be explained in the following way. In some cases, political realignments have made it difficult for Toyota manufacturing Corporation (TCM) to penetrate some markets, such as the European market. The European Union has restrictions on imports in its jurisdiction areas, hence making it difficult for non-members to penetrate (Toyota Motor Corporation, n.d).
Economic factors refer to those factors that directly affect home and overseas economic trends, which in turn affect the company’s cash-flow and the purchasing power of the consumers. They include market and industry cycles, interest and exchange rates and distribution trends (Birkholz, 2007). TCM has been faced by economic factors resulting in both positive and negative outcomes. For instance, in the year ended 2009, the company experienced high sales due to the high demand for its vehicles, particularly because the world economy was steadily rising from the downturn of 2008. However, in the preceding year, the company was severely hit by the economic meltdown. For instance, in the USA the company sales decreased from 1.1 million to 0.869 million, while in Europe it decreased from 0.688 million to 0.507 and in Australia from.191 million to 0.096 (Toyota Motor Corporation, n.d).
On the positive end, the increase in fuel prices has benefited the company because it is a maker of fuel-efficient vehicles. Therefore, most consumers are going for cars that consume low fuel. The purchasing power of consumers is affected, as shown by the downward trends in demand for vehicles during the economic meltdown. Furthermore, the low and middle-income consumers are the hardest hit and being that they form a significant percentage of the company’s market share the company was also affected. Reduction in interest rates also has an effect on the company. For instance, in India interest rates were reduced. This enabled customers to secure loans at low-interest rates. Hence, this motivated them to purchase more vehicles (Toyota Motor Corporation, n.d).
Social factors are those that describe the lifestyles, cultural values, attitudes, beliefs, and customs. They are important to any organisation because when it operates in an environment, it will always interact with people who are defined by those social factors. Therefore, any organisation must ensure that it does not act contrary to those norms (Campbell and Craig, 2005). Toyota is Multinational Corporation, so it is bound to interact with people of different cultures, races and ages as it produces and markets its products. Therefore, it must endeavour to understand those people to serve them better. For instance, the company entered the American market with a small-sized vehicle under the brand name “Toyopet”. There was a poor reception because of the connotation toy and pet. As a result, the company dropped the name. This shows the impact of cultural values and attitudes (Toyota Motor Corporation, n.d).
Families are also experiencing significant changes, whereby most parents are giving birth to a few children, resulting in a change in the social unit. This has affected the demand for large cars, particularly because most families are small and therefore go for small vehicles. Also, extended families are no longer a popular group as most people identify themselves mostly with the nucleus level, giving another reason for dropping the demand for large cars (Campbell and Craig, 2005).
Toyota has, to a great extent, made good use of technology to its advantage. Like in the American market where technology is advanced, the company has been able to mass-produce hybrid vehicles that use gas and electricity. This has made it to be the leading seller of hybrid vehicles. Also, high technology levels in developed countries have enabled the company to use its website to market its products, as customers in those markets don’t use traditional purchasing methods. However, in developing countries such as Kenya the company has to invest a lot in setting up showrooms and market through conventional media channels such as newspapers to reach its customer (Toyota Motor Corporation, n.d).
The environment is the fifth factor that affects a company’s operation, and it refers to the forces that fight for environmental conservation. They include government environmental policies, non-governmental organisations activists and the general concern for the environment from the public. There has been a growing call for organisations to carry out their activities in ways that negatively affect the environment (North, 1997). As a result, Toyota would like to be viewed by consumers and governments as being sensitive to the environment. It has developed vehicles that use electricity instead of oil, which contributes to its initiatives of reducing carbon emissions. It is also involved in environmental conservation projects, such as afforestation around its manufacturing plants, whereby it has planted 230,000 indigenous trees (Toyota Motor Corporation, n.d).
Legal factors refer to the laws that are formed in a country and govern how businesses operate. They include the credibility of the judiciary system, whereby an organisation can get justice if their rights are infringed. Toyota Motor Corporation has, in the past, found itself on the wrong side of the laws of foreign countries. For instance, the company was subjected to a penalty of US$48.8 million by the American government for delaying to respond to National Highway Traffic Safety Administration concerning its car recalls in 2010. The Japanese carmaker received a government bailout in 2009 amounting to US$3 billion from the government-backed bank. Therefore, laws can affect any given business, either positively or negatively (Tabuchi, 2011).
Porter’s five forces based on Toyota
This is an analytical tool that helps organisations to determine the state of competition within an industry. It describes the competitive forces that are present in every industry as a result of the underlying structure of the industry as well as its core characteristics and economics. They are categorised into fives basic forces: a threat of substitute products, a threat of new entrants, rivalry among competitors already in the market and bargaining power of customers as well as suppliers. The strength of each of these forces differs in any given market. In addition, a company will have to deal with one or two forces at any given time in the market (Society for Human Resource Management (US), 2006).
The threat of substitute products. Substitutes refer to products from a different industry that satisfies the same need as those met by products of Toyota Motor Corporation. The company has very few substitutes, such as air transport, water transport or even travelling on foot. In addition, one can decide to hire car services instead of owning one. However, almost all these substitutes do not meet the needs effectively as done by owning a car. For instance, when one owns a car, there is a freedom to travel to wherever place at any time, however going on foot, the distance to be covered is limited. On the other hand, when using hire services frequently, it becomes costly as compared to using one’s own car. Therefore competition from substitutes in this industry is limited (Stonehouse & Campbell, 2004).
The threat of new entrants is determined by how easy the new entrants find it to come into the industry. Automobile industry requires high start-up capital that deters many interested parties from entering the market. However, as the market becomes lucrative day by day, more companies are getting into the business as seen by new manufacturing plants set up in China and South Korea. Most customers are loyal to particular brands. This also has made it difficult for new brands to make any significant progress. Hence, potential entrants are reluctant to come in. In addition, switching costs has also been a contributing factor, in that for customers to shift to a new carmaker they have to be ready to pay for a new car which is costly (Stonehouse & Campbell, 2004).
The bargaining power of customers refers to the ability of customers to influence the decisions of the company in question, such as bargaining over the availability of products, the features as well as prices of those products. The bargaining power of organisational customers is always high, particularly because they purchase Toyota’s products in large volumes. For instance, Toyota has been contracted to make cars for Japan’s imperial family. Therefore, they have to adhere to particular specifications of as far as product features are concerned (Toyota Motor Corporation, n.d). In addition, technology has made it easy for customers to access information. Therefore, they are able to make a comparison of different suppliers. As a result, this increases their bargaining power because as they approach, Toyota they already have the rates and offerings of other companies; therefore they can bargain effectively (Kurtz, MacKenzie & Snow, 2009).
The bargaining power of suppliers; whereby suppliers refer to those organisations that provide the Toyota and other companies in the industry with raw materials, labour, finance etc. Their bargaining power refers to how able the suppliers are in raising prices of inputs or in raising industry costs. For instance, fuel suppliers are able to collude in raising oil prices. Hence, they have strong bargaining power, particularly because they always act collectively. Therefore, Toyota does not have cheaper alternatives. However, the company has ventured in the provision of financial services, therefore reducing the bargaining power of suppliers in that sector as it can provide for itself (Kurtz, MacKenzie & Snow, 2009).
Rivalry among competitors that are already in the market is another factor. Rivalry describes the competitive struggle experienced between organisations within the industry as each of them strives to gain market share from the other. The demand in the carmaking industry is growing every year. This has to a given level reduced the level of competition. However, the high set up costs have led to high levels of competition as each company is trying to recoup back the initial costs through volume sales. Therefore, companies in this industry market aggressively to gain market share from their competitors, hence increased rivalry. The automobile industry is a consolidated industry, whereby there are few companies that dominate the market. Therefore, rivals’ market share is directly affected by competitive moves of one company; as a result, this increases rivalry (Hill and Jones, 2009)
The analysis tools help managers to get a clear picture of the organisation by identifying the forces that affect it. As a result, the manager will be able to make a strategic decision on how to maximise the organisation’s strengths, minimise weaknesses, capitalise on opportunities and avoid or counter threats (Ireland, Hoskisson & Hitt, 2008). Here are some strategic decisions. First, the company should invest in the distribution channels of its raw material suppliers. This reduces the suppliers bargaining power as the supplier will not have total control of the supplies. Furthermore, this helps in giving support to those suppliers in that the company can come up with technologies that enable raw material suppliers to do their work efficiently. This will reduce costs on the suppliers, and the benefits will trickle down to the company.
The company can also buy shares of the supplying com it can have a say on how raw materials are delivered such as costs and quality. Investment in the development of raw materials also helps the company to come up with quality raw materials that will help in getting quality products. Secondly, the company should invest more in research as this will enable it to pioneer in innovative products. As a result, it will be able to retain its market leadership. This entails finding out customer needs and developing products that surpass customers’ expectation, hence its products will be demanded more (Ireland, Hoskisson & Hitt, 2008).
The company should also venture into other fields as a way of diversifying. This is because it’s over-reliance on one industry is very risky, particularly because if the industry experiences economic shocks, the company will be entirely affected. The company can also expand its non-automotive fields such as financial services, communication, housing and biotechnology (Houston, 2002). For instance, through biotechnology, the company can venture into floriculture business or even livestock biomass. On the other hand, it can invest in chemical research where it can come up with cosmetics. These can be strong businesses in which automobile maker can fall on when the vehicle industry is not doing well. They can as well be income-generating opportunities, even when the car industry is still fine (Toyota Motor Corporation, n.d).
Effective communication can also be an important strategy that a business can use to attract and retain customers and also use it to fight competition. Here the company can identify effective media channels depending on the level of technology that exists in that market. For example, the internet for developed countries while traditional channels such as radio for the developing countries. However, in order to counter the threat of substitutes as well as competitors, the message communicated will be crucial. The company should develop messages that clearly describe the distinctiveness of its product from those of competitors. In addition, the distinctiveness should focus on the product’s superiority. This will ensure that customers are able to identify and chose Toyota’s products to meet particular needs as per the communications (Kourdi, 2009)
Pricing is also an important strategy that the company can employ to fight competition from similar or substitute products. Ensuring that the company’s products are fairly priced as compared to other manufacturers’ products will give Toyota an edge over its competitors. For instance, if a particular make (such as pick-up truck), produced by Toyota is also manufactured by a competitor say General Motors, then if Toyota charges slightly lower prices compared to its rival, it will attract more customers in a market where customers are highly sensitive to price change. It can use low prices as its positioning strategy, whereby it develops high performing vehicles but charges them at slightly lower prices as compared to its competitors (Kourdi, 2009).
The analysis tools enable Toyota Motor Corporation to get a clear picture of its business environment, whereby it is able to identify and monitor the forces that have an impact on its operations. With the required information and the clear picture, the managers are able to make the right decisions. As a result, they can be able to take advantage of opportunities, counter threats or avoid them, as well as maximise the corporation’s strengths and minimise its weaknesses. Therefore, the company will have the edge over its competitors as it will be able to determine which customers to sell to, which businesses to partner with and which products to produce.
Therefore, it comes out that those forces in the external environment determine how a company makes decisions to use its resources. Although all these tools are used in the analysis, each of them performs different functions. The SWOT analysis focuses on the company, while the other two focuses on the industry as a whole. However, it is also clear that the tools supplement each other. Therefore, if the managers do not know their objectives in using each of the tools, they might attain the results that might not help them in making the right decisions.
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