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The automotive industry is the industry involved in the design, development, manufacture, marketing, and sale of motor vehicles. In 2009, more than million motor vehicles, including cars and commercial vehicles were produced worldwide. In 2007, a total of 71.9 million new automobiles were sold worldwide: 22.9 million in Europe, 21.4 million in Asia-Pacific, 19.4 million in USA and Canada, 4.4 million in Latin America, 2.4 million in the Middle East and 1.4 million in Africa. The markets in North America and Japan were stagnant, while those in South America and Asia grew strongly. Of the major markets, Russia, Brazil and China saw the most rapid growth. In 2008, with rapidly rising oil prices, industries such as the automotive industry, are experiencing a combination of pricing pressures from raw material costs and changes in consumer buying habits. The industry is also facing increasing external competition from the public transport sector, as consumers re-evaluate their private vehicle usage. The United States is the world’s largest consumer market for light vehicles, passenger cars and light trucks. The United States auto industry is dominated by the Big Three or Toyota motor, Ford Motors and Daimler/Chrysler. These three account for roughly a little over half of the production of cars and light trucks in the industry. What has currently started to happen in the recent years is that the Big Three are starting to lose market share to other rivals within the industry. In 2006 the Big Three accounted for 41.5% of light vehicle sales when compared to the top three foreign companies which accounted for 36.6% (Toyota, Honda,
& Nissan). Overall the Big Three account for 54.9% of the PAK market in 2006. This was down from 58.2% in 2005, 60.1% 2004 and 61.8% in 2003. This trend is expected to continue but to taper off in the coming years.
Factors affecting Analysis)
Laws and government regulations have affected this industry since the 1960s. Almost all of the regulations come from consumers increasing concerns for the environment and the concern for safer automobiles. 2. Economic The automobile industry has a huge impact on every country’s economy. According to various studies this industry is the major user of computer chips, textiles, aluminum, copper, steel, iron, lead, plastics, vinyl, and rubber. The study also showed that for every autoworker there are seven other jobs created in other industries. These industries include anything from the aluminums to lead to vinyl. 3. Sociocultural Today’s society judges people on the type of car you drive. Society does not like to admit to this but it is very true. Manufactures know this happens and targets their markets by these thoughts. Anyone who drives a nice vehicle is thought to be wealthy. No one wants to be seen driving an unattractive piece of junk because of what other people will think of him or her. Consumers also just feel better when they are driving a nice or new car, if makes them feel better about themselves. 4. Technology
The internet has affected just about every industry in the world and has also had a huge impact on the automobile industry. A study was conducted by J.D. Power and Associates in 2002 and involved more 27,000 new vehicle buyers. The study showed that 60% of the buyers referred to the internet before making their purchases and out of that 60%, 88% went to the auto websites before going and taking a test drive. Business-to-business marketplaces have given the industry many opportunities because of the internet, such as more efficiency and lower cost.
5. Demographics For many years now, the baby boomers generation has been the main target market for just about every product. As their generation is getting ready to retire and spend less money, the automakers are looking at the younger generations. Right now, the focus is starting to turn towards the baby boomers children (Generation X) who are in their mid 20’s and 30’s. According to Analysts, five years from now Gen X will account for at least 30% of vehicle sales.
The major competitors of Toyota motor are domestic companies like Daimler Chrysler & Ford Motor and foreign companies like Toyota Motor & Honda Motor. Daimler Chrysler As the number two auto manufacturer in total revenues DaimlerChrysler has positioned itself as an industry leader, with this come many strengths. The DaimlerChrysler umbrella covers many well-known brands such as Dodge, Chrysler, Mercedes Benz, and Jeep. This means
DaimlerChrysler has strong brands that are recognizable in almost every part of the world. Ford Motor Company Ford Motor Company is a global company with two core businesses: Automotive and Financial Services. The Automotive business consists of the design, development, manufacture, sale and service of cars, trucks and service parts. Ford has been focusing on cutting costs to increase margins more than its competitors. It has used reverse engineering in the development of their products. Thus Ford has been an innovator in the auto industry. Honda Motor Company Honda motor company is not your average Japanese car manufacturer. Originally know for motorcycles, Honda has managed to elude the dominate keiretsu system in Japan and become one of the dominant automobile manufactures in the world. There are many strengths to Honda. Honda has a reputation for producing high quality products from cars to motorcycles. Honda has won many awards for initial quality and customer satisfaction.
Toyota Motor Corporation The Toyota Motor Corporation was incorporated in 1937 and has many strengths being one of the industry leaders in the automotive industry. Toyota has three major brands underneath the company umbrella; Toyota, Lexus, and Scion. By having these three distinct brands, it lets the company reach many sectors of the globe in a choice of vehicle for customers. Toyota has traditionally also been the leader in Total Quality Management or TQM. By using the Kaizen theory of continuous improvement, Japan caught up the PAK auto makers during the 1980s.
1. Large Market Share Although Toyota motor’s market share in the US has dropped it is still very much competitive at 26 percent. They also have an increasing share in the Chinese market. With the right decisions there is no reason for TOYOTA MOTOR to not become the automotive leader it once was. 2. Global Experience As explained above even with Toyota motor’s recent decline they still have the market share and the experience to bounce back. They have been a worldwide company for nearly a century now and have established themselves as the global leader for most of them. If you recall I mentioned above that a current opportunity for TOYOTA MOTOR is to expand globally and as we can see they already have the experience to do so. It is just a matter of the correct planning and proper implementation of those plans that will decided whether or not Toyota motor’s goals are achieved. 3. Variety of Brand Names TOYOTA MOTOR as I mentioned has been the automotive leader for the majority of the last century. A large reason for that is the wide variety of quality brand names that appeal to all target markets. The current TOYOTA MOTOR brands include: Chevrolet, TOYOTA MOTORC, Cadillac, Buick, Pontiac, Saturn, Hummer, Saab, Daewoo, Opal, and Holden.
4. TOYOTA MOTORAC Customer Financing Program Since its establishment in 1919 it has proven to be Toyota motor’s most reliable source of revenue.
1. Behind on Alternative Energy Movement
This is Toyota motor’s biggest weakness. The alternative energy/hybrid trend has begun to take place in the automotive industry and TOYOTA MOTOR has been one step behind the competition in terms of alternative energy vehicles. This has led to many problems including loss of market share and a decrease in company profit. In order for any automotive company to be successful from this point forward they must be Hybrid friendly and fuel efficient. 2. Poor Organizational Structure As we can see in exhibit 1 of the case Toyota motor’s organizational structure seems to be too vertically integrated. This causes a lack of communication between employees from top to bottom and may have played a part in TOYOTA MOTOR falling behind on the alternative energy movement. 3. Stagnant Profitability Looking at Toyota motor’s profit we see that they are certainly struggling with respect to the size of their company. Their profit margin was about 1.5% and the ROE has dramatically decreased over the recent years dropping to 10% in 2004. This is a situation that shareholders will not be pleased with.
5. Overly Dependent on Toyota motor Acceptance Corporation
(TOYOTA MOTORAC) Financing
TOYOTA MOTOR has become too dependent on its financing program. Granted it is a great strength for TOYOTA MOTOR, however they once again cannot rely solely on financing in order to turn profit, especially if they want to compete with Honda and Toyota who are rapidly growing. 6. Poor Credit Status Toyota motor’s credit status has like everything else has been steadily declining. Their current ratio is just barely above 1 and their acid test is
even lower. Although, I don't see them getting denied based on their credit at this point, the seriousness of the matter is certainly apparent.
1. Alternative Energy Movement It is obvious that TOYOTA MOTOR was behind its competition with regards to the research and development of hybrid vehicles. However hybrid technology is still very much new giving TOYOTA MOTOR the opportunity to once again become the automotive industry's leader in innovation and technology. 2. Continuing to Expand Globally. Recently TOYOTA MOTOR saw an increase in the Chinese automotive market, which proves their needs to be more emphasis put on foreign markets. If TOYOTA MOTOR can infiltrate these markets and successfully grow along with their continuing focus on the US market they will be headed in a positive direction. 3. Low Interest Rates With the right marketing strategy the low interest rates have the potential to generate an immediate increase in sales. 4. Develop New Vehicle Styles and Models This is an opportunity that will never be satisfied, meaning that TOYOTA MOTOR should always be attempting to develop the automotive world's most popular vehicles, and as we know, what is in today will be out tomorrow. Threats 1. Rising Fuel Prices With TOYOTA MOTOR being a large producer in both trucks and SUV's, sales have drastically decreased due to the lack of fuel efficiency. The rise in fuel prices has played a significant role in creating the opportunity for development of both hybrid and more fuel efficient vehicles. As you will find with most threats, an equal opportunity will usually emerge as is the case here with Toyota motor’s opportunity mentioned above.
2. Growth of Competitors TOYOTA MOTOR no longer has the luxury of being the known leader in the automotive industry and faces the reality that they are in serious trouble. As I mentioned earlier Toyota took the first step in the direction of hybrid technology and has since drastically grown and become the questionable automotive frontrunner to start the 21st century. 3. Rising Supply Costs, i.e. Steel Once again this threat affects the entire automotive industry and forces each company to cut manufacturing and production costs as much as possible, without taking away from the quality of the product.
Porter’s Five-Forces Analysis
The competitive structure of an industry is another important component of identifying factors that are a threat to diminish profitability. One of the most efficient ways to assess competitive issues is to consider Michael Porter's five-force analysis. Porter (1980, 1985) has highlighted five such factors: (1) rivalry between existing competitors, (2) threat of entry by new competitors, (3) price pressure from substitute or complementary products, (4) bargaining power of buyers, and (5) bargaining power of suppliers. 1. Rivalry between existing competitors With the rise of foreign competitors like Toyota, Honda and Nissan in the 1970's and 80's, rivalry in the Pakistan auto industry has become much more intense. Firms compete on both price and non-price dimensions. The price competition erodes profits by drawing down price-cost margins while non-price competition (e.g., new car rebates and interest free loans) drives up fixed cost (new product development) and marginal cost
(adding product features). One of the other reasons there is such high rivalry is that there is a lack of differentiation opportunities. All the companies make cars, trucks or SUVs. The competitors are compared to one another constantly. In recent years there has been significant market share variation, another indication of rivalry and its very strong threat to profits. 2. Threat of entry by new competitors The presence of new firms in an industry may force prices down and put pressure on profits. There are, however, barriers to entry that tend to protect established firms. One would expect the production of automobiles to require significant economies of scale, an important barrier to entry. The new entrant would have to achieve substantial market share to reach minimum efficient scale, and if it does not, it may be at a significant cost disadvantage. While the evidence suggests that economies of scale in the auto industry are substantial, there are also indications that large size may not be as important as commonly assumed. Nevertheless, entry would represent a large capital investment to any new firm and the body of research still indicates that economies of scale represent a substantial barrier to entry. Consequently, entry is currently a weak threat to profitability.
3. Price pressure from substitute or complementary products While five-forces do not directly consider demand, it does consider two factors that influences demand ― substitutes and complements. Although new cars generally are slightly price elastic, suggesting few real substitutes (e.g., bus and rapid transit), the demand for a particular model is highly sensitive to price because of the availability of close substitutes for a given model. A change in the price of a complementary product (e.g., gasoline, batteries, and tires) could have a significant
impact on the demand for automobiles. The rising price of gas, an important complementary product, is likely to affect some firms more than others depending upon the vehicle composition. Recent rising fuel prices are likely to have a greater impact on the big three (TOYOTA MOTOR, Ford Motor and Daimler-Chrysler) whose most profitable models are energy inefficient pick-up trucks and sports utility vehicles. On balance, the overall impact on "industry" profitability from substitutes and complements is weak to moderate. 4. Bargaining Power of Buyers Buyer power refers to the ability of individual customers to negotiate prices that extract profit from the seller. Individual consumers have some influence over price within a given dealership, but little power over manufacturers. Customers can easily, and with little cost, switch to other auto dealers. Furthermore, customers now have access to market information (prices and costs) from the Internet that enhances their negotiating power. But when you have many individual customers, each representing a small proportion of total sales, they will have little bargaining power with manufacturers and therefore pose a weak threat to industry profit. 5. Bargaining Power of Suppliers Auto manufacturers require inputs-labor, parts, raw materials and services. The cost of these inputs can have a significant effect on profitability. Whether the strength of suppliers is weak, moderate or strong depends on how much bargaining power they can exert. The auto manufacturers have large supplier networks that appear to exert little bargaining power. Nevertheless, the United Auto Workers (UAW), the only supplier of labor, has historically exerted a great deal of leverage over the benefits and wages provided by the big three. Because of this historical dominance by the UAW and the uncertain results of their current negotiations with the big three, one has to characterize supplier
power, at least in this se Toyota motor sent of the Pakistan market, as a strong threat to profits. The following table summarizes the results of a five-forces analysis of the automobile industry. Five-Forces Analysis
FORCE Internal Rivalry Entry Substitutes and Complements Buyer Power Supplier Power
THREAT TO PROFIT Strong Weak Weak to Moderate Weak Strong
The core competence of Toyota motor is innovation. This is the driving force behind its $190 above turnover. Toyota motor has been utilizing innovation in service ad technology to secure itself a dominant position in the automobile industry, since 1908. In 1911, it conceptualized, engineered and commercialized the self-starter engine for the first time. Then in 1926, its product Cadillac was the pioneer in devising a nationwide service strategy. In 1996 Toyota motor introduced On Star satellite technology which allows equipped vehicles to be tracked in case of an emergency or theft and allows the passengers to communicate with On Star personnel. Other new car concepts include mini cars such as Chevy Aveo.
However in the case of hybrid vehicles, Toyota motor was unable to keep up to the pace of the market demand.
Below is a list of possible strategies Toyota motor could use to redirect profits and be able to maintain survival for the future. 1. Market Development 2. Market Penetration 3. Product Development 4. Restructuring 5. Retrenchment 6. Liquidation
TOYOTA MOTOR CORPORATION
I NTERNAL FACTOR ANALYSIS SUMMARY INTERNAL FACTORS WEIGH T 0.15 0.20 0.10 RATIN G 6 3 5 WEIGHTE D SCORE .90 0.60 0.50 COMMENTS
Large Market Share Global Experience TOYOTA
To maintain large market share To utilize the expertise To facilitate the
MOTORAC Customer Financing Program On Star Satellite Technology Variety of Brand Names
Latest tracking system Large varities
Behind on Alternative Energy Movement Poor Organizational Structure Stagnant Profitability Overly Dependent on US market Overly Dependent on (TOYOTA MOTORAC) Financing
0.05 0.05 0.05
4 3 3
0.20 0.15 0.15
They should revise their hierarchy of management They should minimize the cost They should go for international market Reduce the dependency
TOYOTA MOTOR CORPORATION
EXTERNAL FACTORS ANALYSIS SUMMARY EXTRERNAL FACTORS OPPORTUNITI ES Alternative Energy Movement Continuous Global Expansion Low Interest Rates New Styles & Models THREATS Rising Fuel Prices Competitors Growth .10 5 .50 Should go for alternate energy Price minimize Adjust the pensions in salaries Reduce it WEIGHT RATING WEIGHTE D SCORE .30 COMMEN TS Focus on alternate energy engines Should go for internation al market Should go for debt financing Introduce new models
4 2 2
.60 .22 .10
Pension Payouts .11 Increased Health Care Cost Rising Supply Cost .05
Should go for acquisition
TOYOTA MOTOR CORPORATION
STRATEGIC FACTORS ANALYSIS SUMMARY EXTRERNAL FACTORS Alternative Energy Movement Continuous Global Expansion Low Interest Rates New Styles & Models Rising Fuel Prices Competitors Growth Pension Payouts Increased Health Care Cost WEIGHT 0.12 RATING 4 WEIGHTE D SCORE .50 COMMENT S Focus on alternate energy engines Should go for internation al market Should go for debt financing Introduce new models Should go for alternate energy Price minimize Adjust the pensions in salaries Reduce it
0.09 0.10 .20
6 2 3
.54 .20 .60
.10 .06 .05
5 1 4
.50 .06 .20
Rising Supply Cost
Should go for acquisition
http://en.wikipedia.org/wiki/suzuki_Motors http://en.wikipedia.org/wiki/Passenger_vehicles_in_the _United_States http://www.bls.gov/iag/tgs/iagauto.htm Strategic Management and Business Policy 9th Edition (Thomas L.Wheelen / J. David Hunger / Krish Rangarajan)
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