Toyota Motor Company (TM) - Strategic Analysis

1207 - Strategy

Professor João Delgado

November 13th, 2022

Matthew Civello - 55132

Jacob Deck - 55133
Alba Min Álvarez Paradela - 55248
Manuel Pais Melo Teixeira Sousa - 46701
Andrea Rosi - 55116
Summary
Company Profile …………………………………………………………………...…………3
External Analysis
General Environment ………………………………………………………...……….3
Industry Environment …………………………………………………………….…..4
Competitive Environment ……………………………………………………...……..4
Internal Analysis
Resource analysis ………………………………………………………….……...…..5
Capabilities and VRCN Model …………………………………………………...…..6
Business Level Strategy ………………………………………………………….….……......7
Corporate Level Strategy ………………………………………………………….….………9
Horizontal diversification ………………………………………………….……...…10
Vertical integration…….. ………………………………………………….………...12
How Toyota obtains its resources ………………………………………….………...14
International Strategy ………………..…………………………………………….….……..15
Conclusion …………………………..…………………………………………….….……...17
Appendix………………………………………………………………………….….………18
Sources………………………………………………………………………….….………...31

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Company Profile
Toyota Motor Company (“Toyota”) is a Japanese automotive company founded in 1937 that
manufactures and distributes vehicles globally across multiple product segments. In the past 5
years, Toyota has sold an average of ~10 M vehicles per year and recorded revenue of ¥2.12T
($255B) in FY20211. Approximately two thirds of Toyota’s revenue is earned by selling
materials handling equipment (lift trucks, warehouse trucks and other logistics solutions), but
it also competes in the consumer automotive segment, and textile machinery markets1. Within
their automotive segment, approximately 50% of revenue is derived from the sale of car air
conditioning compressors, with engine and vehicle sales contributing the majority of
remaining sales1. Japan and the U.S.A. make up approximately 60% of their automotive
sales, and most of their assets are also in these two countries1. See Exhibit 1 for revenue
breakdown by segment.

EXTERNAL ANALYSIS - General Environment

Demographic and economic segment: The biggest market for Toyota is Japan, followed by
the US and China. Toyota’s markets (mainly developed countries) are expected to keep
growing in terms of GDP and population. There are not many inequalities, as the Gini index
is lower than 42 in the three biggest markets. See Exhibit 1,2,3.

Socio-cultural segment: The general Toyota’s market has a stable lifestyle, with an IDH of
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0,926; 0,919; and 0,761 for the US, Japan, and China respectively (2019). There is an
opportunity for Toyota with hybrid and electric cars, because nowadays new generations are
aware and committed to the environment4. But the environmental concern together with the
economic crisis could be a threat for Toyota, as customers would search for cheaper options
such as sharing cars.

Technological, political/legal, and physical segment: With the rise of new technologies,
customers are looking for cars able to connect with the internet and their devices. Toyota
should take this as an opportunity to get ahead and enhance its digital transformation. The
company can also take advantage of e-commerce to expand their scope. However, they must
be aware of cybercrime. And the concern about climate change and the environment brought
regulations such as Motor Vehicle Waste Disposal Wells and Air Pollution Controls (EPA)5,
which might be a threat if Toyota cannot accomplish them.

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Global segment: The Ukraine conflict, and the tension between North Korea, US, and South
Korea are causing many uncertainties about the future, which is a threat for Toyota, as they
have to base their decisions on information that could change rapidly6.

Industry Environment: The threat of new entrants in the automotive industry is low. The
primary rationale is capital intensity, economies of scale of incumbents, the requirement of
deep supply chain relationships, and regulation. The threat of substitution in the automotive
industry is low. The primary rationale is the low quality of substitute products and the
relatively high switching costs for buyers to adopt a substitute product. The bargaining
power of suppliers in the automotive industry is low. The primary rationale is the high
number of suppliers that offer homogenous inputs and the use of contractual relationships to
limit pricing power. The bargaining power of buyers in the automotive industry is moderate.
The primary rationale is the moderate brand loyalty of consumers and significance of the
buyer group within revenues, coupled with a lack of a backward integration threat and
differentiation of products. The competitive rivalry within the automotive industry is high.
The primary rationale is the concentration of large incumbents who are of similar size and
resources, slowing industry growth, and high exit barriers. Overall, the automotive industry is
moderately attractive. Despite a minimal threat of new entrants, substitute products, and
bargaining power, the high competitive rivalry and declining industry growth will drive
returns down towards the cost of capital for incumbents in the long-run. See Exhibit 4 for the
complete industry analysis.

Competitive environment: Toyota’s direct and indirect competitors were determined by

comparing the market commonality and resource similarities to other car manufacturers.
Companies with a high market commonality to Toyota are firms that compete globally in the
consumer automotive industry, with a large importance placed on the affordable and compact
oriented segments. Firms with high resource similarity have similar tangible assets, such as
manufacturing and distribution facilities, as well as intangible assets such as a strong brand
image associated with quality. Using those two criteria, a list of 4 direct competitors with
either medium to high market commonality and resource similarity include Ford,
Volkswagen, Hyundai, and Nissan. On the other hand, manufacturers such as Tesla would be
considered indirect competitors, because they have a medium resource similarity (production
capabilities, etc.), but low market commonality (high end/luxury vs. affordable). (See Exhibit
5).

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Generally, Toyota has a high inclination for competitive behaviors due to their high levels of
awareness, motivation, and ability to act against other firms. The most impactful reason for
Toyota’s willingness for competitive behaviors is their ability to act. Given their assets of
¥67.7 trillion, they are one of the most valuable automotive manufacturers in the world,
which gives them significant ability to make new investments such as M&A, or international
expansion. (See Exhibit 6 for explanation of the other competitive behaviors).
Throughout history, Toyota has leveraged this high level of ability to continuously attack and
react to maintain their position in the industry. For example, in the 1960s, Toyota was a first
mover into the affordable/compact segment with the introduction of the Corolla model. This
competitive action was made possible by the vast resources (the ability) of Toyota, and
resulted in them leading the compact segment for a significant period after the initial launch.
(See Exhibit 7). Innovation within the automotive industry is often shielded by patents held
by manufacturers. However, it is common that manufacturers will upgrade each model in
their product line on a yearly basis (although sometimes incremental), so quality is
continuously being upgraded. Thus, the automotive industry that Toyota competes in is in a
standard cycle industry. (See Exhibit 8)
Toyota’s diversification leads to multiple points of multimarket contact with their direct
competitors. Within the consumer automotive segment, for example, each of their four direct
competitors (Ford, Volkswagen, Hyundai, Nissan) produce cars in the compact, sedan, SUV,
Mini-van, and pick-up truck segments. However, a more significant source of multimarket
contact occurs when other revenue segments are considered, such as their materials and
handling equipment segment (~66% of revenue). Volkswagen, also competes in this segment,
with sales of their MAN and Scania commercial vehicle brands. Both Toyota and
Volkswagen derive significant portions of their revenue from these two segments, creating a
mutual forbearance between the two companies. For example, if Toyota makes a competitive
move to steal share from Volkswagen’s consumer auto division, then Volkswagen may look
to allocate more resources to the commercial vehicles division to retaliate. Thus, Toyota has a
lower propensity to attack Volkswagen.

INTERNAL ANALYSIS
Tangible Resources:
Financial: 2021 Financial Statement shows a strong liquidity position (Current Ratio = 1.10),
which allows Toyota to sustain its innovative strategy based on huge investments in R&D.7

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Physical: factories’ global distribution allows Toyota to exploit low cost of manufacturing in
some geographical areas while serving its demand spread all over the world.
Technological: continuous innovation and renewal of PPE to maintain high levels of
efficiency, in accordance with Toyota Production System (TPS).8
Intangible Resources:
Innovational: TPS is the most valuable resource for Toyota: a difficult-to-imitate concept
which provides the highest quality product, at the lowest cost, in the shortest time and
reduces waste. Vaghefi pointed out that Toyota, with its flexible and minimized inventories,
can respond to changes in customer needs 6 times faster than competitors (GM).8
Human Resources: consistent mindset among all the employees, transferred through
mentorship programs. TPS’s success is conditional to a stimulating working environment.9
Reputational Resources: Toyota is committed to its responsibilities, honest and reliable. Its
recall policy is so strict that it has faced some issues with national governments in the years.1

CAPABILITIES and VRCN Model

Trustable suppliers’ network: reliable suppliers network, characterized by high quality
materials and by long term agreements in which the risk of opportunistic behaviors is very
low (70% of Toyota’s activities are outsourced). It is a source of sustained advantage
because the average relation with suppliers in an average company implies more risks.10
Lean production: it is a source of sustained advantage because, as stated by McKinsey,
many competitors have tried to replicate it, failing. Suppliers’ network replaces large
inventories, granting a quick response to changes in customers’ needs through TPS. 9
Common parts for different models: this capability is unique in the automotive industry and
allows Toyota to develop new products more fastly than competitors. It is a source of
sustained advantage since it is intrinsic with Toyota business model and no other firm has
succeeded in replicating it or finding an alternative method.
Reliable vendors’ network: Toyota works in synergy with its distributors, sharing their
knowledge. Even if this capability is valuable, it may be replicated by competitors. From
another perspective, a reliable vendors’ network may be substituted by a vertical integration
strategy. For these reasons this capability leads to parity.
Employees’ empowerment: Annual Report reveals investments in employees personal growth.
The aim is the maintenance of a strong organizational culture through the Monozukuri
principle. However, this capability does not create a competitive advantage since many other
firms may replicate this model or develop a new and more efficient one.1

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Industrial engineering: it created TPS and it continues to innovate production processes.
Given the huge investments made in the years by Toyota to improve their engineering
department, it is extremely costly to imitate. Despite this, competitors may find alternative
ways to innovate: for this reason it is a source of advantage, not sustained.
Rapid R&D: Toyota captures changes in the market and then adapts its products to new
needs. For example, it is going to invest $5.2 billion in the internal production of batteries for
electric vehicles, in order to react to regulations regarding mobility emissions. It is only a
source of advantage because other firms may have the liquidity to make such investments.11
High brand popularity: Toyota has a positive reputation in terms of safety, price and
durability, as disclosed in their financial statement. These characteristics are common with
other automotive brands so it is not a source of competitive advantage (parity).
● The VRCN model is summarized in Exhibit 9.
WEAKNESSES: (1) In the years, product recalls have negatively affected the brand image. In
the US more than 84,000 vehicles have been involved in the recall in 2022.10 (2) The poor
allocation of resources given by low ROE and ROA may hurt shareholders’ interest in the
long run. (ROE: Toyota = 10.15%; GM = 13.63% ; Tesla = 29.89% | ROA: Toyota = 2.41% ;
GM = 2.64% ; Tesla = 10.96%).7

BUSINESS LEVEL STRATEGY

Key aspects to determine the Business-level (BL) strategy of Toyota: (1) Customer
segments: Toyota’s most profitable markets are, respectively, the United States, Japan, Asia
(excluding Japan), and Europe. (Exhibit 10-11); (2) Customer needs: Toyota produces
high-quality low-cost and premium automobile vehicles, thus being able to attract a wide
range of consumers with considerably different purchasing power, ranging its prices from the
low $20,000 to the $90,000’s, according to its website; (3) Core competencies: Its core
competencies reside on the efficiency of its operations, especially on its vehicle assembly
line, as previously stated.

Market dimension and Quality and cost: To further determine which of the 5 generic BL
strategies applies to Toyota, we need to look at two different dimensions: market dimension
and product cost and quality.

In terms of product differentiation, Toyota is well known for its reliability, overall quality
and long-term durability compared to its competitors. Besides that, it is looking for
partnerships to enlarge its knowledge in technology and in the industry (SoftBank-Toyota

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partnership), creating new products to expand its dimension (like KINTO, a monthly
subscription-based platform that rents Toyota cars for an unlimited time for a month),
enhancing its value chain, to provide better convenience and service to its customers, and its
Kaizen1, Kakushin2, and Kaikaku3 Lean management approaches.12

Regarding cost, the company is considered to be extremely cost effective. According to an

interview with Katsuaki Watanabe, the president of Toyota in 2005, the company’s long-term
goal is to provide high-quality products, while maintaining a fair and affordable price, and the
overall reduction of costs. The president at-the-time also stated that customer service and
satisfaction is one of the company’s main tenets. Toyota, in 2005, had also launched a Value
Innovation Program that aimed to reduce the cost of the components, by incorporating them
into one integrated system, while focusing mostly on its design and development, and not on
its price reduction, thus maintaining a high-quality level.

In terms of market dimension, Toyota offers its products all around the world, having some
geographical regions more profitable, and others less profitable.

Therefore, we can conclude that Toyota applies a Integrated CL/Differentiation strategy,

as it maintains a high-quality standard and it sells overseas to all regions across the globe,
while charging the industry average price and providing a wide range of products. It is
strongly recommended that Toyota continue to operate with this business level strategy for
multiple reasons. First, by offering both low cost and differentiated products, Toyota is able
to maximize its exposure to different consumer segments willing to purchase cars at multiple
price points. Second, given their vast resources in terms of employee count and tangible
assets (production facilities and capital), Toyota has the ability to focus on multiple priorities
while still committing enough resources to each.

Despite this, according to our analysis, there are a few aspects where Toyota could possibly
improve on. During the last few years, the Electric Vehicles (EV) market has experienced a
large fast-paced growth. This is due to the growing environmental concerns of most
consumers and to a shift in consumer preferences towards low carbon and zero-carbon goods.
This business segment is projected to grow even further and faster in the next couple of years,
making it an extremely attractive industry13. According to an online EV database which
collects performance data of multiple EVs across different tests, Toyota EVs generally have a

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- continuous improvement and reduction of waste
2
- transformation and innovation
3
- revolutionary and radical change

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lower battery autonomy than its competitors, and therefore, its vehicles are not able to reach
higher distances than its counterparts.14 Hence, we consider that a significant investment in
battery production and development could be a decisive factor in growing its consumer base
and market share in this specific sector.

Another aspect that we considered to be relevant is the development of the functionalities and
features that come with its vehicles. In the past, there was a focused attention to the singular
performance of the vehicles in terms of fuel efficiency, speed and agility, as those were the
consumer needs at the time. Nowadays, these metrics are still extremely relevant, but
consumers also value comfort other than the cars’ specifications. According to Forbes, with
the technological innovations that occurred in the last two decades, consumers express
different needs than before.15 Heated seats, blind-spot monitoring and front and rear parking
sensors are amongst some of the key factors consumers value the most besides the cars’
technical specifications. The development of these features could lead to a larger degree of
product differentiation by Toyota, and therefore, increase its product attractiveness and
overall sales. Thus, we consider that Toyota should continuously ask for feedback from its
customers and implement the most valuable changes requested, as to create a distinctively
better product.

CORPORATE LEVEL STRATEGY

In considering the corporate level strategy of Toyota, the scope of Toyota Group (the parent
company of Toyota Motor Company) must be considered to understand the linkages and
competencies that are shared between business areas. Toyota Group holds 16 child companies
that can be separated into 3 primary business areas: automotive, automotive component
manufacturing, and industrial/other manufacturing. The automotive manufacturing area is
most prominent, making up roughly 65% of the revenue within Toyota Group (See Exhibit
12). As the businesses within Toyota Group are highly centralized within the automotive
industry, they derive synergies through the sharing of knowledge, competencies, and
activities between businesses. For example, Toyota Motor Company is a manufacturer of
automobiles and JTEKT Corporation is a manufacturer of automobile components. As these
businesses exist along the same supply chain, Toyota can realize synergies through the
sharing of knowledge, resources, and activities between them. Thus, Toyota can be defined as
holding a related constrained diversification corporate strategy; less than 70% of their
revenue comes from a single business area, and these businesses share linkages through
knowledge, resources, and activities.

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Horizontal diversification
As previously stated, Toyota Motor Company follows a related constrained diversification
corporate strategy. In the years, the Japanese market leader enlarged its scope and its portfolio
of brands, maximizing cost and revenue synergies. Toyota Group differentiation strategy can
be analyzed from two different perspectives: the differentiation among the automotive
industry on one side and the differentiation between different industries on the other one. This
paper will refer to both of them, starting from the differentiation in the automotive industry.

Differentiation in the automotive industry

Toyota offers a wide variety of car models, ranging from mini cars (Yaris) to pickups
(Tacoma) and also sports cars. The company counts 30 car models in order to meet the needs
of its entire customer base. These models are distinguished for many factors: number of seats,
price, vehicles’ fuel, scope. Exhibit 13 lists the Toyota models available in the market at the
moment of the analysis.16 Exhibit 14 shows the revenue breakdown for the different car
categories 10. The main source of sales are large and small SUVs together with medium cars,
even if there is not a dominant category where Toyota converges its production. This
diversification among the automotive industry results in a lower business risk and in a higher
adaptability to changes in demand.
Furthermore, Toyota continuously improves performances of existing models or projects new
innovative cars through huge investments in R&D. A remarkable example has been the
launch of Toyota Prius in 1997, which is still one of the most frequently sold models in the
world and one of the first mass-produced hybrid models 17.
In recent years, Toyota is moving in two directions. First, it is pursuing the environmental
goals that have always distinguished the Japanese car manufacturer from its competitors. In
accordance with international regulations, the company has created its own zero-emission
goals through the “Toyota’s Environmental Challenge 2050”, which contains the guidelines
for the development of new models in the next few years. Secondly, it is taking a huge step
toward introducing automated driving technologies. Toyota demonstrated its interest in this
market through the acquisition of Renovo in 2021, made by its subsidiary Woven Planet
Holdings. Toyota’s objective is to diversify even more its car portfolio with the development
of automotive softwares and this acquisition brought the necessary resources to go in this
direction. In words of the Senior Vice-President of software platform at Woven: “The
acquisition of Renovo supports Woven Planet’s work in transforming worldwide mobility. We
immediately recognized the opportunity. The technical and cultural fit could not have been

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better”. Considering that an acquisition is the most complex way to obtain resources, it can be
inferred that Toyota is planning to play a major role in the market in the next few years if it
succeeds in integrating the target company Renovo.18
Toyota is succeeding in building diversified revenue streams for two main reasons. On one
side it shares value chain activities among the different car models. Indeed, Toyota is the only
company in the automotive sector which uses common parts for different models, giving the
possibility to develop new products faster than competitors. Furthermore, Toyota can use its
TPS in all the production activities that it carries out, granting significant cost synergies.
On the other side, Toyota is a virtuous example in the transferring of intangible assets. TPS
would not have been a source of sustained competitive advantage without the human capital
behind. The key of success has been the ability to move this source of competitive advantage
to the different business lines.17

After a deep evaluation of Toyota’s portfolio, we strongly recommend to increase the

investments in the production of zero-emissions vehicles, with a focus on Electric Vehicles,
as suggested after the business level strategy. We defend this position because of external and
internal factors. Firstly, people's awareness about environmental issues is increasing all over
the world and future generations will base their consumer choices not only on quality and
price but also on the environmental commitment of companies. Secondly, the recent
fluctuations in oil price have scared car users and many of them started to consider more
seriously the possibility to switch to hybrid or electric cars. If on one side Toyota is a leader
in hybrid vehicles manufacture, on the other it still has a marginal role in the electric car
market. To remain competitive in the automotive industry the Japanese company will have to
increase its market share in the global electric car market, trying to scale its TPS in this
developing branch of production. This is not only an indication given by the market, but also
by its shareholders. As supporting evidence, Exhibit 15 shows how much the market is
growing and Exhibit 16 forecasts the size of the global market in 2027 (predicted 238.9%
market growth). Through proper strategic actions, Toyota, despite the low market share
(Exhibit 17), can cover a main role in the next few years given its leadership in the
automotive sector, its high commitment to environment protection and the deep knowledge of
market competitors. Finally, a clear dedication to zero-emission production will anticipate
future governmental restrictions in terms of environmental impact. Being compliant with
national laws is essential for Toyota in order to remain competitive in the markets where it is
established, especially in Europe, where the goal is to reach zero-emission before 2035.

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Market differentiation
This paragraph will refer to the differentiation strategy adopted by Toyota Group, the mother
company of Toyota Motor Company. In order to leverage its market power and to support the
main automotive business, Toyota has developed several businesses not directly correlated
with the automotive one. The link between the different businesses is built upon the share of
core competencies, especially in the engineering and human resources management.16 The
main ones are Toyota Financial Services that provides financial services across 35 countries;
Toyota Home that competes in condominium development and housing renovations markets;
Toyota Marine that introduced a high-quality private cruiser; Agribio Services that applies the
biotechnology know-how to agricultural initiatives and Welwalk Business that delivers assist
robots to rehabilitation hospitals.
It is important to underline that, except for Toyota Financial Services, all these businesses
operate exclusively in Japan, meaning that they cover a market extremely smaller that the one
covered by the automotive industry.

Regarding market differentiation, our recommendation to Toyota is to move internationally

with its diversified brands, exploiting its strong brand name and its reputation for products
with high standards of quality and safety. We recommend Toyota to start the international
expansion of these businesses in the two geographic areas where it has the largest market
share: Asia and North America. The risk of this expansion will be lowered by the existing
international network for the automotive industry since Toyota will spoil existing distribution
channels, customer base, local partners and marketing campaigns. The main benefit consists
in a risk diversification given the Japanese car manufacturer will slowly increase revenue
streams from non-car industries.

Vertical integration
First and foremost, so we can understand how Toyota is vertically integrated, we need to
analyze the presence of the company in the different stages of the value chain of its transacted
goods. As we can see from the Value Chain analysis in Exhibit 18, the only business stage in
which Toyota is absent from is the full production of all raw materials and components. This
decision could be justified by three main factors:
1. Automotive vehicles require many different components, sometimes up to
thousands of different pieces, so they can work. Investing in the production of all
of these components reduces the flexibility of the firm and the possibility to use its

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 internal resources to create technological innovations and scientific
breakthroughs, since the firm is overburden with these other activities;
2. This does not constitute an activity that is part of Toyota’s core business, and thus,
it creates very little value for the firm, excluding a few exceptions;
3. Outsourcing can be much more cost-effective and efficient than coordinating this
activity on a large scale.
Internally in the Value Chain, Toyota goes even further combining the Inbound
Manufacturing and Logistics segment with the After-Sales & Customer Support into a new
department, as both have similar goals and operations. This new division, Parts Distribution
and Accessory Development (PDAD), can additionally strengthen the already high
operational efficiency, increase productivity and reduce labor costs19.
Toyota uses a traditional Japanese alliance strategy, which was widely adopted after World
War II, called “keiretsu”20. This strategy can be divided into two sub-strategies: Horizontal
“Keiretsu” (where the power is evenly distributed between all the members, and there is no
group leader) and Vertical “Keiretsu” (where the largest company leads the group, and the
smaller companies are usually its suppliers). It mainly consists of investing small amounts in
the shares of the other companies, so as to gain an incentive to create a strategic partnership.
In the case of Toyota, as we are aware, there is a Vertical “Keiretsu”, which allows Toyota to
have more control over the supply of its components, decreasing the overall risk of exposure
in case of a supply chain disruption and allowing for closer relationships between both
parties, so to increase efficiency in Toyota’s operations.
This system was improved throughout the years and before it was a traditional “keiretsu”, but
nowadays it is a much more modern “keiretsu”. One of its most important changes was
Toyota’s demand with its suppliers for providing integrated systems of components, instead
of individual parts, which helped to maintain the high quality, reduce the overall production
cost and achieve a lower production time. As we can visualize from Exhibit 19, Toyota
partners with many other companies in order to fulfill its operational needs.
To sum up, in terms of Vertical Integration, Toyota relies on the external supply of some
components, through outsourcing to the global market and through close partnerships and
strategic alliances, and it has a large presence in most of the stages of its Value Chain. The
company also has very few M&A activities referring to Vertical Integration and prefers to
build on its capabilities and competencies rather than acquire other companies or businesses
to cover these activities.

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Even though Toyota seems optimally vertically integrated, there are still key business
segments in which Toyota should consider investing in. During the COVID-19 pandemic
there were constant shortages of semiconductors and of other electronic components, due to
many disruptions in the global supply chain, which caused Toyota to shut down some of their
production plants. Tesla has invested immensely in the integration of the production of
semiconductors in the last couple years, in face of the global scarcity of these key parts and
due to supplier unreliability.21 Thus, we consider this a step Toyota could improve on, so it
achieves a higher control on its operations, preventing any possible disruptions in its
production cycle and strengthening its whole value chain control.

How Toyota obtains its resources

Each year Toyota invests $7.66 billion for R&D (build)22, but to face the new changes in the
industry (changes in demand, new technologies) this quantity might not be enough for the
company. Therefore, they must consider all their options, including M&A, to face their
competitors and survive. As Toyota’s chief said: “We need to go on the offensive while also
preserving our areas of strength”. Since 2018, the average of deals per year is 33.8 (Exhibit
20). Through these deals the company not only vertically integrates some activities of their
value chain (with their supplier Cascade), but it also wants to diversify horizontally, as it did
with Nvidia Corp and Renovo to develop its automated driving systems.

Building example 1: In November 2022, Toyota announced a €11.6bn investment in R&D, to

improve the safety and duration of the batteries for electrified vehicles until 2030. Toyota’s
objective is to eliminate CO2 emissions and decrease the cost of production.
Building example 2: According to the company’s website, Toyota is making a large
investment of about $5.2 billion in the production of batteries in Japan and in the United
States, which will start around 2024-26. This move can be caused by the possible supply
chain disruption in the past two years, and strongly motivated by the increasing demand for
electric cars around the globe. Furthermore, Toyota sees this as a valuable and key business
segment soon, and so, it wants to invest in this sector to mark a strong presence and develop
its own capabilities and competencies in a key aspect and component of any manufactured
electric vehicle.23
Borrowing example: At the end of 2016, Toyota and Suzuki began considering the
collaboration between the two firms. At the beginning of 2019, they announced their alliance
to share the costs incurred by developing autonomous vehicles, promote the mutual supply of

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components, and share their strengths in order to survive in the industry. They shared the
same goal, and they only had to coordinate the innovation activities, not all of them. They
have balanced resources and similar learning opportunities. In Suzuki’s perspective, through
the alliance it gets access to Toyota’s massive supplier network and technology and it is
protecting itself against a possible takeover by a foreign competitor. Toyota would receive
Suzuki’s strength in technologies focused on compact vehicles, more human resources, and
experience.

Finally, some years ago there was a rumor saying that Apple was in a project (“Project
Titan”) to develop an electric car. This assumption was based on Apple’s movements related
with the automotive industry, such as hiring expertise in autonomous vehicles. Since Apple
does not have experience in the automotive industry, they would need partners and alliances
to make this project possible.24 In the summer of 2021, LG (knowledge about electric motors)
and Magna (one of the largest suppliers in the automotive industry) made a JV to sign a
contract with Apple and become its suppliers in 2021. The JV LG Magna e-Powertrain will
manufacture motors and drive systems to create electric vehicles. Assuming the truthfulness
of the project, we recommend this opportunity for Toyota since a partnership with Apple
could allow it to enter in Apple’s ecosystem, get their brand recognition and obtain
knowledge about Apple’s electronic devices production. Since they would have to share more
knowledge and human resources than tangible resources, it would be better to make an
alliance, because with a contract it would be difficult to protect their resources from
opportunism and leakage.

INTERNATIONAL STRATEGY
Toyota owns plants all over the world to produce and assemble vehicles for the different local
markets. Plants and production sites can be found in Japan, US, Australia, Canada, Indonesia,
Polonia, South Africa, Turkey, UK, France, Portugal, Brazil and more recently also in
Pakistan, India, Argentina, Czech Republic, Mexico and Venezuela. As stated by Ichijo and
Nonaka, “the success of a company in the 21st century will be determined by the extent to
which its leaders can develop intellectual capital through knowledge creation and sharing on
a global basis”.
Initially, Toyota projected and produced cars only in Japan and exported them abroad. It
adopted this approach to ensure high quality and to maintain customer loyalty. The increasing
overseas demand forced the company to produce vehicles where the market was in order to

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tailor production to local needs. In moving to emerging markets, the management analyzed
whether the manufacturing model used in the US and in Europe could be easily transposed,
given the larger fluctuations in demand. To avoid difficulties, at the beginning Toyota relied
on Japanese workers in the emerging markets, overestimating their ability in understanding
local needs. In 2004, Toyota announced the “Innovative International Multi-purpose Vehicles
(IMV) Project”, with the goal of increasing the self-reliance of overseas manufacturing
facilities, especially in emerging markets, by both understanding global and unique local
needs. These IMV cars are specifically created for emerging markets and are not sold in other
regions such as Europe and US. Despite the initial misconception, the success factor of IMV
has been the massive reliance on local knowledge and engineering, rather than relying only
on the Japanese workforce. IMV suggests that Toyota is following a transnational
international strategy: even if a significant level of control is centralized, the Japanese car
manufacturer is responsive to local needs, especially in emerging markets.

In the years, Toyota has adopted several strategies to build its international network. Toyota
Peugeot Citroën Automobile Czech (TPCA) is the International Joint Venture between
Toyota Motor Corporation and PSA Peugeot Citroën in Czech Republic created in 2001. The
goal of this IJV is the joint development and production of small, entry-level passenger
vehicles targeting European markets. The two partners decided to react to the increasing
demand for small modern and technologically advanced vehicles by building a plant that
manufactures 300,000 small gasoline and diesel cars annually (200,000 units for Peugeot and
Citroën and 100,000 for Toyota). The two global carmakers succeeded in combining their
knowledge of product design, production and supplier relationships, while learning from each
other’s corporate cultures and technologies: PSA learned from Toyota’s skills in
development, manufacturing and production processes; Toyota learned from PSA’s
knowledge of small cars in Europe.25

To better understand today’s international presence, Exhibit 21 ranks the markets where
Toyota has the largest market share. The company is a leader in the automotive market in the
East of the world (Japan, Australia and New Zealand) but has also a strong international
nature, since it has a market share higher than the 10% in countries spread in all the five
continents (Canada for North America, Brazil for South America, South Africa for Africa,
Poland for Europe).10

16
After the international strategy analysis we would like to make some recommendations for
future strategic decisions. First, we strongly recommend Toyota to continue to empower local
workforce and talents rather than relying on the Japanese ones. This approach is essential to
create a sentiment of belonging in foreign branch and to sustain Toyota’s corporate culture
over the years. Furthermore, since the local workforce better knows which are the needs of
local consumers, product differentiation among countries will be more effective. For the
second recommendation we recall the previous one regarding the strengthening of electric car
production. Given the strong incumbents and the small starting market share, Toyota must be
able to enhance its electric vehicle production directly in an international dimension relying
on existing plants all over the world. To be a credible competitor, the car manufacturer must
avoid the safety problems and supply chain delays faced with the first launch of bZ4X model
through the creation of a reliable network of suppliers also for components of electric cars (as
they did for the hybrid ones).

CONCLUSION
Toyota is one one of the worlds largest and most important automotive manufactures. They
have solidified a position for themselves in the dynamic and ever-changing auto industry by
remaining focused on the affordable and high quality compact cars made possible through
their innovative lean production system (their most significant source of competitive
advantage).
Toyota has coupled their integrated cost leadership and differentiation strategy with their
strong propensity for build strategies to maximize their exposure to different geographies
and product segments. This level of horizontal diversification is optimized by shared
knowledge and production capabilities, primarily TPS, which allows them to remain
consistent with their overall goals of affordability across different segments.
Despite their strong success, Toyota must continue to adapt its business to remain relevant
and competitive. First, it is recommended that Toyota increase their investment in
zero-emission vehicles. By sharing resources and knowledge, such as facilities and the TPS,
Toyota can expect to be successful in their rapidly growing market. Second, it is
recommended that Toyota increase their market differentiation, by expanding their
subsidiaries such as Toyota Home and Toyota Marine outside of Japan and thus reducing
their risk of a slow down in the automotive sales segments. Third, Toyota should look to
engrain its corporate culture of diversification, by empowering its workforce outside of
Japan, as well as continuing to invest in other emerging product markets.

17
 APPENDIX

EXHIBIT 1: FY2021 Revenue Segmentation

EXHIBIT 2: Demographic segment

US Japan China

Population (in millions) 331.893 125.682 1,402.000

GDP/per capita (in $) 69,287.5 39,285.2 12,556.3

Gini Index 41,5 32,9 38,2

EXHIBIT 3: Economic segment

Data World Bank US Japan China

Inflation rate 8.26% 3.00% 2.30%

Interest rate 3.25% -0.10% 2.64%

EXHIBIT 4: Porter’s Five Forces Classification

Factor Rating Rationale

Threat of Low Capital Intensive: Entrants must make large and continued
New capital expenditures in PP&E to facilitate production. 26

18
 Entrants Economies of Scale: Incumbents utilize their high production
volumes to spread fixed costs and lower their cost per unit 27,
putting entrants at a cost disadvantage.
Supplier Relationships: Entrants require deep relationships with
high quality suppliers to produce competitive products.
High Regulation: Government regulation surrounding fuel
efficiency and safety standards increases production costs which
hinders entry.28

Threat of Low Number: There are a high number of substitute products such as
Substitute ridesharing, public transportation, biking, and walking.
Products Quality: The available substitutes are of a far lower quality to a
car owner; they cannot offer the same convenience and capability
for transportation.
Switching Cost: There is a high cost in terms of lost convenience
and emotion in switching from using a car to an alternative form
of transportation.

Bargaining Low Number: There are a high number of tier 1 suppliers in the
Power of automotive industry due to the volume of parts required to
Suppliers manufacture an automobile.29
Homogeneity: The parts provided by suppliers are generally
homogeneous, as shown through many different manufacturers
using the same parts in their vehicles.30
Contractual Relationships: Many automotive manufacturers
enter into long-term component supply contracts which decreases
the bargaining power of suppliers.
Threat of Integration: Suppliers pose a limited threat of forward
integration as most individual suppliers do not supply sufficiently
critical components.

Bargaining Med Significance: Wholesalers and automotive dealerships consist of

Power of 50% of industry sales, with the vast majority of end users being
Buyers consumers.31
Switching Costs: There is moderate brand loyalty for consumers;
41% cite brand as an important but will switch if unsatisfied.19
Threat of Integration: There is minimal threat of integration as
the primary buyer group of auto manufacturers lack the resources
to compete in the market.

Rivalry High Number: The industry is concentrated with powerful incumbents

of similar size and resources, which increases competitive
rivalry.32
Industry Growth: The automotive industry is mature, growing at

19
 4.7%33, which increases rivalry among incumbents.
Fixed Costs: Incumbents have high fixed costs within their cost
structure34, which increases competition as players try to maximize
productive capacity.
Exit Barriers: The high value of fixed assets results in significant
losses when a firm chooses to exit the industry, leading
incumbents to stay and increase rivalry.

EXHIBIT 5: Direct & Indirect Competitors, Automotive Segment

Company Analysis
(Direct / Indirect)

Ford Market Commonality: Medium

(Direct Competitor) Segments include small and mid size compact cars with
affordable options like Toyota’s offering. Competes primarily
within the US with minimal exposure in other geographies.

Resource Similarity: High

Assets, including manufacturing and distribution are
concentrated in the US, less in total value compared to Toyota.
Strong intangible brand trust and associated quality.

Volkswagen Market Commonality: High

(Direct Competitor) High emphasis on compact and affordable cars, mostly focused
on the European market, but with a strong presence globally
similar to Toyota.

Resource Similarity: Medium

Tangible asset value exceeds that of Toyota. However, given
recent emission scandals their brand has suffered in terms of
quality perception from customers.

Hyundai Market Commonality: Medium

(Direct Competitor) Hyundai sells cars in similar compact and mid-sized segments,
but are typically priced slightly above Toyota, indicating they
compete for slightly different consumers. Strong presence in both
Asia and North America, Toyota’s two major markets.

Resource Similarity: Medium

Assets (including manufacturing facilities) are valued at about
1/3 of Toyota’s total assets in 2022. Hyundai has enjoyed similar
favorable brand reputation as Toyota for being an Asia car
manufacturer known for their quality and affordability.

20
Nissan Market Commonality: High
(Direct Competitor) Competes in the affordable and compact segments, offering very
similar products to that of Toyota. Nissan’s two main
geographies are Asia and North America, identical to Toyota.

Resource Similarity: Medium

Tangible assets are similar, and include manufacturing and
distribution facilities, but are only valued at about ¼ that of
Toyota’s.

Tesla Market Commonality: Low

(Indirect Competitor) Tesla competes exclusively in the high-end EV market, targeting
a much different consumer than Toyota. Furthermore, Japan is
not one of Tesla’s major target geographies.

Resource Similarity: Medium

Both companies have vast production facilities with assets
concentrated in Asia and North America. However, Tesla’s brand
image as that of an innovator and luxury brand is much different
from Toyota’s, which is focused more on value and affordability.

Uber Market Commonality: Low

(Substitute Product) Resource Similarity: Low

Uber is a company from a separate industry from Toyota, as they

do not manufacture or distribute any cars. However, their
services would be considered a substitute product because they
fulfill a similar need that Toyota fills for customers: the need for
cheap and efficient transportation.
Source: Company Filings

21
EXHIBIT 6: Toyota’s Competitive Behavior Rational

The following analysis was done considering Toyota and their direct competitors

Attribute Analysis / Rational

Awareness - Each year, Toyota and its direct competitors release updated
(Medium) versions of the cars in their product lines. Thus, the innovations
and updated product attributes of each car are well known to
the other competitors, because these innovations are made
public for consumers to understand. Thus, there is a high level
of awareness in most of Toyota’s product segments.

- However, longer term research and development projects are

often kept private until the company is ready to introduce them
to the public. In situations where Toyota or its competitors are
developing a longer term, more difficult project (such as EV’s),
there is a much lower level of awareness, which restricts the
competitive behavior of market firms.

Motivation - Concerning most of its direct competitors, Toyota will have a

(High) high motivation to react to any of their competitive action. This
is because there is a high overlap in the market commonality
between firms.

- Toyota’s most important markets in the automotive segment are

compact and affordable small to midsize cars. Thus, any time a
competitor makes an action in this segment, Toyota will be
highly motivated to counter attack in order to maintain share of
one of their most important segments.

Ability - Aside from Volkswagen, Toyota’s assets are valued at more

(High) than double their other direct competitors. Thus, their R&D
capabilities are much higher than that of their competitors.

- Their superior financial resources, as well as their global

capabilities give Toyota a strong ability to perform competitive
actions in the industry.
Source: Company Filings

22
EXHIBIT 7: Examples of Competitive Actions and Reactions

Competitive 1966: Introduction of the Toyota Corolla

Action
- The Corolla was a product that was brand new to the market,
because of its affordability and practical design.
- This created an all new product segment, where Toyota still
has dominance: the compact affordable car.
- This was different from the large cars being sold in America
at the time, and the poor quality ones being produced in
Japan and other Asian markets.
- The focus on high quality manufacturing at an affordable
price payed off, as consumers were impressed by how long
they lasted, ultimately raising the resale value of the car.
- This provided them with the first mover advantage, which
they achieved through their superior R&D spend, and
overall financial assets.

Competitive 2021: Announcement of 2050 Carbon Neutral Strategy

Reaction
- A major trend sweeping across the automotive industry is
considering the environmental impact of manufacturing.
Hence, many manufacturers are commiting to carbon
Neutrality by 2050.
- Toyota’s commitment was clearly a reaction to other market
firms making the first move. Ford made their neutrality
announcement in 2020, and Volkwagen back in 2018.
- By making this commitment, firms are aligning their brands
with consumers who care about the environment.
- Because most of Toyota's cars are economically minded, the
segment of consumers that are eco friendly is very important
to them, so it makes sense that Toyotal would want to move
to react to this market trend.
Source: Company Filings

EXHIBIT 8: The Standard Cycle Industry

- In the automotive industry, firm’s competitive advantages are somewhat shielded

from imitation due to patents, but oftentimes firms will still copy each others
innovations (many firms have copied Tesla’s sleek EV design).
- Quality is continuously upgraded, as each manufacturer updates each car model in
their various product lines.
- Furthermore, Toyota has a broad strategy, which means that they seek to satisfy many
customers to increase and maintain their share.

23
EXHIBIT 9: VRCN Analysis

Capabilities Valuable Rare Costly Non Competitive

to substituta consequences
imitate ble

Trustable suppliers’ YES YES YES YES Sustained adv.

network

Lean production YES YES YES YES Sustained adv.

Common parts for YES YES YES YES Sustained adv.

different models

Reliable vendors’ network YES NO NO NO Parity

Employees’ empowerment YES NO NO NO Parity

Industrial engineering YES YES YES NO Advantage

Rapid R&D YES YES NO NO Advantage

High brand popularity YES NO NO NO Parity

EXHIBIT 10: Toyota’s motor vehicle sales between FY 2017 and FY 2022, by main region

(in 1,000s)

EXHIBIT 11: BCG/Growth-share matrix of car segments worldwide | Toyota’s largest

segment, Large SUVs, is a Cash Cow segment

24
Growth-share matrix: the chart groups car segments by relative market share and growth
rates. relative market share is calculated by dividing the make revenue with the revenue of the
largest make in the segment.
● Question marks: low relative market share in a fast-growing market. Segments in
this section can grow fast, but at the expense of the company's resources. they should
be analyzed closely and frequently.
● Stars: large relative market share in a fast-growing industry. Stars should be invested
in more in order to maintain their growth and fight competition.
● Dogs: low relative market share in a slow growing market. While dog-segments often
break even, they are prime candidates when divesting.
● Cash Cows: large relative market share in a slow growing market. The segments here
are the most mature and they contribute growth without additional investments.

25
EXHIBIT 12: Toyota Group Companies

EXHIBIT 13: Toyota Car Models

Alphard Aqua bZ4X Camry Century

C-HR Copen GR Sport Corolla C*Pod Crown

GR Yaris GR86 Harrier Hiace Hilux

JPN Taxi Land Cruiser Mirai Noah Passo

Pixis Prius Raize RAV4 Roomy

Sienta Supra Vellfire Voxy Yaris

EXHIBIT 14: Revenues Breakdown for Passenger Cars in 2020

26
EXHIBIT 15: Estimated plug-in electric light vehicle sales worldwide from 2015 to 2021 (in
million units). Source: Statista

EXHIBIT 16: Size of global market for electric vehicles in 2021 and 2027 (in billion US
dollars). Source: Statista

EXHIBIT 17: Units of electric vehicles sold globally (in thousands of units). Source:
Financial Times

27
EXHIBIT 18: Toyota Value Chain Analysis
Primary Activities

The firm uses a model called Just-in-Time (JIT), which is a system

which reduces the overall inventory storage space, optimizes the
assembly and production processes and minimizes waste. Besides
1) Inbound Logistics
that, Toyota doesn’t produce the raw materials for its components, so
it maintains a good relationship with its suppliers and imports from
all around the world.

The manufacturing, tuning, and assembly of the components that are

used in the production of their vehicles. Toyota also uses many other
tools to achieve high levels of efficiency and reduce waste such as
2) Operations a b c
JIT, Heijunka , Jidoka , Total Productive Maintenance (TPM) , and
a standardization production process. All these approaches are in the
Toyota Production System (TPS).

The company controls the full process of distribution, and directly

3)Outbound Logistics distributes the final products to its branches worldwide, with few to
none subsidiaries involved.

The marketing strategies, including the promotion, communication,

4) Marketing & Sales
and advertisement of its goods, are executed internally.

5) After-Sales & The customer support and technical assistance, repairing, complaints
Customer Support handling, and maintenance are activities which Toyota coordinates.

Support Activities

The purchase of goods, materials, and equipment is handled in a mix

1) Procurement
between e-buying and outsourcing.

28
 R&D is a key element to Toyota’s fast-paced production line and
2)Technology
innovative products and functionalities, and it even has partnerships
Development
with MIT and Stanford University to innovate faster.

Toyota has a sophisticated lean production system, as well as high

3) Human Resource internal incentive in developing human resources and providing
Management high-quality training, which, as mentioned before, constitutes a
competitive advantage.

The Management Information System (MIS) is used to facilitate the

4)Firm Infrastructure accounting, production, inventory management and other
departmental functions.

a
– lean production method in which the production of components and goods are based on customer demand, rather than being constant
produced batches, reducing the overall waste and the repetition of start-quit batch processes

b
– lean manufacturing process, fully automated and autonomous, which prevents further goods being produced if a defect is detected,
assuring high-quality during the manufacturing processes

c
- revolutionary and radical change

EXHIBIT 19: Toyota Network

29
EXHIBIT 20: Number of Toyota’s deals, value. (Source: Global Data [Link])

EXHIBIT 21: Market share of Toyota by revenue in 2020

30
SOURCES
1
Toyota’s 2021 Annual Report [Link]
2
The World Bank [Link]
3
Datos Macro [Link]
4
SERNAUTO [Link]
5
Automotive Sector, EPA [Link]
6
Global Conflict Tracker [Link]
7
Yahoo Finance [Link] 9
8
Toyota Lean Management [Link]
9
McKinsey, (Still) Learning from Toyota [Link]
10
Statista, Toyota Report [Link]
11
Financial Times [Link]
12
Toyota TICO Report
13
Statista, Vehicles and Road Traffic [Link]
14
EV Database [Link]
15
Forbes, New Car Features [Link]
16
Toyota Website [Link]
17
James Taylor, “Toyota’s Corporate strategy” [Paper]
18
Just Auto [Link]
19
Thomas, a Xometry company [Link]
20
Crawford, “The Enigma of Toyota’s Competitive Advantage” [Link]
21
Forbes, Tesla Flexes Innovative Muscle By Manufacturing Own Chips During Supply
Crunch [Link]
22
Statista, Toyota R&D Spending [Link]
23
Automotive World [Link]
24
MacRumors, “Apple Car Project, Everything We Know” [Link]
25
Florian Kohlbacher, “The Toyota way of global knowledge creation the 'learn local, act
global' strategy”.
26
Cornell Capital Group [Link]
27
ResearchGate [Link]
28
Investopedia [Link]
29
Yahoo Finance [Link]
30
Illumaware [Link]
31
IBISWorld [Link]

31
32
Morning Consult [Link]
33
IHS Market [Link]
34
Bloomberg [Link]

32