Business Strategy 2019

SWOT ANALYSIS APPLICATION

Toyota Motor Corporation (further Toyota) is the
world’s leading automaker (often tied with
Volkswagen for 1st-2nd place) based in Toyota
City, Japan. In 2012, the company was the first
automotive company to produce over 10 million
vehicles in a single year. Toyota produced and sold
8.964 million vehicles in 170 countries in 2018
alone, including the best-selling hybrid vehicle
Prius.

By 2030, Asia’s share of the world’s middle-class

population is predicted to double, from 30% to
60%. Much of this growth will be in China and
India, but also in Indonesia, Vietnam, Thailand and Malaysia. In many of these countries, the average number of cars per household is
well below the levels in Western countries. These countries represent a significant opportunity for all automotive companies, including
Toyota. The automotive industry is highly competitive in international markets around the world. Toyota’s international rivals such as
Volkswagen and General Motors have aggressively taken market share from Toyota. Despite the fact that the worldwide automotive
market is already highly competitive, the competition is further increasing due to the excess of vehicle production, rapid technological
changes, new entrants and saturation of the largest markets. This competition may further increase with the potential future entry of
Chinese and Indian rivals. In international markets, particularly in growing economies such as China, there is a similar intensity of
competition. This competition is fuelled by the fact that global automotive production capacity far exceeds demand. In 2017, there was
an estimated global excess production capacity of 35 million units.

The main Toyota’s markets are Japan, United States and China, where the company sells over 50% of its vehicles. China is the world’s
largest automotive market and Toyota’s third largest market in terms of volume. Along with many global automotive companies, Toyota
has been capitalizing on China’s double-digit economic growth for much of the past decade. The company currently sells 14.5% (1.3
million vehicles) of its vehicles there. The company sold 6% more units in 2017 when compared to 2016 (1.23 million units sold) and 16%
more units when compared to 2015 (1.12 million units sold), but its market share increased only slightly from 4.5% in 2015 to 4.6% in
2017. China is the largest vehicle market for the two main Toyota’s competitors, General Motors and Volkswagen where both companies
sold 4.041 million vehicles and 4.020 million vehicles, and held 14.3% market share, respectively. For any automotive company, China is
a crucial market, if the company wants to succeed in the future. Although this economic growth is slowing, China still represents a country
of tremendous opportunity for automotive manufacturers, including Toyota. Toyota, which has a weak market share in China will find it
hard to compete with General Motors and Volkswagen in the long run. Toyota’s strategy to increase market share in China is to focus on
introducing more hybrid and electric vehicles to comply with strict Chinese quotas over production and sales for new energy vehicles.
With its strong brand reputation and increasing focus on research and development, Toyota is well-positioned to capitalize on this
opportunity. In India, Toyota similarly has a minimal market share of just 5%. However, the market is forecast to be the world’s third
largest by 2020 behind China and the United States, on the back of a rising middle class population, many of whom will be able to afford
cars for the first time. North America is the largest Toyota’s geographic segment by vehicle unit sales. The company sells 31.3% of its
vehicles in Mexico, Canada and the United States, combined. The company reveals that the U.S. accounts for 87% of the North America’s
sales, which makes it the second most important Toyota’s market in terms of revenue, after Japan. The outlook for the U.S. economy is
positive, which is an opportunity for Toyota to consolidate and increase its already significant market share. Toyota currently has the 3rd
largest market share in the U.S.. Unlike Ford or General Motors, Toyota does not rely as heavily on pickup trucks to generate the majority
of its sales in the U.S., so the company has better opportunities grow its sales by offering smaller electrified passenger cars for the market.

With Toyota currently generating 68.4% of its total revenue from outside of its home Japanese market, the company is vulnerable to
international economic and political conditions. Stricter local government regulations and/or import controls, rising interest rates as well
as the outbreak of hostilities or acts of terrorism could all adversely affect Toyota’s operations internationally. Toyota acknowledges this
risk in its most recent financial report: “Each of the markets in which Toyota competes has been subject to considerable volatility in
demand. Demand for vehicles depends to a large extent on economic, social and political conditions in a given market. As Toyota’s
revenues are derived from sales in markets worldwide, economic conditions in such markets are particularly important to Toyota. Toyota
is subject to various risks associated with conducting business worldwide. These risks include natural calamities; political and economic
instability. Should the major markets in which Toyota purchases materials, parts and components be affected by any of these events, it
may result in disruptions and delays in the operations of Toyota’s business. Should significant or prolonged disruptions or delays related
to Toyota’s business operations occur, it may adversely affect Toyota’s financial condition and results of operations”.

Toyota’s SWOT Analysis (adapted from strategicmanagementinsight.com) Page 1 of 4

 Business Strategy 2019
SWOT ANALYSIS APPLICATION
Toyota Motor Corporation was incorporated in 1937 and
since then, has become one of the most recognizable brands
in the world. According to Interbrand, Toyota’s brand is the
world’s 7th most valuable brand in the world and the most
valuable automotive brand, worth US$50.291 billion.

Brand value is closely related to brand reputation and

recognition. Over its 75 years’ history, the company received
hundreds of awards1 accolades in vehicle design, safety,
environment-friendliness and manufacturing operations.
Manufacturing, research and sales operations worldwide,
combined with a huge number or vehicles sold, as well as
Automotive brand ranking by Interbrand advertising spending has helped the company to create one
of the most recognizable brands in the world. Brand
recognition helps the company to introduce new products to the market more easily and with fewer costs. Toyota’s brand and
recognition provides the company with a competitive edge over competitors as few other automotive brands are so well-known
and reputable.

While Toyota’s branding strategy assists with brand awareness and recognition, there are several potential disadvantages to this
approach. Toyota sells its vehicles under 4 different brands: Hino, Daihatsu, Lexus and Toyota. Toyota currently sells the majority
of its vehicles under its own ‘Toyota’ brand, with top-end luxury cars being sold under its Lexus brand. By comparison, some of its
major competitors have a much larger brand portfolio. Toyota’s competitors with brand diversification (i.e. multiple brands) can
more easily create a hierarchy for their vehicles in consumers’ minds, facilitating product differentiation. A brand diversification
strategy can also minimize the fallout from any controversies that a vehicle manufacturer may experience. A company like Toyota
with their minimalist branding strategy is unlikely to be able to negate the negative publicity associated with product recalls,
advertising scandals or vehicle failures. With only a few brands, Toyota cannot target many different consumer segments and
satisfy their various needs as well as Volkswagen or General Motors with their many brands.

The market share of automotive companies is significantly impacted by the timing and frequency of new model releases.
Historically, new models have tended to have major upgrades every 4 or 5 years, with only minor modifications in between.
However, due to rising consumer expectations in relation to in-car technology and the competitive nature of the industry, there
is an argument to release upgraded models more frequently. Toyota is famous for its innovative culture and is well-positioned
with its current focus on R&D. The company’s goal on being ahead of its competition by introducing some of the most innovative
vehicles in the market has proven to be a successful strategy. Toyota’s R&D initiatives, especially in producing environmentally
friendly vehicle technologies, vehicle safety and information technology,
provide it with some of the best strategic advantages. The company
operates one of the largest research facility network among the
automotive companies to achieve the best possible results from its R&D
expenditure. In total, 15 research facilities in 8 different countries,
including Japan, United States, China, Thailand, Australia, Germany,
France and Belgium, focus on 3 key R&D areas: Basic vehicle technology;
Forward-looking and leading-edge technology development2 (disruptive
innovation that surpasses rivals’ technologies); Product development
Toyota’s and its competitors’ R&D spending (new model development and upgrades for existing ones). Furthermore,
Toyota has ensured partnership with leading R&D institutes for faster innovation in such areas as automated driving, AI, and
robotics. Huge, efficient R&D spending has allowed Toyota to gain a competitive advantage over its competitors and to become
one of the largest automotive manufacturers in the world by researching and introducing the leading-edge technology and
vehicles to the consumers.

1
In 2018 alone, the company has received 7 IIHS (Insurance Institute for Highway Safety) Top Safety Picks 2018 awards (more than any other automotive
company) for its Toyota Corolla, Prius, Camry, Avalon, Highlander and RAV4 vehicle models as well as 4 other Top Safety awards for Lexus models. The company
received more 2017 J.D. Power Vehicle Dependability Awards than any other brand.[9] In addition to the awards for its vehicles, the company ranks the 2nd on
the Carbon Clean 200 List, which ranks the companies according to their efforts to transition to clean energy.
2 Toyota has also partnered with several prominent institutions to further research.

Toyota’s SWOT Analysis (adapted from strategicmanagementinsight.com) Page 2 of 4

 Business Strategy 2019
SWOT ANALYSIS APPLICATION
Toyota excels in technology as well as supply chain management and manufacturing. Its production management strategy has been
hailed as among the best in the entire industry. Toyota has several strengths apart from its technological capabilities and a global
manufacturing and sales network. The company has also managed its human capital very well. Its continued focus in all these areas has
resulted in financially consistent performance over the past several years. Toyota serves its customers across the globe from its several
manufacturing sites and through a large and global distribution network. These activities comprise mainly of the manufacturing and
assembling process of the motor vehicles. Manufacturing takes place in close collaboration with the suppliers. Toyota has established
and maintained the image of producing reliable and long-lasting vehicles largely due to their well-designed and qualified operation
process. One of the main factors of Toyota’s success is credited to their comprehensive implementation of a production system. Toyota
Production System is based on lean management (that combines Just-In-Time, autonomation - Jidoka, production smoothing or leveling
- Heijunka, standardised work and continuous improvement - Kaizen). This empowers the control the production process in accordance
with the customer requirements, and enables higher quality, lower cost and shorter lead times. That is, TPS leads to significant
productivity improvements and cost reduction, along with quality and reliability. Due to the TPS, Toyota constantly enjoys higher
operating profit margins than Volkswagen or General Motors. Toyota’s operating profit margin of 8.2% (2017) is the highest when
compared to its largest competitors Volkswagen’s operating profit margin of 6% (2017) or General Motors’ operating profit margin of
6.2% (in 2016). This means that costs of running the business are much lower for Toyota, which is most likely the result of the company’s
production system. Toyota’s production system is unique and is very hard to replicate.

In 2018, a U.S. Vehicles Dependability Study (VDS) done by J.D. Power revealed that Toyota has some of the best industry’s ratings for
vehicle dependability. The VDS measures the number of problems experienced per 100 vehicles during the past 12 months by original
owners of 2015 model-year vehicles. The lower the score the better vehicle dependability. Toyota’s Lexus was ranked as the most
dependable brand among all automotive brands with only 99 problems per 100 vehicles. Toyota’s own brand ranked 9th with only 127
problems per 100 vehicles. Toyota Motor Corporation also won 6 out of 19 category awards, two for Toyota Tacoma and Toyota Prius
and four for Lexus various models, more than any other automotive company. Nevertheless, vehicle recalls affect every automaker and
Toyota is no exception. In the recent years, Toyota had to make several product recalls. In 2017 and 2018 (July) alone, the company has
issued almost 5 million recalls related to safety issues. While, on the one hand, it is a sign of concern for quality and driver safety, on the
other, large and frequent recalls negatively affect the company’s brand reputation and result in disappointed customers as well as fewer
sales.

Toyota has a large supply chain that receives parts from thousands of suppliers located from around the globe. Its worldwide network
of production and distribution centers, and warehouses, receives parts from the suppliers. Toyota organized its suppliers into functional
tiers. The first-tier suppliers worked together in a product development team and the second-tier suppliers made individual parts.
Inbound logistics use JIT (Just-in-Time) system of production as it decreases the inventory cost, optimize their assembling and production
processes towards lean production. This requires an optimum relationship and coordination with suppliers’ value chain. Toyota works in
close collaboration with its suppliers, has formed strong and long-term relationships with key suppliers, and adopted several policies that
aims their accountability and the control of production costs. It is important to mention that, as Toyota and its suppliers have many
manufacturing facilities in Japan, Thailand, China and Indonesia, and these countries, are often affected by natural disasters, such as
earthquakes, tsunamis and flooding. Every occurrence of such calamity may disrupt the manufacturing processes and result in supply
shortages or an overall halt of the production. In the past, Toyota’s operations have been significantly impacted by such disasters and
resulted in huge losses. For as long as the company or its suppliers will continue to run their manufacturing in these or similarly affected
countries, Toyota will be subject to further occurrences of natural disasters and huge losses.

The worldwide automotive industry is subject to various laws and governmental regulations including those related to environmental
matters such as emission levels, fuel economy, noise and pollution. Toyota has incurred, and expects to incur in the future, significant
costs in complying with these, new or changes in regulations. However, the company’s clear strategy and past successes in achieving
environmental challenges before the deadlines will help the company to strengthen its brand reputation, lower the environmental costs
and will help to achieve compliance for government regulations earlier, which will ultimately result in more sales and higher profits.

In 2015, Toyota announced six environmental challenges that it hopes to achieve until 2050. Covering issues such as climate change and
resource and water recycling, the challenges all involve formidable difficulties, but Toyota is committed to continuing with steady
initiatives to achieve sustained development together with society. In its New Vehicle Zero CO2 Emissions Challenge, Toyota has set itself
the target of achieving by 2050 a 90％ reduction in new vehicle CO2 emissions compared to 2010. Towards this goal, Toyota will roll out
the technology it has built up in the hybrid vehicle sector, adapting it to plug-in hybrid vehicles and to fuel cell and electric vehicles, which
generate no CO2 emissions whatsoever. Toyota is committed to further accelerating its initiatives toward the development and
widespread adoption of hybrid vehicles and other eco-cars.

Toyota’s SWOT Analysis (adapted from strategicmanagementinsight.com) Page 3 of 4

 Business Strategy 2019
SWOT ANALYSIS APPLICATION
The company has introduced its first hybrid vehicle Toyota Prius in 1997. Prius became the first mass-produced hybrid vehicle and
the most successful to date. By the end of 2017, the company has sold over
6.5 million Prius models, of which 457.4 thousand were sold in 2017 alone.
Toyota’s total sales of electrified (mostly hybrid) vehicles were 1.521
million in 2017. Since 1997, the company has sold 11.471 million electrified
vehicles, more than any other automotive company in the world.
Currently, Toyota offers over 30 hybrid vehicles and plug-in hybrid vehicles
under its four brands. Toyota’s HV technology is probably the best-in-class.
It is proven by a 2017 Prius Eco model, which is the most fuel efficient car
that doesn’t have a plug-in capability. The sales of Toyota’s electrified
vehicles are growing faster every year. Toyota’s competence in hybrid
vehicles is a long-term competitive advantage that its competitors will not
be able to match in the near future. In addition, Toyota recently
announced the mass production of the hydrogen model Mirai for the near
future in line with its commitment to sustainability.
Toyota’s sales of electrified vehicles by model in 2017 Other trend is the fast growing global demand for autonomous vehicles,
mainly due to the need to improve road safety, ease the driving experience and minimize traffic congestion in big cities. At the
moment, companies offer feet-off automation vehicles for general consumers. A research from Grand View Research reports that
fully autonomous vehicles will be introduced to the market at a significant scale only in 2021-2022. Even though the potential
opportunity for autonomous vehicles is huge, there are still many challenges. It is yet to be determined what the potential market
size would be, how effective the vehicles are, costs, and how they will be regulated in terms of safety concerns. For example, currently
only 33 states in America permit driverless cars on the roads. However, in terms of innovation and potential, the market for self-
driving cars could potentially be very lucrative. It is an opportunity that automotive companies have no choice but to explore in the
current competitive technological environment.

Toyota has long been reluctant to invest in autonomous vehicle technology.

The company has been engaged in R&D aimed at contributing to the
complete elimination of traffic casualties, but the company had no plans to
introduce completely autonomous vehicles in the near-future. The
company’s first attempt to developing such technology was in 2015,
through the Team Mobility concept, which aims to facilitate the connection
between the car and its surroundings and between the car and the driver to
assure safe and efficient driving. These initiatives were far behind rivals’
efforts on autonomous vehicles and Toyota had to step up. In 2017, Toyota
Research Institute introduced the first Toyota autonomous vehicle trials on
roads. In 2018, the company announced that it will invest US$2.8 billion into
the new Toyota Research Institute-Advanced development company. The
company will focus on developing software for artificial intelligence, which
Assessment of Strategy and Execution Developing ADS will be used for autonomous vehicles. Nonetheless, Toyota still lags behind
its main competitors like General Motors, Volkswagen and Ford. Ford and General Motors were testing their first autonomous cars
back in 2013. In 2017, there were 44 companies working on autonomous vehicles. In 2018, these companies have made more
progress and have better technologies in developing fully autonomous vehicles. According to the research done by Navigant
Research, Toyota’s strategy and execution in developing Automated Driving Systems is worse than most of its rivals. The company’s
lack of technology and experience in building autonomous vehicles puts it at disadvantage against such competitors as General
Motors, Ford and Volkswagen Group. In addition to traditional automotive competitors, technology companies such as Google and
Apple are showing interest in the automotive market, through initiatives such as the development of driverless vehicles and
sophisticated in-car technology that is compatible with their devices and operating platforms. This may give these organizations
technological influence over future vehicle development, which automotive companies may not be able to control.

Toyota’s SWOT Analysis (adapted from strategicmanagementinsight.com) Page 4 of 4