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Toyota: a case study

Background
 Toyota Motor Company was founded in 1937 by the Toyoda
family.
 Business was relatively unsuccessful until Eiji Toyoda introduced
the method of lean production after studying Ford’s Rouge plant in
Detroit in 1950.
 This lean production method became known as the Toyota
Production System.
 The production executive, Taiichi Ohno, successfully helped
Toyoda improve his company using this new production method
and mode of thinking.
Environment
 Cultural
 Company as a community: lifetime employment, access to company
facilities, seniority-based wages (in return for 1/3 work force layoff in
1946) ; as a return, employees must be more flexible and actively
promote interests of company >> Implications: labor = Fixed cost

 Economic
 Postwar conditions put Japan into a country lacking significant capital,
so that Japan had to rely mostly on producing its own technology.

 Political
 The Ministry of Int’l Trade and Industry (MITI) encouraged Japanese
firms to enter the automobile industry despite established competitors
from the West by imposing high tariffs discouraging imports and
prohibiting foreign ownership.
 Japan’s work force, under Western influence after WWII, grew more
powerful and more demanding, thus limiting producers’ efforts to
reduce labor costs.
Environment (cont.)
 Demographical
 The domestic market was very small and un-uniform. Thus, goods had
to be very tailored to specific consumer taste. E.g. luxury cars for
officials, small cars for city residents, etc.

 Technological
 Commitment to innovation and improvement
 Large skilled-labor pool to draw from

 Social
 Commitment by employees to work
Country Differences?
 Western “careers” vs. Japanese “community”

 Focus on long-term growth as opposed to short-term profits

 More interpersonal relationships with employees, suppliers, and


customers
Organizational Structure
 Multi-regional lean enterprise

 Primarily network structure


 Network of suppliers
 Network of dealers/distributors

 Frequent interaction between all levels of the organization


Strategy – Lean Production
 Final assembly plant
 Moved from “move the metal” mentality to kaizen
 Introduced idea of stopping assembly lines in order to correct problems
before continuing
 As a result, quality improved and yields are close to 100%

 Product development and engineering


 Focused on leaders that knew all steps of a process rather than those
with highly specialized knowledge; also, skill-building
 More emphasis on proactive thinking by employees
 Thus, increased productivity, product quality, and responsiveness to
changing consumer demand
 “quality circles”
Lean Production – in more detail
 2 organizational features:
 “Transfer max number of task and responsibilities to those workers
actually adding value to the car on the line”
 “has in place a system for detecting defects that quickly traces every
problem, once discovered, to its ultimate cause”

 Thus, need tight teamwork and open communication among


workers (comprehensive info display system on electronic displays
visible from all work areas)

 4 areas of importance:
 Leadership: Toyota’s large-project leader w/power vs. Western
coordinator
 Teamwork: from many functions, ties with department, and general
interest in promoting team, not department
 Communication: conflicts resolved in beginning, more people => less
people
 Simultaneous Development
Competitive Advantages
 Reliability

 Product variety
 Production plants in North America build 2-3 products at a time, as
opposed to one by Western firms.
 Firms keep models for an average of four years, as opposed to an
average of close to ten years by Western companies.
 Western companies sell almost twice as many cars of the same model
as Japanese firms do.
Suppliers – Lean Production Supply
Chain
 Organized suppliers into functional tiers
 First-tier suppliers: worked together in a product-development team
 Second-tier: made individual parts

 Encouraged cooperation and communication among first-tier


suppliers

 In –house supply operations turned into a network of “quasi-


independent first-tier supplier companies”

 Substantial cross-holdings between Toyota and suppliers, as well


as among suppliers themselves even though each supplier is an
independent company

 Cross- sharing of personnel through


 Toyota sending personnel to suppliers to compensate for greater
workload
 Toyota transferring senior managers to suppliers for top positions
Suppliers – Lean Production Supply
Chain (cont.)
 “market price minus” system, not “supplier cost plus” system
 Value analysis reduces costs
 Declining prices over life of model due to learning curve

 Production smoothing enables suppliers to maintain a constant


volume of business

 Focus is on long-term relationships that underscores cooperation,


teamwork, and gradual mutual improvement, rather than price
through bidding as a way to choose a supplier
Consumers
 The market began to fragment in the 1960s as cars increased in
popularity and became essential household goods.

 Marketing executive Shotaro Kamiya focused on building a sales


network modeled after Toyota’s supplier network.
 Distributors with a “shared destiny”: wholly owned companies or ones
in which Toyota held equity
 “aggressive selling”: promoted long-term relationship between
assembler, dealer, and buyers
 Dealer => production system => build-to-order system
 Buyers => product development process
 Direct calls to households with large database of households and buying
preferences
 Focus on repeat buyers
 Also focus on brand loyalty => “Toyota family”

 5 distribution channels in Japan: Toyota, Toyopet, Auto, Vista, and


Corolla

 Closer and more familiar relationship between buyer and


salesperson
Marketing
 Door-to-door selling/very customized

 Emphasis on “pull” marketing: giving consumers what they want

 Tight relationship with previous buyers to keep clients

 Sales personnel received intensive training before starting their


jobs

 Up-to-date and detailed database of consumers helps keep track


of trends, interests, and tastes
Competitors
 American companies upon which Toyota originally developed
many of its own production processes from
 GM
 Ford
 Etc.

 Korean companies with planned production

 Other Japanese companies, especially Nissan and Honda


Problem
 Obstacle: inward focus of Japanese lean producers

 Lack the ability to think and act globally rather than from a narrow
national perspective

 Backlash to Japanese direct investment in North American and


Europe, a prominent reason of which is that it creates friction as a
result of Japanese corporation biases, mainly two classes of
citizenship in their organizations
 E.g. keiretsu
Possible Solutions
 Appoint native managers to head their manufacturing operations
in North America and Europe

 Designate native supplier companies as source for certain


categories of components

 Governments: restrictions on visas for Japanese employees at new


facilities and in Europe, strong pressures to attain high levels of
domestic content asap

 Author suggests: build a truly global personnel system in which


new workers from North America, Europe, etc. where a company
has design, engineering, and production facilities, are hired in at
an early age and given the skills, including language and exposure
to management in different regions, needed to become full
citizens of the company
 Same for suppliers
 Need increased transparency
Conclusion – Watch for quality
 fear of repetition of Ford’s experience in Britain after 1915
 Wholesale substitution of domestic managers and suppliers, to deal
with investment friction, will degrade performance of production
system toward the existing level

 Evidence that plants that perform best are those with very strong
Japanese mgmt presence in early years of operations and those that
have moved slowly and methodically to build up their domestic supply
base

 Need managers and suppliers that understand lean production and are
committed to it, mostly Japanese
Financial figures
 In fiscal 2003, ended March 31, 2003, Toyota’s consolidated net
revenues increased 9.2%, to ¥15.50 trillion, operating income rose
16.3%, to ¥1.27 trillion, and net income was up 34.9%, to ¥750.9

 ROE reached 10.4%, surpassing the short-term target of 10%.

 As of March 31, 2003, treasury stock repurchased by the Company


totaled ¥1.38 trillion, or 416 million shares, and total shares issued
and outstanding—excluding treasury stock—had decreased to
3.45 billion shares.

 In fiscal 2003, the Company paid its highest-ever annual dividend


—¥36.00 per share, up ¥8.00 from the previous fiscal year.