B 5 Gary Hamel Toyota ISM Commented

8/8/2019 B 5 Gary Hamel Toyota ISM Commented

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Interim Strategy Memo

(Interim)

OnToyota vehicle recalls

Submitted to

Prof. N.R.Govinda Sharma

Submitted by: Team Gary Hamel

Alok Kumar Dash (9004)

Neha Pathak (9030)

Sumasree B S (9053)

Bopanna I.M (9070)

Lucky (9083)

Ravish R Prabhu (9097)


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Interim Strategy Memo Toyota Vehicle Recalls

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Table of Contents1. Automobile Industry Analysis:................................ ................................ ................................ .......... 4

1.1 Major Players ................................ ................................ ................................ ........................... 4

1.2 Market analysis ................................ ................................ ................................ ........................ 5

2. Toyota Motor Corporation ................................ ................................ ................................ ............... 5

2.1 Functional Units of Toyota................................ ................................ ................................ ........ 6

2.1.1 Marketing Unit ................................ ................................ ................................ ................. 6

2.1.2 Production System................................ ................................ ................................ ............ 7

2.1.3 Human Resource Unit................................ ................................ ................................ ....... 7

3.

Competitor analysis................................ ................................ ................................ .........................

83.1 General Motors ................................ ................................ ................................ ........................ 8

3.2 Volkswagen AG: ................................ ................................ ................................ ....................... 8

3.3 Comparative analysis of the top-3 global auto-makers: (in $ billions)................................ ........ 9

4. Toyota SWOT Analysis................................ ................................ ................................ ...................... 9

4.1 Strengths................................ ................................ ................................ ................................ ..9

4.2 Weaknesses ................................ ................................ ................................ ........................... 10

4.3 Opportunities ................................ ................................ ................................ ......................... 10

4.4 Threats ................................ ................................ ................................ ................................ ...11

5. Vehicle recalls at Toyota ................................ ................................ ................................ ................ 11

5.1 Recall Timeline: ................................ ................................ ................................ ...................... 12

6. Analysis of current Situation: ................................ ................................ ................................ ......... 13

7. Financial Impact due to Recall................................ ................................ ................................ ........ 15

7.1 Impact on sales ................................ ................................ ................................ ...................... 16

7.2 Comparison of Income Statement: ................................ ................................ ......................... 17

7.3 The key financial ratios of Toyota ................................ ................................ ........................... 17

8. Reasons for Recall................................ ................................ ................................ .......................... 18

9. Our Interpretation ................................ ................................ ................................ ......................... 18

10. References ................................ ................................ ................................ ................................ .19

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Table of Tables

Table 1 Toyota Income statement comparison................................ ................................ ....................... 17

Table 2 Key Financial Ratios of Toyota ................................ ................................ ............................... 1817

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Start with a brief background for the strategy memo. Typically, the situation which has ledToyota to

recall vehicles leading to loss of profit and more importantly, reputation. The origin of its woes date

back to the year2002 when it declared publicly its Global Vision 2010, according to which it

wanted to increase its global market share from 11% to 15%. In its relentless and single-minded

pursuit of becoming the global market leader by overthrowing GM and Ford, quality was

overlooked by Toyota

So, your strategy memo should deal how Toyota should respond

this situation..

1. Automobile Industry Analysis:

In 2009, the global automobile industry went through a major transformation. Two of the Big

Three American carmakers (GM and Chrysler) have filed for bankruptcy involving direct and

indirect job losses as manufacturing plants are shut down and car-parts suppliers and other

vendors go out of business.

In 2009, the worldwide motor vehicle production dropped 13.5 percent to 61 million. Sales in the

U.S. dropped2

1.2

percent to 10.4 million units, sales in the European Union (supported byscrapping incentives in many markets) dropped 1.3 percent to 14.1 million units. China became

the world's largest motor vehicles market, both by sales as by production. Sales in China rose 45

percent in 2009 to 13.6 million units.

About 250 million vehicles are in use in the United States. Around the world, there were about

806 million cars and light trucks on the road in 2007; they burn over 260 billion gallons of

gasoline and diesel fuel yearly.

The top three global players in terms of units sold are Toyota, GM and Volkswagen.

1.1 Major Players

According to latest information, following are the major players in the worldwide automobileindustry.

Comment [n1]:Haste, causes waste.

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For

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Highlight

For

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Comment [n2]:No wonder, US is the highestpolluter! US is called as the Car economy.

Comment [n3]:This is repetition. See commen6

Comment [n4]:Leading to Global warming


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y General Motorsy Fordy Volkswagen groupy Hyundai Motorsy Tata Motors Limitedy PSA Peugeot Citroeny Daimler Chryslery Skoda Autoy Renault- Nissan (Renault and Nissan merged in 1999)y Honda

1.2 Market analysis

In 2007, worldwide production reached a peak at a total of 73.3 million new motor vehicles

produced worldwide. In 2009, worldwide motor vehicle production dropped 13.5 percent to 61

million. Sales in the U.S. dropped 21.2 percent to 10.4 million units; sales in the European Union

(supported by scrapping incentives in many markets) dropped 1.3 percent to 14.1 million units.

China became the world's largest motor vehicles market, both by sales as by production. Sales in

China rose 45 percent in 2009 to 13.6 million units.

About 250 million vehicles are in use in the United States. Around the world, there were about

806 million cars and light trucks on the road in 2007.

2. Toyota Motor Corporation

Toyota Motor Corporation, commonly known simply as Toyota and abbreviated as TMC, is a

multinational corporation headquartered in Japan. The company was founded by Kiichiro

Toyoda in 1937 as a spinoff from his father's company Toyota Industries to create automobiles.It is currently headed by Akido Toyoda. TMC is the world's largest automobile maker by sales

and production overtaking the American giant GM.

Comment [n5]:All data must have citation

Comment [n6]:This is repetition. See n3

Comment [n7]:See also, Porters Diamondmodel.

Comment [n8]:Read Competitive advantagnations by Michael Porter. See Table B -6 in the

book which indicates that passenger motor vehic

export contributed 14.46% of Japans export in

1985. Japan had 30.8% of world export in

passenger motor vehicles.

Pl update this data tosay, 2009.

So, Japans supremacy in Auto industry is not an

accident but concerted effort of Government an

industry. This should speak volumes about role

macro environment in strategy formulation.


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It manufactures a diverse product line-up that includes subcompacts to luxury and sports

vehicles, as well as SUVs, trucks, minivans, and buses. Its subsidiary Daihatsu Motor produces

mini-vehicles, while Hino Motors produces trucks and buses. Toyota makes automotive parts for

its own use and for sale to others. Toyota is one of the largest companies to push hybrid vehicles

in the market and the first to commercially mass-produce and sell such vehicles, an example

being the Toyota Prius. Toyota's managerial values and business methods are known collectively

as the Toyota Way. Toyota's management philosophy has evolved from the company's origins

and has been reflected in the terms "Lean Manufacturing" and Just In Time Production. The

Toyota way is an expression of values and conduct guidelines that all Toyota employees should

embrace under the two headings of Respect for People and Continuous Improvement . Toyotasummarizes its values and conduct guidelines with the following five principles

y Challengey Kaizen (improvement)y Genchi Genbutsu (go and see)y Respecty Teamwork

2.1 Functional Units of Toyota

This section provides information about the different functional units of Toyota Corporation.

2.1.1 Marketing Unit

Toyota operates 75 manufacturing companies across 28 countries globally, and markets vehicles

in more than 170 countries, with the support of a 320,000-strong workforce.

Toyota's marketing efforts have focused on emphasizing the positive experiences of ownership

and vehicle quality. The ownership experience has been targeted in slogans such as "Oh, what a

feeling!" (19781985 in the U.S.)

"Who could ask for anything more" (19861989)

Comment [n9]:Read Toyota Way

Comment [n10]:Values for a firm: Understavalue as something important


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"I love what you do for me, Toyota!" (19901997)

"Everyday" (19972000)"

"Get the feeling!" (20012004)

"Moving Forward" (2004present).

Recently, Toyota's new United States marketing strategy has included such hits as "Swagger

Wagon" and the marketing for the new Avalon , which includes a throwback to the "old days of

travel."2.1.2 Production System

The production system developed by Toyota Motor Corporation to provide best quality, lowest

cost, and shortest lead time through the elimination of waste.

Toyota Production System? (TPS) is comprised of two pillars, Just-in-Time and jidokaJidoka,

and is often illustrated with the "house" shown below. TPS is maintained and improved through

iterations of standardized work and kaizen, following PDCA, or the scientific method.

Development of TPS is credited to Taiichi Ohno, Toyota's chief of production in post-WWII

period.

Beginning in machining operation and spreading from there, Ohno led the development of TPS

at Toyota throughout the 1950's and 1960's and the dissemination to the supply base through the

1960's and 1970's.

60% of the entire production at Toyota occurs in Japan, 15% in North America, 11% in Asia, and

8% in Europe. Toyota has long been recognized as an industry leader in manufacturing and

production. The principles described by Toyota in its management philosophy, The Toyota Way,

are: Challenge, Kaizen (improvement), Genchi Genbutsu (go and see), Respect, and Teamwork.

2.1.3 Human Resource Unit

The Human Resource Department at Toyota plays a very different role than that of processing

Comment [n11]:I didnt find any House


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people as a stream of assets. The Toyota Way views the way team associates are developed as

the key competitive competency of the company. And since developing exceptional people is the

most important work of the company the organization charged with that responsibility had better

be exceptional. One only has to look at the people who pass through HR as managers to notice

something is different at Toyota.

Managing Directors, Vice Presidents of manufacturing and engineering, and some of the leading

experts on the Toyota Production System have spent time working in HR. That is because HR

has a key role in developing people who work in operations so HR managers must be experts on

operations.

3. Competitor analysis

The main competitors of Toyota in the market are General Motors, Volkswagen and Ford:

3.1 General Motors

General Motors Company, also known as GM, is a United States based automaker with

headquarters in Detroit, Michigan. General Motors was the worlds largest automaker with

386,000 employees in over 50 years. Revenue US$ 148.979 billion (2008). GM was the world's

18th largest corporate entity and third largest automaker as ranked by 2008 revenues on the

Fortune Global 500 Ranked by global unit sales for 2008, it was the world's second largest

automaker.GM manufactures cars and trucks in 34 countries sells and services vehicles in some

140 countries.

GM plans to focus its business on its four core US brands Chevrolet, Cadillac, Buick, and

GMC. In Europe, following a period of negotiation to sell a majority stake in its Opel and

Vauxhall brands, GM decided to retain full ownership of these operations.

3.2 Volkswagen AG:

Wolfsburg (Germany)-based Volkswagen AG (VW) is currently the worlds third-largest

automaker by number of units sold after Toyota and GM, according to the Paris-based global

Formatted: Font: Not Bold, Highlight


Comment [n12]:Do I see details of Ford?

Comment [n13]:Read Iacocca, anautobiography by Lee Iacocca to get a glimpse o

auto industry. It is a good book.

Comment [n14]:Literally, Folks (Peoples)


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automobile body Organisation Internationale des Constructeurs dAutomobiles (OICA). VW

sold 6.29 million units to its customers in 2009 according to the company reports.

Volkswagen Group is divided into two primary divisions: the Automotive Division, and the

Financial Services Division. The Group consists of 342 Group companies, which are involved in

either vehicle production or other related automotive services.

Although it operates worldwide, Volkswagen Group's core market is primarily Europe. Of its

automobile brands, Volkswagen Passenger Cars is its mainstream marque, and the Group's major

subsidiaries also include well-known car marques like SEAT, Audi, koda, and the prestige

marques of, Lamborghini, Bentley, and Bugatti.

In August 2009, Porsche SE and Volkswagen Group reached an agreement that Volkswagen AG

and Porsche AG would merge in 2011.

3.3 Comparative analysis of the top-3 global auto-makers: (in $ billions)

Toyota GM Volkswagen

Parameter Q12010

FY2009

FY 2008 Q12010

FY2009

FY2008

Q12010

FY 2009 FY 2008

Revenue 57 207.852 262.394 31.5 N/A 148.97 36.89 135.67 146.795

Net Profit 1.2 -4.424 17.146 0.9 N/A -30.86 0.633 1.3 6.19 Net Profitmargin*(%)

2.10 -2.1284 6.5344482

2.857143 N/A -20.71 1.715 0.958207 4.216765

*N/A : : As GM applied for bankruptcy. GM came out of the bankruptcy and made profits in the

first quarter of2010 and is on its way for an IPO.

4. Toyota SWOT Analysis

4.1 Strengths

y Global organization, with a strong international position in 170 countries worldwide.y Great financial strength and sales growth of29.3% in 2010

Comment [n15]:What about Ford?

Comment [n16]:See Fred David for a good tfor choice of strategy based on SWOT analysis . U

that model.

I am distributing extract of the book in the class f

your convenience.


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y Strong brand image based on quality, environmental friendly (greener) and customizedrange of cars.

y Industry leader in manufacturing and production. Maximizes profit through efficient leanmanufacturing approaches (e.g. Total Quality Management) and JIT (Just in Time)

manufacturing and first mover in car research and development

y Excellent penetration in key markets like the US, Europe, Middle East and Africa(EMEA), China and India. Now the largest car manufacturer in the world, surpassing

Ford and GM.

y Innovation -first to develop commercial mass-produced hybrid gas-electric vehicles (gasand electric), e.g. Prius model based on advanced technologies and R&D activity.

4.2 Weaknesses

y Being big has its own problems. The world market for cars is in a condition of oversupply and so car manufacturers need to make sure that it is their models that consumers

want and not the other way around.

y So if the car market experiences a down turn, the company could see over capacity. If onthe other hand the car market experiences an upturn, then the company may miss out on

potential sales due to under capacity i.e. it takes time to accommodate

y Toyota is a Japanese car manufacturer , sometimes seen as a foreign importer.y Toyota produces most of its cars in US and Japan whereas competitors may be more

strategically located worldwide to take advantage of global efficiency gains.

y Under heavy criticism due to large-scale recalls made between 2007 and 2009-10 becauseof quality issues.

4.3 Opportunities

y Growing environmental awareness in developed markets opens great avenues for eco-friendly cars instead of gas-guzzlers.

y To expand more aggressively into new segments of the market. The launch of Aygomodel by Toyota is intended to take market share in the youth segment.


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y Continued global expansion - especially in the emerging markets e.g. China and India,Russia, where population and demand for cars are both accelerating.

y European government incentives for consumers to trade in older vehicles for more fuel-efficient ones helping Toyota to boost its sales.

4.4 Threats

y Volkswagen (VW) is the single biggest threat to Toyotas global dominance. VW plansto sell 1 million vehicles and topple Toyota by 2018 on the back of its multi-brand

strength, technological expertise, financial position and global presence which helped it

get through the economic downturn better than its competitorsy Saturation and increased competition; intense marketing campaigns increasing

competitive pressures. The company is facing tremendous pressure from established

European luxury brands like BMW and Mercedes-Benz for its Lexus luxury range, which

hasnt really taken off well since its launch.

y Volatility in the exchange rates affecting profits and cost of raw materials.y Predictions of a double-dip recession and the prolonged European debt crisis will affect

car purchases (especially new cars). As household budgets tighten - this could lead a

decline in new car sales and possible rationalization of dealerships.

y Changing usage - families using the car less for taking children to schools. Homedeliveries. Businesses - restricting business travel (tele-conferencing). Governments

encouraging alternative forms of transport - cycling and incentives to use public transport

across Europe.

y Rising oil prices (fuel costs) and the costs of maintaining cars. Increase in families whohave chosen not to own a car, or decided to use their car less due to increasing acceptance

of concepts like car pooling in developed and developing markets.

5. Vehicle recalls at Toyota

The origin of its woes date back to the year 2002 when it declared publicly its Global Vision

2010, according to which it wanted to increase its global market share from 11% to 15%.In its


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relentless and single-minded pursuit of becoming the global market leader by overthrowing GM

and Ford, quality was overlooked by Toyota. It entered into deals with lots of suppliers

worldwide who did not necessarily share its passion for quality. The automotive industry

operates as a complex web. The carmakers (known as original equipment manufacturers or

OEMs) sit at its centre. Next come the tier-one suppliers, such as Bosch, Delphi, Denso,

Continental, Valeo and Tenneco, who deliver big integrated systems directly to the OEMs.

Connected to these are the tier-two suppliers who provide individual parts or assembled

components either directly to the OEM or to tier-one suppliers. CTS Corp, the maker of the

throttle-pedal assemblies that Toyota has identified as one of the causes of 'unintended

acceleration' in some of its vehicles, is a tier-two supplier (whose automotive business accountsfor about a third of its sales).As the quality of cars is heavily dependent on the quality of

components supplied (carmakers are actually component assemblers), millions of cars had to be

recalled.

Moreover, Toyotas addition of new suppliers globally overstretched its senior engineers. They

could not monitor closely whether the new suppliers were shaping up to Toyotas quality

standards. Still Toyota not only continued to trust its sole-sourcing approach (appointing certain

suppliers as sole source of particular components) , it went even further, gaining unprecedented

economies of scale by using single suppliers for entire ranges of its cars across multiple markets.

This led to loss of accountability.

5.1 Recall Timeline:

Following list provides the recall history of Toyota cars in the US and rest of the world:

Sep 26, 2007 US: 55,000 Camry and ES 350 cars in "all-weather" floor mat recall. Nov 02, 2009 US: 3.8 million Toyota and Lexus vehicles again recalled due to floor

mat problem, this time for all driver's side mats.

Nov 26, 2009 US: floor mat recall amended to include brake override and increased to4.2 million vehicles.

Jan

2

1,2

010 US:2

.3 million Toyota vehicles recalled due to faulty accelerator pedals(of those, 2.1 million already involved in floor mat recall).

Jan 27, 2010 US: 1.1 million Toyotas added to amended floor mat recall.


Comment [n17]:The crux of your memo


Comment [n18]:Haste, causes waste.


Comment [n19]:This speaks it all!!


Comment [n20]:Discuss this as a strategyshortcoming. Therefore, it will also lead you to a

solution to the situation.


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Jan 29, 2010 Europe, China: 1.8 million Toyotas added to faulty accelerator pedalrecall.

Feb 08, 2010 Worldwide: 436,000 hybrid vehicles in brake recall following 200 reportsof Prius brake glitches.

Feb 08, 2010 US: 7,300 MY 2010 Camry vehicles recalled over potential brake tubeproblems.

Feb 12, 2010 US: 8,000 MY 2010 4WD Tacoma pick-up trucks recalled over concernsabout possible defective front drive shafts.

Apr 16, 2010 US: 600,000 MY 1998-2010 Sienna minivans for possible corrosion ofspare tire carrier cable.

Apr 19, 2010 World: 21,000 MY 2010 Toyota Land Cruiser Prado and 13,000 LexusGX 460 SUV's recalled to reprogram the stability control system.

Apr28, 2010 US: 50,000 MY 2003 Toyota Sequoia recalled to reprogram the stabilitycontrol system.

May 21, 2010 Japan: 4,509, US: 7,000 MY 2010 LS for steering system softwareupdate.

July 5, 2010 World: 270,000 Crown and Lexus models for valve springs with potentialproduction issue.

6. Analysis of currentSituation:

This section analyzes the recalls made in different timelines as shown above including the

reasons, response from US administrative department and the investigations followed thereby.

The story of the Toyota recalls began in September 2007 when the Japanese company recalled

heavy duty rubber floor mats from the Toyota Camry and ES 350 Sedans. This recall was carried

out due to the risk that unsecured mats could move towards the gas pedal and trap it. In August

2009, two car crashes were reported due to the pedal entra pment. Vehicles were immediately

recalled to fix the floor mat problem. At the end of2009, 3.8 million Toyota and Lexus vehicles

were recalled due to the floor mat problem. This time it was for all drivers side mats. Again this

was to correct a possible invasion of an incorrect or out-of-place front driver's side floor mat into


Comment [n21]:There must be a separation

between two numbers.

Redraft the sentence.


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the foot pedal well, which could cause pedal entrapment. This was carried out on November2,

2009. By Nov 26, 2009 the count for floor mat recall had increased to 4.2 million vehicles. The

second recall which happened on January 21, 2010, was due to what was identified as a possible

mechanical sticking of the accelerator pedal causing unintended acceleration, referred to

as Sticking Accelerator Pedal. Though Toyota had recalled vehicles earlier, they did not look

into the possibility of the involuntary acceleration occurring due to any other reason except for

the unsecured mats. But soon they were to find another reason. The second recall was begun

after some crashes were shown not to have been caused by floor mat incursion. 2.3 million

Toyota vehicles were recalled due to faulty accelerator pedals. Of these vehicles, 2.1 million had

already been involved in the floor mat recall. Toyota then widened the recall to include1.8 million vehicles in Europe and 75,000 in China.

After a short while, by February, 2010 Reports of possible problems related to the braking

system on the MY 2010 Toyota Prius were received from 102 drivers in the US while an

additional 14 such reports had been received in Japan. Three of these reports claimed that brake

problems had led to the car crashing, with one accident occurring when a Prius crashed head on

into another car injuring two people. Though it had been involved in the first recall involving

floor mats, The Prius was not involved in Toyota's second recall. The issue really was the "short

delay" in regenerative braking when hitting a bump, resulting in increased stopping distance. On

February 08, 2010 about 436,000 hybrid vehicles were recalled following the reports of Priusbrake glitches for hybrid anti-lock brake software. Toyota had initiated the first two recalls with

the assistance of the U.S. National Highway Traffic Safety Administration. The February recall

was voluntary. The period between February 3rd and 8th saw a lot of drama uncover between the

Japanese Transport Ministry, U.S National Highway Traffic Safety Administration and Toyota.

The company which claimed that it was premature to comment accepted that they knew about 77

Prius brake complaints. They also said that they had been working on the complaints. In total,

Toyota recalled three hybrid vehicles to reprogram the anti-lock braking (ABS) software and on

February 08, 2010 7,300 MY 2010 Camry vehicles were also recalled over potential brake tube

problems in the U.S. In the same month, about four days later about 8000 MY 2010 4WD

Tacoma pick-up trucks were recalled as there were concerns about a possible defective front

drive shaft in those vehicles. This was again in the United States.



Formatted: Font: (Default) +Body, 11 pt, N

Bold, Font color: Auto, Highlight



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These were the most important recalls by Toyota. However, the woes of Toyota did not end in

February of2010. In April there was a concern that the Sienna minivans had a possible corrosion

of the spare tire carrier cable. On April 16, 2010 600,000 vehicles were recalled. Continuing the

same fad 21,000 MY 2010 Toyota Land Cruiser Prado and 13,000 Lexus GX 460 SUV's were

recalled to reprogram the stability control system worldwide on April 19, 2010. For the same

reasons, 50,000 MY 2003 Toyota Sequoia vehicles were recalled on April 28, 2010. More

recently, in May 2010 about 4,509 MY 2010 LS in Japan and 7,000 in U.S were recalled for

steering system software update. Just this month, on July 5, 2010, 270,000 Crown and Lexus

models were recalled worldwide as there were potential production issues with valve springs.

The Toyota recall has had many impacts on the company and its consumers. Toyota has

approximately recalled about ten million vehicles in all. Sales have been impacted. About 30 - 40

deaths have alleged to have been caused due to the problems in the vehicles. People have been

injured. Toyota has been accused of neglect and improper repairs. There have also been multiple

lawsuits against Toyota in this period. A company that was known for its high regard for quality

has been neglectful. Consumers have begun to question Toyotas credibility. This issue has been

one of the biggest threats to the image of Toyota.

Toyota has made an attempt to create goodwill amongst customers by initiating the recall and

ensuring vehicle repairs. How it handled the situation has attracted appreciation as well as

criticism. However Toyota has a long way to go in recreating and sustaining the image it once

had.

7. Financial Impact due to Recall

This section describes the impact of the recalls on the balance sheet of Toyota and provides the

information about effect on car sales due to recall issues.

Negative effects of Toyotas product recall include direct costs such as fixing the problem that

caused the recall, litigation costs arising from class-action lawsuits, loss ofmarket

capitalizationdue to the stock's decline and loss of revenue if production and sales of the faulty


Comment [n22]:I guess there is no bigdifference between 9 & 10 million. But use some

number consistently and quote the source.

Comment [n23]:What would Ralph Nader hsaid in these circeumstances?

Comment [n24]:This is the real damamge


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product are halted until the problem is resolved. Other longer-term, indirect effects include loss

of market share and the negative impact on corporate reputation and goodwill.

The automaker has now recalled roughly 9 million vehicles globally and Toyota believes that

this and its other headaches could cost the company up to $2 billion, which consists of repairs

and vanished sales, In the latest figure, Toyota's US market share fell to about 14 percent from

18 percent as it halted sales towards the end of the month of recalled models.

7.1 Impact on sales

Toyota has halted sales and production of eight of its top-selling cars in the U.S. - and recalledmore than 9 million cars worldwide, in two separate recalls Toyota faces the prospect of

billions of dollars in charges and operating losses. The Toyota brand, once almost synonymous

with top quality, has taken a heavy hit. The stock plunge wiped out about $32 billion in market

value over a one-month period in February.

Considered to other market segments, Toyota is incurring decrease in sales in North America

where overall U.S. sales in 2010 ended at 11.5 million vehicles, which would entail a 500,000

unit drop from Toyota's 2009 sales of 1.77 million.

To regain the confidence of customers, Toyota is incurring heavy costs in the form of incentives.

It offered existing Toyota owners who buy another vehicle from the company will receive two

years of free maintenance. The automaker also is offering zero-percent financing and low-priced

leases to customers who buy or lease several of the recalled vehicles, including Corollas, Camrys

and Avalons. The cost of these offering is estimated to cost the automaker hundreds of millions

of dollars. On average, incentive programs cost Toyota nearly $2,800 for each vehicle it sold in

March. According to estimate this amounts to potentially depressing operating profit by about $2

billion. Further due to recalls concerning sticky accelerator pedals on several other models,

Toyota could freeze European launch of the RAV4 2010 model, the 2010 Auris and the Auris

Hybrid slated to release this year.

People who purchased Toyota vehicles in the U.S. have filed at least 41 class action suits against

Toyota, seeking damages that range from loss of car value to a return of profits. Toyota is facing


Comment [n25]:I guess there is no bigdifference between 9 & 10 million. But use some

number consistently and quote the source.


Comment [n26]:Is this right as a strategy? W

else should Toyota do?

Comment [n27]:What are Class Action Suit


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at least 97 US lawsuits seeking damages for injury or death linked to sudden acceleration and

138 class action lawsuits from American customers suing to recoup losses in the resale value of

Toyota vehicles. It is estimated that Toyota will have to spend $1.12 billion on warranty

expenses and 89 class-action lawsuits that could cost the Japanese auto giant $3 billion or more.

7.2 Comparison of Income Statement:

The below table provides the comparative analysis of Toyota income statement for the past three

years (.All figures in $ thousands.)

31-Mar-10 31-Mar-09 31-Mar-08

Total Revenue 202,814,000 207,852,000 262,394,000

Cost of Revenue 178,551,000 186,856,000 214,795,000

Gross Profit 24,263,000 20,996,000 47,599,000

Selling General andAdministrative 22,685,000 25,663,000 24,938,000

Operating Income orLoss 1,579,000 -4,668,000 22,661,000

Net Income 2,242,000 -4,424,000 17,146,000Table1Toyota Income statement comparison

7.3 The key financial ratios of Toyota

Financial Condition Company Industry AnalysisDebt/Equity Ratio 1.21 1.35 Leveraging is below industry

standard, more equity is used forfinancing.

Current Ratio 1.2 1.1 Current assets provide good liquidity.Current P/E Ratio 45.1 19.3 Share price is at a high price

compared to rivals.Return On Equity 2.1 0.7 Profit earned through equity is more

than industry.

Return On Assets 0.7 0.2 Companies assets are generatingmore than average income.

Inventory Turnover 11.6 8.3 Inventory management is efficientand far superior to industry standards.


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Table 2 Key Financial Ratios ofToyota

8. Reasons for Recall

Toyota has traditionally branded its cars to stand for quality and reliability. It recalled its cars so

that it can prevent further damage to its brand image and reputation in the global marketplace.

Though the recalls have been largely confined to the US, Europe and China, the amount of

negative publicity it has garnered thanks to the media has left no choice for the Japanese

carmaker.

9. Our Interpretation

The history of recalls from 2007 to 2010 is indicative of systemic flaws in the overall quality

processes adopted in the manufacturing of cars at Toyota. Recalls have happened regularly since

2007 and therefore cannot be dismissed as a one off incident. Over the last three years, a lot of its

models have been recalled from the dealerships and the customers to fix the technical flaws. The

fact that Toyota became the worlds largest car maker both in terms of revenues and volumes

(overthrowing the General Motors from its pole position) in 2008 despite the recalls could be

attributed to a great extent to the poor state of affairs at GM and the subsequent global financial

crisis. GM and Ford, the traditional rivals of Toyota, have been unable to lure away thousands of

existing and potential Toyota customers into their fold by exploiting this golden opportunity to

their advantage fully.

Toyota however isnt sitting quiet. Its website is replete with all the information that is required

for customers who have been hit by the recalls. It has planned to setup a special organization in

Europe with subsidiary offices in each country there to address any technical issues reported by

dealerships and customers within 24 hours. Despite its recall problems, the company has still

Comment [n28]:If there was no negativepublicity, would not Toyota recall is defective car

Pl read Chapter 11 Corporate Performance,

Governance and Business Ethics in Hill & Jones i

its entirety




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managed to score highly in JDPower customer satisfaction and cost of ownership surveys in

2010.

10.References

y www.economictimes.indiatimes.comy www.reuters.comy www.businessweek.com y www.4wheelsnews.comy thearticlewriter.com/y www.toyota.co.jpy en.wikipedia.orgy www.thehindubusinessline.comy www.business-standard.com

What I would typically look for in the Strategy Memo would be:

1. Be focussed on the situation you want to address and the strategy you recommend .2. Give a correct title for the proposal. Strategy Memo is a proposal and not a case analysis.3. (Toyotas) background (SWOT)4. Brief description of the situation that led to (Toyota) into recall problem

a. Take cues from SWOT analysis and show how the strategy you would recommend wouldhelp (Toyota) to leverage its strengths and compensate its weakness while exploiting

the opportunities and compensating the threats.

b. What were the options for handling this situation? How is the choice recommended? Plremember, Strategy Memo is not post-facto case analysis but a memo recommending a

particular course of action rather than the other .


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c. You can use the tool for strategy choice that you are going to learn. For example: a toolsuch as SPACE Matrix analysis

5. Include citation with references tied to body text. Citation is not mere listing of references.y

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12 pt

Formatted: Normal, Indent: Left: 0.25", N

bullets or numbering

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B 5 Gary Hamel Toyota ISM Commented