Toyota: a case studyToyota: a case study

BackgroundBackground Toyota Motor Company was founded in 1937 by the Toyoda Toyota Motor Company was founded in 1937 by the Toyoda

family.family. Business was relatively unsuccessful until Eiji Toyoda introduced Business was relatively unsuccessful until Eiji Toyoda introduced

the method of lean production after studying Ford’s Rouge plant in the method of lean production after studying Ford’s Rouge plant in Detroit in 1950.Detroit in 1950.

This lean production method became known as the Toyota This lean production method became known as the Toyota Production System.Production System.

The production executive, Taiichi Ohno, successfully helped The production executive, Taiichi Ohno, successfully helped Toyoda improve his company using this new production method Toyoda improve his company using this new production method and mode of thinking.and mode of thinking.

EnvironmentEnvironment CulturalCultural

Company as a community: lifetime employment, access to company Company as a community: lifetime employment, access to company facilities, seniority-based wages (in return for 1/3 work force layoff in facilities, seniority-based wages (in return for 1/3 work force layoff in 1946) ; as a return, employees must be more flexible and actively 1946) ; as a return, employees must be more flexible and actively promote interests of company >> Implications: labor = Fixed costpromote interests of company >> Implications: labor = Fixed cost

EconomicEconomic Postwar conditions put Japan into a country lacking significant capital, Postwar conditions put Japan into a country lacking significant capital,

so that Japan had to rely mostly on producing its own technology.so that Japan had to rely mostly on producing its own technology.

PoliticalPolitical The Ministry of Int’l Trade and Industry (MITI) encouraged Japanese The Ministry of Int’l Trade and Industry (MITI) encouraged Japanese

firms to enter the automobile industry despite established competitors firms to enter the automobile industry despite established competitors from the West by imposing high tariffs discouraging imports and from the West by imposing high tariffs discouraging imports and prohibiting foreign ownership.prohibiting foreign ownership.

Japan’s work force, under Western influence after WWII, grew more Japan’s work force, under Western influence after WWII, grew more powerful and more demanding, thus limiting producers’ efforts to powerful and more demanding, thus limiting producers’ efforts to reduce labor costs.reduce labor costs.

Environment (cont.)Environment (cont.) DemographicalDemographical

The domestic market was very small and un-uniform. Thus, goods had 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 to be very tailored to specific consumer taste. E.g. luxury cars for officials, small cars for city residents, etc.officials, small cars for city residents, etc.

TechnologicalTechnological Commitment to innovation and improvementCommitment to innovation and improvement Large skilled-labor pool to draw fromLarge skilled-labor pool to draw from

SocialSocial Commitment by employees to workCommitment by employees to work

Country Differences?Country Differences? Western “careers” vs. Japanese “community”Western “careers” vs. Japanese “community”

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

More interpersonal relationships with employees, suppliers, and More interpersonal relationships with employees, suppliers, and customerscustomers

Organizational StructureOrganizational Structure Multi-regional lean enterpriseMulti-regional lean enterprise

Primarily network structurePrimarily network structure Network of suppliersNetwork of suppliers Network of dealers/distributorsNetwork of dealers/distributors

Frequent interaction between all levels of the organizationFrequent interaction between all levels of the organization

Strategy – Lean ProductionStrategy – Lean Production Final assembly plantFinal assembly plant

Moved from “move the metal” mentality to Moved from “move the metal” mentality to kaizenkaizen Introduced idea of stopping assembly lines in order to correct problems Introduced idea of stopping assembly lines in order to correct problems

before continuingbefore continuing As a result, quality improved and yields are close to 100%As a result, quality improved and yields are close to 100%

Product development and engineeringProduct development and engineering Focused on leaders that knew all steps of a process rather than those Focused on leaders that knew all steps of a process rather than those

with highly specialized knowledge; also, skill-buildingwith highly specialized knowledge; also, skill-building More emphasis on proactive thinking by employeesMore emphasis on proactive thinking by employees Thus, increased productivity, product quality, and responsiveness to Thus, increased productivity, product quality, and responsiveness to

changing consumer demandchanging consumer demand ““quality circles”quality circles”

Lean Production – in more detailLean Production – in more detail 2 organizational features:2 organizational features:

““Transfer max number of task and responsibilities to those workers actually Transfer max number of task and responsibilities to those workers actually adding value to the car on the line”adding value to the car on the line”

““has in place a system for detecting defects that quickly traces every has in place a system for detecting defects that quickly traces every problem, once discovered, to its ultimate cause”problem, once discovered, to its ultimate cause”

Thus, need tight teamwork and open communication among workers Thus, need tight teamwork and open communication among workers (comprehensive info display system on electronic displays visible from (comprehensive info display system on electronic displays visible from all work areas)all work areas)

4 areas of importance:4 areas of importance: Leadership: Toyota’s large-project leader w/power vs. Western coordinatorLeadership: Toyota’s large-project leader w/power vs. Western coordinator Teamwork: from many functions, ties with department, and general interest Teamwork: from many functions, ties with department, and general interest

in promoting team, not departmentin promoting team, not department Communication: conflicts resolved in beginning, more people => less Communication: conflicts resolved in beginning, more people => less

peoplepeople Simultaneous DevelopmentSimultaneous Development

Competitive AdvantagesCompetitive Advantages ReliabilityReliability

Product varietyProduct variety Production plants in North America build 2-3 products at a time, as Production plants in North America build 2-3 products at a time, as

opposed to one by Western firms.opposed to one by Western firms. Firms keep models for an average of four years, as opposed to an Firms keep models for an average of four years, as opposed to an

average of close to ten years by Western companies.average of close to ten years by Western companies. Western companies sell almost twice as many cars of the same model Western companies sell almost twice as many cars of the same model

as Japanese firms do.as Japanese firms do.

Suppliers – Lean Production Supply Suppliers – Lean Production Supply ChainChain

Organized suppliers into functional tiersOrganized suppliers into functional tiers First-tier suppliers: worked together in a product-development team First-tier suppliers: worked together in a product-development team Second-tier: made individual partsSecond-tier: made individual parts

Encouraged cooperation and communication among first-tier suppliersEncouraged cooperation and communication among first-tier suppliers

In –house supply operations turned into a network of “quasi-In –house supply operations turned into a network of “quasi-independent first-tier supplier companies”independent first-tier supplier companies”

Substantial cross-holdings between Toyota and suppliers, as well as Substantial cross-holdings between Toyota and suppliers, as well as among suppliers themselves even though each supplier is an among suppliers themselves even though each supplier is an independent companyindependent company

Cross- sharing of personnel through Cross- sharing of personnel through Toyota sending personnel to suppliers to compensate for greater workloadToyota sending personnel to suppliers to compensate for greater workload Toyota transferring senior managers to suppliers for top positionsToyota transferring senior managers to suppliers for top positions

Developed the “just-in-time” (JIT) system, or Developed the “just-in-time” (JIT) system, or kanbankanban

Suppliers – Lean Production Supply Suppliers – Lean Production Supply Chain (cont.)Chain (cont.)

““market price minus” system, not “supplier cost plus” systemmarket price minus” system, not “supplier cost plus” system Value analysis reduces costsValue analysis reduces costs Declining prices over life of model due to learning curveDeclining prices over life of model due to learning curve

Production smoothing enables suppliers to maintain a constant Production smoothing enables suppliers to maintain a constant volume of businessvolume of business

Focus is on long-term relationships that underscores cooperation, Focus is on long-term relationships that underscores cooperation, teamwork, and gradual mutual improvement, rather than price teamwork, and gradual mutual improvement, rather than price through bidding as a way to choose a supplierthrough bidding as a way to choose a supplier

ConsumersConsumers The market began to fragment in the 1960s as cars increased in The market began to fragment in the 1960s as cars increased in

popularity and became essential household goods.popularity and became essential household goods.

Marketing executive Shotaro Kamiya focused on building a sales Marketing executive Shotaro Kamiya focused on building a sales network modeled after Toyota’s supplier network.network modeled after Toyota’s supplier network.

Distributors with a “shared destiny”: wholly owned companies or ones in Distributors with a “shared destiny”: wholly owned companies or ones in which Toyota held equitywhich Toyota held equity

““aggressive selling”: promoted long-term relationship between assembler, aggressive selling”: promoted long-term relationship between assembler, dealer, and buyersdealer, and buyers

Dealer => production system => build-to-order systemDealer => production system => build-to-order system Buyers => product development processBuyers => product development process Direct calls to households with large database of households and buying Direct calls to households with large database of households and buying

preferencespreferences Focus on repeat buyersFocus on repeat buyers Also focus on brand loyalty => “Toyota family”Also focus on brand loyalty => “Toyota family”

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

Closer and more familiar relationship between buyer and salespersonCloser and more familiar relationship between buyer and salesperson

Focus on customer-specified orderFocus on customer-specified order

MarketingMarketing Door-to-door selling/very customizedDoor-to-door selling/very customized

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

Tight relationship with previous buyers to keep clientsTight relationship with previous buyers to keep clients

Sales personnel received intensive training before starting their Sales personnel received intensive training before starting their jobsjobs

Up-to-date and detailed database of consumers helps keep track Up-to-date and detailed database of consumers helps keep track of trends, interests, and tastesof trends, interests, and tastes

CompetitorsCompetitors American companies upon which Toyota originally developed American companies upon which Toyota originally developed

many of its own production processes frommany of its own production processes from GMGM FordFord Etc.Etc.

Korean companies with planned productionKorean companies with planned production

Other Japanese companies, especially Nissan and HondaOther Japanese companies, especially Nissan and Honda

ProblemProblem Obstacle: inward focus of Japanese lean producersObstacle: inward focus of Japanese lean producers Lack the ability to think and act globally rather than from a narrow Lack the ability to think and act globally rather than from a narrow

national perspectivenational perspective Backlash to Japanese direct investment in North American and Backlash to Japanese direct investment in North American and

Europe, a prominent reason of which is that it creates friction as a Europe, a prominent reason of which is that it creates friction as a result of Japanese corporation biases, mainly two classes of result of Japanese corporation biases, mainly two classes of citizenship in their organizationscitizenship in their organizations

E.g. keiretsuE.g. keiretsu

Possible SolutionsPossible Solutions Appoint native managers to head their manufacturing operations Appoint native managers to head their manufacturing operations

in North America and Europein North America and Europe Designate native supplier companies as source for certain Designate native supplier companies as source for certain

categories of componentscategories of components Governments: restrictions on visas for Japanese employees at new Governments: restrictions on visas for Japanese employees at new

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

Author suggests: build a truly global personnel system in which Author suggests: build a truly global personnel system in which new workers from North America, Europe, etc. where a company new workers from North America, Europe, etc. where a company has design, engineering, and production facilities, are hired in at has design, engineering, and production facilities, are hired in at an early age and given the skills, including language and exposure an early age and given the skills, including language and exposure to management in different regions, needed to become full to management in different regions, needed to become full citizens of the companycitizens of the company

Same for suppliersSame for suppliers Need increased transparencyNeed increased transparency

Conclusion – Watch for qualityConclusion – Watch for quality fear of repetition of Ford’s experience in Britain after 1915fear of repetition of Ford’s experience in Britain after 1915

Wholesale substitution of domestic managers and suppliers, to deal Wholesale substitution of domestic managers and suppliers, to deal with investment friction, will degrade performance of production with investment friction, will degrade performance of production system toward the existing levelsystem toward the existing level

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

Need managers and suppliers that understand lean production and are Need managers and suppliers that understand lean production and are committed to it, mostly Japanesecommitted to it, mostly Japanese

Financial figuresFinancial 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.