Toyota's Cost Advantage Over Other Japanese Firms example essay topic

Toyota Financial Services (TFS) recently undertook a major business transition programme to in-source its back-office functions. This required that a large number of Toyota and Lexus retail finance contracts, together with all their associated transaction data, be converted from an external IBM mainframe-based system to an in-house system. The new system was based on the Lynx 'Portfolio's oftware package using Unix and Oracle technology. ATD consultants worked closely with TFS throughout the data conversion project in the following roles: o contributing to a feasibility study into the risks and benefits of undertaking a data conversion from the outsourced external system, and presenting the findings of the study to the TFS management board, which approved the data conversion project o managing the data conversion project from the start, through to its successful conclusion 18 months later o acting as the principal contacts with both the existing external system supplier (Black Horse) and the suppliers of the new in-house system, for the resolution of technical and data-related issues o support for the transition of the business to an in-house operation, particularly through the provision of management information from the source data o data analysis, data mapping, design of the migration procedures and development of migration software o unit and system testing of the data migration procedures and software, as well as support for user acceptance testing o development of procedures for both the financial and non-financial reconciliation of the data conversion. The director of the transition programme was Blair Pollock, TFS' General Manager, Business Development, who commented:' When the ATD consultants joined TFS, the administration of our finance portfolio was outsourced to Black Horse, a subsidiary of Lloyds TSB Bank. We had decided to bring this part of our business in-house and were looking for someone to lead the effort to convert our retail customer data from the Black Horse systems to our own.

The ATD consultants came to us highly recommended for their extensive knowledge and experience of similar conversions within the motor finance industry. We therefore expected a high quality outcome, but were nevertheless surprised by the excellent job that they did. During the two years that the ATD consultants were with us, they delivered outstanding results. Their structured approach and attention to detail ensured that the specification, development and testing of the conversion was meticulous. The conversion event, a "big bang", took place according to schedule, and 100% of nearly 80,000 contracts were successfully loaded into the contract management system. We have subsequently had very few issues with the quality of the converted data and have been able to cope well with the tremendous increase in business volumes.

It is a great testament to the quality of the work performed by the ATD consultants that in a recent review of our in sourcing project, the Board of Management of TFS recognised the retail conversion as a major success". web studies. htm, Copyright (c) 2004 ATD Data Solutions Limited. All Rights Reserved Columbia Project: Use of Software to Achieve Competitive Advantage AUTOMOBILES: TOYOTA MOTOR CORPORATION Gaining and Sustaining Long-term Advantage Through InformationTechnologyCase Prepared By William V. Rapp Co-Principal Investigator The College of International RelationsRitsumeikan University Kyoto, Japan 914-945-0630 (Fax: 914-923-1416; 011-81-75-466-1214) E-mail: April 20002 SOFTWARE AS A TOOL OF COMPETITIVE ADVANTAGE: AUTOMOBILE INDUSTRY 1 Introduction: Objectives of this Benchmarking Study... 32 Approach: Methodology and Questions... 93 Introduction to Case...

104 The Industry Context: The Japanese and Global Automobile Industries... 105 Toyota's Multi-faceted Global Strategy... 21 Smart Production (scheduling, buffer stocks, interactive controls) Smart Design IT and Management of Supplier Networks Smart Marketing Responding to Demand Changes Through Smart Production & Design 6 Smart Car... 42 Environmentally Smart Cars Intelligent Transportation System (ITS) 7 Information Technology Infrastructure and Project Selection... 608 Summary - Controlling the Future... 68 Exhibit 1 - Promotion Plan for Intelligent Transportation System...

78 Exhibit 2 - Toyota's ITS Businesses and R&D... 79 Exhibit 3 - ITS Evolutionary Development... 80 Appendix I Summary Answers to Questions for Toyota - Auto Strategy & Operations... 81 Appendix II - Some Industry and Firm Data... 88 Bibliography and References... 963 Introduction: Objectives of this Benchmarking Study This automobile study for Toyota Motor Corporation (TMC) was completed under a three-year research grant from the Sloan Foundation.

The project's overall purpose has been to examine in a series of case studies how U.S. and Japanese firms which are recognized leaders in using information technology (IT) 1 to achieve advantage have organized and managed this process. While each case is complete in itself, each is part of this larger study. 2 This case for a large automobile producer, together with other cases, support an initial research hypothesis that leading software users in the U.S. and Japan are very sophisticated in the ways they have integrated software into their business strategies. They use IT to institutionalize organizational strengths and capture tacit knowledge on an iterative basis. In Japan this strategy has involved heavy reliance on customized and semi-customized software (Rapp 1995) but is changing towards a more selective use of package software managed via customized systems. This case is illustrated by Toyota's development of its system to automate its traditional "just-in-time" (JIT) ordering from suppliers, its new intelligent transportation system (ITS) and its new smart cars.

Conversely, U.S. firms, such as Merck, who have often relied more on packaged 1 In this paper and the study, software, information technology (IT) and systems are used interchangeably. In addition, when referring to the firm as a whole, the text uses "it", but when referring to management, "they" is used. 2 There is no comparable US auto company case. However, the industries and firms examined are food retailing (Ito-Yokado), semiconductors (NEC and AMD), pharmaceuticals (Takeda and Merck), retail banking (Santa and Citibank), investment banking (Nomura and Credit Suisse First Boston), life insurance (Meiji and Nationwide), autos (Toyota), steel (integrated mills and mini-mills, Nippon Steel, Tokyo Steel and Nuc or), and apparel retailing (Isetanand Federated). Nationwide has replaced USAA, as the latter was unable to participate. These industries and cases were generally selected based on the advice and research of specific industry centers funded by the Sloan Foundation.

These are the computer and software center at Stanford, the semiconductor and software centers at Berkeley, the financial services center at Wharton, the pharmaceutical and auto centers at MIT, the steel project at Carnegie-Mellon, the food services project at the University of Minnesota and the apparel center at Harvard. The case writer and research team for this case thus wish to express their appreciation to the Alfred P. Sloan Foundation for making this work possible and to the Sloan industry centers for their invaluable assistance. They especially appreciate the guidance given by the auto center at MIT as well as the staff at Toyota who were so generous with their time. Still, the views expressed in this case are those of the author and are not necessarily those of Toyota or its management. 4 software, are now customizing more. This is especially true for the systems needed to integrate software packages into something more closely linked with a firm's business strategies, markets, and organizational structure.

Thus, coming from different directions, there appears to be convergence in the strategic approach of these leading software users. The cases confirm what some other analysts have hypothesized; a coherent business strategy is a necessary condition for a successful IT strategy (Wold and Shriver 1993). 3 These strategic links for Toyota and Japan's automobile industry are presented in the following study. 4 Business strategies are important in understanding IT strategies. This case along with the other case studies illustrate that the implementation and design of each company's software and software strategy is unique to its competitive situation, industry, and strategic objectives. These factors influence how each chooses between packaged and 3 These and other summary results are presented in another Center on Japanese Economy and Business working paper: William V. Rapp, "Gaining and Sustaining Long-term Advantage Through Information Technology: The Emergence of Controlled Production", December 1998.

Also see: William V. Rapp, "Gaining and Sustaining Long-term Advantage Using Information Technology: Emergence of Controlled Production", Best Papers Proceedings, Association of Japanese Business Studies, Salt Lake City, UT, June 1999.4 All the cases are being written with a strategic focus. That is, each examines a firm's IT strategy rather than the specific software or IT systems used. In this sense, they illustrate how IT is used to improve competitiveness rather than what specific software a firm is using. The latter is generally only noted to illustrate and explain the former. This emphasis was not specified when the project began but evolved as research progressed. There are three major reasons the cases became focused this way.

First, at a detailed level, all these firms have unique software and IT systems due to the way each weaves organization with packaged and custom software. There is thus little others could learn if a study just explained each firm's detailed IT system or systems. Further, the cases would be long and would quickly drown the reader in data since IT pervades all aspects of these very large corporations. This was apparent at an early stage in the research when the project team tried to develop IT organization charts for Takeda, Merck and NEC. The second reason is that at a general level, differences in firm IT systems can be almost trivial since there are only a limited number of operating system options, e.g. IBM mainframes, Unix workstations, and Windows or MAC based PCs. Third, information technology changes very rapidly and thus each firm is constantly upgrading and evolving its systems.

So detailed descriptions of each IT system would rapidly become obsolete. For these reasons, focusing the cases on strategic principles developed as the best way to explain to readers something they could use and apply in their own situations. This reasoning has been confirmed when the material has been presented in different forums as discussants have commented favorably on the approach. Equally importantly, in our interviews and conversations with management, this is where they have focused their responses.

That is, as the various cases illustrate, the firms manage their IT decision-making by following a set of strategic principles integrated with their view of their competitive environments. This is similar to Nelson and Winter's (1982) rules and routines for other kinds of management decisions and innovations, and illustrates these firms' evolutionary approach to IT use and development. Their basic reasons for this incorporate the points noted above, i.e. each firm's unique system, the limited operating system options, and IT's rapid technical change. Based on what the case study teams have learned, therefore, it is these firms's strategic approaches, including the concept of controlled production explained later, that seem to have the widest applicability 5 customized software options to achieve specific goals, and how each measures its success. Indeed, as part of each firm's strategic integration, Toyota and the other leading software users examined, have linked their software strategies with their overall management goals through clear mission statements that explicitly note the importance of information technology to the success of the firm. Each has also coupled this view with active CIO (Chief Information Officer) and IT-support group participation in the firm's business and decision-making structure.

Thus for firms such as TMC the totally independent MIS (Management Information Systems) department is a thing of the past. This may be one reason why out-sourcing has not been a real option for TMC, except to captive subsidiaries (Rapp 1995). The company's successful business performance in automobiles and other vehicles is not based solely on software, however. Instead, as is described below, software is an integral element within its overall management strategy with respect to producing, selling and servicing automobiles. It also plays a key role in serving corporate goals such as enhancing plant productivity by improving production scheduling, reducing inventories or strengthening customer relations. The systems are thus coupled with the company's approach to marketing, design, production, customer service, new product development and constant cost reduction.

This reflects Toyota's clear understanding of its business, its industry, and its competitive strengths within the context of its industry. This clear business vision, especially of the smart car, smart design and smart production strategies described below, has enabled TMC's management to select, develop and use the software they believe is required to assist TMC's plants to operate at and offer other organizations the most potential insights without becoming dated in how to use IT to improve competitiveness. The detailed strategy described here, though, only applies to vehicle production and primarily autos. 6 a higher and more consistent level of performance and customer support. In turn, TMC has integrated this support to its plants into a total support system for the firm, including its overseas affiliates, which is coupled with the company's overall operations including parts and steel ordering. Since this vision impacts other corporate decisions, TMC has also developed good human resource and financial characteristics (see Appendices I & I Ion Strategy & Operations as well as Firm & Industry Data).

Toyota does share some common IT approaches with other leading software users, such as the creation of large proprietary interactive databases that promote automatic feedback between various stages of the design, order, production, delivery, and the service process. Its ability to use IT to economize on traditional production systems and inventory practices, such as the amount of steel that must be held for various automobile models, is also a common issue for other leading software users. In addition, TMC has been able organizationally and competitively to build beneficial feedback cycles or loops that increase productivity in areas as different as design, customer warranty service and product availability while reducing cycle times and improving the production and delivery of products and replacement parts to the customer. TMC's management recognizes that better cycle times between client orders and ultimate delivery reduce costs and improve business forecasts since projections are for shorter periods (Fujimoto 1999). Similarly, more rapid design cycles more quickly incorporate the latest technologies in its new model cars (Sealy 1991 and So bek 1997). Therefore, customer satisfaction is improved through the more timely completion of the sales process as well as the constant product enhancement.

One example of this use of ITto improve competitiveness through faster cycle times is TMC's new parallel and buffer 7 stock production system that permits Toyota to reduce assembly times compared to the traditional continuous track approach (Fujimoto 1999 and company visit). In sum, IT inputs are critical factors in TMC's and other leading users' overall business strategies, yielding strong positive results for doing it well and posing potentially negative implications for competitors. An important consideration in this respect is the apparent emergence of a new strategic production paradigm, "controlled production" ("CP"), where TMC is clearly a leader. Mass production dramatically improved on craft production through economies of scale using standardized products, and lean production improved on mass production by making production more continuous and tying it more closely to actual demand". Controlled" production seems to significantly improve productivity through monitoring, controlling and linking every aspect of producing and delivering a product or service, including after sales support and product changes. Such effects are described for Toyota in what follows in terms of its new smart car combined with its smart design and smart production scheduling.

However, controlled production (CP) is only possible by a firm actively using IT systems to continuously monitor and control functions that were previously parts of a business structure that only responded to changes in expected or actual demand. Now it can actually influence or stimulate those changes. This may be why such firms and several industry analysts see the skillful use of IT as important to these firms's success, including Toyota's (Brogan 1997 a and Matsushima 1998). But this is only true when ITis integrated with the firm's business from an operation, product and organization standpoint, reflecting its overall business strategy and clear competitive vision. 8 This is one reason why at Toyota the software and systems development people are part of the decision-making structure within each plant and operation.

So Seagate Technology is certainly correct for Toyota when it states in its 1997 Annual Report: "Weare experiencing a new industrial revolution, one more powerful than any before it. In this emerging digital world of the Third Millennium, the new currency will be information. How we harness it will mean the difference between success and failure, between having competitive advantage and being an also-ran". However, the key in TMC's case to using IT successfully, as with the other leading software users examined, is to develop a mix of packaged and customized systems that support the firm's business strategies and differentiate it from competitors.

TMC's management has achieved this by using IT to enhance its organizational and product strengths rather than trying to adapt TMC's organizational structure or products to the software used. They have also looked to functional and market gains to justify the additional expense incurred in customizing certain systems, including the related costs of integrating customized and packaged software into a single IT system while training employees to use it. This integration is done by first assessing the possible business uses of software within the organization, its operations and its products. Particular focus is placed on IT's role in enhancing Toyota's core competencies in developing, producing and delivering many different qualities and types of vehicles (Appendix II). Management therefore rejects the view that IT systems are generic products best developed by outside vendors who achieve low cost through economies of scale and who can more easily afford to invest in the latest technologies. 55 Toyota and the other cases have been developed using a common methodology that examines cross-national pairs of firms in key industries.

In principle, each pair of cases focuses on a Japanese and American firm in an industry where 9 Approach: Methodology and Questions In undertaking this and the other cases to assess the importance for each firm of the IT related issues noted above, the project team sought to answer key questions while recognizing firm, country, and industry differences. These have been explained in the summary paper referenced in footnote 3 and are set forth for Toyota in Appendix I a swell. TMC's profile is presented there based on company interviews and other research. Readers that wish to assess Toyota's strategies and approaches to using IT in summary form prior to reading the case may find it a useful outline. 6 software is a significant and successful input into competitive performance. Excepting Nationwide Insurance, the firms examined are ones recommended by the Sloan industry centers as ones using IT successfully.

A leading securities analyst recommended Nationwide as a replacement for USAA. So all are recognized by their industries as being good at using IT to improve competitiveness. To develop these "best-practice" studies the research team combined analysis of current research results with questionnaires and direct interviews. Further, to relate these materials to previous work as well as the expertise located in each industry center, the team talked with the industry centers. In addition, it coupled new questionnaires with the materials used in a previous study to either update or obtain a questionnaire similar to the one used in the 1993-95 research (Rapp 1995). This method enabled the researchers to relate each candidate and industry to earlier results.

The team also worked with the different industry centers to develop a set of questions that specifically relate to a firm's business strategy and software's role within that. Some questions address issues that appear relatively general across industries such as inventory control. Others such as managing the IC manufacturing process are more specific to a particular industry. The focus has been to establish the firm's perception of its industry and its competitive position as well as its advantage in developing and using a software strategy.

The team also contacted customers, competitors, and industry analysts to determine whether competitive benefits or impacts perceived by the firm were recognized outside the organization. These sources provided additional data on measures of competitiveness as well as industry strategies and structure. The case studies are thus based on detailed interviews by the project team on IT's use and integration into management strategies to improve competitiveness in specific industries, augmenting existing data on industry dynamics, firm organizational structure and management strategy collected from the industry centers. Further, data was gathered from outside sources and firms or organizations that had helped in the earlier project. Finally, the US and Japanese companies in each industry were selected based on being perceived as successfully using software in a key role in their competitive strategies. In turn, each firm saw its use of software in this manner while the competitive benefits were generally confirmed after further research.

In the case of automobiles the team was particularly aided by presentations given by the MIT automobile group at the annual Sloan Industry Center Meetings from 1997-99 as well as the book produced by that Center (Womack, Jones and Roos 1990). 6 The questions are broken into the following categories: General Management and Corporate Strategy, Industry Related Issues, Competition, Country Related Issues, IT Strategy, IT Operations, Human Resources and Organization, Various Measures such as Inventory Control, Cycle Times and Cost Reduction, and finally some Conclusions and Results. The questions cover a range of issues from direct use of software to achieve competitive advantage, to corporate strategy, to criteria for selecting software, to industry economics, to measures of success, to organizational integration, to beneficial loops, to training and institutional dynamics, and finally to inter-industry comparisons. These are summarized for Toyota in Appendix I. 10 Introduction to Case The TMC case begins by placing Japan's automobile industry in a competitive context and then examines the governmental policies, economic factors, and competitive dynamics affecting the Japanese and global automobile markets and its producers. As Japan's leading auto producer, and one of the world's largest (Appendix II), Toyota's evolution, competitive situation and current strategies are integral to this picture. Its situation illustrates well many of the competitive issues facing the world automobile industry.

As competitive pressures mount, many Japanese firms are being absorbed by global groupings such as GM, Ford, Daimler-Chrysler, and Renault. These expanding groups are aggressively challenging the leading Japanese producers, Toyota and Honda, in both export and domestic markets. It is therefore critical to TMC's long-term strategy that it successfully maintains its position, as the world's most efficient vehicle producer, while managing its planned transition to a new competitive model (Appendix II). This is because vehicle production and related businesses, such as replacement parts and finance, represent virtually all its revenues, operating earnings and invested capital (Table 11). At the same time, TMC's organizational structure and software product choices help one understand the company's use and demand for IT while the case describes how it is using and plans to use IT as a tool to create a competitive advantage in producing, selling and delivering automobiles.

But to appreciate IT's role within TMC, some auto industry, market and economic characteristics need to be explained. The Industry Context: The Japanese and Global Automobile Industries " Since its establishment, Toyota's principle has been to strive constantly to build " better products at lesser costs. ' To this end, Toyota has developed its own unique 11 production method. This system is based on the idea of 'just in time' (i.e. producing only the necessary amount of parts just at its needed time), the idea of Toyota FounderKiichiro Toyoda. This system also seeks to thoroughly eliminate all sorts of waste in order to reduce prime costs.

Toyota also places a maximum value on the human element, allowing an individual worker to employ his capabilities to the fullest through participation in the productive management, and improvement of his given job and its environment. With the motto 'Good Thinking, Good Products,' each individual worker is making his best effort to assure Toyota's customers the highest quality product, with an understanding that it is in his work process that quality is built in", (TMC 1994). Using these principles, by the late 1970's and early 1980's, TMC was firmly established as the world's most efficient and lowest cost producer of high quality automobiles (Womack, Jones and Roos 1990 and Fujimoto 1999). The reasons for this were then explained during the late 1980's through a series of studies organized by MIT " automobile Industry Center culminating in 1990 in Womack, Jones and Roos's emin al work on lean production.

As a result, U.S. and European producers became well aware of lean production principles and have spent several years benchmarking and trying to catch Toyota. In addition, they expanded through global groupings to combine global scale and scope with improved design and manufacturing efficiency. Therefore, competitive pressures began to shift significantly during the 1990's for Japanese auto producers from two industry-based sources. One was the emergence of these larger global and more efficient competitor groupings such as Ford, GM, Renault, Daimler-Chrysler and Volkswagen. The second was the serious decline in domestic auto demand as the Japanese economy felt the combined pressures of the Bubble collapse and 12 a continuing strong yen (TMC 1999, Brogan 1997 a and Appendix II).

On top of these conditions, the strong yen made Japanese auto exports less competitive in world markets, stimulating foreign direct investment (FDI) by Japanese producers, which further reduced export demand for Japanese cars. As seen in Appendix II, these cumulative effects were only moderately ameliorated by increased export demand due to a rapidly expanding Asian economy. Indeed, due to local content and production requirements, Japan's high Asian market share did not help Japanese auto producers all that much in using excess Japanese production capacity despite the region's rapid growth. In 1995, for example, out of total vehicle sales of about 3.9 million units in Asian markets other than Japan, roughly 3.5 million units in total were produced in those Asian countries (including exports outside of Asia).

In turn only 600,000 units were imported from Japan, which was only a 100,000 units' increase from 1991. So the impact of Asia's economic expansion during this period on Japanese vehicle exports and production capacity utilization was fairly modest (MacKnight 1997). While Japanese vehicle shipments (exports plus domestic demand) hit an all time high of 13.6 million units toward the end of 1991, domestic production peaked at 13.5 million in 1990 with the end of the Bubble. It subsequently fell to 10 million units by 1998 (TMC 1999).

Further as indicated in Table 3 (Appendix II), exports fell from about 6.6 million units in 1986 to 3.3 million in 1998, while domestic demand, which peaked in 1990 at 7.8 million units, fell by about 1 million units during the 1990's. At the same time, overseas production rose dramatically from very low levels in 1986 to several million units a year by 1998 (Tables 3 and 8). So the combined and interactive effect of a strong yen and FDI on exports has created substantial excess Japanese production capacity. The 13 drop in domestic demand due to the recession has just added to that extra capacity. Further, this extra capacity is unlikely to be absorbed via either a Japanese recovery or exports since domestic demand is currently saturated at around 7 million units (MacKnight 1997) and overseas production is still expanding.

However, this excess capacity has created real downward pressure on prices, while increasing domestic and export competition. Yen appreciation has had a direct effect on profits and competition (Table 9), but there have been indirect and strategic effects too. These stem from the fact that in a declining market, the low cost producer hasa great advantage. This is because that firm can afford to continue to invest in capacity and research and development (R&D) as well as develop new models. It can also afford to price lower to maintain market share and keep its factories operating profitably and close to capacity. In a capital-intensive fixed investment industry like automobiles, this yields tremendous operating advantages that tend to compound over time since the natural reaction of weaker competitors is to rationalize and cut back in areas like R&D, capacity additions or new model development.

If the decline in demand is short-term, these actions may have minimal strategic effects. But when weaker demand and excess capacity becomes protracted, as it has for Japan in the 1990's, the competitive effects of decreased innovation and older-looking models become important since consumers correctly perceive that the low-cost producer's products are both cheaper and technically superior. In addition, the low-cost producer can invest in new plant and equipment or production capacity that can further increase cost competitiveness. 14 This appears to have been the situation for Toyota and Honda compared to firms such as Mazda, Nissan and Mitsubishi. 7 As seen in Table 9, the latter tried to solve their negative margin problems (Table 6) by rationalizing production and reducing or just maintaining R&D. These solutions to the effects on automobile demand of the Bubble collapse and a strong yen were generally not successful, though, since they did not close the productivity gap with the industry leaders, Toyota and Honda (footnote 7). Toy was able to continue to increase profits through process and product design improvements while both Toyota and Honda expanded their product offerings (Table 9).

Throughout the 1990's Toyota and Honda remained profitable while their Japanese competitors faced loses and more pressure to rationalize and keep R&D and model changes low. Since Toyota and Honda continued and even increased their heavy R&Investment and new model introduction, however, they were constantly able to bring new and improved products to the market and especially innovative vehicles such as the hybrid car (Tables 5 and 8; Brogan 1997 a). But while this approach helped TMC to maintain, and perhaps even improve, its competitiveness, it did not raise production atTMC's domestic plants. This is because TMC still had to lower domestic output as production shifted overseas in response to a strong yen, weak domestic demand (Table 8), and foreign governments' regulations and investment incentives (MacKnight 1997). 7 Fujimoto (1999) and Smitka (1993) note that in the 1970's and early 1980's Japanese automobile producers were the world's lowest cost. Fujimoto cites several studies that indicate Japan's productivity advantage may have been double the U.S. and three times Europe.

At a 200 plus yen-dollar exchange rate this translated into an almost 50% cost advantage. However, due to the strong yen, which roughly doubled its value after 1985, and the productivity gains of Western producers, especially U.S. firms, "the overwhelming unit cost advantages of the average Japanese car maker that existed in the early 1980's had been basically wiped out by the mid-1990's", (Fujimoto 1999). This is why Smitka (1993) was basically correct in predicting the Japanese industry's decline. At the same time averages can disguise substantial cost differentials among firms. So while Western producers had caught the Japanese average, "Toyota's cost advantage over other Japanese firms was estimated to be at least several hundred dollars per car in the early 1990's". Therefore, as seen in Appendix II, it was the relatively weaker Japanese firms and particularly Nissan that bore the greatest effects of the change in market demand and global competitive pressures.

15 This situation indicates how for Japanese automobile producers trade and international competition now have a much different impact compared to the period before September 1985 and the Plaza Accord's impact on the global competitive environment. Prior to the Accord the Japanese were the acknowledged cost leaders worldwide in producing high quality small cars (Smitka 1993 and Fujimoto 1999). As Smitka (1993) and Fujimoto (1999) explain, the effect of the big yen appreciation in late 1985 was to close the cost gap with most foreign producers. Then when these foreign producers began to understand and apply lean production techniques as well, the efficiency gap began to close too (Smitka 1993 and Fujimoto 1999). So while exports have been an important source of demand for Japanese producers since the 1960's (Rapp 1972) and continue in auto parts as an area of trade negotiations with the U.S., Japanese cars no longer are in short supply or sell at a premium in the U.S. market. Rather, a strong or weak Yen relative to the dollar affects prices for Japanese produced cars both overseas and in Japan.

In addition, with over 50% of sales being tied to foreign markets (Tables 1, 8 & 10), events external to Japan such as the U.S. stock market boom or the Asian financial crisis can affect Japanese producers' business results, such as Toyota's, both positively and negatively. So, more than ever before, international circumstances and exchange rates impact profitability and the demand for Japanese brand vehicles in domestic and overseas markets (Matsushima 1998). This competitive situation raises several important strategic issues once one recognizes that the global market for automobiles is not static. That is, there are several important trends occurring within the industry that are inter-linked. First, unit growth in automobile demand is no longer in the advanced countries but in developing ones 16 (MacKnight 1997).

However, in the advanced countries, including Japan, there has been a dramatic demand shift from sedans to recreational vehicles (RVs), so that the growth in demand for new RVs has been quite strong. 8 At the same time Japan, several European countries and states such as California, which is the fifth largest car market in the world (Sealy 1991), have introduced increasingly stringent environmental and mileage standards (Brogan 1997 a). These affect the ability of producers to meet these standards and still respond to the increased demand for RVs that tend to be less fuel-efficient. This is because these standards are frequently on a fleet-sold basis. Therefore, automobile companies need to have more cars with better mileage and emission performance in order to sell many of their high-margin RVs. In addition, it is likely that many developing countries such as China that are already facing serious pollution issues will need to implement similar regulations in the future.

In combination with their economic situation, this strategic landscape has several important implications for Japanese producers. One, it indicates there is excess capacity in Japan of three to four million cars that will not be used in the foreseeable future for meeting either domestic or export demand (Keller 1997, MacKnight 1997 and AppendixII). Therefore, plant closings are inevitable, and Nissan has already announced some. Inaddition, to fully use the remaining capacity, firms will need to shift production both towards RVs and environmentally sensitive vehicles. This has already happened to a large degree in RVs (Matsushima 1998), but only Toyota and Honda have made significant strides with respect to the latter. Furthermore, since several other advanced 8 This demand shift has benefited TMC because Toyota is able to use the same parts for regular cars and RVs, but RV prices and margins are higher.

So the fact that this market has grown is good from a business viewpoint. Also Toyota can still benefit from its scale and low cost parts supplies. 17 countries have excess supply plus what is being added in developing countries (Keller 1997 and MacKnight 1997), Japanese FDI in automobiles will need to be efficient. They will also need to produce vehicles that are responsive to demand in terms of size, price, fuel economy, local conditions and the environment.

9 Recently, the biggest and fastest growing vehicle market has been Asia, and with about an 80% market share, the Japanese currently dominate it since they saw its potential very early (MacKnight 1997). They were also pushed in this direction by the combination of Japan's recession and the strong yen. However, this size and growth is inviting strong challenges from the new global auto groupings (Keller 1997 and MacKnight 1997). This is quite logical since the potential here is very great when one recognizes that in the U.S. there is one vehicle for every licensed driver, but in the developing countries it might be one for every ten or twenty. Inaddition, just India and China have populations exceeding 1 billion. This is why the major global groupings are pushing into Asia.

The global groups have been aided in this belated initiative by several fortuitous developments. One, the Asian financial crisis has forced three major Korean producers, Hyundai / Kia, Daewoo and Samsung, to restructure, including possible foreign ownership. The Asian crisis plus Japan's continued recession has forced the weaker Japanese automobile producers including Nissan, Mitsubishi and Mazda into progressive rationalizations and periodic losses (Appendix II). Since Toyota and Honda, as explained above, have been able to take advantage of this situation given their greater financial resources and lower production costs, the weaker Japanese firms have been pushed intothe arms of the global groups.

Mitsubishi has joined Daimler-Chrysler; Mazda has 9 Keller (1997) notes global excess capacity could be as much as 15 to 20 million vehicles per year. In Japan, such excess capacity and a weak Japanese economy has caused several firms to close plants such as Nissan's Zama plant. 18 strengthened its ownership ties with Ford; and Renault has acquired Nissan. In addition, Nissan has had to sell its interest in Fuji Heavy (Subaru) to GM, which now has a 20%stake in that firm and effective control in addition to its positions in Isuzu and Suzuki. Thus, except for Toyota and Honda, Japan's remaining car producers have now clearly joined the U.S. and European dominated global groups and will be dependent on them to meet the various cost, model and environmental issues facing the global industry.

Since these other Japanese producers are under cost, demand, and revenue pressures and have limited resources for new models and R&D (Appendix II), they will depend on participation in the global groups for new technologies, new models and an expanded market network. At the same time, their sharing in the allocation of resources and demand will be driven by each group's global strategy and sourcing decisions that will depend on demand for certain vehicles and exchange rates. Given these conditions, it will be very difficult for these Japanese producers to fully anticipate either prices or demand. Furthermore international pressures will be exacerbated by Japan's continued economic weakness that limits demand generally and puts pressure on all producers to fill capacity while further rationalizing production. While the weakening of such Japanese competitors would seem to be beneficial to Toyota, this combination of events has not left TMC unaffected. Its domestic auto revenues and profitability have declined during the 1990's as these competitors rationalized production and lowered prices to generate sales even at a loss (Appendix II).

In addition, now that these competitors have joined one of the major global groups, their continued competitive existence in some form is assured, since they will have greater access to new model designs and technical resources. They will also be able to contribute 19 to their groups' competitive capabilities in foreign markets where Toyota also competes and sees its future market growth. 10 This is an important consideration when one recognizes that certain of these Japanese competitors are strong in selected, such as Mitsubishi in RVs. With proper group support, this strength can increase global competitive pressures on Toyota. For example, not only in the U.S. but also in Japan, RVs, including vans, SUVs (sport-utility-vehicles), and station wagons, have become very popular, going from 14.4% of the Japanese market in 1991 to 40.8% in 1997 and 51% in 1998 (Matsushima 1998).

This demand shift particularly affected Honda and Mazda whose RV sales went from 0% and 10% of Japanese sales respectively to 63.5% and 70.3%, while Mitsubishi who has always produced lightweight trucks, saw RVs go from 32.3% to 62.8% of sales. On the other hand, while Toyota's RV sales grew too from 11% to 35.3%, it was not as marked as for its competitors, reflecting its improved position in traditional cars. But even here import competition has increased, rising from less than 1% before 1985 to over 6% of the total car market by 1996 and over 30% in the very profitable large car segment. So even the Japanese market has now become subject to global competitive forces. Furthermore, TMC's overseas sales and production grew substantially during the 1990's (Appendix II). Indeed, sales growth is now mostly overseas and Toyota expects that eventually global sales will be over 65% of revenues, compared to 48% in 1994 (Matsushima).

Therefore competition will be global in all markets against large global 10 Asian growth is especially key for TMC. "Top Toyota executives see Asian markets-where the world's number-three automotive producer sold 433,000 vehicles in 1995 versus nearly 1.1 million in the United States and almost 2.1 million at home-as key to the success of plans to boost global sales to 6 million units a year early in the next decade from an estimated 4.7 million now. Much larger sales in China and India are central to Toyota's Asian strategy", (MacKnight 1997). This is one reason why TMC recently increased its ownership in Daihatsu to over 50% given the latter's strength in the Chinese market. 20 competitors. So Toyota must continue to meet certain primary strategic objectives in order to manage these challenges of global expansion, shifting demand and stronger competitors.

First, it must continue as the global low-cost producer; second, it must expand further into emerging markets (footnote 10); and third, it must develop and produce new cars and technologies that meet its vision of the future. Further, it must accomplish this as its own independent global group. Rationalizing its operations as its Japanese competitors other than Honda have done is not a logical approach to addressing these considerations. Rather, the strategy it has developed seeks to build on existing strengths to produce more efficiently a wider model range responsive to existing or emerging demands. A strategic problem for Toyota in implementing this approach, though, is how to substantially differentiate its product and services, including new ones, from those of its competitors, even if it continues to be the world's most efficient and lowest cost producer domestically and overseas. 11 This is because, as explained above, all its competitors were able to effectively follow the demand shift to RVs.

Even Honda, which primarily had produced sedans, was able to extend its line into small sports cars, sport utility vehicles, and vans. So with the support of the larger global groups, Toyota's competitors should be able to make similar future shifts, including possible increases in value added through new features or technologies. Acquisitions and affiliations have also been easily emulated. Indeed almost all large Japanese auto producers have been able to find similar solutions given the same business and economic environment in terms of geographic or product diversification 11 Toyota wants its Japanese production to be about 13,000 units per day. This is because if production drops below 12,000, TMC would have to go under an 8-hour day. But this level is affected by the exchange rate.

Every 10 yen change impacts profits by 1 billion yen. Thus, despite changes in the market, if the yen went to 130 from 140, for example, profits would fall. However, as TMC is the strongest Japanese producer globally in costs, profits, technology, management, and economics, such a yen change would make them stronger relative to Japanese competitors. 21 possibilities, global affiliation and cost reduction initiatives.

This is why TMC has recognized for some time that another strategic approach is required to address the changing nature of the industry, the increase in global group-based competition and periodic excess capacity. And it must be one that is not easily emulated by competitors, even the more formidable competition that will emerge from the well-financed and -groupings with their recently expanded Japanese ties. Without such a strategy the firm's major business and the company could continue to be adversely impacted by events largely outside its control such as exchange rate fluctuations, global economic developments and industry consolidation. On the other hand if Toyota can succeed in its objective of efficiently selling to existing and new customers a wider range of specialized or even unique products and services that cannot be easily copied, then sales and earnings should increase, while global market share will expand. This is the key strategic issue TMC has been facing.

The solution has been to develop a smart-design, smart-production and smart-product strategy that can efficiently offer customers an expanded range of customized products and services in ways that cannot be easily copied or adopted by competitors. A key element within this strategy involves the use of both organizational and embedded information technologies. Toyota's Multi-faceted Global Strategy To meet a globally diverse market and competitive challenge TMC has developed an equally diverse and global strategic response. While there are many elements to this, two aspects stand out as particularly important. One is the use of IT to enhance Toyota " sle an production and lean design strategy so that it evolves into a smart production and design strategy. The other is to design and develop vehicles that are also smart.

In this 22 way they are responding to Mr. Okuda's vision of the future evolution of the global automobile industry (Okuda 1998), where he states in "When the Ground Rules Change":" I now have discussed three watersheds in the history of the automobile industry. Each time, a new business model changed the ground rules for the industry. Each time the new model seemed invincible. And each time, it gave way to changing circumstances and anew business model... Our old business model is breaking down for four main reasons.

One, we need to decentralize our manufacturing and R&D activities... Two, the product and process paradigms that Henry Ford established are themselves breaking down... Three, information technology is transforming the inner workings of the automobile. It is also transforming the way we develop and make and sell our products. And four, the changing product paradigm and the growing role of information technology will open our industry to a vast array of competitors". One aspect of this perspective bears on the way TMC produces its products since this influences both product design and competitiveness and has been central to Toyota's development as the world's low cost producer.

A second impacts the products and services TMC will be selling in the future. Smart Production While seemingly contradictory due to its impact on prices and profits (AppendixII), one benefit for Toyota of Japan's rapid economic expansion during the late 1980's was that many Japanese auto producers added capacity. This is because most of this expanded capacity during the Bubble period went into highly automated plants that turned out to be economically inefficient due to high capital and maintenance costs combined with excessive downtime due to complex production processes (Fujimoto 1999). Toyota, on the other hand, while experimenting with sophisticated automation off 23 line, avoided a large commitment to this approach by sticking to its basic philosophy of keeping it simple and using the "human element" and its "capabilities", as quoted from the company's manual at the beginning of the previous section. As Fujimoto (1999) explains: "when automation technologies are adopted, the Toyota-style factories tend to take a conservative stance, both economically and technologically. For example, these plants have tended to authorize only low-cost robots whose unit investment cost can be repaid back in one or two years (i. e., equivalent of a year's labor cost).

Technologically, they tend to choose simpler equipment that has 'just enough' functions, rely on mechanistic automation rather than sophisticated numerical control whenever the latter does not seem to be reliable enough, and use semi-automation rather than full automation methods whenever the former seems to be cost-effective". Thus, the emphasis here for Toyota as in other areas, including using IT, is on total cost effectiveness and reliability, while avoiding using technology for its own sake. This policy has in turn improved relative profitability and return on investment. In addition, it was this orientation that led Toyota to develop its multi-faceted strategy that incorporates a smart multi-path design and produce strategy together with the strategic use of IT to enhance both organizational and product performance. To differentiate this approach from TMC's traditional lean production strategy, this case will refer to it as TMC's smart design, smart production and smart car strategy, or just " smart" strategy. The first part of this new smart strategy, i.e. smart design and production, is described by Fujimoto (1999) in some detail and so will only be summarized here.

However, IT's role in supporting this new approach will be described more fully, both because it is the focus of this case, and because Fujimoto touches on it 24 very briefly. The second part of TMC's new approach, or smart product strategy, while explaining the growing role of embedded software and electronics in automobiles generally, will emphasize its role in implementing TMC's twin initiatives in environmentally sensitive vehicles and intelligent transportation systems (ITS) respectively. Toyota believes this dual approach that emphasizes both organization and product will meet its strategic requirements including that competitors will find it difficult to emulate. We know from Womack, Jones and Roos (1990) and other researchers that TMC had already developed a comprehensive lean production system by the early 1970's. Another Japanese producers such as Mazda and Mitsubishi emulated it, the whole Japanese industry began to achieve similar productivity improvements. Indeed, as already explained above, the Japanese industry had a huge productivity and cost advantage by the early 1980's, which was only eliminated in the early 1990's by a large yen appreciation and the U.S. industry's strong productivity improvements (Fujimoto 1999 and Smitka 1993).

By this time, though, TMC had almost 30 years of experience with lean production compared to perhaps five to ten for Western firms. Further, lean concepts were totally integrated into TMC's organization and strategic thinking. Therefore, as Toyota began to feel the competitive pressures discussed above and the need for a new approach, it was in the best position to assess the strengths and weaknesses of its own production system. In making this assessment, Toyota shows its tremendous ability to learn and think in an evolutionary manner (Fujimoto 1999).

In its simplest terms TMC recognized that despite its production efficiency due to just in time delivery, its lean production line was still a line. There were also limits to the 25 benefits of assembling larger "black-box" units delivered from suppliers (Fujimoto 1999). Operations in both cases had to be done sequentially rather than in parallel. Secondly, there were certain steps in the assembly process where TMC had improved productivity to a point where further improvements were marginal. These limited the speed at which the entire line could improve.

Thirdly, the labor force was aging, and, despite the recession, in the long-term there was likely to be a shortage of assembly workers leading to more older workers, part-timers or returnees, such as women, working in its plants. This thought process led to a complete rethinking of the assembly line. The new process was initiated in a new plant in Kyushu in 1992, and then migrated to Toyota City in 1995 to produce the small RAV 4 SUV (Economist March 1995). Success there led to a revamping of the plant in Georgetown, Kentucky in 1999 as well as theMotomachi plant in Toyota City that the case writer visited in November of 1999. Fujimoto (1999) explains the dramatic productivity improvements of this new smart production system as due to the " the autonomous complete assembly line concept". Under this concept the line is broken into 5 to 12 segments with buffer stocks to manage the differences in timing between completing various assembly functions.

Therefore one already sees important differences in this approach from the lean production system where the producer tries to have everything operate continuously and where in-process inventories are kept to a minimum (Womack et al 1990 and Fujimoto 1999). Further, whereas previously assembly tasks might be unrelated but were driven by the timing or sequencing of assembly tasks, now related tasks are assigned by segment. As described by Fujimoto (1999) and seen by the author on previous visits, "the final assembly process at Toyota's conventional factories of the 1980's... can be characterized 26 as follows: Toyota's volume factories adopted the Ford-style moving assembly lines... ; there is nothing unique in the body transfer mechanisms and basic layouts of Toyota's conventional assembly lines... The convey er lines tended to be separated into three line segments: trim, chassis, and final.

Different convey er systems tended to be used among them. However, no buffer body was allowed between the line segments, so the assembly process was operated as if there had been one long and continuous line". The new system, however, while retaining many elements of the old (such as justin time parts delivery) is substantively different. "A group of functionally related assembly tasks (e.g. piping) are assigned to one segment. Toyota defined 108 subcategories of assembly tasks and changed the task assignments so that each subcategory was completed within a group of workers... A quality check is located at the end of each line segment...

Each line segment corresponds to a group (kum i) of about twenty workers, within which job rotation and training are conducted. The function and responsibility of group leaders are strengthened. Each group leader, now in charge of semi-independent line segment, enjoys more discretion in managing the group's operations. For example, each segment can fine-tune its line speed within a certain limit. Other supporting equipment for line control (line speed controllers, switches for planned line stops), information sharing (monitoring, displays and on boards) and self actualization... is set up for each line segment". In addition, "the automation zone and the manual assembly zone coexist on the same assembly line", and "a group of assembly workers on the line, rather than off-line maintenance staff, are in charge of operating the equipment".

Such integration of human and machine elements together with worker responsibility for improving performance is of course a Toyota core competency. So the 27 end result was "generally consistent with what the process engineers had aimed for: ... As each set of assembly jobs assigned to a work group became more meaningful and easier to understand, and since each group could self-inspect quality more effectively, the productivity and quality of the autonomous complete line was generally higher than the conventional assembly line, particularly during the start-up period". Such improvement was measurable. "The lead time for mastering a job was shortened to about a half. According to a survey of Toyota Kyushu assembly workers, over 70 percent of the respondents said they became more quality conscious and that their jobs became easier to understand, compared to the previous assembly lines.

Also, because the body buffer areas absorbed the impact of line stops at other segments, overall down-time decreased". In this way the system helped workers focus and avoid being " swamped by the complexity and confusion of the line, partly owing to the tasks assigned to them". So Toyota's new system achieved its objectives of substantial improvements in quality and productivity while making it easier to use and absorb a more diverse work force. What is not stated in Fujimoto's excellent description and analysis, though, is the complex IT system that lies behind this "simpler" more productive assembly process. For example, for buffer stocks not to become excess in-process inventory but to just manage the assembly flow from one segment to another in order to decrease assembly time, each segment must know in real time what the line speed and buffer stock levels are at each other segment. In addition, the overall layout is represented by three large "U"s.

One U is composed of line segments assembling the body. A second U consists of those assembling the chassis; and a third has segments completing the engines 28 and transmissions that have arrived almost ready to install from the engine factory. The third U's biggest task is to put the engine and transmission together. The completed engines with transmission are mounted on the chassis in-line and the U with completed chassis, engine and transmission then intersects with a completed body coming from another U-shaped set of segments dedicated to body assembly. The car then continues down the assembly line to receive the parts that are needed to complete the process. Because several operations are now done in parallel, in-process inventories despite the buffer stocks are substantially reduced compared to the process beginning with the chassis and having the parts, including the body, added in sequence.

At the same time, making sure that the right chassis, engine, and body come together for a given order requires sophisticated and complex real time data management. This might not have presented great difficulties for the first Henry Ford since all Model T's were the same and all were black. However, for Toyota every car is unique in terms of color, equipment, engine configuration, etc., etc. Thus the precise chassis with the particular engine to go with a certain color and style body must all come together at the precise point that the U's converge.

Furthermore, they must do this while allowing for the fact that the different segments may be operating at different line speeds so that particular modules may entering or leaving the buffer stocks at different times. This is why the new production system is "smart". Furthermore, under the old "just in time" system, parts were delivered to the assembly lines according to the production schedule sent to first-tier parts suppliers. This process is well documented in Womack et al (1990) as well as Fujimoto (1999) andAhmadjian (1997 a) among others.

Recently this communication has moved from data 29 transfer by computer to a real time on-line system in which the parts suppliers participate. That is, the parts suppliers are now directly connected to Toyota's production information system so that they can automatically access the information they need for just in time parts delivery, rather than receiving a delivery schedule on a batch basis based on planned production. Effectively they know where each car is in the production process at any point in time, though the production schedule usually becomes set about four days ahead of actual production (Fujimoto 1999). 12 This real time system allows the suppliers greater flexibility in planning their own production, and enables them to respond to changes that occur in real time. Further, logistical instructions are now included in this data because the industry's (and particularly Toyota's) success has led to increased scale and traffic congestion near its plants, as suppliers try to deliver parts at the same time to the same factory.

Indeed, Smitka (1993) notes that by the early 1990's parts inventories on trucks were Toyota's largest inventory item. To solve this situation Toyota developed a sophisticated logistical and traffic-control system that is now coupled with its on-line just in time parts delivery system, so that delivery routes and times are part of the demand pull ordering system. In this way, Toyota is using IT to control every aspect of its production system while enhancing and further institutionalizing the benefits of its existing supplier network. 12 TMC itself explains (Toyota 1993 & 1999): "auto manufacture involves bringing together tens of thousands of parts. And we have now introduced assembly line control (ALC) to control this complicated process. Computers and Robots are utilized in each production line, bringing quality to the auto making process at the system level".

But apparently this attention to detail and organization has been part of Toyota's culture from the beginning. In 1937 Toyoda Kiichiroobserved that "an automobile consists of thousands of parts, each one essential for building a flawless, complete vehicle. It is no easy task to coordinate their assembly. Without perfect organization of the assembly process, even a 30 These benefits include the willingness of suppliers to commit to firm-specific investments including the IT investments needed to become part of TMC's real time online network. As Ahmad jian (199.