Figure no 2. Toyota’s price and promotion policies at work

Lower unit costs meant better productivity. In 1958, Toyota’s productivity was 1.5 cars per worker per year. In 1965, productivity was up to 23 and in 1969 up to 39. GM’s ratio in 1959 was 8.9 and 11.4 in 1969.

Sales impact on lower unit costs was magnified by four production factors. First, a high quality engineering staff led by Tyuichi Nakagawa, who had designed the engine for fighter planes in World War II.

Second, quality control circles were a constant source of creative ideas for both process and product improvements. Third, a zero defect program was developed with the objective of identifying rot causes of less than satisfactory productions. As a consequence, end-of-line defects fell to under 1%.

Finally, “kanban” – just in time supply – kept inventory levels at a minimum. This was achieved by locating suppliers in the same industrial parks as the factories.

So holding the ground was facilitated by moving rapidly along the experience curve. There was also a second facilitator: having strengths in key success factors. The subcompact segment has four such factors:

fuel consumption;

maneuverability;

price;

and design.

Corona’s fuel consumption was less than the Beetle’s and also lower than its indirect competitors (Pinto, Vega, Falcon, Valiant, Corvair). It decreased a further 30% in the next ten years.

Maneuverability was high due to Corona’s small size and the fact that it was the first imported car to have automatic transmission.

Price was another variable where Toyota had advantage. As we have already seen, the introductory price was lower than its nearer competitors and decreased 20% over the next decade until the Corolla was introduced at a 20% lower tag price. This gradual reduction was enabled by experience effects and other savings. The unit cost per car of marine damage in 1966 was 18 dollars per car; by 1967 this had diminished to 6 dollars; and a few years later it was 3 dollars.

Maintenance costs were lowered thanks to good servicing and spare parts capacity. Toyota invested heavily in training, incentives, show rooms, sales promotion and a sophisticated computerized system for spare parts. The cost of TV and media advertisements was shared on a 50-50 basis between Toyota and the dealers.

The fourth success factor was design. The Corona was an attractive car with tinted glass. The interior had the high specification required by American customers, including soft upholstery.

The major obstacle to holding the ground came from the fact that it required a frontal attack on the segment leader: the VW Beetle. However, Toyota was able to execute such an attack successfully: it entered only one segment (the subcompact) and fought directly with only one competitor (VW) – thus there was focus. Third, not only did Toyota identify the competitor’s weaknesses (by using market research and dealer surveys) but acted on the information received: more leg room, arm rests, a smoother drive, and lower time implemented small but continuous improvements in emissions and car safety.

Experience effects and success factor strengths also constituted barriers to entry of indirect competition. If GM, Ford and Chrysler had decided to enter, the barriers might have been insufficient, due to the size of these players. But they opted not to do so, for fear of cannibalizing their own sales in the more profitable segments.

Toyota held its ground, performed a successful frontal attack, and, combined with the absence of any blockage by indirect competition, became one on the West Coast in subcompacts.

5.4. Stage IV: geographical expansion

Toyota had now consolidated its inroad into the USA. But California, Oregon, and Washington were only a small fraction of the USA. The obvious next move was to expand geographically, but always in the subcompact segment – and with the Corona.

Four guidelines were followed. First, Toyota expanded eastwards in a solid movement.

Nevada and Arizona were first, and Utah, Texas and Louisiana followed.

Second, it moved progressively, i.e. not attacking all states at the same time. Only when a dealer network had been solidly established when sales were up and the market position strong was another geographical move considered. This careful use of time allowed for focus and concentration of resources.

Third, it avoided more conservative states, those with a lower urban population and fewer large cities. These states were less receptive to mall cars. Toyota also avoided demographically poorer states: Mississippi and Alabama in the south; West Virginia, Colorado, Nebraska, and Oklahoma in the Midwest.

Fourth, it created “pools” of states where Toyota’s presence would be mutually reinforcing: Nevada, Utah and Arizona in the west; Connecticut, Massachusetts, and New York in New England; and Texas and Louisiana in the south.

State pooling generated strong dealerships because they could be chosen, trained, and controlled effectively. It also allowed for a lower spare parts inventory, which improved servicing and the impact of promotion.

Toyota’s geographic expansion was accompanied by two other factors. The fixed barrier strategy (low price and heavy promotion) was repeated in exactly the way it had been implemented on the West Coast, and a new element was added: mobile barriers, of which the Corolla was the first example.

5.5. Stage V: Adding mobile barriers to fixed barriers

Toyota began its repetition of the Californian defensive by investing heavily in dealers and assistance. There were more

than 1000 dealers by 1970, from a total of 384 in 1965. Toyota gave master franchises to influential and knowledgeable

distributors in large areas then allowed them to use their market expertise to recruit other smaller dealers within their territory.

Complaints dropped from 4.5% in 1969 to 1.3% in 1973. Quality of dealership was improved by marketing programs such as Project Image, the goal of which was to help distributors improve their salesmanship through deeper understanding of customers and better personal communications. Dealers were also given high margins per unit of cars: 181 dollars, equivalent to that of much larger cars such as the Chevrolet.

Heavy promotion was a repeated characteristic. In 1971 Toyota’s share of imported cars ads on TV was 39%. Nissan’s was 19%. Volkswagen averaged only 16%. Experience benefits in quality and price were achieved through factory automation; Toyota adopted specialized robots and multispot welding machines in various parts of the assembly line: dealership excellence, heavy promotion, continuous improvements in manufacturing process. But none of these

variables were new. They merely illustrate how Toyota replicated its initial defensive strategy across the USA: move aggressively, occupy the ground, and create fixed barriers.

As the fixed barriers were repeated, the mobile ones were too. The first new model was the Corolla, which had improved stability; larger vehicle tread; enlarged body; lower fuel consumption; lower emissions; improved safety; and it was faster. It cost 1800 dollars, some 200 dollars less than the Corona’s introductory price. These innovations emerged from market research and dealer surveys.

The Corolla went through an evolutionary process: its 1.1. liter engine was upgraded to 1.2 liters, and then to 1.6 liters with the Tercel Corolla model. In 1979 the fourth generation appeared in 1984 the fifth generation was introduced with front – wheel drive and coupé version.

Between 1965 and 1972 the Corona sold one million cars. By the mid 1970s Toyota was selling 290,000 cars annually and by 1975 it was the leading importer of passenger vehicles.

Inevitably, US companies complained. Henry Ford II estimated that for every 1%

increase in car imports, 20,000 jobs were lost in the USA. And the American government reacted: in August 1971 President Nixon

imposed a 10%on all imports. Despite this, in the last five years of the 1970s, Toyota’s car sales grew at astonishing 14% yearly rate. By 1980 sales were near 600,000 units per year, accounting for 25% of all imported cars. Toyota now dominated the subcompact segment in the USA. So, with its market position solidified, it was time to move on. Disposable resources could be applied somewhere else. But where?

5.6. Stage VI: jumping from one segment to another – bypassing again

Toyota asked the important question once more: “Where are the industries leaders not present?”. The answer was motorcycles, both in the very low and very expensive sports segment, luxury cars over 150,000 dollars, and all-terrain vehicles priced above 40,000 dollars.

It then asked the second question: “In which of those segments in specialized competition weaker?” Harley Davidson was strong in motorbikes. Porsche, Ferrari, Lamborghini, and Maserati were hard to dislodge in the highest – priced sports cars. Rolls Royce, Bentley and Jaguar brought European glamour and prestige to luxury cars. British Leyland and the American Motors Jeep dominated the high end of all-terrain vehicles.

The only suitable area was lower-priced (bellow 40,000 dollars) sports cars. There was no dominated player here, but several competing head on. They were mostly non- US companies: Alfa Romeo, Triumph and Fiat.

The third question was:” Has this segment higher unit margin than the others?” The answer was “yes”. Sports cars, even at the lower end, give higher margins per car than cheaper vehicles.

But what counted for Toyota’s purposes was the crossover between low and medium priced sports cars – they are to some extent substitutes. Therefore, if the big three were to block Toyota’s entry into the low-priced sports segment by launching a competing brand, they would be cannibalizing sales of their own immediate prices sports models (in the 40-70,000 dollars range): GM’s Chevrolet Corvette; Ford’s Mustang and Chrysler’s Dodge Daytona. So there was no incentive for the major players to block Toyota.

The fourth question, “Is the segment attractive?” was answered by market research and dealer surveys. There was increasing demand for such cars. Potential customers shared five characteristics with customers of higher-priced sports cars: they were relatively young, highly active, charismatic, impulsive, and generally male.

There was also a sixth, important characteristic: the potential customers were willing to buy a sports car only if it was cheaper than the rival’s offering. Demand for low-priced sports cars came from men in their 30s and 40s who either didn’t have the finances or didn’t want to guilt of buying a “toy”. Frequently, the low priced sports car was a second car.

Finally, the low end of the sports cars segment was more compatible with Toyota’s image as a manufacturer of subcompacts and Japan as a producer of cheaper products than the high-end sports cars or luxury cars.

So Toyota had found a segment where the industry leaders were not present, where specialized competition was weaker, where Blockage by industry leaders was unlikely since it would mean cannibalism, and where the segment was attractive: “good margins and high growth potential”

The resulting car, the Celica ST, was launched in the state where the demographic profile was right, California, and expanded rapidly to the rest of the US market, profiting from the already established dealer network.

The rest of the story was a repetition of what Toyota had done with subcompacts. Low price and heavy promotion moved the company rapidly along the experience curve. Strengths in the success factors constituted entry barriers. Competing models were studied to find their weaknesses and to discover how to perform successful frontal attacks on Alfa Romeo, Triumph and Fiat.

Mobile barriers (successive innovations) were introduced, i.e. the Celica Supra in 1979. And so on.

5.7. Stage VII: the circle

Toyota continued to add new models, always searching for poorly served segments where the competition was weak, and only later moving towards other parts of the market.