How does Toyota Prius gain from Globalisation?

Globalisation is the growth of a business to a worldwide scale. This allows them to trade anywhere in the world due to advancing technology and greater openness. This has made it easier for firms to buy their supplies from a wider range of businesses and sell their products anywhere in the world. Different governments and businesses have different views; many believe that freer trade between nations will offer prosperity and growth for all countries and businesses.

The Toyota Prius is a hybrid electric car, developed and manufactured by Toyota Motor Corporation. The Prius was the first mass produced hybrid vehicle and was first sold in 1997 in Japan. It was later introduced worldwide in 2001. The Prius is sold in more than 40 countries and regions, with its largest markets being those in Japan and North America. Toyota announced in 2007 that it had sold 1 million hybrid vehicles globally, and 757,600 of those were Prius.

According to the United States Environmental Protection Agency, the 2008 Prius is the most fuel efficient car sold in the U.S. The UK department for transport also reported the Prius to be one of the least CO2 emitting vehicles on sale in the UK.

The Prius has had a global effect as it has reduced CO2 emissions by 4.5 million tonnes as compared with the conventional vehicles they have replaced.

Demand for the Prius in 1997 was low, because the product was innovative; Toyota used the creaming/skimming pricing strategy which meant that the price of the product was too high. Customers were unsure with the service that it would provide and were happier buying the usual. The Prius wasn’t mass produced which also made the costs of production too high, and that meant that Toyota were not able to cut prices and pass savings onto their customers when the demand was low. The creaming/skimming pricing strategy was used to maximise profits, so that the initial cost of research and development could be covered and because the product was innovative customers could not see what the price of similar products were in the market and therefore had to pay the price that Toyota charged. This allows Toyota to gain a high profit margin and also allows them to break even and start to make a profit faster as they do not have to sell as many units.

Appendix 1 (the table) compares the differences in between cars from across the global market. Appendix 1 shows that the Toyota Prius is the most fuel efficient car in the market at that price. The creaming/skimming pricing strategy is no longer used and as other businesses have entered the market, to gain a competitive advantage Toyota has used cost leadership. This can be used by Toyota because they have established a strong brand reputation in the market for hybrid vehicles and because they have a greater mass production rate, they can benefit from economies of scale through cheaper raw materials and they can afford to pass savings onto customers and still make a large profit. Other businesses cannot afford to mass produce and therefore Toyota may be able to outcompete them as they do not have a strong reputation like Toyota in hybrid vehicles. The advantage to Toyota of maintaining a strong reputation is that their production techniques have improved over the years they have a shorter lead time than other businesses that have recently started production in hybrid vehicles. This allows Toyota to make a decision and execute it faster, allowing them to be a step ahead of their competitors.

Appendix 1 also shows that Toyota, after the success of the Prius, decided to target different parts of the market. This is because they have a more luxurious hybrid vehicle in the form of the Toyota Highlander. The Highlander would be aimed at a higher socio-economic group, which includes higher paid jobs. Toyota hybrid cars accounted for 79% of all hybrid cars sold in June 2006 courtesy of the Highlander’s launch earlier that year.

This allows Toyota to maximise profits and also broaden their product portfolio, allowing them to take further risks in the future. Risk bearing economies allows Toyota to be more powerful than their rivals, allowing them to continuously innovate. They know that if a product does fail, they have other products that can make up for the loss. This allows Toyota to improve and gain competitive advantage over other businesses. Risk bearing economies are important to a global business because the state of the economy can vary in different countries and as Toyota supply to 40 different countries, they have to be aware of the state of the economy as it could be in recession, boom, decline or recovery as shown in the economic cycle. Toyota would have to be aware of this as it could also be seen as an external opportunity and Toyota should take advantage of this.

The demand for a product is affected by a number of factors such as price, income, price of substitutes and the change in customer attitudes. Demand for the Prius may have increased because of the change in customer attitudes, because consumers may be starting to realise that for a better future, hybrid cars are the way forward. The improvements over the years may have satisfied customers who weren’t pleased with the product previously, as the Prius now has improved fuel economy and overall performance is better. Toyota may have been threatened by new entrants but this may have been good for the market as customers have more choice and the demand overall for hybrid cars may have increased.

The car market has an oligopolistic structure; Toyota tried to innovate as they saw a gap in the market, they tried to exploit this gap and attract customers through product differentiation. This led to businesses copying each other, known as Game Theory. Game Theory can be applied to the Prius because it was the first of its type and then other businesses like Honda, Ford and GM all copied the hybrid type of vehicles. The reason other businesses decided to copy the hybrid was because of the Profit Signalling Mechanism (PSM), which attracts other businesses to the market as they all want their share of the profit. Due to there being only a few competitors to Toyota, demand for the hybrid vehicle is relatively inelastic. This means that Toyota have developed a product for which the proportionate change in demand is less than the proportionate change in price.One of the factors which affect demand is income. If income increases and the hybrid vehicles provide the same performance as other vehicles, then customers will not hesitate to switch because disposable income is high and customers can take the risk of buying a Prius.

It can be seen as a risk because according to the rest of the car market the hybrid type is only a small minority and therefore it would be harder to find spare parts later. The advantage with this is that Toyota can decide to increase the price to see the effects of inelasticity, as customers have high disposable income and at the same time can maximise profits. Due to the present economic conditions, customers would not have high disposable income and therefore wouldn’t take the risk and Toyota would probably have to use other techniques like loss leaders, giveaway gifts etc, to attract customers. The disadvantage with this is the costs will increase in the short term, but in the long term, it may enable customers to become loyal and can lead to advertisement as satisfied customers will tell other people, allowing Toyota to gain a strong reputation. A strong reputation is advantageous for Toyota because according to Porter’s 5 forces there is always a constant threat of new entrants and substitutes, a strong brand reputation may make customers brand loyal and hence they will not turn to substitutes allowing Toyota to increase market share, sales and profits.

Toyota has overtaken US rival General Motors to become one of the world’s biggest carmakers. According to Toyota and GM business figures, Toyota sold 2.348 million vehicles in the first three months of 2007, which is more than that of GM’s 2.26. Toyota has enjoyed outstanding sales due to the success of the Prius and has become market leader. Due to Toyota being market leader, it gives them power to be able to bargain with suppliers and gain raw materials cheaper, this is shown as one of Porters 5 forces. They can also benefit from economies of scale, and are able to gain competitive advantage over their competitors as they can spend larger amounts on research and development. By being allocatively efficient, they can produce exactly what customers want, allowing them to be confident that the product will sell.

Production of the Prius started in 1997 and currently takes place in Tsutsumi plant in Aichi, Japan. Toyota may have decided to product the hybrid vehicle in Japan because Japan specialises in production and hence they have an absolute advantage over other countries. Japan can produce cars in the cheapest way due the resources available to them, giving them a comparative advantage. Toyota is currently increasing production of the Prius by 60%. In 2007, Toyota produced some 280,000 Prius hybrid cars, and in 2008 they produced 450,000. Toyota now builds the Prius at two plants in Japan. Its Tsutsumi plant began production in 2003, and then its Toyota Auto Body subsidiary joined in October 2004 to try to satisfy demand. To increase efficiency, the way in which the plants work is similar to the just-in-time production method. One plant produces body work and the other plant assembles the parts together. This decreases buffer stock, and allows capital to be used elsewhere. This decreases buffer stock, and allows capital to be used elsewhere. This will enable Toyota to double production from the current 60, 000 annual units.

Not only is Toyota known for producing environmentally friendly cars, but they are also known for their strong relationships with their stakeholders as they have not been accused of using child/ cheap labour or using poor working conditions in the past. Toyota believes in respecting its employees and honouring the basic human rights of the people involved in their business. They comply with all applicable local laws and regulations wherever they operate while providing fair compensation and benefits. Toyota seems to have an encouraging corporate culture, where each worker is trained and employees help each other to enhance their skills. Training increases costs but an encouraging corporate culture can decrease costs as workers can be trained to a minimum and then they can just be trained through on the job training by other employees. Due to their efficient production methods Toyota do not have a top heavy organisational structure, but an efficient and ordered organisational structure. This is beneficial for Toyota because decisions can be passed down the short chain of command quicker allowing action to be taken faster and decreasing lead time. Also this may create an encouraging corporate culture this is because there are many employees at the bottom end of the organisational structure and hence therefore they may believe that they have a chance of promotion depending on how hard they work. This can lead to high productivity, as each motivated worker will work harder and therefore, output per employee increases.

To see how Toyota has a global effect, it is important to see how they affect economies in different countries. When Toyota opens a new plant in a different country, they increase the employment rates of that area. The government is affected because now that more people are employed, so government spending decreases because no jobs have to be created and they can receive tax off people who are now employed. People are affected because they are no longer depressed socially or by loss of skills, but they now have higher disposable incomes and living standards. This leads to the regional multiplier effect, and the injection of money into the economy can lead to the start of the upwards spiral. The increased spending leads to a steady rise in the price of products, known as inflation. This shows that when unemployment is low, inflation is high and when unemployment is high, inflation is low as shown in the Phillips Curve.

The manufacturing of the Prius and its effect on the economy is known as an externality. The fact that manufacturing decreases unemployment is a positive externality. A negative externality can include pollution from the manufacturing, but the Prius actually decreases pollution and has a beneficial effect on global warming. Toyota are an ethical environmentally friendly organisation The product life cycle shows that when the Prius was first mass produced and was in the introduction stage, Toyota were not generating enough sales to break even. Now the Prius has reached the growth stage of the product life cycle and is generating enough sales to break even. This has attracted other business into the market now Toyota is able to produce products cheaper through large scale production, taking advantage of economies of scale and bulk buying.

Due to Toyota being a large business they can benefit from economies of scale and are able to bear risks due to the large capital investment. Toyota had to make sure that the hybrid type was successful as Toyota couldn’t just afford to discard the project. The main objectives of the production of the Prius may have been because Toyota actually care about the environemnt and know that when people decide to do act about enviromental issues they will turn to environemntally friendly companies like Toyota. Toyota may have wanted to start a trend by being innovative and attracting other business to the market as when a market beomes competitive it attracts customers because the products can be supplied cheaper and the business may try being innovative and bring out newer ideas to attract more customers which again is a cost and a risk.

Toyota have entered a new market but retained their existing customers. By entering a new market it has allowed them to grow. Ansoff’s Growth Vector shows ways in which a business can grow. The risk increases from 1-4. From the grid we can see that Toyota have chosen to use market development. This is very risky because Toyota do not know much about the market and even though the product is still cars, it is a completely different type of car and is also innovatve. Therefore Toyota can not carry out the cheaper secondary research method and so a large amount of capital investment is necessary.

Conclusion

Global businesses like Toytoa have a major role in determining future trends in the world economy because they try to make a profit exploring new markets to attract customers and make a profit. When Toyota start making a profit, it can attract other businesses into the market due the to the PSM. Competition increases and businesses try to cut costs leading to the most efficient businesses controlling the market. The larger businesses move and explore other innovative ideas tyring to move to the market in a different direction trying to gain higher profits.