Toyota Motor’s entry into the U.S. market is a fine example to use for
examining Michael Porter’s “Five Forces” for industry analysis.
Toyota’s entry into the U.S. market came from a home market with high
growth; rapid technical change; and competition against numerous
competitors (Honda, Fuji Motors, Nissan, Prince, Tohatsu, Mitsubishi,
Mazda, Isuzu, Daihatsu and Suzuki). Dealers played a minor role in
the Japanese market. And until the 1970s, financial resources of the
Japanese auto manufacturers were strained.
By contrast, in the 1950s Toyota was entering a U.S. market where
there were three major manufacturers, which shared 95% of a market – a
market 100 times the size of the Japanese market. Dealers were so
closely affiliated with one of the Big Three that they had exclusive
relationships with only one of the companies. The American companies
were well-financed, with excellent infrastructure for financing
consumers.
Into this market came not one, but three Japanese companies between
1957-1958. Simultaneously, Toyota, Nissan and Honda Motors all came
into the U.S. market and each found a different way to establish
themselves and compete profitably over the next 40 years.
PORTER’S 5 FORCES
------------------
Michael Porter’s book “Competitive Strategy: Techniques for Analyzing
Industries and Competitors” says that there are 5 forces operating to
determine the level of competitive rivalry:
1. Supplier power
2. Barriers to entry
3. Buyer power
4. Threat of substitute products
5. Degree of rivalry
The five forces exist in a kind of equilibrium, according to Porter.
But the forces can suddenly shift competitive balance, rapidly
changing market share – similar to the evolutionary theory of
punctuated equilibrium. This is what happened with the major
Japanese auto manufacturers. It took 15 years for the three to get 5%
of the U.S. market. Eight years later they held a 30% share.
What are the important factors about each force?
1. SUPPLIER POWER:
Suppliers are weak if products are standardized; there are many
suppliers; purchasers can integrate backwards; and the end customers
are weak or diffuse. These characteristics describe the automotive
assembly industry of both Japan and the U.S., where auto manufacturers
of both companies had worked hard to rationalize the component
businesses.
By contrast, for auto dealers in the 1950s the car companies were
suppliers that strong. Ford, Chrysler and GM controlled promotional
conditions and financing – even access to key vehicles – for thousands
of single-location dealers. This presented special problems for new
entrants like Volkswagen and the Japanese firms.
2. BARRIERS TO ENTRY:
Once again there’s a significant difference between being a
manufacturer – and being an auto dealer.
Barriers to entry are high for a car company. Henry Kaiser raised
$53 million in 1946 to enter the U.S. auto industry, but the company
“was always undercapitalized,” says David Halberstam in his history of
the auto industry, ‘The Reckoning.’ “The $53M was startup money,
nothing more. It cost $15 million just for a line to produce the
engine blocks; it cost $10M more for a line to build bumpers.”
“There was no better industrialist in American and he had failed in
Detroit, and failed during an auto boom,” Halberstam says of Kaiser,
who’d built the Grand Coulee Dam and developed the American aluminum
industry during World War II. Kaiser’s finance people estimated the
cost of entry into the U.S. auto industry was $300 million in 1945; by
late 1970s $2 billion.
But barriers to entry can be financial, governmental; intellectual
property (patents); or scale economies.
Japanese car companies didn’t have economies of scale yet – but were
protected in the period after WWII by the Ministry of International
Trade and Industry (MITI). But U.S. markets had virtually no barriers
to entry, a surprise to the Toyota employees researching exporting.
And luckily for the Japanese companies, barriers to entry to the
dealer business in the United States were also low.
3. BUYER POWER
Again, both Japanese and American car assemblers enjoyed power by
being concentrated; purchasing large volumes from parts companies; and
being able to vertically integrate. Indeed, each of the companies
operated their own supply companies. For the Americans it was Mopar
for Chrysler; Delco and other divisions for GM; and Ford’s River Rouge
steel plant and Autolite parts company. But it was no different in
Japan, where parts companies even shared employees and management with
other companies in their "keiretsu".
Dealers were fragmented and weak in both countries.
4. THREAT OF SUBSTITUTE PRODUCTS
Though public transportation represented a margin threat in both
countries, cars were (and remain) the dominant transportation.
5. DEGREE OF RIVALRY
In Porter’s model, the most-complex area, where competition increases
with
* the number of firms
* slow market growth
* high fixed costs, providing economies of scale and high costs to
exit
* high storage costs
* low switching costs for the customer
* commodity status for the product
* strategic stakes are high because a firm is losing share
* exit barriers are high
* diversity of rivals, providing different products, cultures,
histories, philosophies
* industry shakeout upsets existing business models
In entering the U.S. market, Toyota faced three U.S. firms – and a
fourth competitor in Volkswagen. None regarded strategic stakes to be
high; Japanese cars were not viewed to be comparable replacements for
American cars with larger V-6 and V-8 engines; and the market leaders
did not expect Toyota’s entry to upset competitive dynamics. The Big
Three American car manufacturers were also protected by the inability
of their dealers to switch customers to Japanese cars.
But competition would soon include Honda and Nissan as well.
For more information on Porter, see “Competitive Strategy: Techniques
for Analyzing Industries and Competitors” or:
QuickMBA
“Porter’s Five Forces” (undated):
http://www.quickmba.com/strategy/porter.shtml
TOYOTA’S EARLY HISTORY
----------------------
Ford and GM dominated the Japanese car business from the mid-1920s.
Only intervention by the Japanese military stopped a major Ford
investment to build an automated plant in 1936. GM held 40% of the
Japanese car market until WWII broke out. “I’d give my right arm for
a tenth of that today,” a GM exec said in 2000.
Pacific Basin Economic Commission (PBEC)
"Rethinking Multinational Corporations in a Global Economy (2000)"
Rudolph A. Schlais, Jr.
Group Vice President, General Motors Corporation
President, General Motors Asia Pacific:
www.pbec.org/newhorizons/speeches/schlais.htm
Toyota Motor was established in 1937 as the spinoff of a textile
machinery company and supplied trucks to the Japanese military during
WWII. It only produced its first small car in 1947. But Toyota, like
all of the car companies, followed the teachings of Edward Deming, the
American quality expert whose lectures on quality had religious impact
on Japanese manufacturing engineers:
The Deming Institute
"Bibliography" (undated)
http://www.deming.org/theman/articles/articles_gbnf07.html
"There is not a day I don't think about what Dr. Deming meant to us.
Deming is the core of our management,” Shoichiro Toyoda, president of
Toyota Motor Corp., said when the company won the 1991 Deming Prize.
Engineer Taiichi Ohno pushed a system of quality, just-in-time
delivery and lean production that dramatically boosted production
while continually increasing quality. This lean product system would
eventually become known as Toyota’s Lean Production System.
Toyota Motor
"History" (undated):
http://www.toyota.co.jp/en/ci.html
TOYOTA’S US MARKET ENTRY
-------------------------
The early entry from Toyota in the late 1950s was underpowered, with a
small 4-cylinder engine. It was so unsuccessful that it was withdrawn
from the U.S. market, according to Halberstam.
Toyota tried again in the 1960s with the "Crown," which Corolland
calls "unpopular and barely-noticed."
Corolland.com
"Toyota Corolla History"
http://www.corolland.com/history.html
In 1968, the Corolla came to the U.S., two years after its
introduction in Japan. Initially it sold with a 1.1 liter engine;
then was upgraded to a 1.2 liter engine in 1970 – and finally Toyota
sales started to grow. In 1970 Corolla sales put it in second place
among imports, trailing only Volkswagen.
Despite limited success until 1970, Japanese suppliers were all
working on problems facing their U.S. market position:
* the lock held by the Big Three on large dealers meant that Japanese
manufacturers encouraged used car dealers to enter the new car
business
* Japanese cars were being modernized, tested and adapted for the
U.S. market. Engine size was increased; cars were being tested on
U.S. highways and design flaws eliminated; the Japanese steel industry
developed sub 1-millimeter steel; corrosion-resistant metals were
being developed.
* And in the protected Japanese market, volumes were growing rapidly
permitting scale economies to rapidly reduce costs.
Still, in 1972 according to Lester Thurow in "Head to Head," the
market share in the U.S. was:
GM: 40%
Ford: 30%
Chrysler: 25%
Imports (Japanese and VW): 5%
But groundwork had already been by Toyota to reduce the strength of
the 5 forces against it – and the situation was ripe for "punctuated
equilibrium."
And Toyota kept working on barriers to the U.S. market. In October,
1973 it set up the Calty Design Research Center in California to
produce designs specifically for the U.S. market. In June, 1977 it
opened a Technical Center in the U.S. to translate those designs for
production engineering in Japan.
The Arab oil embargo of October, 1973 sent oil prices up 300%, from $3
per barrel to $12 per barrel and the competitive balance was upset.
The larger 6- and 8-cylinder American cars were now uneconomic, even
impossible to fuel when gas was rationed. By 1975 Toyota's sales were
outstripping the long-term import leader, Volkswagen. According to
Halberstam, the import share was 18.3% of passenger cars in 1975, with
Toyota selling 283,000 and VW at #2 with 268,000.
But it was the second oil shock, after the fall of the Shah of Iran in
1979 that sent Toyota sales skyrocketing. By the end of the year,
Japanese imports held 25% of the U.S. market, with Toyota the leader.
By the spring of 1981 political pressure was so great on Japanese
manufacturers that a quota of 1.68 million cars was negotiated for the
U.S. market. And it led to establishment of manufacturing facilities
in the U.S. by the leading Japanese car companies during the 1980s.
TOYOTA EXPLOITS THE 5 FORCES
-----------------------------
What worked against Toyota in the 1960s?
1. SUPPLIER POWER: many aspects of the dominance of the dealer chain
by the American Big Three, from sales to financing and service
2. BARRIER TO ENTRY: the substantially higher volumes of the U.S. auto
industry in the 1960s
3. BARRIER TO ENTRY: weaker auto production technology in the 1960s,
compounded by a product mal-suited to another geographic environment –
and the inability to fund separate models for the U.S. market
4. DEGREE OF RIVALRY: initially there was a low degree of rivalry,
accelerated as several Japanese manufacturers entered the U.S. market
simultaneously
5. DEGREE OF RIVALRY: Japanese manufacturers, providing a product for
the low end of the vehicle market, were not perceived as strategic
threats.
But several forces were also working in Toyota's favor.
1. SUPPLIER POWER: strong keiretsu gave Toyota the ability to dictate
terms to suppliers
2. BARRIERS TO ENTRY: a "phonebook" of regulations from MITI governed
the production of cars in Japan, giving Toyota a protected market to
enjoy the benefits of scale economies during the 1960s.
3. THREAT OF SUBSTITUTE PRODUCTS: nil in both countries
4. DEGREE OF RIVALRY: Toyota was actually strengthened by the number
of firms competing in its home markets, giving it skills (in product
management, quality control) that would later prove to be key
advantages in the U.S. market.
And finally, Toyota was able to manage its business to overcome key
issues in each of the areas working against it in the 1960s, to
produce success in the 1970s. Specifically:
* used car dealers were encouraged to enter the business, attracted by
margins on Toyotas that were 18-20% -- higher than on American new
cars.
* cars were adapted to the U.S. market over a 10-year period, adding
features, increasing engine size – and eventually building a design
center specifically for the non-Japanese market.
* investments were made in all areas of production technology,
eventually developing industry-best practices in quality control and
inventory management.
* scale economies continued to work for Toyota. According to the
Boston Consulting Group, the cost of Japanese cars was roughly at
parity with American cars in 1961. By 1970, it cost $1,210 for a
Japanese car and $2,215 for an American car.
* and the degree of rivalry increased in the American market, reducing
profitability of the Big Three and forcing one to the verge of
bankruptcy.
Some references:
"Head to Head," Lester Thurow, William Morrow and Co., 1992
"The Reckoning," David Halberstam, William Morrow and Co., 1986
"Collision: GM, Toyota, Volkswagen and the Race of the 21st Century,"
Maryann Keller, Doubleday, 1993
"Against all odds : the story of the Toyota Motor Corporation and the
family that created it," Yukiyasu Togo and William Wartman, St.
Martin's Press, 1993
See also:
Washington & Lee Alumni College
"The Japanese Auto Industry" presentation by Michael Smitka, (July 20,
2000):
home.wlu.edu/~smitkam/2000-01research/alumni_talk.ppt
Google search strategy:
"Michael Porter"
Toyota + "The Reckoning"+ Halberstam
Toyota + "market entry" + U.S.
Best regards,
Omnivorous-GA |
