Mie 480 Toyota Strategic Audit Team 4 Jessica Chew Matt Dupree Shelby Westbrook Chrissy Zirpolo Executive Summary

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MIE 480

Toyota Strategic Audit

Team 4
Jessica Chew

Matt Dupree

Shelby Westbrook

Chrissy Zirpolo

Executive Summary
Toyota has had many external issues to handle when devising and carrying out their own strategy. The market has numerous automotive dealerships, leaving the level of competition at a very high rate. They have to consider what their competitors are doing to entice buyers and match or top their deals with the Toyota line of automobiles. So far, they have been able to do this successfully. They are currently the leading car manufacturer in the world based on the sales and production volume.

Several factors have risen as car buyers have become more demanding about the safety features offered, miles per gallon the car can hold, and more detail-oriented aspects like the color, leather in the interior, or if it has a ten-disk CD player. The car companies have had to continuously enhance the features offered in their models, while trying to keep the prices as low as possible to attract buyers. Toyota has been known for having several cars on the “Top Safety Picks” list, until recently due to the large number of recalls in the United States and Europe. However, Toyota offers the widest variety of cars with the best gas mileage available. It has been their strategy to offer cars that are affordable for first-time buyers, all the way up to the buyers that are looking for a more luxurious model. This is where their ownership in Lexus comes in. They have prospered for many years since they have been so versatile with their products.

Currently, Toyota, along with several other car companies is experiencing down-turns in their margin. The automotive industry relies on whether buyers can purchase cars. Since the falling of the economy in a number of countries, this has been hurt who can afford to buy cars. Toyota has decided to offer a six year no interest financing. This will severely decrease their income.

At the same time, Toyota has internal factors that have helped, as well as hurt them as an organization. They are able to form relationships with suppliers that decrease costs due to the large size of the company. The most pressing issue has been the recent recall. Toyota did not immediately address the issue to the public and the CEO chose to have a hands-off approach in this apology. On the other hand, Toyota appears to have high level of loyal customers that stand by the brand and its value of the customers’ opinions and safety that needs to be tweaked in some vehicles. They are still the third largest automotive maker but have been hurt by the recession, like many of their competitors. It is projected that as the economy begins to raise again, so will Toyota’s profits. However, they cannot change some people’s minds about the way the recall has affected their reputation. They need to take every measure to kick-start a new brand-image for the people that have doubt in their company.

Toyota needs to make a public apology directly addressing the loss of confidence in the car-maker. They pride themselves on having great customer loyalty, but the lack of a public apology from the CEO in a timely manner could hurt their continued or future customer base. It will be vital to have a commercial featuring the CEO or other executives that includes an apology, along with what they plan to do to secure confidence from customers. Currently, they do not have a marketing strategy that is in this form. They need to endure the cost to further growth. Also, a prepaid maintenance plan should be put in place for all Toyota owners. Recalled car-owners need to feel safe once again, and we believe this can help in restoring Toyota’s reputation while making in more convenient for customers to get their problems taken care of. Toyota must implement an emergency protocol to handle situation such as the recent recall. No issue should be taken lightly. They should have an open-door policy when owners experience any type of problem, should be able to come straight in to any dealership. They will have to set up a shuttle service and do everything possible that poses the least amount of inconvenience on their customers.
Toyota was founded by the Toyoda family in 1867, and was known as “Sakichi Toyoda.” Today, the CEO is Akio Toyoda. He leads a company for 320,808 employees. The majority of the company is focused on the automobile lines offered, including cars, mini-vans, SUVs, and pick-ups. The other areas of the company are forklift production, manufactured housing, and financial services. Toyota also owns and operates the Lexus and Scion lines, as well venturing into building robots. They have taken the initiative to become more ‘green’ with the introduction of the Prius into the market. The Prius is the first mass-produced hybrid car and was introduced in 1997. In 2008, sales topped $1 million.

(Yahoo Finance)

Toyota officially established its automobile department in 1933. However, it became recognized on the New York Stock Exchange in August of 1937. They say they base their company around five principles; challenge, improvement, go and see, respect and teamwork. They have tried to express many of these concepts through marketing. Currently, their emphasis is on positive experiences of ownership and vehicle quality, and has the slogan “Moving Forward.” This slogan is not new, based on the most recent recall incident. In fact, it has been the slogan for more than five years.

(Standard and Poor’s)

Their biggest market is in Japan, where the company was founded. They have the most revenue and units of sales there. Their strategy in Japan is to ‘maintain market leadership by actively introducing remodeled and new cars, increase market efforts, enhancing customer loyalty through information technologies and the brand image, and better target consumer demand patterns’ (Standard and Poor’s). Investing so much in Japan pays off with 40% of the market share there.

In the U.S., they expected to see continued sales expansion and production capacity, until the wide-spread recall occurred in the beginning of 2010. There were several reports of problems with accelerators and also with brake pedals. The first of the reports were not investigated, which caused the problem to escalate. In April of 2010, the U.S. government issued a record penalty to Toyota for deliberately hiding information about defective accelerator pedals. Toyota’s reputation has been affected and confidence from buyers has decreased. They have new commercials trying to repair their image. They must reassure and target the problem in order to further grow.

External Environment / Industry Analysis
The Automotive industry began in Germany when Benz put its first automobile into production in 1885 (Wright, 1996). Since then, the market has had fierce rivalries and countless mergers and acquisitions all of which allowed the market to evolve into what it is today. The intensity of competitors in the industry has always been high which makes the power of customers strong since they have so many choices to choose from. This means that each car company could be a substitute for another car company. This is actually what creates such fierce rivalries within the industry. These rivalries have even gone down the chain to the customers where Ford car owners and Chevrolet car owners maybe rivals because of the car that they drive. All of these forces affect the way that an automotive firm operates and Toyota has overcome these tough industry factors and become the leading car manufacturer in the world.

The key success factors in the automotive industry have also been changing since its inception. In the early years people just wanted a car; it didn’t matter what color, how many miles per gallon the car received, or even the safety features of the car. Today, car buyers are buying cars with higher safety standards, higher gas mileage, and more options than ever before. They are buying these things while still expecting to pay a low price. Toyota, who last year had five vehicles on the “Top Safety Pick” list, this year, has only one which is the Corolla (cnnmoney.com). Overlooking safety maybe the cause of the recent recalls, which cost Toyota over $2 Billion (cnnmoney.com). In terms of miles per gallon, Toyota is ahead of most companies. The Prius has the best miles per gallon in its class with 46 miles per gallon and according to cnnmoney.com, out of the top ten cars with the best gas mileage Toyota holds six out of the ten. So competitively, if people are looking to save money on gas, they are probably going to be looking at Toyota as one of their main choices. Like most industries there are different types of automotive companies who seek to excel in a different segment of the market. There are several different ways that an automotive company could choose to take strategically when designing their cars. They could choose to be low cost like Kia, Luxurious like Cadillac, or high safety like Volvo. All of these things are success factors in the automotive industry today and Toyota tries to capture all of these strategies in one. They try to have relatively low cost while still serving the high safety features and with Lexus also cater to the luxurious car buyers. In the past Toyota has done a great job of incorporating the overall industries success factors into their strategy and firms who can do this usually are the ones to prosper.

The cost of new cars sales has been steadily rising in the past decade, for instance in the past year average car sales have risen by three percent (bls.gov). This is causing consumers to keep their cars longer in order see that they break even on their purchase. This has caused a reduction in new car sales. This matched with the bad economy which is also causing consumers to hold on to their cars for longer has made it necessary for automotive companies to do something. Recently, the automotive industry has set its focus on payment terms to try to battle back during these tough economic times. Many people are unsure of their jobs and are reluctant to purchase a car that will stretch their budget too far; therefore they are turning to cars with less overall cost to help minimize their risk of defaulting on a car payment. Due to these new payment terms the industry has lost much of its margin. For example after the recent Toyota recall, to try to keep the flow of Toyota’s off the lots, Toyota introduced a six year no interest financing strategy. This will not only eat away at their margin this year but also for the following years during the payoff periods. This will be a choice that today will keep sales up, but in the future may cause cash flow problems that Toyota will have to overcome.

On the Macro level, the automotive industry is affected by many factors. The unemployment rate and average yearly wages directly correlate to the sale of new cars. For example we will use recent economic downturn. Consumers had less money to spend and had the choice to spend a lot of their money on buying a new car or to spend comparatively a small amount on maintenance and repairs of their old cars. This created a gap between what the car companies expected to sale and what they actually sold which left many new cars sitting on the lots and costing car companies millions of dollars. Another factor that has had a major impact on the automotive industry in the past decade is technology. The increased use of computers in cars has increased cars durability in that they give the driver more information about when their car should be serviced and can tell the mechanic specifically what is wrong with a car. This technology is making it easier for cars to be repaired and by giving the owner more information about service aspects of the cars they are in turn not breaking down as often. The increase in durability caused by technology can also create another problem for car companies. By increasing the durability they are also increasing the longevity which makes it easier for a consumer to consider buying a used car. For example asiaone.com claims that used car sales outnumber new car sales seven to one. Interest rates and the overall cost of borrowing money also correlate with the growth of the automotive industry. Higher interest rates and borrowing cost will deter consumers from borrowing the money to purchase a new car. Overall the automotive industry is affected by the economy that the market is surrounded by. If the market is prospering then the auto market is normally also growing, but at the first sight of an economic downturn new car sales are often first to take a hit.

Internal Environment Analysis
Toyota has been one of the top car manufacturers for as long as any of us can remember. When thinking of Toyota as a company, what typically comes to mind is safety and reliability. However due to the recent recall issue, those images may have been slightly tainted in consumers minds.

Toyota has several strengths that help the company in being very successful as well as several weaknesses that hold it back. Some of their strengths are that Toyota is a very large company and has the capital to invest in several ventures. They are also known for having a very specific set of skills. These skills include working closely with suppliers, continually finding ways to innovate and improve, and constantly challenging it to cut costs (Autoweek.com, 2008). Along with these strengths, Toyota also has several weaknesses. First and foremost, the way Toyota handled the recall issue was completely unacceptable. It took quite awhile for the CEO to come out and make a statement apologizing for all of the recall issues. Many also felt that the statement was implying that Toyota as a company was sorry the recall issue occurred, rather than apologizing to their customers for severely inconveniencing them as well as putting several of them in danger. Another major weakness of Toyota is the down economy. Every since the economy made a turn for the worst, car manufacturers started to have an over capacity of vehicles while still maintaining their very high fixed costs. Toyota was no exception to this and suffered greatly during the recession.

Their business model has proven somewhat successful for the past several decades. Toyota went from making low quality, inexpensive cars in Japan to being the most profitable-from the sale of vehicles-automaker. The company became so successful because of their long term planning skills as well as continuously seeking customer feedback on their vehicles (Glgroup.com, 2008). Toyota has proven that they value their customers’ opinion as well as their safety which has allowed them to retain so many loyal customers over the years. Since the recall issue in the beginning of 2010, several consumers are upset with Toyota however several consumers are also remaining loyal to the brand despite the previous discrepancies.

Despite the recent recall issue, Toyota has maintained its market standing. It is currently third in sales behind GM and Daimler. On the contrary, their profit margin is still in the negatives, which is probably due more to the recession as supposed to the current recall issue. Their profit margin is currently at -3.89% followed by their operating margin which is at -3.66%. Unfortunately, Toyota's management effectiveness is not doing much better with their return on assets at a -1.33% and their return on equity at a very low -6.39%. As previously stated, the negative percentages are more than likely do to the downturn in the economy as supposed to the recall issue. Had the negative ROE, ROA, profit margins and operating margins been due to the recall issue, Toyota's sales would not be as high and they would no longer have a strong hold on third place behind GM and Daimler. Toyota's revenues are a reported $183 billion and their gross profit is reported to be approximately $21 billion. Although the economy is still down, it is a positive sign that they are still proving to be profitable and it is hopeful that they will continue on an upward slope when the economy is better (Yahoo Finance).

Given the poor performance by Toyota in their recent history, it is hard to determine whether this is because of the down economy or the recall issue itself. If the recall issue had not occurred, Toyota would probably be ahead of Daimler but would most likely still be behind the number 1 car manufacturer on the market, GM. Some resources and drivers of performance that affect Toyota's current sales and market standing are the recession, the recall issue and customer views. Since the economy is down, the average American is not spending money unless the item is an absolute necessity which unfortunately, a new vehicle is probably not. The recall issue has also had a significant impact and Toyota's financial performance. With the recent brake/ gas pedal recall issue, many consumers are going to be weary about purchasing a vehicle from Toyota. The brake and gas issues are problems that proved to be very dangerous if not addressed immediately. Some of these dangers included moderate to severe accidents from the gas pedal sticking and not retracting back up when necessary (a reported 50,000 2003 Sequoia's are reportedly being recalled for maintenance issues). Lastly, the way in which customers view Toyota is going to be very important for the company through out the next decade. Several people no longer view Toyota as being safe and reliable, and many have voiced their concerns on the issue of the amount of time it took the CEO to make a statement.

Toyota Recommendations and Action Plan
In our extensive research of Toyota we are recommending three strategies to help Toyota get back on top. These three strategies would include a public apology, offering a prepaid maintenance plan, and the implementation of a new emergency protocol.

Just a short time ago Toyota was an icon of reliability. They were the only automotive company that had gone such a substantial amount of time without a mishap. However due to recent circumstances, consumers are thinking twice before purchasing a new or used Toyota. After much research we were able to conclude that there has never been a pubic apology for losing the confidence and trust of Toyota owners. There have been apologies for having to recall the vehicle, or for any inconvenience they caused the consumer, but we believe that consumers want to know that Toyota cares about their loyalty and trust and are willing to do whatever it takes to get it back.

In each of the new commercials and ads Toyota has put out recently, which they didn’t even air during Super Bowl Sunday, there have only been the faces of the factory works, guaranteeing you that the quality of their cars will again maintain its position of quality, but never do you see the CEO’s, president, or other executives of Toyota. In a poll on aolnews.com out of 221 voters, 52% said that the new commercials didn’t regain their trust, and for 48% it did. Every effort should be made to turn these statistics around and pull the general public back on Toyota’s side.

We are recommending that Toyota run this apology commercial on four different stations during prime time hours. The cost for a 30 second commercial on each of the four stations would be: FOX $658,333, NBC $479,250, CBS $374,231 and ABC $323,000 (Baker, 2009). Each of these commercials would air once a day, every day, for 1 month. To go along with the commercials it would also be a good idea to have a video streaming on Toyota.com. This would be a 10 second apology from the president of the company stating, “We at Toyota are extremely apologetic for losing your confidence as a customer. We are currently doing everything we can to regain that trust and appreciate your continued loyalty and patience.” This footage would pop up on a side bar each time someone was to log on to the company’s website. There would also be subtitles in the instance that the website viewer didn’t have sound, or were unable to hear.

On top of the commercials and online streaming, Toyota could also make a statement for themselves when they sponsor the NBA Finals this year. On top of airing their commercials in house, during breaks, they could also distribute 25 thousand shirts to the attendees of the first game of the finals. For each shirt it would cost around four dollars totaling to 100 thousand dollars. The shirts could have the name of both teams competing in the finals, with Toyota’s logo on the back. This way each attendee has something to go home with that reminds them of Toyota. Even though the cost of these three media recommendations seem to be high, it is essential that Toyota do whatever they can to regain the trust of their current and future customers.

The second recommendation is that Toyota offer prepaid maintenance plans for their vehicles for a certain period of time. Once all the cars that were recalled are reinstated to their owners, those driving these cars are going to be a least a little nervous about something happening. According to CNNmoney.com there have been 5.3 million cars recalled. With a prepaid servicing plan Toyota owners can take their car to just about any auto shop and have it repaired, keeping away from an inconvenience to the car owners.

Typically Toyota offers a 55,000 mile or 4-year program to be purchased by its customers, but due to the financial constraint Toyota is under and the fact that all of the plans would be paid for by Toyota, it would be beneficial to narrow this down to a one year, 14,000 mile program. Currently Toyota factory workers are investigating why their pedals are malfunctioning. By the time they are able to figure out what the problem is, fix the issue, and redistribute all the cars, plus 14,000 miles, researchers will have had a substantial amount of time conduct reliable research. Prepaid maintenance plans range in price and service options. Currently Toyota has a plan in place that allows for service at predetermined intervals, 24-Hour roadside assistance, prepaid maintenance booklet, timed service reminders, computerized service history, to which they should add monthly break check and servicing.

The cost of their 4- year plan is $1,355 (toyotafinancial.com), which is obviously inflated to allow a return of revenue for Toyota, leading one to believe that it is much less expensive for Toyota themselves. However, since the plane will now be a 1- year plan the cost would only be $340 per car. With 5.3 million cars currently in recall this would cost Toyota 1.8 billion dollars. 1.8 billion is a large sum of money, but it is better that Toyota service and repairs the issues before it becomes a national recall, on top of the fact that it will help to renew the trust of current and potential customers.

Our last recommendation would to be implementing a new emergency protocol. Because Toyota has never experience such a large recall, there was no set procedure in place. In the first instance of an issue Toyota would bring that car in and investigate what the problem. They would then notify customers that there is an issue via letter or phone calls, letting them know that they would keep them updated.

If the issue turned into something much larger they would then advise Toyota users to bring their vehicle in to be checked, and provide a shuttle to and from work, or wherever they happened to be to avoid inconvenience. From there they would submit a news release to advise the public that they are aware of the issue and everything is being handled accordingly. In implementing this plan it will help to keep from having mass chaos in a time of crisis. It is important to familiarize existing and future employees on this plan. The best crisis to have is one that has already been evaluated and have a firm plan of action.

After examining Toyota’s issues, in order to continue to produce revenue and rebuild the trust of new and existing consumers it is essential that Toyota follow the previously stated recommendations. Not only will it help their image as far as the public eye is concerned, but it will also improve company morale, and eventually bring Toyota back to the top of its game.

Works Cited

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Baker, F. (2009, October 26). Math in the media. Retrieved from http://www.frankwbaker.com/thirtysecadcosts.htm
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Economic News Release: Consumer Price Index Summary. (April 14, 2010). Retrieved April 27, 2010, from http://www.bls.gov/news.release/cpi.nr0.htm.
Jack Lifton. (12/10/08). Toyota's Business Model is the Reason Detroit

should not Bail Out. April 28, 2010.

James B. Treece. (08/18/06). The Roots of Toyota's Strength. April 28,

2010. http://www.autoweek.com/article/20060818/FREE/60816004

Pendlebury, S. (2010, February 9). Toyota joins apology ad parade with "commitment". Retrieved from http://www.aolnews.com/the-point/article/toyota-joins-apology-ad-parade-with-commitment-commercial/19350790
Standard and Poor’s. (2010). Toyota Motor ADS. Retrieved from http://www.netadvantage.standard and poors.com/NASApp/NetAdvantage/simple
Tan, Christopher. (2010, April 18). Used cars will outsell new cars by 7 to 1. Retrieved April 27, 2010, from http://www.asiaone.com/Motoring/News/Story/A1Story20100416- 210821.html.
Toyota auto care prepaid maintenance. (n.d.). Retrieved from http://www.toyotafinancial.com/consumer/tfs.portal;ofsc=jfGyLQkB9pFMGcG4yx09YMpk4TylnWTShNnyv2pG3FGWt1JhvS4v!248595339!10578159?_nfpb=true&_pageLabel=pg_TACPrepaidMaintenance
Toyota motor corp. (tm). (2009, March 31). Retrieved from http://finance.yahoo.com/q/is?s=TM&annual

Valdes-Dapena, P. (2010). Toyota recalls top 5.3 million vehicles. Cnnmoney.com. Retrieved (2010, April 29) from http://money.cnn.com/2010/01/27/autos/toyota_recall_expanded/index.htm

(04/28/20). Yahoo Finance. April 28, 2010. http://finance.yahoo.com/q?s=TM

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