Chapter 1: INTRODUCTION
1.1 Project Background
The primary reason for choosing this research topic is my genuine interest in cars and my intention to work in the automobile industry. And there could not be a better topic than to study the most significant change at the top which is the emergence of Toyota as the global leader. Although a lot has been written about Toyota, but this dissertation will study it from a different perspective, i.e. innovation management and critical success factors.
Toyota Motors Corporation (TMC) has become one of the biggest car manufacturers of the world from a humble start seventy years ago (Toyota, 2008). Toyota’s has been one of the most phenomenal success stories in the ultra-competitive automobile industry and can be a great benchmark for any company. The company has posted record annual earnings for almost a decade and has become the most profitable car manufacturer on the planet. And in the market that matters the most, the USA, its unbroken sequence of record sales stretches back even further. Fifty years ago, the Big 3 US carmakers (GM, Ford, Chrysler) dominated the industry, both in the US and worldwide. Now Toyota is set to overtake GM as the world’s largest carmaker, ending 70 years of dominance (BBC, 2007). Toyota’s success is even more remarkable given the problems elsewhere in the industry (see Appendix 1). GM and Ford are cutting thousands of jobs and closing plants, while Toyota is building one new plant each year. Ford in particular has found the going tough and a $12.7 billion deficit in 2006 coupled with significant losses among its subsidiaries signals the most miserable year of the company’s existence. As GM and Ford have racked up huge losses in the past few years, their financial ratings have shrunk. Toyota is now worth 10 times as much as GM on the stock market. So how has Toyota managed to buck the trend so dramatically? (Strategic Direction, 2007)
Toyota’s success with U.S. customers begins with the appeal of its cars and trucks, which are prized for their quality and durability, ease of operation, and thoughtful features such as controls that are intuitive to operate. Since demand is high and inventories typically low, Toyota, unlike Detroit, sells cars with skimpy marketing incentives, which protects its margins and boosts resale prices (Taylor, 2003).
Moreover, Toyota does its homework thoroughly. For instance, the company closely monitors economic and demographic developments and regularly sends its researchers out in the field to interview those who matter most – people who buy the cars. Keeping its ear to the ground ensures that the automaker remains best positioned to anticipate evolving customer preferences and future trends. Others carry out similar functions, so what makes Toyota different? How can a Japanese company be best at knowing what does the American car buyer want? This dissertation attempts to find out these factors from a different perspective; innovation.
The competitive advantage that many Japanese firms had gained in their respective industries came not from advantages in “hard” technology … but from the way they manned the same technology … Toyota attained holistic integration of technology with people, organization, product and strategy … the difference lay in their socio-technical system (Liker and Meier, 2006).
1.2 Aims and objectives of research
The aim of this dissertation is to establish the factors leading to Toyota’s success over GM in the US automobile market.
In order to achieve this aim, the following objectives have been set:-
- To review critically the body of literature of innovation theory in explaining Toyota’s success.
- To identify the changing critical success factors where Toyota gained the advantage.
- To study other factors and theories (like national competitive advantage) which led to Toyota’s success.
In order to achieve these aims and objectives, literature review is carried out in the next chapter which critically evaluates the theory surrounding this topic and then refined research questions are developed which will be answered by collecting secondary data.
1.3 Structure of dissertation
This dissertation has been divided into five chapters. They are organised as follows:
The first chapter describes the background of this research, a brief introduction about Toyota and this dissertation’s structure. It also mentions the aims and objectives of this dissertation which are broad but get refined at the end of chapter two.
The second chapter critically evaluates the literature studied for this dissertation including innovation theory, critical success factors and other factors. It forms five propositions at the end of that chapter which are more refined research questions.
Chapter three describes the methodology and discusses how the research is conducted to achieve the objectives set earlier. This chapter reviews the various factors of research design like research philosophy, paradigm, strategy and approach. It evaluates the options available and justifies the options chosen by the author.
After methodology, research findings and discussion are presented in chapter four. Here secondary data is presented and used to test the propositions formed at the end of chapter two.
Chapter five finishes this dissertation with conclusions and recommendations. And finally, the author shares his learning experience in the reflections section.
Chapter 2: Literature Review
This part of the dissertation will start with reviewing critically the body of literature in innovation theory and changing critical success factors in context to the automobile industry in general, and Toyota and GM in particular, to help explain the former’s success over latter in US market. Besides these two theories; some other theories like national competitive advantage, lean etc are discussed in the third section. This chapter will end in forming research propositions based on the theories reviewed. Although this chapter is primarily designed to review general theory concerning automobile industry, the author has cited particular examples about Toyota and GM in some places as seen relevant to stress the point.
Innovation is defined in Oxford dictionary as ‘… something established by introducing new methods, ideas, or products’. In today’s competitive world, innovation essentially can provide companies new ways to beat the competition. “Innovation process involves the exploration and exploitation of opportunities for new or improved products, processes or services, based either on an advance in technical practise, or a change in market demand, or a combination of the two. Innovation is therefore essentially a matching process” (Fagerberg et al, 2006).
‘… not to innovate is to die’ wrote Christopher Freeman (1982) in his famous study of the economics of innovation. Certainly companies that have established themselves as technical and market leaders have shown an ability to develop successful new products. Innovation is defined by Myers and Marquis (1969; cited by Trott 2005) as not a single action but a total process of interrelated sub processes. It is not just the conception of a new idea, nor the invention of a new device, nor the development of a new market. The process is a combination of all these things acting in an integrated fashion. A new idea is normally the starting point for innovation. It is neither innovation nor invention; it is merely a concept or thought. The process of converting these ideas into a new product or service is invention. To convert that to a successful profit generating offering in a market is exploitation. And this complete process is innovation.
Innovation has long been argued the engine of growth. Schumpeter (1934, 1939 and 1942; cited by Trott 2005) was among the first economist to emphasise the importance of new products as stimuli to economic growth. He argued that the competition posed by new products was far more important than marginal changes in the prices of existing products. For example, a car manufacturer can achieve far more growth by introducing new, efficient cars or new features than just slicing down prices.
Fane et al. (2003) studied the Schumpeter’s view in detail. Schumpeter employed innovation to explain Kondratiev’s “long waves” in business cycle theory, those of 54 to 60 years’ duration, and the nature of the economic growth processes. The Kondratiev/Schumpeterian view gained increased popularity at the end of the 20th century. Innovation, for Schumpeter, was not the same thing as invention – innovations may be copied and may not be protected by “intellectual property rights”, or IPRs, (with the exception, perhaps, of trade secrets) while inventions are protected for a specified period of time by IPRs such as patents and copyrights. Innovations for Schumpeter reflect: the introduction of “new methods of production” or a change in current production functions; the creation of “new forms of organisation”; the discovery of “new sources of supply”; or the opening of “new trade routes and markets”. Further, he identified the source of innovation as the consequences of the actions within a capitalist system of the entrepreneur seeking competitive advantage in the quest for profit.
Another theory argues that sustained economic growth arises from competition among firms. Firms try to increase their profits by devoting resources to creating new products and developing new ways of making existing products. There have been many economists supporting the argument that innovations could be associated with waves of economic growth as mentioned earlier. Albernathy and Utterback (1978) contended that at the birth of any industrial sector there is radical product innovation which is then followed by radical innovation in production process, followed, in turn, by wide-spread incremental innovation.
Some firms develop a reputation for innovation and it helps propagate a virtuous circle that reinforces a company’s abilities. Trott (2005) views this concept as a specific example of Porter’s (1985) notion of competitive advantage. Porter argued that those companies who are able to achieve competitive advantage – that is, above-average performance in an industry sector – are able to reinvest this additional profit into the activities that created the advantage in the first place, thus creating a virtuous circle of improvement, or competitive advantage. The success or failure of a firm depends on a strategic competitive advantage. Competitive advantage can be achieved by delivering the product at lower cost or by offering unique benefits to the buyer. It can take many years for a company to build a reputation for being innovative, but once it has done so, it attracts further creative people leading to further leaps in innovation. But the company also has to provide the right atmosphere for that by encouraging creativity and willingness to accept new ideas like Toyota does.
Marketing also plays a very important role in the innovation process as it helps in finding out what customers want. This is crucial as success in the future will lie in the ability to acquire and utilize knowledge and apply this to the development of new products which meets and exceed the target customers’ expectations. But recent studies by Hamel & Prahalad (1994) and Christensen (2003) suggest that listening to your customer may actually stifle technological innovation and be detrimental to long term business success. While sustaining or incremental innovation may appeal to existing customers as they provide improvements to established products; disruptive innovations tend to create new markets which eventually capture the existing markets. For example, the launches of video CDs have made the VHS cassettes obsolete.
2.1.1 Models of innovation
There are two schools of thought over what drives innovation; market-based view and resource-based view. The market-based view argues that market conditions provide the context which facilitate or constrain the extent of innovation activity. This of course depends on the firm’s ability to recognise opportunities in the market place. The resource based view of innovation considers that a market-driven orientation does not provide a secure foundation for formulating innovation strategies for markets which are dynamic and volatile; rather a firm’s own resources provide a much more stable context in which to develop its innovation activity and shape its markets in accordance to its own views (Wernerfelt, 1995).
2.1.2 Types of Innovation
Innovation can be divided into following types (adapted from Trott, 2005):
- Product Innovation: The development of a new product. E.g. A new car model.
- Process innovation: The development of a new manufacturing process. E.g. lean manufacturing, flexible platform sharing.
- Organizational innovation: A new venture division; a new communication system; introduction of new procedures.
- Management innovation: TQM systems; Business Process Re-engineering (BPR) which are explained in details later.
- Production innovation: Quality circles; Just In Time (JIT)
- Environmental Innovation: These are the author’s views (see section 2.1.6).
Among the various types of innovations mentioned, the author will discuss some crucial management and environmental innovations which will help in tracing down the factors behind Toyota’s success.
2.1.3 Management Innovation 1: Total Quality Management (TQM)
TQM can be defined as: An effective system for integrating the quality development, quality maintenance and quality improvement efforts of the various groups in an organization so to enable production and service at the most economical levels which allows for full customer satisfaction (Feigenbaum, 1986).
An effective TQM approach demands all the employees in an organization to be involved. It regards quality as the responsibility of everyone and not limited to a manager or a particular department. Quality and employee improvements are therefore inextricably linked and should be part of a continuous cycle. TQM is an ongoing process of continuous improvements and incremental innovations. The impact of small, relatively easy to achieve improvements can be very positive. Much of the improvement in the reliability of cars over the past twenty years has been attributed to a very large number of improvements initiated by thousands of employees in all the manufacturing companies involved (Trott, 2005).
Toyota’s commitment to quality can be appreciated by this example. If there is even a small defect like a seatbelt not fitted properly, the workers can pull a cord and stop the production line until the problem is resolved. Workers at the Toyota plant in Georgetown, Kentucky, pull the cord 2,000 times a week – and their care is what makes Toyota one of the most reliable, and most desired, brands in the US. In contrast, workers at Ford’s brand-new truck plant in Dearborn, Michigan, pull the cord only twice a week – indicating the legacy of generations of mistrust between shop-floor workers and managers (Schifferes, 2007).
Toyota’s relentless cost engineering creates efficiencies that Detroit can chase but not match. Its philosophy of continuous improvement–rethinking the thousands of steps that go into building each model–allows Toyota to constantly trim material costs and production time. For example, the company lowered the base price of its 1997 Camry by 4%, after taking steps that included streamlining the front-bumper assembly from 20 parts to 13 and reducing the number of steel body fasteners from 53 to 15. Such improvements enable Toyota to assemble a car in 21 hours, vs. 25 for Ford, 27 for Chrysler and 29 for GM (Greenwald et al., 1996). (See also appendix 4)
However, in pursuit of continuous improvement, there could be some stages where a radical change may involve complete withdrawal of a procedure leading to potential job losses for the employees. So the employees would be reluctant to pursue that idea. The very feeling of process ownership by the employees may obstruct radical change, i.e. TQM may not support major innovation (Giaver, 1998).
2.1.4 Management Innovation 2: Quality Function Deployment (QFD)
QFD is another important management innovation. Making design decisions concurrently rather than sequentially requires superior coordination among the parties involved – marketing, engineering, operations and most importantly, the customer. Quality function deployment is a structured approach to this problem that relates the voice of the customer to every stage of the design and delivering process. It promotes better understanding of customer demands and design interactions.
For a company to achieve its own quality goals it must include and consider the quality programmes of its suppliers and customers. Identifying the causes of uncertainty, determining how this affects other activities in the supply chain and formulating ways of reducing or eliminating the uncertainty is essential to the management of all the processes involved. Here is an example to illustrate this. McDonald’s built a restaurant in Moscow. To achieve its required and expected level of quality and service, the company set up an entire supply chain for growing, processing and distributing the food. McDonald’s made sure that all parties along the whole chain understood its expectations of performance and closely monitored performance (Upton, 1998).
The QFD approach requires trust between all parties. As in the modern world, the competition between organizations effectively becomes competition between supply chains. Only by innovating within the organization’s supply chain, in terms of product and service, will the organization survive.
2.1.5 Management Innovation 3: Business Process Re-engineering (BPR)
This is a completely opposite approach to that of incremental innovation preached in TQM. Slack et al. (2004) defines BPR as ‘The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed’.
This approach is quite similar to that of Peters (1997) who suggests total destruction of company systems, hierarchy and procedures and replacing them with a multitude of single-person business units working as professionals. He argues that small modest improvement enshrined in TQM detracts effort from the real need to reinvent the business, i.e. ‘Incrementalism is an enemy of innovation’. He argues that a radical approach is the only way organizations can be sufficiently innovative to survive in the twenty-first century.
But BPR is criticised as one of the major downsizing tools common in 1980s and 1990s. The combination of radical downsizing and redesign can mean the loss of core experience from the operation. If taken too far (e.g. if the short term improvement was achieved at the expense of support for R&D expenditure) the resulting organization could become hollow and die. Also, the core business has to be sound otherwise BPR is akin to ‘flogging a dead horse’ (Trott, 2005). So, an organization has to take care that their core knowledge is passed on and they do not suffer due to BPR.
2.1.6 Environmental Innovation
The author has found a gap in literature in the form of environment innovation. It is not limited to any product or process innovation, but it is the holistic process companies have to follow to keep pace with the changing environment (also see section 2.2.1). Companies round the world are making more fuel efficient cars and alternative fuels to reduce the burden on fossil fuels. GM has realized this a little late and now their full attention is towards environmental innovation. This is because fancy designs and add-ons are not sufficient to compete in the environment-conscious market. Auto makers are under pressure to produce more efficient cars that use less fuel and thus pollute less, in part because petrol prices have soared in recent years in the US, but also because they will soon be required to do so by law. In December 2007, US President George W Bush signed an energy bill that will force the industry to cut average emissions from all vehicles. By 2020, the average must have been slashed by 40% to 35 miles per gallon, and the industry is convinced they will be able to deliver – though it will not come cheaply (Madslien, 2008).
Today, a fuel called biodiesel, which is derived from vegetable oil, is used throughout Europe. While it has been used in the United States in fleet vehicles for decades, only recently has it become more widely available to the general public.
With the world’s oil supply declining and the increasing effect of greenhouse gases on global warming, the push for alternative-fuel vehicles will only continue to grow. In addition to increased production of the types of vehicles discussed here, the next step in alternative-fuel vehicles is fuel cells. A fuel cell vehicle is essentially a hybrid vehicle that is powered by an electric motor, which gets its power from a fuel cell stack rather than an internal combustion engine. There are only a handful of fuel cell vehicles in use today because the technology is still being developed. In addition, there are relatively few fueling stations with hydrogen, the fuel used to power the fuel cell stack.
The U.S. Department of Energy, the agency that oversees a federally funded program to pursue fuel cell development, will decide by 2015 whether fuel cell technology is viable. Even if the decision is made to move forward, hybrid vehicles and gasoline-powered vehicles—as well as those powered by diesel and ethanol—will most likely remain in use for many years (JDPower, 2008).
2.2 Critical Success Factors
Critical success factors are those product features that are particularly valued by a group of customers and, therefore, where the organization must excel to outperform competition (Johnson et al., 2006). A firm needs to have the threshold capabilities and core competencies to meet the critical success factors. Threshold capabilities are the bare minimum required for an organization to be able to compete in a market without which, an organization cannot survive. The threshold levels rise over time as critical success factors change and as new competitors enter the market. So a company has to keep on reviewing and improving its threshold capabilities just to stay in the market. But this is not sufficient to create competitive advantage. That can only be achieved by unique resources and core competencies which the competitors cannot imitate. Whereas unique resources are those resources that critically underpin competitive advantage and core competencies are the activities and processes through which resources are deployed to achieve competitive advantage. So, even if a company has unique resources, without having the requisite core competencies, it cannot achieve competitive advantage.
Lynch (2003) refers to CSFs as KFS or Key Factors for Success. Lynch states that KFS are those resources, skills and attributes of the organisations in the industry that are essential to deliver success in the market place. There are endless issues that can be explored by an organization, but due to limited time and resources, it is better to narrow them down to KFSs and focus the resources on the most important matters. KFS are common to all organizations in an industry but they do vary from industry to industry. They are dependent on customers’ expectations, quality of competition and corporation’s own resources and skills. The author agrees with Lynch’s view of the need to concentrate the organization’s resources to KSFs. But the author also feels that they are not easy to pin-point and measure. Moreover, an organization should also create new CSFs through innovation and invention. For example, the creation of digital cameras completely changed the CSFs in that industry.
Another point of view is provided by Sousa et al. (1989), who call it shared experience view. The shared experiences school maintains that the area of business strategies is amenable to research aimed at finding nomological statements. It is believed to be possible to find out how different strategy types are linked to business success under various conditions. This school can be called the shared experience school, because it builds on the expectation that, if experience on business strategies is shared, it becomes possible to build up general, empirically based theoretical knowledge, which then can guide the selection of business strategy. For this school, business success is governed by causal relationships, which exist as an objective truth, and which gradually can be uncovered by research.
2.2.1 Strategic Drift and Scenario Planning.
Johnson et al. (2006) describes strategic drift as the stage where strategies progressively fail to address the strategic position of the organisation and performance deteriorates (see figure 2 below). For example, GM find themselves far behind in the environment innovation sector. Therefore, the organization needs to understand and address the contemporary issues that are challenging them. The figure shows environmental change and strategic change. An organization has to keep pace with the changing environment via incremental changes and when required, transformational changes. If it fails to do so, the organization is at the risk of completely failing.
Johnson et al. (2006) provides a possible solution to prevent these risks through scenario planning. Scenarios are detailed and plausible views of how the business environment of an organization might develop in the future based on groupings of key environmental influences and drivers of change about which there is a high level of uncertainty. While it is not possible to correctly predict the future, but it is valuable to have different views of possible futures. Managers should form multiple, equally plausible futures and develop contingency plans for each scenario. They have to do so by limiting the number of assumptions and uncertainties to minimum by focussing on factors that are uncertain but can have a high impact. Such scenario planning will no doubt consume some resources currently, but it can prevent huge losses in the future by limiting the number of shocks and surprises and help create a pro-active organization which moves with the changing environment.
2.3 Other Factors
2.3.1 National competitive advantage: Porter’s Diamond
It is argued that some nations provide better environment to foster innovation than others. Porter (1990) devised a diamond to explain the four main factors helping a country build and maintain competitive advantage These are:
Porter’s Single diamond framework
1. Factor conditions: These include the human resources; physical resources such as land, water mineral deposits, infrastructure etc; nation’s stock of knowledge resources such as scientific, technical and market knowledge which can affect the quantity and quality of goods and services and finally, the cost of capital and availability. Although Japan was low on natural resources, they more than made that up with their excellent human resources. Morita (1992; cited by Trott 2005) argues that ‘you will notice that almost every major manufacturer in Japan is run by an engineer or technologist. However in the UK, some manufacturing companies are run by CEOs who do not understand the technology that goes into their own products. Indeed, many UK corporations are headed by chartered accountants whose major concern is statistics and figures of past performance. How can an accountant reach out and grab the future if he or she is always looking at last quarter’s results? Therefore, it is important for an innovative firm to have the right leadership at the top who can guide the firm into the future.
2. Demand conditions: These include the composition of demand in the home market, size and growth rate of home demand, ways through which domestic demand is internationalized and pulls a nation’s products and services abroad. The demand for cars in Japan was low, so Toyota ventured into US shores to feed their ever-growing ambitions.
3. Related and supporting industries: These include the presence of internationally competitive supplier industries which can create advantage through speed and efficiency. Also related industries which are internationally competitive can create value when competing or by complementary products. Toyota was competing in Japan with the likes of Honda and Nissan who themselves, were very effective in their production methods. Moreover, Toyota’s JIT was successful due to efficiency of their suppliers and their ability to keep up to Toyota’s high standards.
4. Firm strategy, structure and rivalry: This includes the way in which firms are managed and choose to compete; company’s goals and their employees’ motivation and the amount of domestic rivalry and the creation of value in the respective industry.
Apart from the above four main factors, two other variable play an important role.
1. The role of chance: Some unexpected, odd events can sometimes nullify the advantage of competitors and change the entire competitive position of a market. These could be new inventions, political decisions, wars, drastic changes in economy, oil price surges and major technological breakthroughs. Toyota’s innovations like JIT, lean manufacturing, TPS and hybrids were all responsible for its meteoric rise among soaring oil prices and environmental concerns in the USA.
2. The role of government: Government can influence all four of the major determinants through actions like subsidies, policies, regulation of market, product regulations, tax laws and antitrust regulations. While some countries like Japan, provided extensive support and subsidies to promote industrial innovation, others such as United States, have aimed to create positive effects in the economy by letting the market achieve the most efficient allocation of resources with minimal possible intervention. The so-called Chicago school paradigm for promoting competitiveness and innovation, which created a belief in the free market to maximise innovation and productivity has, for more than two decades, been the dominant perspective in the United States (Rosenthal, 1993).
Critique of Porter’s Diamond
Although Porter’ diamond provides us a useful tool to study national factors in competitive advantage, it has some shortcomings according to Rugman et al. (2003). First, it was constructed on the basis of aggregated data on export shares for ten countries: Denmark, Italy, Japan, Singapore, South Korea, Sweden, Switzerland, UK, USA and West Germany. And it took only case studies from four industries. Therefore, it cannot be applied in every case without modification. Second, it fails to accept the notion that sometimes government’s action can end up protecting a domestic industry excessively and in turn, make it less competitive internationally. Third, it considers chance as an important factor but it fails to acknowledge that it very hard to predict any such events and therefore not possible to include in an organization’s strategy. Although a solution to this problem is scenario planning. (See page 14)
2.3.2 Lean and Multiple-project approach
Michael Porter, could encapsulate the lean manufacturing strategy as being one which comprised (amongst other things) “a wide line of models offering multiple features”, based on “standard products” with a “wide range of options” (Porter et al., 2000).