Changing the Rules of the Game

CHANGING THE RULES OF THE GAME

Successful latecomers: Toyota in Europe

By Professor Kazuo Ichijo and George Rädler, Research Associate (November, 2006)

IMD

Chemin de Bellerive 23

PO Box 915,

CH-1001 Lausanne

Switzerland

Tel: +41 21 618 01 11

Fax: +41 21 618 07 07 info@imd.ch http://www.imd.ch

CHANGING THE RULES OF THE GAME | Successful latecomers: Toyota in Europe

"It is not the strongest of species that survive, or the most intelligent, but the one most responsive to change." Charles Darwin

Does your company operate in a mature market? Are you a latecomer in certain parts of the globe? Is your business model requiring adjustments? Let's look at how Toyota dealt with these issues in Europe.

The possibility of profitable growth

− Don't be afraid of change

− Don't be satisfied with status quo

Between 2001 and 2005, Toyota's global sales increased from 5.5 million units to 8 million units. Within the industry, Toyota had an excellent balance of cost-effectiveness and quality. Although recent recalls may have effected their reputation, they did not impact financial results. In 2005, Toyota was one of only two manufacturing companies being a member of the "$10 billion club" - reporting a net income in excess of $10 billion. With this performance, Toyota is widely seen as the most successful automobile company and has become the benchmark for the global automotive industry. But, in the view of Katsuaki Watanabe, President of Toyota, there was no reason to relax:

"Everyone should be dissatisfied with the present situation and constantly try to improve or change things. It's important to realize that there is always something more we need to aim at. That's what needs to be recognized by every individual. When you are growing you are satisfied with the status quo, and that's no good."

IMD - www.imd.ch CHANGING THE RULES OF THE GAME Page 2/6

CHANGING THE RULES OF THE GAME | Successful latecomers: Toyota in Europe

It's about ambition

− Set your goals

− Keep your company focused

"Our goals are not directly positioned against competitors. Our goals are around customers." Toyota initiated a goal of 15% global market share by 2010 (up from 11% in

2005). In order to reach 15%, international growth was of utmost importance, particularly in Europe. Although Toyota recorded its ninth consecutive sales records in Europe in 2005 - and outsold its Japanese and Korean competitors by far - much more was expected from the company. It held a European market share of only 5.1% in 2005, compared to 13.7% in the USA for the same year.

Europe started to play an important role within Toyota. A European design center was established in Nice. A range of new factories brought the number of locally produced vehicles up to 60% and much needed diesel engines were installed in about 40% of all vehicles.

New approaches for latecomers

− Think beyond your existing methods

− Check your competition

With the launch of the Aygo minicar, Toyota challenged many of its traditional views, its traditional Toyota way of doing business. It decided to enter the hugely competitive minicar segment, even after several competitors withdrew due to lack of sales and profits. For Toyota to successfully enter this segment, existing assumptions of the business model had to be changed. Given the cost pressure, Toyota joined forces with Peugeot/ Citroën (PSA). The joint factory in the Czech Republic started operations in 2004 and had a production capacity of 300,000 units. It was producing three cars on the same production line: the Toyota Aygo, the Peugeot 107 and the Citroën C1. This was the only way for Toyota to reach the minimum efficient scale and be cost competitive right from the beginning.

IMD