The US Automobile Industry and Toyota: A Marketing Analysis

Introduction

The subject of this marketing analysis will be the US automobile industry with a particular focus on Toyota.  This analysis will be divided into the following three sections.  After the introduction, the industry analysis for the automobile industry will be presented.  The second section will present the organizational analysis for Toyota.  This section will also include a SWOT analysis for the firm.  The third section will discuss recommendations for Toyota's business based on details developed in the SWOT analysis.  

Section 1: Industry Analysis

The following industry analysis will examine the situation of the automobile industry with a particular focus on the United States.  This section will conduct both a situation and an environmental analysis on the automobile industry.  These analyses will include a basic description of the industry, a discussion of factors that influence demand for automobiles in the US, a discussion of factors that influence industry cost structures and profitability, opportunities for the automobile industry and potential threats to the industry.  The latter two items are usually developed from a SWOT analysis.  So after discussing the first two subject areas of the industry analysis, a SWOT analysis will be conducted for the US automobile industry.  The company analysis section will perform a SWOT analysis focusing on the excellence of Toyota. 

A situation analysis is conducted by managers to analyze an industry or organization's total operating environment.  This environment includes internal and external factors affecting the business. A situation analysis can help clarify an industry's current capabilities, its customers, and the business environment in which it functions.  The situation analysis is usually handled in three stages ("Taming," n.d., p. 2).  These stages are the target market analysis, the environmental analysis, and the SWOT analysis.

Target Market Analysis

The target market analysis examines the issues affecting the current target market of the automobile industry. This analysis will focus on the type of product the industry produces, customer information and distribution channels, industry size as measured in annual sales, geographic location, profit trends, and finally the competitive environment of the industry. 

Product type. Automobiles are motorized vehicles designed to be used on roads for the transportation of passengers and commercial goods.

Customer information and distribution channels. Automobiles are manufactured in factories and are then made available for sale through numerous retail outlets.  To minimize costs auto makers usually move production facilities near to where the vehicles are going to be sold.  This is thought to be cheaper than centralizing production facilities and then exporting the vehicles over large distances.  They then utilize local retail networks to distribute their brand to consumers.  This also allows a significant degree of customization in the production of motor vehicles.  Auto makers recognize, through market research, that preferences vary from region to region even within a single country.  Thus they can tailor their brand to fit macro and sometimes even micro consumer preferences (Colovic & Mayrhofer, 2011).  

Industry size.  It is estimated that over 1 billion vehicles are in operation worldwide (Tencer, 2013).  In 2013 auto sales accounted for an estimated $4 trillion in revenue.  The automotive industry employed nearly 5.5 million workers worldwide and sustained over 350,000 business enterprises ("Global Car" 2013).  

The automotive industry is one of the core industries in the US economy.  In October 2012, direct employment in the automotive and automotive equipment sectors was nearly 775,000.  But when employment in all sectors dependent on the automotive industry are included this employment rises to 13 million jobs or nearly 10 percent of the nation's workforce ("Automotive" 2012, 3). However, the future of workforce autonomation may greatly impact these figures. 

Due to the Great Recession the US auto market has experienced some severe fluctuations in recent years.  Before the recession began, new passenger car registrations reached a peak of 16 million in 2007 and declined to a low of 10.4 million in 2009 ("Automotive" 2012, 2).  There has since been a rebound to over 15 million new car registrations.  While this is still below the pre-recession peak, industry forecasters predict continued growth in the years ahead.  Table A1 provides a nine year overview of registrations for various types of passenger vehicles.  This overview includes projections for industry growth three years out. Table A2 provides passenger car registrations with a cross-national perspective. The world's top four automotive markets are represented in the table plus Canada ("Automotive" 2012, 3).

Geographic location. As noted above, the automobile industry is global in scope and is not limited to any one specific geographic location.  Indeed the only region that appears to have little significant market penetration is Sub-Saharan Africa (Cropley, 2013).  Indeed according to Cropley (2013) the 40 countries of sub-Saharan Africa have a combined total of less than 2 million vehicle sales in 2013.  As table A2 shows, 2013 car registrations in Japan alone were more than twice this amount.  

The top two regions for automotive sales are North America and western Europe.  However, in recent years Eastern Asia has increased its proportion of car registrations.  This increase is due to traditional strength in Japan and South Korea.  However, recent years have seen burgeoning market growth in China. The US accounts for about 20% of global auto sales ("Automotive" 2012, 3).

Profit trends.  As reported above, the US and global automotive industry has been under some considerable stress in recent years.  The decline in car registrations due to the Great Recession has mostly been recovered.  Although sales have still not recovered to pre-recession levels they are expected to do so by 2015.  

Competitive environment. The US automotive industry is extremely competitive.  An example of this competitiveness is the decline in market share of the traditional ”big three" US automakers.  This has happened with the increasing success of Japanese and Korean automakers in the US market.  The big three automakers are General Motors (GM), Ford and Chrysler.  These firms were traditionally the biggest automotive firms in North America and two of the three are still among the top five nationally.  But for the first time in 2007 the combined market share of the big three dropped below 50% (Micheline & Bunkley 2007).  This decline has been due to the increasing strength of Toyota in the North American car market.  Toyota is now the third largest seller of motor vehicles in the US.  As of 2012 the big three's decline has continued.  These firms now hold only 45% of the US automotive market ("United States Autos" 2013, 16).  In contrast, the combined market share of the "big three" Japanese auto makers (Toyota, Honda and Nissan) reached 32% in 2012.   US sales of the top two Korean auto makers, Hyundai and Kia Motors, topped 8%.  Sales of the two European auto makers Volkswagen and BMW were both less than 7% ("United States Autos" 2013, 16).  

In order to compensate for declining US market share the big three Detroit auto makers are looking increasingly to emerging markets.  These markets include Asia, Latin America and Russia which have relatively low market penetration with a high potential for sales growth ("Automotive" 2012, 5). 

Environmental Analysis

An environmental analysis examines the issues affecting the demand side of the automobile industry's total operating environment.  This environment includes economic, demographic, socio-cultural, political and technological factors.  This analysis will address those factors as well as such issues as product purpose and function, the product lifecycle stage, marketing plans developed by firms in the industry, and the use of price as a competitive tool.  

Product purpose. As noted above, depending on the type of vehicle, automobiles serve both a passenger and a commercial transportation purpose.  Passenger transportation is typically used for commutes to and from work.  It can also include usage for purposes of shopping and recreation. Commercial vehicles, such as trucks of various sizes, are used to transport cargo over large distances and also to transport technicians and equipment to work sites. Commercial vehicles can also be used to transport passengers as in the case of taxis and buses.  Vehicle ownership can include either private individuals or business enterprises. 

Product Lifecycle

A product has four different stages in its life cycle.  These are the introductory, growth, maturity and decline stages ("Product Life," n.d.).  Sales volume usually varies during each stage of the product life cycle. Also marketing strategies also shift with each stage as well.  Below is a brief review of the product life cycle. 

Introductory phase. During this phase car companies emphasize what makes the new product unique.  These unique characteristics could include such features as higher fuel economy, driver assistance technology, and other amenities.  At this stage the price of a new vehicle is at its highest.  Therefore the marketing campaign is targeted on the more affluent segments of the consumer market.  There is often a waiting list for potential purchasers. 

Growth phase. As the success of the new vehicle gains momentum it is now possible to expand the marketing campaign to a much wider audience.  At this stage the price of the new product has begun to decline thus making it more affordable to a much wider proportion of potential consumers.  This is also the phase at which competitors become a factor.  As a result firms will offer a competitive price and "sweeten the pot" with such offers as cash rebates.  Producers will expand their marketing focus to brand differentiation rather than just the distinguishing features of the product.  The new car is now available in vehicle showrooms and is featured at marketing expos. 

Mature phase. The mature phase of the product life cycle is characterized by declining growth.  This growth decline is caused partly by market saturation and partly by the counter-measures performed by industry competitors. The battle for market share becomes particularly acute as competitors continue to bid down price in order to gain a crucial edge in the market. This makes the vehicle even more affordable thus making it available to an even larger potential pool of consumers than in the previous phase.  This is a phase in which brand differentiation and market segmentation become crucial strategies in the battle to maintain market share.  

Decline phase. Interest in the once hot commodity begins to drop thus initiating in the decline phase.  This occurs as new products come online and move existing vehicles to the periphery of the marketing strategy.  At this phase, firms will offer significant discounts in order to move the remaining unsold stock of vehicles.  Also, car companies may have to pay taxes on any unsold stock at year end. Thus this is an added incentive to aggressively move unsold inventory.

Economic factors. As noted above, the automotive industry is still in recovery from the worst economic downturn since the Great Depression.  As it stands the recovery has been slower than many economic forecasters would have hoped.  But it has been both appreciable and steady.  The US also remains the world's largest economy with one of the world's highest per capita incomes.   Forecasts expect an increase in per capita GDP, population and number of households through 2016.  Relevant data from 2007-2016 are in Table B1.

Demographic factors. As can be seen in table B1, demographic factors are crucial.  Forecasts are for increases in GDP, per capita GDP, population and households through 2016. This increases should fuel gradual growth in the domestic vehicle market. 

Socio-cultural factors.  Demographic and economic factors are indicating some solid growth prospects through the middle of the decade.  However, there are socio-cultural factors that indicate some cause for concern.  There is recent data that suggests younger Americans, particularly those of the millennial generation (or generation Y), are not as interested in automobiles as previous generations. Generation Y is defined as the 18-34 age group and it's believed to have about 70-80 million members (Weinstein 2012, 14).  

Weinstein (2012) reports research that the percentage of 19 year old individuals with a driver's license has declined from 87.3% in 1983 to 75.5% in 2008 and to 69.5% in 2010 (Weinstein 2012, 15).  There is also research that shows that Americans are driving less.  Total vehicle miles traveled (VMT) increased from 631 billion miles in 1956 to over 3 trillion miles in 2007.  However, from 2007 to 2012 VMT declined by 99 billion miles (Weinstein 2012, 16). VMT per capita reached a peak of over 10,000 miles in 2005 and fell by 700 miles in 2012 (Weinstein 2012, 16). 

It appears that many younger Americans are forgoing automobiles in favor of bicycles.  There is also evidence that as more Americans move back into urban centers they are abandoning automobiles in favor of mass transportation.  Weinstein also reports evidence that this trend started even before the Great Recession.  This trend is likely driven by a greatly reduced ability of younger Americans to afford automobiles (Weinstein 2012, 14-16).  If this continues, population growth alone will not be enough to sustain improved sales forecasts of automobiles.  There will need to be a revival in the popularity and affordability of automobiles as a consumer item. 

Political factors. The key political factor affecting the automobile industry concern the cost of gas prices. Increased consumption of oil by newly industrializing countries has impacted gas prices throughout the last decade.  But another factor is the ongoing instability in the Middle East.  This instability will affect gas prices going forward and may act as a further deterrent to US driving habits and vehicle consumption. The automotive industry is responding by switching to light vehicles, alternative fuels, and improved fuel economy.  But these measures may only have a partial impact on the overall price of oil. 

Technological factors.  Technology continues to be a source of innovation in the auto industry.  These innovations are taking the forms of alternative fuels, fuel economy improvements, driver assistance technology, and internet connectivity.  These improvements will continue to make automobiles an attractive investment for a large portion of the public. 

Cost Structures and Profitability Factors

The following factors affect the cost structures and profitability of the automobile industry:  the stage of the product life cycle, the competitive environment, and the cost drivers.  The current section will examine each of these three factors. Stage of the product life cycle. Please refer to the discussion of the stages of the product life cycle completed above. Competitive environment. Please refer to the "competitive environment" section above. Cost drivers. Among the cost drivers for automobiles are increased fuel economy standards, the state of California also mandates the production of electric cars, oil prices, and the cost of labor. 

SWOT Analysis

SWOT is an acronym for Strength, Weakness, Opportunity and Threat.  The SWOT analysis is used in marketing analysis to identify the strengths and weaknesses of an industry or organization.  It can also be used to identify potential threats to an industry or business. SWOT is also useful in determining potential threats to a major initiative a firm could be considering.  Tables B2 and C1 will contain the industry SWOT analysis.  For simplicity's sake, this analysis is being split into two tables.  The first table (B2) will examine strengths and weaknesses and the second table (C1) will focus mainly on opportunities and threats.  

Section 2. Company Analysis: Toyota

The subject of this marketing plan will be the Tokyo, Japan based Toyota Motor Corporation.  The first  section will provide a basic description of the firm.  This section will discuss Toyota's history and development into a major player in the global industry marketplace.  It will also provide an overview of the firm's major characteristics.  There will be a review of Toyota's past objectives and strategies.  The second section will conduct a financial analysis of Toyota.  This analysis will include a discussion of the company's financial ratios and trends.  The third section is the SWOT analysis performed on the firm.  

Company Overview

Company mission. Toyota doesn't issue a mission statement per se.  However, it's guiding principle and global vision provide what can be taken as a kind of mission statement.  Toyota's guiding principle is to produce reliable vehicles.  The firm also promotes a sustainable development of society through utilizing high quality, innovative products and services ("Vision & Philosophy" 2013). Toyota's global vision is to lead the way to the future of transportation. While doing so it looks to enrich lives around the world.  It promotes safe and responsible transportation for all ("Global Vision" 2013).  

Company characteristics. Toyota had total sales of JPY22 billion in FY 2013.  This is a substantial improvement from its FY2012 sales of JPY18.5 billion. FY2012 sales were actually down from FY2011 sales which were JPY18.9 billion ("Overview," 2013).  Toyota's production and sales results for the last three fiscal years are produced in table C2. 

Toyota operates primarily in Japan, North America, western Europe, and Southeast Asia. The firm employs  nearly 332,000 workers worldwide ("Overview," 2013).  Toyota was founded in August 1937 making it 76 years old. It has FY2013 assets of $146.4 billion ("Statement of Financial," 2013).  

The firm's culture can be described as efficient and participatory.  When new prototypes are being developed many different stakeholders are included in the process.  This includes the design and process engineers, the suppliers and staff from the plants (Harris, 2007 16).  The hallmark of Toyota is its famed Toyota Production System (TPS).  The TPS involves streamlining the production process and using plant staff to check each vehicle for flaws.  It also allows each vehicle to be customized appropriately (Harris, 2007 15-16)

The company’s pattern of past objectives and strategies.  As mentioned above, the hallmark of Toyota is the TPS.  This system has produced a very successful record in the firm's several decades history.  However, the firm has run into difficulties in recent years.  Recalls of Toyota vehicles have become very uncharacteristically common. First between 1999 and 2010, over 2000 Toyota vehicles sold in the US resulted in rapid, unintentional acceleration.  This led to over 800 accidents and over 100 deaths (Cusumano, 2011 33).  The cause was identified as sticky brake pedals and loose floor mats that depressed the gas pedal. Issues were also discovered with the software that controlled the engine and braking systems (Cusumano, 2011 33).   

Then there was the corrosion that was discovered in the frames of Tacoma and Tundra pickup trucks sold in the US between 1995 and 2000 (Cusumano, 2011 33).  The cause was improper antirust treatment.  The affected vehicles were quietly purchased from their owners so as to keep the problems out of the news media (Cusumano, 2011 33).  Additional complaints centered on driving systems in the Camry and Corolla models, although these were fairly minor.  By August 2010 Toyota had recalled a total of 10 million vehicles.  It did so during a period when it sold a total of 7 million vehicles (Cusumano, 2011 33).   

These recalls have not permanently affected Toyota's sales and reputation. But they did gain the attention of upper management and the firm has since made the necessary corrections.  Toyota has also recovered quite well from the recall debacles and the Great Recession.  According to Cusumano (2011, 34) a management problem has emerged at Toyota, where a too ambitious bid to overtake GM as the leading automotive producer in the US, led to critical design missteps.  At the same it appears complacency has set in at the firm.  It's probably worth noting that the firm's signature TPS remains as robust as ever and was not implicated in any of the vehicle recall issues (Cusumano, 2011 34).  

Company Financial Analysis

Financial ratios will be discussed in this section.  Table D1 contains financial ratios for Toyota.  Note due to the size of the table it is being divided into two sections. Table D1 contains several different categories of financial ratios comparing company performance to industry averages.  These categories include valuation ratios, dividends, growth rates, financial strength, profitability ratios, management effectiveness and efficiency.  A brief review of what these categories mean follows.

Valuation ratios are used to assess the value of a potential or existing investment.  These ratios are given as a fraction. The value or price of the asset is the numerator and the firm's financial, operational or physical data serves as the denominator.  Dividends are the usually quarterly payments by a firm to its shareholders.  Dividends are paid from either the firm's profits or reserves.  Growth rates refer to the rate of firm growth over a given period of time.  Financial strength refers to the firm's financial health as rated by professional analysts. The quick ratio and current ratio are liquidity measures.  That is, they measure of a firm's ability to produce cash to cover its immediate obligations (Drake, n.d. 6).  Profitability ratios emphasize firm performance.  Performance is measured against sales and expressed as profit margins. Rate of return ratios measure performance in relation to size of investment.  Management effectiveness is measured in terms of firm net profitability and return on investment.  Thus it measures how well the leadership of the firm is performing.  Efficiency ratios measures certain elements of company performance with relation to such items as worker productivity and inventory clearance

Data on Toyota financial trends were referred above in table C2.  It is pertinent to note that Toyota's trend line is one of peaks and valleys.  This is no doubt related to the firm's difficult period involving both the Great Recession and recalls. The firm has since recovered and this is evident in table D1.  A comparison of the firm's 5 year profit margin, growth rate and return on investment averages are significantly below both the industry average and the firm's single year performance. This is because the 5 year average includes both Toyota's recall debacle and the effects of the Great Recession. Whereas the most recent single year performance includes only the firm's impressive return to profitability.  The SWOT analysis for Toyota is presented in table E1. 

Section 3. Recommendations: Toyota

There are not a lot of recommendations for Toyota.  The firm definitely experienced a difficult period due to management overreach and the effects of the 2008 global financial meltdown.  Management overreach is partly responsible for some ill-advised decisions and lax design choices in Toyota vehicles that led to the unfortunate recall debacle.  However, Toyota's senior management has since made the necessary adjustments and the firm has once again returned to profitability.  

One might imagine Toyota's highly publicized recall issues would have permanently damaged the brand.  But they have not.  This can only be due to the strong reputation the firm has built with both customers and other stakeholders in the industry.  Nevertheless, if there is one recommendation to make it's that Toyota's management should not again repeat the mistakes that led to so many recalls.  Nor should it again demonstrate an unwillingness to acknowledge mistakes.  It should always communicate promptly with customers and public officials over product safety concerns.  Toyota must maintain transparency in its operations management going forward in order for confidence to be maintained as well.  Additional episodes could inspire a lack of confidence in the brand that could be more long lasting.  It's TPS continues to be a strong point and in this area management has been diligent to provide it with tweaks that keep it just ahead of its imitators.  Toyota must continue to refine its TPS as well. 

(Appendix A-E omitted for preview. Available via download)

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