The purpose of this essay is to apply the resource based view to critically analyse how Toyota use their resources and capabilities to establish core competences, sustain competitive advantage and achieve their corporate strategy. Toyota Industries Corporation was established on November 18th 1926. Their business industries include; Manufacture and sales of textile machinery, automobiles, materials handling equipment and logistics (www.Toyotaindustries.com). For the purpose of this essay however, the automobile industry is the key focus with specific attention given to the vehicle market segment (see figure 1 below).
Fig 1.
Source: (www.Toyotaindustries.com)
Toyota Motor Company was established on August 28th 1937. Within the vehicle industry, Toyota has become the world’s largest automotive manufacturer, overtaking General Motors in 2008 and produces sports and luxury vehicles, SUV’s, trucks, minivans and buses. Additionally Toyota’s subsidiaries manufacture Daihatsu mini-vehicles, with Hino motors producing trucks and buses. Vehicle parts are also produced by Toyota for its own use and to sell around the world, with Asia generating near 40% of vehicle and vehicle parts sales (www.
Hoovers.com). Toyota Motor Corporation’s top competitors are; Ford Motor Company, General Motor Company and Honda Motors Co., Ltd (www.uk.finance.yahoo.com).
The resource based view identifies that a firm is a set of resources and capabilities that determines strategy and performance (Grant 2005) (See fig.2 below). This view is a development from Porter’s (1980) structural perspective of strategy where emphasis is on the competitive environment rather than the resources and capabilities firms have, develop and evolve to compete (Miller et al 1996).
Broadly speaking, a resource can be defined as: “An economic or productive factor required to accomplish an activity, or as means to undertake an enterprise and achieve a desired outcome” (businessdictionary.com). Resources can be categorised into types, each essential for creating competences.
These include; physical, technological, financial, human and intellectual capital. Johnson et al (2008) defines resources as the tangible and intangible assets of an organisation, such as buildings, people and reputation (Johnson et al, 2008). Toyota is a vast organisation that competes in many markets (fig.1). Over the years it has built up its market resources in order to compete in an array of market segments. By using resources in an effective way, Toyota has created competences in ‘lean’ manufacturing, efficient supply chain management and inventory management. This has enabled flexible, reliable production on a global scale, whilst being able to react quickly to fast changing customer needs.
These elements are at the heart of their strategy in the vehicle market segment (Chen 2004; Lee 2007; Vaghefi 2000). We will now take a look at Toyota’s resources in respect to the categories above. First are the financial resources. Net income was (Yen in millions) ¥209,456 (see appendix page 1) with a loss of ¥86,370 in the automotive sector (see appendix page 2).
In the past Toyota has seen bigger profits and in turn have invested a lot of money in physical, technological and human resources, with many assets all over the globe. Using flexible production methods and standardised production, Toyota have invested heavily in physical and technological resources around the world in order to produce cheap and reliable cars in a number of markets. The graph below demonstrates the extent to which Toyota invests in assets (per employee) in comparison to their main competitors. Fig2.
Adapted from (Raghefi et al 2000)
Toyota has physical assets all over the world with facilities in Japan, North America, Europe, Asia, central and south America, Oceania and Africa (property, plants and equipment) and are valued at (US dollars in millions) $326,196 (see appendix page 3). Globalisation of production has meant their operations span many different cultures and markets. Their human resources accounts for the number of employees, which from March 2010 stood at 71,567 (see appendix page 4). Intellectual capital resources are harder to define specifically.
However we can see from their reputation in ‘lean production’, supply chain management and inventory management that they have specialist knowledge and skills in these areas. In terms of technological resources, Toyota is famed for having advanced material and inventory systems as well as automated plants with in-built quality control systems (Lee 2007). These resources are physical but at the heart is complex technological software and workers that man and run them. Communication networks are also set up through video conferencing which improves global communication and problem solving.
Fig.3
Adapted from (Grant 2005)
To understand why resources and capabilities are essential to strategy, the basic business notion of Porter’s (1981) ‘value added’ model encompasses how resources are used to create and then sell ‘value added’ outputs or products in to a given market (Betz 2002). Ultimately we are looking at how a firm uses its resources, values and procedures/ activities to create organisational competences which then lead to strategic capabilities. Rather than competing primarily through tangible resources, intellectual capital or knowledge is seen as the basis of competition in today’s economy (trekconsulting.com).
Toyota’s competences are built and sustained through creation and implementation of intellectual capital. Focusing on this, Toyota’s competences are supply chain management, inventory management (outsourcing), and ‘lean’ production (‘Kaizan’ approach) aided through their core competence, the Toyota production system (TPS) (Vaghefi 2000). Grant (1996) emphasises that with economic factors being un-stable and with increased competition and diversity, knowledge and specialised organisational knowledge is the catalyst in driving and formulating organisational capabilities. Chandler (1992) points out the importance of capabilities for a firm’s growth and dominance within oligopolistic competition.
Moreover he highlights that capabilities come from a ‘knowledge acquiring processes’ through solving problems. As firms get better at utilising their resources and processes to create organisational competences, strategic capabilities are formed. Essentially it is the way resources and processes and utilised and implemented by managers to generate competences. Therefore capabilities can be seen as learnt managerial skills.
The next section will use theories and models to explain how Toyota uses their resources to create competences and how this then relates back to their strategy and competitive advantage. Businesses that have production utilities generally strive to optimise efficiency. Betz (2002) showed how a company’s strategy or business model can be generated through different combinations of four operational proponents; Resources, sales, profits and capital (see fig 4&5). Fig.5
Fig.4
Adapted from (Betz 2002)
Adapted from (Betz 2002)
Adapted from (Betz 2002)
The Strategic Enterprise Model provides a view to optimise sales and profits by rationalising capital and resource operations. As a model, it is useful in demonstrating and contextualising Toyota’s use of technology, physical machinery, workers and intellectual capital to develop and build quality cars quickly and efficiently (which is their strategy). Bower and Hout (1988) recognised that within the automobile industry four interrelated cycles exist; product development, ordering, pant scheduling and production. Over the years Toyota has designed a decentralised/organic business structure and networks to quickly transfer information, decisions and materials through each cycle.
Sales and scheduling are combined in real time to minimise inventories and utilise flexible manufacturing cells, therefore speeding up response times to changing customer needs faster than competitors like GM. Integrating technological resources and monetary capital in physical machinery thereby lead to a competence in lean and flexible production to aid in a sustainable competitive advantage. Support for this point comes from Vaghefi et al (2000) as they note for most car manufacturers it takes 30 days to meet customer orders, whereas Toyota can respond and produce a car in 5 days. Gadde and Hakansson (1994) discuss the role of purchasing in organisations. It is important to analyse how and why Toyota purchase in the way they do as it reflects their lean production strategy. With just 200 suppliers, Toyota production output is similar to General Motors (GM) who uses approximately 2500 (Laowee 2010).
Toyota outsources 70% of their production activities, standardises production and breaks up the value chain by dispersing productive activities to various manufacturers. This is also known as a value system. Therefore it takes far less time to design and deliver a new car Mahadevan (2010). By structuring their suppliers in hierarchies they knew exactly who delivered where and to whom. For example, first level suppliers are in charge of just-in-time deliveries. Over time, using their knowledge and technology, efficiency of material flows grew. Obviously cooperation and integration of suppliers to this degree takes time. It took 17 years to fully integrate its first level suppliers. Relating this back to Chandler (1994), Toyota clearly had to go through the process of ‘knowledge acquiring’ and learning to fully optimise their business to supplier (B to B) relationship.
However this does reveal how Toyota has built a competence in efficient outsourcing and supply chain management. By making use of outsourcing, Toyota has improved the consistency of car quality as each component is made by a specialist company. Clearly this is one of the main strategies for Toyota, a key activity in the value chain in leading to cheap quality cars which are valued highly by customers. Chen et al (2004) also back up this point of reference in their paper ‘Strategic purchasing, supply management, and firm performance’. They state that “firms with a strategic orientation that emphasises cooperation among supply-chain partners are more likely to achieve greater economic benefits compared to firms that subscribe to the traditional, zero-sum-based notion of competition” (Chen et al p 507).
In the study they used a sample of 221 American companies and found strategic purchasing has a number of positive attributes for a business if done correctly. Firstly, close relationships with limited suppliers can be formed, fostering reliability. Secondly strategic purchasing develops open communication between buyer and supplier. Thirdly, long term strategic relationships can orient mutual gains through working closely with each other. Lastly their results show support for links between strategic purchasing, supply management and financial performance of the buying firm. From their study they created a model for strategic supply management (See fig.6)
Rifkin (2007) writes that there’s a paradigm shift between markets and networks. He argues markets make money by maximising production through the margin of transaction and the volume of units sold, whereas networks minimise production, pooling risk with partners or suppliers and sharing the rewards.
Ultimately this point shows us how Toyota has exploited strong supplier relationships (human and technological resources) to foster their ‘lean’ and just-in-time production competences. Dyer and Nobeoka (2000) confirm this by arguing that Toyota’s cooperation with its suppliers does significantly enhance its competitive position as well as that of its suppliers in the global automobile industry.
Fig.6
Adapted from (Chen et al 2000)
Just-in-time philosophy is considered to be one of the major factors underlying the competitive power of Toyota. It is inevitable that competitors in other parts of the world have tried competing in this area. For Toyota, this has long been a matter of strong relationships with suppliers. Just-in-time parts delivery was pioneered by Toyota and is now widespread. As we have seen, Toyota involves their suppliers in all operations. In making use of their technological and intellectual assets, they have introduced practices for transferring knowledge between itself and the suppliers, so that the whole group learns faster in designing, engineering and manufacturing.
When adopting a JIT delivery strategy there is a decrease in lot sizes and an increase in delivery frequency that supports just-in-time Raghefi (2000). For example, in most of the Toyota plants in the USA there is no tyre inventory at the assembly plant. A local tyre supplier makes deliveries each day by truck. The supplier is responsible for ensuring that the tyre specified is loaded on the conveyor belt connected to the assembly line, according to the schedule decided by the purchaser (Offodile and Arrington, 1992).
Toyota has designed its organisation in a way that fosters close dependable relationships with suppliers, customers and staff. Curado (2006) argues that there is a relationship between how an organisation is designed and organisational knowledge and learning. The relevancy of this theory is high due to the fact many believe knowledge is the key to sustaining a competitive advantage (Chandler 1994, Chen 2004). Albers and Jerke (2004) suggest organisational structure and technological infrastructure impacts knowledge management.
As mentioned earlier, Toyota has invested heavily in technology and use a de-centralised structure, which theoretically is how they have extended their ability to acquire knowledge and learn from mistakes to continually improve Torkkeli et al (2000). Undoubtedly this process has lead over time to Toyota’s strong competences in ‘lean’ manufacturing, supply chain management and inventory management. Consistent knowledge acquisition (intellectual capital), learning, and integration of technological assets with knowledge has then lead to the flexibility and efficiency of their core competence— the Toyota production system (TPS).
The TPS is theoretically or on paper a relatively simple concept. The aims are to establish a system which will maximise flow, eliminate waste, and respect employees. Conceptually TPS is not especially complicated, but its implementation and co-ordination that is exceptionally demanding Lee et al (2007). This is an area where Toyota excels and can therefore produce cars efficiently all over the world using the same production methods or TPS.
We have learnt that by coordinating managerial processes, experimenting and then learning from mistakes, Toyota has been able to create a highly flexible and reliable production and inventory methods. Teece et al (1997) refers to this as a flexible competence. As a consequence Toyota doesn’t just compete in the vehicle industry but in a variety of markets (fig.1). This can be demonstrated by the fact that their technological and intellectual assets in logistics and material handling equipment is likely to have assisted with their competitive advantage (TPS) in the automobile industry, thus allowing them to satisfy their overall strategy.
In conclusion, through a number of theories and models we have analysed and contextualised Toyota’s resources and how through knowledge and learning managers have been able to create competences in ‘lean’ production, inventory and supply chain management.
Attention was given to their just-in-time process and how this relates to competitive advantage. Lastly we looked at how all these elements combine to form a world renowned, flexible production system (Toyota’s core competence TPS) and how this allows Toyota to carry out its overall strategy of flexible, reliable production on a global scale, whilst being able to react quickly to fast changing customer needs thus leading to sustained competitive advantage against competitors.
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