It has been a not-so-quiet battle between two titans, General Motos and Toyota. Only one is winning. M. Reza Vaghefi, Cheryl Van Deusen and Louis Woods have researched Toyota's success and say it's no accident
The April 24, 2007, headline in The International Herald Tribune spoke volumes about what’s happening in the automotive industry: “Toyota ends GM’s reign as leader in global sales”. For some time our interest has been focused on how Toyota managed this coup, because it’s far too easy to say that it’s due to “Japanese management”, the popular phrase du jour of professors and consultants in the 1980s. Instead, our research indicates that Toyota overtook all competitors by both savvy strategic thinking and nuts-and-bolts efficiencies. Toyota is a prime example of how policy consistency – adhering to and expanding upon the founder’s values, then applying them across the company – can take a company to the top.
One of the first things Toyota did to charge ahead was to leverage its management of supply chains. Engineering and component fabrication account for around 85 per cent of the direct cost of the manufacturing process associated with car production. Outsourcing plays an increasingly important role for both domestic and foreign carmakers as companies attempt to externalize many of these direct costs and minimize market risk, while at the same time realizing the benefits of using specialized suppliers.
For a number of years, in-house production has been in steady decline for both domestic and foreign manufacturers. Among US carmakers, General Motors continues to depend on Delphi for a high percentage of components required to build its cars and trucks, while Daimler-Chrysler (which split off into two companies in mid-2007) outsourced more than any other firm. Volkswagen, a German brand, produces on average less than 50 per cent of its automotive components in Germany; indeed, in terms of country of origin, Volkswagen is as much a Mexican product as it is a German one. And, as international trade agreements such as NAFTA continue to gain favour and provide regional comparative advantages, international outsourcing and offshoring will accelerate.
Supply chain relationships among Asian manufacturers are based on a complex system of cooperation and equity interests. In both Japan and Korea, cooperation and asset concentration are encouraged, and antitrust prohibitions are far less restrictive than in the US. Importantly, both government and culture play a major role in Asian manufacturing and distribution practices. Asian values, more so than in Western cultures, traditionally emphasize collective health and wealth over the success of one individual. This attitude clearly supports the synergistic approach of supply chain management and has encouraged concern for quality and productivity.
Some Asian manufacturers, such as Toyota, have been able to transcend Western cultural and institutional barriers and superimpose Asian models of supply chain management and cooperation elsewhere. They have realized real advantages in both production and customer satisfaction in the US. Conversely, Asian manufacturers who have been unable to transcend these cultural barriers and who have been forced to adopt essentially Western models, such as Daewoo, have performed poorly in the US market.
In commenting on Toyota’s worldwide performance, Fortune recently proclaimed that the Japanese manufacturer “defies gravity”, an obvious reference to the company’s sustained competitive advantage in the car industry. In large measure, this advantage is directly attributable to the precision with which Toyota has been able to schedule and coordinate the activities of its network of 300 first- tier component suppliers.
But Toyota also managed itself in special ways; the company has, in effect, its own way of making, selling and servicing automobiles. It all starts with the Toyota Production System (TPS). Toyota’s approach to product development and production has always been different from the path taken by other foreign manufacturers. First, Toyota made a strategic commitment at the outset to produce automobiles exclusively without establishing strategic alliances with other major car producers at the time. Second, founder Toyoda Kiichiro believed the company would fare better if it selectively borrowed technologies and practices from established carmakers without being bound by the restrictions that direct technology transfer would have imposed on the company. In effect, Toyota borrowed the best concepts and practices from elsewhere and then developed what was needed to satisfy customer demand.