Essay on Toyota

This essay has a total of 9555 words and 38 pages.

Toyota

Toyota Financial Services (TFS) recently undertook a major business transition programme
to in-source its back-office functions. This required that a large number of Toyota and
Lexus retail finance contracts, together with all their associated transaction data, be
converted from an external IBM mainframe-based system to an in-house system. The new
system was based on the Lynx "Portfolio" software package using Unix and Oracle
technology. ATD consultants worked closely with TFS throughout the data conversion project
in the following roles:

• contributing to a feasibility study into the risks and benefits of undertaking a
data conversion from the outsourced external system, and presenting the findings of the
study to the TFS management board, which approved the data conversion project

• managing the data conversion project from the start, through to its successful conclusion 18 months later
• acting as the principal contacts with both the existing external system supplier
(Black Horse) and the suppliers of the new in-house system, for the resolution of
technical and data-related issues

• support for the transition of the business to an in-house operation, particularly
through the provision of management information from the source data

• data analysis, data mapping, design of the migration procedures and development of migration software
• unit and system testing of the data migration procedures and software, as well as
support for user acceptance testing

• development of procedures for both the financial and non-financial reconciliation of the data conversion.
The director of the transition programme was Blair Pollock, TFS' General Manager, Business Development, who commented:

"When the ATD consultants joined TFS, the administration of our finance portfolio was
outsourced to Black Horse, a subsidiary of Lloyds TSB Bank. We had decided to bring this
part of our business in-house and were looking for someone to lead the effort to convert
our retail customer data from the Black Horse systems to our own.


The ATD consultants came to us highly recommended for their extensive knowledge and
experience of similar conversions within the motor finance industry. We therefore expected
a high quality outcome, but were nevertheless surprised by the excellent job that they
did.


During the two years that the ATD consultants were with us, they delivered outstanding
results. Their structured approach and attention to detail ensured that the specification,
development and testing of the conversion was meticulous. The conversion event, a "big
bang", took place according to schedule, and 100% of nearly 80,000 contracts were
successfully loaded into the contract management system. We have subsequently had very few
issues with the quality of the converted data and have been able to cope well with the
tremendous increase in business volumes.


It is a great testament to the quality of the work performed by the ATD consultants that
in a recent review of our insourcing project, the Board of Management of TFS recognised
the retail conversion as a major success."

http://www.attentiontodata.com/case_studies.htm, Copyright © 2004 ATD Data Solutions Limited. All Rights Reserved
Columbia Project: Use of Software to Achieve Competitive Advantage
AUTOMOBILES: TOYOTA MOTOR CORPORATION
Gaining and Sustaining Long-term Advantage Through Information
Technology
Case Prepared By
William V. Rapp
Co-Principal Investigator
The College of International Relations
Ritsumeikan University
Kyoto, Japan
914-945-0630 (Fax: 914-923-1416; 011-81-75-466-1214)
E-mail: william.rapp@aya.yale.edu
April 2000
2
SOFTWARE AS A TOOL OF COMPETITIVE ADVANTAGE:
AUTOMOBILE INDUSTRY
1 Introduction: Objectives of this Benchmarking Study……………………….…….3
2 Approach: Methodology and Questions…………………………………………....9
3 Introduction to Case…………………………………………………………….…10
4 The Industry Context: The Japanese and Global Automobile Industries………….10
5 Toyota's Multi-faceted Global Strategy………………………………….………..21
Smart Production (scheduling, buffer stocks, interactive controls)
Smart Design
IT and Management of Supplier Networks
Smart Marketing
Responding to Demand Changes Through Smart Production & Design
6 Smart Car…………………………………………………………………….……...42
Environmentally Smart Cars
Intelligent Transportation System (ITS)
7 Information Technology Infrastructure and Project Selection………………………60
8 Summary - Controlling the Future…………………………………………………..68
Exhibit 1 - Promotion Plan for Intelligent Transportation System………………………78
Exhibit 2 - Toyota's ITS Businesses and R&D………………………………………….79
Exhibit 3 - ITS Evolutionary Development……………………………………………..80
Appendix I Summary Answers to Questions for Toyota - Auto Strategy & Operations..81
Appendix II - Some Industry and Firm Data…………………………………………….88
Bibliography and References……………………………………………………………96
3
Introduction: Objectives of this Benchmarking Study
This automobile study for Toyota Motor Corporation (TMC) was completed
under a three-year research grant from the Sloan Foundation. The project's overall
purpose has been to examine in a series of case studies how U.S. and Japanese firms
which are recognized leaders in using information technology (IT)1 to achieve longterm
sustainable advantage have organized and managed this process. While each
case is complete in itself, each is part of this larger study.2
This case for a large automobile producer, together with other cases, support an
initial research hypothesis that leading software users in the U.S. and Japan are very
sophisticated in the ways they have integrated software into their business strategies.
They use IT to institutionalize organizational strengths and capture tacit knowledge on an
iterative basis. In Japan this strategy has involved heavy reliance on customized and
semi-customized software (Rapp 1995) but is changing towards a more selective use of
package software managed via customized systems. This case is illustrated by Toyota's
development of its system to automate its traditional "just-in-time" (JIT) ordering from
suppliers, its new intelligent transportation system (ITS) and its new smart cars.
Conversely, U.S. firms, such as Merck, who have often relied more on packaged
1
In this paper and the study, software, information technology (IT) and systems are used interchangeably. In addition,
when referring to the firm as a whole, the text uses "it", but when referring to management, "they" is used.
2 There is no comparable US auto company case. However, the industries and firms examined are food retailing (Ito-
Yokado), semiconductors (NEC and AMD), pharmaceuticals (Takeda and Merck), retail banking (Sanwa and
Citibank), investment banking (Nomura and Credit Suisse First Boston), life insurance (Meiji and Nationwide), autos
(Toyota), steel (integrated mills and mini-mills, Nippon Steel, Tokyo Steel and Nucor), and apparel retailing (Isetan
and Federated). Nationwide has replaced USAA, as the latter was unable to participate. These industries and cases
were generally selected based on the advice and research of specific industry centers funded by the Sloan Foundation.
These are the computer and software center at Stanford, the semiconductor and software centers at Berkeley, the
financial services center at Wharton, the pharmaceutical and auto centers at MIT, the steel project at Carnegie-Mellon,
the food services project at the University of Minnesota and the apparel center at Harvard. The case writer and research
team for this case thus wish to express their appreciation to the Alfred P. Sloan Foundation for making this work
possible and to the Sloan industry centers for their invaluable assistance. They
especially appreciate the guidance given

by the auto center at MIT as well as the staff at Toyota who were so generous with their
time. Still, the views expressed

in this case are those of the author and are not necessarily those of Toyota or its management.
4
software, are now customizing more. This is especially true for the systems needed to
integrate software packages into something more closely linked with a firm's business
strategies, markets, and organizational structure.
Thus, coming from different directions, there appears to be convergence in the
strategic approach of these leading software users. The cases confirm what some other
analysts have hypothesized; a coherent business strategy is a necessary condition for a
successful IT strategy (Wold and Shriver 1993).3 These strategic links for Toyota and
Japan's automobile industry are presented in the following study.4
Business strategies are important in understanding IT strategies. This case along
with the other case studies illustrate that the implementation and design of each
company's software and software strategy is unique to its competitive situation, industry,
and strategic objectives. These factors influence how each chooses between packaged and
3 These and other summary results are presented in another Center on Japanese Economy and Business working paper:
William V. Rapp, "Gaining and Sustaining Long-term Advantage Through Information Technology: The Emergence of
Controlled Production," December 1998. Also see: William V. Rapp, "Gaining and Sustaining Long-term Advantage
Using Information Technology: Emergence of Controlled Production," Best Papers Proceedings, Association of
Japanese Business Studies, Salt Lake City, UT, June 1999.
4 All the cases are being written with a strategic focus. That is, each examines a firm's IT strategy rather than the
specific software or IT systems used. In this sense, they illustrate how IT is used to improve competitiveness rather
than what specific software a firm is using. The latter is generally only noted to
illustrate and explain the former. This

emphasis was not specified when the project began but evolved as research progressed. There are three major reasons
the cases became focused this way. First, at a detailed level, all these firms have unique
software and IT systems due to

the way each weaves organization with packaged and custom software. There is thus little others could learn if a study
just explained each firm's detailed IT system or systems. Further, the cases would be long and would quickly drown the
reader in data since IT pervades all aspects of these very large corporations. This was
apparent at an early stage in the

research when the project team tried to develop IT organization charts for Takeda, Merck and NEC. The second reason
is that at a general level, differences in firm IT systems can be almost trivial since
there are only a limited number of

operating system options, e.g. IBM mainframes, Unix workstations, and Windows or MAC based PCs. Third,
information technology changes very rapidly and thus each firm is constantly upgrading and evolving its systems. So
detailed descriptions of each IT system would rapidly become obsolete. For these reasons, focusing the cases on
strategic principles developed as the best way to explain to readers something they could use and apply in their own
situations. This reasoning has been confirmed when the material has been presented in different forums as discussants
have commented favorably on the approach. Equally importantly, in our interviews and conversations with
management, this is where they have focused their responses. That is, as the various cases illustrate, the firms manage
their IT decision-making by following a set of strategic principles integrated with their view of their competitive
environments. This is similar to Nelson and Winter's (1982) rules and routines for other kinds of management decisions
and innovations, and illustrates these firms' evolutionary approach to IT use and development. Their basic reasons for
this incorporate the points noted above, i.e. each firm's unique system, the limited operating system options, and IT's
rapid technical change. Based on what the case study teams have learned, therefore, it is these firms' strategic
approaches, including the concept of controlled production explained later, that seem to have the widest applicability
5
customized software options to achieve specific goals, and how each measures its
success. Indeed, as part of each firm's strategic integration, Toyota and the other leading
software users examined, have linked their software strategies with their overall
management goals through clear mission statements that explicitly note the importance of
information technology to the success of the firm.
Each has also coupled this view with active CIO (Chief Information Officer) and
IT-support group participation in the firm's business and decision-making structure. Thus
for firms such as TMC the totally independent MIS (Management Information Systems)
department is a thing of the past. This may be one reason why out-sourcing has not been
a real option for TMC, except to captive subsidiaries (Rapp 1995). The company's
successful business performance in automobiles and other vehicles is not based solely on
software, however. Instead, as is described below, software is an integral element within
its overall management strategy with respect to producing, selling and servicing
automobiles. It also plays a key role in serving corporate goals such as enhancing plant
productivity by improving production scheduling, reducing inventories or strengthening
customer relations. The systems are thus coupled with the company's approach to
marketing, design, production, customer service, new product development and constant
cost reduction. This reflects Toyota's clear understanding of its business, its industry, and
its competitive strengths within the context of its industry.
This clear business vision, especially of the smart car, smart design and smart
production strategies described below, has enabled TMC's management to select,
develop and use the software they believe is required to assist TMC's plants to operate at
and offer other organizations the most potential insights without becoming dated in how to use IT to improve
competitiveness. The detailed strategy described here, though, only applies to vehicle production and primarily autos.
6
a higher and more consistent level of performance and customer support. In turn, TMC
has integrated this support to its plants into a total support system for the firm, including
its overseas affiliates, which is coupled with the company's overall operations including
parts and steel ordering. Since this vision impacts other corporate decisions, TMC has
also developed good human resource and financial characteristics (see Appendices I & II
on Strategy & Operations as well as Firm & Industry Data).
Toyota does share some common IT approaches with other leading software
users, such as the creation of large proprietary interactive databases that promote
automatic feedback between various stages of the design, order, production, delivery, and
the service process. Its ability to use IT to economize on traditional production systems
and inventory practices, such as the amount of steel that must be held for various
automobile models, is also a common issue for other leading software users. In addition,
TMC has been able organizationally and competitively to build beneficial feedback
cycles or loops that increase productivity in areas as different as design, customer
warranty service and product availability while reducing cycle times and improving the
production and delivery of products and replacement parts to the customer.
TMC's management recognizes that better cycle times between client orders and
ultimate delivery reduce costs and improve business forecasts since projections are for
shorter periods (Fujimoto 1999). Similarly, more rapid design cycles more quickly
incorporate the latest technologies in its new model cars (Sealy 1991 and Sobek 1997).
Therefore, customer satisfaction is improved through the more timely completion of the
sales process as well as the constant product enhancement. One example of this use of IT
to improve competitiveness through faster cycle times is TMC's new parallel and buffer
7
stock production system that permits Toyota to reduce assembly times compared to the
traditional continuous track approach (Fujimoto 1999 and company visit). In sum, IT
inputs are critical factors in TMC's and other leading users' overall business strategies,
yielding strong positive results for doing it well and posing potentially negative
implications for competitors.
An important consideration in this respect is the apparent emergence of a new
strategic production paradigm, "controlled production" ("CP"), where TMC is clearly a
leader. Mass production dramatically improved on craft production through economies of
scale using standardized products, and lean production improved on mass production by
making production more continuous and tying it more closely to actual demand.
"Controlled" production seems to significantly improve productivity through monitoring,
controlling and linking every aspect of producing and delivering a product or service,
including after sales support and product changes. Such effects are described for Toyota
in what follows in terms of its new smart car combined with its smart design and smart
production scheduling.
However, controlled production (CP) is only possible by a firm actively using IT
systems to continuously monitor and control functions that were previously parts of a
business structure that only responded to changes in expected or actual demand. Now it
can actually influence or stimulate those changes. This may be why such firms and
several industry analysts see the skillful use of IT as important to these firms' success,
including Toyota's (Brogan 1997a and Matsushima 1998). But this is only true when IT
is integrated with the firm's business from an operation, product and organization
standpoint, reflecting its overall business strategy and clear competitive vision.
8
This is one reason why at Toyota the software and systems development people
are part of the decision-making structure within each plant and operation. So Seagate
Technology is certainly correct for Toyota when it states in its 1997 Annual Report: "We
are experiencing a new industrial revolution, one more powerful than any before it.
In this emerging digital world of the Third Millennium, the new currency will be
information. How we harness it will mean the difference between success and
failure, between having competitive advantage and being an also-ran."
However, the key in TMC's case to using IT successfully, as with the other
leading software users examined, is to develop a mix of packaged and customized
systems that support the firm's business strategies and differentiate it from competitors.
TMC's management has achieved this by using IT to enhance its organizational and
product strengths rather than trying to adapt TMC's organizational structure or products
to the software used. They have also looked to functional and market gains to justify the
additional expense incurred in customizing certain systems, including the related costs of
integrating customized and packaged software into a single IT system while training
employees to use it. This integration is done by first assessing the possible business uses
of software within the organization, its operations and its products. Particular focus is
placed on IT's role in enhancing Toyota's core competencies in developing, producing
and delivering many different qualities and types of vehicles (Appendix II). Management
therefore rejects the view that IT systems are generic products best developed by outside
vendors who achieve low cost through economies of scale and who can more easily
afford to invest in the latest technologies.5
5 Toyota and the other cases have been developed using a common methodology that examines cross-national pairs of
firms in key industries. In principle, each pair of cases focuses on a Japanese and American firm in an industry where
9
Approach: Methodology and Questions
In undertaking this and the other cases to assess the importance for each firm of
the IT related issues noted above, the project team sought to answer key questions while
recognizing firm, country, and industry differences. These have been explained in the
summary paper referenced in footnote 3 and are set forth for Toyota in Appendix I as
well. TMC's profile is presented there based on company interviews and other research.
Readers that wish to assess Toyota's strategies and approaches to using IT in summary
form prior to reading the case may find it a useful outline.6
software is a significant and successful input into competitive performance. Excepting Nationwide Insurance, the firms
examined are ones recommended by the Sloan industry centers as ones using IT successfully. A leading securities
analyst recommended Nationwide as a replacement for USAA. So all are recognized by their industries as being good
at using IT to improve competitiveness. To develop these "best-practice" studies the research team combined analysis
of current research results with questionnaires and direct interviews. Further, to relate
these materials to previous work

as well as the expertise located in each industry center, the team talked with the
industry centers. In addition, it coupled

new questionnaires with the materials used in a previous study to either update or obtain a questionnaire similar to the
one used in the 1993-95 research (Rapp 1995). This method enabled the researchers to relate each candidate and
industry to earlier results. The team also worked with the different industry centers to develop a set of questions that
specifically relate to a firm's business strategy and software's role within that. Some questions address issues that
appear relatively general across industries such as inventory control. Others such as managing the IC manufacturing
process are more specific to a particular industry. The focus has been to establish the
firm's perception of its industry

and its competitive position as well as its advantage in developing and using a software strategy. The team also
contacted customers, competitors, and industry analysts to determine whether competitive benefits or impacts
perceived by the firm were recognized outside the organization. These sources provided additional data on measures of
competitiveness as well as industry strategies and structure. The case studies are thus based on detailed interviews by
the project team on IT's use and integration into management strategies to improve competitiveness in specific
industries, augmenting existing data on industry dynamics, firm organizational structure and management strategy
collected from the industry centers. Further, data was gathered from outside sources and firms or organizations that had
helped in the earlier project. Finally, the US and Japanese companies in each industry were selected based on being
perceived as successfully using software in a key role in their competitive strategies. In
turn, each firm saw its use of

software in this manner while the competitive benefits were generally confirmed after further research. In the case of
automobiles the team was particularly aided by presentations given by the MIT automobile group at the annual Sloan
Industry Center Meetings from 1997-99 as well as the book produced by that Center (Womack, Jones and Roos 1990).
6
The questions are broken into the following categories: General Management and Corporate Strategy, Industry
Related Issues, Competition, Country Related Issues, IT Strategy, IT Operations, Human Resources and Organization,
Various Measures such as Inventory Control, Cycle Times and Cost Reduction, and finally some Conclusions and
Results. The questions cover a range of issues from direct use of software to achieve competitive advantage, to
corporate strategy, to criteria for selecting software, to industry economics, to measures of success, to organizational
integration, to beneficial loops, to training and institutional dynamics, and finally to
inter-industry comparisons. These

are summarized for Toyota in Appendix I.
10
Introduction to Case
The TMC case begins by placing Japan's automobile industry in a competitive
context and then examines the governmental policies, economic factors, and competitive
dynamics affecting the Japanese and global automobile markets and its producers. As
Japan's leading auto producer, and one of the world's largest (Appendix II), Toyota's
evolution, competitive situation and current strategies are integral to this picture. Its
situation illustrates well many of the competitive issues facing the world automobile
industry. As competitive pressures mount, many Japanese firms are being absorbed by
global groupings such as GM, Ford, Daimler-Chrysler, and Renault. These expanding
groups are aggressively challenging the leading Japanese producers, Toyota and Honda,
in both export and domestic markets. It is therefore critical to TMC's long-term strategy
that it successfully maintains its position, as the world's most efficient vehicle producer,
while managing its planned transition to a new competitive model (Appendix II).
This is because vehicle production and related businesses, such as replacement
parts and finance, represent virtually all its revenues, operating earnings and invested
capital (Table 11). At the same time, TMC's organizational structure and software
product choices help one understand the company's use and demand for IT while the case
describes how it is using and plans to use IT as a tool to create a competitive advantage in
producing, selling and delivering automobiles. But to appreciate IT's role within TMC,
some auto industry, market and economic characteristics need to be explained.
The Industry Context: The Japanese and Global Automobile Industries
"Since its establishment, Toyota's principle has been to strive constantly to build
‘better products at lesser costs.' To this end, Toyota has developed its own unique
11
production method. This system is based on the idea of ‘just in time' (i.e. producing only
the necessary amount of parts just at its needed time), the idea of Toyota Founder
Kiichiro Toyoda. This system also seeks to thoroughly eliminate all sorts of waste in
order to reduce prime costs. Toyota also places a maximum value on the human element,
allowing an individual worker to employ his capabilities to the fullest through
participation in the productive management, and improvement of his given job and its
environment. With the motto ‘Good Thinking, Good Products,' each individual worker is
making his best effort to assure Toyota's customers the highest quality product, with an
understanding that it is in his work process that quality is built in," (TMC 1994).
Using these principles, by the late 1970s and early 1980s, TMC was firmly
established as the world's most efficient and lowest cost producer of high quality
automobiles (Womack, Jones and Roos 1990 and Fujimoto 1999). The reasons for this
were then explained during the late 1980s through a series of studies organized by MIT's
Automobile Industry Center culminating in 1990 in Womack, Jones and Roos' seminal
work on lean production. As a result, U.S. and European producers became well aware of
lean production principles and have spent several years benchmarking and trying to catch
Toyota. In addition, they expanded through global groupings to combine global scale and
scope with improved design and manufacturing efficiency.
Therefore, competitive pressures began to shift significantly during the 1990s for
Japanese auto producers from two industry-based sources. One was the emergence of
these larger global and more efficient competitor groupings such as Ford, GM, Renault,
Daimler-Chrysler and Volkswagen. The second was the serious decline in domestic auto
demand as the Japanese economy felt the combined pressures of the Bubble collapse and
12
a continuing strong yen (TMC 1999, Brogan 1997a and Appendix II). On top of these
conditions, the strong yen made Japanese auto exports less competitive in world markets,
stimulating foreign direct investment (FDI) by Japanese producers, which further reduced
export demand for Japanese cars. As seen in Appendix II, these cumulative effects were
only moderately ameliorated by increased export demand due to a rapidly expanding
Asian economy. Indeed, due to local content and production requirements, Japan's high
Asian market share did not help Japanese auto producers all that much in using excess
Japanese production capacity despite the region's rapid growth. In 1995, for example, out
of total vehicle sales of about 3.9 million units in Asian markets other than Japan,
roughly 3.5 million units in total were produced in those Asian countries (including
exports outside of Asia). In turn only 600,000 units were imported from Japan, which
was only a 100,000 units' increase from 1991. So the impact of Asia's economic
expansion during this period on Japanese vehicle exports and production capacity
utilization was fairly modest (MacKnight 1997).
While Japanese vehicle shipments (exports plus domestic demand) hit an all time
high of 13.6 million units toward the end of 1991, domestic production peaked at 13.5
million in 1990 with the end of the Bubble. It subsequently fell to 10 million units by
1998 (TMC 1999). Further as indicated in Table 3 (Appendix II), exports fell from about
6.6 million units in 1986 to 3.3 million in 1998, while domestic demand, which peaked in
1990 at 7.8 million units, fell by about 1 million units during the 1990s. At the same time,
overseas production rose dramatically from very low levels in 1986 to several million
units a year by 1998 (Tables 3 and 8). So the combined and interactive effect of a strong
yen and FDI on exports has created substantial excess Japanese production capacity. The
13
drop in domestic demand due to the recession has just added to that extra capacity.
Further, this extra capacity is unlikely to be absorbed via either a Japanese recovery or
exports since domestic demand is currently saturated at around 7 million units
(MacKnight 1997) and overseas production is still expanding.
However, this excess capacity has created real downward pressure on prices,
while increasing domestic and export competition. Yen appreciation has had a direct
effect on profits and competition (Table 9), but there have been indirect and strategic
effects too. These stem from the fact that in a declining market, the low cost producer has
a great advantage. This is because that firm can afford to continue to invest in capacity
and research and development (R&D) as well as develop new models. It can also afford
to price lower to maintain market share and keep its factories operating profitably and
close to capacity. In a capital-intensive fixed investment industry like automobiles, this
yields tremendous operating advantages that tend to compound over time since the
natural reaction of weaker competitors is to rationalize and cut back in areas like R&D,
capacity additions or new model development. If the decline in demand is short-term,
these actions may have minimal strategic effects. But when weaker demand and excess
capacity becomes protracted, as it has for Japan in the 1990s, the competitive effects of
decreased innovation and older-looking models become important since consumers
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