Globalisation - The essay analyses the competitive advantage of Toyota Motor- a Japanese car PDF

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The essay analyses the competitive advantage of Toyota Motor- a Japanese car manufacturer...

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GLOBALIZATION

Assignment Rubric The distinction among nations in cultures, values, economic structures and institutions have undoubtedly made different contributions to its industries’ success. There are some companies which succeed in particular industries and gain the competitive advantages because their home environment is the most challenging, plausible and forward-looking (Hill et al., 2014). Japanese firms, led by Toyota Motor- a Japanese car manufacturer which was ranked as one of 50 most profitable companies in 2015 have maintained its competitive over recent decades. According to Hill et al., (2014), the firm’s competitive advantage is mainly attribute to its distinctive competences which are the firm- specific strengths that allow the firm to differentiate its products from those offered by competitors (Hill et al., 2014; Lado and Wilson, 1994). Toyota has distinctive competencies in development and operation of manufacturing process. These competencies are considered as the basis of its competitive advantage in the global automobile industry (Hill et al., 2014). It is believed that Toyota’s competitive advantage stems from its capabilities to translate the national advantage into international advantages (Betz, 2003). Meanwhile, the Porter Diamond Model suggests that the national home base of a firm performs a momentous role in the creation of a firm’s competitive advantages on a global scale (Heene and Sanchez, 2010) Therefore, the Porter’s Diamond Model will explain how Japanese mobile industry has become the world’ leading automotive manufacturers during the last decades and then focus on the competitive advantage strategy of Toyota Motor in maintaining its outstanding performance.

I.

JAPANESE

AUTOMOTIVE

INDUSTRY

&

TOYOTA

MOTOR

OVERVIEW The world’s automotive industry has shaped not only the global economy but also billions of people lives. (Shimokawa, 2010). Among the global car manufacturers, the Japanese automobile industry began to merge internationally when the US automotive industry lost its competitiveness and went to decline after the second oil crises (Mohr et al., 2013; Shimokawa, 2010). As the later comer, Japan took advantage of the situation and attempted to establish its superiority of car industry both in cost and quality. Moving into a new era of internationalization, 1

GLOBALIZATION Japan still secures its status as a world leader in car manufacturing and technology with six of the world’s ten largest automobile manufacturers in ranking (Shimokawa, 2010; Tollefson, J., 2008). Among the Japanese car manufacturing brands, Toyota stands out to be the number one automaker in terms of global production volumes, right before Nissan and Honda (Levin, 2014). Established in 1937, Toyota Motor Corporation is a Japanese multinational automotive manufacturer which specializes in car design, manufacture, assembly, sales and related parts and accessories mainly throughout Japan, Asia, Europe and North America. Toyota was ranked as one of the most innovative manufacturing firms in the world in 1980s and becomes the world's second largest automobile manufacturer in terms of global sales units, only behind German Volkswagen Group by 2016 (Schmitt, 2017). During the last decades, Toyota has remained its competitive advantage over its international automobile manufacturing competitors (Heene and Sanchez, 2010; Betz, 2003).

II.

PORTER DIAMOND

From classical economics, a national prosperity or competitiveness is created from its natural endowment including four potent determinants that are labor cost, interest rates, exchange rates and economies of scale (Moon, 2000; Porter, 1990). However, the true sources of competitive advantages are misperceived since the companies nowadays gain competitive advantage over the world competitors because of benefiting from the competitions with strong domestic rivals, having aggressive home based suppliers and highly demanding local customers (Porter, 1990). Disillusioned by the traditional ideology, Porter (1990) advanced a new theory to explain the national competitive advantage. He identified an interconnected system of four classes of national attributes that are (1) factor conditions, (2) demand conditions- feature of internal market, (3) related and supporting industries and (4) firm strategy, structure and rivalsdomestic competition which form a “National Competitive Advantage Diamond ” framework. From Porter’s perspective, the nature of competition and sources of competitive advantages are different among industries and even among different segments within an industry (Dicken, 2007). These determinants create a home environment for the companies learn to compete internationally, therefore serve as an underlying platform or conditions for the competitive advantage of a nation or an industry in international markets (Smit, 2010). However, these 2

GLOBALIZATION determinants are significantly influenced by other two factors that are the chance and governmental policies that perform a role of supporting and complementing the system of national advantages but they do not create a sustainable advantage (Rugman and Verbeke, 2003). The interconnected system is shown in the following model:

CHANCE

FIRM STRATEGY, STRUCTURE AND RIVALRY

DEMAND CONDITIONS

FACTOR CONDITIONS

RELATED AND SUPPORTING INDUSTRIES

GOVERNMENT

The Porter’s National Competitive Advantage Diamond Model Source: Porter (1990), chapter 3

1. FACTORIAL DETERMINANT The factor conditions relates to a nation’s position in factors of production such as skilled labor, knowledge, infrastructure that are necessary for competitiveness in particular industries (Porter, 1990). From the classical economic ideology, labor, land and capital are the determinant factors of production (Frăsineanu, 2008). Nonetheless, Porter theory indicates that although the endowment with factors is apparently irreplaceable, the critical element for a nation to be competitive is to create new factors and to improve the existing ones (Frăsineanu, 2008). According to Porter (1990), the competitive advantage should be created but not inherited. Porter 3

GLOBALIZATION classifies the production factors into different categories including (1) human resources (2) natural resources (3) knowledge resources (4) capital resources (5) infrastructure. Scarce natural resource is one of distinctive characteristics of Japan (Moon, 2016;

McBrierty,

2014; Karan, 2010). Important materials such as oil and metal are meager and areas of good arable land are also relatively limited (Moon, 2016; Oki and Kanae, 2006). Hence, Japanese firms are severely vulnerable to energy shortage. Nevertheless, due to lack of natural resources, Japanese firms mainly focus on investing in highly resource-efficient automobile (Moon, 2016). In terms of human resources, Japan is facing with crisis of domestic labor shortage due to the increasing number of aging population (Frăsineanu, 2008; Uhlenberg, 2009; Faruqee and Mühleisen, 2003; Oliver et al., 1997). According to government projections, labor force in Japan tends to decline tremendously in the next two decades (Ganelli and Miake, 2015). Moreover, the female participation in Japanese labor force is below average in other developed countries (Financial Times, 2017; Holodny, 2016). In 2014, the female participation rate is 66% which is lower than those of women in northern European countries like Norway with 75.9% and Switzerland with 79%. First, to overcome the disadvantage of human resources, immigration has been proposed as an effective solution to Japan’s aging demographic with low birthrate. A lot of Japanese firms start to diversify their workforces and seek for peripheral workers to reduce various costs ((Tominaga, 2016; McDonald, 2003). It is recorded that the official number of foreign employees in Japan has surpassed one million (Japan Times, 2017). Moreover, the drawback of labor shortage has encouraged Japanese industries to innovate labor and resourcesaving technologies in their production chain and shift from labor and resource-intensive products into capital and technology-intensive ones (Blechinger and Legewie, 2000). Despite having shortage in labor force, Japanese automakers still enjoyed access to youthful, welleducated and flexible workforce thanks to the intensive training and rotation programmes within Japanese firms (Buckley, 2006). According to Porter (1990), the disadvantages can be converted into advantages to be competitive. Japan has successfully leveraged its disadvantages of natural resource scarcity and labor shortage into strong competitive attributes to promote innovation and foster productivity growth (Moon, 2016). By continuing investing in energy-saving technology development and

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GLOBALIZATION educating high-quality and high-productive labor, Japanese automobile products have received recognition for their efficiency and high standards.

2. DEMAND DETERMINANT The demand conditions refer to nature of home-market demand for the industry’s product (Porter, 1990). The home market demand can have impact on the direction of innovation and advancement of product development since the demanding buyers in the home base are able to pressure the firms into meeting high standards and innovating their products (Porter, 1990). Porter identifies three characteristics of a domestic demand which have influence on the achievement of competitive advantage, including (1) the structure of domestic market which defines the level of product quality (2) demanding domestic customers with sophisticated needs (3) the anticipatory needs of domestic customers. To Toyota Motor, Japan has continuously remained the major market for its products. Japanese customers are one of the most sophisticated and demanding customers in global automobile industry that, according to Porter (1990), provide a window into advanced customer needs and complicated expectation of design, function and concept (Czinkota and Kotabe, 2000). It forces the Japanese car manufacturers to meet high standards by conducting faster innovation and improving productivity to be able to compete within domestic market and international markets (Czinkota and Kotabe, 2000). Consumers’ incomes and buying behaviors are also influenced considerably after the bust of economic bubble in the early 1990s which demotivate them to spend less on luxurious items like cars (Bungsche, 2015). As a result, automobile firms are encouraged to not only innovate their cars but also lower down their costs to offer lower prices. In terms of governmental policies, current tax does not offer incentive to increase domestic consumption since Japan has raised its consumption tax in attempt to rein the public debt (BBC News, 2014; Kang et al., 2011). Furthermore, Japan automobile industry is a mature market with the less car buyers due to the decreasing population and increasing percentage of the elderly (Bungsche, 2015). The shrinking domestic market leads the domestic car manufactures to improve their companies’ global strategies in order to expand their markets internationally (Shimokawa, 2010).

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GLOBALIZATION 3. RELATED AND SUPPORTING INDUSTRIES The presence of supplier industries or other related industries have significant impact on the firm’s competitive advantage (Porter, 1990). According to Frăsineanu (2008), a firm or an industry becomes more competitive if they own a more concentrated and specialized horizontal and vertical industries that provide information flow and innovation. In automotive industry, suppliers are significantly important players because they provide critical components for manufacturing process. The Japanese automobile industry owes its rapid development to the performance of its suppling industries such as machine tools, steel, plastic and part industries (Shimokawa, 1994). The industry has developed thanks to the establishment of co-operative relationships between automakers and parts manufacturers (Odaka et al., 1988). Japan’s automotive component industries are greatly diversified with companies which specialize in chemicals, electronics, textiles and mechanical components (Nag et al., 2007). The industry receives the best support from both local supplier quantity and local supplier quality which were both ranked 1st by the World Economic Forum 2014 (Schwab and Sala-i-Martin, 2015). The notable suppliers also hold top spots globally such as Aisin Seiki, Yazaki or Hitachi Automotive Systems. Especially, Denso- a part of Toyota group is the largest automobile part manufacturer in Japan as well as a global leader in automotive parts industry (Neely, 2016). According to Porter (1990), nations are not only the home for just one competitive industry but also the environment that promotes clusters of competitive industries. Clusters are defined as geographical concentrations of interrelated companies within a particular field (Porter, 1998). Once a cluster is formed, the whole group of industries mutually supports. The presence of suppliers’ association formed by part suppliers, raw material suppliers and suppliers of equipment and tools have provided significant support for automotive firms (Yamawaki, 2002). Namely, the association enabled firms to diffuse innovative practices rapidly and enhance informational efficiency within the Japanese automotive sector (Sako, 1996). Therefore, with substantial support from automotive component manufacturers, the automotive industry in general and Toyota in particular can gain competitive global advantage over its rivals in terms of supplies.

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GLOBALIZATION 4. FIRM STRATEGY, STRUCTURE AND RIVALS It refers to the national circumstances that govern how the firm is shaped, operated and managed as well as the nature of domestic competition (Porter, 1990). From Porter perspective, cultural aspect performs an important role. Each nation possesses different cultural traits where the business is structured, working morale within the workforce and interactions among the companies are shaped (Porter, 1990). According to Alston and Takei (2005), in Japanese culture, workers are viewed as modern-day warriors or samurai, fighting to preserve the nation. Hence, the belief encourages workers to adopt the samurai war-like spirit as well as enhance workers’ morale, especially the exporters in defending their nation (Alston and Takei, 2005). Besides the working spirit, the innovative culture also shapes the operation of Japanese automobile firms. Innovations and Research and Development in the organization of factory space enabled Japanese firms to obtain higher levels of quality and variety while lowering down the time and investment required in designing new models (Buckley, 2006). “Lean production” process, for example, pioneered by Toyota and other Japanese firms was adopted in attempt to reduce the inventory level held in factory and to facilitate incremental innovation (Holweg, 2008). In addition, the presence of strong domestic rivals is powerful and stimulus to the creation and persistence of a firm’s competitive advantage (Porter, 1990). According to Porter, among all of the determinants on the diamond model, domestic rivalry is considered the most important due to its powerfully stimulating effect it has on others, such as pressuring companies to innovate, lower costs, improve quality and service and create new products and processes (Porter, 1990). Nowhere is the role of fierce competition more apparent in Japanese automobile industry. Japan was ranked 1st as the world’s most fierce local competition, 4 th in effective anti-trust monopoly policy and 1 st in customer orientation by World Economic Forum 2014 (Schwab and Sala-iMartin, 2015). In Japanese automobile industry, the strong rivalry is operated by seven major companies including: Toyota, Honda, Nissa, Mitsubishi, Suzuki, Mazda and Subaru which all fight for the market share (Menton, 2003). The strong domestic competition in Japanese car manufacturing industry forces Toyota and all other firms to have superior technologies, products and management practices to be able to compete successfully within its own domestic marke (Rothaermel, 2016). Benefiting from an intensely competitive domestic market, Toyota and other Japanese automakers have to constantly upgrade the sources of competitive advantage and look

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GLOBALIZATION outwards to foreign markets to capture greater efficiency and higher profitability to expand their economies of scales (Porter, 1990).

5. GOVERNMENT Governments can influence each of four determinants either positively or negatively. To encourage the development of industries and companies both at home and abroad, governments play a powerful role in finance, infrastructure or education through regulations. In Japanese automotive industry, loans and financial incentives provided to auto car parts producer were the most importance support from the government to automobile industry (Richardson and Richardson, 1997). The government support has encouraged lower costs and higher quality products in the small and medium firms which consequently improves inputs to the assembly lines in larger firms (Yang, 1995). Moreover, the history of car industry in Japan is a clear example of Japanese government policies which did successfully in curbing automobile imports under strict quotas system which encouraged local automakers stand on their own feet (Wolff, 1986). According to Haugh et al. (2010), governmental has offered the support to the automobile industry in a variety of forms such as subsidies to firms or direct involvement in industry restructuring plans.

III.

CONCLUSION

The Porter’s diamond framework is an interactive and interconnected system where four determinants highly depend on state of each other and upgrade the competitive advantage of industry over time (Porter, 1990). In Japanese automobile industry, the role of factor, demand, supporting and related industries, firms’ strategy and rivalry as well as the influence of governments on those factors are correlated. Despite lack of natural resources, human workforce and low customer demands, Toyota and other Japanese car makers still can gain competitive advantage in international markets thanks to the combination of substantial support from government and suppliers; strong domestic rivalry; nation’s innovative culture and working spirit; and capabilities to convert their disadvantage to strong advantages by intensive training for employees and focus on innovation and technology development. Word count: 2260

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GLOBALIZATION Reference 1. Alston, J.P. and Takei, I., 2005. Japanese business culture and practices: A guide to twenty-first century Japanese business. iUniverse. 2. BBC News. 2014. Japan raises sales tax for first time in 17 years - BBC News . [online] Available at: http://www.bbc.co.uk/news/26830486 [Accessed 20 Jun. 2017]. 3. Betz, F., 2003. Managing technological innovation: competitive advantage from change. John Wiley & Sons. 4. Blechinger, V. and Legewie, J. eds., 2000. Facing Asia-Japan's role in the political and economic dynamism of regional cooperation (Vol. 24). Iudicium Verlag. 5. Buckley, S. ed., 2006. Encyclopedia of contemporary Japanese culture. Routledge. 6. Bungsche, H., 2015. Japan’s Automobile Market in Troubled Times. Global Automobile Demand: Major Trends in Mature Economies, 1, p.151. 7. Czinkota, M.R. and Kotabe, M. eds., 2000. Japanese Distribution Strategy: Changes and Innovations. Cengage Learning EMEA. 8. De Mooij, R.A. and Saito, I., 2014. Japan’s Corporate Income Tax: Facts, Issues and Reform Options (No. 14-138). International Monetary Fund. 9. Dicken, P., 2007. Global shift: Mapping the changing contours of the world economy . SAGE Publications Ltd. 10. European Automobile Manufacturers Association, 2008. The automobile industry pocket guide. ACEA Communications Department, Brussels. 11. Faruqee, H. and Mühleisen, M., ...