Introduction: The automobile industry can be considered one of the most competitive industries that exist today. The production has to be flawless, the employees hardworking and the managers fully aware of their product. This case study is to discuss the economics phenomenon with Toyota in the automobile industry. Trying to analyze the relationships among the price, demand and supply and other factors in the automobile industry, such as substitute and complement products, market competitors and input prices or costs, etc. 1. Market structures
Definition A classification system for the key characteristics of a market, including the number of firms, the similarity of the products they sell, and the ease of entry in to and exit from the market. Classification It refers to the characteristics of a market that define its structure include the number of firms in that market, the degree to which the products they sell are similar and the ease of entry into, and exit from, the market. Market structure includes, Perfect competition, Monopolistic competition, Oligopoly, Monopoly, etc.
Toyota market structures Toyota Motor Corporation is a multinational company headquartered in Japan and it is one of the best car selling companies in the world. The company was founded in the year 1937 by a successful businessman – Mr. Kiichiro Toyoda. Toyota Group is the largest group of industries in the world. Toyota Industries develops and manufactures automobile and automobile-related products, such as vehicles, engines, car air-conditioning compressors, car electronics components and devices, and stamping dies.
In the vehicle and engine businesses Toyota has achieved a top-class level of quality and productivity within the Toyota Group and is contributing to Toyota Motor Corporation’s car production. The picture above shows the most popular model in the current market from the Toyota Company. The white car show on the right corners that Corolla. With over 30 million sold, the Corolla is one of the most popular and best selling cars in the world. And also Toyota Camry the one in the middle, that is a mid size car. In the United States, the Camry has been regularly the bestselling car for the last 10 years, but has been outsold in some years.
The Camry also sells very well in Australia, Canada, and a number of Asian markets—in particular Cambodia where the vast majority of cars are Camry. Toyota Yaris that is only one small car in the Toyota Company. There many girls love it includes me because it cute, small and economic. There are many different kinds of vehicle from the Toyota Company which can meet different customers need. There are four main different categories in the market which Passenger, 4WD, Commercial and Hybrid cars with the price of the car around ten thousand to hundred thousand.
Toyota Camry Toyota sold 450,000 Camrys in 2006, up nearly 4 percent from 2005, according to Auto data, and well ahead of the No. 2 Accord with 354,000 units, down about 4 percent. Toyota Camry was established in 1980. It is the most successful car. The Camry has been one of the best selling vehicles in Australia and overseas over the past five years. The price of Toyota Camry ranges from 28,490 to 39,990$. 2. Toyota Camry Price sensitivity factors analysis 2. 1Unique value effect
Their main value emphasized throughout this ad is the fact that it’s a hybrid car, with all advantages thereof: cleaner exhaust, contributing to personal (though not stated clearly) and national economy. Although Toyota is not the only hybrid car manufactured (there are others by Honda and Ford), this ad doesn’t mention it and presents it as a unique value inherent to Toyota Camry. The fact that a hybrid car is not a widespread phenomenon boosts the influence of this factor. We rank its influence as high (decreasing PS). 2. 2Substitute awareness effect It’s difficult to compare car prices and benefits just when reading this add, hough most of the information is readily available for those interested, on the internet, for example. Because of this we rank the influence as low (increasing PS). 2. 3Difficult comparison effect Although it might seem otherwise, comparing value for money of different cars is not trivial at best. Although there are several major factors used in comparison (such as engine capacity, horsepower, physical size), there are plenty of secondary characteristics (ranging from turning circle and engine torque to the model of the internal GPS device and MP3 player) which may be important for some.
In our opinion, the influence of this fact is underestimated, and thus some hard-to-compare characteristics are missing from this ad, leaving only the hybrid nature of this car. Though it’s a clear advantage in comparison to the competition, information about any car model can be obtained very easily. We rank influence of this factor as average (decreasing PS). 2. 4Total expenditure effect Toyota Camry is mainly a family car, and only one such car will be usually bought per family. Also, the personal fuel economy is not emphasized here at all, so this factor has low influence here (contributing to low PS). . 5End-benefit effect The main end-benefit effect present in this ad is somewhat skewed. Instead of emphasizing personal benefits of buying a hybrid car (such as fuel economy), the more altruistic “heal the world” reasons are presented. The bottom line message of this ad clearly states: “buy this car, and you will be blessed, as a good soul, caring about the future of our planet and about the US economy. ” This approach may be effective in certain contexts, but that requires further research. In our opinion, the more ego-centric the benefits are presented, the more effective the ad will be.
Or, conversely, another way to make it more effective would be to take it to extreme: “buy this car for the future well-being of your kids and grandchildren”, “together we will change the world”, “stop global warming”, etc. The influence is ranked as low to average (decreasing PS). 2. 6Shared cost effect By and large, it is missing from this ad. The ad is apparently addressed mostly to private buyers, who usually pay from their own pockets. Also, there are no discount propositions, such as “bring your old car and get a discount”.
Influence ranked as none (contributing to high PS). 2. 7Switching cost effect The switching costs of buying a new car are mainly psychological (giving up the old one if upgrading or giving up other alternatives, such as public transportation) as well as the price of the car itself. No ways to reduce these costs were offered in the ad, and therefore PS stays at a high level. 2. 8Price-Quality effect The issue of the price is not mentioned in this ad, although as explained above, this car is relatively high priced in its category ($26,200 vs. 21,636, average category price (the difference of $4,564), or $23,045 for average non-hybrid Toyota Camry (difference of $3,155)). Some emphasis might have been put on this, promoting the high price as a sign of luxury, or, on the contrary, as price worth paying for the sake of next generations. Influence is low (thus increasing PS). 2. 9Inventory effect A family car usually stays in the household inventory for many years. Therefore the effect of this factor on price sensitivity is relatively high (increasing PS).
It could have been emphasized that Toyota cars are high-mileage cars to help decrease price sensitivity. In total, overall price sensitivity promoted by this ad is average (some of the factors contribute to its high level and some decrease it), but it’s clear that an effort to decrease the sensitivity was made, mostly successfully. However, more could have been done, as stated in recommendations to each PS factor. 3. Substitute products The substitute product is very important for a product. One of the Porter’s five forces analysis mentioned that the threat of substitute products or services.
The substitute products are attractive alternative because the similar price and flavour, when the substitute products lower switching cost, the customers will easily shift to the substitutions. Also the similar price, quality and performance of the products will promote customer’ comparison when they are purchasing. On the other hand, the substitute products may affect the quantity of demand of a product. Based on the law of demand, when the price of a good rises, other things remaining the same, and its relative price its opportunity cost rises.
Although each good is unique, it has substitutes, other goods that can be used in its place. As the opportunity cost of a good rises, people buy less of that good and more of its substitutes (McTaggart et al. 2003). For example, when the price of another car, a substitute for Toyota Camry increases, and the quantity of Toyota Camry demanded will be increased. In fact there are not many substitute products for automobiles; therefore the threat of substitute products in the auto industry is low. Substitutes are defined as other alternatives provided by a different industry.
Some substitutes are walking, riding a bike, or taking public transportation. One component of substitute availability products is the geographic location of the consumer. Cities in which it is easy to use alternatives to automobiles may not require a consumer to use a personal vehicle. For example, in those types of cities a lot of people take cabs or ride city transportation, such as the city bus or the subway (Automotive Digest). However, because most people feel the need to own their own vehicle nowadays, there is not a high threat of substitute products no matter where a consumer is located. 4.
Market competitors, size and growth Rivalry among the competitors in the auto industry is very strong. The power of buyers in this industry plays a part in the rivalry competition between competitors. The major competitors are so closely balanced that rivalry and competition is increased. The ultimate goal of any large corporation is to gain market share. This also applies to Toyota and every other company in the auto industry. In order to gain market share, it is necessary to take it from the competition. Given this, every player in the industry is trying to gain market share at once, which makes for strong rivalries.
One of the other reasons for such high rivalry between Toyota and its competitors is that there is little differentiation opportunity in automobiles. Toyota, along with all of its competitors, makes cars, trucks, or SUVs. Because of this, there is really no opportunity for any company to market itself in a completely different way. The only differences between these vehicles are design and features, which is largely competitive as well. The differences between the companies, in addition to vehicle differences, include price and quality, which are equally as competitive.
Therefore, competitors are constantly compared to one another. A great example of this is manufacturer advertisements. Differentiation is often the angle that they take when promoting new products or ideas (Automotive Digest). The number of competitors, the low differentiation opportunities, and the high degree of comparison all contribute to high rivalry and competition in the auto industry. The following graph shows the major competitors in the automotive industry and their portion of the market share, based on production.
Based on Sales, market share can be roughly determined. The best determinants of the market make up are the major companies; GM, Toyota, Ford, Honda, and Nissan. GM’s market share was 18. 2 percent in November and its sales were 293,558 vehicles in the Australian. Toyota sold 196,695 vehicles in November. Ford’s market share of the domestic market is 14. 3 percent in November, with Ford selling 181,111 vehicles. DaimlerChrysler sold 186,635 vehicles. Honda Motor Co. sold 106,446 vehicles. Nissan Motor Co. sales were 76,015 (Forbes).
According to current predictions, Toyota is expected to become the world’s largest automaker, overtaking General Motors, by producing and selling 9. 8 million vehicles in 2011 along with increasing sales. 5. Input prices or costs of factors of production Toyota believes the role of purchasing is through long term and stable production of quality products at the lowest price in a fast and timely manner. (Toyota Co. sustainability report 2006). The main objective of administering prices within any company in the automobile industry is profitability and to consistently increase efficiency in their product line.
The traditional pricing strategy is formulated into the cost + profit = selling price. When auto companies make changes and improvements, cost of production increases causing the selling prices to go higher. Companies normally do not want to cut their targeted return and therefore the costs are passed on to the consumer to maintain their profit margin. Toyota takes on slightly different approach with sales – oriented objective. Although the variables are the same, the formula is adjusted strategically into the selling price – cost = profit.
Toyota firmly believes that its markets and consumers is what determine the selling price. Waste elimination is given top priority which reduces cost and by continuously reducing these types of costs, it will result in persevering the company’s profit growth. It was in 1929 that Kiichiro Toyoda, founder of Toyota, began traveling and extensive research in the auto industry all around Europe and the United States. Since Kiichiro’s main objective was to become the best automaker in the world, he wanted to figure out a way to eliminate wasting time, money and material in the initial stage of production.
Toyota eventually developed a breakthrough process that changed the factory equipment allowing production lines to produce different models on the same production line. This way, they are able to consistently produce vehicles faster and more efficiently. This breakthrough has given Toyota a competitive advantage over other automakers. Another system that Toyota has established is Jidoku, a production system that detects defects and abnormalities to obtain sustainability of high quality, low cost vehicles offered to the market. 6.
Current problem: 2009–2010 vehicle recalls The current big issue of Toyota is vehicle recalls. In January 2010, Toyota announced it was recalling up to 1. 8 million cars across Europe, following problems with defective accelerator pedals. Many Toyota models were involved, covering the 2007-2010 model years. Lately toyota recalled the Prius model for reprogramming of its ABS system. On March Toyota said it would stop production in France and Britain for 12 days because of poor sales following the recalls. On April 2010, The US government seek a record penalty of US$16. 75 million from Toyota for its delayed response in notifying the National Highway Traffic Safety Administration regarding the defective accelerator pedals, and on 19 April Toyota said that it would pay the fine. Until now the recalls could cost the company up to US$ 2 billion in lost output and sales. The 2010 Toyota Camry also subjected to a recall this year. It is because of the brake fluid leak that may cause increased brake pedal stroke and greater vehicle stopping distance. And the cause of this brake fluid leak is the length of power steering pressure hose on vehicles.
This power steering pressure hose is equipped with the 4-cylinder engine and may be insufficient such that the gap between the crimp on the pressure hose and the brake tube for the left rear brake may be insufficient. In this situation, the brake tube may interfere with the crimp and may wear and then perforate. This perforation in the brake tube may result in brake fluid leakage making it more difficult for a driver to stop the car. Dealing with any recall is never a positive situation and our estimates are this particular recall will cost Toyota in excess of $925 million dollars.
Toyota will most likely borrow from its future earnings at nominal discount rates. However, given Toyota’s positioning as the world’s eight largest and most profitable automobile company they will be able to take this problem in stride. A careful executed balance coupled with and firm understanding of the benefits and disadvantage of debt and equity financing will go far in ensuring the financial position of Toyota remains strong for many years to come despite the setback of this recall. Conclusion Toyota is a well-known and famous automobile industry in worldwide.
Everyone prefers to pursue a vehicle which is manufactured by Toyota. Not only because of its brand loyalty, but the excellent customer service and innovative technologies delivered by Toyota. Toyota leads large market share as it bought up new brands as a source to maintain the consistent growth of the company in the long run by managing it working capital and the management of the workforce. For current vehicle recalls problem, Toyota positioning as the world’s eighth largest and most profitable automobile company they will be able to take this problem in stride. Reference:
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