The Expansion Of Toyota Into Chinese Market Through The Use Of Its Management Model

The Expansion Of Toyota Into Chinese Market Through The Use Of Its Management Model

1.0 AbstractThe modern day business markets exhibit extreme volatilities that make it difficult for their managements to rely on conventional wisdoms and past experiences when trying to effect best management strategies (Uva 2006, p.1).The selection of best management models has called for the top management to carry out intensive research in their organizations to determine their unique needs and challenges. As the effects of modern day globalization continue to pose considerable challenges to the existing management patterns, current managers have been called upon to ‘upgrade’ their skills to cope with the ever changing and demanding business situations.

Though there have been a number of challenges for modern day businesses to overcome, it should be noted that the selection of proper management models to address these challenges has business practically implemented across various business organizations.

This study aims to demonstrate how selection of the best management models can lead to accumulation of a number of benefits for business enterprises. The study selects the expansion of Toyota into the expansive Chinese market through the use of its widely acknowledged management model.

There were various reasons cited for the choice of the model in this market. Some of the key reasons cited in defence of the selection of the model included the need to embrace hybrid technology to answer to the needs of the shifting auto-market towards more fuel-efficient car models. Other reasons cited for the use of the models included the need to reduce on the production costs as well as the need to overcome the stiff competition as posed by Toyota’s rivals amongst them General Motors, Kia Motors, Honda Motors and Ford Motors.

A variety of challenges stood in waiting for Toyota, having made a late entry into this lucrative but challenging auto-market. Key amongst them were the increasing energy costs that led to the increased costs of production, the few number of skilled manpower that made it difficult to implement the ‘complex’ processes of the model, the very demanding Chinese auto-consumers and the less capital availed to implement the expansion programme.

Towards its end, this study advises on the importance of addressing both the needs of the particular institutions and its business partners when choosing or customizing a particular management model.

2.0 AcknowledgementThis dissertation could not have been successfully completed without the help and guidance of the following groups of individuals who extended lots of valuable assistance in the various stages of the project.

First on the cue, my gratitude goes to the management at Teesside Business School for having introduced this research project amongst its courses. This research has helped me to put my research skills into practice. Also, in availing the course outline in the Project Handbook distributed to each of us, the management ensured that all the course students were fully guided and inspired in overcoming all the obstacles they encountered during the completion of this research project. For this, I also salute them.

In addition, I would like to thank my project supervisor, for having accorded me the necessary support during the preparing and presentation of this research project. His unwavering and moral support was the key to the successful completion of the project.

Many thanks to the 10 primary source respondents in China, who took their time to answer the various questions mailed to them. For showing this gesture, I salute them all.

To my course mates, I say thank you for having given me the needed encouragement. As we “depart” from the institution, I pray that God will open opportunities for us to meet and share our inspirational ideas in future.

To my family and close relatives, I say thank for having provided me with the necessary financial assistance to complete the project. Without your assistance, it would have been impossible to carry out the phone conversations and print the completed versions of this project.

Lastly, for the omnipresent God, I say thanks for having answered all my prayers and having passed on the strength to me to complete this project. For this, thank you Dear Lord. Amen.

Table of Contents

TOC o “1-3” h z u 1.0 Abstract PAGEREF _Toc293166564 h 22.0 Acknowledgement PAGEREF _Toc293166565 h 33.0 Background PAGEREF _Toc293166566 h 53.1 Current business environment PAGEREF _Toc293166567 h 53.2 Need/Justification for doing the project PAGEREF _Toc293166568 h 64.0 Introduction PAGEREF _Toc293166569 h 65.0 Aim PAGEREF _Toc293166570 h 86.0 Objectives PAGEREF _Toc293166571 h 87.0 Literature Review PAGEREF _Toc293166572 h 97.1 Definitions of management models PAGEREF _Toc293166573 h 107.2 Need for management models in business institutions PAGEREF _Toc293166574 h 117.3 Management models and their application PAGEREF _Toc293166575 h 117.4 Management models at successful institutions: Case study of Toyota management model PAGEREF _Toc293166576 h 127.5 Components of the Toyota management models PAGEREF _Toc293166577 h 137.5.1 The marketing system PAGEREF _Toc293166578 h 137.5.2 Product development system PAGEREF _Toc293166579 h 147.5.3 The design management system PAGEREF _Toc293166580 h 147.5.4 Standardized work sequences PAGEREF _Toc293166581 h 147.5.5 Just-In-Time Systems PAGEREF _Toc293166582 h 147.5.6 Addressing “customer” needs PAGEREF _Toc293166583 h 148.0 Toyotas expansion into Chinese market PAGEREF _Toc293166584 h 169.0 Other factors which facilitated Toyota’s entry into Chinese market PAGEREF _Toc293166585 h 179.1 The 4P Model PAGEREF _Toc293166586 h 17Diagram 2 showing the 4P model PAGEREF _Toc293166587 h 1810.0 Comparison of Toyota and other rivals PAGEREF _Toc293166588 h 1810.1 Honda Motors PAGEREF _Toc293166589 h 1810.2 Kia and Hyundai Motors PAGEREF _Toc293166590 h 2010.3 General Motors (GM) Ltd PAGEREF _Toc293166591 h 2010.4 Ford Motors PAGEREF _Toc293166592 h 2211.0 Research Strategy PAGEREF _Toc293166593 h 2211.1 The study population PAGEREF _Toc293166594 h 2311.2 Sampling Technique PAGEREF _Toc293166595 h 2411.2.1 Random Sampling Technique PAGEREF _Toc293166596 h 2411.3 Main source of Research Data PAGEREF _Toc293166597 h 2411.3.1 Secondary source PAGEREF _Toc293166598 h 2411.4 Methods and techniques of Data Collection PAGEREF _Toc293166599 h 2711.4.1 Questionnaires PAGEREF _Toc293166600 h 2711.4.2 Follow-up phone interviews PAGEREF _Toc293166601 h 2912.0 Findings PAGEREF _Toc293166602 h 3013.0 Presentation and Interpretation PAGEREF _Toc293166603 h 3114.0 Conclusions PAGEREF _Toc293166604 h 3515.0 Recommendations PAGEREF _Toc293166605 h 3516.0 References PAGEREF _Toc293166606 h 3817.0 Appendices PAGEREF _Toc293166607 h 41Appendix A: Project Report Certification (Sample) PAGEREF _Toc293166608 h 41Appendix B: Research Ethics Form (Sample) PAGEREF _Toc293166609 h 43Appendix C. The Chevy Volt electric vehicle, one of Toyota hybrid cars of 21st-century. PAGEREF _Toc293166610 h 45Appendix D. Sample Research Questionnaire PAGEREF _Toc293166611 h 46

3.0 Background

3.1 Current business environment

Today’s business environment has been greatly affected by the increased effects of globalization. These increased effects of globalization have forced international businesses to undergo processes of rapid transforms (Thurman 1993, p.39). For instance, during the period 1970-1990, the total items produced as well as the flow of finance around the globe rapidly increased from 12% to a high of 27% for the produce and 3 trillion to 50 trillion for the financial flows. The increased business transformations have left businesses trying to overcome the many internal and external challenges. Some of these challenges have been fundamental; thus calling for rapid and/or reactive adjustments to be effected by managements of affected businesses. This is in order for them to maintain a competitive status.

Ideally, even though today’s firms can be said to possess large physical assets and routinely undertake huge investments in fixed plants, research and development, market development, and so forth, the overall success factor seems to boil down to how capable the people in the organization are-in terms of such aspects as spotting business opportunities and mobilizing their own business research initiatives to go after these opportunities (Amdam 1996, p.246). Competent “brain driven” staffs are therefore vital in running modern day industries.

3.2 Need/Justification for doing the projectIt is for the above reasons that Teesside university school of business has identified and incorporated a Business Research and Project Module under its key courses to enable its students to sharpen their research skills as well as acquire the relevant knowledge spurring the growth and development of modern day competitive industries. In this module, students are required to demonstrate their unique business research capabilities by demonstrating their abilities to identify and investigate topical management or business issues or problem. The students go ahead to analyse and evaluate relevant information, drawing supportive conclusions and making recommendations for effecting changes.

4.0 IntroductionIn a spontaneous attempt to address the recent negative effects of globalization, especially the challenge of increased stiff competition, managers of multinational companies have identified and implemented the use of a growing number of management models (Jonker & Eskildsen 2009, p.2). These models have provided a “stable” theoretical framework that can be used to observe, create and assess a real life organizational ‘situation ‘in order to make desired (future) improvements (Jonker & Eskildsen 2009, p.3).Management models shape the way managers think, manage and run their organizations (Rapid Business Improvement 2007). According to Smith and others (2010), management models combine three elements necessary to develop and systematize a management approach within and outside the company (p.11). These elements include a definition of performance; a set of management objectives; and organizational devices, processes and skills (Smith et al. 2010, p.112).

In assessing the assessing the practical application of management models across various multinational corporations, this business dissertation narrows down to the use of the management model by the world’s undisputed leading auto manufacturer, Toyota, to its new Chinese market. Toyota’s expansion into the world’s populous and lucrative market of China in 2002 was marked by the use of its Japanese management model that demonstrated how companies (in this case Toyota) can create extraordinary value by fostering long-term, partnerial relationships with their suppliers (Hohn 2009, p.14). In using its management model to expand into China, Toyota’s management recognized that more opportunities existed for cost reduction during product planning than in actual development production and development (Shim et al. 2009, p. 379). In doing this, the company was target costing to facilitate its ability to compete in the competitive Chinese market.

The major component of the Toyota model has been the Toyota Production System (TPS), which, according to Fortune magazine, mainly derived its success from ‘highly experienced managers working unselfishly with a motivated, well trained workforce (Heller & de Bono 2005). The TPS emphasized that production of Toyota models was to solely depend on the preferences of customers and not necessarily machines. In addition to the TPS, other components of the Toyota management model include: The Just in Time (JIT) logistics system and the supplier partnering process (Russo & Zhao 2010).

In selecting to analyze the management model at Toyota, the researcher was motivated by the success-story of the Japanese company that started its business as a little known car manufacturer with a production capacity of only 10,000 vehicles per year in the 1950’s but rose impressively within a half a century to become the undisputed world leading auto manufacturer as of 2006 with an estimated worldwide market share of 15% and sales of 10 million vehicles a year (Paul 2011, p.546). In analyzing this model, the researcher will pay attention to factors facilitating the company’s increasing auto-market share for instance, the reduced costs of ownership for Toyota products.

5.0 AimThe research study aims to demonstrate why selecting and implementing best and unique business models can go a great way in ensuring the success of any business enterprise in the current competitive global markets.

6.0 ObjectivesThe following were the objectives of this project:

To clearly define what management models are.

To explore into the need for management models across business institutions

To select the Toyota management model and study some of its unique features.

To highlight more additional factors which have facilitated the growth of Toyota into a world auto-leader?

To study how Toyota expanded into the competitive Chinese market using this management model.

To recall some of impacts that the Toyota model has contributed to the company, especially in terms of revenue and sales

To list as well as analyse some of the challenges that the management has encountered in its efforts to successfully implement the model.

To inquire and list some of the benefits that the consumers of Toyota models have derived from the models created using the company’s management model.

To provide a comparison of Toyota Motor Corporation and its closest competitors, some of whom include Ford Motors, Kia Motors, Honda Motors and General Motors Corporation.

7.0 Literature ReviewThe following literature review has been done based on the objectives stated above. This literature aims to identify, evaluate and synthesize the established bodies of finalized and recorded works of scholars, researchers and practitioners in this area. In line with the aim and stated objectives above, the following bodies or themes will form the topics of literature review for this dissertation:

7.1 Definitions of management modelsManagement models, by their definition, are, “a broad range of informal and formal models that are used by organizations to represent various (functional, social, and emotional) aspects of a business, such as operational processes, organizational structures, and financial forecasts (Jonker & Eskildsen 2009, p.3). From another perspective, management models can be looked at as, “referring to formalized and systematic representations of a set of practices (Smith et al. 2010, p. 111).

In summing up the works of 9 scholars, Wimmer (2004), gave a comprehensive definition of business management models as, a description of the following components each of which should be determined contingently considering technological, institutional changes, competitive and macro-economic environments (p.31). Wimmer’s components included the: value model which involved realization of product, information and service qualities; customer model which targeted groups of customers in their various segmentations; activity model which involved strategically positioning the initiated business activities on the industry market and the financial model which specifies the monetary and time costs associated with initiating and sustaining the business. In other words, the financial model estimates the revenues and profits associated with implementing the specific management model in the specific business institution.

On his part, Birkinshaw (2010) gave his formal definition of a management model as “the choices made by the executives of a firm regarding how they define objectives, motivate effort, coordinate activities, and allocate resources”. From Birkinshaws definition, the following 2 important features can be derived;

Management models are mainly concerned with making right choices

Management disciplines consist of 4 specific dimensions; defining objectives, motivating effort or the people, coordinating activities and making right decisions.

7.2 Need for management models in business institutionsThe need for management models keep on varying from one business institution to the other. According to Jonker and Eskildsen (2009), the need for management models has arose from the fact that many business institutions have currently come to struggle with the question of successfully designing and organizing their new-and often difficult to grasp-dynamic business demands (p.2). The two scholars go ahead to stress that the present day competitive market, and the rapidly increasing societal demands have become imminent and as such called for the need of management models to assist in innovation, renovation and re-invigoration.

Tellingly, management models are needed to help business organizations to realize outcomes such as, products, services, profits and ideologies while taking into account the well being of institutional staffs, customers and the surrounding community members (de Bono & Heller 2004). In addition, Jackson and Mathis (2007) that the most common reasons behind the adoption of management models is to address poor team work and enhance employee leadership, communication and team building amongst others (p. 312).

7.3 Management models and their applicationManagement models have not been miracle cures in the sense that any institutions that applied them were guaranteed success. Jonker and Eskildsen (2009) noted in their studies that the application of management models was hard work that called for dedication, persistency and courage prerequisites (p.7). The reason why the two scholars arrived at the above was based on the fact that the application of management models brought about other unforeseen consequences for the organization. In this sense, they were not physical in nature (Hohn 2009). Management models do not give complete descriptions of organizations and their contexts but provide condensed versions of reality- that facilitate the management of complexities in organizations (The Boston Consulting Group 2007).

7.4 Management models at successful institutions: Case study of Toyota management modelAccording to the studies conducted by Hohn (2009), the best-practice models for supply chain management from a performance point of view still remained those based on the Japanese “keiretsu” relations, of which the Toyota management model formed part of (p.14). The “keiretsu” relationships emphasized on negotiations with simple build-to-print component suppliers thus lessening on the anticipated risks (Hohn 2009, p.14).

Hutt and Speh (2009), in highlighting some of the essential requirements of managers using the management model, went on to note that Toyota:

Imposed stringent selection criteria that ensured that every supplier met the model’s requirements in terms of cost, technology and quality (Hutt & Speh 2009, p.19). The Boston Consulting Group (2007) emphasized on this requirement when they stated that Toyota carefully monitored its supplier network and demanded that each senior executive at supplier organization was to be responsible for all performance and quality issues.

Retained critical new product development (NPD) and design knowledge in its in-house operations; (Hutt & Speh 2009, p.19) and

Took the responsibility of helping its suppliers to develop on their business capabilities. For instance, by regularly performing semi- annual consulting services and quality audits to enhance suppliers’ capabilities. According to the Boston Consulting Group (2007), the company performed quality audits after a period of 6 months across all the suppliers.

Tellingly, the Boston Consulting Group (2007) went on to list the following as some of the additional key tools employed by Toyota in its management model:

The company employed proprietary processes to facilitate rapid resolution for the identified quality issues. This prevented the problems from recurring.

The company employed a robust network of sharing knowledge. This ensured that suppliers shared that best practices thus enhancing their capabilities.

7.5 Components of the Toyota management modelsThe Toyota management model is made up of the key strategy, namely, The Toyota Production System (TPS), also referred to as the Lean manufacturing system. Drawing from Goldsmith (2011) research, The TPS boasts of more than 50 years of experience-leading to its successful adoption and implementation across many business organizations. It has also acted as a basis upon which modern-day management theories have been formulated from.

Hino (2006) identified the following series of functions as the key components of Toyotas Production System:

7.5.1 The marketing systemThis consisted of the following related policies; marketing theory and product research & and production engineering research, and comprehensive product planning (Hino 2006, p.174).

7.5.2 Product development systemThis was made up of the Shusa or the Chief Engineer system. Under the chief engineer, the following sub systems exist: design and development, individual product planning, production engineering, purchasing, fabrication and sales (Hino 2006, p.174).

7.5.3 The design management systemThe design management system incorporates the following aspects: standardization, product diversification or parts minimization, project management, product information management and design reviews (p.174).

From the Kiano’s (1997) keynote address at Kentucky University, the following were identified as the key components that sum up Toyotas TPS;

7.5.4 Standardized work sequencesThese comprised of the repeatable process steps and machine processes or rational methods, work flow or logical directions and reasonable lengths of time and endurance between processes (Kiano 1997, p.4).

7.5.5 Just-In-Time SystemsThese ensured flexibility while avoiding inconsistencies across production systems. These systems are based on little or no inventory, supplying the production process with the right part, at the right time, and in the right amount, and first-in-first out flow (Kiano 1997, p.5).

7.5.6 Addressing “customer” needsThis principle emphasized on improving customer relations by encouraging your workforce to practice one-by-one confirmation, listening to your workforce, trusting your workforce and supporting your people (Kiano 1997, p.7).

The Toyota Motor Corporation (2011) emphasized that the TPS was established based on two concepts: the first called “Jidoka” meant “automation with the human touch”. This meant that when a problem was identified in the production system, the affected product stopped immediately to prevent the production of more defective products. The second concept, “Just-In-Time,” meant that each process produced what was only needed by the adjacent successive process. This ensured a continuous flow.

Conclusively, from the above themes, the components of a TPS can be summarised as shown in the below diagram.

Diagram 1 depicting the various components of the TPS (Source: Toyota Motor Corporation, 2011)

8.0 Toyotas expansion into Chinese marketBefore its entry into China, the Chinese auto market was an already competitive market that was dominated by the well established automakers of Kia Motors, General Motors, Honda Motors, Ford Motors, and Isuzu amongst others. At the time of Toyota’s entry in 2002, the Chinese auto industry market was growing at a high of 1 million vehicles a year (Asia News 2005). The market other than being expansive contained customers who had specific demands on the models of vehicles that they wanted.

Chen and Yao (2006) noted that as the world’s second largest automaker at that time, Toyota made a relatively late entry into the Chinese market when it formed a principal alliance with the FAW Group in 2002 (p. 206).The two authors went ahead to aver that though the company had already achieved popular name recognition through its previous automobile exports to the Chinese market, its entry made it to become a follower rather than a leader in China by its virtue of its conservative organizational and corporate structure that majorly emphasized on the use of its management model (p.206). The adoption of the efficient TPS in Toyota’s entry into China was highlighted as a major factor that facilitated the passing of General Motors by Toyota as the largest automobile company in the world during the second quarter of 2007 in terms of sales (Toyota Motors Corporation 2011).

Though many scholars overlook some of the major challenges that Toyota encountered at the time of its entry into the competitive Chinese market, The Asian News (2005) brings to our attention that the company went through a bumpy road in China during its first 7months of entry into this market. For instance, sales of the Vios, one of its top three models in the mainland, had tumbled more than 30%, making it to lag behind the rival models of Honda Motors, Kia Motors and General Motors (Asia News 2005). Though the Japanese automaker was paying the price for its late entry into this populous Chinese market, The Toyota Motor Corporation (2011) noted that the company strategically positioned itself by using the TPS model to attain sales target of 1 million cars in the Chinese market by the year 2010; a target which it surpassed when it recorded a sales output of 1.3 million cars. The Asian News (2011) concluded that the company’s success in the Chinese market was achieved after the company fought its additional challenge: the political risks that were caused by anti-Japanese feelings in China.

9.0 Other factors which facilitated Toyota’s entry into Chinese marketOther than the components stated above in the TPS, the following philosophies, which also constitute part of TPS, facilitated the successful expansion of Toyota into the Chinese market;

9.1 The 4P ModelThe 4p model has the following components:

9.1.1 Philosophy

Philosophy requires that all Toyota’s inventions and principles of operation are initiated with the aim of achieving long term success.

9.1.2 Process

The process stipulates that the use of right processes during the production of Toyota models will guarantee right results.

9.1.3 People and their partners

This virtue emphasizes on Toyota adding value to its organization by developing their human resource manpower.

9.1.4 Problem solving

By believing in problem solving, Toyota continuously solves its root problems. This drives the company ahead.

Problem Solve

Continous improvement


People Respect, Challenge them


Eliminate wastes from products


The long-term thinking

Diagram 2 showing the 4P model10.0 Comparison of Toyota and other rivals10.1 Honda MotorsHonda Motors had successfully fought to redeem its earlier perceived “bad” image of being a dominant Japanese motorcycles producer to become a renowned world wider auto producer. According to Chinese association of Automobile Manufacturers (2009), Honda’s first fully-fledged entry in Chinese auto market had come as early as 1982 when the company began to locally produce motorcycles through a technical operation agreement. From there, the company tremendously expanded its auto operations by using marketing strategies that were tailored towards local demands. As of 2005, the company’s had successfully established its presence on the Chinese auto market through two of its core brands, The Accord and the CRV. As such, the company formed a major rival to Toyota’s late into the Chinese market.

Established: January 1982

Capital Investment of: US$100 million

Capitalization Ratio of: 100% Honda Motor Co., Ltd.

Representative: Mr. Atsuyoshi Hyogo, President

Employment aasociates: Approximately 150 associates

Where Located: Beijing (Headquarters), plus Shanghai, Guangzhou (branch offices)

Business Areas: China’s Regional HeadquartersInvestment activities espescially for Honda-related businesses around ChinaImporting and selling of Acura auto brands as well as its service parts

Table 1 showing an overview of Honda’s Chinese investment

10.2 Kia and Hyundai MotorsAccording to the Kia Homepage (2000), Kia Motors and Hyundai Motors partnership with Jiangsu Yueda Group, a Chinese local partner, to establish a production plant with an annual capacity of 300,000 vehicles marked the successful entry of the Korean auto makers into the Chinese market. The parties in the partnership agreed to adhere to the government regulations especially on the domestically produced vehicle ratio. As such, the parties experienced favorable auto sales growth to present thus posing a stiff challenge to Toyota Motors Corporation.

10.3 General Motors (GM) LtdThough GM had experienced reduction in sales as a result of its insistence in producing the highly fuel consuming sports utility vehicles (SUV’s), the USA based automaker continued to sell more cars in the foreign markets, especially China, than its domestic American market (Kelly 2010). For instance, the company made history sales of 1.21 million auto units in the months spanning January 2010 to June 2010 (Kelly 2010).

Though GM had a head start in the Chinese market, Toyota has done its best globally to overtake it as the world’s number 1 automaker and seller.

Below is a comparison of the 5 key categories upon which the two auto giants have been regularly compared.

Table 2 showing the 5 key categories (Source: Greimel, 2008)

Issue Leader

1. Domestic domineeranceToyota

2. Expansion overseas GM

3. Technology Toyota

4. Partnerships Toyota

5. Corporate culture Toyota

Chart 1 depicting sales battle between GM and Toyota in the last 12 years (Source LS2).

10.4 Ford MotorsChina’s rough terrain plus its growing number of rich citizens have facilitated increased purchasing of Ford vehicles for instance, the Ford Escape. The Ford Escape was well suited to China’s demography in addition to being fuel-efficient. As such, Ford has been able to pose relatively stiff competition on the Chinese market. Also, Ford’s widely praised trend of producing unique car designs that specifically answer to the needs of the “heavily” demanding Chinese auto market have been its key to its success. A comparison of Ford Motors and Toyota would present the following statistics in the Chinese market.

On the production systems, Ford’s system was specifically designed to create huge quantities of vehicles but of few models. On the other hand, Toyota’s production system produced less quantities but of very many models. As such, Toyota had a difficulty in meeting the specific market demands.

In terms of cash and established market, Ford boasted of a $5 billion at its disposal for Chinese operations. It also had a relatively large market. On the hand, Toyota did not possess the vast resources to match the many economies of scales and the many volumes of inventories at Ford’s dis