Resources and capability strategy analysis- the case study of Toyota

In order to survive in the fierce business competition, every company sustains its own competitive advantage to different itself from others and holds its position in the market. Michael Porter (1985) states that competitive advantage is the profits which the firm possesses over its rivals. In order to achieve a sustainable competitive advantage, different methods of business strategies are applied by companies. As the internal core value of a firm, resources and capabilities in a company are concerned to be the fundament of creating strategy. A resources-based view from Michael Porter (1985)highlights that a company makes the use of its resources and capabilities to the maximum limit to produce a competitive advantage that leads to superior value creation. The idea is supported by Barney (1991, p:102) that ‘a firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented b any current or potential competitors’. The unique resource is the basic requirement for firm to sustain a competitive advantage. The present business industry faces an increasing emphasis on the affect of resources and capabilities based strategy which is concerned to be influenced by two factors. First, with the diversity and unstable of business environment, internal core value of a firm, resources and capability, play a more important role in securing strategy rather than external market focus. Secondly, competitive advantage is increasing regarded as the primary source to get more profit rather than industry attractiveness.

This report will briefly introduce the theoretical terms of resources and capabilities strategy, especially focusing on how to appraise resources and capabilities in a firm, as well as how to utilize this strategy to achieve competitive advantage with the case study of Toyota, the world’s largest automobile manufacturer by production( World banking of manufactures,2010).

What are resources and capabilities

To start with, it is important to understand resources and capabilities separately, distinguishing their differences and elaborating their relationship. Grant (2005) states that resources are the productive assets owned by the firm. However, capabilities are what the firm can do. In that case, resources themselves can’t create competitive advantage until work with company capability to combine and fully utilize resources together. The relationship among resources, capabilities and competitive advantage is shown in figure 1 (Grant, 2005, p: 131).

Figure 1: The relationship among resources, capabilities and competitive advantage

 

With majorities of resources and capabilities, it is more stable for company to sustain its own market position and define its identity. Toyota is the world’s largest automobile manufacturer. Founded in 1937, Toyota now is a group providing automobile manufacturing, financial services, and building robots.

Figure 2: Toyota Product development milestones

 

Types of resources

In order to fully understand the company resources, it is important to identify three types of resources: tangible, intangible and human resources (Grant, 2005, p: 131).

  • Tangible resources

Known from its name, tangible resources are the easiest values to appraise and cognize. The information can be found in the firm’s annual report as financial resources or physical assets. The primary aim to analyze tangible resources is to understand the firm’s potential for creating competitive advantage rather than evaluate the assets themselves.  As a result, it is important to not only get the value, but also relative information.  At the end of 2011, the Toyota total asset is ¥29,818,166 million (Toyota 2011 Annual Report- Consolidated Performance Highlights), 1.7% lower than 2010 with the asset of ¥ 30,349,287.

  • Intangible resources

Although intangible resources are difficult to identify and invisible in the financial material, they are regarded as the more important resources for most of the companies. Brand name is considered to be the most valuable intangible resource for a company. As a reputational asset, the value of brand name is perceived by customers, displaying on customer’s confidence on the products. Brand value will create superior profitability, inspiring annual sales volume, and leading to the accumulating of revenue. In 2011, Toyota brand value is worth $ 34 billion (toyota leads brand value survey mercedes leads luxury brands), ranking as the top one in the automotive industry and sixth in the all companies.

Besides brand name, technology is another intangible asset such as patents, copyrights, trademarks and trade secrets. The main R&D principles are: a. providing clean and safe products and enhancing the quality of life of people everywhere through all the activities; b.pursuing advanced technological development in a wide range of fields (Toyota 2011 annual report). In 2011, Toyota expenditures ¥ 730.3 billion in R&D, involving developing the effectiveness of components and products, enhancing forward looking, leading-edge technologies and product associated with the environment, energy, and safety (Toyota 2011 annual report).

  • Human resources

The evaluation of human resources transfers its emphasis from formal qualifications and years of experiences to employee attitude, motivation, learning capacity and potential for collaboration. On the other hand, the human resources do not only depend on their individual personalities, but also company culture, known as company value, philosophy and social norms. Two of the guiding principles of Toyota regarding to employee are to ‘always strive to build a homelike atmosphere at work that is warm and friendly’, and ‘always have respect for spiritual matters, and remember to be grateful at all times’ (Toyota 2011 Annual Report-Company Philosophy). In that case, Toyota tries to develop sustainable long term relationship with its shareholders including employee.

Capabilities

There are three competences concerned company competence, core competence and distinctive competence (organizational competence). Company competence is the real proficiency in performing an internal activity. Core competence is the central and critical activity to achieve profitability and survive from competition (Prahalad, C.K. and Hamel, G. 1990). The organizational competence is also known as organizational capabilities. Selznick (17) takes the organizational competence as the activities of a firm which is superior to its rivals.

Two approaches are applied to classify a firm’s capabilities which are functional analysis (figure 2) and value chain analysis (figure 3) by Michael Porter (Porter, M. E. 1996).

Figure 3: Functional analysis of Toyota

Functional areas

Capability

Corporate functions

Financial control

Strategic management of multiple business

Strategic innovation

Multidivisional coordination

International management

Management information

Comprehensive, integrated MIS network linked to managerial decision making

Research & Development

Research

Innovation new product development

Fast-cycle new product development

Operations

Efficiency in volume manufacturing

Continuous improvements in operations

Flexibility and speed of response

Product design

Design capability

Marketing

Brand management

Promoting reputation for quality

Responsiveness to market trends

Sales and distribution

Effective sales promotion and execution

Efficiency and speed of order processing

Speed of distribution

Quality and effectiveness of customer service

Figure 4: Porter’s Value chain model

 

  • The hierarchy of capabilities

The hierarchy of capabilities is a more general and structured format to analysis company capabilities either applicable for functional analysis or value chain. Figure 4 demonstrates Toyota’s manufacturing capability.

Figure 5: Toyota manufacturing capability hierarchy

 

Appraising resources and capabilities

Barney (1991) indicates that in order to provide sustainable competitive advantage, the resource and capability must contain four features (V.R.I.N.).

Valuable: a resource is regarded as valuable when it contribute to increase the profitability performance in a company both in deceasing cost or adding revenue.

Rare: the ownership of scarcity resources in a firm creates competitive differentiation from other companies.

Non-imitable is regarded as the difficult or impossibility for competitors to copy or imitate the resources or capabilities. Generally, high cost resource is difficult for company with cost advantage. The technology advantages such as patents, licenses and regulations also establish entry barriers to copy. on the other hand, intangible resources are concerned as the unique value for company which making the main differentiation. The just in time (JIT) (Shigeo Shingo, 1989) system created by Toyota, also called Toyota Production System, is the exclusive capability for Toyota to enhance the production effectiveness which is too sophisticated to complement by others.

Non-substitutable refers to the difficulty or impossibility to achieve the same goal with another strategies rather than the same one designed by a firm.

Resources and capability analysis of Toyota

Step 1: Identify the key resources and capabilities

At the beginning of evaluation Toyota’s key resources and capabilities, it is necessary to understand the key external success factors in the world automobile industry. Grant (2005) suggests that the key terms are attractively designed new models with latest technology, low-cost manufacture, heavy investment requirements of the industry and financial strength to afford the life cycle of each model. In order to keep pack with the industry success, it is necessary to transfer the key factors to Toyota resources and capabilities in its value chain, looking at the whole process from research and development of new products to material purchasing, to supply chain management, to implement the manufacture, to marketing and sales, and to the after-sale service.

Step 2: appraising the importance and strength

Two criteria are applied into appraising Toyota’s resources and capabilities. First is the importance to sustain competitive advantage. Second is Toyota’s strengths and weaknesses comparing with its rivals.

  • Assessing importance

The desired result of exploiting all the resources and capabilities is to achieve the most competitive advantages from its competitors. As a result, the four criteria V.R.I.N are revised. In terms of Toyota, lots of resources and capabilities are regarded to be important to make its position in the industry. How ever, most of these factors such as heavy financial support and management, and technology development are not limited to Toyota, which are accessible to other companies as well. On the other hand, other factors such as brand names, distribution networks, and research and development capabilities are not easily to achieve which cost a long time to establish and contribute to the competitive advantage. As mentioned above, the Just- In- Time production system is the critical and unique advantage created by Toyota.

  • Assessing relative strengths

In order to understand its own position in the industry, it is important to compare its strengths and weaknesses both in internal and external environment. For internal information, looking through its history data and previous annual report is an essential way to understand how the company performed, where is the strengths and where needs to improve. In terms of external discussion, benchmarking is a powerful technique to analyze the factors with its competitors.

Figure 5 demonstrates the key Toyota resources and capabilities as well as their importance and strengths.

Figure 5: Toyota key resources and capabilities

 

Importance

Toyota’s relative strength

Comments

Resources

R1.Finance

6

8

Toyota is ranked as the top one automobile group in the world in 2010. But free cash flow remains negative.

R2.Technology

7

7

Toyota emphases on the technology development especially designing models to meet the needs of different clients

R3.Plant and equipment

8

7

Toyota has factories in most parts of the world, manufacturing or assembly vehicles for local markets

R4.Location

4

4

Plants in many countries both in low cost and high cost area

R5.Distribution

8

6

Toyota worldwide factories to provide products for local market, promising the efficiency and effective

R6.Brands

6

4

Toyota is a strong brand name. But the recall crisis in 2010 and 2011 workers’ strike in France reduce the reputation

Capabilities

C1.Product development

9

8

Product development is the traditional advantage of Toyota. It is one of the largest firms to push hydride vehicles in the market

C2.Purchasing

7

5

Toward creating vehicles earning the satisfaction of clients

C3.Engineering

7

4

Traditional weakness for Toyota main focus on the north American market

C4.Manufacturing

8

9

Famous Just-In-Time system, producing effectively

C5.Financial management

6

7

Has its own financial services, easier to solve financial problems

C6.R&D

5

8

Recently heavily invest in R&D as well as creating new models

C7.Marketing and sales

9

8

Its own way of marketing and sales- TWSM, taking ‘continuous improvement’,‘respect for people’, ‘genchi genbutsu’, ‘respect for people’ and ‘teamwork’ as principles

C8.Government relationship

4

6

Important in emerging markets but the financial crisis reduce the relationship

C9.Strategic management

7

8

Effective method of manufacturing and unique method in marketing. And strategy to sustain sustainable long term relationship

  1. All the scales range from 1 to 10 (1= very low, 10 = very high).
  2. Toyota’s resources and capabilities strength are comparing with those of VW, GM, Ford, Nissan, Honda, and PSA, where 5 represents parity. The ratings are based on author’s subject judgment.  
  3. Sources are from Toyota annual report and industry report. 
  • Bringing together importance and relative strength

After comparing with the importance and strength individually, it is necessary to put all the factors together to get a comprehensive view. Figure 6 is the summary of all the factors in the metric to support designing of competitive advantage strategy.

 

 

 

 

Figure 6: Toyota resources and capabilities metric

 

Step 3: Developing strategy- the Toyota way

Toyota has established its own management philology for a long time from its origins which is known as ‘The Toyota Way’. The terms of ‘Learning Manufacturing’ and ‘Just-In-Time production’ are regarded as two classic strategies (Strategos-International. Toyota Production System and Lean Manufacturing). Respect for people and continuous improvement are two of the basic principles in Toyota philosophy. Besides that, Toyota comes up with five principles (Toyota internal document, 2001) as challenge, Kaizen (improvement), Genchi Genbutsu (go and see), respect and teamwork. There are four components in the Toyota Way (Liker, J. 2004)long-term thinking as a basis for management decision, a process for problem-solving, adding value to the organization by developing its people, and recognizing that continuously solving root problems drives organizational learning.

  • Just-in-time (JIT)

JIT (Hirano, Hiroyuki and Makota, Furuya, 2006), known as Toyota Production System, is the system created by Toyota as a production strategy to reduce cost during manufacturing and inventory process and distribution, leading to the improvement of business return on investment. Generally, information delivers between signals in different process, in order to start the next step effectively. The fluent operation of JIT system can’t exist without effective application of key components such as engineering development, production management, technology improvement, statistics and behavioral science.

Conclusion

Toyota is a classic example which effectively puts its resources and capabilities into creating competitive advantage strategy. Resources and capabilities are possessed by any of the company and the easiest way to create unique competitive advantage for company. Following the appraising and evaluation process, comparing its strengths and weaknesses with its competitors, it is easy to sustain competitive strategy.

 

Bibliography

Grant. R.M. (2005). Analyzing Resources and Capabilities in Contemporary Strategy Analysis (5th ed.), pp. 130-185. Oxford: Blackwells.

 

Hirano, Hiroyuki and Makota, Furuya (2006), JIT Is Flow: Practice and Principles of Lean Manufacturing, PCS Press, Inc.

 

James Martinez, (Sep, 25, 2008), Toyota leads brand value survey, Mercedes Leads Luxury Brands,

http://www.motorauthority.com/news/1029841_toyota-leads-brand-value-survey-mercedes-leads-luxury-brands, accessed on 9th Dec, 2011.

 

Jay Barney (1991), Firm Resources and Sustained Competitive Advantage, Journal of Management, Vol. 17, No. 1, pp: 99-120, London: Sage

 

Liker, J. 2004. The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer.New York: McGraw-Hill.

 

Maynard, Micheline (October 10, 2008). Toyota May Make Prius a Brand and Widen the Model Lineup. The New York Times.

http://www.nytimes.com/2008/10/10/business/10prius.html. Accessed on 10th Dec, 2011.

 

Michael E. Porter, (1985), Competitive Advantage, London: free press.

 

Porter, M. E. (1996). What is strategy? Harvard Business Review, November–December, pp: 61-78.

 

Prahalad, C.K. and Hamel, G. (1990),The Core Competence of the Corporation, Harvard Business Review, Vol.68, No.3, pp. 79–91.

 

Shigeo Shingo, (1989), A study of the Toyota Production System, Productivity Press, p 187

 

Toyota 2011 annual report,

http://www.toyota-global.com/investors/ir_library/annual/pdf/2011/, Accessed on 9th Dec, 2011

 

Toyota Motor Corp, Cash Flow,

http://finance.yahoo.com/q/cf?s=TM+Cash+Flow&annual, Accessed on 10th Dec, 2011.

 

Toyota Official Website, http://www.toyota.co.uk, accessed on 8th Dec, 2011.

 

World Banking of Manufacture Year 2010 (PDF). OICA. August 2011.

原文链接:Strategic management 丰田案例分析