Figure no.1 Stage I (Defense): Japanese firms erect entry barriers and concentrate on the internal market to learn

From a production rate of 20,000 in 1955, Japan was producing over 500,000 cars by

the 1960s. It was now time to look overseas.

5.2. Stage II: attack through bypass and

geographical concentration

In the early 1960s Europe was still suffering economically from the after-effects of World War II. There was no indication of the booming economy that Japan would later become. The only obvious export market was the USA – that was where the money was.

But the US market posed several problems. General Motors, Ford, and Chrysler dominated it. Imported cars counted for less than 2% of the market. To American customers, US manufacture meant quality, European production passed for dubious, and Japanese meant cheap, inferior goods.

How did Toyota decide deal with the three obstacles of ignorance of the US market, powerful competitors, and customer reluctance? It started by researching the US market extensively. It analyzed the competition. And finally it created an organization that would offer value to American consumers.

The market research used information sources: foreign statistics, a customer and distributor survey, and industry consultants.

This led to two major outputs: first, a segmentation matrix; and second, market research evaluated each segment’s attractiveness in terms of forecasted growth. The segmentation matrix presented alternative market entries. Any segment was theoretically possible. To concentrate its resources, Toyota did not want to enter the US market in more than one segment, which ruled out differential or undifferentiated circles. Of the remaining possibilities, guerrilla attacks were the easiest. Then bypass, than flanking, with frontal attacks as the most difficult.

Which segments could be entered by guerrilla or bypass? Competitor analysis of General Motors, Ford and Chrysler could show which segments they offered models in, and which they did not. That knowledge would enable Japanese firms to enter the US market whilst avoiding direct confrontation with the market lenders.

Within guerrillas and bypasses there were several options: motorcycles; subcompacts;

low and high-priced sports cars; luxury cars over 150,000 dollars, and all-terrain vehicles above 40,000 dollars.

How to choose? Two criteria were used. First, how strong was the specialized competition in each? Second, how attractive were segments (in terms of sales, value, margin, and growth)? The more attractive a segment and weaker the competition, the better.

In the early 1960s, the motorcycle segments were dominated by Harley Davidson, an all- American symbol. Popularized worldwide by the movie Easy Rider, Harley Davidson represented a way of life. In the upper and of the all-terrain segment, competition was very strong: from British Leyland and especially from Jeep. At both ends of the sports car segment, competition was also strong. At the high end there were the European models: Porsche, Maserati,

Lamborghini, Ferrari, and some Lotus models. At the low end there were Alfa Romeo’s cheaper models, the Triumph, the Sunbeam, and Fiat’s X19. The medium range was the big three’s domain, with GM’s Chevrolet Corvette, Ford’s Mustang, and Chrysler’s Daytona. The more expensive Alfa Romeo and Lotus models also belonged here.

In the luxury car segment, limousines above 150,000 dollars for institutions were also dominated by the big three. For individuals there were European brands such as Rolls Royce and Bentley.

Besides competition strengths, the image of Japan as a manufacturer of cheap products made it impossible for Toyota to introduce sports or luxury models, or expensive allterrain vehicles. Therefore, the best remain option was subcompacts. Subcompacts also offered another advantage: they were the surest way to keep industry leaders at bay.

Since the subcompact profit margin was lower than that of the largest models (compacts and super-compacts) offered by industry leaders, GM and its rivals had little incentive to block Toyota’s entry by offering their own subcompact. If they had done so, they might have entered up cannibalizing their own profits and sales in other

segments. Toyota satisfied one of the major criteria recommended when performing a bypass: entry should be into a lower unit margin segment than those of the industry leaders.

As a result, despite seeing Toyota’s sales jump at a yearly growth rate of 45%, the three market leaders hesitated, then lacked the will, and finally abandoned the idea of following suit.

Happily for Toyota, the US market leaders did not dominate in subcompacts. The segment leader was German – the

Volkswagen Beetle. Competitor analysis revealed that the Volkswagen Beetle had several weaknesses in consumer’s eyes:

- little leg room;

- lack of arm rests;

- uncomfortable ride;

- high fuel consumption.

So competition was weaker in subcompacts. But what about attractiveness? Market research on consumers and distributors indicated that America’s traditional love of cars as status symbols was waning. Some customers were looking more at cars as a simple means of transportation. In other words, there was a demand for subcompacts. As this demand was not satisfied by the Beetle, there was opportunity for Toyota, so in 1965 it launched the Corona, priced at

2000 dollars – but not across the USA. It launched in a concentrated geographical area that was as near as possible to Japan, and also was attractive – California. Geographical concentration facilitated low price and quality: it was easier to select, train and control the dealers. Proximity to Japan allowed for low transportation costs, which also kept costs (and price) under control. Finally, California was an attractive market: it had a large, wealthy, young population and there was a large Japanese migrant community.

Toyota had achieved a double concentration:

one model (subcompact); and one geographical area “the West Coast”. Toyota’s bypass attack hurt the dominant player’s sales because it stole some customers of the Falcon, Valiant, and Corvair.

5.3. Stage III: holding the ground while erecting entry barriers to indirect competitors

and performing a frontal attack on the market leader, Volkswagen

Having achieved inroads into the US market, Toyota focused on consolidating its position. Strategically that meant three things: First, holding the ground; second, erecting entry barriers to prevent blockage by indirect competition and by GM, Ford and Chrysler; and finally, performing a frontal attack on the main subcompact competitor, the VW Beetle.

Holding the ground is facilitated by four factors: larger size, synergy, experience, and resource quality. Toyota used the latter two.

The key to experience benefits was price and promotion. The Corona was initially priced at 2000 dollars. Similar models cost between 1000 dollars and 4000 dollars (the Vega). The Corona price was decreased by 20% over a ten year period. The lower price increased sales, which led to higher production, which created lower unit costs, and thus in turn

increased margin.

Then there was promotion. Toyota promoted intensively: three times more per unit of cars sold than American Motors. Again, more promotion led to higher sales, which led to higher production, which created lower unit costs, and thus higher margin.

The end result was a virtuous cycle with the final result of higher share and profits