Toyota's Prius market position and hybrid car strategy

TOYOTA'S PRIUS

With the increased level of awareness of the environment, automotive car manufacturers vie on the viability of selling environmentally hybrid cars. Leading this group are Honda and Toyota. The following is a market analysis of the position of Toyota's Prius. It analyzes the following factors:

Situation of the firm in the market

The industry of hybrid cars

The strategy adopted by Prius and how it is faring in the market

The barriers of the market

Some alternative strategies to rectify the weakness of Prius and The implementation of one of its alternatives.

SITUATION ANALYSIS

Firm

Toyota Motor Corporation with its subsidiaries all around the world reports $5,447 billion for the fiscal year 2001. With more than 5.5 million cars, trucks, and buses worldwide sold annually, the company boast of high profits and symbolizes the ideal in automotive industry. Spread to 24 nations and regions worldwide, Toyota with its new innovative concept of business has recently introduced Prius, an environmentally friendly hybrid car in direct competition with Honda Insight. Only second to Japan, North America is the largest market for its products with 1734 thousand units for the year 2001 alone. This has inspired the company to target the American market for the new Prius [http://global.toyota.com/ir.html].

Industry-Porter Analysis

Threats of entry: Currently, the automotive industry is categorized by high level of technological development. Although Honda and Toyota are known for innovations, it is also common knowledge that technological development in this arena is being categorized by the need of the consumers to have environmentally friendly products. The threat lies in the fact that hybrid cars will become dominant opening doors for new entrants to manipulate this technology to meet their business needs. Soon all mode of transportation will become hybrid.

Threats o f substitute products: Gasoline operated cars is gradually being pushed out of the picture in favor of the electric cars. Hybrid cars will also become extinct like Gasoline cars when alternative fueled cars become common such as solar powered, hydrogen fuel etc. become common technology for car manufacturing.

Bargaining power of suppliers: Currently, hybrid cars technology is still new for the market. Furthermore, hybrid car technology is still new for the consumer market to digest. In order to fetch a good price, the model, designs and convenience of the products must be enhanced in order to generate the level of consumers desired for its successful sales. The bargaining power of the suppliers is still limited as compared to the technology they have on hand because the demand is still low.

Bargaining power of buyers: Buyers at the moment still find gasoline cars more convenient due to the convenience of achieving fuel. Electric powered cars is still costly when compared to gas cars in terms of fuel and maintenance. Hence, the buyers at this initial stage command the pricing of their productions. Due to their high price, the buyers are also cautious of buying the "technology" and do not consider it as an investment.

Competitors: Cars are considered to contribute to 90% of the pollutants to the environment. Smog free products are much favored today then they did two decades ago. Hybrid cars like Prius by Toyota and Insight by Honda are considered to be environmentally friendly, with only periodical recharge requirement. Due to this demand by the niche segment of the society, the two companies have been trying to dominate one another in the hybrid cars market. The competition will further increase when the government takes steps to promote. Low Emission Vehicle Program, adopted by the Air Resources Board in 1990 [Weiss, 2000]. Also, seeing the success of Prius, American local companies like GM and Ford are also coming up with their own brands of hybrid trucks by 2004 and Chrysler's hybrid Durango and Ram from 2003. Prius and Honda may be the leaders but they will be faced with harsh competition from the other industrial leaders.

SWOT

Strength and weaknesses: Currently, the company is focussed on external environment more then its internal environment. This is because having established its organization on concrete structure right from the beginning. Set on a hereditary mode of operations, Toyota operates on hierarchy basis. The company believes in not firing its employees, which could be one of its greatest disadvantage resulting in redundant retainment. However, at the executive level, Toyota is one of the most admired companies due to efficient management planning.

The key to its success among consumers is its ease of sales through its drive-away pricing systems that takes away the issue of negotiation of new cars. Individual model prices are set in all geographical location therefore consumers are not subjected to dealer's manipulation.

Opportunities and Threats:

The company is faced with high level of new entrants' threats with its new product Prius. This is one of the reasons why it must build on its brands to lead cars in this genre. Although there is plenty of opportunity for the company to explore in the alternative fuel automotive genre, the market for the product is still at its initial stages.

Market action and strategy analysis

Target market: Prius was launched to target the commercial market directed at environmental friendly consumers. By using various media, the company planed to communicate to its consumers the theme of "Prius / genius" and enhance its presence in the market. The typical Prius consumer is thought to have more concern for the environment then transportation yet wants to maintain their lifestyle. These would be high levels of professionals who work at managerial level who can afford the price Prius offers. These includes executives, sponsors, corporations and institutions etc. [PR Newswire. July 20, 2000].

Positioning the product: In order to position their products, Prius was designed to positioned itself using its technology and design. The selling point is based on the range of 560 miles coverage from a 11-gallon tank. Furthermore it also has the efficiency of a German diesel engine of 65 mpg, 115 bhp. With two motors and electronic gadget the car is designed to secure the luxury market as well as efficiency market [English, 2000]. Prius achieves a fuel economy rating of 3.6 L/100 km or more than 60 mpg -- about double the Corolla's figures [Cavanah, 2001].

Product line decisions and branding: In order to gauge how receptive the consumers are, the company have arranged for dealer's packages as well where they allow the consumers for test drive, and allocate rental programs. Consumers interested in buying the product will be able to contact their dealers immediately. This is expected to increase the level of demand. So far Prius has not achieved the desired branding or exclusivity that it deserves due to entry level competition. What the company have achieved is meeting up with the American standard of fuel emission especially California's strict Super Ultra Low Emissions Vehicle (SULEV) standards [PR Newswire, 2000].

Sales Force: In order to accommodate for the low demands, Prius aimed to use its marketing strategy to boost its sales level. Although there are distribution channels common to other Toyota products, the company planned to use its media programs to boost the level of sales instead of relying on its sales force alone [PR Newswire, 2000].

3. PROBLEMS

Statement of Primary Problem:

From the above analysis it is clear that Toyota and its Prius will face a lot of bottlenecks due to low demands for the car. Initial market test indicates that there is a lot of interest but it seems that the market is still not receptive into buying the product. One of the reasons being that hybrid cars are too costly for an average driver. Secondly, the fact that there are too many entrants into the same industry has increased barriers to leading the products. Establishment of the brand or the product therefore is difficult because there is little difference between the products.

Statement of Secondary Problem:

With the recent incident of September 11, coupled with U.S. recession, the U.S. has experienced one of the lowest GDP ever. Due to this consumption level has decreased which affected the production of industries as well. Since Prius was underway long before this recession, Toyota stand to face the loss resulting from unexpected low demands of consumers that would affect the level of productions and income for the company.

4. STRATEGIC ALTERNATIVES:

Alternative 1: What the company can do at the moment is to generate an aggressive market plan that would target a new market. Previously, the designs of the Prius were directed at ordinary consumers but its price was meant for corporate executives. This irregular strategy of the product is constraint with the budget of its production. In order to increase its level of production, the company must revive the need for hybrid cars in the niche market like middle age individuals who earn at a certain income brackets. This would first generate the client level and then it would determine whether Prius should continue to produce. However, one disadvantage stem from this tactic is that with a low outcome from the campaign would mean increase in expenditure without any income to back it up resulting in chances of closing down Prius.

Alternative 2: Looking at the combined market for hybrid cars, it is clear that there is only limited number of individuals interested in this. It would benefit Toyota and Honda [two leading car manufacturers] to combine their forces to focus on consumer generation then dividing the market through competition. This would minimize competition level as well as the cost on campaigns. Once established that both cars are from the same manufacturers, consumers base from both the companies could be targeted to generate more profits. This alternative would involve low level of cost at the production end but it involves more cost at the merging end. An effective strategy would be partnership with Honda in this category of car manufacturing only.

Alternative 3: The company also has the alternative to produce for companies who are interested in producing hybrid cars hence becoming a producer. This would have many enterprising effects. First of all Toyota will not need to spend on advertising to generate its consumers. Secondly, it would be increasing its market without having to compete. By selling its product to companies like Chrysler, Ford and GM it would localize its own products and still retain a high margin for sales. This would also increase its level of production, revenue and decrease its cost for marketing.

5. SELECTION OF STRATEGIC ALTERNATIVE & IMPLEMENTATION

Statement of selected strategy:

Toyota should select alternative three which state that the company focuses on reselling its Prius to its competitors.

Justification for selection of strategy: In dong so, it would be able to secure high level of demands, and hence increase its level of production. Looking at the sales statement for the year 2000-2001 it could be seen that Prius has a stagnant increase of demands. At this rate the company is likely to close down its division unless it chooses to develop a marketing strategy that is different from its conventional strategy. One such strategy is to minimize its competition by working along with them. This could only be possible if it plans to provide for the competitors through production. The company will only gain in the long run as market demand increase gradually.

Description of implementation of strategy

What it needs to first do is to generate a marketing plan that would direct its sales force towards manufacturers instead of only at direct consumers. This should encompass deals that provide for a significant profit margin for the reseller. Ford, GM and Chrysler although have the technology do not have much on the market for middle class cars. Prius would provide for this need. Furthermore, since they have a client base for luxury cars, it is most likely that they would benefit from Prius technology using their designs to enhance the product line.

6. SUMMARY

Prius facing tough competition in the hybrid car market against Honda Insight. Furthermore due to economic and global environment, demands level of hybrid cars are still small compared to other cars. To increase the level of demands, Toyota should follow the reseller and value chain strategy to increase its client base through its various competitors. It should target its market through resellers rather then direct consumers.

7. APPENDICES

Financial analysis

In fiscal 2001, Toyota sold 1.77 million automobiles in Japan (excluding minivehicles) to capture a 43.1% market share. The Japanese auto market is estimated to be worth around 30 trillion, but not many people know that sales of new cars account for only a quarter of this figure. The remaining three-quarters includes services, automobile accessories, used cars, car rentals, auto leases, loans and insurance. This is a situation we view as an exciting opportunity to enter into a variety of new fields."

Technical analysis

Actually, gas mileage varies dramatically based on your driving. If you are easy on the gas and drive with slow, steady acceleration, you will do much better. If you tend to do a lot of stoplight racing and drive at over 75 mph on the freeway, you will do much worse. Likewise, since the engine seems to get about 10 mpg less when cold (since the gas engine is always running until it warms up), if you live in the North and do a lot of small trips, gas mileage will be relatively poor. Summer mileage is, we expect, substantially higher than winter mileage, because the engine needs to run less to operate the heater and keep the catalyst at operating temperature. Tire pressure also seems to be an important factor - keep pressure at the recommended level, which we believe is 35 psi.

The Prius really is not designed for a commute like mine - 50 miles of high-speed freeway driving with a mile or so of city driving at one end and five miles of normal-speed highway on the other. I generally reached about 41 mpg on that route, driving at high speeds; that's roughly the same gas mileage I would get in a new Corolla, a little above my own 1999 model. (That is in some ways unfair, since the Prius is an automatic, while a Corolla needs a five-speed to get 38-41 mpg; and because test cars nearly always get lower mileage than ordinary cars, because they are not broken in as well)." http://www.corolland.com/prius-review.html