Toyota

MIS Porter’s Five Forces Model Of Toyota Porter’s five forces model is a framework for the industry analysis and development of business strategy. Three of Porter’s five forces refers to rivalry from external/outside sources such as micro environment, macro environment and rest are internal threats. It draws ahead Industrial Organization economics to develop five forces that conclude the competitive intensity and consequently attractiveness of a market place or industry. Attractiveness in this framework refers to the generally overall industry profitability.

An “unattractiveness” in industry is one in which the mixture of these five forces proceed to constrain behind overall profitability. An extremely unattractive industry would be one moving toward “pure competition”, in which existing profits for all companies are moving down to zero. 1. Bargaining power of suppliers The bargaining power of suppliers is low. There are various types of suppliers in the vehicles industry, including the cooling system, electrical system, braking system and fuel supply system distributed across the globe.

However, most vehicle manufactures own many interchangeable suppliers, and also have the ability to produce the components by their own in the short time. Thus, the suppliers do not own the power to change the price. 2. Bargaining power of buyers The Bargaining power of buyers is high. Today, buyers have a lot of information channel, such as the internet, where can easily find the proper vehicle. And, the preferences of the private consumers are important to the vehicle corporations.

If automobile Company increases one type, they can also choose other type or the cheaper one. And the vehicle’s buyers can easily find the substitutes, such as walking, and bus. 3. Threat of new entrants The entrants can not enter to the automotive industry easily, as automobiles are special products that require a large amount of money on the design, electronic functions, and safety issues. And another important issue is the brand loyalty in the car market. Vehicle firms always benefit the brand value, and decrease the consumer sensitivity about the price.

For example, General Motors provided $1000 to the Saab owners who planed to buy the 2008 model. 4. Rivalry among competitors The competition in the auto industry is strong. The top eight auto companies have occupy large part of global revenues, and these automobile manufacturers strengthened the globalization and consolidation across the worldwide range. The competition is not only between the corporations, but between the governments. Governments established protection laws to protect the products of each own production.

For example, U. S. government increased the additional tariffs on Chinese tires in 2009. And the Toyota vehicles were recalled because the U. S. government investigated into the accelerator pedal problems. 5. Threat of substitutes The threat of the substitutes is high. There are a lot of substitutes in the automobile industry. When the price of the vehicles rises, the substitutes will emerge, there are many types of equipment that can take the place of vehicles, such bus, subway, bicycle and even walking.

There are different financial ratios that are to be studied with regard to the financial analysis of the financial condition of the two companies, General Motors, and Toyota. This paper seeks to make a general financial analysis of the previously mentioned companies through the available financial ratios. Particularly, this intends to present the relevant financial ratios, comparison of the indicators in the two companies, and interpretation of such. The financial indicators There are several financial indicators that are noted for the two companies. These are the current ratio, quick ratio, net working capital ratio, return on assets, return on equity, earnings per share, inventory turnover ratio, interest cover ratio, dividend yield, and dividend payout ratio. The results for the following are presented in the table below. For GM, the current ratio is computed at 0. 86 with current assets at $60,135 and current liabilities at $70,308 where both values are in million dollars. On the other hand, Toyota’s current ratio is placed at 0.

32 as computed from the current assets of $4,811,532 and current liabilities of $15,039,178. For the computation of the quick ratio, GM has a ratio of 0. 5 while Toyota has 0. 0 This is taken from the quick assets divided by the current liabilities of the two companies. In comparison to their liquidity ratios, GM has a liquidity ratio of 0. 38, and Toyota has 0. 19. The networking capital ratio is -6. 67 for GM and -28. 10 for Toyota. These values were computed from the net working capital and total assets for Toyota and GM. The return on assets for GM is 26.0 whereas it is 0. 017 for Toyota and it is computed through the net income divided by the average total assets for the companies. In addition to this, the return on equity for GM is 0. 0 and 0. 0 for Toyota where it is taken from the net income over the average stakeholders’ equity. Furthermore, a great difference may be seen from the earnings per share of the two companies where it is $-68. 45 for GM whereas it is $5. 40. For a particular day for GM, the turnover was 33 while Toyota had zero. Above all these, the dividend payout ratio for GM is 9.9 % and it is 2. 4 % for Toyota. The dividend payout ratio for GM is pegged at 0% and for Toyota, it is at 40%. These are the results of the financial indicators presented above. It can be seen that the two companies have their own strengths and weaknesses. GM has more current assets for its current liabilities as compared to Toyota. However, the ability to generate profit for the outstanding shares marks a great difference for the two companies.

Reference

1. http://www.advfn.com/p.phppid=financials&cb=1215163649&btn=sf_ok&symbol=NYSE%3AGM&sf_symbol_search=NYSE%3AGM&ss_symb=GM. ADVFN Financial. “Toyota.
2. http://www.advfn.com/p.php?pid=financials&symbol=NYSE%3ATM. Financial Highlights. Retrieved July 04, 2008.
3. http://www.toyota-industries.com/ir/library/annual/2007/ar/p02-03.pdf.
4. http://www.gm.com/corporate/investor_information/docs/fin_data/gm07ar/download/gm07ar_full. pdf

Even though Zara can survive with the highest market share in the clothing market, still there are those competitors out there that Zara might gain more of their customers if it applied new marketing strategies . There’ 4 main competitors that the company should consider, including H&M, Mango, Uniqlo and Gap. For H&M ,it has the customers that are mostly similar to Zara which mostly are women that are into fashionable clothes, want to follow the trends but are more price-conscious and unwilling to spend a lot of money on clothes comparing to Zara. For this reason, the company’s objectives are to always provide customer with new designs under the name of an inexpensive clothing label. Talking about Mango, just like H&M, Mango has the same target market as Zara.

However, Mango focuses only women who are into fashion and follow latest trends. The price ranges of both Zara and Mango are also the same meaning that mostly they share the same women customers. Unlike Uniqlo, the company doesn’t segment out on any target group but focus on market as whole, women, men and children at every age. Read also about Zara corporate social responsibility issues

Like Mary Lawton, a spokeswoman for the Uniqlo once said. “We’re inclusive of everyone.” Moreover, Uniqlo offer unbeatable low prices to the customers and for this reasons it attracts customers with every purchasing-power level and encourages them to go to its store. Lastly, For Gap its focus group is ones who concerns with good quality but not willing to pay expensive prices.

However, regarding the change in taste of the customers and gap still offers basic clothing which makes its sales have dropped due to the lack of sense of exclusiveness. As a result, Gap is now stuck in between the company’s other two brand which are Old Navy ,brand that offer low price clothes and Banana Republic which offer high-end clothes.

Read how a survey of hobbies and purchases can help a producer

Introduction

Indian automobile industry currently contributes 5% to India’s current GDP of $1. 4 trillion. The projected size in 2016 of the Indian automotive industry varies between $ 122 billion and $ 159 billion including USD 35 billion in exports. This translates into a contribution of 10% to 11% towards India’s GDP by 2016, which is more than double the current contribution. We can safely assume the passenger car market as a whole grows in the same phase if not more than mentioned above.

Passenger cars have sub-classifications within them and they are as follows:

Segmentation of Indian car market

As per SIAM (Society of Indian Automobile Manufacturers), The classification of segments are done as per the length of the vehicle, (Passenger car segment)

1. A1 – Mini – Up to 3400mm (M800, Nano)
2. A2 – Compact – 3401 to 4000mm (Alto, wagon r, Zen,i10,A-star,Swift,i20,palio,indica etc)
3. A3 – Midsize – 4001 to 4500mm (City,Sx4,Dzire,Logan,Accent,Fiesta,Verna etc)
4. A4 – Executive – 4501 to 4700mm (Corolla,civic,C class,Optra,Octavia, etc) 5.
5. A5 – Premium – 4701 to 5000mm (Camry,Eclass,Accord,Sonata,Laura,Superb,etc)
6. A6 – Luxury – Above 5000mm (S class,5 series etc)
7. B1 – Van – Omni, Versa, Magic etc
8. B2 – MUV/MPV – Innova, Tavera, Sumo etc
9. SUV – CRV, Vitara, etc A segment, B segment, etc. were used earlier.

But now the segmentation in India is done on the basis of length. Maruti Suzuki India Limited, the leading passenger car producer, currently holds a market share of about 45% in the passenger vehicle segment. The dominant share of the current 45% has primarily come from passenger cars that belong to the Mini/Compact hatchback or midsize sedan.

As Maruti Suzuki started its operations in 1981 the needs of the country’s automotive industries were affordable/entry-level cars which Maruti very successfully catered to. But very recently the executive, premium, and luxury segment cars are growing more than 20% every year which is higher than the growth of the compact passenger cars. Here is data that reiterates the growth of premium segment cars in India. The data shows the number of cars whose price is in the range of 15lakh to 30 lakh.

Model| 2004/05| 2006| 2007-08| 2008| 2009| 2010| 2011| Skoda superb| Na| 769| 586| 694| 541| 2078| |BMW 3 series| -| -| 946| 1,075 (FY09)| 1,155| 2,220 (Jan-Nov)| | Audi A4| -| -| 102| 1,050| 1,658| 3,003| 4,210 (Q1-Q3)| Mercedes c class| 785| 883| 1,127| 1,765| 1,607| 5,109 ( Jan-Nov)| 3,233 (Jan-May)|

The above data clearly shows there is a strong growth in the premium segment that is being seen in the Indian passenger segment. So how far can Maruti Suzuki, a pioneer in the small car segment, address the changing trends of the Indian car market. Can it replicate the success of small car sales into the premium segment also?

In order to identify the needs and the values of the luxury class and their views and expectations on Maruti entering the premium car segment we conducted the following interviews which are given below

INTERVIEWS WITH POTENTIAL CUSTOMERS

Interview 1:

What is your profile? I am Prakhar Sharma. I am an electronics engineer and had been working for BEL for the last one year. At present, I am a student in IIM Bangalore. Do you own a sedan? If yes, which car? My father would be the rightful owner of the cars that we possess. He is a Government officer. We currently own an SX4 petrol version.

It is the ‘fully loaded’ petrol version, and we own it for over a year. Do you own any other car? We do own a Maruti 800, which is around 20 years old. Apart from that, my father has his office car as well. We thought about buying a new car because the Maruti 800 was very old. What are the various factors you considered before you bought the car? Generally, when a person is looking to buy a sedan, it is his second or third car purchase. There are various factors people consider while buying a car. Personally, the factors I feel that influence my choice are Style, Power, Ergonomics, and driving experience.

This is of course taking into account that certain minimum requirements are met by the cars in this category. What other cars did you compare with before buying the SX4? There are a number of options available in this price range. We had basically zeroed down upon SX4 and Honda City. The Honda City is a really good car as well. The best thing I liked about it was the experience. It is extremely smooth with a feather touch power steering. The design and interiors are really nice as well. What made you choose the SX4 over the Honda City? We had a fixed budget assigned towards the car, with the flexibility of around 1 lakh.

Within that budget, the two cars I really liked were SX4 and Honda City. However, the Honda City base model would cost us as much as the SX4 fully loaded model (with all features already installed). So we felt that it was better value for money, and went along to buy the SX4. Apart from that, some other factors which influenced our decision were that maintenance costs of Maruti are very low, spare parts are readily available and don’t really cost that high either. If you are looking to upgrade to a higher-end sedan, would you go for a Maruti again?

Say Kizashi? If I assume that I do not have any budget constraints, then I probably would not go for a Maruti. The new Kizashi seems good as far as design and technical specifications are concerned, but the name Maruti has a perception attached to it. Maruti is the car that was trusted by your parents and grandparents, it is the car that almost every Indian owns. If I want to own a high-end sedan, I would want to show it off as well. I feel that would not be possible with the Maruti tag associated with it. It does not have that association of exclusivity.

So I would rule out Maruti in the first place and go for a brand which is not possessed by too many people.

Interview 2:

What is your profile? I am Vaibhav Singh, I graduated from IIT Kanpur. Currently am a PGP-I student at IIM Bangalore. Prior to joining IIMB, I worked at National Instruments for almost 3 years. Do you own a car now? If yes what is the car Yes, I own a Maruti 800. What are the facts you like and dislike about your current car? I feel a sense of safety in the case of Maruti mainly because it’s a trusted brand, especially in India. Secondly, it’s low on maintenance and its spares are readily available.

Also, Maruti has a strong service network. What I don’t like about Maruti, I get confused as there are many cars in the same segment and it’s very difficult to select. Do you have any other cars in the family? Which one do you like comparatively? Yes, we also own a Ford Figo. I like Figo over Maruti 800 as it is newer and has many more features. Are you planning to upgrade your car now? What are the key features you look for in the car? I may upgrade after a couple of years from now and mostly to a sedan. The key features I will look for would be i. Brand value. How it’s perceived in the market.

If Maruti comes up with a new car would you be willing to consider it? Why or why not? I will mostly not consider Maruti as my option. The reason is that I associate Maruti with a low cost so there is a brand disconnect. I would rather consider a Honda or Toyota. What do you think about the new car Maruti has launched Kizashi? When I saw the car it was portrayed as a sports sedan but I think the looks could have been better. Basically, I don’t perceive a Maruti car as a sports sedan. When a car is that expensive it should also add status which I think Maruti does not add.

What can Maruti do so that you will consider it as an option? I think what most other companies have done by separating the brand-specific for luxury cars, Maruti should do something similar. If possible leverage on some brand that concentrates on the luxury segment alone. If not anything else, they should at least use just ‘Suzuki’ and not ‘Maruti Suzuki’ to launch a car in the targeted segment. Finally, what are the two main reasons why you will not buy a Maruti in the luxury segment? 1. There will not be any status enhancement 2. I do not associate Maruti with high performance. I only think it is low cost and reliable.

Interview 3:

What is your profile? I am Shobhit Agrawal from Delhi. I completed my graduation from St. Stephen’s College. Currently am a PGP-I student at IIM Bangalore. Do you own a car? If yes, which? Yes, we own a Volkswagen Polo for over a year. We also own a Maruti 800 but it’s not in a major use now. What you like and dislike about your current car? We bought Polo because it was one of the better cars in terms of performance in that price range. We preferred a top-end version of the hatchback over a low-end version of a bigger car.

Polo has many features and most importantly we wanted a car that is new and different from the ones generally present in society. So Polo met most of our needs. There’s nothing specific which I don’t like so far. If you want to upgrade your car in the future what will it be to? What are the key features you would look for in the car? If I upgrade my car in the future, it might be a sedan. Key features I would consider are i. Performance (engine) and mileage ii. Value for money – The car should be ergonomically comfortable, it should have good features, better quality, and good interior design & aesthetics iii.

Brand – It should make a statement. iv. It should also have a good dealership network and servicing network. Suppose you would want a luxury sedan, and Maruti launch cars it that segment. Would you consider Maruti as your option? Why or why not? As I mentioned the key features I would be looking for in a new luxury sedan car, If I feel that a Maruti sedan meets my requirements, I may consider it as my option. But since such an investment is considerably large and highly infrequent, the brand will also play an important role in selection as it is a status symbol.

What’s your view about Maruti Suzuki SX4 and Kizashi compared to competitors in their segment? When I see SX4 against Honda City, SX4 seems to be lower in class although it is not. Similarly, if I compare Kizashi with Accord or Camry, Kizashi seems to be slightly lower. This I think is mainly because people associate Maruti with small cars than sedans and luxury cars. What do you Maruti lacks to be in the luxury sedan segment? What should it do? I think Maruti lacks an image of a luxury car maker. It is generally associated with small cars owing to its leadership in that segment.

In order to be more successful, Maruti will have to develop expertise and capability to compete in that segment.

Survey analysis

So from the discussions with the consumers, we have come to the following conclusions regarding whether they would prefer to buy a Maruti in the sedan segment the following conclusions can be drawn. The major reason is that Maruti is associated with a low-cost car. It is a very trusted brand as many of the people interviewed were either owners or had owned a Maruti car in the past and were very satisfied with the product. However, the brand is not associated with a status symbol so people upgrading will most probably not prefer a Maruti even if the product and the price is the same as the competition.

Another reason for non-acceptance is that there a real as well as perceived difference between the competitors and Maruti. When we compare higher-end cars by Maruti with others in the segment, it fails to beat the established standards by other brands. For e. g. In a 2. 4 Lit engine car segment, it is perceived by the consumers that Toyota and Honda cars will have a superior engine than Maruti’s s engine.

Also they are perceived to provide a better quality in terms of aesthetics to the buyer. For this reason, even though, Maruti Suzuki SX4 was launched in the same segment as Honda City, it was always considered to be lower than City.

One reason for people not to consider the car is that they feel the resale value will not be good. As many people in these segments buy cars and switch between 3-5 years resale value is an important consideration and this is where Maruti lags behind a lot compared to a Honda or a Toyota. Some points were also in favor of Maruti.

Most of the people have already owned a Maruti and were very satisfied with the product and have a high opinion of its after-sales service and cheaper spare parts so they think that compared to the others the maintenance cost will be low. Therefore after analyzing the 4 interviews we can come to the conclusion that Maruti cannot be seen as a status symbol that most people upgrading to higher-end cars look for. However, this segment is growing at a very fast rate compared to the average industry so this is a segment Maruti cannot afford to ignore.

The advertisements and promotions for their latest car Kizashi also could not generate much excitement among the customers like what Mahindra Scorpio’s advertisements did so this could be one area they could look at. So the key questions going ahead for us will be: * Maruti has entered the segment with its current brand the following table shows the specifications of Maruti Kizashi and its competitors Technical Specification and Pricing * As shown in the table above even with similar specifications and competitive pricing Kizashi was not able to catapult its sales figures as done by Accord (3324 units– 2005-06) and Camry (794 units– 2005-06).

So the burning question is does it need a new brand either fully made by themselves as Toyota did with Lexus or should they come into collaboration or acquire a luxury brand and enter into the market * Will Maruti be able to use the current distribution channel to effectively market the cars? With the same dealership network having two types of customers, one targeting an entry-level hatchback and the other targeting a luxury sedan served effectively? Or will they need a new dealership network for high segments cars for specific target consumers which can be a costly affair?

This study has discussed different theoretical model of FDI that takes topographic point. These theories briefly explicate why houses go to problem when set uping or geting abroad. Theories that use on this study are Hymer ‘s parts, merchandise life-cycle theory, caves theory, internalization theory, the eclectic paradigm, strategic motives of foreign direct investing and investing way development ( IDP ) theory. This study besides evaluates Honda automotive as an illustration on how they survive and compete in the competitory international markets nowadays with utilizing FDI theoretical accounts, statistics and theories. Based on these analyses, I feel that FDI takes an of import function to both foreign and host states and besides impact steadfast behavior or effects on host economic systems.

Introduction

This study will discourse Foreign Direct Investment theories and measure the FDI of a taking participant industry that chosen, Toyota, Japan. Foreign direct investing ( FDI ) is the name given to treat where a house from a state provides capital to an bing or newly-created house in another state ( Jones, 2006 # 1 ) . For illustration, a foreign house may make up one’s mind to set-up production in the UK and by so making will prosecuting in the procedure known as FDI. Firms turn uping production in more than one state are frequently referred to as transnational endeavors ( MNEs ) . Tormenting ( 1981 ) notes there are two chief jobs with sing FDI. First, FDI is more than merely the transportation of capital, since merely as significantly it involves the transportation of engineering, direction and organisational accomplishments. Second, the resources are transferred within the house instead than between two independent parties in the market topographic point, as is the instance with capital ( Jones, 2006 # 1 ) . These factors give FDI own a alone cardinal theories and frequently cited as Hymer ( 1960 ) international operations of national houses ; Vernon ‘s ( 1966 ) merchandise life-cycle theory ; Cave ‘s ( 1971 ) horizontal and perpendicular theories ; Buckley and Casson ( 1976 ) Internalization theory ; Dunning ( 1977 ) eclectic theory ; Graham ( 1978 ) strategic behaviour of houses and John Dunning ( 1981 ) investing development way ( IDP ) theory. This study will get down by analyzing the Hymer ( 1960 ) theory.

Hymer ( 1960 ) international operations of national houses

Hymer ‘s ( 1960 ) , who saw defects in the prevailing position that direct investings and portfolio were synonymous with one another. Hymer noted that direct investing was chiefly performed by houses in fabrication, whereas there was a predomination of fiscal administrations involved in portfolio investing ( Jones, 2006 # 1 ) . Hymer was besides explained why direct investings across assorted states ( Kogut, 1998 # 2 ) . Hymer ( 1960 ) expressed his dissatisfaction with the theory of indirect ( or portfolio ) capital transportations to explicate the foreign value-added activities of houses ( Dunning, 2008 # 3 ) . In peculiar, he identified three grounds for his discontent. The first was that one time uncertainness and hazard, the cost of geting information and volatile exchange rates and doing minutess were incorporated into classical portfolio theory, many anticipations, for illustration, with regard to the cross-border motions of money capital in response to involvement rate alterations, became nullified. This was because such market imperfectnesss modified the behavioral parametric quantities impacting public presentation of houses and the behavior and, in peculiar, scheme in serving foreign markets ( Tormenting, 2008 # 3 ) . Second, Hymer stated that FDI involved the transportation of a bundle of resource ( i.e engineering, entrepreneurship, direction accomplishments, and so on ) , and non merely finance capital which portfolio theories such as Iversen ( 1935 ) had sought to explicate. The 3rd and possibly most cardinal feature of FDI was that it involved no alteration in the ownership of resources or rights transferred, whereas indirect investing, which was transacted through the market, did ask such a alteration. In effects, the organizational mode of both the dealing of the resources, for illustration, intermediate merchandises, and the value-added activities linked by these minutess was different. Furthermore, Hymer ‘s theory of FDI draws its influence from Bain ‘s ( 1956 ) barriers to entry theoretical account of industrial economic sciences ( Teece, 1985 ) . Hymer Begins by observing that there are barriers to entry for a house desiring to set-up production abroad. These are in the signifier of uncertainness, hazard, and host-country patriotism ( Kogut, 1998 # 2 ) . Uncertainty gives rise to costs in get the better ofing informational disadvantages associated with strangeness with local imposts. Each state has its ain linguistic communications, legal system, economic system and authorities, which place houses from exterior of the state at a disadvantage compared to houses that are of course resident to the state. The 2nd barrier is chauvinistic favoritism by host states, which may happen by the authorities with a protectionist docket, or by consumers of the host state who prefer to buy goods from ain national houses for grounds of loyal or trueness inclinations. The concluding barrier manifests itself as an exchange rate hazard ( Kogut, 1998 # 2 ) . As the house has to pay a dividend to its stockholders in the place state it has to repatriate the net incomes back to its ain currency.

Given these barriers to international productions, why do houses prosecute in foreign direct investing? Harmonizing to Hymer there are two grounds, whether of which could use, and both of which are expected to increase its net incomes ( Kogut, 1998 # 2 ) . First, the house removes competition from within the industry, by taking-over or by unifying with houses in other states. Second, the house has advantages over other houses runing in a foreign state. Examples of the latter are the ability of the house to get factors of production at a lower cost, the usage of better distributional installations, the ownership of cognition non known to its challengers or a differentiated merchandise that is now known in the other state. Both grounds stress the importance of ‘market imperfectnesss ‘ ( Dunning and Rugman, 1985 ) , and underlying these the investor has direct control of the investing.

Overall, these grounds are non sufficient for a house to prosecute in direct foreign investing, as what is necessary is that it must come in the foreign market in order to to the full allow the net incomes, for illustration, a house could licence its merchandise to a house in the foreign state, so that it need non straight put in the market. However, there are jobs with licencing the merchandise. These include the failure to make an understanding with the licensing house over the degrees of end product or monetary values, or the costs involved in the monitoring an understanding made between the houses.

Product Life-Cycle Theory

Vernon ( 1966 ) , argued that “ the determination to turn up production is non made by standard factor-cost or labour-cost analysis, but by a more complicated procedure ” ( Kogut, 1998 # 2, p.29 ) . The merchandise rhythm theoretical account was introduced in the 1960s to explicate market-seeking production by houses of a peculiar ownership or nationality ( Dunning, 2008 # 3 ) . On the other manus, the merchandise rhythm was the first dynamic reading of the determiners of, and relationship between, international trade and foreign production ( Dunning, 1996 # 5 ) . It besides introduced some fresh hypotheses sing demand stimulations, engineering leads and slowdowns, and information and communicating costs, which have later proved utile tools in the survey of foreign production and exchange ( Dunning, 1996 # 5 ) . Harmonizing to Vernon, a merchandise has a life rhythm that has three chief phases. These phases are of import as they have deductions for the international location of a merchandise as follows.

Phase One: Merchandise development procedure. In other words, the nature of the merchandise that the house is doing is non standardised ( Kogut, 1998 # 2 ) .

Phase Two: Maturing merchandise. This means that the demand for the merchandise to be situated near to its market diminutions, which allows for economic systems of graduated table. These impact on the locational determination of the house, particularly as the demand for the merchandise is likely to turn in other states, and the house will hold to make up one’s mind whether it is deserving puting up production abroad. Furthermore, this could even intend that the place state experiences exports back to it from the foreign works.

Phase Three: Standardized merchandise. This is an extension to the maturating merchandise phase, where the standardization of the merchandise has reached its ‘zenith ‘ , and a concluding model of the merchandise has been found ( Kogut, 1998 # 2 ) .

Caves Theory

Caves ( 1971 ) , expanded upon Hymer ‘s theory of direct investing, and placed it steadfastly in the context of industrial administration theory ( Jones, 2006 # 1 ) . The importance of Caves work is that this theory will associate Hymer ‘s theory of international production to the so current theories of industrial administration on horizontal and perpendicular integrating. Caves identify between houses that engage in horizontal FDI and those that undertake perpendicular FDI ( Dunning, 2008 # 3 ) . Horizontal FDI takes topographic point when a house enters into its ain merchandise market within a foreign state, whereas perpendicular FDI happens when a house enters into the merchandise market at a different phase of production ( Jones, 2006 # 1 ) .

Internalisation Theory

Coase ( 1937 ) , examines the function that dealing costs play in the formation of administrations known as internalization theory ( Jones, 2006 # 1 ) . In brief, Coase was concerned with why houses exist and why non all minutess in a n economic system occur in the market. Coase besides answered this in footings of the minutess costs involved in utilizing the market, where this is the cost of seeking and finding the market monetary value, or, one time the monetary value is found, the cost of dialogue, subscribing and enforcement of contracts between the parties involved in the dealing. The procedure of internalization is developed to explicate international production and FDI, and one of the taking advocates is Buckley and Casson ( 1976 ) . They present the MNE as basically an extension of the multi-plant house ( Dunning, 2008 # 3 ) . Bucley and Casson note that the operations of house, particularly big houses, take the signifier non merely of bring forthing services and goods, but activities such as selling, preparation, development and research, direction techniques and engagement with fiscal markets. These activities are mutualist and are connected by ‘intermediate merchandises ‘ , taking the signifier of either cognition or stuff merchandises, and expertness. A cardinal intermediate merchandise in the internalization theory of FDI is knowledge. One ground is that cognition takes a considerable period of clip to bring forth, for illustration through development and research, but is extremely hazardous, so that hereafters markets do non be. Sellers of markets may be unwilling to unwrap information, which has unsure value to the purchaser, doing market fail. Further, Sellerss and purchasers of cognition can frequently keep a grade of market power, which leads to a ‘bilateral concentration of power ‘ ( Williamson, 1979 ) , and unsure results ( Dunning, 2008 # 3 ) . These jobs indicate the terrible troubles in licensing and undertaking where information is important.

In respects to internationalization, the public good belongings of cognition agencies it is easy transmitted within the house, irrespective of whether it is inside or across national boundaries. This creates internal markets across national boundaries, and as Buckley and Casson province, as houses search for and work cognition to their maximal potency they do so in legion locations, with this taking topographic point on an international graduated table, taking to a “ web of workss on a global footing ” ( Jones, 2006 # 1, p.45 ) . The internalization theories of FDI played an of import function in progressing and developing the theory of FDI in the 1970s and have remained popular since that clip ( Dunning, 2008 # 3 ) .

The Eclectic Paradigm

Reflecting upon the history of the theory of FDI, Dunning ( 1977 ) noted that it was really much couched in footings of either the structural market failure hypothesis of Hymer and Caves or the internalization attack of Buckley and Casson ( Dunning, 1996 # 5 ) . Tormenting provided an eclectic response to these by conveying the viing theories together to organize a individual theory, or paradigm as it is more frequently referred. The basic premiss of Dunning ‘s paradigm is that it links together Hymer ‘s ownership advantages with the internalization school, and at the same clip adds a locational dimension to the theory, which at the clip had non been to the full explored ( Jones, 2006 # 1 ) . Further, Dunning does pull off to present some new considerations, such as the impact that different state and industry features have on each of the ownership, locational and internalization advantages of FD ( Jones, 2006 # 1 ) .

The eclectic paradigm of FDI provinces that a house will straight put in a foreign state merely if it fulfils three conditions. First, the house must possess an ownership-specific plus, which gives it an advantage over other houses and which are sole to the house. Second, it must internalize these assets within the house instead than through catching or licensing. Third, there must be an advantage in setting-up production in a peculiar foreign state instead than trusting on exports ( Blomstrom, 2000 # 8 ) . Different types of ownership ( O ) , locational ( L ) and internalization ( I ) factors are given in Table 1 ( jointly known as OLI ) ( Jones, 2006 # 1 ) .

Internalization advantages are the ways that a house maximises the additions from their ownership advantages to avoid or get the better of market imperfectnesss ( Dunning, 1996 # 5 ) . Internalisation-specific advantages consequences in the procedure of production going internal to the house. Reasons for internalization include the turning away of dealing costs, the protection of the good, market and finance, turning away of duties and the ability to capture economic systems of graduated table from production ( Dunning, 2008 # 3 ) .

Furthermore, non all of the OLI conditions for FDI will be equally dispersed across states, and hence each status will be determined by the factors that are specific to single states ( Dunning, 1996 # 5 ) . Linkss between the OLI advantages and the country-specific features are summarised in Table 2. For illustration, the ownership-specific advantage of house size is likely to be influenced by market size in the house ‘s place state ( Dunning, 1996 # 5 ) . This is because the larger the market is, the more likely will a house be able to derive ownership-specific advantages in the signifier of economic systems of graduated table. In footings of location-specific factors, labor costs will change across developed and developing states, while conveyance costs are determined by the distance between the host and place states. Finally, country-specific factors are likely to impact the grade to which houses internalise their advantages.

Strategic Motivations of Foreign Direct Investment

Despite the progress made by the eclectic attack to FDI, the theory has been criticised for disregarding another facet of FDI theory. Knickerbocker ( 1973 ) , and so advanced by Graham ( 1978, 1998 ) . The distinguished characteristic of the strategic attack to FDI is that is believes that an initial influx of FDI into a state will bring forth a reaction signifier the local manufacturers in that state, so that FDI is a dynamic procedure. The procedure from the domestic manufacturers can either be aggressive or defensive in nature. An aggressive response would be a monetary value war or entry into the foreign house ‘s place market while a defensive response would be an acquisition or amalgamation of other domestic manufacturers to reenforce market power ( Dunning, 1996 # 5 ) .

Investment Development Path Theory

John Dunning ‘s ‘investment development way ( IDP ) ‘ theory ( 1981 ) and its latest version ( Tormenting an Narula 1994 ) are implicitly built on the impression that the planetary economic system is needfully hierarchal in footings of the assorted phases of economic development in which its diverse component states are situated. The IDP basically traces out the net cross-border flows of industrial cognition, the flows that are internalised in foreign direct investing ( FDI ) and that restructure and upgrade the planetary economic system, although there is besides the non-equity type of cognition transportation such as licensing, turn-key operations, and the similar. In this manner, the IDP can therefore be position as a cross-border yarning curve exhibited by a state that successfully move up the phases of development by geting industrial cognition from its more advanced ‘neighbours ‘ . A move from the ‘U-shaped ‘ ( i.e negative NOI ) part to the ‘wiggle ‘ subdivision of the IDP indicates an ‘equilibration in cognition airing ‘ ( Dunning, 1996 # 5, p.143 ) and that is, a narrowing of the industrial engineering spread between the advanced and the catching-up states. Therefore, IDP curve conceptualised by Dunning is an idealized form based on free-market exchanged of cognition among states ( Dunning, 1996 # 5 ) .

Japan Automotive Industry

Cars and auto-parts had long been targeted by the Nipponese authorities as one of the most promising industries in which both higher technological advancement and productiveness were possible and whose merchandises were extremely income elastic. In add-on to cars, another components-intensive, assembly-based industry that successfully emerged in Japan in the 1970s was consumer electronics ( Dunning, 1996 # 5 ) . Both cars and consumer electronics came to capitalize really adroitly on Japan ‘s double industrial construction in which legion little and moderate-sized endeavor coexisted alongside a limited figure of large-scale houses ; the former specialised at the comparatively labor-intensive terminal, while the latter operated at the comparatively capital-intensive, scale-based terminal of vertically incorporate fabrication ( Dunning, 2008 # 3 ) .

Furthermore, it was besides in Japan ‘s car industry ( at Toyota Motor Co. , to be exact ) that a new fabrication paradigm, ‘lean ‘ or ‘flexible ‘ production, originated as a superior option to ‘Fordist ‘ mass production ( Womack, Jones and Roos, 1990 ) . This technological advancement came to be reflected in lifting engineering exports in the conveyance equipment ( largely, car ) industry. But the really success of constructing up the efficient, large-scale ( hence exploitative of scale/scope economic systems ) hierarchies of assembly operations in extremely differentiated cars and electronics goods, along with increased R & A ; D and technological accretion ( which is reflected in increasing engineering exports ) , resulted in Japan ‘s export thrust and spread outing trade excess. These state of affairss in bend rapidly led to merchandise issues and the crisp grasp of the hankering ( Dunning, 2008 # 3 ) .

To besiege protectionism, Nipponese manufacturers of cars and electronics goods began to replace their exports with local assembly operations in the Western markets, chiefly in North America and Europe. Meanwhile, they besides started to bring forth reasonably standardised ( Internet Explorer. Relatively low value added ) parts and constituents, or those that can be cost-effectively produced, locally, both in low-wage developing states, particularly in Asia, and in high-wage Western countries- in the latter, with the installing of labour-cost-reducing and labour-quality-augmenting mechanization equipment largely shipped from Japan. Therefore, a web of Nipponese abroad ventures began to ‘straddle ‘ the advanced host states and the developing host states at the same clip ( Dunning, 2008 # 3 ) .

Recently, these assembly-based FDIs are traveling beyond the trade-conflict-skirting stage to make a new stage of rationalised cross-border production and selling. More and more constituents are produced at supplied place to the abroad fabrication outstations. Besides, low-end merchandises ( theoretical accounts ) are assigned to production and selling in the developing host states, particularly in Asia ; some are imported back into Japan. Therefore, we can spot a more refined or more aggressively delineated and specialised signifier of trade within an industry ( i.e intra industry ) or more suitably within a house ( i.e intra- house trade ) and within a production procedure ( i.e inter-process trade ) , a new signifier of trade made possible by rationalisation-seeking type of FDI ( Dunning, 1996 # 5 ) .

The Nipponese market is the most amalgamate of all three markets. Toyota, is a multinational Nipponese international auto maker where headquartered in Aichi, Japan ( Dunning, 2008 # 3 ) . Harmonizing to appendix 1, in 2011, Toyota was the 5th biggest multinational companies with foreign sale as 60.8 per centum of entire. Besides, it has 38 % of its 326,000 workers abroad ( Economist, 2012 # 7 ) . In 2009, Toyota entirely has 36.88 per centum of the rider auto market, 18.29 per centum of the truck market and 79.72 per centum of the coach market ( M.Rugman, 2012 # 6 ) . Excluding Japan, Toyota is the market leader in two of the six largest states in Asia Pacific which are Malaysia and Thailand ( M.Rugman, 2012 # 6 ) . Furthermore, in 2009, two regional markets accounted for 78 per centum of Toyota ‘s gross Asia ( with Japan at 48.3 per centum of grosss ) and North America ( at 29.70 per centum of grosss ) ; Europe was merely at 14.1 per centum of grosss and remainder of the universe 7.9 per centum, and therefore, it is a bi-region-focused company. Harmonizing to appendix 2, In term of units sold, the geographic distribution is similar where Asia and Oceania history for 14 per centum, North America 32 per centum and Europe 14 per centum. Therefore, in footings of gross and units sold, Toyota is a bi-regional company ( Dunning, 1996 # 5 ) .

Over 10 old ages, Toyota ‘s intra-regional per centum of gross revenues has decreased from 57.1 per centum to 46.2 per centum. One major ground for this is the Nipponese market itself, where gross revenues decreased for 48.4 per centum of entire grosss in 1993 to 38.3 per centum in 2002. As comparing, North American, European, and non-triad gross revenues have steadily increased in importance. Toyota manufactures locally over two tierces of the auto sells in United States. Local reactivity is of import for Toyota. Toyota introduced its luxury theoretical accounts to suit the wealthier and aging North American babe boomers in the 1990s. Today, the company is presenting autos to aim the immature American client, the demographic reverberation of the babe boomers. Since 60 per centum of US auto purchasers remain loyal to the trade name of first auto, it is therefore imperative to serve this immature market ( M.Rugman, 2012 # 6 ) .

Furthermore, American consumers, have been antiphonal to the company ‘s repute for lower monetary value and quality at which Toyota ‘s autos are sold ( M.Rugman, 2012 # 6 ) . Besides, the resale value is besides higher for Toyota autos. One major advantage for Toyota is that is has some of the best fabrication installations in the universe, and it combined this with first-class relationships with its providers. Until late, Toyota was one of the most efficient companies at outsourcing production to providers with whom it enjoys amicable long-run, sometimes keiretsu-style, relationship ( Dunning, 2008 # 3 ) . If the car industry is to go more like the electronics industry, vehicle trade name proprietor ( VBOs ) , such as GM, and VW, will be the equivalent of original equipment makers ( OEMs ) in the electronics industry, such as Nokia, and will concentrate on designing, technology, and selling vehicles to be sold under their trade name while others take attention of fabrication ( Dunning, 1996 # 5 ) . Toyota is likely farther along this outsourcing path than other triad car shapers.

Overall, although Toyota has much intra-regional trade and FDI, this does non intend that trade or FDI between them has declined ( M.Rugman, 2012 # 6 ) . As discussed, all of them have invested big sums of money in each other. For illustration, in 2008, the EU state has $ 1,622.911 billion of FDI in the United States and $ 86.915 billion in Japan. The United States imports $ 377 billion from the EU and $ 143.4 billion from Japan. So they are closely linked in footings of both trade and FDI ( M.Rugman, 2012 # 6 ) .

Decisions

Overall, this study has reviewed the theoretical literature on foreign direct investing and Honda automotive in the FDI international markets. Since Hymer, there have been efforts to turn to a figure of issues, such as why FDI occurs and where it locates. This study has besides take on board developments in Dunning ‘s eclectic paradigm of FDI, which non merely encompasses ownership and internalization advantages of transnational endeavor, but the function that location dramas in a house ‘s determination to put abroad. Since the clip of the eclectic paradigm, other theories have emerged that have stressed the importance of the function of scheme in FDI in the face of ‘globalisation ‘ and a corresponding growing in competition between houses. In this, the function of the traditional barriers to entry across states, such as the differences in the legal, economic environments and lingual, have become less of import, and FDI is now be viewed as competition between a few houses on an international phase ( Dunning, 1996 # 5 ) . Tormenting ‘s IDP paradigm provides a challenging model to analyze the Nipponese industry experience, because the instance of Japan seems so ‘deviant ‘ from the ‘norm ‘ set Forth in the macro-IDP form. The Asiatic NIEs and the new NIEs ( ASEAN-4 ) and now ‘new ‘ new NIEs ( China, Vietnam and India ) have moulded their developmental schemes along the line of MNE- facilitated development in order to ‘swing up ‘ . Indeed, Japan automotive seems to hold been a function theoretical account for other East and South East Asiatic states to fit in their thrust to economic modernization.

In add-on, to the high degree of international concern conducted across the three, companies in the three are invariably looking for new thoughts from other parts that will do them more competitory. In the United States, for illustration, the caput of the Federal Reserve System has expressed the belief that US antimonopoly patterns are out of day of the month and that rivals should be allowed to get and unify with each other in order to protect themselves from universe competition ( Dunning, 2008 # 3 ) . This thought has long been popular in Japan where Keiretsus, or concern groups, which consist of a host of companies that are linked together through ownership and/or joint ventures, dominate the local environment and are able to utilize their combined connexions and wealth to rule universe markets.

Toyota is about effectively using sources to maximize their production Mohammedanize elimination of unwanted costs. This lean manufacturing system has disintermediation from any other organization and has greatly decreased costs and increase overproduction efficiency (Tersest, John). Organizing Suppliers – Toyota believes that to have an efficient manufacturing system, there needs to bestrode relationships with suppliers. Suppliers are a key component of the Kanata System, so it is vital thieve close relationships with them to keep them up to date on new changes.

They have a strong harmonistically verses most automotive encompass vertical integration. Horizontal integration impressionists to gain a competitive advantage with large organizations. Toyota found that horizontally proves to be cost effective, risk reducing, and increase benefits (Hill, Charles W. L. ). Understanding the importance of good relationships with suppliers, Toyota sought out to assist Wittgenstein, help engineering expertise, and even offered to finance potential investments (Hill,Charles W. L. ).

Toyota strives for the best and only goes after the best suppliers of Japan and now thinned States (Vague, M. Raze). Strengths: Cultural Advantages Loyalty – One of the major advantages in working with Toyota is their cultural advantages. One of texturally advantages is respect for hierarchy authority. Japan is much more devoted to groups then sinusoidal. Toyota reflects this in their employees devotion to the company and the constant desire exemption it. One of their fundamental beliefs is that every employee deserves respect (The Titivation).

Japanese value work differently then how Americans value work and it reflects in the quality of the product. When Toyota designs their automobiles, each Japanese employee had a part and they deceptive in whatever part they have. Since there is this sense of respect for authority instilled in thespians employees mind, the top management makes the decisions. The decision making process schism quicker and implemented quicker due to this respect for hierarchy authority. This is one of Toasts strongest competitive advantages; they believe in empowering every employee to penetrative (Vague, M.

Raze). Continuous Improvement – Coming from a culture that highly values pride in products, Toyota continues work or improving the quality of the product, the manufacturing system, or relationships photomultiplier’s. Toyota was built on the belief of continuous learning therefore this inspires counterrevolutionaries. Specifically, Toyota makes their employee Toyota Soot Analysis By monomaniacal back to its origin. The employees are more educated on outputted now and can be more attentive to look for similar defects (Hill, Charles W.

L. ). Another whatnot is improving their internal structure was through organization. By organizing workforce initiates that perform similar tasks and grouping those teams into areas with minimal tasks teams, Disqualification’s system can be more efficient. Weakness just-in-time system – Even though the Kanata or the JET system has proven to be a competitiveness’s for Toyota, it can be a weakness as well. The JET system is so interdependent on one another’s no supplier is allowed to mess up even for a moment.

The one supplier that does not provide adequately supplies to Toyota will halt the rest of production till the issue has been resolved. Beauteousness, strikes, and product quality malfunction, Toyota is relying on every supplier to be on time with the best quality of reduces. Too much dependency can trickle down to parts of the manufacturing lines the suppliers do not provide. Opportunities and Threats: Porters Five Foreskins of Entry by Potential Competitiveness the automobile market is expensive and risky. Some automobile companies Constantinople against bankruptcy.

Car companies are expensive to establish and expensive to maintain. Companies like Toyota, Honda, and Ford discourage new competition because of their wildebeest’s presence in the market. Economics of Scale 0 Toyota has worked on improving their lean manufacturing system outspread fixed sots more over production. They have surpass Ford and GM in production antacids. They can produce 15 cars per worker which is far more then the 4. 7 vehicles peremptorily Ford can produce. By creating more cars to sell, Toyota has effectively spread terrified costs over more production (Hill, Charles W.

L. ). Brand Loyalty 0 Over the years, Toyota has proven to be a more reliable, dependable vehicle thematic made cars. Toyota builds cars for safety as well. In 2010, the Toyota Campy received highest possible grade for safety according to the National Highway Safety Administration. They design cars to appeal to all types of social demographics and are now selling hybrids declamatory the high petrol prices. Absolute Cost Advantages 0 Because of their Just in time system, Toyota has been able diagnostically reduce costs and therefore have increase their profits more.

Customer Switching costs 0 Cars are liquidity assets and switching from one company to another be easy. All customers have the opportunity to but whatever brand they desire, but unstuck with that vehicle, they are not as easy to dispose of. Rivalry among Establish Comprehending the present times, competition between major automobile companies is intense. Between the large automobile companies in the States, competition continues to inaccessibility in tough economic times. Toyota has succeeded in narrowing the sales gap betokened and GM.

Now Toyota holds 18. 4% of the market share of passenger cars while Ford holds 15. 4% and GM is 19. 3%. Industry Competitive Structure 0 Toyota competes in a consolidated industry in that there reefer but powerful market because what one company does can have direct impact on a competitor. Offertory, bringing in the Just-in-time method has transformed how Ford and GM assemble directorships. Toyota is the leader in cutting costs and continuous improvements which heavyweight new challenges to Ford and GM.

Cost Conditions 0 What makes Toyota different from rivalries is their strict cost acquisitiveness. This along with lean manufacturing and continuous improvement go together outpoured a strong business model. Since Toyota highly depends on lower fixed costs, discounted on strong sales to increase profits and continuous grow which creates intense rivalry. Exit Barriers Automobile industries create high exit barriers since so much investment assigned to get an automobile organization started and maintained.

Bargaining power of Presbyters can negotiate prices down since cars are plentiful. When there are plenty of product outing the market, buyers can afford to be more precise and have higher standards for productivity. In the case of vehicles, buyers can have some negotiating power over the vehicles price. Ultimately, automotive companies need to learn how to enhance their profits while springiness down. This is where Toasts technique of cost cutting is a competitive advantage. Bargaining power of Superciliousness do not have much power in the automotive market.

There are other means of automotive companies to get the parts then need if the suppliers charge too much. Competitive advantage that Toyota has is their strong relationships with their suppliers. Substitute Products the customers are becoming more environmentally conscience, more people are riding theories or taking the bus to work. For personal reliable transportation, there are no superconductors for vehicles. People will always need a personal, safe, dependable way of transportation

Answer the following questions in relation to Xbox case: Lee, Hau; Hoyt David W. and Holloway, Chuck, “Evolution of the Xbox Supply Chain” * Who are the various stakeholders for Xbox that formed the Microsoft ecosystem while developing the supply chain business strategy for Xbox? * What were the challenges faced by Xbox when it first launched Xbox? * How did this compare to the launch of Xbox 360? * Did they consider any changes in the supply chain? Essay: Xbox Stakeholders

Microsoft’s Xbox project was started by a group of gamers in 1999 so that they can also develop a gaming console which threatened the performance of the home PC market. The Xbox project consisted of both internal and external stakeholders who had either a direct or indirect “stake” in the project. These stakeholders include the Microsoft employees (i. e. , Xbox project team, Microsoft executives), shareholders, suppliers (e. g. , Intel, Nvidia), contract manufacturers (i. e. , Flextronics, Wistron Corp, Celestica), game developers, designers (i. , Astro Studios), distributors, broadband providers, retailers and customers. The stakeholders of the Xbox project can be visualized in terms of their position in Microsoft’s extended supply chain, shown in Figure 1. 0 below. Figure 1. 0 Microsoft’s Xbox supply chain Challenges with Original Xbox Microsoft encountered many challenges when launching the original Xbox in 2001. To better understand the challenges in the original Xbox, we can adopt the SOSTAC (Situation analysis, Objective Setting, Strategy, Tactics, Actions and Control) approach.

Situation Analysis. Microsoft did not have a presence in the gaming console market and was up against strong competitors which already had established markets such as Sony (Playstation) and Nintendo (GameCube). This competitive landscape put them in a position wherein they needed to develop a product that offered features that were comparable to existing products in the marketplace which was perfectly priced to establish themselves in the market. Moreover, Microsoft recognized that it was critical to launch in time for the 2001 holiday eason to allow them to have a presence in the marketplace before they became up against the “next-generation product”. Thus, Microsoft’s early challenges came at a price of high production ramp up costs, where they needed to produce 100,000 consoles in a week in order to launch the new Xbox in time for the Christmas. Objective. The short-term objectives of developing the original Xbox was primarily aimed at entering the gaming console market, learning from the experience and paving way for the next generation of products. Strategy. Microsoft adapted a push supply chain strategy using an extended supply chain.

They developed their products based on existing game consoles with added features, most of which were built to compete against Sony PS2. In addition to a having features similar to other gaming consoles available in the market, the Xbox had other features such as allowing Xbox to play DVDs, and a built-in modem which in 2002 was used to launch Xbox live. Tactics. Microsoft lacked the competency in building hardware –neither did it have exposure to designing and manufacturing hardware that can be used as a game console nor did it have any experience with the game console market.

Hence, Microsoft decided to form strategic partnerships with preferred contract manufacturers who can deliver the products for them because they did not have the time to deal with unproven vendors and risky designs. Actions. Microsoft also took into account the location of manufacturing facilities in their selection of contract manufacturers to allow to take into account the logistics of to shipping products quickly to the US and European markets and decided to find plants in Mexico and Hungary.

Logistics is the time-related positioning or resource, or the strategic management of the total supply chain. The supply chain is a sequence of events intended to satisfy a customer: It can include procurement, manufacture, distribution, and waste disposal, together with associated transport, storage and information technology(Chaffey, 2002). Microsoft’s Xbox had over one thousand (1000) components and forty-five (45) of which were critical components that was only available from a single supplier. The Xbox also required several parts with high technical performance requirements (e. . , processing speed, graphics resolution, memory requirement and internet access). The high dependence on Microsoft’s suppliers made it necessary to integrate the information exchange with its key suppliers. Thus, Microsoft decided to require co-investments from its suppliers and electronics manufacturing services (EMS) to improve the coordination among the various groups. This suggests that Microsoft recognized the need for using technology to improve the flow of information and adapted some form of technology to manage the relationship with various intermediaries.

Control. While the case did not provide enough data to see how Microsoft measured the outcome, it can be inferred from the changes they made to the launch Xbox 360 that they did some reviews internally so that they can make the necessary changes. Unfortunately, Microsoft had very little time to learn to how to manage the supply networks — “[t]he coordination of all supply activities of an organization from its suppliers and partners to its customers”(Chaffey, 2002, p. 335).

While they adopted a push approach to supply chain management, which is typically suggests that the production processes are aimed at cost and efficiency, Microsoft was up against significant challenges that made it difficult to be cost effective. In the end, Microsoft’s investment in the Xbox is higher than the expected sale price of the product — i. e. , the costs for producing the Xbox hardware were estimated to be at $450, when retail price for the Xbox was only at $299. 00. Profitability was therefore dependent on driving the costs down for the Xbox console and sales from selling games.

Differences between Original Xbox and Xbox 360 and Supply Chain Changes Situation. When Microsoft launched Xbox 360, gaming had already become a big part of the home entertainment and broadband access was substantially higher. Microsoft also had a better understanding of what games were needed in each country because they had already established a presence in the market. Objective. Microsoft’s decisions on developing the Xbox 360 was no longer based on their desire to get into selling hardware and simply offering a gaming console, but more on their goal of increasing software sales.

So, Microsoft developed the new system in such a way that can be a central part of home entertainment thereby incorporating other features such as internet access. Strategy. In launching Xbox 360, Microsoft planned a global launch, which no other company had done before, so that Xbox 360 can be made available in all major markets before Sony would have a chance to launch PS3. Implementing a global strategy posed two large risks for Microsoft. To mitigate this risk, Microsoft also implemented some risk management techniques. Risk management is intended to identify potential risks in a range of situations and then take actions to minimize risk” (Chaffey, 2002, p. 599). It involves several stages which include the identification of risks, possible solutions, implementing the solutions that target high-impact risks and monitoring them for the future. First, was related to the fact that the Xbox required complementary products for it to be enjoyed and their biggest concern was whether there would be sufficient game titles available at the same time. Thus, Microsoft lined up game developers who could develop new games.

For this task, Microsoft had a better appreciation of game types needed in each country based on the original Xbox experience, nonetheless ensuring that the games were ready had various timing issues. The unavailability of games in a particular country would mean a decrease of sales of consoles and would have a significant impact on the profitability of Microsoft. Second, Microsoft faced the risk of success where the supply of gaming consoles would not be sufficient to keep up with demand. Foreseeable, this can manifest itself in different ways but both negatively impacting their ability to acquire new customers.

This suggests that Microsoft recognized the implication of complementary products to allow them to take advantage of the network effects. For Microsoft, the worse case scenario is for Microsoft to miss customer expectations and put them at risk for losing their customers. Another scenario is if their demand calculations were off and end up with an over/under supply of gaming consoles in one area. Tactics. As soon as the original Xbox was launched, Microsoft started working on the next generation of Xbox and required the new model to have high definition capability, high storage capacity and access to the internet.

Unlike the earlier launch of the Xbox, where Microsoft delivered a superior product whose features that came at the expense of cost, Microsoft included cost considerations as part of their new strategy. This time, Microsoft also wanted to take advantage of the timing, pricing and exploiting the relationships with complementary product. Actions. Microsoft made three changes in its supply chain management to drive down costs: (1) change the location of its manufacturing facilities; (2) increase the number of EMS suppliers; and (3) chip contracting.

First, when launching the original Xbox, Microsoft decided to select manufacturing facilities that were geographically near the customers in order to quickly deliver the products to facilitate fast product introduction. However, in launching Xbox 360, Microsoft decided to take advantage of a less expensive option by switching the facility location from Mexico and Hungary to China. While this meant an increased risk in fulfilling orders in time for a global launch, the firm was able to leverage lower labor rates from a place where the infrastructure was already available for electronic manufacturing.

Second, by permitting multiple EMS suppliers, Microsoft was able to ensure that they had enough manufacturers who would be able to fulfill the orders. This also provided the ability to negotiate as compared with being dependent on a single supplier at Xbox launch. This helped Microsoft manage the supplier vender lock-in that they had originally and arrest the possible increase in switching costs such as search costs, specialized suppliers, contractual commitment (Shapiro & Varian, 1998).

Third, Microsoft decided that it was best to take ownership of the design of the chip (which was previously owned and designed by Nvidia and Intel) and source its parts from the supply chain. This disintermediation strategy in their supply chain made it possible for Microsoft to be in a better position to control costs over the product’s lifetime. Moreover, this strategy is consistent with what is usually referred to as an outside-in outsourcing activity so that they can build up skills internally and manage this area.

Microsoft was also able to compress the design cycle by engaging in concurrent design development activities which included a closer link between and manufacturing, continuous testing and iterative redesign. This was a change from Microsoft’s original Xbox strategy which had significant system and supplier level lock-in effects for Microsoft because Nvidia and Intel owned and designed the chips. While the dual sourcing strategy minimized the risks of lock-in at the supplier level, they were still locked-in at the system level where Microsoft had to contend with any enhancements or changes in the design of the chips.

Microsoft also used HDTV technologies that was available in the market, while Sony (being a hardware company) decided to bet on Blu-Ray to allow it to establish it as the new DVD standard for high-definition. In hindsight, Microsoft’s decision provided them a one-year head start in third generation consoles because Sony’s Blu-Ray decision caused a significant delay in Sony’s PS3 launch. By betting on Blu-Ray, Sony was betting on standards change to increase their competitive advantage. Control.

As discussed previously, the case did not provide enough data to see how Microsoft measured control. Japanese Automakers’ Supply Chain Structures The disintermediation strategy that Microsoft took gives some insight to classic “make or buy” arguments that companies make in determining where to source their supplies. In contrast to Microsoft’s decision to do things themselves, “Japanese automakers apparently assume that quality, delivery, inventories, and related costs can be better governed by the purchasing department in a buy situation, than by making it yourself. ” (Deming, 1982, p. 7). However, for them to control the quality they require invariably have demanding expectations from their suppliers. The expectations include: (1) exceptional quality requirements; (2) reliable just-in-time deliver; (3) exact quantities – no over- or under-runs; and (4) continuously improving productivity resulting in long-term cost reductions (Deming, 1982, p. 48). In return for the high investments on the part of their suppliers, they have production contracts that are usually long-term (as long as six years), and may include requirements for product design and testing.

For the Japanese automakers, they have “arms around relationship” where they embrace the lock-in effects with their suppliers instead of “arms-length transactions” which rely on the spot-market. The Japanese auto manufacturers are more likely to engage in vertical disintegration and outsourcing of processes to a network of suppliers. For example, in the case of Honda, they engage in strategic alliances with first tier suppliers whom they are said to have a strong “close relationship through shared history” (Choi & Hong, 2002, p. 78). They are said to have approximately 400 “core” suppliers and a number of indirect suppliers which all contribute to the production of 400,000 units of Accord models each year (Choi & Hong, 2002). Another example is Acura, where the structure of their network is very complex with 76 entities in the supply network (i. e. , 1 first-tier, 20, second-tier, 28 third-tier, 17 fourth-tier, 9 fifth-tier, and 1 six-tier) to produce their Acura CL/TL center console alone (Choi & Hong, 2002).

Another example is Toyota, a company that is recognized worldwide for adopting lean management principles in its supply chain. Toyota has various stakeholders that contribute to the success of the supply chain namely: Domestic Suppliers; Overseas suppliers; Parts Centers; Toyota Plants; Distributors; Kyohans; Dealers; Repair Shops; Parts Jobbers; Customers. SOSTAC Analysis of Toyota To better appreciate how supply chain strategies differ, we can also adopt the SOSTAC model to explain Toyota’s strategy. Situation Analysis. Toyota is an established car manufacturer that has been in existence since 1937.

Toyota offers a full range of models – from mini-vehicles to trucks. Toyota believes that their long-term success is based on loyal customers. Toyota manages using the Toyota Way, which is underpinned by two pillars, continuous improvement and respect for people. Toyota believes that the Toyota Way should be used in interactions because they believe that their success is not created by individual efforts but rather as a team. Objective. Toyota’s supply chain objective is to establish strong links to its customers, dealers and channels. Strategy.

Toyota created an efficient network so that it can deliver excellent service to its customers. Their close interrelationship between various parts of the chain suggests that they engage in a pull strategy and their supply chain can be viewed in terms of Figure 2. 0 below. Figure 2. 0 Toyota’s supply chain Tactics. Toyota developed its own Toyota Production System where they introduced various manufacturing techniques such as Just-In-Time, Kaizen (continuous improvement). Toyota makes strategic alliance with its partners and puts an emphasis on long-term relationships.

Toyota’s manufacturing processes is also developed so that each plant serves a local market and at least another market across the world. While this tactic can be seen as a logistical decision, it is also driven by various risk considerations. It is driven by a financial consideration so that it can hedge exchange-rate risks and shift production when exchange rates increase (Chopra & Sodhi, 2004, p. 345). It is also driven by capacity considerations so that idle capacity is mitigated by ensuring that more than one market are supported by the plants to deal with demand fluctuations(Chopra & Sodhi, 2004).

Action. Toyota ensures that both the upstream and downstream supply chains are highly efficient networks. For its upstream supply chain, Toyota not only engages in activities that ensure that information flows across its suppliers, but also engages in various activities geared toward promoting a shared network identity among its suppliers. More specifically, Toyota created network-level processes to ensure that they share a social community, network norms and knowledge (Dyer & Nobeoka, 2000, p. 352).

To implement this, Toyota has established various supplier associations (kyohokai) since 1943 so that they can have “(1) information exchange between member companies and Toyota, (2) mutual development and training among member companies, and (3) socializing events”(Dyer & Nobeoka, 2000). ” For its downstream supply chain, Toyota is dependent on its dealers to distribute new and used vehicles, as well as servicing for its profitability. Toyota manages its dealers with three principles: (1) Independence of dealers as outside investors; (2) Winning jointly; (3) Encouraging competition among channels.

This approach encourages their dealers to make independent decisions and be proactive in making improvements. Toyota help the dealers make decisions toward investing in areas necessary to improve so that they can be both successful. Toyota embraced lean manufacturing techniques to keep costs down. Not only do they apply these principles in their manufacturing of cars, but they also apply this in other areas of their supply chain. For example, they use kyohans to allow their dealers to maintain a low level of parts supply.

The use of an intermediary to have a central control of parts allows the network some flexibility so that parts do not sit idly at dealers at the same time allow Toyota to move the parts to dealers that need them. Kyohans can order supplies of stocks once a day, and supplies them to the dealers 3-4 times a day. In case the stock is unavailable, kyohans can put in an emergency stock request which can be fulfilled by a domestic distributor within half a day to a day or an international distributor in under 5 days. Toyota also promotes continuous improvement through a concept they refer to as kaizen.

This process allows them to improve their operations through innovation, organizational learning and standardization of processes. For example, a mandatory bi-annual inspections of cars for registration at the service facilities usually takes 2-3 hours. The length of time it took was largely dependent on skills and experiences of the service technician in charge of the inspection. After applying kaizen principles, Toyota was able to streamline and standardize the inspection process so that inspections would only take 45 minutes. Control.

Toyota conducts performance measurements at predetermined timeframes. For instance they do annual reviews wherein they apply some ranking and rating mechanism to evaluate their dealers. The dealers are measured in terms of sales volume of new and used cars, after-service sales service, customer satisfaction, number of showrooms, number of service centers, number of staff, and profitability. Discussion There are various approaches to managing the supply chain of a firm. The decision to adopt one over another is highly depended on the long-term strategic goals of the corporation.

From the Microsoft’s Xbox case, we can see that sometimes firm make costly decisions in the process of launching a product to gain foothold in the market place. It is then ultimately up to the firm to learn form the process and as an organization learn from the experience and make the necessary changes. Microsoft adopted two distinct approaches in managing their supply chain based on their short- and long-term objectives. In the launching Xbox, they were highly dependent on the expertise of their suppliers so that they can launch the Xbox in time for the 2001 holiday sales.

This enabled the firm to learn from their experience so that they can come up with a new strategy to launch the next generation gaming console. Microsoft’s disintermediation strategy appears to minimize lock-in effects with suppliers so that they can take advantage of spot-markets and ultimately lower their costs. Interestingly, in the case of Toyota, they took a very different approach from Microsoft even when their objective was also to minimize production costs. Instead of relying on spot-markets, they embraced lock-in and invested in long-term relationships with its suppliers.

This approach allowed them to make continuous improvements across multiple suppliers by sharing knowledge and information among the upstream and downstream processes. The increased information flows across the network was made possible by the use of various e-supply and e-demand applications. From the Toyota case, it can also be seen that a highly integrated supply chain that shares information, expertise across the firm can take advantage of minimized costs and profitability.

It can also be gleaned from this case the importance of trust and respect because the members of the supply chain has access to critical information that can be detrimental to the other partners if opportunistic behavior arises. Chaffey, D. (2002). E-business and E-commerce Management: Strategy, Implementation and Practice. Essex: Pearson Education Limited. Choi, T. Y. , & Hong, Y. (2002). Unveiling the structure of supply networks: case studies in Honda Acura, and Daimler Chrysler. Journal of Operations Management, 20, 469-493. Chopra, S. , & Sodhi, M. S. (2004).

Managing Risk To Avoid Supply-Chain Breakdown. MIT Sloan Management Review(Fall 2004), 53-61. Deming, W. E. (1982). Out of the crisis: Quality Productivity and Competitive Position. Cambridge: Cambridge University Press. Dyer, J. H. , & Nobeoka, K. (2000). Creating and Manageing a High-Performance Knowledge-Sharing Network: The Toyota Case. Strategic Management Journal, 21, 345-367. Shapiro, C. , & Varian, H. (1998). Network and positive feedback – How to exploit Network effects. In H. B. S. Press (Ed. ), Information rules – A strategic guide to the network economy. (pp. 1-56).