Toyota's Strategy and Initiativesin Europe: the Launch of the Aygo

Kazuo IchijoInternattonal Institute ofManagementDevelopment

George RadlerInternational Institute ofManagementDevelopment

Since 2000 the output of the global [auto] industry has risen by about 3 million vehicles to some 60 million: of thatincrease. [more thari] half. can'ie from Toyota alone. While mosi attention over the past four years has focused on aspectacular turnaround at Nissan;Toyota has undergone a dramatic growth spurt all round the world.

-The Economist, January 29. 2005. p. 61

II)

F or Toyota Motor Europe (TME). locallydesigned cars and the availability of die~

sel engines led to impressive results: 2005was the ninth consecutive year of record'sales forToyota in Europe. Sales grew by almost 50 per­cent from 2000 to 2005. The new strategy paid offfinancially. too. According to BusinessWeek. theoperating profit increased ninefold to $654 mil­lion in 2003.

After plant openings in France, Turkey, Poland,and the Czech Republic. local production was ex­pected to reach 60 percent in 2006. This lowered ex­posure to exchange rates and import tariffs. WithinToyota. sales increases from Europe were needed tomeet ambitiqus global sales targets.

But for the European marketing team 9fToyota'sAygo minicar, the challenge continued. In a fjercelycompetitive market they had to find 100,000 buy­ers annually for the 3.41-meter Aygo. This segmentwas seen as a difficult market: low prices meant low

Research Associate George Radler prepared this caseunder the supervision 'of Professor Kazuo Ichijo as abasis for class discussion rather !.han to iIIwtrale cilhereffectivo or, ineffective handlina of a.bwiness situation.

Copyright 0 2006 by IMD-lntornational Institute for ManagementDevelopment, Lausanne. Switzerland. NO.1 19 be used or reproducedwithout written permission directly· from fMD.

margins. Mercedes-Benz' s "MCC smart" recordedlosses Qf€4 billion between 2000 and 2005. 1 Othercompetitors also had difficulties making money inthis segment.

With. the launch of the Aygo, Toyota challengedmany of its traditional views: the car was specifi­cally designed for the European market and exclu­sively sold there. The factory was a 50150 jointventure with the Peugeot/Citroen Group (PSA) inthe Czech Republic. But for the marketing manag­ers of the Aygo, the challenge was how to sell the1'00.000 units annually they guaranteed to buy fromthe factory in the Czech Republic. '

TOYOTA GLOBAL:BECOMING NUMBER rToyota Motor Corporation (Toyota) had postedrecord growth. Sales reached 7.97 million units in2005, an increase of about 2.5 million since 2000(Exhibit 1).

For Toyota, North America remained the mostimportant international market anI! its market sharewas increasing rapidly. In 2005 sales hit the 2 mil­lion unit level for the firsnime and Toyota held 13.7percent of the important U.S. market (up from 9.3

C·24S

C-246 Part 2 Cases in Crafting and Executing Strategy

Exhibit 1 Vehicle Sales of Toyota MotorCqrporati.on

Note: Toyota publishes its numbers for the finencial yeer ending March 31.

Source: Various annual reports, press reports.

percent in 2000). Sixty percent of the Americandemand was satisfied by 12 plants in the NAFTAregion.

For 2006 Toyota was expected to reach 9 millionunits in production-with luxury brand Lexus reach­ing the 500,000 units mark for the first time (up from400,000 units in 2004). Between 1990 and 2005, thenumber ofToyota plants increased from 20 factoriesin 14 countries to 47 factories in 26 countries. WithinToyota, there was concern that such rapid expansioncould hurt the company. Toyota president KatsuakiWatanabe explained:

Everyone should be dissatisfied with the present situ­ation and should constantly try to improve or changethings. It's important to realize that there is alwayssomething more we need to aim at. That's what needsto be recognized by every individual. When you aregrowing you are satisfied with the status quo, andthat's no good.]

A European supplier, listening to a presenta­tion by former chairman Fujio Cho in 2004, laterremembered:

Listening to them [the top management], you get theimpression that Toyota is facing its biggest crisis inhistory.•

The company was one of nine members of the"$10 billion club," indicating a net income in excessof $1 0 billion (2005: net income of $1'2.35 billion onrevenues of $189 billion; revenue grew by 14 per­cent). Toyota was one of two manufacTuring compa­nies on that list, the other seven companies were ineither oiVgas or financial services. In order to avoidcomplacency, Toyota set the ambitious goal of reach­ing IS p~rcent global share by 2010 (up from II per­cent in 2005). On the financial markets, Toyota hadthe reputation of delivering on its ambitious goals.As of March 2006, Toyota accounted for 35 percentof the total market capitalization in the global auto­motive industry (refer to Exhibit 2).

It was expected that as early as 2006, Toyotacould overtake General Motors (GM) as the world's

Exhibit 2 Shares of Global Sales andMarket Capitalization (2006)

Note: According to this study, Asian manufacturers accounted torno more than 43 parcent of all passenger cars sold in the worldbut for 73 percent of the worth of ell car makers. GM's sales dataare likely to include volume from foreign manufacturers. in whichGM holds a minority slake.

Source: Wall Street Journal/Iurope. March 23, 2006, p. 4.

largest car manufaCTurer. Bilt Jim Farley, Toyota's VPof marketing in the U.S. was cautious: "And if wedo become No. I, we'll still act like we're No.3 or4, because that's the Toyota Way."s A spokespersonexplained: "Our goals are not directly positionedagainst competitors. Our goals are around custom­ers." However, in order to reach the 15 percent shareby 2010, continued growth in Europe was essential.

TOYOTA IN EUROPE:"WE ARE GROWINGSTEP-BY-STEP"6With the launch of the Yaris model in 1999, Toyota'ssales took off. The initial goal ofreaching a Europeansales volume of 800,000 units was reached two yearsahead of time-in 2003 instead of 2005 (refer toExhibit 3).

Besides attractive models from the designcenter in Nice (France), Toyota benefited from themuch belleravailability of diesel engines (starting,

Case 17 Toyota's Strategy and Initiatives in Europe: the launch of the Aygo

Exhibit 3 Unit Sales and Market Share for Toyotain Western and Eastern Europe

in 2002), which reached penetration rates of almost40 percent in 2005. Moreover, Toyota's position inthe market was different: for the first time the com­pany was able to exploit a more emotional position­ing around "green issues." The Prius hybrid modelwon the coveted "2005 [European] Car of the YearAward." In 2005 Toyota sold around 18,000 units ofPrius in Europe (global sales: 180,000 units) and by20 I0 was expecting to sell 1,000,000 units, world­wide. Hybrid technology gave Toyota a good oppor­tunity to position itself as a technology leade.r sincethe competition had only just started to sell hybridmodels. The technology was also launched 'in theLexus RX 400h in 2005. The hybrid version fetcheda price premium of €6,200* over the gasoline­powered RX 300. In Europe, Toyota was also oneof the first to offer its D-Cat diesel engines with adiesel particulate filter. Toyota's environmental ini­tiatives were widely recognized. In a 2006 surveyon "who builds the most environment-friendly car,"Toyota came first in the five biggest European mar­kets plus Poland.'

• EXchange rale: £1 = $1.27 (May 7. 2006)

Toyota drivers were on average around 53 yearsof age.· Customers were very loyal and Toyota usu­ally topped customer satisfaction indexes such as1. D. Power. Lexus continued to secure top ratingsin 1. D. Power surveys, but its sales continued tobe below expectations, with the volume fluctuatingaround 25,000 unit~ompared to over 250,000units in the U.S. In Europe, Lexus models were soldwith extended warranties, including a six-year war­ranty, three years of free services, maintenance, androadside assistance (compared with two years atmost luxury car manufacturers).

Apart from Lexus, Toyota was in the passinglane in Europe. It had considerably increased itssales volumes in Europe, unlike some of the otherJapanese manufacturers (refer to Exhibit 4 for an­nual sales in Western Europe).

In 2005 Toyota's largest markets were: UK(138,500 units), Italy (130,507 units), Germany(130,275 units), France (92,024 units), and Spain(65,498 units). However, Toyota executives believedthere was still a huge potential for the brand. Despiterecord sales in Europe, Toyota made it to the top-10

Exhibit 4 Annual Sales of Asian Brands of Motor Vehicles in Western Europe,2000 vs. 2005

Note: The Kia numbers are for 2001 (not 2000).

Sourr:e: ACEA.

.0

Exhibit 5

Part 2 Cases in Crafting and Executing Strategy

Top-10 Car Registrations in Four Largest European Countries, 2005

Source: Auto Motor Sport. Mard12006. p. 12.

best-selling list only for Italy (refer to Exhibit 5 forthe top registrations in the largest four markets inEurope).

But Toyota wanted more: It stated its sales goalof 1.2 million units annually in Europe by 2010.However, the press was already speculating on wheth­er the goal could be reached two years earlier.9

LOCALIZING PRODUCTIONIN EUROPEAfter the 1992 opening ofToyota's first car and en­gine plant in the UK, the specd of plant openingsaccelerated in the new millclUlium. A car piant inFrancc started production in 200I; in the same yearToyota produced over 200,000 cars in Europe forthe first time. Only three years later, the companywas producing 583,000 cars per year in Europe (sceExhibit 6).

Exhibit 6 Toyota's Production InEurope, 2004

By 2005 Toyota had produced 638,000 vehiclesin Europe and this was expected to increase to over800,000 units in 2006. Exhibit 7 gives an overviewof the factory openings in Europe.

By 2005, Toyota had a total of eight plants insix countrics (total investment: about €6 billion since1990). A spokesperson for the company explainedthe dilemma they were facing, "We really don't wantto be perceived as a Japanese invader."'o But thequestion was, how to gct round it?

TOYOTA AND PSAJOIN FORCESThe automotive industry was surprised when Toyotaand PSA (holding company for the Peugeot andCitroen brands) aIU10unced a 50/50 joint venture inlate 200 I. The factory, to be located in Kolin, CzechRepublic (about 60 km to the east of Prague), wasplanned for an aIU1ual capacity of 300,000 units. Thejointvcnture was limited to manufacturing, with carsbeing sold separately through the Toyota/Peugeot/Citroen distribution channels. Manufacturing, pur­chasing and R&D accounted for around 70 percentofvalue-added in'car manufacturing (refer to Exhibit8 for the business system).

The objective was to produce a minicar with 93percent common parts between the Toyota, Peugeot,and Citroen cars. For Toyota, this was a completelynew segment. Peugeot's aim was to produce the re­placement model for the Peugeot 106. This model

Case 17 Toyota's Strategy and Initiatives In Europe: the Launch of the Aygo C-249

Exhibit 7 Timeline for Toyota's Factory Openings in Europe

Source: Vanous Toyota documents.

Exhibit 8 Value Chain System in the Automotive Industry

Upstream Downstream

31% 100%

tl Value added related69% :.'~., to supply and

assembly

qValue added related31 0./0 ".. to distribution and

marketIng6%

18% .--+-'•

--- I--- I

I

I!

i

45%

Purchasing Production Research & Sales & Price toDevelopment Marketing the Consumer

Source: McKinsey. ATKaarney

was on sale between 1991 and 2004 and sold a to­tal of 2.8 million units over that period. It was alsosold under the Citroen Saxo brand between 1997 and2003. Until the Kolin factory opened in mid-2005,PSA did not have a replacement for the Peugeot 106and the Citroen Saxo.

PSA Company BackgroundParis-based PSA had been the big success story ofthe European automobile sector. Although the PSAname was almost unknown to the majority of endcustomers, the company's two brands (Peugeot and

'(:-250 Part 2 Cases in Crafting and Executing Strategy

Citroen) were very popular. Sales increased from 2.8million units in 2000 to 3.39 million units in 2005(5.5 percent share globally).' Non-European salessurpassed 1 million units in 2005 for the fust timeever. The non-European growth averaged 17 percentup to 2005 (mostly from Asia and South America).

In the five years up to 2003, PSA increased itsEuropean share from 12 percent to 15.5 percent, butit fell to 14 percent in 2005. Nevertheless, it remainedEurope's second biggest manufacturer (after the VWGroup). The company was praised for its good ve­hicle designs, diesel engines, clever advertising andexcellent cost position in manufacturing, but it wasdisappointed by the results of quality surveys (referto Exhibit 9 for an overview of quality ratiilgs).

PSA strongly pushed its platform strategy. By2008, the three main platforms were expected toaccount for 3 million units (up from 1.5 millionin 2005). Factories were specializing in platformsand manufactured both Peugeot and Citroen mod­els on the same line. PSA had an annual savingstarget of around €600 million. In the industry, PSAwas known for its various joint ventures: diesel en­gines with Ford, gasoline engines with Renault andBMW, commercial trucks with Fiat and SlNs withMitsubishi.

At the same time, PSA was actively involvedin Eastern Europe. In addition, the company alsoopened a new factory in Slovakia (animal capacity:300,000 units). It was estimated that PSA wouldsource 15 percent of its. total 'European productionfrom Eastern Europe by 2008, up from 0 percent in2004." Industry sources were·expecting the factoryin Slovakia to grow to 500,000 units. This wouldmake it the fifth largest car plant in Europe.

INTRICACIES OF THEMINICAR SEGMENT

The Challenge: OperatingProfitablyThe segment for minicars (also referred to as theA-segment in the industry) had existed for a longtime, but had only became popular again in recentyears. Economic uncertainty, high unemploymentand increasingly high fuel prices had led to volumegains in this segment.

Competitors either relied on cars from low-costcountries such as the Fiat Panda (built in Poland),

Exhibit 9 The Perception of Various Car Brands in Europe(as seen by drivers of the brands)

90'

60

70

60

102.0 50

I

60 .7Q 1'10

"in Percent IJ 2005 CJ 2006

Source: Auto Molar und Sport, "Best Cars 06:' 61200e: 139

Case 17 Toyota's Strategy and Initiatives in Europe: the Launch of the Aygo

VW Fox (Brazil), Hyundai Getz (South Korea).Some other competitors opted for very long prod­uct life cycles: Renault's Twingo had sold for overa decade without major changes, as had the formermodel of the Nissan Micra (both models were builtin Western Europe). The base price for this categorywas normally below £10,000, but it could increasewith the addition of features.

[n the case of MCC smart, the company wentfurthest in differentiating their offering. The car waspositioned as a fashion item. Customers could have thecolor of the plastic exterior body panels completelychanged within 90 minutes at a cost ofbetween £825and £1,225. However, only 0.8 percent of customersmade use of this option-mostly after accidents orother damage. Most other innovative features aroundthe car such as the mobility concept, for examplespecial rates at parking garages, were either stoppedor drastically reduced. Cumulated losses reached inexcess of £4 billion between 2000 and 2005 and thefuture of the car remained uncertain.

Volkswagen Group tried entering this segmentby offering the technological advanced aluminumframe for its Audi A2 model and offering a 3-literversion of its VW Lupo minicar with a fuel consurrip-

tion of less than 3 liters/I 00 km. However, the Audimodel became too expensive and the 3-liter Lupoinitially lacked convenience features, such as powerwindows and power steering in order to keep the fuelconsumption low. Neither of the modl~ls reachedsales targets and both were discontinued in 2004.Soon afterwards, Volkswagen started to import theFox model as a replacement for the Lupo. BMW'sMINI model was rdaunched in 2001 and stressed itsrich heritage. At average transaction prices in ex~ess

of £22,000, it sold around 200,000 units in 2005 (re­fer to Exhibit 10 for'the actual sales data).

Minicars Please RegulatorsRegardless of the economics around minicars, theywere helping car makers to make big improvementswith regard to their voluntary target for reducingcarbon dioxide by 2008. Under a 1999 agreementwith the European Union, the European car indus­try pledged to reduce the per-car carbon dioxide(COJ emissiorys to 140 grams per kilometer by theyear 2008; compared to 175 grams per kilometerin 1999. Japanese and Korean manufacturers alsoaccepted this challenge, but they were given an

Exhibit 10 New Vehicle Registrations in Europe in the Minicar Segment, 2001-2005

Note: The data covedll European·countrles.

Chevrolet took over Daewoo and la fading out the Daewoo brand.

The numbers tor BMW Mini and Mee smart are world-wide sales data.

Soutee: Toyota, various annual reports. press releases.

.'Part 2 Cases in Crafting and Executing Strategy

,'l<It'()n~l year to irnlJiernent it. Car makers tookcl~;, ..;,~,iGusly, as such c ':otuntary agreement could,',,,, .... h;;rl it, 'Nay 'r,t0 cegu!ations, The best wayte'. ;.:::,,""::e CO, ',;;'ai> :0 reduce fuel consumption.r,"L',:,<;:, usuafly had sma;! engines clld henCe lowfuei c0nsumption. While 'tr,e popula.rity of diesel en­gine,; greatly helped (they consumed less fuel), theincreasing consumer demand for air conditioning,more norsepower, big SUVs, as well as new regu­lations including better protection for pedestrians,often added additional weight to the car and newsources for electricity consumption (hence higherfuel, consumption), So fuel-efficient engines be­came crucial for meeting the needs of this voluntarytarget. PSA developed a new 1.6-liter engine whichconsumed 10 percent less fuel, but this developmentcame at a cost of €610 million. '2 PSA decided toshare this cost with BMW.

TOYOTA PEUGEOTCITROEN AUTOMOBILE(TPCA) IN THE CZECHREPUBLIC·

Setup: Simple, Slim, LeanThe TPCA factory was the biggest foreign directinvestment ever made in the Czech Republic at acost of €1.3 billion. Located in Kolin, it was about60 km from Mlada Boleslav, the home town, ofSkoda Auto (member of the VW Group) anlmanysuppliers.

The factory was set up by Masatake Enomotofrom Toyota. A lawyer by training, he led the ne·gotiations that resulted in the establishment of theKolin plant. The negotiations ended with a clear ar­rangement on the financial side. Jean-Martin Folz,CEO of PSA, later explained, "We shared ,the de­velopment cost and we paid for only two-thirlls ofthe new factory in Kolin."l3 The pillars of the agree­ment included: PSA would absorb 200,000 units

. annually and Toyota half of that. Toyota would beresponsible for running the factory (according tothe Toyota Production System [TPSJ) and would

• Reade,.. olthls case are strongly encouraged'io heve elook altheolflclaJ Web site 01 TPCA for a virtual rectory tour. hnp:J!yiww IDca'C2cornleo/aboyt factory how phpN

be responsible for the development of the three ve­hicles to be produced at the factory (including tnePeugeot 107 and Citroen CI). This helped greatly tobL!ild in the 93 percent parts (;c,"''''1'\onality betweenthe different bra.!'lds. In retum" PSA would handieall purchasing and supplier relatio.!!s including theirselection. Toyota was hoping to benefit from PSA'sexperience with European suppliers. Each partnerwould also bring one engine to the venture with theright [size] specification. Toyota would produce a3-cylinder gasoline engine (also to be used in thebigger Toyota Yaris model) and PSA would bring a4-cylinder diesel engine (also used in the Peugeot206, Citroen C2 and C3), Engines were among themost expensive components of a car, averaging ataround 32 percent of total vehicle cost. "

Enomoto' oversaw the construction and start­up. This could explain why the factory looked verymuch like a Toyota factory. Automotive News, an in­dustry newspaper, reported:

In many ways. the Kolin plant is a typical Toyotafactory, The principles of efficient production thatToyota has established over the years are practiced infull at TPCA, including kaizen (continuous improve­ment), jidoka (fixing problems right away, where theyoccur), and just-in-time delivery,"

Much of this can be attributed to Satoshi Takae.Takae was a Toyota veteran who started in Kolin as

. factory manager and was promoted to president ofTPCA in 2005. His goal for the factory was veryclear: "To be the number one plant in Europe."

In order to real ize this, he had to work togeth­er with not only his 30 expatriate colleagues fromToyota, but also with nine permanent members ofstaff from PSA. For Takae, this meant exposing theToyota Way, the "mysterious" Toyota DNA to out­siders (refer to Exhibit II for the key concepts ofthe Toyota Way). At the same time, this working ar·rangement implied transferring control of suppliersto PSA,

Role of PSAWith an increasing trend toward outsourcing, PSA'stask to manage all purchasing functions was hugelyimportant to the outcome. Developing the local sup­ply infrastructure, which accounted for 80 percentof all parts purchased (by value and volume), wasseen as a major task. TPCA was directly dealing with

Case 17 Toyota's Strategy and Iniliauves in Europe: the Launch of the Aygo

Exhibit 11 The Toyota Way

C-2S3

Source: Jeffrey K. Lil<er. The Toyota Way (New Yorl<: McGraw-Hili. 2004).

around 150 Tier-I suppliers. These were the big sup­pliers at the top of the hierarchy and many of themwere the Czech or Slovak subsidiaries of the big in­ternational suppliers.

Within the automotive industry, PSA was knownfor its cost focus and its various Ns. Nicolas Guibert,TPCA's executive VP and highest ranking PSA offi­cial in Kolin and previously a plant manager in oneof Peugeot's French factories, explained:

PSA is one of the most joint-ventured companies [inthe industry]. But this JV is different from other JVs.Usually, the responsibilities are clearly shared andeach company works with high autonomy for what itis in charge. PSA has two Ns with Fiat-one in Italyand one in France. In Italy, Fiat does the design, proc­ess engineering and production operation and PSApays for each car. In France, it is the contrary. Our en­gine]V with Ford is structured in a similar way: PSAis in charge of some engines from design to manu­facturing and Ford of others. In our engine JV withBMW, they do the design and we do the industrializa­tion. But here it is slightly different. We also share thetasks within the production operation. In TPCA weare not only spectators but also actors.

The level ofdifference could be seen in Guibert'srole. He was reporting to Takae. Guibert was alsoresponsible for accounting and finance functions ofthe factory.

Supplier SelectionEuropean suppliers were very eager to supply TPCAsince this was seen as the entry point for supplyingToyota. European suppliers were struggling, as manyof their traditional customers had cut their produc­tion volumes considerably in recent years. Therefore,by supplying TPCA they hoped to grow with Toyotain Europe. TPCA was quite clear on what it wouldnot do. The company did not outsource external sur­faces and key structural parts for quality reasons.

While supplying Toyota was an excellent refer­ence in the industry, dealing with the company wasnot seen to be easy. Toyota's search for simplicity andeconomic efficiency was still a big question mark formany suppliers. Takae explained:

We are relationship-oriented with regards to the sup­pliers. We were surprised to see this transaction ori­entation with some of the suppliers here.

C·254 Part 2 Cases In Crafting and Executing Strategy

Suppliers to TPCA could also qualify for PSA'sfactory in neighboring Slovakia, about 250 kIn fromKolin. PSA had big plans at this factory, too.

RUNNING TPCAToyota's Production System (TPS) was running allover the world, but in each market, it needed someminor adjustments. In the case of TPCA, the rapidramp-up worked well (reaching full production ca­paciry in less than 12 months). The factory producedfour body rypes (both Toyota and PSA had a 3-doorand 5-door version of their respective models) onthe same line. TPCA had around 3,000 employees.Extensive training took place at various Europeanfactories and in Japan for the senior positions. Thetraining sessions lasted for a anywhere between onemonth and six months.

The normal shift system saw employees work­ing for four days (10 hours each) and then they wereoff for three days. Newspapers reported:

Few line workers have cars. Many live far fromKolin, often staying locally during the workweek andreturning home only on days off. J6

Management at TPCA soon started to wonderabout high absenteeism among employees. A de­tailed analysis showed that in some cases, employeeswere asked to work six days in a row. And often, theydid not show up on the sixth day. TPCA's manage­ment soon changed the allocation of shifts and it low­ered absenteeism. But turnover remained an issue.

Regarding talent management, the question was,what would happen once competitor Hyundai Motorstarted hiring for its new Czech factory? Would em·ployees switch to the new factory or would they staywith TPCA?

Overall, the management made every effort toembed the TPS at TPCA. [t was willing to makesome of the displays (ANDON) showing the statusof the plant operation using pictures only, with notext, unlike in Japan and the US. With regard to run­ning TPCA, Takae explained:

Of course, we had 10 overcome cultural and languagebarriers. We are dealing here wilh three nationalcu Itures-Japanese, French and Czech-and IWOcompany cullures with very different histories andproduction systems. But we found an overriding

principle--cosl reduction. Everything would dependon cost. In order to overcome the language barriers,we visualized everything; we never had to do this be­fore [to this extent].

At the same time, TPCA actively tried to workaround local regulations. Automotive News Europereported:

To keep a promise it would not bring weekend heavy­truck traffic through town to the plant, TPCA muststockpile extra parts before the weekend Slarts....It's built a parking lot. ... The new parking lot canhold up to 180 trailers full of parts and raw male·rials. Then as the assembly lines move on Saturdayand Sunday, logislics workers can move the parts viaforklifts and cranes into the plant. [t is an indicationof how flexible Ihe joint venture between PSA andToyota is being to accommodate public feeling inits new Czech nome. Because of local political pres­sures. the aUlomaker gave up its promised exemption10 Czech laws that limit weekend truck traffic. Theselaws ban trucks of 7.5 tons and larger between mid­night and 10 pm on Sundays and during tne summermonths from 7 am to 8 pm on Saturdays.I'

It seems that this also created a lot of goodwillwithin the company.

Meeting StructureManagers at TPCA had to represent the interests ofboth TPCA and their employers. In order to mini­mize miscommunication, TPCA had a systematicmeeting structure:

Daily production meeting: This meeting tookplace every morning at 8:30. At this meeting,most managers were present in order to dis­cuss quality, absenteeism and announce majordecisions.Project Leaders Meeting: Managers from bothcompanies originally met on a monthly basisand then only once a quarter. These meetingswere anended by 10 to 20 managers from PSAand around 30 to 40 from Toyota.Steering Committee-TPCA's highest decision­making committee: Critical decisions were dis­cussed here, There were five members from eachside including Takae and Guibert. The meetingstook place either at Toyota's HQ in Tokyo orPSA's HQ in Paris. This committee met twicea year,

Case 17 Toyota's Strategy and Initiatives in Europe: the Launch of the Aygo

Kolin, the New TravelDestinationKolin became the new travel destination for plantmanagers and other executives from both Toyota andPSA. The factory was of interest, as it was a placefor both companies to try new things. Generallyspeaking, with only 100,000 square meters, this fac­tory was seen as having very little space. Guibertcommented:

In this project we see interesting new methodologiescompared to PSA's production system. But first, theTPS is a lot more than what we see and secondly, wecannot modify deeply our system because it is coher­ent and it has also its strong points. Willie both sys­tems have their qualities, they are above all different.

Nevertheless, within TPCA there were a fewthings that were off-limits to managers from the par­ent companies, as they were protected by patents orseen as proprietary.

UNDERSTANDING THEMARKET SPACEAs the construction 0 f the factory was progressing,marketing managers at Toyota were getting ready forthe positioning of the Aygo. The marketing challengefor selling the Aygo was considerable:

How could a car with 93 percent standardizedparts be differentiated in the marketplace fromits two siblings? Colors were one differentia­tor, but only to a limited extent. There were sixshared colors among the three brands and twocolors were specific to each brand..Toyota also launched the new Yaris in 2005. Thecar was a bit bigger than the Aygo, but 3,000more expensive. Sales representatives werelikely to push the more expensive Yaris, as com­missions were normally based on transactionprices.The plant setup with fixed volumes of 200,000units for PSA and 100,000 for Toyota was unu­sual. In comparable joint ventures, there wasnormally a transfer pricing agreement, so theproduction volumes could be determined ac­cording to the market situation.

The average age of Toyota's customers wasrelatively high (50+ years in Europe). The deal­erships were not really accustomed to servingyounger clients.Toyota had neither a recent history of sellingcars in the A-segment nor a loyal customer basein that segment.The agreement with PSA prohibited the use ofcar pictures until the launch of the car.

For marketing managers working on the launchof the Aygo, this was a tough list to work on. ForAndrea Formica, marketing manager at Toyota'sEuropean HQ in Brussels, these constraints wereseen as a challenge:

We will take the car out of the traditional showroomand bring it to the customer through special events,experience centers and concept cafes."

But would yolinger customers select the Toyota?

Knowing Younger Customers:What Makes Generation YDifferent?Roughly speaking, Generation Y were those custom­ers born after 1976 and was expected to be biggerthan Generation X (1965-1976). Market researchrevealed major differences for Generation Y:

I. Consumers were more individualistic. Carswere not just transportation, they were anotherform of fashion apparel-it's about "making itmine."

2. Young consumers were Intemet-savvy-gener­al1y they had done their homework online be­fore physical1y inspecting the car.

3. ,This group was immune to traditional advertis­ing. Members of Generation Y were not likelyto sit in front of the TV. A study by McKinseyfound that American teenagers spent 2.4 hoursper day online, about six times the average ofthe overall population. 19 By· contrast, teen­agers spent less than half the time watchingTV compared with the overall popUlation.

Generation Y Was definitely attractive size-wise,'btitreathing them would require many changes tothe exisling ways ofdoing things.

Part 2 Cases in Crafting and Executing Strategy

LAUNCHING THE AYGOGiven the challenge ofentering a new segment, therewere different approaches for launching the Aygo inEurope. As one manager put it, "It is difficult to co­ordinate between the different countries. And whatis good for one country may not necessarily be goodfor another." To capture the European spirit, Toyotaasked 10 artists from different European countries toredo the outside of an Aygo. These cars could be seenat many European car shows. Although the EuropeanHQ provided some background marketing material,the approaches for launching were different.

In Sweden, initially it was not even possible tobuy the Aygo. Until May 2006, customers could onlylease it as part of a mobility package, for €190 permonth, including insurance, service and repairs. Thiswas seen as a way to make the cost of owning the carmore transparent.

An Example from theGerman MarketMarkus Schrick, managing director of Toyota inGermany, outlined the initial situation: .

With Aygo we had a historic opportunity: Targetingyoung people who were new to Toyota with a com­pletely new and appealing product in a [for Toyota]new segment of the market.

The launch was phased in several steps, of which thefirst ones were the most important and maybe alsothe most impressive ones: (I) Identifying trendset­ters amongst young people, (2) getting in touch withIhem personally to "promote" Aygo via (3) so-called"players." These players followed the trends dis­covered and created by the trendsetters and broughtIhem to a broad young mainstream audience.

This is what "viral marketing" is all about--but weneeded to remain credible with our brand and productin order not to fail or to be misunderstood.

"Go 10 where the people are" was one of our centralideas-and all together it worked well. And of coursethe fact that we discussed our strategies prior to ouractions with these respective people helped a lot inunderstanding their lifestyle, artitudes and dreams.

Soon, it became apparent that the 18-30 agegroup was going to be the target market. Michae"lPotthast, Toyota's product manager for the Aygo inGermany, remembered the beginning;

In hindsight. this was the most exciting launch I havedone in my career.

We wanted to sell into a market that Toyota did notknow but. as always, understanding the customerswas important. We had to make the car attractive toyoung, first-time buyers. We wanted to position our­selves as young, but we had to be credible in whatwe do.

[Generation Y] was definitely a good target group.but they were difficult to get in lauch with. Our deal­ers were not used to them as customers, except whenthe parents were buying a car for their children. Wehad a similar reaction in focus groups. One of ourmain findings, which became a motto for the Aygoretail experience was the Generation Y attribute:"Don't sell to me, make me buy."

For Aygo's product managers in Europe, reach­ing the customers would require new approaches(refer to Exhibit 12 for pictures of the car). At thesame time, they could not change everything. Forexample, Toyota did not want-under any circum­stances--to alter its reputation of having sufficientsafety equipment on board. Starting with the firstAygo models sold, the standard equipment includedsix airbags, ABS and power steering at price pointsbelow €9,OOO.

Early Promotional Activities For the executivesaround Potthast and the agencies involved, it becameclear that Generation Y could not be reached through"traditional marketing" practices. They would relyon very little traditional advertising, opting insteadfor direct contact with potential customers at theplaces they frequented:

Phase 1 (aboUl nine months prior to the launch):Toyota started communication with potentialcustomers very early on. They created an in­teractive HAygo online community" without theToyota name. Visitors to the Web site wondered:Who/what is Aygo? At that point, there were noanswers to that question. The goal was to getinto dialogue with this market. The Web site in­cluded, among other things, videogames.

Phase 2 (afew months before the lauru:h in July2005): Aygo trendscouts arrived at discothequesand pointed visitors to the Aygo booths insidethe venue. There, booths for playing video­games were set up. The highest scorers of theevening would get attractive prizes, includingleather cowboy hats, which were very popularat the time. Visitors could also continue their

Case 17 Toyota's Strategy and Initiatives in Europe: the Launch of the Aygo C-2S7

Exhibit 12 The Aygo (3-door and 5-door)

!1Q,~1___

I· -,1.410mm

I· -I1,615 mm

2.340 mm

3.410 mm1.61.6 mm

~I__I' -I

1.415 mmIf-o•..-----------~-I I. • I I--I.l-------------+j

3.410 mm

Sourcs: Toyota.

game from home via the Aygo Web site. Insideanother booth, pictures and video messages ofvisitors were taken. The pictures were posted onthe Web site; the video messages could be sent toany e-mail address. The cowboy hats and otherprizes were marked. "Aygo by Toyota," with "byToyota" in a much smaller font size. Other priz­es included mints in the shape of "ecstasy" drugpills and were also marked, "Aygo by Toyota:'

Toyota also became involved in sponsoringrap concerts, among others a popular rap band­Fantastischen Vier. While the rappers did not ac­tively promote the car during the concert, an Aygoposter was hanging on the stage. By sending textmessages from their mobiles, visitors could wintickets to an after-hour VIP party with the band,which was sponsored by Toyota. The band also pro­duced four video clips and a music contest. Here thepublic could send in their music files and the bestone would then be recorded professionally. Thispartnership attracted a lot of attention by the me­dia, and eventually led to an open-air concert, whichwas also sponsored by MTY, a popular TV stationamong teenagers.

Getting Closer to the Launch Besides the Website, Toyota put great emphasis on other ways ofcommunicating with potential customers. The goalwas to launch Aygo as a lifestyle vehicle. Besides athorough dealer training, there were several innova­tive ways to reach customers:

Dealer Training; As dealers did not have muchexperience with young customers, they weresent to an extensive dealer training. The loca­tion. an unused subway station in the center ofBerlin, provided an unusual location. The sub­way station was remodeled into a living room.The goal was to get the dealers in the mindsof the core customers in the 18-30 age group.This covered everything from how do thesepeople live to what kind of technologies wereimportant to them, for example MP3 players.The subway station was also used for the presslaunch.Aygo Nights: The launch was on a Friday nightin early July 2005 and it was intended to besomething special. The logic was to take thecar to where the customers were. The deal­ers either picked their showroom or. if they

C-258 Part 2 Cases in Crafting and Execuhng Strategy

felt that their location was unsuitable for thetarget group, various other locations whereyoung people would go. Some organized beachparties/volleyball tournaments, disco nightsand concerts.Aygo Lifestyle Magazine: On the one hand, thiswas a car brochure dealing with the Aygo, but onthe other hand, it was a real lifestyle magazinecovering typical topics such as fashion, travel,food and spons. The lifestyle side also includedcommercials from Calvin Klein, Sarnsonite, andFossil watches. It was also used for communi­cating product news, such as the arrival of newcolors. The magazine was initially publishedeveryqulirtecand subsequent1ytwicea year; Itwas produced oli 'a Eurppc<aii basis,with soinevariation according to countries..Aygo City Toiu: to the biggest universities. Thiswas a way: fbr university students to test-drivethe Aygo. But it was far from a norrnaltest-drive.The Tour~ansistedpf several renovated cara­vans from ¢¢.1970s: One caravan was for book­ing test-drives. Another caravan was convertedinto a lounge, another one was set up for sendingvideo messages via the Internet.

Mobile Services: Potential customers couldhave car specifications sent to their mobilephones and register for brochures via SMS,a technology heavily used by members ofGeneration Y.

Exhibit 13 Different Positioning

Features of the Aygo The Aygo had emissionrates that were among the lowest--only 109 gramsper kilometer. This was an important argument forthe target market. The car came with a full warrantyfor three years or 100,000 km. But here the commo­nalities with other car manufacturers stopped. Theinterest rates for the cars were calculated accordingto the age of the driver. An [8-year-old customerwould pay 1.8 percent interest, a 30-year-old cus­tomer had to pay 3.0 percent. The positioning of theAygo was quite different from its siblings (refer toExhibit 13 for pictures and different positioning ofthe vehicl~s).:Customers could also opt for a pack·age incllidinglnsurance arid service contracts; theycould get Ilerterrates on the insurance if they joinedaone-day driving training.

Accessories It was possible to select from a widerange of accessories including window covers in"crazy" colors, costing €179. Covers for the sidewere available at €2l5.

In early 2006 Aygo was doing extremely wellon the forecasted resale values of the major leasingcompanies. This limited the risk Toyota had to takewhen financing the cars. The launch was widely seenas successful and Toyota won the coveted "best me­dia strategy award" in Germany. This was the trophyeveryone wanted to have, but for managers at Toyotain Europe in 2006, the question was, how to keep upthe momentum?

Source: Pia Krix, "Von Schweinen, Frauen und Lifestyle:' AutomobJlwochB, June 11,2005.

Endnotes

Case 17 Toyota's Strategy and Initiatives in Europe: the Launch of the Aygo C.2S9

lHIUebrand, Warter. "Zetsche's SChlachlplen," Csplfa/9/2006: 44.2Pans of the global overview of Toyota were taken from IMD·case-royota: Rapoaitloning the Brand In Europe (D): Growing Step-by-step"(Case IMD-5-Q701), by George Radler and Dominique Turpin, 2006.:1"10 Questions for Katsuakl Watanabe." Interview in Time magazine,August 22, 2005: 10.4"Formel Toyota." Maneger Magazln, December 2004, 72 ft.'''''oyota searches for love," Wall Street Journal Europe, January 11.2006.28.'Toyota press release January 12. 2006. Quole laken from Mr. ShinichlSasaki, President & CEO oIToyota Motor Europe (TME).'See Auto Motor Spor1612oo6.8Krix, PIa. "Von SChwelnen, Fral:'sn und Lifesty1e," AutomobilwocheOnline. June 11, 2005tAutomotive News, July 11, 2005.lOKentsr, James. ""'oyola leads Asia drl\fa In Europe." InternationalHeratd Tribune, July 23, 2005.!lJanas. Adem and Oevk1 Cramer. "PSA Peugeot CitroAn--The Toyota01 Europe." Morgen Stonley Company Updete, November 18.2005: 7.

"Au/Omotlve News europe. July 25, 2005: 19..3Eschmenl, Wolfgang. -PSA plant kelne welteren Kooper8t1onen.~

Automobilwoche Onllns. March 12.2005."Radtke, Philipp and Eberhard Abele! And",a. E. Z1e1l<e. "Ole smarteR8IIOIution In der AutomobUlndustrle." Ueberreuter (Redline Wirt­schaft). 2004: 133."Kochan, Anna. -r'oyota transfers high standards 10 CZech factory.'"Automotive News europe. July 11, 2005: 26."Frink. Lyle. "Day Ona at Kolin: CZech piant starts reguiar output ofPSA." Automoffve News europe, March 7, 2005."Frink, Lyle. -Add Il shltt.? Build a Pal1dng lot." Automotive Newseurope, September 19, 2005: 4."Weernlnk, Wlm Cude. -royola teps US SCion brand for Aygo Market·ing." Automotive News, Merch 7, 2005: 18."Court. David C.. Jonathan W. Gordon and Jasko Perry. "Boostingreturns on marketIng Invelllment... McKInsey Ouarterly 2005, Number2: 37-47.