In the highly competitive automobile industry, with shrinking differences in terms of quality and performance of different cars, manufacturers are increasingly competing to create and sustain a strong brand image. In this paper, we examine the case of Toyota in the context of Formula 1 racing. We review Toyota’s objectives in entering Formula 1 and analyse Toyota’s up-to-date failures in meeting these objectives. We conclude with recommendations for Toyota’s Formula 1 strategy to succeed.

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2. The Global Automobile Industry

Industry, Competition and Growth

The global automobile industry is highly concentrated, with the four major players – GM, Ford, DaimlerChrysler and Toyota – controlling almost half of the market share (see Exhibit 1). In terms of sales by geography, the three largest – North America, Western Europe and Japan – account for 79% of the market. The industry is expected to post relatively low volume growth over the next few years (cumulative 9.3% from 2002 to 2007)1.

It is anticipated that most of the growth will come from emerging markets, particularly Asia (excluding Japan). Manufacturers that take advantage of this shift by targeting these markets with the right kind of positioning and product mix stand to win major rewards. There is also scope for the Japanese manufacturers to increase their market share in Europe, where Japanese auto companies have a combined market share of 11.4%. According to an International Trade Services report, “the Japanese, long renowned for high quality and efficient manufacturing systems, have now begun to compete with more stylish models well adapted to local tastes, embracing diesel engines and improving their dealership structure. Now they need to build up the strength of their brands to enhance loyalty and lure more new buyers.”2

The automobile industry traditionally measured its performance in terms of market share and revenues (top players are GM, Ford, DaimlerChrysler and Toyota, respectively). Increasingly liquid and global capital markets have raised performance requirements for all industries, and have increased the need to integrate the product market perspective with capital-market performance measures (such as market capitalization). According to a McKinsey study3, companies that attain global cost leadership and brand premiums will be able to attain the necessary market capitalization to meet investor expectations. See Exhibit 2 for performance of top players in the global auto manufacturing industry, in terms of revenues versus market capitalization.

Threat of entry – Structural changes in the industry

Given the characteristics of the market – high capital intensity, mature industry, the significant economies of scale and scope, and power of existing manufacturers, shifts in structure in the industry come mostly from mergers and consolidations (for example: Ford now owns Jaguar, Volvo, Land Rover, and Aston Martin; GM owns SAAB and has significant investments in Fiat and Suzuki, Isuzu and Subaru; Toyota is jointly developing a sub-compact car in Europe with PSA Peugeot Citroen). Additionally, according to Forbes magazine, “the economic downturn, rising oil prices and the cost of developing new technologies, such as hybrid systems and fuel cells, could spur another wave of consolidation.”4 An auto manufacturer’s market capitalization frequently determines the balance of power in mergers and consolidations.


One of the key aspects of the highly competitive automobile industry is the power of customer. The car companies constantly strive to monitor and cater to fast-moving trends in buyers’ preferences (see Exhibit 3). Companies seek to maintain or improve their cost

structure while trying to increase their brand appeal to an increasingly fragmented customer base. For example, Toyota launched a major marketing campaign in the US to promote a “sporty image” of the Toyota Camry. The company invested $160 million in 1999 to increase the car’s appeal to a segment 15 years younger than the car’s aging customer base (average customer age of 50 years old).

With rapidly changing consumer preferences, and ever-reducing gaps in quality and performance of different cars, companies have to exercise creative and powerful ways of reinforcing their brand image with the consumers. They can do this via effective advertising, and through interactions with the various media that consumers use to send demand signals – such as web pages (more than 70% of new-car buyers in the US research their vehicle purchase online), dealer salespeople (US buyers visit 3 dealerships on average over the 6-month period leading to a new car purchase), and interactive marketing.6


Automobile manufacturers in the US use thousands of different suppliers to outsource the manufacture of different components. In 2000, GM, Ford and DaimlerChrysler created Covisint, a business-to-business (B2B) exchange that connects the automakers to thousands of suppliers. There are, however, trends of consolidation also in the auto supplier industry. Already, there are a number of powerful suppliers in Europe such as Magna Steyr Fahrzeugtechnik AG ; Co., the company that engineered major components of BMW’s X3 and DaimlerChrysler’s Smart car, and Bosch, which manufactures a high percentage of parts for Ferrari. This trend could add pressure on auto manufacturers to have pull power through their brand image.

3. Toyota Motor Corporation

The company was founded in 1937 as a subsidiary of Toyota Automatic Loom Works. Toyota’s first car was launched in 1947, with global expansion beginning in Brazil in 1959. A significant early competitive advantage (especially in terms of cost) for Toyota was its focus on improving production systems, based on Just-In-Time and Kaizen methods. Toyota listed its shares on the New York and London stock exchanges in 1999. While the automotive manufacturing and financing businesses are its primary sources of income, the company also offers financing in relation to its vehicle business, as well as other small business units including telecommunications, industrial products, housing, and boats.

Along with Ford and GM, Toyota is seen as one of the most recognizable global auto brands. Its scale and depth of products enables Toyota to minimise risk of introduction of new models, and spread costs over a wide range of models. Toyota’s wide range of brands allows the company to capture revenue from a broad section of consumer segments. Toyota’s recognized superiority in high-tech production gives it a large advantage over its rivals. One of Toyota’s main concerns is to attract and retain innovative engineers to sustain this competitive advantage.

Toyota operates in an industry where development of new products requires high capital expenditure, which can be sustained as long as markets keep growing; as prices become more competitive and consumers’ preferences rapidly change, this could expose Toyota to large cost issues.

Recognizing these trends, Toyota has made significant efforts at localising manufacturing and sales – enhancing Toyota’s cost and marketing abilities. For example, Toyota has set up a focused European subsidiary to streamline its manufacturing and sales within Europe.7 Toyota is making a large push into expanding sales into Europe, with record sales of 260,508 units from January to March 2004, a 23% increase from the previous period a year ago. Total European market share has risen from 4.6% to 5.4%.8 Toyota attributes this growth, in the face of overall declines in the European market, to cost cutting and a reputation for reliability, and an increased focus on a “sporty” image. Toyota recognizes the need to further develop its marketing message for Europe to maximize market penetration in the region.

From a marketing point of view, Toyota has created a brand on the concept of a “rational purchase” with the key factor being reliability.9 However, Toyota realizes that its traditional manufacturing and marketing strengths will not be enough to sustain its market position, and will need to enhance its rapid innovation and design capabilities to succeed.

From an overall market perspective, while Toyota is seeking growth in emerging markets, the company has targeted Europe for revenue growth due to its relatively low market share. The two main factors identified by the company to assist in this growth are a more localized marketing message, and developing a range of models engineered to European tastes.

4. Why did Toyota enter Formula 1?

In key markets, Toyota seeks to leverage its brand via targeted marketing programs. Globally, Toyota has been involved in motor sports for over 40 years. One of the major motor sports programs includes Formula 1 participation. Six out of the top ten manufacturers have teams in Formula 1, which commands the biggest audience of any sport (at approximately 2 billion cumulative per year), and that attracts the highest sponsorship money, with USD 1.35 billion (followed by golf with USD 788 million).10 Formula 1’s proposed expansion to markets such as China and India makes it even more attractive with its potential to reach key target audiences in emerging countries11.

Toyota decided to enter Formula 1 in 1999. Overall, Toyota believes it has more room for growth in Europe, as it has a market share of 5.4%, compared with 20.7% in Australia, 11.2% in the US and 43% in Japan, and its Formula 1 participation is therefore primarily targeted at European consumers. According to Jozef Vandecruys12, General Manager of Toyota Motor Marketing Europe, Toyota’s reasons for participating in Formula 1 are:

i. To display technological leadership

To enter F1, Toyota chose to design a complete car (engine and chassis). It was the only team after Ferrari to do so (see mission statement in Exhibit 4). If Toyota wins the F1 championship, this choice would enhance its reputation for technological leadership.

ii. To increase brand awareness and to enhance brand image

In a market where the technical contents are not enough to confer a competitive advantage to the products, brand promotion becomes key for success. With this in mind, Toyota has designed new models, such as the sporting variants of Yaris and Corolla, to increase brand awareness and change Toyota’s traditional staid image into a sportier one. Formula One can be very powerful tool to help achieving these objectives. According to Vandecruys13, “[All] motor sports activities should contribute to increase brand awareness and brand awareness is the first layer on top of the purchase funnel.”

iii. To promote sales

The average viewing figures for each Grand Prix is over 354 million worldwide, and many of the viewers will visit a showroom to purchase a car at some point. That is why many consider Formula 1 a huge showroom for car manufacturers. And Formula 1 is indeed an extremely effective tool to generate sales, especially for those that achieve the top position. Exhibit 5 highlights that more than 75% of a leading Formula 1 team’s budget is covered by revenues generated in F1.

iv. To increase internal motivation and pride

One of the distinctive resources able to generate strong and sustainable competitive advantages is the company’s human capital. In the world engineering community, Toyota was seen as a conservative and stodgy company, so it had difficulty recruiting innovative engineers. Toyota believes that the Grand Prix team will help increasing internal motivation and pride, thereby helping attracting top engineering and design talent.

5. Has Toyota met its objectives in Formula 1?

Formula 1 is an extremely cost-effective strategy when compared to other alternatives with similar targets (see Exhibit 6). Compared to a traditional communication plan like the one in the UK or the Toyota Camry promotion plan in the US (mentioned in section 2), the participation in Formula 1 can be exponentially more effective.

Toyota entered F1 with a budget of �300 million a year and defined a long-term plan to achieve the championship in five years (see exhibit 7 for the budget of F1 teams). The company declared that its target was to learn the first year, to conquer some podium in the second year, to win some races in the third year, to compete for the championship in the fourth year and to win it in the fifth year.

Toyota started racing in 2002, but after three years and with the second largest budget of F1, the results are not consistent with Toyota’s original targets. (See Exhibit 8 for Toyota’s results in the world championships).

6. Why did Toyota fail to meet its objectives?

We have identified five main distinctive resources that constitute a competitive advantage in F1:

Drivers – In a Grand Prix, the time gap between the car that achieves the first position and the car that attains the last one is typically 3-4 seconds. On average a champion driver can drive the same car 0.4 seconds faster then a medium driver (see Exhibit 9 for a comparison) and can represent up to 15% of the competitive advantage of a team. Besides, a champion driver is an active part of the development of the car during the year and plays a fundamental role in creating team cohesion. Although being a distinctive resource, a champion driver is not a sustainable competitive advantage, for obvious reasons. But we could consider the company’s ability (through its reputation and economic capacity) to attract the best drivers as a competitive advantage.

Strong relationship with FIA – FIA is the entity that annually defines the technical specifications that form the basis for designing the F1 cars. Top teams have a special “relationship” with FIA and are often involved in the definition of the new specifications. Being involved in the definition, development and testing of these new specifications gives the top teams a great competitive advantage over their competitors.

Design capability – Top teams develop this capability by fighting to hire the best talent and by developing specific methodologies of design. These capabilities are extremely specific to the product and cannot be acquired or transferred from sources outside the F1 world.

Manufacturing capability – Innovative material and a sophisticated manufacturing process are ways of creating a competitive advantage. Top teams in F1 invest a high percentage of their budget in this area.

Technological investments – There is almost a direct link between the final classification in a World championship and the budget invested in technology. In particular there is a big correlation between the investment done on the wind tunnel, and the competitiveness of a car (see Exhibit 10). Here, not only the amount invested, but also the precise selection of the investment matters, which required specialized technical skills.

We believe that the key resource enabling to capture all of these five main distinctive resources is human capital, as being able to hire the right people allows a Formula 1 player to acquire the technical and networking skills necessary to achieve excellence in the 6 fields listed.

Toyota has indeed leveraged its financial capabilities to draw key human resources (Toyota’s salaries are reputed to be twice as high as its competitor’s). However, Toyota has also made several mistakes, limiting its ability to build adequate human resources:

Location – Toyota has built its F1 racing department in the same location (Cologne, Germany) as their plant for their World Rally team. But Cologne is far from the main F1 districts in England and Italy, where most of the top teams and manufacturing suppliers of the F1 industry are located. This causes problems with supplier interactions and retention of key employees. Suppliers play a fundamental role in the technological development of a car and, in a dynamic world like that of F1, unscheduled meetings with them up to several times a day are extremely common (for example, to solve unexpected problems during the machining phase of an innovative component). In this environment, distance is a problem. Additionally, a vast majority of the F1 experts are English or Italian, and the company has struggled to retain these experts in Germany- while Toyota was able to attract many top people with lucrative financial incentives, most left the company after short periods due to family issues.

Choice of top management – In 1999, Toyota appointed Ove Andersson as Team Manager and De Cortanze as Technical Director. Though both were talented as managers and garnered the trust of the company, neither had any experience in F1. Their talent was not enough to develop the distinctive resources required to succeed in F1, and the debut of Toyota in the 2002 championship was a big disappointment. In 2004, Tsutomu Tomita, a veteran of Toyota for 20 years but again with no direct experience in F1, was appointed Chairman and Team principal.

These weaknesses have limited Toyota team’s ability to recruit top F1 players on the driving, designing, manufacturing and technological investment management roles and to have a strong relationship with FIA. Therefore, Toyota has not yet been able to reach a high enough performance level in each of the five main resources we have listed. For example, Toyota’s drivers are Cristiano Da Matta (0 successes in F1) and Olivier Panis (only 1 success in F1). None of the drivers have showed enough “skills” to become a “champion” or to help the team develop the car.

7. How can Toyota improve its performance in Formula 1?

We believe Toyota could be successful in Formula 1. Our recommendation for Toyota to achieve the top position in Formula 1 is the following two-step strategy:

i. Leverage liquidity to acquire the necessary resources

Toyota is the biggest company that competes in F1 (in terms of market cap) and it can rely on a healthy cash influx. We recommend that Toyota use this to lure key human capital away from competitors, in particular:

– Hire a “champion” driver

Hire an expert manager

We think Toyota’s managers should be assisted by an “expert” who should be committed to the company (with a long-term contract) and would have the mission of creating a successful F1 team. Ferrari’s CEO, after having led the team for two years with poor results, did the same by hiring Jean Todt, leading to spectacular results (see Exhibit 11). We propose Flavio Briatore, Team Manager of Renault, or Ross Brawn, Technical Manager of Ferrari, for this role. The expertise would bring to Toyota not only their capabilities, but also their “network” knowledge in F1. In every top team there are talented people that could bring to Toyota the resources required to excel, but an “expert” would be much better able to identify and motivate key people to join Toyota. (For example, everyone knows about the chief designer of the gearbox department of a team, but only an expert could know the name of the otherwise unknown designer that really was responsible for the gearbox and “added value” to that component.)

– Improve retention of team members in Germany by implementing programs to help the family of its employee to better integrate in the local community

– Improve relationship with suppliers

Every team relies on the work of more then 50 small and extremely specialized local suppliers, but only 4-5 among these add the bulk of the real value to the company. Toyota should create partnerships with these “strategic suppliers” and motivate them to open divisions near Cologne. This partnership will help Toyota to enhance their manufacturing capability.

ii. Develop a sustainable competitive advantage

We think Toyota has two distinctive resources that could yield a sustainable competitive advantage to compete in Formula 1.

– Build on ability to attract Japanese sponsors

Most Japanese companies base their culture on strong values of pride and nationalism. For this reason, a Japanese company receives more value from a sponsorship when they associate their brand to another Japanese company. Toyota is one of the most prestigious brands in Japan, and its participation in Formula 1 by designing a complete car is a matter of national pride (while Honda is also present in F1, it only supplies the engine to an English team, Jordan). Therefore, Toyota’s ability to attract partners and sponsors among Japanese companies could provide them with an advantage in terms of financial resources. (Panasonic and Toyoda are currently two Japanese sponsors of Toyota.)

– Build on ability to attract Japanese technological partners

The strong Japanese companies’ culture based on pride and nationalism can also help Toyota obtain a competitive advantage in the technological area. Most of the top teams base their success on partnerships with Japanese companies (see Exhibit 12), such as Ferrari’s strong partnership with Bridgestone. Being a Japanese manufacturer, Toyota could leverage on the national pride and “steal” Japanese partners such as Bridgestone from their competitors.

This competitive advantage would be difficult to imitate and could be sustainable in the long run, but Toyota must become competitive enough (it must accomplish phase one of our strategy) to achieve this advantage, as Japanese suppliers would not be willing to develop a technology partnership with a national company if it has sub-par performance.

By following this two-step strategy Toyota would be able to leverage their financial resources, technological leadership and the Japanese culture to acquire the distinctive resources needed to succeed in Formula 1, and to develop sustainable competitive advantages to maintain this position in the long run.

1 Source: Datamonitor

2 Source: “Japan’s Automakers Capture Greater Market Share In Europe”, Autoparts Report, 2003

3 “The Future of the Automobile Industry – Global cost leadership and brand premium”, 1999

4 Forbes article “Stock Focus: Auto Industry Consolidation”

5 We focus on end-costumers and not distributors as the first ones have a significantly higher impact on the companies’ strategies.

6 “Sensing Automotive Demand,” Forrester Research Inc., 2002

7 Source: Toyota 2003 Annual Report

8 Source: Toyota’s European First Quarter Sales Rise 23%, 7 April 2004, Market News International

9 Source: Toyota outsells Ford globally, David Kiley, 27 January 2004, USA Today

10 Source: International Events Group (IEG) estimates for year 2000

11 Source: BBC Sport 2004

12 Source: Personal interview with Jozef Vandecruys, General Manager of Toyota Motor Marketing Europe, on April 9th, 2004

13 Source: Personal interview with Jozef Vandecruys, General Manager of Toyota Motor Marketing Europe, on April 9th, 2004


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