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Toyota Motor Corporation Launching Prius Case Solution

Solution Id Length Case Author Case Publisher
1135 1878 Words (7 Pages) Forest L. Reinhardt, Dennis Yao, Masako Egawa Harvard Business School : 706458
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The case is set in the year 1998, at the time when several US automobile manufacturers are vying to launch the first hybrid vehicle. The case relates to the difficult decision need to be made by top executives of Toyota, whether to launch a Prius – Toyota’s first hybrid vehicle – within a short span of time to gain first mover advantage over its competitors. In addition to a decision pertaining to the timing of the product launch, the decision also needs to be made about the pricing of the innovative product and the production volume for the initial batch. These decisions are important because if the price is set at too high a level, then Toyota’s presence in hybrid cars will be compromised in the long-run. Also, Toyota needs to recover its research and development costs for these vehicles, as well.

Following questions are answered in this case study solution

  1. Situation Audit

  2. Critical Issue

  3. Problem Analysis

  • Technology of Production

  • Value of First Mover Advantage for an Automobile Manufacturer in Hybrid Segment

  • Degree of Rivalry to Launch Hybrid Vehicle

  • Key Competitive Advantages In Automoblie Industry

  1. Alternatives

  2. Recommendations

Case Analysis for Toyota Motor Corporation Launching Prius

Critical Issues

The critical issues in this scenario relate to the degree of divergence of hybrid technology from traditional vehicles; the benefits associated with gaining positioning of first-mover advantages, the degree of rivalry between automobile manufacturers and the key competencies of Toyota for automobile production.

Problem Analysis

Analysis of the problem requires careful attention to be paid to various facets of the situation ranging from the technology of hybrid vehicles to the degree of rivalry between automobile manufacturers and anticipated consumer reaction to the initial hybrid vehicles.

i. Technology of Production

The key aspect of hybrid vehicle production is that it significantly different from the manufacture of traditional vehicles, therefore, significantly high fixed costs are bound to occur if a company aims to gain a first-mover advantage. A hybrid electric automobile is a car that uses two storage of energy to move – first storage is that of gasoline while the second one is electric. A plug-in hybrid car needs an external source of electrical energy (such as grid connection), for the batteries to charge. They are generally referred to simply as the hybrid cars in the case of combining a combustion engine and an electric machine reversible. A hybrid "electro-electric" uses a fuel cell to produce the current for the electric motor. The important factor to consider is that both forms of vehicles require large battery storage for electricity irrespective of electricity is provided from an external source or created from internal combustion. These batteries entail a very high cost of production and, even more importantly, research and development expenditure to find the most efficient substance for the batteries.

Another key aspect of hybrid vehicle production is that there are various alternatives for the technological backbone of these vehicles. The general operating principle of a hybrid vehicle is to combine an electric motor (often reversible generator) with an internal combustion engine to propel a vehicle. When the vehicle is stationary, the two engines are stopped. At startup, the electric motor works only which ensures the movement of the car to a speed of about 50 km per hour. When higher speed is reached or a strong acceleration is required, the engine takes over to gradually replace the electric motor. In the case of very high acceleration, the two motors are operated simultaneously, allowing superior acceleration. During deceleration, downhill and braking, a part of the kinetic energy are converted by the motor/generator into electricity to recharge the batteries, ensuring the role of engine braking and relieving the mechanical brakes. Another important consideration in the technology of these vehicles it that management of the whole is generally entrusted to the electronics that reflect the state of battery charge, the temperature of the engine and that of the catalyst.

The above-mentioned evaluation of technology shows that considerable trial-and-error costs will be required to create an optimum combination of the intricate mechanism. One possible option for Toyota is to let a competitor incur large costs of research and development and launch the product. Toyota can then reverse engineer competitor’s product to create its own version of a hybrid vehicle.

ii. Value of First Mover Advantage for an Automobile Manufacturer in Hybrid Segment

The value of the first-mover advantage is directly related to the anticipated level of sales to the early adopters of the technology. The immediate economical advantage to the consumers is likely to be low because the cost of these vehicles would be approximately 1000-2000 USD greater than traditional vehicles, while this type of engine decreases fuel consumption by only 10 to 30%. The upfront investment is very large as compared to cost savings. Consumption of hybrid vehicles offers the greatest benefits for urban driving with the biggest gains and the lowest benefits for motorway driving. The hybrid vehicle also reduces emissions proportional to fuel consumption, which might be perceived as an attractive feature for early adopters. Consumers also recognize that a hybrid is not comparable to an electric motor. It is simply an internal combustion engine optimizing energy use. Hybridization is the source of significant progress in the year 2000, allowing hybrid vehicles to gasoline to present a balance sheet in terms of emissions of pollutants better than that of diesel vehicles. This is similar in terms of CO2 but with lower emissions of air pollutants.

The disadvantages of hybrid vehicles are also recognized in comparison to traditional vehicles by consumers. The electrochemical storage of these vehicles would not have a life as long as the vehicle itself. It would have to change them once or more before the full recycling of the vehicle, resulting in an additional cost of maintenance and the important obligation of the manufacturer for recycling. Evaluations of these aspects of hybrid vehicles imply that first-mover advantage is not likely to result in a correspondingly high level of sales during the initial period of launch.

iii. Degree of Rivalry to Launch Hybrid Vehicle

The oil crisis and ecological stress have motivated several automakers to announce major research programs in the area of hybrid vehicles. These include giants like General Motors, which is associated in this area with Mercedes and BMW.  Ford has acquired the technology of Toyota first generation and more recently PSA that is associated with various major OEMs to achieve the first hybrid diesel-electric, as part of a major development program supported by the Agency for Industrial Innovation

The US automotive industry is currently characterized by strong price competition, high prices for raw materials and energy, a strong focus on cost management and restructuring of production processes.

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