Adaptation to Technological Innovation and Corporate Core Rigidities

KEYWORDS: Architectural innovation, Radical innovation, Incremental innovation, Core-rigidities INTRODUCTION In previous research related to technological innovation, a phenomenon has

■2012 JSPS Asian CORE Program, Nagoya University and VNU University of Economics and Business

Adaptation to Technological Innovation and Corporate Core-Rigidities

Nagoya University TomomiHAMADA*

ABSTRACT: This paper postulatesthat corporate core-rigidities affect an established firm‟s adaptation to technological innovation This manuscript further clarifies that when the implementation of new activities is sacrificed at the cost of an established firm‟s core-rigidities, the firm may find it difficult to incorporate (either incrementally or radically) new technological innovations into their operations To analyze these issues in greater detail, this paper evaluates the Toyota Motor Company as a case study for an organization‟s struggle to simultaneously adapt two innovations.Interviews at the Chinese production base for Toyota served as the methodology for this case study

KEYWORDS: Architectural innovation, Radical innovation, Incremental innovation, Core-rigidities

INTRODUCTION

In previous research related to technological

innovation, a phenomenon has been theoretically and

pragmatically explained whereby an established firm

cannot immediately adapt to the competitive

environment resultant from radical changes in the

industry‟s technological capabilities When these

technological changes occur, the industry is often

inundated with new entries or outsiders, making for an

increasingly competitive environment(Cooper and

Schendel, 1976; Tushman and Anderson, 1986; Cooper

and Smith, 1992; Utterback, 1994; Tushman and

O‟Reilly, 1996; Christensen, 1997; Tripsas and Gavetti,

2000) To consider the challenges posed to the

established firm by innovation and environmental

changes, researchers have tried to analyze and classify

the characteristics of technological innovationsthat

prompt large-scale technological change in a given

industry

To considera firm‟s failures to adapt, to technological change, theclassification approach centers on analyzing specific characteristics and propertiesof technological innovation However, this raises a potential problem.Historically, this approach has not adequately explained how, in some instances, established firms have maintained their market position while launching

a product that either (a) incorporates or (b) ignores technological innovations that highlight its value in a changing environment

For example, Toyota Motor Corporationsucceeded in situatinga hybrid vehicle (HV) in the existing gasoline-dominated automobile market, although it is capable of supplantinggasoline-powered vehicles (GV)

in the future Similarly, in an examination of the

organization‟s transition from analog to digital imaging

Corporation,which developed a digital camera with

flash memory despite their longstanding success with

analog imaging

On the other hand, there is some evidence to suggest

that established firms sometimes experience trouble

adapting to even the most minor of technological

innovations To expand upon an above example,

consider that Toyota may experience success related to

its HV models, but has failed to launch a ultra-low cost

vehicle (ULCV) in emerging markets as a means to be

competitive there

thoseof previous research.Specifically, previous work

in this field has historically shown that established

firmsthat find radical or disruptive technological

innovation difficult.However, cases such as those

mentioned above are not uncommon Most established

firms traditionallyattempt to adapt to survive future

changes in the operational environment by learning

from the adaptive strengths and weaknesses of other

firms in the industry As a result of this learning process,

some firms gaina dynamic capability (Teece, Pisano,

andShuen, 1999; Eisenhardt and Martin, 2000; Adner

and Helfat, 2003) to acquire resources from resource

routes different from so far

Contrarily, firms that fail in incremental innovation

development arealso no longer unusual.Theycannot

adapt to incremental advances in technological

capability, despite theirpossession of product

technological skills, competencies, capacities for

research and development, and comparatively

abundant assets Clearly, there is some discrepancy

related to how well some firms adapt to technological

innovation Some firms can adapt to innovations in

their respective industries quickly whereas others

cannot.Because of this, innovation categorization

theories that are contingent upon changes in firms‟

physical or material capacities are insufficient for

revealing the underlying causes for why differences in

adaptive capabilities exist

For these reasons, understanding the cause behind successful adaptation to technological innovation requiresthe analysis offactors endogenous to the firm that stifle innovation implementation Such an approach emphasizes a focus on an individual firm‟s organizational characteristics and properties In this manuscript, Iinvestigatetwo innovations in the automobile industry, HV and ULCV (representative of radical and incremental innovation, respectively) for emerging markets, andanalyzeToyota‟s reactions to them In doing so, I seek toillustrate that corporate core-capabilities can hinder an organization‟s adaption

to innovation, and that the innovations to which an organization fails to adaptare not always radical

LITERATURE REVIEW

In this section, I review the previous literature oncategorization of innovations, with a particular emphasis on an established firm‟s adaptation and organizational reaction to such innovations Incremental innovation and radical innovation were the primary categories identified in the early stages of related research (Attlee, Bridges, and O‟Keefe, 1984; Dewar and Dutton,1986; Tushman and Anderson, 1986).Incremental innovation is signified byrelatively minor technological change to anexisting product for improving and enhancing its extant function In contrast, radical innovation is indicated by large-scale changes in engineering or chemical technology that yield products that are vastly different than those that currently exist In addition to developing new products, radical innovations may succeed in pioneering new markets in which to operate.Using the concept of

“core-competencies”(Abernathy and Clark, 1985), Tushman and Anderson (1986) denoted that the

traditionallycompetence-enhancing for established

competence-destroying for themAs such, radical innovation is typically brought into extant industries by

outsiders or new entries rather than established firms in

those industries

Henderson and Clark (1990) discussed product

architecture in relation to the study of incremental and

radical innovation In doing so, they expanded

innovation categorization byfocusing on product core

components.Their research has enabled us to classify

incremental and radical innovation in a more structured

fashion Further, Christensen (1997) mentioned that

radical innovation could have social and industrial

impacts that forceleading firms to withdraw from their

respective industries He also supplemented the

existing innovation taxonomy by introducing the

concepts ofsustaining innovation and disruptive

innovation

Christensen‟s (1997) additions to the categorization of

innovations have contributed to understanding not only

that some firms fail, but why they fail They

accomplish this through quantitative and qualitative

observations of corresponding case studies They also

demonstrated a positive relationship between

competence requirements and technological or

architectural change Further, they demonstrate that the

greater the discordance between extant competencies

and those required to innovate, the more difficult

implications,we can predictthe degree of difficulty a

firm will experience in adapting to innovation by

characteristics or attributes in relation to a firm‟s

competencies

Despite their contributions to the literature,

thesecategorizationtheoriesfail todirectly identifythe

cause of a firm‟s difficulty in adaptingto innovation.In

other words, obstacles to adaptation originate from the

characteristics of a givenorganization Because

theycannot mention the fatal problem withina firm‟s

inappropriate actions in adaption, namelyendogenous

organizational problem, even if they can detail external

environmental change, exogenous technological innovation

As the study of organizational problems in adapting to

organizational structural inertia (Hannan and Freeman, 1977) and incumbent inertia (Liberman and Montgomery, 1988) have evolved as critical concepts

in organization theory (Henderson and Clark, 1990; Burgelman, 1991; Tushman and O‟Reilly, 1996; Gilbert, 2005) Organizational inertia refers to a firm‟s tendency to maintain the status quo and is directly related to the firm‟s age, size and complexity (Barnett and Carroll, 1995).Organizations with high levels of inertia may find it especially difficult to adapt to environmental change (Hannan and Freeman, 1977) Focusing on the characteristics of core-capabilities (Prahalad and Hamel, 1990), Leonard-Barton (1992) demonstrated that firms with strong core-capabilities tend to experience difficulty inimplementing radical

core-capabilities as a“set of knowledge”thatis deeply rooted in the knowledge and value-system of an organization‟s constituents Core-capabilities are comprised of four dimensions: values and norms, skills and knowledge base, technical systems, and

core-capabilities canprevent a firm‟s implementation of new activities because changing them is extremely difficult As such, they can be rightfully dubbed

“core-rigidities” Leonard-Barton (1992) described core-rigidities as theflipside of core-capabilities She concluded that core-rigidities are those characteristics that contribute to an organization‟s structural or incumbent inertia, thus making adaptation to competitive environmental change difficult.This position contributes to an understanding of those organizational characteristics that promote a failure to adapt As a caveat, however, Leonard-Barton (1992) argued thatcore-capabilities only hinder new activities

innovation.She made no conjectures regarding

core-capabilities and their impact on implementing

incremental innovations

Regardless of the nature of an innovation (i.e.,

incremental or radical), the firm that strictly adheres to

its core-rigidities tends to experiencedifficulty in

adapting to innovation Given this, I observe the case

of Toyota Corporation to analyze an established firm‟s

dilemma in balancing existing core capabilities and

implementing new innovations in the industry

METHODS AND DATA

This research analyzes Toyota‟s core-rigidities and

current measures in dealing withtwo different

innovations, the aforementioned HV and ULCV for

emerging markets I indicateToyota‟s core-capabilities

according to Leonard-Barton‟s research Following

this,Iobserve whether(a) these core-capabilitiesfunction

as rigidities in reacting to innovations,and (b) whether

innovationare in contrast with Toyota‟s core rigidities

Practically speaking, it is sometimes arguedthat ULCV

for emerging markets is not a technological innovation

However, because the ULCV is intended to improve

the cost performance of an existing product and that

improvement requiredthe development of a revamped

production system, supply and suppliers system, and

product architecture, ULCV can be called an

incremental“innovation”

sourceinformation and extant literatures, interviews

were conducted with the executives of three Toyota

Group Chinese production bases These interviews

were carried out at Guangzhou Toyota Motor Co., Ltd

(GTMC), Denso (Guangzhou Nansha) Co., Ltd

(DMNS), and Aisin Seiki Foshan Automotive Parts

Co., Ltd (ASFA)1 Interviews wereconductedorally,

1

With faculty members of universities in the Tokai area of

Japan, I made an appointment through Japanese headquarters

and visited these Chinese production bases to carry out

and primary respondents were top managers of these three firms Technical information related to machinery was available from industry experts Supplemental information about Toyota was obtained from publicly available sources, including annual reports, business magazines, and newspaper articles These data were drawn primarily from Nikkei Business Press magazine and Nikkei Newspaper

It should be noted that this case study is currently in progress, so it is impossible to presently determine Toyota‟s strategy with respect to the ULCV

CASE STUDY Two innovations

Toyota currently faces uncertainty in the form of two innovations, HV and ULCV for emerging markets These industry innovations require Toyota to take immediate action, but must be careful about how to proceed in the future.Toyotahas already launchedits

HV model, Prius,and maintains a 70% market share of the world HV market.However, it has thus far been unable to launch a ULCV priced low enough to establish a strong presence in Brazil, Russia, India, and/or China (BRIC), widely accepted to represent strong emerging markets for ULCVs.In this section, I consider how changes are required in the two types ofinnovations, and why Toyotawill continue to experience difficulty in propagating its ULCVsdespite its success with its HV model

First, the changes and impacts of the two innovations should be considered HV is strongly considered to be one of the automobiles that can fully supplant GV in the future.Factors such as increasing fuel prices, enhanced regulatory environment, and increasing public eco-awareness have stimulatedstrong sales growth for HVs According to Toyota, for example, HV sales have increased annually, from 6,400 units sold in 2000 to over six million units sold

interview research with executives in March 2012

in 2011.Although this growth indicates a strong

movement toward HVs, the advent of the fully electric

vehicle and performance improvements of the GV

suggest that the growth of the HV is not fully

guaranteed However, even with such uncertainty, Toyota anticipates its HV to become the primary vehicle of choice in the future

Table 1 Principal changes in automobile parts of component modules between GV and HV

Main Component/Car Type Example Toyota [Premio] Toyota [Prius]

Power Train 4-cylinder engine + CVT 4-cylinder engine + hybrid system

Engine (Motor) Mechanism Element

Belt (2) Water pumps Air compressor

―

Transmission Mechanism Element

Rolling bearing (18) Spool valve (8) Electromagnetic solenoid (5) Brake and clutch (2) Pulley (2) Planetary gear CVT Belt Torque Converter Lock-up clutch

Rolling bearing (14) Planetary gear (2) Damper

Accessory Drive, Traction and Power

Generating Motor

Alternator Starter

Traction motor Power generating motor Air compressor Engine cooling Motor/inverter cooling Dynamo-electric brake

Battery, Inverter

― High pressure battery (Ni-MH)

Inverter DC-DC Converter Battery monitoring system High pressure harness Source: Nikkei Automotive Technology (2010)p31, and author revised partially

Notes: the number of parts shown in () is estimated in generic research of Nikkei group, and not actual number

Although it has experienced success with its HV

model, Toyota also should simultaneously considerhow

to deal with the emergence of ULCVinnovation in

emerging markets Because the majority of automobile

markets shift from developed countries to developing

countries characterized by economic and population

growth, launching ULCV models has become a

priority among established automobile firms A

2010survey by Euromonitor International showed that

the total middle-income population in developing

countries (annual disposable income: $5,000~$35,000)

increased from 0.6 billion in 2000 to 2.8 billion in 2010,

while the low-income population (less than $5,000)

decreased from 3.2 billion to 1.4 billion over the

situationisimproving, emerging markets in developing

countries show potential to further expandin the future

The automobile markets in developing countries have also been rapidly expanding According to FOURIN World Automobile Statistical Yearbook (2010), the ratio of sales in emerging markets in developed countries is increasing annually and exceeded 50% in 2010.Those in the middle income bracket in emerging markets will require an automobile priced appropriately for their income level The ULCV can be that automobile

Thus far, Toyota has been unable to price its ULCV model lowenough relativeto rivals, so its share of emerging markets remains modest Incontrast, firms that are ranked lower in the world market are expanding their share in emerging markets by implementing a low cost strategy FOURIN (2010) reported that Toyota‟s ULCV market share in BRIC are Toyota is 2% (9th), 5% (5th), 1% (not reach 10th), 6%

(6th), respectively.These numbers are low

comparedwithother established rivals like Hyundai

Motor Company, Volkswagen Passenger Cars, Nissan

and Renault Even local firms have performed better

than Toyota‟s ULCV in some emerging markets

Next, I will focus on product architecture in the

context of these two innovations First, Idescribethe

architectural differences between GV and HV See

Table 1 for a summary of these differences

The power source of new automobiles has

transitioned from gasoline to electricity, thus reducing

the number of parts required for the engine and

transmission components Simultaneously, the power output from the motor battery has drastically increased Taken together, this means that the component architecture has been fundamentally altered Due to this drastic change in product architecture, the new technologies inherent in HVs are indicative of a

“radical innovation” (Henderson & Clark, 1990).Additionally, HV stands asa viable alternative to

GV, so it can also be considered a “disruptive innovation”with potential for replacing GV in the future

Table 2.Variety of Measures in ULCV

Measures in Cutting Cost Detail Example of Measures

The Number of Parts Cut

 One door mirror at driver side, One windshield wiper, no backdoor, no wheel cover, comparative small trunk space, no tail gate,

no air-conditioner/defroster/vacuum booster, fixed seats, not plastic indoor cover, no power window, no bumper painting (Tata)

 Meter: analog speedometer without tachometer Lamp type fuel gauge (Tata)

Reducing of Process Number in

Manufacturing

 The rate of modularized Parts from suppliers reach 80% (Tata)

 Cutting the number of parts, reducing press section to the limit to short manufacturing process

 Pressed parts changed to pipe and cut equipment expenses (Tata)

 Communize similar shaped parts to the limit, and modularize by changing slightly product architecture (VW) Function and Specification Cut  Full speed set in 105km/h without disk brake in front wheel and anti-lock brake system (Tata)

 Sliding mechanism is set only in driver‟s seat, and without reclining (Tata) Weight Saving  Arranging beads partially in car framework, ensure basic stiffness (Nissan)

 Omitting partially high cost damping material, more low grade material such as resin form laid on floor (Nissan) Source: Nikkei Automotive Technology, Nikkei Monodukuri, Nikkei Business

Survey is based on each firm‟s standard modelautomobile.

Similarly, some changes are required for the successful

launch of ULCV in emerging markets.Fundamentally,

automobile”remains unchanged However, ULCV

requires exhaustive cost cutting in manufacturing

Withouta changein the existing design method,

manufacturing process, and quality management,

automobile manufacturers cannot offer ULCVs at a

price low enough for emerging markets, particularly in

somefirmsachieve price reduction by minor changes in

product architecture or the manufacturing process

without sacrificingthe safety and utility of their

automobiles These changes in architecture are minor,

however, and the product concept is not dramatically

an“incremental innovation” from existing GV

Toyota’s Core-capabilities and Core-rigidities

Although Toyotapossesses the highest standard of technology in the world and has used that technology

withoutreservation, it has shown difficulty in adapting

to incremental innovation, specifically ULCV Additionally, in March of 2012, Toyota declared that it had no plans toenter the ultra-low price market as

“Toyota bland.”In this section, I analyze the four dimensions of Toyota‟s core-capabilities (which, given their organizational inertia, can be considered core-rigidities) in the context of the organization‟s historical experience I then verify hypothesis through interview observation

According to Leonard-Barton‟s (1992) four dimensions, skills and knowledge base, managerial systems, technical systems, and values and norms, Toyota‟s

exclusive core-capabilities can be described as follows:

Dominant knowledge regarding quality and

safety,

Long-range cooperation with suppliers,

management system,

The Toyota Production System (TPS), and

A distinct culture and philosophy

These core capabilities are displayed in Figure 1

Figure1 Four Dimensions of Toyota‟s Core-rigidities

LONG TERM COOPERATION

IN TOYOTA GROUP

KNOWHOW OF QUALITY AND SAFETY

TPS

DISTINCTIVE CULTURE AND PHILOSOPHY

These capabilities have been strengthened and

protected and have long been considered to be a source

of competitive advantage against Western firms

Because they are largely intangible and are integrated

theorganization, their removal would be extremely

difficult.Therefore, thesecore-capabilitiesmayfunction

as rigidities when the firm implements new activities

Given this, we can begin to understand why Toyota

cannot successfully launch ULCV despite its huge

success in launching HV Below, I detail the properties

of each of the four dimensions of core-capabilities

(Leonard-Barton, 1992)anddescribe how each affects

the implementation of both HV and ULCV, particularly

when core-capabilities are so ingrained as to be

considered core-rigidities

Skills and Knowledge Base

Toyota‟s knowledge of methods to improve quality and safety serve as the skills and knowledge base described in Leonard-Barton‟s (1992) taxonomy of capabilities As evidenced byKaizen‟sactivities, every constituent believesin givingthe highest priority to safety Education and training related to product safety

at Kaizen are extremely thorough.Additionally, because product performance (particularly with respect

to safety) is subjected to strict self-evaluation criteria Toyota‟s automobiles have received positivefeedback fromJ D Power and Associates‟Initial Quality Study, which sets a worldwide standard for quality evaluation Through high quality and safety standards and TPS, Toyota has succeeded in distancing itselffrom itsWestern rivals and only continues to improve Toyota‟s skill and knowledge base is critical for implementing HV because it allows for the targeting of existing users in the GV market A “user‟ssense of

quality”remainsunchanged, so Toyota can differentiate itself fromrivals by using its established advantage in quality and safety This dimension offers Toyota a sustainable competitive advantage not only in traditional GV, but also in the HV market

Unfortunately, Toyota‟s strengths in regard to this dimension hamper the organization‟s ability to implement cost cutting strategies required for launching an ULCV To maintain theexclusive benefits garnered from building a high reputation regarding the quality of its automobiles, Toyota cannot launch a productfalling below the existingstandardfor quality as designated by the company‟s self-evaluation criteria Ultra-low pricing requires revampingquality evaluation criteria and drastically altering expectations about quality standards.As such,Toyota should remove this dimension from its core-capabilities if it aims to successfully launch ULCV Such cost cutting proposals coupled with a degradation in product quality must be ordered from top management since employee education about quality and safety is ingrained through

all aspects of the organization

Management System

Toyota‟s core-capabilities related to its management

systemare long-range cooperation with suppliers,

labor-management cooperation, and a conventional

Japanese management system Among these, the most

important point in considering the management

system‟s relationship with drastic and incremental

innovation is the cooperative relationship with

suppliers Toyota‟s cooperative relationship with

suppliers is sustainable, based on customary mutual

trust, and adheres toToyota‟s standards for corporate

Japanese-specific Keiretsu (pyramid) system, which

illustrates the relationship between Toyota and its

suppliers, can be imagined as much stronger closely

united “value-network” described by Christensen

(1997) The Toyota Group contains approximatelya

dozen tier one (T1) suppliers They are all Japanese

firms dedicated to the same standards of product

quality and safety as the Toyota Corporation Therefore,

the quality control and knowledgeof Toyota Group‟s

capability to oversee the thousands of suppliers on the

lower levels of the Keiretsu pyramid.So, Toyota

entrusts T1 suppliers to manage those suppliers at Tier

2, and does not deal with them directly

By altering parts in a product architecture, a firm

likewise alters the network from which it obtains

supplies In the case of the transition from GV to HV,

the parts equipped in the engine motor, drive system,

transmission device, and steering gear system of

GVsareeliminated due to the drastic change in product

architecture As such, suppliers of these parts are

subsequently excluded from Toyota‟s value network

Despite the ever-changing myriad supplies Toyota

requires to produce its HV, its T1 suppliers are able to

maintain demand by predicting product innovations

and behaving accordingly And also in HV, they formerly cope with R&D and manufacturing to supply parts of HV to Toyota So the suppliers of minimum necessary which Toyota should protect according toCSR are remained as it was in Keiretsu of HV Therefore Toyota‟s suppliersdo not obstruct Toyota fromlaunching HV

To launch ULCV priced low enough for emerging markets, Toyota should switch from the high-cost Japanese suppliersof Toyota Group to local suppliers offering comparatively low prices and quality parts However, Toyota switching suppliers could damage therelationship with Toyota Group suppliersas CSR activities.Betraying the expectations of Japanese firms would likely result in a damaged corporate image Additionally, some of Toyota‟s suppliers (and employees) are dependent upon Toyota for financial stability Abandoning these suppliers could leave these firms in financial ruin, thus further damaging Toyota‟s image This runs contrary to Toyota‟s declaration of cooperation with suppliers As such, a change in supply management stands as an obstacle in cost cutting, and thus is also an obstacle in launching ULCV

Technical System

With respect to the technical system component of Toyota‟s core-capabilities, the corporation utilizes a number of sophisticated technologies that are often referred to as “lean production systems” in the West

As the industry has grown, Toyota has differentiated itself from its Western rivals by establishing a just-in-time (JIT) inventory system, multiple small quantity production systems, total quality control (TQC) and improvement (Kaizen) activity, production leveling, multi-skilled worker development, and

production system has proven to beefficient and methodical to the point that even rivals attempt to imitate it for financial gain

In actuality, this system is not an obstacle to

launching HV Although the modular parts supplied to

Toyota for their HV line are different than those

supplied for their GV line, the assembly process

remains unchanged As such the production system can

remain the same, although the architecture changes

somewhat.To illustrate, in Tsutsumi factory in Toyoda

city, Toyota manufactures their new“Prius”line

concordantly with their traditional GV models,

the“Camry” and “Premio.”This indicates that HV

requires no change in the established TPS concept

On the other hand, technology related toTPS also

facilitates the launching of ULCV TPS makes a short

deft movement is ideal style in slightly cost cutting and

improving cost performance TPS has been established

as providing the highest quality and safety precautions

at every point in the production process So if it would

be intended drastic cutting cost with sacrificing them to

launch ULCV, production system requires change such

as reducing of process in manufacturing and promoting

modularization of parts.Additionally, communizingthe

interface among parts production modules simplifies

the production system but requires a durability

downgradeby way of reducing theintegration process

This would lead Toyota to concede its advantage in

integration technologies This, in turn, would destroy

the main concept of TPS Therefore, TPS is both a

benefit and a detriment in launching the Toyota ULCV

line

Values and Norms

The above described dimensions of Toyota‟s core

capabilities comprisethe organization‟svalues and

norms They are informally called “Toyota‟s DNA”and

permeate corporate culture, organizational structure,

and the personal values of employees and managers

These values have a tendency to remain extremely

rigid since they have been established through the

experienced successes of the organization.Established

firms, especially those with a history of success tend to

maintain their core values Coupled with their

intangible nature, Toyota‟s values are extremely rigid

To launch ULCV, Toyota should adjust itshigh-level quality evaluation criteria.For example, by accepting lower grade raw material or parts, Toyotacan foster a less stringent adherence to established norms and And

supplementary safety cannot be accepted by existing safety evaluation criteria of Toyota.It requires Toyota abandon pride,established status, and corporate identity corresponding to “world highest quality” And traffic accidents due to it would injure Toyota‟s reputation Toyota is afraid it above all else in launching ULCV Given everything discussed above, Toyota‟s core-capabilities have a minimal impact on the launch

of HV The target user of HV is the same as theGV, so a change in theevaluation criteria about quality and function of the product are not needed Technologies and skills required in launching HV are also not in contest with existing core-capabilities, so Toyota can

ofperformingradical product architectural change in shifting from GV to HV

However, launching ULCV is in contest with Toyota‟s core-capabilities in some aspects.Most primarily, for Toyota to adhere to its established high-quality criteria, it cannot meet the low costs needed to produce a viable ULCV

To verify that thehypothesis about Toyota‟s core-rigidities in ULCV is accurate, Iinterview top managers of three Toyota Groups firms It is to a discussion of these interviews I now turn

INTERVIEW

In this section I detail the results of interviews with top managers from GTMC, DMNS, and ASFA Specifically, Idocument how the top managers of production bases near emerging markets feel about Toyota‟s core rigidities and their impact on launching the ULCV line of automobiles The interviews focus

onrespondents‟ intention tolower prices by reducing

existing quality evaluation criteria, what kinds of

dilemma they encounter, and whether they intend to

switch Keiretsu suppliers

The strategic policies of the three firms regarding a

switch to local suppliers are nearly unanimous To

launch ULCV, they must possess a willingness to

switch from Japanese to Chinese suppliers, which can offer cheaper parts at a reduced level of quality They consider abandoning the long-term relationship with suppliers in Toyota-Keiretsu and intend to sever it to the extent that Toyota‟s quality evaluation criteria permit

Table 3 Parts of Interview Questions and Answers

Rate of Local Procurement Nearly 100% Approximately 15%(the rest is

from internal procurement)

Nearly 100％

Current Situation of

Procurement from Chinese

Firms

2 of all suppliers 163, and planning to expand local procurement

Approximately 1% until 2008, and now promoting local procurement

21, and exploiting local procurement

Nissan 20%

Foresees firms such as Hyundai,

VW, Fordetc.30%

Toyota 100％

Plan to switch procurement

from Japanese to Chinese

suppliers

Yes, but it has not yet found a partner

Yes, searching and expanding Chinese suppliers, and switching

is dependent on Buyers quality evaluation criteria

Yes, but it has not yet found a partner

Plan to cut product cost Yes,

[measure] decreasing the transaction prices of parts

Yes [measure] making manufacturing equipment in the firm and increasing the rate of local procurement

Yes, [measure] searching for a Chinese firm to supply low-grade materials or building machines

Plan to cut quality evaluation

criteria to reduce cost

No No for Toyota, depends on

parts/partner

No The departments absolutely

need Japanese managers

Quality assurance, R&D, and operation management These departments need constant contact with the Japanese headquarters

Quality assurance Quality assurance, knowhow-related department

(especially casting section)

subordinate firms have extreme difficulty in lowering

the grade of quality evaluation criteria The top

manager of GTMC stated that Toyota does not

currently consider cost cutting at the expense of quality

a viable strategy Managers at DMNS and ASFA

expressed similar sentiments.Additionally, thetop

managers of the three firms noted that they would

never remove a Japanese manager from quality

control.ASFA‟s manager commented: “When I asked a

Chinese employee to adopt Kaizen improvements, he

replied „why should I do this?‟” This comment

suggests that Chinese employees do not yet

fullyunderstand Toyota‟s quality values ASFA also

manufacturing line when it tried to implement

manufacturing methods that are more amenable to

Chinese culture.Japanese managers at Toyotaare conscious that their own DNA attaches greater importance to high quality relative to manufacturing efficiency

Quality care is also an obstacle to improving the rate

of resource procurement from local Chinese firms ASFA‟s technology department manager noted: “At this time, we have no criteria to evaluate their products‟quality from a technological perspective because they have not caught up with our agreed quality level No firms can answer our requests, excluding Japanese firms.” ASFA is thus struggling to develop local Chinese firms as suppliers

Japanese managersare also conscious that their automobile is not priced lowenough to appeal to the middle-class of emerging markets GTMC‟s top manager said, for example, that“comparative high