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Bobby YangMGMT 458:002Professor Edgell

Business-Level Strategy Analysis: LexusI. Company and Industry

Established in 1989, Lexus is a division of Japan’s most prestigious auto

manufacturer, Toyota Motor Corporation. Along side with Lexus, includes Toyota, Scion,

Daihatsu, and Hino Motors. These companies form the Toyota Motor Corporation, which is

the world’s third-leading auto manufacturer. Together, the Corporation employs

approximately 190,000 employees in the United States and investments (in the U.S.) total

to $12 billion (Lexus, 2010). Today, Lexus is marketed and sold throughout 70 countries

worldwide (Wilson, 2009).

Its business-level strategy involves a mix of broad differentiation strategy and best-

cost provider strategy. Lexus is Toyota’s luxury vehicle division. The establishment of this

division was due to the creation of Acura, which is Honda Motor Company’s luxury division,

in 1986 (Dawson, 2004). The division was also established to enter the luxury vehicle

market as a best-cost provider. For instance, the first Lexus vehicle, LS 400, was created to

compete against Mercedes Benz and BMW’s mid-sized vehicles. With similar performance

and build quality, the LS 400 was priced a lot cheaper, by at least $15,000, compared to

BMW’s 735i and Mercedes’ 420 SEL. As a result, the European manufacturers were caught

by surprise because of a decrease in their product’s sales (Dawson, 2004). Lexus’

specialization themes consist of product reliability and engineering design. Quality,

reliability, and enhanced customer satisfaction is associated with the Lexus marque brand.

Generating approximately $365.2 billion in the United States, the automotive

industry involves the designing, developing, manufacturing, marketing, and selling of

motor vehicles. Of this amount, Lexus’ parent company, Toyota Motor Corporation, holds

15.9% of the total market share (Derby, 2010). In the past five years, the automotive

industry, as a whole, has been struggling in the global economy due to the worldwide

recession and the increase of prices on fuel. Although many consumers withdrew from

purchasing a vehicle at the time, those that did make a purchase aimed specifically for

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more fuel-efficient vehicles, hybrids. Lexus, and the Toyota Corporation as a whole,

benefitted from the time period and may continue to do so (Wilson, 2009).

Lexus’ obtains a large consumer base due to its variety in their product line. The

company manufactures vehicles such as sedans (IS, GS, LS models), SUVs (RX, GX, and LX

models), convertibles, and coupes (SC model) (Lexus, 2010). In addition to the listed

vehicles, most of the models are accompanied with a hybrid option if the consumer wishes

to save money on fuel. Most of Lexus’ consumers consist of middle to wealthy classmen

because of their luxury vehicle status. Its major competitors include Mercedes-Benz,

Infiniti, BMW, Audi, Lincoln, and Acura. The competitors listed all carry similar product

lines as well as maintain their focus on the luxury aspect of vehicles.

II. Situation Analysis: Porter’s 6-forces analysis and SWOT

Using Porter’s 6-forces model, below is an analysis of the automotive industry in the

United States.

Threat of New Entrants: The automotive industry is a sophisticated industry,

especially for luxury vehicles, to take part in. It requires a lot of capital, time, and

engineering investment to successfully enter into this industry. There are also many

existing companies that are already participating in the United States market. Therefore,

within the next year or two, threats of new entrants would be non-existent. However, it is a

different scenario within Asian markets, though not many may be able to afford luxury

vehicles.

Rivalry Among Car Manufacturers: Strong competition exists within the automotive

industry. The average consumers are constantly looking for the best dollar value of

vehicles. Yes, quality also comes into play when purchasing a vehicle, however, a car may

be the second most valuable asset in the average person’s life. Competitors within the

industry are constantly coming out with new cutting edge technology, discounts, and after-

sale specials for vehicles in order to increase sales (Derby, 2010).

Substitute Products: There are different approaches in finding substitute products

within the automotive industry. One approach would be the type of vehicle a consumer

would want to purchase. Would one want something of luxury or speed? The main purpose

to own a car is specifically for transportation. In another approach, there are many

alternatives to purchasing a car. Would one consider purchasing a motorcycle, scooter, or

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even a bicycle? These options are a fraction of the cost of a car. Lastly, would a consumer

want to save their money and take public transportation or car pool for a friend?

Buyer Power: It is safe to say that it is a consumer’s market in the automotive

industry. With the existence of many competitors and availability of substitute products,

many buyers in the market often find themselves bargaining with their car

salesman/dealership. It is well known that dealerships often mark up the prices on vehicles

with fees that include shipping and a cup of coffee from the showroom that has a $100

value. Cars are expensive assets that require a one-year turnover, therefore, most

dealerships will negotiate in order to make a sale.

Supplier Power: On a business level, a dealerships’ main supplier is its own

corporation. The supplier and company are equally dependent on each other because of

production and sales forecasts. Manufacturers would produce X amount of cars per year

and expect the independent dealers to sell these cars. On the other hand, if the vehicle is a

best buy, the dealerships depend on the manufacturer to supply more (Derby, 2010).

Below is an in depth, yet concise, SWOT analysis of Toyota’s luxury vehicle division,

Lexus.

Strengths: Lexus marque has strong brand equity and strong global presence. With a

parent corporation that is the world’s third leading auto manufacturer, Lexus carries a

remarkable upper hand in the automotive industry. As stated on Lexus’ Corporate website,

“The brand reputation grew quickly until, barely a dozen years after its founding, Lexus

became America's best-selling line of luxury motor vehicles (Lexus, 2010).” Not only is

their recognition in America, but Lexus’ caters to 70 countries worldwide (Wilson, 2009).

Many consumers also acknowledge Toyota’s Production Systems. The culture of the

company is to manufacture reliable and quality products at an efficient rate (Vasilash,

2009). “No matter where a Lexus is built, one thing remains constant: The idea that every

step of the production process should reflect the Pursuit of Perfection (Lexus, 2010).”

Weaknesses: All, with the exception of one, of Lexus’ manufacturing facilities are

located in Japan. Last year, Lexus sold 215,965 vehicles in the United States (Ramsey,

2010). With the United States being its top selling country, Lexus spends a significant

amount of money on shipping costs, and also, the amount of time that dealerships wait for

the vehicles. Secondly, compared to Mercedes Benz and BMW, the driving performance on

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Lexus products do not equate to these companies. Though the performance reaches

customer satisfaction, Lexus products are not the “ultimate driving machines.”

Opportunities: The growing economies in China and India are becoming globally

recognized. These markets have the ability to expand and citizens of these countries are

acquiring money. China also has the world’s largest auto market (Kutamura, 2010). As

years progress, consumers become more environmentally friendly. As of today, Lexus

already have the reputation for manufacturing environmentally friendly vehicles.

Threats: Within the past year, Toyota has recalled thousands of vehicles due to

operational malfunctions (Dapena, 2010). With the existing recalls, this questions the

reliability of Toyota’s Production System. With consumer doubt, vehicle sales may decrease

which may not help the second threat of a stiff competition. In an industry with strong

competition, there is almost no room for mistakes.

III. Strategy Options:

Below are the strategy options that are based on the TOWs matrix. Some of these

strategy options mentioned are in the process/already occurring.

The possible strategy options for Lexus to generate more revenue are based on the

Industrial Organization I/O model. In order to generate higher revenue, Lexus has the

opportunity to take part in the emerging markets of China and India. As of this year, the

global recession has come to an end, therefore, the production, forecasting, and marketing

of Lexus vehicles should be as effective as possible (Irwin, 2010). If Lexus chooses to be

conservative on production, a possible strategy may be to concentrate more on research

and development. One of their weaknesses includes the lack of performance engineering.

With the availability of time, Lexus may conduct research on post-recession consumer

behaviors to imply what the next company step will be. By doing so, it may be possible to

break into new consumer segments or gain a higher volume in the U.S. market. Lastly,

Lexus has another option of expanding its facilities. By expanding production facilities, in

the United States for instance, Lexus has the chance to cut shipping costs and delivery

delays to its dealerships. These options have their ups and downs. Even though the

recession is over, the demand for vehicles may not come into play until the market is

secure. Therefore, the forecasting of production needs to be efficient and accurate.

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Conducting research and investing more in research and development may require time

and at the end of research, Lexus may already be late.

With the utilization of Lexus’ current competencies, based on the Resource-Based

model, the company has already made the jump in obtaining the reputation of being an

environmentally friendly car manufacturer. The strategy can possibly overcome the threat

of rising oil prices and maintenance costs. With the presence of the Toyota Production

System, Lexus could perhaps invest in improving the production system preventing any

future recalls to maintain a reliable reputation. With their existing brand equity and global

presence, Lexus and Toyota Corporation still has room to strengthen these aspects. Similar

to one of its rivals, BMW, Lexus should design and manufacture a small-sized vehicle. By

doing so, Lexus has the opportunity to expand to more of the younger consumers by

offering a high-end luxury sport compact car.

Recommendations

The original strategies of Lexus shall remain the same because of the direction the

market is flowing. It’s original business-level strategy that consists of a broad

differentiation and low-cost provider strategy fits well with the current economic

conditions. The recession is over and consumers are beginning to gain a source of income

again. Though many may not be able to afford a Mercedes or BMW, consumers can

compromise with a Lexus, which is just as luxurious as the former two companies but

cheaper. Lexus has incorporated two great strategies. (1) Offering hybrids for most of its

product line up and (2) Designing and manufacturing lost-cost cars for the China and India

market (Kutamura, 2010). By offering hybrid options, Lexus covers the environmentally

friendly consumers with a wide variety of vehicles.

Secondly, as stated above, developing a luxury sport compact vehicle may become a

best seller for Lexus. Similar to the BMW 1 series, Lexus has the opportunity to reach out to

younger consumers with an affordable car. Not only would this approach reach out to

more consumers but also it may solve the threat of change in demographics. If a person’s

income has changed and can no longer afford a mid-sized Lexus, this specific consumer

may consider downsizing due to financial reasons. Personally, I am comfortable with Lexus

vehicles and its performance. Many, however, may disagree and there may be plenty of

room for improvement.

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Internal Strategic Factors Weight Rating Weighted Score

Comments

StrengthsS1 Strong brand equity .20 5 1 Being the luxury vehicle division of Toyota

Motor Corporation, allows Lexus to become its own brand.

S2 Lexus (Toyota) Production Systems- manufacturing efficiency and product quality

.15 4 .6 Manufacturing quality products efficiently has been the culture for all divisions of Toyota Motor Corporation.

S3 Diverse vehicle product line up reaching out to a variety of customer segments

.05 3.6 .18 Lexus group carries an intense variety of vehicles that cater to drivers of all ages.

S4 Strong Global Presence .10 3.2 .32 Lexus vehicles are available in 76 worldwide countries.

S5 Enhanced training for prospective Lexus dealers

.05 2.8 .14 Fuji Lexus college trains and recruits future Lexus dealers.

WeaknessesW1 Production of vehicles is concentrated in Japan

.15 2.7 .41 High cost of shipping and delivery wait time.

W2 Reduction in R&D costs and capital spending due to decrease in sales.

.05 2 .1 Cutting operation costs because the recent global recession.

W3 Lack of a small vehicle product in major markets

.10 2.1 .21 The smallest vehicle that Lexus offers is a mid-sized vehicle. Competitors’ may/already have developed a small vehicle.

W4 Not having a dominant level of mechanical design as opposed to a high level of production.

.10 2.9 .29 Although Lexus produces and manufactures quality products, the performance of its actual vehicles is not the best of the market.

W5 Major job layoffs due to lack of sales in North America

.05 2.6 .13 Lay-offs could affect shareholders’ decision in investment as well as faith in the internal work environment.

Total Scores 1.00 3.38

Internal Factor Analysis Summary (IFAS) Table

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External Strategic Factors Weight Rating WeightedScore

Comments

OpportunitiesO1 Growing demand for hybrid electric/fuel-efficient vehicles.

.20 4 .8 There are Hybrid options for most of Lexus’ product lines.

O2 Emerging markets in China and India

.10 3.6 .36 This opportunity allows Lexus to enter in a market sector with high demand of vehicles and economic growth.

O3 The end of the global recession

.10 3 .3 The global recession was a result of decrease in vehicle sales throughout the industry. With the recession over, manufacturers may want to pick up production again.

O4 Ability to adjust to post-recession demands

.05 2.8 .14 With the recession recently ending, Lexus has time to research consumer needs in order to increase vehicle sales.

O5 Finding alternative locations for production.

.05 2.4 .12 Lexus may have the opportunity to relocate its production of vehicles. This may be costly, however it may save shipping costs and delays.

ThreatsT1 Rising oil prices and other car maintenance costs

.10 2 .2 The more expensive it is to operate a car will lead to a lesser desire of owning a vehicle.

T2 Alternative forms of transportation encouraged by government.

.05 1.8 .09 Governments in metropolitan cities encourage citizens to car pool or take public transportation in order to lower emissions. With the availability of alternative transportation, Lexus may lose out on vehicle sales.

T3 The recent recall of Toyota Motor Corporation vehicles and the affect of media about the issue.

.20 2.8 .56 There have been massive recalls on millions of vehicles by the Toyota Motor Corporation. It has made headline news and created bad publicity for the corporation as a whole.

T4 Stiff competition and a fluctuating market

.10 2.6 .26 As with any other car manufacturer, Lexus faces tremendous competitive rivalry in the car industry.

T5 Change in demographics (ie. Income, family size, etc.)

.05 2 .1 Lexus produces a variety of cars such as SUVs and family sedans. With possible change in demographics, the demand for

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Lexus vehicles may decline.Total Scores 1.00 2.93

External Factor Analysis Summary (EFAS) Table

Strategic Factors Weight Rating WeightedScore

SHORT

INTMDT.

LONG

Comments

S1 Strong brand Equity (S)

.20 5 1 X Being the luxury vehicle division of Toyota Motor Corporation, allows Lexus to become its own brand.

S2 Lexus (Toyota) Production Systems- manufacturing efficiency and product quality (S)

.10 3.8 .38 X X Manufacturing quality products efficiently has been the culture for all divisions of Toyota Motor Corporation.

S4 Strong Global Presence (S)

.15 3.6 .54 X Lexus vehicles are available in 70 worldwide countries.

W1 Production of vehicles is concentrated in Japan (W)

.10 3 .3 X X High cost of shipping and delivery wait time.

W4 Not having a dominant level of mechanical design as opposed to a high level of production. (W)

.05 2.8 .14 X Although Lexus produces and manufactures quality products, the performance of its actual vehicles is not the best of the market.

O1 Growing demand for hybrid electric/fuel-efficient vehicles. (O)

.10 3 .3 X X There are Hybrid options for most of Lexus’ product lines.

O2 Emerging markets in China and India (O)

.10 3 .3 X X This opportunity allows Lexus to enter in a market sector with high demand of vehicles and economic growth.

T3 The recent recall of Toyota Motor Corporation vehicles and the affect of media about the issue. (T)

.15 2.6 .39 X X There have been massive recalls on millions of vehicles by the Toyota Motor Corporation. It has made headline news and created bad publicity for the corporation as a whole.

T4 Stiff competition .05 2.4 .12 X As with any other car manufacturer,

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and a fluctuating market. (T)

Lexus faces tremendous competitive rivalry in the car industry.

Total Scores 1.00 3.47

Strategic Factor Analysis Summary (SFAS) Table Internal Factors (IFAS Table)

External Factors(EFAS Table)

Strengths (S)

S1 Strong brand equityS2 Lexus Production SystemsS3 Diverse Product LineS4 Strong Global presenceS5 Enhanced Employee training

Weaknesses (W)

W1 Production in JapanW2 Reduction in costsW3 Lack of small vehiclesW4 Lack of performance engineeringW5 Major lay-offs

Opportunities (O)

O1 Growing demand for HybridsO2 Emerging markets in China/IndiaO3 End of Global RecessionO4 Adjusting to post-recession DemandsO5 Alternative Production locations

SO Strategies

Easy expansion into China/India due to Lexus’ marque brand and strong global presence.Respond to post-recession demands with efficient production and forecasting of products.Although costly, consider a new production location with the advantage of having a strong global presence.

WO Strategies

Design and manufacture a vehicle of smaller stature for the China/India markets.Establishing a new production facility would increase job force.Invest more into the engineering of performance Hybrids.

Threats (T)

T1 Rising oil prices and maintenance costsT2 Alternative forms of transportationT3 Corporation RecallsT4 Stiff CompetitionT5 Change in Demographics

ST Strategies

With the offering of Hybrid options for most of Lexus’ products, Lexus may be able to overcome the increase on fuel prices.Improve Lexus’ Production systems in order to reduce the possibility of recalls.Increase brand equity and global presence to overcome stiff competition.

WT Strategies

The production of smaller vehicles can solve the threat of change in demographics.Reduce R&D costs in order to sell more affordable vehicles allowing the demand for non-hybrids to increase.Increase research in performance engineering to create an all-around luxury vehicle to overcome competition.

TOWS Matrix

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Works Cited

Dawson, Chester. Lexus: The Relentless Pursuit. New York, NY: Wiley, 2004. Print.

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Irwin, Neil, and Nia-Malika Henderson. "Recession is officially over, but anxiety lingers."

Washington Post - Politics, National, World & D.C. Area News and Headlines -

washingtonpost.com. N.p., n.d. Web. 13 Oct. 2010.

<http://www.washingtonpost.com/wp-dyn/content/article/2010/09/20/AR201009200635

5.html>.

Kitamura, Makiko. " Toyota Plans Low-Cost Car for China, India, Thailand - Bloomberg ."

Bloomberg - Business & Financial News, Breaking News Headlines Web. 13 Oct. 2010.

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thailand-funo-says.html>.

"Lexus Japan Layoffs | The Lexus Enthusiast." The Lexus Enthusiast | Lexus News &

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<http://lexusenthusiast.com/2008/08/06/lexus-japan-layoffs/>.

"Lexus Manufacturing." Lexus: New Luxury Cars and SUVs from Lexus USA. N.p., n.d. Web. 13

Oct. 2010. <http://www.lexus.com/about/corporate/manufacturing.html>.

Ramsey, Mike . "Toyota’s Lexus Holds Off BMW, Keeps Luxury Lead for 10th Year -

Bloomberg." Bloomberg - Business & Financial News, Breaking News Headlines. N.p.,

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n.d. Web. 13 Oct. 2010. <http://www.bloomberg.com/apps/news?

pid=newsarchive&sid=a2txYe.J5ma8>.

Vasilash, Gary. "Feature Article - Lexus Comes into Its Own - 09/06." Automotive Design &

Production - Field Guide to the Automotive Revolution. N.p., n.d. Web. 13 Oct. 2010.

<http://www.autofieldguide.com/articles/090601.html>.

Wilson, Tom. "View the latest first drive review of the 2010 Lexus RX 350 & RX 450h. Find

pictures and comprehensive information about Lexus cars at RoadandTrack.com."

Automotive Magazine - Expert Car News | RoadandTrack.com. N.p., n.d. Web. 13 Oct.

2010. <http://www.roadandtrack.com/tests/drives/2010-lexus-rx-350-rx-450h>.

Student Statement

On my honor, I have neither given nor received unauthorized aid on this assignment.

___________________________

Bobby Yang

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