Toyota and Differentiation

A recent (February 13, 2013) post on Yahoo Finance (http://finance.yahoo.com/news/toyota-lost-moat-120000528.html), which is a repost of a Morningstar article written by David Whiston, exposes some strategic issues associated with Toyota.

Whiston notes that Toyota’s economic profit remains high and, although I have not done a comparison with other automakers, the strong economic profit suggest that Toyota may still enjoy a competitive advantage relative to rivals. However, as Whiston notes, this advantage may be eroding.

Whiston points out that industry-wide, quality is no longer the differentiator it once was. This is to be expected – Toyota’s rivals have improved their manufacturing capabilities and can now approach, if not equal, Toyota’s quality performance. However, rivals may be less efficient in achieving these quality levels than Toyota and that might explain why Toyota’s economic profit still remains high.

I have often stated that operational excellence cannot be the basis of sustained competitive advantage. This is because a firm’s rivals can replicate operational best practices and achieve the same results as a best-practice leader. This would appear to happening to Toyota – rivals are closing the quality gap and, one would expect, the cost gap eventually.

Value-for-money through quality and reliability was a key component of Toyota’s differentiated value proposition. As that differentiation is being eroded by rivals, it will be interesting to see how Toyota responds strategically.

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