BUSINESS

Green on wheels: How Toyota trumped the auto industry

August 29, 2007

Automakers are a big target for government regulators, which is no surprise. Vehicles are some of the biggest contributors to CO₂ emissions and greenhouse gases.

This year, the German auto industry was hit with proposed E.U. standards: no more than 130 grams of CO2 per kilometer to be met by 2012. The Toyota Prius comes in at 104 grams.

While some carmakers are scratching their heads over how they will meet the new rules, one stands far out in front: Toyota.

In June, Toyota delivered its millionth Prius vehicle – the hybrid that “stole the march on the auto industry.”¹

More tellingly, the company has a market value worth almost as much as all the other carmakers combined.²

How did Toyota come out on top? The company’s success is a story about innovation and how to turn good ideas into real-world solutions, and revenue.

Lawmakers clamp down

Carmakers are up against new regulations and incentives aimed at curbing emissions and fuel consumption.

This year, the German auto industry was hit with proposed E.U. standards: no more than 130 grams of CO₂ per kilometer to be met by 2012. ³ (The Toyota Prius comes in at 104 grams.)

While in London, greener vehicles are exempted from the downtown traffic congestion tariff. And in one borough, plans are to set parking permit fees based on engine size.⁴

Federal lawmakers in the U.S. are pushing to increase average fuel economy from 25 miles to 35 miles per gallon by 2020.

Federal lawmakers in the U.S. are also pushing a plan for production of more energy-efficient cars: increasing average fuel economy from 25 miles to 35 miles per gallon by 2020. ⁵

Higher costs, lost customers

American automakers are balking. They say such efficiency standards will push up production costs, adding another $5,000 to $7,000 to the price tag.

From Europe, the luxury car industry is also finding itself on the wrong side of two big shifts: the demand for fuel-efficient “sensible motoring” and cheap cars manufactured in Asia – such as the Tata, which will sell for $2,300.⁶

And according to The Economist, the biggest threat to the German motor industry could be a disruption such as the “gradual decoupling of personal mobility from emotion.” That is, where speed and power take a backseat to things like safety and environmental protection in the minds of drivers.⁷

The Toyota way: How to build greener, cheaper cars

Meanwhile, Toyota is already ahead on fuel efficiency and emission controls. In spite of it, the company president set another challenge.

He asked his research chief to cut in half the $5,000 price difference between its hybrids and regular gas models – without compromising features, standards, or performance.

The company is also rallying to come up with a budget car for Asia. In turn, the cost-saving strategies will be deployed across the fleet.

“When I asked for the low-cost development project two years ago, I wanted to see technology that would be applied to other vehicles as well,” says Toyota president Katsuaki Watanabe.⁸

Constraints drive innovation

In London, greener vehicles are exempted from the downtown traffic congestion tariff. In one borough, plans are to set parking permit fees based on engine size.

Toyota business partner and master instructor Matthew May says it’s this kind of innovative thinking that makes the organization both unique and successful.

In his paper, Elegant Solutions: Breakthrough Thinking the Toyota Way,⁹ he cites the three principles that drive the company’s business practices:

Ingenuity in craft. Explore and experiment with new ways of doing things within the confines of the organization. Here, constraints should inspire innovative thinking.
Pursuit of perfection. Achieve breakthroughs using small steps. It increases the odds of finding elegant solutions. It will also sustain your competitive advantage.
Fit with society. Innovation should serve the needs of society and the times. It demands keen insight into the trends and changes that are happening around us.

The principles inform actions and decisions. And they put the company in a “better position to adapt to a rapidly changing environment.”

May adds that they are also universal. He believes they’re behind nearly every great innovation out there.

Learn to see, design for today

In practice, innovation at Toyota also means a number of strategies. Among them: learn to see, design for today, keep it lean, and run the numbers.

First, if you know your customer, you can define the problem and design the appropriate solution.

"Live the customer’s life. Watch the problem in the context and environment within which it occurs. View it from every angle”.

“Live the customer’s life. Watch the problem in the context and environment within which it occurs. View it from every conceivable angle,” says May.

Next, focus on real and present needs, and balance creativity with market acceptability. “You have to be progressive, but you can’t get too far out there, because customers won’t understand […] remember who you’re designing for.”

Keep it lean and run the numbers

Overproduced, complex solutions are “usually proof that we lack real insight into our customer’s desires.” They can destroy value. Instead, keep it lean. The most elegant solutions are usually the simplest.

Finally, run the numbers, because innovation is based on more than just gut feeling. Digging into relevant data provides the solid evidence to overcome bias and conventional thinking.

Use analysis, reporting to support innovation

These practices aren’t far removed from what any company should be doing to improve its customer insight and business.

Run the numbers: digging into relevant data provides the solid evidence to overcome bias and conventional thinking.

For one, organizations generate massive volumes of customer data, but they don’t always leverage it. With dimensional analysis and reporting, they can combine information in different ways to find out what customers want and drive improvement.

Companies can gain broader insight too by analyzing outside trends, market drivers, competitor moves, and changing regulations.

And a strong analytic orientation allows people to aggregate ideas from anywhere, analyze them, discover patterns, and reveal innovative solutions.

Avoid the “brainstorm” trap with planning

May says people also want to avoid the “brainstorm” trap – misguided creativity that is out of sync with company direction.

Harvard University business guru Michael Porter takes a similar view: “If there’s no connection to a company’s business, it doesn’t have much leverage to make an impact.”¹⁰

Here, enterprise planning can provide the alignment companies need. People define goals, communicate strategy, and engage the organization. Everyone knows what has to be done, and new initiatives are developed in the right context.

Summary

As carmakers worldwide struggle with cost-cutting measures, greener rules and practices, Toyota is “playing offense on a field of innovation,” says Matthew May.

Innovative principles and practices have put the business ahead of most of its competitors.

Toyota has taken a unique path. But by learning lessons from the company, everyone can find better ways to understand their customers, anticipate trends, and succeed in a changing environment.

Find Out More

Sources

¹ Beyond the Prius, The Economist, June 14, 2007.

² Matthew E. May, Elegant Solutions: Breakthrough Thinking the Toyota Way, ChangeThis, December 4, 2006.

³ The big-car problem, The Economist, February 22, 2007.

⁴ Ibid.

⁵ Brian Wingfield, Cleaner Cars, Forbes, June 11, 2007.

⁶ Losing their vrroooom?, The Economist, February 22, 2007.

⁷ The big-car problem, The Economist, February 22, 2007.

⁸ Gail Edmondson, The Race to Build Really Cheap Cars, BusinessWeek, April 23, 2007.

⁹ Matthew E. May, Elegant Solutions: Breakthrough Thinking the Toyota Way, ChangeThis, December 4, 2006.

¹⁰ Pete Engardio, Beyond the Green Corporation, BusinessWeek, January 29, 2007.