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By February 27, 2019Academic Papers

A research on how Toyota manages competitive advantage using Porter’s local clusters theory







Toyota is a common name in the automobile industry due to its large production capacity and its competitive nature. Toyota corporation, one of the largest automotive manufacturers in the world, is known for its efficient production system that many firms across the world replicate. The just in time model, multi-skilled workers, Kanban (meaning a signboard) are some of the models they employ. They also have an employee suggestion program and the jidoka system (man and machine working together) to improve efficiency in the firm. The diamond metaphor proposed by Porter (2000) explains the competitive advantages that nations and firms have in the global market. According to the model, competitiveness does not depend on the basic factors of production but arise where a group of interconnected firms (clusters) are located. Porter (2000) defines clusters as a concentration of related businesses that offer highly specialized skills to institutions, corporations and customers. A company’s ability to exploit the benefits of a cluster will give it a competitive advantage over its competitors. This essay will apply secondary sources in determining how Toyota applies Porter’s theoretical framework on clusters and its impact on the company’s competitive advantage.

An overview of Porter’s theory on Multinationals’ strategic location

Neo-classical and Classical location theories concentrate on the cost benefits that a company may accrue by locating their firms in strategic environments (Brouwer et. al. 2004). Many scholars also emphasize the proximity to customers and raw materials as the principal basis for choosing a suitable business location. Porter’s primary concern was to demonstrate the ways that firms could use to become competitive and succeed in international markets (Palacios, 2005).

According to Palacios (2005), one of the theory’s conclusions was that firms have to employ strategies of constant improvement and innovation. The clustering of rival companies, in a single geographical area, prompts businesses to consistently improve the products’ quality levels.  This encourages organizations to also innovate ways to beat their competition, leading to an increase in creativity in the market. Porter (1990) outlines that companies should be willing to compete and should have an understanding of the key national and local policies influencing their businesses.

Porter uses the diamond metaphor to depict the effect of a business’ location on its competitiveness through its four influences. Organizations utilize factor inputs in drawing out their competition (Yamawaki, 2002). A business needs to improve the efficiency, specialization and quality of these inputs for productivity to increase. Firm strategy and rivalry are the culture and rules that govern competition in the region. Great intensity in the rivalry will result in a high level of competition among competing firms. The clients’ respective demands will also determine whether firms will innovate to match specific requirements. Supporting industries include businesses that assist the clustered firms to achieve their primary objectives (Yamawaki, 2002).

Context for firm strategy and rivalry

According to porter (2000) the local conditions in a particular country will play a huge role in the strategy that a firm chooses. This strategy is primarily determined by the goals and objectives that it has. The goals of the owners and shareholders need to align with the needs of the said industry for a company to achieve prosperity. Toyota’s main strategy when entering a new market is to position itself in an area where it is likely to get supportive firms. The Java area in Indonesia is one example of a cluster that Toyota chose while creating a plant in the region. Irawati (2012) argues that the choice to locate the company in the Java area was a strategy to enjoy the benefits of clusters to surrounding enterprises.

Toyota was formed on the philosophy ‘There is always a better way’. As such, the firm aims at constantly improving their products and its business processes. Consistent innovation in the company is also a major strategy that has enabled Toyota to be a successful corporation. Other automobile companies such as General Motors mainly focus on sales and achieving short-term growth. The location of Toyota in a cluster is thus likely to achieve better results than other firms that do not focus on innovation.

Another major determinant of the behaviour of a company is the intensity of rivalry from its local competitors. An increase in productivity of a firm can not only be traced to the management of the organization but also to the competitiveness of other firms around it. The underlying logic behind this theory is that competing firms put undue pressure on each other hence creating the need to improve. Honda, a Japanese manufacturer, is one of the main competitors that pressures Toyota to innovate and constantly improve their processes.

The agglomeration of automotive industries, in particular clusters, has been instrumental in improving Toyota’s sales. Cluster formation has a positive correlation with product quality increases in local firms (Sölvell, 2015). Increase in innovations arising from competition has enabled Toyota to improve its services to clients.

Demand conditions

The direction of production i.e. the type and quality of goods in a market economy is largely determined by the needs of each client.

The needs of each customer is thus a major factor that decides the competitiveness of a firm and the quality of its outputs. A highly knowledgeable customer base is likely to prompt a company to improve its product development.  According to porter (1990) some of the essential elements regarding demand conditions include the composition of the demand, growth of the home market and the how such preferences are transmitted to global markets. The complexity and maturity of the Japan market is one of the reasons that stimulate growth in the company.

The technical knowledge of the Japanese enables them to demand the best quality and improvements from all the automobile makers (Kotabe, Martin & Domoto, 2003) This fact increases the competition locally while also improving the quality of products that compete in the international market. The preferences of the Japanese people get transmitted to the overseas market since the global market also embrace the high innovation and quality of the company. Toyota responses highly to the demands of Japanese consumers who set a high benchmark for the Japanese car maker. This demand translates to the international markets thereby increasing competitiveness with other global firms.

Mudambi and Swift (2012) argue that knowledge transfers between clustered organizations raises innovation levels in the enterprises. Each cluster contains companies that specialise in acquiring and generating specialized market data. Clustered organizations gain indispensable information on buyer needs and other consumer needs. These insights will prompt a company to craft new products and designs that serve particular market niches and needs (Sölvell, 2015).

Related and supporting industries

The presence of quality suppliers in an industry that support a company makes a significant contribution to the competitive advantage of the corporation. These supporting industries present a lot of benefits to the existing firms since they provide input and knowledge necessary for innovation. The formation of clusters in certain regions helps achieve competitive advantage since there are competing firms and quality suppliers who may assist an organisation achieve competitive advantage.

For example, the Nagoya area in Japan has the country’s highest concentration of automobile industries. High-tech industries, aircraft companies and fine ceramic firms are other important establishments in the region (Matsushima, 2002). Nagoya city is also home to numerous small and medium-sized enterprises that have the technical abilities to support the leading firms. Matsushima (2002) states that Toyota, as one of the major automobile companies in the area, has benefited from technical support offered by other smaller and specialized businesses operating in the region. The complimentary industries built around this cluster prove that the companies have been benefitting from the each other. This presents one example of Toyota’s clusters at work.

One of Toyota’s main cluster advantages is a subsequent increase in productivity levels (Rutten & Irawati, 2013). Clustering often leads to the formation of other support industries and rival companies. However, a lot of people also move near industrial clusters due to emergent employment opportunities in the localities. This availability of manpower, around clusters, is a motivating factor that many firms consider when planning for new manufacturing facilities. Toyota requires a large number of specialized personnel, and it is easier to get them in clusters regardless of the high demand in the clusters (Rutten & Irawati, 2013).

Rutten & Irawati, (2013) propose that the access to knowledge and other technological linkages between clustered firms also helps in improving corporate productivity. Innovations in these clusters are quick to spread (Rutten & Irawati, 2013). Productivity improvements in these clusters offer competitive advantage to firms in the region, and global markets by extension (Rutten & Irawati, 2013).

Clustered firms are able to quickly adapt to new technology changes and industry standards, compared to their standalone counterparts. Technical institutions in these regions offer useful research data and technology to clustered firms. The Toyota Technological Institute in Nagoya is an example of a research centre that carries out research on the company’s product development (Matsushima, 2002). New technologies and manufacturing processes from these institutions are rapidly transferred to locally clustered enterprises. An observation and adoption of the practices done by other firms are more straightforward in clustered firms than in isolated companies.

Vom Hofe & Chen (2006) argue that cooperative research with other firms is also important in developing and enhancing the available technology. The partnership between Toyota Indonesia and Astra International serves as an example of cooperative development. The two firms have conducted various knowledge transfer programmes. These plans are critical to enhancing the technology available to all companies that operate in the cluster. An increase in competition in the cluster will also lead to a variety of innovations, as companies seek new ways to improve their market share. Labour costs and utility bills of firms in a cluster are almost similar making them seek other ways to beat their competition. Innovation is one way that Toyota uses to get ahead of their competition since it gives them an edge over other companies (Sölvell, 2015).

All these benefits have increased Toyota’s competitive edge over other global firms in the vehicle-manufacturing sector. Sölvell (2015) explicates that technological advancements via clusters have made it possible for the company to improve its products and services to clients. This dynamic improvement strategy stands in line with Toyota’s Kaizen philosophy.

Factor Conditions

Ozawa (2014) explicates that the presence of factors of production are arguably the most important resources in a country that determines whether firms will have any competitive advantage. Each country has its own unique factors of production that favour particular industries. These include labour, land, natural resources, capital and infrastructure. A company may achieve a competitive advantage if it has access to low-cost inputs or high quality factors that are better than their competitors. A firm will have a competitive advantage over other firms if they have access to advance factors of production than those with basic factors (Ozawa, 2014).

  • Human resources– these include the skills, cost and proper management of personnel in the country. Toyota has access to a qualified personnel in the country due to the availability of good educational institutions and research centres (Aoki, Delbridge & Endo, 2014).
  • Capital resources– this is the capital available to a company and the ease it takes to deploy such capital. Toyota is a major multinational company that can use its resources to innovate and develop better products. The availability of these resources gives it a great competitive edge over its rivals.
  • Knowledge resources- it involves the technical and scientific knowledge required in the production process. According to Kotabe, Martin & Domoto (2003) the educational and technical institutions in Japan offer great contribution to Toyota’s production process. The company has collaborated with various research institutions that offer it technological and technical advancements.

Government and Chance

MacKay, R & Chia, R. (2013) argues that chance events are important as they have a significant influence on the strategy that a firm decides to use. They include events that are outside the control of the firm; these include inventions, earthquakes and breakthroughs in technology. These events may shift competitive advantage to a firm that can utilise them.

The Japan government has been instrumental in supporting Toyota to achieve competitive advantage (Kotabe, Martin & Domoto, 2003). Witt & Redding (2012) posit Toyota contributes positively to the social, economic, technological and environmental aspects in communities where it operates. Therefore, national policies that offer positive advantages to the company and subsidies are given to the firm help it achieve a competitive advantage over other international firms (Kotabe, Martin & Domoto, 2003).


Porter’s theory suggests some of the important factors that determine a firm’s ability to gain competitive advantage over other enterprises. Porter (2000) presents useful insights that enterprises may use to be successful. From the analysis it is clear that a lot of factors favour Toyota in its bid to gain a competitive advantage over other firms. External conditions such as demand conditions and factor conditions assist the company to gain a competitive edge over its rivals. Its context and management strategy is also among the best in the world due to the number of companies replicating its production system. The focus on innovation and process improvement have enabled it to become a top-tier firm in the world. It is thus arguably one of the most competitive firms in the world. There exists a need for an updated and more thorough discourse on the topic.




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Originally posted 2017-10-07 23:47:15.



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