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Graduate School of Management

Prof. Daniel Zarate

21 June 2007

Is Toyota strategically managing intellectual capital?

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CONTENTS

Executive summary…………………………………………………………………… 4

1.- Background…… ………………………………………………………………….. 5

2. Strategy Focus………………………………………………………........................ 6

2.1 Toyota’s Strategy to use and manage assets and confidential

matters.………………………………………………………………………… 8

2.2 Key operational and corporative strategies ……………………………….. 9

3. Operational Focus…………………………………………………………………... 10

4. Infrastructure for cultivating and sharing intellectual capital ………........................ 10

4.1 Corporate Culture………………………………………………………….. 11

4.2 Cultivating Intellectual Capital…………………………………………….. 11

4.3 Sharing Intellectual Capital………………………………………………… 12

4.4 Database on Communication………………………………………………. 13

4.5 Communication System Document to Share Value………………………... 13

5. Best Practice Guide………………………………………………………………….. 14

Implementation of an Intellectual Capital Management………………………………. 15

Appendix 1 ………………………..…………………………………………………… 15

Appendix 2………………………………………………………………………... …… 16

Appendix 3…………………………………………………………………………….. 17

Appendix 4…………………………………………………………………………...... 18

References……………………………………………………………………………… 19

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EXECUTIVE SUMMARY

Within today’s rapidly changing corporations, individuals at all levels are increasingly called

upon to demonstrate their ability to think strategically. However, many are inadequately prepared

to perform this task. Many new executives, and even those long within the executive ranks, are

unsure how to properly engage in strategic thinking.

The aim of this paper is to present what intellectual capital refers to, how intellectual capital

holds keys to improve operating efficiency and how Toyota Motor Corporation has formulated

effective strategies to attach the value chain activities to the intellectual capital challenge.

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1. Background :

The Toyota Motor Corporation (TMC) was founded in 1937 in Japan by Kiichido

Toyoda. With an initial capital of £100 000, which proceeded from the sale of the pattern of the

automotive loom his father invented in 1924, he has built over the year a massive empire in the

car industry. Toyota activities now encompasses design, manufacturing and sale of passenger

cars, recreational vehicles sport car, vans, bus and related parts (www.toyota.com)

In 2007, Toyota dethrones the U.S. giant General Motors, the leader for eighty one years,

taking the leadership in term of the number of car production. Actually The Japanese company

has yet the higher level of production among all car manufacturer, with nearly 9,18 million cars

produced per year. On the financial level there is no comparison possible. Whereas the stock

capitalization of Toyota amount to 234,3 billion dollars, his competitor general motors hardly get

17 billions ( Gautier, 2006).

Toyota competes in an industry, which has recorded a stagnant growth in the U.S., Europe

and Japan market these last years. However, it offers new opportunities with the increasing

demand from emerging markets such as Brazil, China, India and Russia (Edmondson, 2007). Car

manufacturers also have to take up new challenges and overcome difficulties with the increasing

awareness of environmental problems (Gautier,2007), the rise of the gasoline price, the growing

luxury segment and the boom in low-cost car (Edmondson, 2007).

Toyota has definitely proved its ability to take up these new trends. The firm has for long

claimed its concern for environmental problem and has developed in a record time of 15 month

the first hybrid car (Chaturvedi, 2005). It also has created the brand Lexus to respond to the

increasing demand for luxury car. And finally thanks to its Toyota Product System (TPS) it has

shown a great efficiency which has enabled the firms to cuts its cost and provides customers with

highly competitive cars without sacrificing the quality (Cleveland, 2006).

Actually, what has enables the company to achieve these performance is its unique ability

to create, communicate and share its intellectual management through very well developed

knowledge management, which will be discussed in this report.

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2. Strategic Focus:

There is something mystical about the word “strategy”. People love to use strategy in a

variety of different context – business strategy, technical strategy, product strategy, process

strategy, people strategy, competitive strategy, winning strategy, sales strategy, marketing

strategy, to name a few. You read about strategy. You hear about strategy. You talk about

strategy. You think strategy.

A strategy According to Hitt et.al. (2001) is “an integrated and coordinated set of

commitments and actions designed to exploit core competencies and gain competitive

advantage”. This is the typical conservative view, or it can be called as the basic school. Now, for

the contemporaries strategic is the ability to think systemically, having a whole systems

perspective, which often goes beyond what the Organizations are currently engaged in. This

person or group has a high level of Cognitive Competence, to make sense of a large amount of

complex and often ambiguous information (Paul,1993).

Strong organizational cultures are elaborated first at the individual level, then at the group

level and finally at the organization level. For instance, to reach a stable culture all across the

company, the enterprise needs to have different groups of people committed to the values and

attitudes of the other members. The founder or owner of the organization transmits these values,

in almost all the cases. So analyzing the process, it can be assumed that the beliefs of one person

were transmitted to any number of persons or a group of persons and then, as a consequence, to

the whole firm.

The particular strategy of Toyota is clear and strong, with a short sentence that embedded

the essence of its vision; “innovation into the future and passion to create a better society”.

(Toyota.com, 2007).

Toyota is creating globalization with renewing passion and ever grater aspirations, based

on four themes to create a more prosperous society in this new century

1.- Be a driving force in global regeneration by implementing the most advances

Environmental technologies.

2.- create automobiles and motorized society in which people can live safely, securely

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and comfortably.

3.- promote the advantages of cars trough the world and attract more Toyota fans

4.- be truly global company than is trusted and respected around the globe.

(Toyota.com,2007)

It has been found that the size of the firm could be very important to define the strength of

the organizational culture. According to Louis (1991) the continuity of leadership and the

stability of the workforce found in larger firms tend to have more formalized structure and

organizational cultures. In addition, Poutziouris et al. (2004) affirm that small family businesses

can have many disadvantages in comparison with larger firms, like informality, limited

cooperation and introversion.

To achieve sustainable mobility in the twenty-first century, Toyota is taking on the

challenge to develop various technologies and incorporate them in products, including improved

fuel efficiency to reduce carbon dioxide emissions, diversification of energy sources with an eye

towards restricted petroleum consumption, and clean emissions and safety technologies.

(Toyota.com,2007)

One specific measure is a commitment to developing further innovations in hybrid

technology, a key technology in addressing environmental issues and to continue expanding the

hybrid model lineup. At the same time, the giant company will make further efforts to enable the

use of synthetic and bio-fuels and to develop fuel cell vehicles as options on fossil fuels.

(Toyota.com,2007)

At Toyota, sharing knowledge is intertwined with its people based enterprise culture. The

five key strategies that summed up the Toyota strategy are; 1. Challenge, 2. Kayzen

(improvement), 3. Genshi genbutsu (go and see), 4. Respect and 5. Teamwork.

(Chaturvedi,2005). The Toyota Strategy recognized employees as the company’s strength and

attached great importance to developing human abilities through training, coaching and

mentoring. This is a big strategy of the giant company to achieve the intellectual capital known as

“knowledge asset”. The principals of “respect of people” and “continuously improvement” are at

the core of the Toyota key teachings. In 2001, Toyota realized a document called “The Way of

Toyota 2001” to give its guiding principals a concrete shape so they could improve by its

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employees across the globe and carried further in the future. It encourages the employees to

generate ideas and help the company ´s evolution. (Chaturvedi,2005)

2.1.- Toyota’s Strategy to use and management of assets and confidential matters.

Toyota presents a wide variety of tangible and intangible assets that are indispensable and

invaluable to its successful business operation. To ensure assets maintenance and confidentially

management, Toyota manages such assets with a firm hand in order to prevent such assets from

being lost, stolen , use illegally or wrongfully.

The giant company endeavors to protect confidential information (e.g. its trade secrets)

and to use such information in a proper manner. At the same time, Toyota does not tolerate the

illegal use of other party’s assets or intellectual property or the unauthorized use of another

party’s confidential information. (Toyota.com,2007).

But the real protection of their assets does not come from a wide and efficient legal

department established world wide, but for the right acting and the right treatment for their work

force and to the whole chain of production and commercialization. The company is protected for

its entire environment. This is an unusual achieved capital for any company, but precious and

desirable. This is the best protection that the giant company can obtain of their tangible assets

such as land, buildings, facilities, equipments, products, merchandise, materials, office

equipment, networks, office supplies, cash and deposits, securities and bonds, corporate credit

cards among others. Furthermore, they keep an open doors policy to their competitors and any

person that would like to approach to learn from them. Therefore, the relationship is clear; the

thief is not motivated once he finds the house open.

In regards of intangible assets such as intellectual property rights such as patents,

trademarks, copyrights, design rights, know-how,. Confidential corporate matters such as

products, technology information, procurements, sales information, personnel, and accounting

information, software (e.g. program data) among others. The giant company uses the legal

department to assure that in any country where they trade their products, the correct registrations

are implemented. (Toyota.com,2007).

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2.2.- Key operational and corporative strategies:

- Enhancing vehicle safety.

- People education such as driving education

- Traffic environment.

- Provide clean and safe products and enhance the quality of life

- Assure continual improvement in the environmental performance

- To attend the highest level of environmental stewardship in each country

- Establish research and development centers around the world in order to meet the needs

of local areas and environmental necessities.

- Enhance the philosophy of “customer is first”, help the dealers to grow with the

philosophy of “mutual growth “, and have a fair market competition.

- Even though the headquarters are in Japan, they go with the strategy of go global and

local, in order to meet the international goals with the local issues to face.

The most important developed strategy of Toyota Motor Company as crucial intellectual

capital is that, its management is part of every day life. This concept will be enhancing farther in

the part of “sharing intellectual capital” of this paper. However, Toyota has raised continuous

improvement and employment involment to a unique level, creating one of the few examples of a

genuine learning enterprise in human history. This is the most expensive asset that they treasures,

not locked in any security cage but open to the entire world and encourages other companies to

fallow the model. Nevertheless, the massive communication sharing system that the company has

achieved during the last three decades is an important instrument that is a key tool for their

success.

The concept is easy to understand as a strategy, not only solving problems is important but

share the solutions. Not only share the solutions at managerial level is crucial but, at all the levels

through the partners, dealers, work force thru the headquarters in Japan. Not only share the

problem and the situation but also, share the explicit process of the issue. However, how the giant

company can achieve this diffusion of massive information at a real time? With the development

and implementation of a variety of web sites and communications systems, that starts from a

corporative magazine thru high tech networks.

This systems and networks will be wide explained farther in this paper.

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3. Operational Focus :

Operates five main activities: Research and Development, design, manufacturing, sales

and services. These operations are not located only in Japan but in all over the world. According

to its Managing Officer Koichi Ina, they are located in seven locations overseas which show that

“from development and design to production, sales and services, Toyota has now achieved

consistent globalization as well as location”. (www.toyota.co.jp) (See Appendix 1)

Research and Development, Design: Toyota has invested 1500 billions year this year in its

R&D activities (Les Echos, 2007). The firm possesses twelve R&D centres all over the world in

Japan, France, Germany, U.S.A., Thailand and Australia, each of them having different activities

According to Cleveland under the Toyota Product development system, “close collaboration

between R&D and Manufacturing is the norm” (Automotive Design and Production, 2006)

Manufacturing: In May 2007, Toyota has twelve plants in Japan and a total of 52 overseas

manufacturing companies. Each plant scrupulously follows the Toyota Process System.

Sales and services: Toyota has yet a worldwide retail outlet network. In order to remain

efficient, salespersons are constantly under pressure to avoid stock (Gautier, 2006). Actually

employees are continuously trained to improve sales and marketing knowledge by Global

Knowledge Centre, established by the firm in 2002 (Chaturvedi, 2005).

4. Infrastructure for cultivating and sharing intellectual capital

Every year since 1998, the research program The Most Admired Knowledge Enterprises

(MAKE) awards the company that are “leader at creating Intellectual Capital and shareholder

wealth […] by transforming new as well as existing knowledge into superior products, services

and solution” (Rory Chase, 2007). The companies are assessed through eight-knowledge

performance dimension (shown in Appendix 2 and 3). According to the managing Director of

the institute Teleos –which has established the MAKE survey- Rory Chase, “Toyota does not

have a separate Knowledge Management philosophy and strategy; managing and sharing

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knowledge are a part of everyday life at Toyota”. Moreover Koichi Ina, managing officer at

Toyota claimed that “the way to achieve quality assurance and spread the Toyota way is by

educating people: making things is about developing people” (www.toyota.co.jp).

It is not surprising then to find out that Toyota has won this award 6 times since 1998. In

this part, we are going to go over what has contributed to make Toyota a “learning organization”

(Cleveland, 2006) ; which is the key to its worldwide Leadership.

4.1. Corporate Culture

Toyota has a very strong corporate culture that is closely linked to the Japanese culture

and plays an essential role in the success of its intellectual capital management. Actually,

according to Chaturvedi (2005), “knowledge management [is] embedded in [Toyota’s] culture”

and this “knowledge-driven work culture is a major contributor to its success”.

The Japanese culture, in fact, contributes to a favourable learning environment. It

considers learning as an important endeavour and stresses the importance of details and

perfection. Moreover Japanese companies are known for lifetime employment, teamwork and

trust ( Chaturvedi, 2005)

The Corporate Culture of Toyota is people- based. Previously mentioned the “Toyota

Way” and the five key principles: Challenge, Team Work, Go and See ,Continuous Improvement,

and Respect for People. The two last principles; “Continuous Improvement, and Respect for

People” constitute the core value of the firm and are formulated as following in the annual report:

“ Foster a corporate culture that enhances individual creativity and teamwork value, while

honouring mutual trust and respect between labour and management” ( See Appendix 4).

(www.toyota.co.jp)

4.2 Cultivating Intellectual capital

Sharing the knowledge at Toyota Motor Corporation starts in its offices. It may seem to

be an insignificant detail; however, the layout of offices totally reflects that culture of openness

that Toyota has cultivated over the years. The Japanese company is one of the first, which has

experiment the “Big Room” also called “Open space”, considered as a cultural shift. By

converting several compartmentalized office into large open space, the workers are more likely to

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share information and exchange ideas. The organizational leader has a desk in the centre of the

room, “teams organized by product family are clustered around the centre and the walls are used

for visual management of the development process”. Information is regularly updated so that if

an employee needs information he just has to look at the walls. This strategy as a result, shows

time saving as less e-mail or phone calls are required (Cleveland, 2006)

Cultivating Intellectual Capital is also achieved though the principle that the managers are

Teachers. The product development managers are those people who own technical knowledge,

which legitimizes their authority (Cleveland, 2006). Actually new employees are trained by

working in existing facilities at the beginning with highly trained managers and skilled old

worker group before opening a new plant. Senior manager have to transfer knowledge and guide

workers by asking questions. This system relies on a participative culture. Employees are

enhanced to ask questions and to take initiatives in order to learn. They have a total freedom to

ask question and The Toyota Way views mistakes as learning opportunities (Chaturvedi, 2005).

4.3 Sharing Intellectual capital

Toyota put a stress on the fact that people can learn from each other and that there is a

dynamic in the learning process. Its strategy is not to have control on every activity and does not

interfere with practice implemented all over the world. The company rather shares its knowledge,

let the employee to find a way, and constantly try to improve process and sharing their

knowledge as well. According to Koichi, Managin Officer at Toyota, “ [the company] needs to

spread the Toyota’s manufacturing philosophy –the “Toyota Way” to all overseas bases”. He

then added that it should minimize the necessary support that comes from Japan and let each

bases become self-reliant.(www.toyota.jp.com)

According to Chatuverdi, “one of Toyota’s major initiatives in the area of organizational

learning was the establishment of the Toyota University”. This University aims at training dealers

and Toyota’s employees. By the way of simulation they lead dealers to think from the customer

viewpoint to generate higher penetration levels. In 1999, Toyota University launched e-learning

training with 400 on-line courses that 4500 employees from all over the world have benefited

from. In 2001 it also launched a program Called “Insight” to “centralize and Standardize web-

based training by implementing an Integrated Learning Management Solution (LMS) which

enabled to train 50 000 Toyota dealer on topic from technical to financial management.

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Toyota has also established four others centre to manage strategically its intellectual

capital at each stage of the Value Chain, delivering consequently high value to the customers

without necessarily increasing the cost as its knowledge management has been implemented

since many years and contributes to substantial savings.

In January 2002, Toyota created the Global Leadership School and the Management

Development School within the Toyota Institute, to share the best practices in the organization,

drafting action plans and develop internal human resources. These Two School trained 750

employees during the first year.

In July 2002, Toyota opened a specialized organization relative to the marketing and sales

activities; The Global Knowledge Centre. The aim of this centre is “to help distributor train their

employees and continuously improve the sales and the marketing process” (www.toyota.co.jp)

Last, in July 2003 the firm founded The Global Production Centre (GPC), which aims to

train middle production manager and teaching them to apply best practices. This last Centre will

be further discussed in the report (see part 5. Intellectual Capital Creation) According to Toyota

the GPC “made learning faster and more effective for the employees”. By using simulation

equipment, it reproduces a “virtual real life learning experience”.

4.4 Database on Communication

Over the year, Toyota has built an impressive database though a rigid and systematic

recording of all its operation, best practices and problems encountered.

Toyota has implemented an on-line database using a software tool called “Analytical

Problem Solving”. This software enables the company to “collect problem data, find the root

cause, and develop countermeasures” (Chaturvedi,2005). It is used as both a library and a

database, by constant reporting by employees. If there is a problem, workers can connect to the

on-line software and see if the problem already occurred and how it as been solved. Alternatively,

they can propose a solution and put it online. Every problem then is entered into the database for

future reference (Chaturvedi, 2005). This helps Toyota saves time in problem solving and expert

consultant could then focus on new problem rather than loosing time solving recurrent issues.

4.5 Communications system document to share value

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The communication is very important within a learning organization such as Toyota. It is

very important for the firm to change “tacit knowledge” into “explicit knowledge” through

mechanisms Toyota calls “communicating for joint problem solving”. Once information have

been explicated it is important to spread it for the use of the entire organization (Cleveland, 2006)

The first very basic but also very efficient tool Toyota uses to communicate is boards

displayed on the wall on each office, plant or workshop. They are more convenient and easily

consultable than a fact book and enables manager to spread information. Employees can then

read management announcement or basic information by having a quick look.

Then, to facilitate the communication within the dealer Network, Toyota launched in 2001

a website called “Dealer Daily”. It has also developed Knowledge One Content Manager to

create and maintained consistent content and a well- developed knowledge base (Chaturvedi,

2005)

The company also communicates though its magazine called “Team Toyota” that covers

the sales and marketing activities on the global market. For the global Operation Toyota has

compiled its best practices in a case study.

5. Best Practice Guide

Toyota like other company that operates in industry sector with a high level of research

and development highly protects its trade secrets. However the firm is happy to share its expertise

in knowledge management and is open about the Toyota Production system. Media even reported

managers claiming “Study us all you want”(Chaturvedi, 2005).

Toyota may be open about its intellectual capital management; no other company that

could apply the Toyota’s model. General Motors made an alliance with the Japanese firm in order

to see production system and learn knowledge management from Toyota but it did not achieve to

match Toyota standards. Knowledge management is embedded in culture and it is therefore very

long to implement (Chaturvedi, 2005). According to Cleveland (2006), sophisticated knowledge

management enables efficiency and that without it, it is impossible to manage “the complexity of

the information needed to make the choice between multiple combinations of options”. He

concurs with Chaturvedi on the fact that it requires several year to put in place.

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Nevertheless, it can be learned plenty from Toyota and there is no hesitation that

implementing better knowledge management practices of the Japanese company can radically

help other companies to strategically manage their intellectual capital. Therefore, from the above

report, we can derive since recommendations and sum it up in a best practice Guide.

Implementation of an Intellectual Capital Management system requires:

To be rooted in the company corporate culture. The firm must create an environment

favourable to learning. It must accept mistakes as part of the learning process.

To convert Tacit Knowledge into explicit knowledge by giving employees the opportunity

to express their ideas, problems they have experienced and new concepts that could be

developed.

To develop standardized format for data collection. This could be implemented par the

way of on-line software for example. Documents and procedures have to be developed

for a systematic recording of information and intellectual capital. This step could be

viewed as rigid and difficult to implement, however it will save a lot of time and money

to companies that invest in data collection system.

To organize office in Open-Space room with no wall in order to facilitate communication

between co-workers and entice them into asking question and solving problem together.

To give employees the opportunity to share their ideas for continuous improvement by the

way of a suggestion system and to record each proposition. This would encourage them to

generate ideas.

To make managers become teachers. Managers have to lead employee to learn by

practicing and must be a guide for them. They have to take on the role of teachers.

To communicate on the company’s activity by the way of a newsletter for example. So

Intellectual capital can be shared and benefit to the whole organization.

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To organize training based on simulation exercises that provide near real-life learning but

that are less costly and less risky.

Appendix 1. Globalizing and localizing at Toyota

Source: www.toyota.jp.com

Appendix 2. The MAKE knowledge Performance dimension:

Creating a corporate knowledge-driven culture

Developing knowledge workers through senior management leadership

Delivering knowledge-based product/service

Maximizing enterprise intellectual capital

Creating an environment for collaborative knowledge sharing

Creating a learning organization

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Delivering value based on customer knowledge

Transforming enterprise knowledge into shareholder value

Appendix 3. The MAKE Executive summary

Toyota Motor Corporation (Japan)

Toyota Motor Corporation is the second largest global automobile manufacturer by volume (8.5 million vehicles annually). The company has annual sales of US $178.7 billion and employs over 265,000 people. Toyota has created a people-based enterprise culture known as the ‘Toyota Way.’ The company believes that Toyota consists of people and that developing human abilities by training, coaching or mentoring is a core responsibility of the company. Toyota also encourages employees to generate ideas to transform the company to cope with changes in the wider business environment. The emphasis is on converting personal tacit knowledge into enterprise knowledge – all the time stressing human relationships. The overall 2006 Global MAKE Winner has been recognized for its knowledge-driven corporate culture and organizational learning. Toyota is a five-time Global MAKE Winner.

Source: www.knowledgebusiness.com

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Appendix 4.

Guiding Principle at Toyota

1.Honor the language and spirit of the law of every nation and undertake open and fair

corporate activities to be a good corporate citizen of the world.

2.Respect the culture and customs of every nation and contribute to economic and

social development through corporate activities in the communities.

3. Dedicate ourselves to providing clean and safe products and to enhancing the quality

of life everywhere through all our activities.

4. Create and develop advanced technologies and provide outstanding products and

services that fulfill the needs of customers worldwide.

5.Foster a corporate culture that enhances individual creativity and teamwork value,

while honoring mutual trust and respect between labor and management.

6. Pursue growth in harmony with the global community through innovative

management.

7.Work with business partners in research and creation to achieve stable, long-term

growth and mutual benefits, while keeping ourselves open to new partnerships.

Source: www.toyota.jp.com

Source: www.knowledgebusiness.com

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Janv/Feb 2007 pg 20

Chturvedi Ruchi, “Knowledge Management Practices at Toyota Motors” case study,

2005.

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Cleveland, J. (2006), The Toyota Product Develoment System’s Implementation

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Edmondson, G. (2007), The race to build really cheap cars, Business Week, April

2007, pg 45

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http://www.toyota.com/about/operations/index.html?s_van=GM_TN_ABOUT_OPERA

TIONS (10 June 2007)