Creating a new market: The Introduction of the Toyota Prius

Stan Watson

Content
Introduction ...................................................................................................................................2 Background and product history .................................................................................................2 Value Proposition .........................................................................................................................3 Key elements of success .............................................................................................................4 Conclusion ....................................................................................................................................6 Appendix .......................................................................................................................................7 References....................................................................................................................................7

Introduction
Global warming, pollution and sustainability are amongst today`s most crucial challenges for our modern society. Especially cars, taking up a substantial part of CO2 emissions, were blamed for contributing a large amount to the greenhouse effect. According to the German Ministry of the Environment (2011), road traffic accounts for 18.3 % of global CO2 emissions. As a result, Toyota took a strategic step in 1997 by introducing the first massmanufactured hybrid vehicle in the market (Toyota Corporation 2000). In this paper we will show, how Toyota managed to transform a visionary idea into one of the most successful innovations in the car industry in the last twenty years. First, we will examine the background and the product history of the Toyota Prius. Secondly, the innovative value-proposition will be analyzed, in order to explain the key elements of the products success.

Background and product history

Since the establishment of Toyota in 1937, the company succeeded in becoming the global leading automobile manufacturer with approximately 8.5 million manufactured cars in 2010 (International Organization of Motor Vehicle Manufacturers 2010). Since the 1990s the environmental sensitivity of car buyers grows substantially. CO2 emission and fuel consumption became highly important factors when considering buying a car (see figure 1, Forsa 2009).
Figure 1

In 1992, Toyota already sensed this environmental change and implemented the Toyota Earth Charter into its corporate strategy: Through this Charter, Toyota makes environmental responses a top management priority (Toyota Earth Charter 1992) .
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As reaction to this development, Toyota`s top management proposed in 1993 to found the G21 project (Generation 21st century) to study how cars can be competitive in the 21st century (Nonaka & Peltokorpi 2006). As a result, a team of engineers stated that future cars need improved fuel efficiency and therefore need to consume less than 5 liters per 100 km. Toyota`s top management named the product development project Zi and made it a top priority. In 1995 Toyota had a first prototype for a hybrid car, and planned to launch the car in 1998. Nevertheless, the president, Hiroshi Okuda, insisted upon launching the car already in 1997, as the car may change the future of the auto industry, not to mention the future of Toyota . As the product-development cycle time had to be very short, eventually 1,000 people worked for the project with precise division of work. In October 1997, Toyota unveiled the Prius to the media, and in December 1997 the first Prius was ready to be sold (Nonaka & Peltokorpi 2006).

Value Proposition
The Toyota Prius belongs to the mid-size passenger car segment with a two seats, sports car design; however, the Prius provides high convenience and comfort. The business-to-consumer segment is the most important one, with mainly 30 to 50 year old customers. Those consumers are mostly well-educated and intellectual, employed in a managerial, administrative, or professional position and have family responsibilities. Hence, these costumer groups consider environmental issues when purchasing a car, and due to their social status, have a higher disposable income to pay a price premium (Oakley & Oakley 2003). Toyota succeeded in establishing the Toyota Prius as a symbol of environmental concern (Rego & Stempel & Mintz 2007). This brand image has to be considered, as Toyota`s value proposition does not only consists of fuel savings and monetary incentives. The Prius was Toyota`s strategic response to the environmental debate, offering an innovative drive system that made Toyota the leader in the market of hybrid systems and gave Toyota an important competitive advantage, as Toyota was the first company to introduce such a car (Porter 1985). With the introduction of the Prius in 1997, Toyota generated demand for hybrid vehicles almost on its own (Galbreath 2009).

In order to explain the growing demand of fuel-saving and low emission vehicles, the change in consumer needs has to be examined. As shown in table 1, fuel price and carbon-dioxide emission both range among the top criteria for consumers when buying a passenger car nowadays. Toyota was able to anticipate that trend early enough to develop a product adopted to especially fit these criteria, and offer a value proposition that did not exist on the market before. Not only did Toyota use a hybrid engine to power the Prius, various other features were also implemented: "We're looking closely at how they reduced cost - not only in the hybrid system but also the car itself states Toyotas chief engineer Akihiko Otsuka. One of these features is the increase of aerodynamics, which led to a significant decrease of fuel consumption. Another one is the improved nickel metal hydride battery, which has a power density of 1,250 W/kg, which is a 108 % improvement compared to the market standard of 600 W/kg. Furthermore, the operating costs of the Prius are lower than for traditional powered vehicles, due to tax benefits (Kobayashi, Plotkin & Ribeiro 2008). Nevertheless, the value proposition cannot be analyzed by exclusively considering economic criteria. In Fact, as of 2006, a US costumer needs 7.2 years to amortize the additional cost of a Prius compared to a traditional-powered vehicle (Rego & Stempel, Mintz 2007). The value the Prius offers also includes an innovative image and idea that is sold to the costumer. These intrinsic values of the product represent the unique selling proposition of the Prius, as it suggests the feeling to feel like part of the solution (Rego & Stempel, Mintz 2007). This solution refers to the debate of sustainability and environmental concerns that are a substantial element for car purchases. This hypothesis is supported by a CNW Marketing Research that analyzed the reasons for the purchase of a hybrid car. According to this study, the most important element, according to 57% of the informants, is that the purchase of such a car makes a statement of me, referring to the idea of being part of the sustainability movement that the Toyota Prius conveys (Hack 2007).

Key elements of success

The hybrid market was, at the time of the introduction of the Prius, only a niche, accounting for 0.4% of the US automobile market until May 2004 (Heutel & Muehlegger 2010). However, two years after the introduction of the Prius to the U.S.
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market, sales were already above 100,000 units per year (Doll 2008). By the first quarter of 2008, Toyota Motor Corporation has sold more than 1million Prius, which accounts for two-thirds of the global hybrid vehicle market, and a market share of 80% in the US hybrid car market. (Doll 2008). Finally, new product or market strategies can emerge from changing social and political forces. Toyota Motor's success with the Prius can be attributed to a growing interest in environmentally friendly products. (McKinsey Quarterly 2006) Figure 2 shows the regional sales development of the Prius. Between 1997 and 2007, the sales have been multiplied by over 50 times (Toyota Corporation 2007). The market for the Prius is expanding and Toyota has taken advantage of it, as it
Figure 2

managed to steadily increase its sales, accounting for the Prius success. Another indicator for the productsuccess of the Prius is the high number of awards the car has won, including: Car of the Year (2005), International Engine of

Toyota Corporation

the Year (2004, 2005, 2006), Car with the highest Customer Satisfaction (2007) . A crucial element of the Prius success story is the corporate culture and the innovation strategy of Toyota. In fact, top management was aware of the change in consumer needs and promoted an innovation-strategy looking for radical and pathbreaking innovations that would bring Toyota to a new level. When the Prius-idea arose, top management was committed to providing the needed resources for the uncertain project (Nonaka & Peltokorpi 2006).

Forecast of market shares per fuel type in the year 2020

2% 6% 14%

Figure 3

According to a study by BCG (Figure 3), the hybrid market will account for one fifth of the
gasoline hybrid diesel

global car market in 2020, outpacing diesel, electric and gas vehicles.

20%

58%

electric drive gas

market share of total car sales

Boston Consulting Group 2011

Conclusion
Toyota managed to capture the signals of a changing market, and succeeded to turn this signal into a well timed product launch. The Prius offers a value proposition to the customers, that convinces simultaneously by extrinsic and intrinsic values. Especially the unique selling proposition of an environmental friendly car, helped the Prius to become a star in Toyota`s portfolio. Facing a steady growth of Prius` sales and the volume of the hybrid market, the Prius has become a substantial success for the Toyota Company. The big issue in the company future will be, whether Toyota will succeed in preserving its position as one of the most innovative automotive companies, and will continue to sense future market trends.

Appendix
Toyota Earth Charter The Toyota Earth Charter (adopted in 1992; revised in 2000) is based on the Guiding Principles at Toyota (adopted in 1992; revised in 1997) and embodies Toyotas policies concerning the global environment. Through this Charter, Toyota makes environmental responses a top management priority. The three main parts of the Toyota Earth Charter are: 1) Basic Policy; 2) Action Guidelines; and 3) Organization in Charge. The Basic Policy comprises: 1) Contribution toward a prosperous 21st century society; 2) Pursuit of environmental technologies; 3) Voluntary actions; and 4) Working in cooperation with society. The consolidated Toyota affiliates commonly share the Toyota Earth Charter (Toyota Corporation 2000).

Fuel consumption per 100 km in liters ( Spritmonitor 2011)

7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00

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