Did Customer Perceptions Prevent Toyota from Moving Forward?
Articles: http://news.bbc.co.uk/2/hi/business/8498036.stm
In 2008, Toyota Motor Corporation found itself in an excellent business position. According to an article written by Jorn Madslien on February 4, 2010 titled “Toyota’s Reputation could be tarnished for years”, Toyota had outsold domestic powerhouse General Motors by the end of 2008. Additionally, General Motors was facing bankruptcy as it dealt with financial issues that threatened the company’s future. However, Toyota’s successful run was about to come to a quick halt. In Spring 2009, the company announced a decline in profit. Later on that year, a recall of 3.8 million vehicles due to a accelerator problem plagued the company. As shown by the figure below, the company’s USA profits struggled to rise to the levels it had experienced in previous years, as production of vehicles decreased. Yet, the recent trend in Toyota’s sales cannot be fully explained by investigating the product that the company develops. Consumer perception has much to do with the company’s success.
"Toyota Sales and Production." Graph. Figures: Market/Toyota Sales and Production. Toyota Motor Corporation.Web. 17 November 2011.
In an October 2009 speech, Akio Toyota, president of Toyota Motor Corporation stated, “Toyota has become too big and distant from its customers” (Madslien). This fading connection to the consumer market is a prime example of how individual perceptions can affect an entire population. Because Toyota did not put in a strong effort to connect to their customers, their customers were led astray by bad signals. According to the general cascade model, the probability that accepting an option is a bad choice given that the signal is actually bad is over 50%. Therefore, prospective customers would have been more than likely to not buy a Toyota vehicle after hearing about the huge recall of Toyota cars. This recall, as well as a dying company presence among customers, caused a bad signal which triggered customers to not choose Toyota. Following the same cascade model, if the number of people choosing other car companies was greater than the number of people choosing Toyota by two or more, an individual would choose to follow the majority. Since it would only take a slight majority in order to make an individual disregard his own private signal, it was very probable that an information cascade could occur.
Network effects can also explain the recent decline in Toyota’s sales. Suppose that the price at which a customer values a product is a function of the customer’s reservation price and the fraction of the population using the product. With all of the negative publicity surrounding Toyota, a decrease in sales occurred. Due to a lower fraction of the population purchasing Toyota vehicles, customers would value a Toyota car at a lower price. Therefore, unless Toyota lowered their prices by a corresponding amount, less people would be willing to pay for a Toyota vehicle. Both individuals and populations on a whole have the ability to challenge the success of a company. It is for this reason that Madslien stated in his article that “losses could escalate if it turns out that the trust and reputation the company built up over a period of decades has been demolished almost overnight.”
Reference: Madslien, Jorn. “BBC News – Toyota’s Reputation Could Be Tarnished for Years.” BBC News – Home. British Broadcasting Network, 4 Feb. 2010. Web. 17 Nov. 2011. <http://news.bbc.co.uk/2/hi/business/8498036.stm>.
“Toyota Sales and Production.” Graph. Figures: Market/Toyota Sales and Production. Toyota Motor Corporation.Web. 17 November 2011.