Toyota Prius: A Case in New Product Development

Abstract:
The case focuses on the world's first mass produced hybrid passenger car - Prius -
manufactured by the world's second largest automaker Toyota Motors. The case
explains the new hybrid technology used in the car. It also looks for the reasons for
the success of the original Prius in the Japanese market and of the subsequent
models of the Prius launched in the US and other markets. The strategies for
marketing the product in the US are also analyzed.

The Prius is solid evidence that the ponderous development process that produces
new automobiles is finally on the brink of a genuine technological breakthrough."1
- Popular Science Magazine, July 1997.

"We believe that clearing environmental hurdles and offering an attractive driving
experience are critical for cars to thrive in the 21st century."2
- Hiroyuki Watanabe, Senior Managing Director, Toyota in 2003.

Introduction

In December 1997, Toyota Motor Corporation (Toyota) of Japan launched its hybrid
vehicle Prius in the Japanese market. This was one of the first mass-produced
hybrid vehicles in the world. It used the Toyota Hybrid System (THS), which
combined an internal combustion engine fueled by gasoline with an electric motor.

Prius achieved a balance between high mileage and low emissions and was the
upshot of the company's initiative to produce environment-friendly automobiles and
its goal of manufacturing the ‘Ultimate Eco Car'(Refer Exhibit I for the Ultimate Eco
Car goal of Toyota). The Prius generated a lot of enthusiasm in the industry as it
was both efficient and stylish.

It was also a safe car. The car conformed to Japanese regulations and standards
pertaining to environmental pollution. Having sold more than 100,000 units
worldwide by 2002, it was the best selling hybrid car model in the world.

The company introduced further refined models in 2000 and 2003. Toyota
introduced Prius in the US market in 2000. Before entering, Toyota conducted a
research study of the US market and consumer preferences there. It developed
various strategies specifically for this market based on its research findings. The
price of the new improved Prius was unchanged from that of the original Prius.

These initiatives helped Prius to break successfully into the tough US market even
though it was based on a new concept of a hybrid car. In 2001, the Automotive
Engineering International3 recognized rius as the ‘world's best engineered
passenger car.'
By 2002, it was being sold in North America, Japan, Europe, Hong Kong, Australia
and Singapore. Analysts opined that the demand for hybrid cars would rise because
of the unstable oil prices and the growing need for environment friendly products.
Commenting on the future of green technologies and on Prius in particular, Chris
Giller of Grist.org4 said, “In the marketplace, green technologies and industries are
among the fastest growing and most innovative developments.

The Toyota Prius has defied every prediction to become the must-have car. The
organic food business doubles every time you blink. Green architecture is taking off.

Renewable energy, emissions trading, environmentally-conscious investing: many

of the most exciting advances in environmental thinking are happening in the
private sector.”5

Background Note

Toyota
Toyota's history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into
the textile machinery business from his traditional family business of carpentry. He
invented a power loom in 1902 and founded the parent organization of Toyota, the
Toyoda Group, in the same year. In 1926, Sakichi invented an automatic loom that
stopped operating when a thread broke.

This prevented the manufacture of imperfect cloth. (Calling attention to problems

and rectifying them at the earliest later became an important part of the Toyota
Production System (TPS)). The same year, Sakichi formed the Toyoda Automatic
Loom Works (TALW) to manufacture automatic looms.

Sakichi's son Kiichiro, an engineer from Tokyo University, was more interested in
automobiles and engines than the family's textile business. In 1929, he traveled to
the US and Europe to study the manufacturing processes in car factories there.
After returning to Japan, he spent his time studying car engines and experimenting
with better ways to manufacture them.

In the early 1930s, Kiichiro convinced his father to launch an automobile business
and in 1933, Sakichi established an automobile department within TALW. The first
passenger car prototype was developed in 1935. In 1936, Sakichi sold the patent
rights of his automatic loom to a company in England to raise money to set up a
new automobile business...

Hybrid Cars

Ferdinand Porsche manufactured the first hybrid-electric car in 1898. In the 1960s
a few attempts were made to manufacture hybrid cars by applying turbine engines
to the production of the vehicles. A turbine-powered race car was introduced in
1967 with the turbine engines powering the wheels through a mechanical
transmission.
The need for cleaner and more efficient vehicles led to the development of hybrid
vehicles in the 1970s. In 1970, a program called the Federal Clean Car Incentive
(FCCI) was started by the US government. This program led to the development of
a hybrid prototype in 1972.

The program was scrapped in 1976 by the Environmental Protection Agency (EPA)
of the US. In 1993, another program called the Partnership for a New Generation of
Vehicles (PNGV) was launched in the US. The partners in the program: Chrysler,
Ford, GM, and a few governmental agencies, developed hybrid prototypes but never
commercialized them...

Knowledge Management at Toyota

According to analysts, Toyota's success in both the local and global markets was
based on its gaining a competitive advantage through implementation of innovative
and path-breaking ideas on its production floors. Toyota had focused on learning
from the very beginning.

At Toyota, knowledge sharing was intertwined with its people-based enterprise

culture, referred to as the Toyota Way. The five key principles that summed up the
Toyota Way were: Challenge , Kaizen (improvement), Genchi Genbutsu (go and
see), Respect and Teamwork.

The Toyota Way recognized employees as the company's strength and attached
great importance to developing human abilities through training, coaching and
mentoring. The principles of “Respect for People” and “Continuous Improvement”
were at the core of the Toyota Way. Most experts agree that the TPS system at
Toyota worked by combining its explicit , implicit and tacit knowledge...

The Original Prius

The original Prius was powered by the THS. The THS was an advanced version of
the EMS. THS is a power train that combined an internal combustion engine and an
electric motor. It was based on the series/parallel hybrid system. It contained a
power split mechanism that divided and sent power through two passages...

The First Generation Prius

In 2000, Toyota introduced its first generation model of the Prius in the US, Europe
and other markets. This model was also called Prius NHW11 or Prius Classic. A few
modifications were made to the vehicle to meet vehicle standards for California,
USA. Modifications were made to the engine by increasing the horsepower from 58
to 72...

Marketing the First Generation Prius in the US

For Toyota, marketing the first generation Prius in the US was a challenge.
Commenting on the launch of Prius in the US market, Senior Vice President and
General Manager of Toyota Motor Sales, Don Edmond (Edmond) said, “Frankly, it
was one of the biggest crapshoots I've ever been involved in. Not because we
lacked confidence in the quality of the product. Or the logic of the concept. Or the
significance of this breakthrough technology. The key was to convince consumers in
the U.S. that hybrid technology was more than a science project...

The Second Generation Prius

Toyota began evaluating the popularity of its first generation Prius in the market
soon after it was launched. The evaluation was based on the price, performance
and social aspects of the product as seen by buyers and potential customers...

The Testing

The most important feature of the new Prius was its enhanced safety. The company
had worked toward child safety and reducing the impact of collisions to a
remarkable degree...

Outlook

Toyota expected higher demand for the new Prius than the earlier versions.
Edmond said, “We are targeting a sales volume of 36,000 for the first full year.
That's three times our sales target for Prius (original) when it launched in the
U.S.”...

Issues:

• History of hybrid vehicles.

• Working and usefulness of hybrid vehicles.

• The growing need for clean and green cars in the 21st century.

• The system Toyota put in place for the manufacture of the original Prius.

• The technology and other aspects and features of the original Prius and
its subsequent versions.

• Toyota's marketing strategies in the US.

• The role of buzz marketing in the marketing of new and innovative

products like the Prius.