The Pursuit of Profit
An analysis of Toyota’s strategic decision
It’s quite known that the road to success and the road to failure are almost exactly the same. This phrase makes all the more relevance when we focus on Toyota, a multinational conglomerate which specializes in the automotive industry. Fiscal year 2018, was very favorable for Toyota, where they experienced a good financial turnover. But we have something better to take away from them. Analyzing the application of economics in their decision making, better known as Business Economics.
In FY- 18, their annual sales experienced a fall of 2%, which equals 140000 units in cardinal terms. This led to a 10% drop in their revenue, which amounts to Rs. 190000 million. Eventually, the market share too dropped as an immediate consequence of fall in annual sales. These figures would definitely mean a fiasco to the automotive giant, but a closer scrutiny into their reports, would reveal the other side of the coin.
When a company has an increase in their profit after tax (PAT), there is nothing else that would concern them in financial terms because profit making is the ultimate objective of most business. In FY-18, Toyota had an increase of 73% in their PAT.
One could always think, how does profit increase, when sales drops. The fact remains that they are different. Sales is the overall amount a firm receives and profit is the net amount a firm retains after paying all the costs which were incurred to earn that sales. Thus, analyzing profit is a better measure of profitability.
What Toyota did here, was to define their goals clearly. They focused on profit maximization and compromised sales maximization. As the two are quiet conflicting objectives of an entity. While the former provides a long term vision, the latter is a short term move. Toyota focused on increased localization, where they customized their vehicles according to the local terrain. They worked an efficient ways of cost reduction, which decreases expenses for a better profit. They also capitalized on the favorable currency movement. Both profit maximization and cost reduction plans, will benefit Toyota on the long run as they both have a favorable impact on the long run.
Operating in a monopolistic industry, it is not necessary for a firm to be an optimum firm; it can operate as a sub-optimum firm too. A data which supports this economic principle is the fact that, Toyota operated only at a 50% capacity utilization.
At a time where their market share is dropping, we also get news that they are planning to enter into a new segment of sedans, following their good sales of fleet vehicles. An action, probably to counter their market share concerns.