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How Product Lifecycle Management makes a difference in your industry: 
AEROSPACE
AUTOMOTIVE
CONSUMER
CONSUMER ELECTRONICS
DEFENSE
EDUCATION
INDUSTRIAL EQUIPMENT
HIGH-TECH ELECTRONICS
LIFE SCIENCES
PLASTICS
SHIPBUILDING
TELECOM
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Value Opportunity Six: Design to Realize a Price Premium By Kevin P. Hopkins The experience of Toyota demonstrates that consumer product companies can literally reinvent themselves and their product lines through an unwavering commitment to quality--and realize a significant price premium in the process. "Lexus." The name connotes style, elegance, and excellence in engineering. Spoken aloud, it even sounds luxurious. And yet, it is a completely fabricated word, meaningless before it was given meaning in the marketplace. Today, of course, its meaning is clear: the name stands for the most popular luxury car in the world. Few branding campaigns have been as successful as Toyota's launch of the Lexus in the 1980s. But the magnitude of Toyota's accomplishment was not always immediately apparent. The world's other leading luxury vehicles, Mercedes and BMW, had been known since their inception as elegant, high-class cars. But prior to Lexus, Toyota was primarily a mid-range brand. In introducing Lexus, Toyota not only boldly entered a new market space, but it simultaneously elevated the stature of its entire product line. The product design and engineering work that gave birth to Lexus are a sterling example of a business strategy that product development software maker PTC calls its sixth Value Opportunity, "Designing to Realize a Price Premium." (As discussed in previous columns, PTC's Product First Roadmap defines paths and strategies that companies can take to create and capture value for their firms.) By building an automobile whose technical quality rivaled that of the established luxury leaders, and then backing the new product with an inspired marketing campaign, Toyota achieved the miraculous feat of commanding luxury car premiums for a brand that, not too long before, could support only Main Street prices. Streamlining Manufacturing Processes It is hard to imagine the depth of the challenge that Toyota, now the world's leading automobile company, faced in the decades prior to the introduction of Lexus. As long ago as the end of World War II, Toyota was finding it difficult to compete with foreign automobile manufacturers--to the point that its long-term viability as a company was being seriously called into question. Toyota did offer a broad product range, but its low sales volume on all of its models undercut the company's ability to achieve any significant economies of scale. The automaker was also burdened with the Japanese government's requirement to maintain lifetime employment for all of its employees. And expansion was hampered as well, as Japanese companies like Toyota had limited access to capital or foreign investment. Toyota responded to this dire situation with some equally dramatic actions. The company significantly streamlined its manufacturing processes--for instance, it reduced stamping die setup times from one day to a mere three minutes. It increased the flexibility of its labor force by eliminating arbitrary specialist roles. And it reduced batch sizes to allow it to compete across a wider product line with smaller volumes and less inventory. Emphasizing Quality Toyota's most significant change, though, was to place an unprecedented emphasis on product quality. Part of this renewed emphasis was a natural result of its new, more efficient manufacturing processes: lower inventory levels and accelerated production schedules allowed for the quicker discovery and correction of quality problems. But Toyota also made an explicit decision to embed improvements in quality throughout the product design cycle. While all automakers take special efforts to reinvigorate their product line from time to time, Toyota went further than most, consciously incorporating Mercedes-class engineering standards across its full model range. Consumers responded to these innovations with increased purchases and greater satisfaction ratings, while reviewers gave Toyota vehicles the kind of high marks that were previously reserved for the luxury carmakers. It wasn't until the introduction of Lexus, though, that Toyota achieved the full transformation into a boardroom brand. Suddenly, Lexus became the "must have" car among the newly wealthy and the upwardly mobile. Toyota extended this cachet through its later introduction of the midsize Avalon and its superbly engineered Sienna minivan. Within only a few years, the Toyota brand had succeeded in towering above the Hondas, Fords, and Chevrolets with which it had once struggled to compete. Realizing a Price Premium The most tangible benefit of this strategy to Toyota, beyond its significantly increased market share, was the company's ability to command premium prices from consumers. For instance, in one study of SUV quality of experience rankings, the Lexus RX300 received a price premium of $17,400 above average and the Toyota 4-Runner a premium of $9,300, compared to a much lower $5,700 premium for the Ford Explorer. Overall, across its product line, Toyota commanded a price premium of some 17%. The key lesson from the Toyota experience is simply this. Consciously incorporating quality into a product, and then persuasively communicating this quality through a successful branding and marketing campaign, can allow companies not only to expand their market share, but to secure higher prices than more conventional products could command. That's a key element of PTC's Product First strategy--designing to realize a price premium--and one that Toyota successfully employed to become the leading luxury and mainstream automotive brand in the world. PTC's Product First Roadmap highlights this and eight other Value Opportunities, which we will continue to explore in upcoming columns. |
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Copyright 2003, by The McGraw-Hill Companies, Inc. |
