evaluation of toyota’s strategy for connected cars based

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Journal of Strategic Management StudiesVol. 12, No. 1, 41–57 (October 2020)

Copyright © 2020 by International Academy of Strategic Management

Evaluation of Toyota’s Strategy for Connected Cars —Based on the Theory of Dynamic Managerial Capabilities—

TADAHIKO KAWAIProfessor Emeritus, University of Tsukuba

Abstract

Automobile manufacturers including Toyota Motor Corporation (Toyota) are struggling to not only change their strategies but also reconfigure their resources in order to survive the “war” against Google, Apple, Facebook, and Amazon (GAFA) in facing a once-in-a-century stage of innovation in the automotive industry called CASE—namely, connected cars (C), autonomous vehicles (A), share driving (S), and electric cars (A).

The objective of this paper is to assess the progress of Toyota’s survival strategy concentrating on connected cars based on the theory of dynamic managerial capabilities (DMC) developed in Kawai (2018a, 2018b) and the framework of dynamic platform strategy developed in Kawai (2019a, 2019b).

First, a typology of the possible defense strategies of Toyota was deduced based on examination of existing research concerning the theme. Then, the locus of Toyota’s efforts for defense was sketched and the company’s intermediary performance was assessed in reference to the above typology. Final-ly, evaluation shows that Toyota’s performance assessed by the extent of progress in measures taken is not necessarily poor as of today albeit there are substantial concerns, but it is too difficult to predict a final outcome.

Keywords:CASE, connected device, theory of dynamic managerial capabilities (DMC), dynamic platform strat-egy, platform envelopment, crossing-type framework

INTRODUCTION

Automobile manufacturers including Toyota are struggling to not only change their strategies but also reconfigure their resources in order to survive the “war” against GAFA in facing a once-in-a-century stage of innovation in the automotive industry called CASE, which has been chiefly caused by GAFA themselves.

The objective of this paper is to assess Toyota’s survival strategy concentrating on connected cars (abbreviated as “Connected” below) as of this point in time based on the theory of DMC developed in Kawai (2018a, 2019b) and the framework of dy-namic platform strategy developed in Kawai (2019a, 2019b). The former asserts the importance of firms’ capabilities of changing both strategies and resourc-es (configuration) amidst changes in environment. The latter is the crossing-type framework developed

as a part of the theory of DMC in order to make it applicable to the platform type of products with indi-rect network effects.

One may say that such an attempt is premature or meaningless since it would take a long time before we could witness the final outcome. However, it is meaningful and possible. Evaluation at this time holds importance because it may offer prescriptions for recovery for the companies suffering episodes of defeat in the “war” whereas “post-war” evaluation, while capable of identifying the causes of defeat more accurately, is of less significance in terms of recovery as the “war” will have concluded. More-over, evaluation is possible if a certain, “logically solid” framework or model explaining the outcome is constructed and proves to be valid. Such would be useful to a considerable extent for companies to evaluate their strategies and revise them, if neces-sary.

doi: 10.24760/iasme.12.1_41

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Vol. 12, No. 1 (October 2020)

Three caveats for carrying out the above evalua-tion are in order. The first is that, while Connected is closely concerned with other areas of CASE and in the eyes of Toyota not treated as a separate area from Sharing, this paper concentrates solely on Connected for the purpose of brevity—a comprehensive evalua-tion of all four elements of CASE would require ex-haustive exposition for which a single research paper is not suited.

The second caveat is that, while this paper deals with the area relating to both platform and dynamic managerial capabilities, the platform it addresses is the first of the following two types of platforms relating to CASE. These platforms are connected platform devices, such as Google’s Android Auto or Apple’s CarPlay, that are being used in the of-fensive against automobile manufacturers as well as the platform of Sharing (or Mobility as a Service (MaaS) business), which Google is said to be try-ing to construct and under which various types of vehicles equipped with Google’s connected devices and automated-driving kits would provide users with various services.

The last caveat is that achieving the above objec-tive of this paper contributes to exemplifying the effectiveness of the theory of DMC and the dynamic platform theory stated above.

LITERATURE

Let us examine the existing literature on the above theme. While there is a substantial amount of work on Toyota’s struggle1 because of high public inter-est due to its importance, most are rather journalistic and devoid of solid theoretical foundation. To as-sess Toyota’s efforts, I have selected three works, each with a solid background, and will examine them rather intensively in order to construct a useful framework. These works are Nakanishi (2018) based on product manufacturing theory, Kato and Takagi (2018) based on product layer structure theory, and

Kawai (2019b) based on the theory of dynamic strat-egy and platform theory.2 In examining these works, I specifically pay attention to two points: 1) Key factors raised by the authors as determining the per-formance of Toyota’s efforts concerning Connected; and 2) The authors’ assessment of those efforts and prescriptions for future course of action.

NakanishiThe first work to examine is Nakanishi (2018).

Nakanishi’s thoughts on Connected are summa-rized as follows. In order to circumvent the intent of invasion of the automotive industry on the side of Google and Apple via their smartphone-based connected devices, it is necessary to develop a next generation of in-vehicle integrated electronic control system(s) (ECS) effective for achieving that goal. An integrated ECS implies an electric control system consisting of various electric control unit(s) (ECU) which control the movement of the electric parts in specific areas (domains) of operation of vehicles. Let us draw up a simple example and assume that an ECS consist of two ECUs. One ECU controls the vehicle’s external connection and can be called the “connected ECU,” while the other ECU con-trols operation of the vehicle (acceleration, turning, and braking), and can be called the “driving ECU.” Given the fact that many users cannot live without smartphones even within vehicles, it is vital for automobile manufacturers to produce vehicles with connected ECU (and ECS integrating the connected ECU) to enable drivers to enjoy the services pro-vided by smartphones, while at the same time block-ing smartphones from accessing vehicles’ running data gathered by the driving ECU. This is because if Google and Apple can access a vehicle’s running data through the driving ECU, it would become pos-sible for them, for example, to create and provide drivers with timely information on tire replacement and ultimately invade Toyota’s important busi-nesses with affiliated dealers. Nakanishi continues

1 Examples are Negoro & Hamaya (2016), Momota (2017), Tanaka (2018), Nakanishi (2018), Hidaka et al., (2018), Kato & Takagi (2018).

2 Concerning the theory of dynamic strategy, see Kawai (2004, 2010, 2012, 2013, 2018a, 2018b, 2019a, 2019b). Concerning platform theory, see, for example, Parker & Van Alstyne, 2005; Rochet & Tirole (2003), Eisenmann, Parker, & Van Alstyne, 2006, 2011; Hagieu & Yoffie, 2009; Parker, Van Alstyne, & Choudary, 2016; Moazed & Johnson, 2016; Evans & Schmalens-ee, 2016, McAfee & Brynjolfsson, 2017; Reiller & Reiller, 2017.

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Evaluation of Toyota’s Strategy for Connected Cars—Based on the Theory of Dynamic Managerial Capabilities—

as follows. It is possible for Toyota to develop the next generation of ECS for the following reasons. Toyota has initiated a camp for an open-source platform named “Automotive Grade Linux (AGL)” which utilizes Linux as its base OS for developing standard connected ECU with technology unique to the automotive industry. It also has succeeded in developing an OS which restricts smartphones’ connection to connected ECU only for multi-media-type information and preserves the connection to vehicles’ running data by supplying the open-source platform “SmartDeviceLink (SDL)” initiated by Ford Motor Company (Ford). Moreover, Toyota is now developing a new generation of integrated ECS by integrating the above connected ECU with other ECUs which concern areas other than infotainment (=information+entertainment) based on the com-mon architecture developed by a partnership led by the German automotive companies.3 Nakanishi concludes that if Toyota succeeds in developing this next generation of ECS as the global standard, it will deter Google’s ambitions of entering into the automobile business. I largely agree with both his evaluation of Toyota’s efforts toward Connected and rather optimistic forecast of Toyota’s future in that area and find his arguments persuasive. However, I have to raise two points about his discussion.

The first is that, while his solution of prohibiting Google and Apple from accessing vehicles’ running data has proved effective so far given the fact that neither Google nor Apple have made a foray into the automotive industry in addition to reports that Apple has abandoned the idea, his solution does not apply to the case in which one company becomes a vehicle manufacturer by acquiring an existing auto-mobile manufacturer comparable to Toyota. In such a case, the company would come to acquire vehicles’ running data and Toyota would lose the source of its competitive advantage. This seems to be exactly what Google had in mind when it expressed jointly with the Nissan-Mitsubishi-Renault alliance the de-cision to develop an Android-based, next-generation

in-vehicle ECU to serve as the foundation of its strategy concerning Connected (Nakanishi, 2018, p. 124). If this alliance comes to introduce Google’s integrated ECS, Toyota’s fear would become real and Nakanishi’s solution would be neutralized. What other measures, then, are left for Toyota? I will re-turn to this problem later.

The second point to be raised concerning Na-kanishi’s work is that, while it is persuasive, it is mostly restricted to discussing ECU architecture, or, speaking more broadly, manufacturing and neither consumer types nor strategies of automakers are addressed. Since this is related to the above point, I will address user demands and the strategies of au-tomakers when constructing the framework later in this paper.

Kato and TakagiLet us turn to the second work concerning Con-

nected, i.e., Kato and Takagi (2018). This work focuses on Toyota’s AGL and discusses the purpose and strategic tasks to be addressed by Toyota. While it is based on the layer structure theory of products, which asserts that since vehicles as a product are going to be transformed to consist of several layers, such as vehicle, in-vehicle OS (ECU), in-vehicle de-vices (connected devices such as CarPlay or Android Auto), its evaluation of the positive aspects of AGL is largely similar to that of Nakanishi, and it states that there is a possibility of AGL becoming an effec-tive tool for competing with Google. (As a matter of fact, AGL is reportedly positioned in Toyota as the countermeasure against Google according to Kato and Takagi (2018, p. 8)).

In terms of where Kato and Takagi deviate from Nakanishi, first they elaborate on the reasons why AGL is effective and state that AGL enables Toyota to raise the level of service by analyzing and pro-cessing vehicles’ running data while simultaneously offering “differentiation” as a selling point alongside its traditional strengths of safety and durability of vehicles. This implies that, while Nakanishi asserted

3 It is an AUTmotive Open System ARchitecture (Autosar), a global partnership of development of standard software architec-ture for ECUs for the areas other than infotainment. It started in July 2003 with original members including BMW, Bosh, Con-tinental, Daimler/Chrysler, and VW and later joined by Ford (in November), Toyota (in December), GM (2014) etc. (Retrieved from https://ja.wikipedia.org/wiki/AUTOSAR).

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that the merit of AGL is to circumvent Google’s utilization of vehicles’ running data to rob Toyota of its profits from its dealer systems, Kato and Takagi point out the importance of utilizing AGL more posi-tively to increase attractiveness of Toyota vehicles for users.

Second, Kato and Takagi raise three points that Toyota must overcome to realize the merits of AGL. The first is that the success of AGL may impact Toyota’s profits since it would commoditize ve-hicles and reduce Toyota’s controlling power over affiliated companies. Another is that Toyota may not be rewarded for the time and effort it invests in organizing the consortium because if Toyota tries to monopolize AGL’s merits, the consortium may fail due to possible withdrawal of its members. Even in a scenario where AGL is a success, Toyota would not receive the lion’s share. Moreover, while accumula-tion of vehicles’ running data and utilizing the data to create new value proposition are vital for AGL’s success, it is not a simple task.

Finally, Kato and Takagi raise another more fun-damental concern about AGL, notably that it might dissuade some customers from Toyota vehicles due to the lack of cohesion in connecting smartphones to a vehicle, implying that a system integrated through Android alone is easier to use and viewed more fa-vorably by customers.

These points concerning the merits of AGL in Kato and Takagi are not found in Nakanishi and are mostly acceptable. It is important to note that their elucidation was made possible by introducing to the discussion the aspects of marketing and strategy as well as user needs. However, while their discussion can be evaluated rather highly, I must admit that they share a similar limitation with Nakanishi.

Kato and Takagi fall parallel with Nakanishi in that they do not cover the case in which Toyota with AGL competes with Google that has become a vehicle manufacturer by acquiring an existing au-tomobile manufacturer. In that case, Google would be able to obtain vehicles’ running data and Toyota would lose the source of its competitive advantage.

What should Toyota do in such a situation? A more extensive discussion based on the theory of dynamic strategy is required to answer this question, and I will present it later in the analysis section of this paper.

Incidentally, it should be noted that while Kato and Takagi do introduce marketing and strategy as viewpoints, it is not enough since they do not refer to the type of consumers targeted under such ac-tivities. I will elaborate further on what this implies below.

KawaiAs the final work to examine here, Kawai (2019b)

proposes the crossing-type framework of DMC shown in FIGURE 14 to analyze the defense strate-gies of Toyota against the attempts of Google and Apple to attack it via smartphone and without the intention of producing vehicles themselves.

The vertical axis in the upper half of the figure represents (total) quality of Toyota vehicles without connected devices. In other words, it represents the traditional strong points of Toyota—driving comfort, product quality, safety, livability, and fuel efficiency. The horizontal axis represents quality (level) of con-nected devices. UR, US, and UT represent the respec-tive indifference curves of three types of consumers. UR represents the type of consumers who value qual-ity of Toyota vehicles quite highly and do not value quality of connected devices. In contrast, UT rep-resents consumers who value quality of connected devices far higher than that of Toyota vehicles. US represents consumers who value both quality of Toy-ota vehicles and connected devices. BM1 is Toyota’s business model. It represents the combination of quality of Toyota vehicles and that of in-house con-nected devices which Toyota can realize.5

Based on this apparatus, FIGURE 1 shows that Point Y, where BM1 and US have an interface, rep-resents an optimal combination of quality of Toyota vehicle and that of connected devices for both con-sumers and Toyota. Importantly, this optimal combi-nation is nothing but the optimal “bundling” of two

4 This is a simplified version of FIGURE 8 of Kawai (2019b, p.14).5 The lower half of FIGURE 1 represents how optimal quality of connected (TY) is realized. BM2 is the business model of the

supplier of software and the figure shows that Toyota must charge royalty PY to the supplier to get software with quality TY.

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types of quality for Toyota stated above. (TZ is the maximum level of quality of telematics which can be attained through its connected device.)

Concerning Kawai (2019b), the following points need to be noted. First, it deals with a different situation from that of the two works examined above concerning Toyota’s reaction against attacks of Google and Apple in making Toyota adopt their con-nected devices. Generally stated, three reactions on the part of Toyota can be considered. One is to adopt either of the two connected devices and abandon in-house development of its own connected device. Another is to reject the devices and develop and install its own connected device. Lastly, Toyota can compromise by adopting some functions of other de-vices that may be considered indispensable because of their popularity among consumers while main-taining its own device as the primary connected de-vice. According to this taxonomy, it would be clear that Kawai (2019b) concerns the second situation, and Nakanishi (2018) and Kato and Takagi (2018) the third. While this is a kind of division of labor, it is not desirable that Kawai (2019b) does not refer to the third option, and elaboration of his discussion is

needed. One possibility would be to generalize it so that the other two types of discussion can be incor-porated.

The second point to be noted is that, while the works of Nakanishi (2018) and Kato and Takagi (2018) have not (and probably cannot) addressed the situation in which Google or Apple attacks Toyota by becoming a vehicle manufacturer through acquisition of an existing automobile manufac-turer, Kawai (2019b) can be utilized for that. This is because, in such a case, competition would not be limited to competitive strategy and instead extend to corporate strategy since both Toyota and others stand on an equal footing in that they both manu-facture vehicles that have integrated ECS involving connected ECU. Moreover, the framework presented by Kawai (2019b) involves consumer types, and this would be effective in executing an extension of theory.

Suggestions for the Framework for AssessmentThe above examination of existing literature re-

veals three things. The first is that while there is a difference between the situation addressed by Na-

FIGURE 1 Crossing-Type Framework of DMC

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kanishi (2018) and Kato and Takagi (2018) and that addressed by Kawai (2019b), both are necessary for preparing a framework to assess the defense strategy of Toyota against Google and Apple. The second is that while Nakanishi (2018) and Kato and Takagi (2018) offer different accounts concerning the de-fense strategy of Toyota, both are necessary for as-sessment under the above framework. Lastly, while none of the three works reference conceiving a de-fense against a bid by Google or Apple to become a manufacturer by acquiring an existing automaker, it is desirable that such a situation is considered when preparing an assessment under the above framework.

The next task of this paper has become appar-ent. It is to prepare the framework organizing the above discussion and examine if there are other frameworks that can be employed in addition to the crossing-type framework of DMC in Kawai (2019b) stated above.

RESEARCH METHOD

Let us prepare the frameworks with which we can assess the performance or progress of Toyota’s defense efforts against Google and Apple in addition to the crossing-type framework of DMC presented in FIGURE 1. Of these, one is the framework constructed by organizing the above results of the review of existing literature. The other will be a framework relevant to the theme of this paper in that while the above framework concerns only strategy,

this new framework will concern resources as well.

Typology of Defense MeasuresLet us first look at the framework resulting from

the review of existing literature—it is the typology of defense measures shown in TABLE 1. The targets of IT companies including Google and Apple are divided into two types: “connected ECU” and “inte-grated ECS,” which involves connected ECU as one of its constituent ECUs. The defense measures and strategies of targeted existing automobile manufac-turers are shown as “Defense Measures” and “Type of Strategies.”

“Defense Measures against attack on Connected ECU” can be broken down into two types. One is “In-house development of ECU and no adoption of attacker’s ECU” (measure X1), implying total resistance to the attacker. Another is “In-house de-velopment of ECU+partial adoption of attacker’s ECU” (measure X2). (The third type, “Adoption of attacker’s ECU and abandonment of developing in-house ECU,” is not included since it means defeat of the attacked.)

Let us look more closely at “Defense Measures against attack on Connected ECU” in terms of the categories of strategic management theory. “Mea-sure X1” is a differentiation strategy explained by Kawai’s crossing-type framework of DMC and implies selecting the “optimum mix of two types of differentiation quality (or differentiation level): qual-ity of connected ECU and quality of vehicle. This

TABLE 1 Types of Defense Measures and Strategies

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strategy can be named “optimizing differentiation-mix strategy.” “Measure X2” consists of two types of strategies: “differentiation strategy” pointed out by Kato and Takagi (2018), which implies differen-tiation made possible by vehicles’ running data ac-cumulated by AGL, and “corporate strategy” pointed out by Nakanishi (2018). This is a strategy for pro-tecting profits gained from the existing value chain of the automobile business of a relevant company, consisting of dealers and suppliers, etc.

Let us take a look at “Defense Measures against attack on Integrated ECS.” These concern the broader battle between the attacker and the defend-ing automobile company since both have their own integrated ECS with connected ECU and thus stand on a level battle field. In order to build upon these elements, we will introduce the concept “platform envelopment.” This implies “entry by one platform provider into another’s market by bundling its own platform’s functionality with that of the target’s so as to leverage shared user relationships and com-mon components” (Eisenmann et al., 2011, p. 1271). (Bundling is originally a concept used in marketing, implying selling a certain product or a part coupled with another product or part.)

Moreover, the platform envelopment attack can be divided into two types: the “pure platform envelopment attack” as defined in the original definition shown above and implies an attack by one platformer against another, and the “quasi plat-form envelopment attack,” which implies an attack by a platformer against some part of a product of “non-platformers (Kawai, 2019a).” It is important to note that Kawai’s crossing-type framework, from which measure X2 was deduced, matches the “quasi platform envelopment attack,” and the attack of a platformer against integrated ECS corresponds to the case of “pure platform envelopment attack.” Thus, “Defense Measures against attack on Integrated ECS” are the same with the “offence measures” car-ried out by the attackers as “pure platform envelop-ment attack” and can be identified as follows.

One form of “pure platform envelopment attack” is “in-house development of ECS” combined with “partial adoption of ECU” (measure Y1), while an-other is “development of platform with competitive advantage” (measure Y2). In terms of strategy, the

former adopts the “optimizing differentiation-mix strategy,” which has incorporated Kato and Takagi (2018)’s “differentiation” strategy into Kawai’s strategy of “optimal combination of quality of ve-hicle and that of connected devices” stated earlier. The former also adopts the “optimizing product-mix strategy,” implying realizing the optimal mix of type of vehicle such as sedan, SUV, etc. on the one hand, and luxury, mid-range, and low-priced vehicles, etc. on the other in accordance with each of consumer type. This is a corporate strategy.

Another form of “pure platform envelopment attack” is “development of platform with competi-tive advantage,” meaning maintaining the strength of the platform that is determined by such factors as the scale of the platform and how well it can be managed. This is important because the platform development contributes to the competitive strategy of “optimizing differentiation-mix strategy” in such a way as, for example, lowering the cost of products and the operating cost of the platform or elevating the platform’s capacity for innovation. Incidentally, “protecting value chain (Nakanishi, 2018)” would also be included in this strategy since it contributes to strengthening the capacity of the platform by maintaining a higher level of profit for the company.

Sequential Framework of DMCAnother framework to be employed is the “se-

quential framework of DMC” shown in FIGURE 2, and on which DMC theory is based (Kawai, 2018b). It represents how DMC theory recognizes the relationship among environments, strategies, and resources over time. The first row implies that the environment shifts from E1 to E2, from E2 to E3, and so on. What is required of companies facing such a situation is to first consider whether “con-version” of existing strategy is needed, and if it is, proceeding to implement change. This is represented by arrows from environments (E1~E3) to strategy (S1~S3). The second row of FIGURE 2 implies that when an environment changes in such a way as [E1→E2→E3], strategies have to be changed in such a way as [S1→S2→S3]. Moreover, the abilities to change strategies over time are named dynamic strategy(-making) capabilities (DSCs).

In order to actualize (changes in) strategies, some

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congruent resources are required. If strategies need to be changed over time in such a way as [S1→S2→S3], companies have to reconfigure resources similarly in such a way as [R1→R2→R3]. The abilities to change resources over time are named dynamic resource(-reconfiguring) capabilities (DRCs).

Now that the frameworks for assessment are prepared, the next step is to follow Toyota’s actual efforts for Connected and apply those frameworks for analysis. Before that, however, one note is in order. The method for assessing Toyota’s efforts concerning Connected stated above is largely similar to Eisenhardt’s method of case study research for building theory (Eisenhardt, 1997). This is because both allow investigators to refer to extant literature in order to find concepts bearing relevance to their case studies prior to their start, which is usually for-bidden in case study research.

LOCUS OF TOYOTA’S EFFORTS FOR CONNECTED

Now let us look at the locus of Toyota’s efforts concerning Connected (see TABLE 2). Toyota in fact started to cope with Connected (at least in part) before the CASE problem arose. It launched a telematics service “G-BOOK” in 2002 that supplied drivers with a “safe driving” support service pro-viding information such as road traffic information through use of mobile communications systems.6

However, with the rapid spread of smartphones using the internet, drivers’ expectations for enjoying “infotainment” while driving grew and, in concert

with this, the ambitions of IT platformers includ-ing Google and Apple rose. By first standardizing smartphone-based connected devices as the con-nected ECU for providing infotainment services, IT platformers have set their eyes on invading the busi-ness of existing motor companies, and by position-ing integrated ECS that can incorporate not only the connected ECU but also other ECUs such as those concerning vehicles’ running data and automated driving, etc., they have pushed forward their attack. In addition, IT platformers began to envision becom-ing platformers of businesses for renting or sharing vehicles employing automated vehicles.

Thus, the problem of Connected for Toyota changed from simply raising the level of “safe driv-ing” services to absorbing the attacks of IT platform-ers and came to involve not only Connected but also Sharing in the sense of CASE. The renovation of “G-Book,” which had become rather outdated be-cause users could access only limited internet func-tions, became one of the focal points for Toyota to achieve both its traditional objective of raising the level of “safe driving” services and its new objective of meeting user needs for “infotainment” services. We shall take a look at these efforts next.

T-Connect and Connected CompanyThe year 2014 may be unforgettable for Toyota

because the company made it clear that it would intercept IT giants including Google and Apple with its new weapon. In that year, Apple and Google is-sued a great threat to Toyota by making it possible for users to enjoy various functions of iPhone and

6 https://www.toyotaconnected.co.jp//company/history.html (April 23, 2020)

FIGURE 2 Sequential Framework of DMC

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Android smartphones in addition to navigation func-tions by connecting devices to vehicles via USB cable or wireless with the release of “CarPlay” by Apple and “Android Auto” by Google.

Toyota’s answer to this threat came in the same year with its new telematics service “T-Connect,”7 a revamped G-BOOK. This new weapon in T-Connect became the symbol of Toyota’s counterattack. The characteristic points of T-Connect were infotain-ment services such as calling, sending messages, or enjoying music, which had been added to the exist-ing telematics services. The level of some services supplied by G-BOOK were elevated, and T-Connect enabled users to be able to access any website on the internet.

In addition to the above characteristics, one note is in order. While the direct objective of Toyota’s in-troduction of various measures concerning Connect-ed was to frustrate the ambitions of IT giants, it was intricately connected with another, higher priority objective of maintaining one of the long-established sources of Toyota’s competitive advantage—the ecosystem consisting of the “keiretsu” network of dealers, auto-repair shops, and insurance agencies,

etc. The reason for this can be easily guessed. If a certain automotive company that has incorporated only CarPlay as its connected device tries to provide a new service such as Toyota’s “e-care health check service,” it has to allow Apple to access to vehicles’ running data, which gives Apple the opportunity to develop various new services using that data.

As part of its broader objective, Toyota announced a change in its strategy. In January 2016, prior to the Consumer Electronics show (CES)8 in Las Vegas, Toyota’s managing director Shigeki Tomoyama explained the company’s measures for promoting development of technology for connecting vehicles to the internet via smartphone. These measures in-cluded the introduction of a Data Communication Module (DCM) starting in the North American mar-ket and construction of the Toyota Big Data Center (TBDC) within Toyota Smart Center (TSC)9 for analyzing and utilizing data gathered by DCM to de-velop various services. Moreover, since smartphones were made available in addition to DCM as devices for connection, Toyota began exploring development of standard middleware for safer use of smartphones in incorporated information devices.10

TABLE 2 Actions of Toyota Related to Connected

7 https://response.jp/article/2014/06/19/225760.html (August 10, 2020)8 CES is an annual trade show organized by the Consumer Technology Association (CTA) in the US and typically hosts presen-

tations of new products and technologies in the consumer electronics industry.9 TSC is Toyota’s energy management system developed in 2010 for centrally controlling energy consumption by connecting

homes, cars, electric utility companies, and users.10 https://monoist.atmarkit.co.jp/mn/articles/1601/05/news062.html ‘(August 10, 2020)

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In April 2016, Toyota launched a separate unit called “Connected Company” whose purpose was reported to promote development of world-wide services concerning the connected company and constructing the platform named Mobility Service Platform (MSPF).11 Details of the initiative were revealed by Tomoyama at a briefing on Toyota’s connected strategy held in November 2016. He built from the announcement he made in January in Las Vegas, stating that Toyota will provide active col-laboration with smartphones, supply traffic informa-tion and remote support based on big data and AI, and launch new services in collaboration with ride and car sharing businesses.12

The facts stated above suggest that Toyota changed its strategy in the face of attacks by IT platformers from simply satisfying user needs for safe driving to satisfying those for infotainment (and preparing for their ambition of becoming a plat-former for car sharing and rental businesses as well). However, in order for Toyota to realize its ambition, it became imperative that the company exploited the merits of utilizing smartphones while warding theft of vehicles’ running data. Toyota’s contrivance for that consisted of two sets of measures, the first (AGL & SDL) being directly related to the above require-ment, while the other (DCM & MSPF) being indi-rectly related. Let us examine them in this sequence.

AGL & SDLOne of the first set of measures behind the devel-

opment of T-Connect was establishing a standard “connected ECU” for the automotive industry with no black box. It was realized by establishing the AGL open consortium. The project began in 2012 under an initiative by Toyota and Mazda and later joined by Suzuki, Honda, Nissan, Ford, and Daimler, etc. (Kato & Takagi, 2018, p.8; Nakanishi, 2018, p.122).

It is important to note that this AGL consortium was established to rival Google’s attempted closed consortium “Open Automotive Alliance (OAA)” through which Google aims to lead development of various software for automobiles. Thus, Toyota lead-ing AGL was a move to block Google from monopo-lizing profits from automobile software by rallying like-minded companies. It is worthy to note that at the press conference of T-Connect, Tomoyama, when asked whether Toyota would join Google’s OAA, stated “…the driving safety and information security of vehicles are particularly important. We have to examine carefully whether careless access to ECU, unauthorized access such as program tamper-ing, or unauthorized extraction of vehicles’ (driving) data might occur (Momota, 2014a, 2014b).”

Another basis for developing T-Connect was restricting the connection between smartphones and connected ECU (which enables viewing of smartphone applications on a vehicle’s display) to multi-media-type telecommunications by employing technology specific to the automotive industry and excluding vehicles’ running data from that connec-tion. This was realized by Toyota joining the Linux-based open source consortium SDL led by Ford in January 2016.13 Ford had already built the connected device “Ford SYNC AppLink,” which provides to consumers a method for easily accessing their favor-ite smartphone apps using voice commands.14

Incidentally, Toyota’s adoption of SDL greatly contributed to accelerating SDL toward becoming an industry standard since almost all the automakers in Japan except Honda and PSA Group, etc. joined the consortium. In March 2016, Ford created a sub-sidiary, “Ford Smart Mobility,” focused on markets such as mobility, autonomous vehicles, and digital services with the hope to accelerate its digital trans-formation efforts.15

11 https://car.watch.impress.co.jp/docs/news/1027929.html (April 20, 2020)12 https://ascii.jp/elem/000/001/260/1260906/ (April 20, 2020)a https://carcareplus.jp/article/2016/11/11/1021.html13 https://global.toyota/jp.detail/10853507 (September 4, 2020) https://global.toyota/jp.detail/8103677/ (September 4, 2020)14 http://media.ford.com/content/fordmedia/fna/us/en/news/2016/01/04/toyota-adopts-ford-smartdevicelink-software.html (August

10, 2020) https://www.ford.com/technology/sync/ (August 9, 2020)15 https://www.zdnet.com/article/ford-forms-ford-smart-mobility^unit (August 9, 2020)

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DCM & MSPFThe second set of measures is indirectly related

to the above problem of exploiting the merits of smartphones while avoiding their possible demerits, and can be broken down as follows. One aspect is the attempt to secure customers by making the con-nected device “DCM” (which had been incorporated into “Lexus” since 2005) a standard for Toyota ve-hicles and further develop Toyota’s unique platform for connected devices. (The plan that DCM would be incorporated in most of the automobiles to be launched until 2020 was revealed at Toyota’s brief-ing on connected strategy held in November 2016 stated earlier.)

The rationale for securing this base of custom-ers was that since DCM is not based on smartphone technology, the platform founded on it can supply customers with services without having to rely on smartphones and thus circumvents any possibility of a smartphone-based platform invading the vehicle-controlling ECU in Toyota vehicles. This objective began to be realized through the standard incorpora-tion of DCM into in all grades of Toyota’s newest “Crown” and “Corolla-Sports” which hit market in

June 2018.16 DCM is explained in FIGURE 3.The bottom column shows DCMs incorporated

into Toyota vehicles where various connected ser-vices are supplied via MSPF, Toyota’s information infrastructure for its connected vehicles. This system constitutes the basis on which Toyota’s mobility strategies are made and has the following character-istics.

The first and most important characteristic is that since DCM is connected to a Controller Area Net-work (CAN), the controlling network for vehicles, it enables supplying of various services to drivers based on vehicles’ running data, a function that was not available via T-Connect, as well as upgraded ver-sions of T-Connect services. An example of the for-mer is the “e-care health check service (preventive maintenance based on vehicles’ running data)” listed on the topmost row of FIGURE 3. The service recommends maintenance warehousing sent from dealer to driver before actual trouble occurs based on constant diagnosis of vehicles’ running data. This service is restricted to users who own Toyota ve-hicles equipped with DCM.

The second characteristic is that while DCM does

(Source) https://global.toyota/jp/newsroom/corporate/23157743.htmlFIGURE 3 DSPF

16 https://global.toyota/jp/newsroom/corporate/23157743.html (April 29, 2020)

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not require the co-incorporation of T-Connect, if co-incorporated, it will supply Toyota vehicles with special services exclusive to instances when both DCM and T-Connect are incorporated. Moreover, along with the abovementioned services exclusive to vehicles equipped with DCM, Toyota provides DCM with functions to differentiate it from CarPlay and Android Auto. An example is the center route service.

The third characteristic is that DCM maintains a constant connection to vehicles via a “proprietary network” different from the commonly used net-works of smartphones or cellular phones, and it is through this that Toyota makes possible the above-mentioned differentiation of its connected devices from Android Auto or CarPlay (Tomoyama, 2019, p. 2).

In addition to the above characteristics, a few notes are in order. First, while the direct objec-tive of Toyota’s introduction of various measures concerning Connected was to frustrate the ambi-tions of IT giants, it was intricately connected with another objective of maintaining the ecosystem consisting of the “keiretsu” network of dealers, as stated earlier. Second, there are two companies that contributed to the construction of MSPF since two elements were required for it to function. The first element is the communication network transmitting vehicles’ running data gathered by DCM to MSPF and transmitting various services from MSPF to us-ers and service suppliers. The company concerned with handling this first element is KDDI Corporation (KDDI). The second element is the cloud center for analyzing vehicles’ running (big) data and prescrib-ing services. The company handling this element is Microsoft Corporation (Microsoft).

In June 2016, Toyota announced the development of a global communication network in cooperation with KDDI. This would serve as the proprietary net-work for DCM and the reason for its development was to enable Toyota to consolidate the contracts it had with various companies in various countries

into a single contract with KDDI in accordance with its plan of making DCM a global standard for con-nected devices.17

In April 2016, Toyota established “TOYOTA Connected North America” jointly with Microsoft. Its purpose is to operate “Toyota Big Data Center (TBDC)” based on Microsoft’s “Azure” cloud com-puting service and develop and supply DCM-related services.18 It may be worthy of note that this move seemed to follow the steps of Ford since Micro-soft’s most high-profile partnership in the automo-tive industry was with Ford and its SYNK AppLink platform revolved around infotainment. (Today, the SYNK AppLink is run by BlackBerry’s QNX unit.) It should also be noted that the reason Toyota and Microsoft could form a partnership was that al-though Microsoft had also earlier explored opportu-nities for entering the automotive industry, the com-pany appeared to have abandoned the idea around 2016, and instead made a strategic shift to become an enabler for the automotive industry through cloud technology.19 Finally, in August 2017, Toyota an-nounced an agreement with Mazda concerning com-munalizing connected devices. The purpose of this agreement was to connect Toyota and Mazda vehi-cles by establishing compatibility between Toyota’s DCM and corresponding devices of Mazda.20

Actions of Toyota Related to SharingI have finished introducing Toyota’s measures

concerning Connected in the sense of CASE. How-ever, the word “connected” has been used at Toyota in a broader sense that also involves Sharing, and the company’s efforts for Connected and Sharing have been carried out in congruence. Therefore, in order to deepen our understanding of Toyota’s efforts con-cerning Connected, let us also quickly look at what it has done concerning Sharing (see TABLE 3).

As stated earlier, in 2016, Toyota revealed that it would pursue two goals in its connected strategy with the construction of MSPF. One is supplying traffic information and remote support based on big

17 https://news.kddi.com/kddi/corporate/newsrelease/2016/06/02/1840.html (April 19, 2020)18 https://japan.zdnet.com/article/35080641/ (August 9, 2020)19 https://www.zdnet.com/article/microsofts-refines-auto-strategy (August 9, 2020)20 Nikkei Shimbun [Nikkei Newspaper], August 26, 2017.

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data and AI with active collaboration with smart-phones. The other is launching new services in collaboration with ride and car sharing businesses. Simply put, Toyota’s actions concerning Connected have mostly been concerned the latter of these goals.

Toyota has since changed to a more proactive strategy of being an MaaS platformer, or a “plat-former supplying various mobility-related services through automated electric vehicles.” The launch of “Monet Technologies” with Softbank became a symbol of such strategic change. Its purpose was to promote the MaaS platform business by obtaining knowhow on managing platforms from Softbank, which possesses substantial experience in the field. The “e-Palette,” an automated, multi-purpose elec-tric vehicle in development was intended to be the major vehicle utilized in Toyota’s MaaS platform business.

ANALYSIS

Let us evaluate Toyota’s defense efforts against platformers by referring to the frameworks devel-oped for assessing progress. Before proceeding to that, however, I will present an overall intermediary evaluation of Toyota’ efforts.

Remaining in the Top GroupToyota is off to a rather good start concerning

Connected since the company announced its con-nected strategy in November 2016 alongside Daim-ler in September in the same year and followed by

Ford (October 2017) and VW (August 2018) (Na-kanishi, 2018, p. 130, pp. 133–134) . While a good start does not necessarily promise a final victory, it seems that Toyota still remains in the top group of the race for the following reasons.

First, the company seems to be doing fairly well in its efforts for Connected labelled “In-house de-velopment of ECU + partial adoption of attacker’s ECU,” or “measure X2,” in TABLE 1, judging from its defense measures as explained below.

Second, as evidence supporting the above point, we can identify some companies that appear to be lagging behind in introducing/developing connected devices, and Toyota does not belong to this group. For example, the Nissan-Mitsubishi-Renault alliance decided to introduce Google’s connected device instead of developing it in-house. Meanwhile, there are other automobile manufacturers that have not yet decided their course of action concerning connected devices.

EvaluationToyota changed its existing strategy and took

“measure X2” as its counterattack against the (pos-sible) attack of platformers against its connected ECU. That is, Toyota adopted the measure of “in-house development of ECU + partial adoption of attacker’s ECU,” allowing use of smartphones in ve-hicles while restricting access to important data such as vehicles’ running data. More specifically, Toyota’s push to develop AGL and participate in SDL served as a direct measure to its counterattack, while intro-

TABLE 3 Actions of Toyota Related to Sharing

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ducing DCM and developing MSPF have contrib-uted more indirectly. This initiative can be evaluated highly for the following reasons.

First, this measure was desirable and the only one to be adopted by Toyota, which as company decided to take an unwavering posture against platformers concerning the core of its vehicles, namely, the in-tegrated ECS which involves connected and other ECUs such as automated driving ECU or automated driving kits. While Toyota could not forego its tra-ditional functions of satisfying conventional needs for safe driving, etc. of users, the company saw it as imperative to satisfy new needs for infotain-ment. Moreover, losing ground in ECS would lead to Toyota relinquishing its hegemony over keiretsu companies, which would result in the loss of a major profit source.

Second, Toyota pursued the above measure ex-haustively by resorting to every conceivable method for acquiring necessary resources from in and out-side the Toyota Group. Examples of this are par-ticipation alongside other companies such as Mazda, Suzuki, Honda, Nissan, and Ford in the AGL consor-tium, collaboration with Ford concerning SGL, and collaboration with KDDI and Microsoft concerning DCM and MSPF. It is to be noted that this is signifi-cant as it implies a major ideological shift by Toyota toward hastening collaboration with other compa-nies. This leads us to speculate the degree of the threat Toyota faces from platformers and its stalwart determination for defense.

These are the basic reasons for this paper’s rather high evaluation of Toyota, implying that Toyota took measures consonant with the theory of DMC which suggests that strategies and resources should be changed when faced with an unfavorable change in environment.

ConcernsWhile the above evaluation may lead to a some-

what optimistic outlook for the future of Toyota in Connected, there are several concerns to be noticed.

First, there is a possibility that Toyota’s strategy of attempting to satisfy both conventional and new demands of users through the introduction of a pro-prietary connected ECU based on AGL might not be welcomed. It is reported that a sales manager of

Toyota said, “AGL was adopted for the sake of mak-ers’ (and the automotive industry’s) convenience, and it is doubtful it has merits for users.” Moreover, an employee of a Toyota call center has been credit with saying, “We receive numerous inquiries from users saying they do not understand how to connect smartphones with vehicles. It would be easier to establish a connection between smartphones and ve-hicles through Android integration.” (Kato & Takagi, 2018; 12–13).

Second, while the success of Toyota’s strat-egy depends largely on collaboration with numer-ous companies in and outside the Toyota Group, effective implementation is no simple task. Specifi-cally, collaboration with group companies is difficult because, while collaboration sometimes requires adjustment not only in terms of strategy but also resources, companies tend to have a traditional way of doing things and may be reluctant to compromise. Uchida’s work points to this difficulty in adjustment, “The Toyota Group gives the impression that its businesses are fragmented since inefficient tactics remain among group companies.” (Uchida, 2018, p. 304).

Third, it is not clear if Toyota is prepared for a de-cisive battle with Google, meaning competition with a Google that has acquired, for example, Nissan and incorporated its integrated ECS in Nissan vehicles. This is exactly the case of a mutual “pure platform envelopment attack” (TABLE 1) between Toyota and Google-Nissan. In this case, these companies stand on the equal footing in terms of vehicles with an integrated ECS and the consumer demand they face. Thus, there is no difference between Toyota and Google-Nissan in terms of the type of functions they must offer. Both must supply functions cor-responding to the conventional demands of users as well as new demands for infotainment. How, then, would Toyota compete with Google?

The measures Toyota should take are Y1 (In-house development of ECS+partial adoption of attacker’s ECU) and Y2 (Development of platform with com-petitive advantage), and the strategies for executing these measures are: 1) optimizing differentiation-mix, 2) optimizing product-mix, and 3) maintaining strength of the platform. Among them, 1) may be problematic for Toyota. This is because the core of

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the problem is realizing differentiation of the two groups of functions satisfying either conventional or infotainment needs, and Toyota is not adept at differentiation of functions satisfying infotainment needs. This implies that Toyota must emphasize differentiation of functions for satisfying conven-tional needs and thus the most important factor that would contribute to its victory would be identical to that which has contributed to its success to date. These functions are quality of product, safe driv-ing, and low price, etc., and the problem is whether Toyota can actualize continued leveraging of these longstanding strengths. If not, it would manifest an obstacle hindering Toyota’s progress.

Compared with the above, 2) and 3) are less problematic. Concerning 2), Toyota is accustomed to producing multiple types of vehicles owing to its traditional multi-product manufacturing policy, and while it does not necessarily produce unique or stand-out vehicles, the initiatives being pursued to strengthen the group under concerted actions for de-fense stated above may contribute to elevating Toy-ota Group’s ability to produce unique or innovative vehicles. However, if Toyota’s attempts to control the product strategies of group companies in pursuit of short-term results are excessive, its product lineup would suffer and contribute less over the long run.

Concerning 3), Toyota seems to be prepared for this problem as evidenced by its longstanding rela-tionship with Microsoft with respect to MSPF. This is reinforced by Toyota’s recent announcement that it will collaborate with Amazon concerning use of the Amazon Web Service cloud computing service. The purpose of this collaboration appears to be to maintain the strength of Toyota’s platform by rein-forcing its cloud base by diversifying collaborating cloud partners.21

Implications for ResearchThe above evaluation offers the following impli-

cations concerning future research. The effectiveness of the theory of DMC in analyzing the conditions of survival for companies stricken by changes in envi-ronment and prescribing solutions for those compa-

nies was exemplified. While the fundamental asser-tion of the theory of DMC is that companies must change not only their strategy but also resources in order to survive, Toyota’s efforts in Connected have involved both. Moreover, as part of the above point, the effectiveness of the framework of dynamic plat-form theory, i.e., the crossing-type framework, was also verified. It was useful in analyzing the defense strategies of Toyota regarding attacks by platformers against connected ECU and integrated ECS.

Finally, Nakanishi (2018) and Kato and Takagi (2018) were adequate in discussing the possibil-ity of Toyota’s success in its countermeasures and asserting that AGL would play an important role. Concerning AGL, Nakanishi (2018) pointed out its importance mainly from the view of corporate strat-egy and Kato and Takagi (2018) from the view of competitive strategy.

Kawai (2019b) demonstrated differences from Nakanishi (2018) and Kato and Takagi (2018) in terms of strategy first by using the theory of dynamic strategy including platform theory as the basis of research rather than existing strategy theory. Second, Kawai (2019b) newly introduced the concepts of consumer demand and consumer types in his theo-ries, while the other two did not.

CONCLUSION

The objective of this paper was to assess Toyota’s strategy for survival concentrating on Connected based on a framework developed in Kawai (2019b), and it seems to be mostly fulfilled.

Toyota’s performance as assessed by the degree of progress in measures taken is not necessarily poor as of today, but there are still substantial concerns and it is too difficult to predict a final outcome. Toyota is not a great innovator and often being late in in-troducing innovations from outside. However, the company has demonstrated that it is quick to catch up with first movers once it recognizes the delay. Moreover, once Toyota starts, it pursues a recovery strategy quite exhaustively under a better business model to the extent that it can often be an “innova-

21 Nikkei Shimbun [Nikkei Newspaper], August 26, 2017. Incidentally, Toyota launched Avalon (luxury saloon) incorporating Amazon “Alexa,” an AI voice recognition device, in June 2018 in the North-American market.

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tive first follower.” Thus, the possibility of Toyota’s survival seems rather high if the company does not see great success.

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Tadahiko Kawai is a Professor, Emeritus at the University of Tsukuba. He received his MBA from Tokyo University and Ph. D. from the University of California at Berkeley. His re-search focuses on dynamic theory of strategies, the theory of dynamic managerial capabilities (DMC), leadership of top and middle manage-ment, and business and society relationship including corporate social responsibility and corporate governance.E-mail: [email protected]

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evaluation of toyota’s strategy for connected cars based

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