Video Case
Demand Drives the Toyota Prius
Higher gas prices and concerns about global energy supplies are driving the demand for hybrid automobiles, which combine small, fuel-efficient gas engines with electric motors to boost fuel economy. Although they accounted for only 1.5 percent of all U.S. auto sales in 2006, many analysts predict that sales will triple by 2012.
One of the most popular hybrid cars is Toyota’s Prius, which was launched in Japan in 1997 and introduced to the United States in 2000. Car enthusiasts have snapped up the egg-shaped Prius, which gets up to 60 miles to the gallon in city driving. With sales of about 100,000 vehicles in 2005, the Prius represents 2.4 percent of Toyota sales.
According to Paul Daverio, Prius product manager, customers look at hybrids for three main reasons: fuel economy, environmental performance, and the desire for the latest automotive technology. Purchase price and cost to operate and maintain are also factors. “If you don’t bring a product that’s going to be reliable and that’s going to be of great value for them, it doesn’t matter how great the technology is, it doesn’t matter how clean it is, it doesn’t matter if you get 100 miles per gallon; it won’t sell,” says Ed LaRocque, Toyota’s national manager for Advance Technology Vehicles.
Building relationships with its Prius customers is an important part of Toyota’s competitive strategy for its hybrid cars. Many buyers are willing to try this new technology because of Toyota’s solid reputation for producing reliable, high-quality cars and providing excellent customer service. A large number of Prius owners have never owned a Toyota before, opening up new market segments for the company. Loyalty programs such as “Prius Pioneers” gave the owners of the early Prius models the first opportunity to buy the second generation Prius.
With hybrid vehicle prices about $4,000 to $5,000 more than a traditional gasoline car, the economics don’t pencil out. Even at today’s high gasoline prices, the savings over the life of the car won’t offset the extra cost. So Toyota has improved the quality of the driving experience by adding more horsepower to make its hybrids more appealing to customers who want to make a statement about reducing dependency on foreign oil and show their concern for the environment.
Toyota also recognizes the importance of hybrid technology to its overall competitive strategy. In 2006 it introduced more hybrid models, including a version of its popular Camry sedan and a Lexus RX400h luxury sport utility vehicle. With its strong sales, reputation for high-quality, fuel-efficient vehicles, and excellent customer service, in mid-2006 it overtook General Motors to become the leader of the global automotive industry. At the same time, Toyota recognizes the importance of strategic alliances and works closely with competitors such as Nissan, which will license Toyota’s hybrid technology for use in its vehicles.
Critical Thinking Questions
1. Explain the relationship between energy supplies, gas prices, and demand for hybrid vehicles. What might happen if more customers wanted to buy Prius cars than Toyota expected?
2. How do Toyota’s relationship-building strategies for the Prius brand enhance the company’s competitive position?
3. What benefits does Toyota achieve by sharing its hybrid technology with competing auto manufacturers?
Sources: Adapted from video “Toyota and the Toyota Prius;” Dee-Ann Durbin, “Hybrids Take Center Stage,” San Diego Union-Tribune, January 6, 2006, p. C3; Martin Fickler, “Toyota Asks: What Slump?” San Diego Union-Tribune, November 5, 2005, p. C3; Jonathon Sapsford, “Toyota’s Chief Bets on Hybrids, Squeezing Rivals,” Wall Street Journal, July 13, 2005, pp. B1, B2; Noriko Slurouzu, “Toyota Studies Hybrid Switch,” Wall Street Journal, January 11, 2006, p. D7; and “U.S. Hybrid Sales in April Back over 21,000,” Green Car Congress, May, 2, 2006,