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Bobby Yang
MGMT 458:002
Professor Edgell
Business-Level Strategy Analysis: Lexus
I. Company and Industry
Established in 1989, Lexus is a division of Japan’s most prestigious auto
manufacturer, Toyota Motor Corporation. Along side with Lexus, includes Toyota, Scion,
Daihatsu, and Hino Motors. These companies form the Toyota Motor Corporation, which is
the world’s third-leading auto manufacturer. Together, the Corporation employs
approximately 190,000 employees in the United States and investments (in the U.S.) total
to $12 billion (Lexus, 2010). Today, Lexus is marketed and sold throughout 70 countries
worldwide (Wilson, 2009).
Its business-level strategy involves a mix of broad differentiation strategy and best-
cost provider strategy. Lexus is Toyota’s luxury vehicle division. The establishment of this
division was due to the creation of Acura, which is Honda Motor Company’s luxury division,
in 1986 (Dawson, 2004). The division was also established to enter the luxury vehicle
market as a best-cost provider. For instance, the first Lexus vehicle, LS 400, was created to
compete against Mercedes Benz and BMW’s mid-sized vehicles. With similar performance
and build quality, the LS 400 was priced a lot cheaper, by at least $15,000, compared to
BMW’s 735i and Mercedes’ 420 SEL. As a result, the European manufacturers were caught
by surprise because of a decrease in their product’s sales (Dawson, 2004). Lexus’
specialization themes consist of product reliability and engineering design. Quality,
reliability, and enhanced customer satisfaction is associated with the Lexus marque brand.
Generating approximately $365.2 billion in the United States, the automotive
industry involves the designing, developing, manufacturing, marketing, and selling of
motor vehicles. Of this amount, Lexus’ parent company, Toyota Motor Corporation, holds
15.9% of the total market share (Derby, 2010). In the past five years, the automotive
industry, as a whole, has been struggling in the global economy due to the worldwide
recession and the increase of prices on fuel. Although many consumers withdrew from
purchasing a vehicle at the time, those that did make a purchase aimed specifically for

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more fuel-efficient vehicles, hybrids. Lexus, and the Toyota Corporation as a whole,
benefitted from the time period and may continue to do so (Wilson, 2009).
Lexus’ obtains a large consumer base due to its variety in their product line. The
company manufactures vehicles such as sedans (IS, GS, LS models), SUVs (RX, GX, and LX
models), convertibles, and coupes (SC model) (Lexus, 2010). In addition to the listed
vehicles, most of the models are accompanied with a hybrid option if the consumer wishes
to save money on fuel. Most of Lexus’ consumers consist of middle to wealthy classmen
because of their luxury vehicle status. Its major competitors include Mercedes-Benz,
Infiniti, BMW, Audi, Lincoln, and Acura. The competitors listed all carry similar product
lines as well as maintain their focus on the luxury aspect of vehicles.
II. Situation Analysis: Porter’s 6-forces analysis and SWOT
Using Porter’s 6-forces model, below is an analysis of the automotive industry in the
United States.
Threat of New Entrants: The automotive industry is a sophisticated industry,
especially for luxury vehicles, to take part in. It requires a lot of capital, time, and
engineering investment to successfully enter into this industry. There are also many
existing companies that are already participating in the United States market. Therefore,
within the next year or two, threats of new entrants would be non-existent. However, it is a
different scenario within Asian markets, though not many may be able to afford luxury
vehicles.
Rivalry Among Car Manufacturers: Strong competition exists within the automotive
industry. The average consumers are constantly looking for the best dollar value of
vehicles. Yes, quality also comes into play when purchasing a vehicle, however, a car may
be the second most valuable asset in the average person’s life. Competitors within the
industry are constantly coming out with new cutting edge technology, discounts, and after-
sale specials for vehicles in order to increase sales (Derby, 2010).
Substitute Products: There are different approaches in finding substitute products
within the automotive industry. One approach would be the type of vehicle a consumer
would want to purchase. Would one want something of luxury or speed? The main purpose
to own a car is specifically for transportation. In another approach, there are many
alternatives to purchasing a car. Would one consider purchasing a motorcycle, scooter, or

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even a bicycle? These options are a fraction of the cost of a car. Lastly, would a consumer
want to save their money and take public transportation or car pool for a friend?
Buyer Power: It is safe to say that it is a consumer’s market in the automotive
industry. With the existence of many competitors and availability of substitute products,
many buyers in the market often find themselves bargaining with their car
salesman/dealership. It is well known that dealerships often mark up the prices on vehicles
with fees that include shipping and a cup of coffee from the showroom that has a $100
value. Cars are expensive assets that require a one-year turnover, therefore, most
dealerships will negotiate in order to make a sale.
Supplier Power: On a business level, a dealerships’ main supplier is its own
corporation. The supplier and company are equally dependent on each other because of
production and sales forecasts. Manufacturers would produce X amount of cars per year
and expect the independent dealers to sell these cars. On the other hand, if the vehicle is a
best buy, the dealerships depend on the manufacturer to supply more (Derby, 2010).
Below is an in depth, yet concise, SWOT analysis of Toyota’s luxury vehicle division,
Lexus.
Strengths: Lexus marque has strong brand equity and strong global presence. With a
parent corporation that is the world’s third leading auto manufacturer, Lexus carries a
remarkable upper hand in the automotive industry. As stated on Lexus’ Corporate website,
“The brand reputation grew quickly until, barely a dozen years after its founding, Lexus
became America's best-selling line of luxury motor vehicles (Lexus, 2010).” Not only is
their recognition in America, but Lexus’ caters to 70 countries worldwide (Wilson, 2009).
Many consumers also acknowledge Toyota’s Production Systems. The culture of the
company is to manufacture reliable and quality products at an efficient rate (Vasilash,
2009). “No matter where a Lexus is built, one thing remains constant: The idea that every
step of the production process should reflect the Pursuit of Perfection (Lexus, 2010).”
Weaknesses: All, with the exception of one, of Lexus’ manufacturing facilities are
located in Japan. Last year, Lexus sold 215,965 vehicles in the United States (Ramsey,
2010). With the United States being its top selling country, Lexus spends a significant
amount of money on shipping costs, and also, the amount of time that dealerships wait for
the vehicles. Secondly, compared to Mercedes Benz and BMW, the driving performance on

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Lexus products do not equate to these companies. Though the performance reaches
customer satisfaction, Lexus products are not the “ultimate driving machines.”
Opportunities: The growing economies in China and India are becoming globally
recognized. These markets have the ability to expand and citizens of these countries are
acquiring money. China also has the world’s largest auto market (Kutamura, 2010). As
years progress, consumers become more environmentally friendly. As of today, Lexus
already have the reputation for manufacturing environmentally friendly vehicles.
Threats: Within the past year, Toyota has recalled thousands of vehicles due to
operational malfunctions (Dapena, 2010). With the existing recalls, this questions the
reliability of Toyota’s Production System. With consumer doubt, vehicle sales may decrease
which may not help the second threat of a stiff competition. In an industry with strong
competition, there is almost no room for mistakes.
III. Strategy Options:
Below are the strategy options that are based on the TOWs matrix. Some of these
strategy options mentioned are in the process/already occurring.
The possible strategy options for Lexus to generate more revenue are based on the
Industrial Organization I/O model. In order to generate higher revenue, Lexus has the
opportunity to take part in the emerging markets of China and India. As of this year, the
global recession has come to an end, therefore, the production, forecasting, and marketing
of Lexus vehicles should be as effective as possible (Irwin, 2010). If Lexus chooses to be
conservative on production, a possible strategy may be to concentrate more on research
and development. One of their weaknesses includes the lack of performance engineering.
With the availability of time, Lexus may conduct research on post-recession consumer
behaviors to imply what the next company step will be. By doing so, it may be possible to
break into new consumer segments or gain a higher volume in the U.S. market. Lastly,
Lexus has another option of expanding its facilities. By expanding production facilities, in
the United States for instance, Lexus has the chance to cut shipping costs and delivery
delays to its dealerships. These options have their ups and downs. Even though the
recession is over, the demand for vehicles may not come into play until the market is
secure. Therefore, the forecasting of production needs to be efficient and accurate.

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Conducting research and investing more in research and development may require time
and at the end of research, Lexus may already be late.
With the utilization of Lexus’ current competencies, based on the Resource-Based
model, the company has already made the jump in obtaining the reputation of being an
environmentally friendly car manufacturer. The strategy can possibly overcome the threat
of rising oil prices and maintenance costs. With the presence of the Toyota Production
System, Lexus could perhaps invest in improving the production system preventing any
future recalls to maintain a reliable reputation. With their existing brand equity and global
presence, Lexus and Toyota Corporation still has room to strengthen these aspects. Similar
to one of its rivals, BMW, Lexus should design and manufacture a small-sized vehicle. By
doing so, Lexus has the opportunity to expand to more of the younger consumers by
offering a high-end luxury sport compact car.
Recommendations
The original strategies of Lexus shall remain the same because of the direction the
market is flowing. It’s original business-level strategy that consists of a broad
differentiation and low-cost provider strategy fits well with the current economic
conditions. The recession is over and consumers are beginning to gain a source of income
again. Though many may not be able to afford a Mercedes or BMW, consumers can
compromise with a Lexus, which is just as luxurious as the former two companies but
cheaper. Lexus has incorporated two great strategies. (1) Offering hybrids for most of its
product line up and (2) Designing and manufacturing lost-cost cars for the China and India
market (Kutamura, 2010). By offering hybrid options, Lexus covers the environmentally
friendly consumers with a wide variety of vehicles.
Secondly, as stated above, developing a luxury sport compact vehicle may become a
best seller for Lexus. Similar to the BMW 1 series, Lexus has the opportunity to reach out to
younger consumers with an affordable car. Not only would this approach reach out to
more consumers but also it may solve the threat of change in demographics. If a person’s
income has changed and can no longer afford a mid-sized Lexus, this specific consumer
may consider downsizing due to financial reasons. Personally, I am comfortable with Lexus
vehicles and its performance. Many, however, may disagree and there may be plenty of
room for improvement.

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Internal Strategic Factors Weight Rating Weighted Comments
Score
Strengths
S1 Strong brand equity .20 5 1 Being the luxury vehicle division of Toyota
Motor Corporation, allows Lexus to
become its own brand.
S2 Lexus (Toyota) .15 4 .6 Manufacturing quality products efficiently
Production Systems- has been the culture for all divisions of
manufacturing efficiency Toyota Motor Corporation.
and product quality
S3 Diverse vehicle product .05 3.6 .18 Lexus group carries an intense variety of
line up reaching out to a vehicles that cater to drivers of all ages.
variety of customer
segments
S4 Strong Global Presence .10 3.2 .32 Lexus vehicles are available in 76
worldwide countries.
S5 Enhanced training for .05 2.8 .14 Fuji Lexus college trains and recruits
prospective Lexus dealers future Lexus dealers.
Weaknesses
W1 Production of vehicles .15 2.7 .41 High cost of shipping and delivery wait
is concentrated in Japan time.
W2 Reduction in R&D .05 2 .1 Cutting operation costs because the recent
costs and capital spending global recession.
due to decrease in sales.
W3 Lack of a small vehicle .10 2.1 .21 The smallest vehicle that Lexus offers is a
product in major markets mid-sized vehicle. Competitors’
may/already have developed a small
vehicle.
W4 Not having a dominant .10 2.9 .29 Although Lexus produces and
level of mechanical design manufactures quality products, the
as opposed to a high level performance of its actual vehicles is not
of production. the best of the market.
W5 Major job layoffs due .05 2.6 .13 Lay-offs could affect shareholders’ decision
to lack of sales in North in investment as well as faith in the
America internal work environment.
Total Scores 1.00 3.38
Internal Factor Analysis Summary (IFAS) Table

7. External Strategic Factors Weight Rating Weighted Comments
Score Yang 7
Opportunities
O1 Growing demand for .20 4 .8 There are Hybrid options for most of Lexus’
hybrid electric/fuel- product lines.
efficient vehicles.
O2 Emerging markets in .10 3.6 .36 This opportunity allows Lexus to enter in a
China and India market sector with high demand of
vehicles and economic growth.
O3 The end of the global .10 3 .3 The global recession was a result of
recession decrease in vehicle sales throughout the
industry. With the recession over,
manufacturers may want to pick up
production again.
O4 Ability to adjust to .05 2.8 .14 With the recession recently ending, Lexus
post-recession demands has time to research consumer needs in
order to increase vehicle sales.
O5 Finding alternative .05 2.4 .12 Lexus may have the opportunity to relocate
locations for production. its production of vehicles. This may be
costly, however it may save shipping costs
and delays.
Threats
T1 Rising oil prices and .10 2 .2 The more expensive it is to operate a car
other car maintenance will lead to a lesser desire of owning a
costs vehicle.
T2 Alternative forms of .05 1.8 .09 Governments in metropolitan cities
transportation encouraged encourage citizens to car pool or take
by government. public transportation in order to lower
emissions. With the availability of
alternative transportation, Lexus may lose
out on vehicle sales.
T3 The recent recall of .20 2.8 .56 There have been massive recalls on
Toyota Motor Corporation millions of vehicles by the Toyota Motor
vehicles and the affect of Corporation. It has made headline news
media about the issue. and created bad publicity for the
corporation as a whole.
T4 Stiff competition and a .10 2.6 .26 As with any other car manufacturer, Lexus
fluctuating market faces tremendous competitive rivalry in the
car industry.
T5 Change in .05 2 .1 Lexus produces a variety of cars such as
demographics (ie. Income, SUVs and family sedans. With possible
family size, etc.) change in demographics, the demand for
Lexus vehicles may decline.
Total Scores 1.00 2.93
External Factor Analysis Summary (EFAS) Table

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Strategic Factors Weight Rating Weighted S I L Comments
Score H N O
O T N
R M G
T D
T.
S1 Strong brand .20 5 1 X Being the luxury vehicle division of
Equity (S) Toyota Motor Corporation, allows
Lexus to become its own brand.
S2 Lexus (Toyota) .10 3.8 .38 X X Manufacturing quality products
Production Systems- efficiently has been the culture for all
manufacturing divisions of Toyota Motor Corporation.
efficiency and
product quality (S)
S4 Strong Global .15 3.6 .54 X Lexus vehicles are available in 70
Presence (S) worldwide countries.
W1 Production of .10 3 .3 X X High cost of shipping and delivery wait
vehicles is time.
concentrated in Japan
(W)
W4 Not having a .05 2.8 .14 X Although Lexus produces and
dominant level of manufactures quality products, the
mechanical design as performance of its actual vehicles is
opposed to a high not the best of the market.
level of production.
(W)
O1 Growing demand .10 3 .3 X X There are Hybrid options for most of
for hybrid Lexus’ product lines.
electric/fuel-efficient
vehicles. (O)
O2 Emerging .10 3 .3 X X This opportunity allows Lexus to enter
markets in China and in a market sector with high demand
India (O) of vehicles and economic growth.
T3 The recent recall .15 2.6 .39 X X There have been massive recalls on
of Toyota Motor millions of vehicles by the Toyota
Corporation vehicles Motor Corporation. It has made
and the affect of headline news and created bad
media about the publicity for the corporation as a
issue. (T) whole.
T4 Stiff competition .05 2.4 .12 X As with any other car manufacturer,
and a fluctuating Lexus faces tremendous competitive
market. (T) rivalry in the car industry.
Total Scores 1.00 3.47
Strategic Factor Analysis Summary (SFAS) Table

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Internal Factors (IFAS Table) Strengths (S) Weaknesses (W)
S1 Strong brand equity W1 Production in Japan
S2 Lexus Production W2 Reduction in costs
Systems W3 Lack of small vehicles
S3 Diverse Product Line W4 Lack of performance
External Factors S4 Strong Global presence engineering
(EFAS Table) S5 Enhanced Employee W5 Major lay-offs
training
Opportunities (O) SO Strategies WO Strategies
O1 Growing demand for Hybrids Easy expansion into China/India Design and manufacture a
O2 Emerging markets in due to Lexus’ marque brand and vehicle of smaller stature for the
China/India strong global presence. China/India markets.
O3 End of Global Recession Respond to post-recession Establishing a new production
O4 Adjusting to post-recession demands with efficient production facility would increase job force.
Demands and forecasting of products. Invest more into the engineering
O5 Alternative Production Although costly, consider a new of performance Hybrids.
locations production location with the
advantage of having a strong
global presence.
Threats (T) ST Strategies WT Strategies
T1 Rising oil prices and With the offering of Hybrid The production of smaller
maintenance costs options for most of Lexus’ vehicles can solve the threat of
T2 Alternative forms of products, Lexus may be able to change in demographics.
transportation overcome the increase on fuel Reduce R&D costs in order to
T3 Corporation Recalls prices. sell more affordable vehicles
T4 Stiff Competition Improve Lexus’ Production allowing the demand for non-
T5 Change in Demographics systems in order to reduce the hybrids to increase.
possibility of recalls. Increase research in
Increase brand equity and global performance engineering to
presence to overcome stiff create an all-around luxury
competition. vehicle to overcome
competition.
TOWS Matrix

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Works Cited
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Production - Field Guide to the Automotive Revolution. N.p., n.d. Web. 13 Oct. 2010.
<http://www.autofieldguide.com/articles/090601.html>.
Wilson, Tom. "View the latest first drive review of the 2010 Lexus RX 350 & RX 450h. Find
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Automotive Magazine - Expert Car News | RoadandTrack.com. N.p., n.d. Web. 13 Oct.
2010. <http://www.roadandtrack.com/tests/drives/2010-lexus-rx-350-rx-450h>.
Student Statement
On my honor, I have neither given nor received unauthorized aid on this assignment.
___________________________
Bobby Yang

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