REPORT

Lexus Case-Study

Working team:

Tomislav Dorotić, Yulia Parinova, Valentin Sébart, Gustave Marengo

May, 2015

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Content

I. Introduction

II. About Lexus

III. Lexus’s main problems

IV. International management

V. Future plans

VI. Conclusion

VII. Sources

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I. Introduction

According to statistics of car sales in 2014, BMW maintained its title of most popular luxury

automotive brand in the world in 2014, with its sales for the year coming in at 1,811,719 cars.

Audi came in second with 1,741,100 sales worldwide. In third place was Mercedes-Benz,

which sold 1,650,010 cars. Lexus already sits in fourth in worldwide sales, albeit trailing

Mercedes by nearly one million sales. It sold 523,000 sales cars.

Global luxury cars’ market grew up to 351 billion euros in 2014.

http://www.statista.com/statistics/281574/size-of-the-luxury-car-market/

Luxury car market has its trends and peculiarities:

• The global luxury car market has seen been relatively untouched by the financial crisis

and has been posting growth driven by the emerging markets.

• The three German players BMW, Audi and Mercedes-Benz account for approximately

80% share of the global luxury car market. While BMW is the global leader, there is stiff

competition between the three players.

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• Countries such as China, Japan, the U.S., Canada, India and European countries are

the major markets for the luxury vehicles.

• Size is no longer one of the key definitions of a luxury vehicle. There is a growing market

for smaller, fuel-efficient luxury cars. The compact segment is expected to be one of the

fastest-growing luxury car segments, growing by % to reach close to million sales

globally by 2020

• Increasing disposable income is the major driver for the luxury vehicle globally.

• Various loan schemes launched by the automobile manufacturers and the financial

institutions have made it easy for the customer to buy luxury vehicles to maintain their

status in the society. This may provide growth opportunity for the luxury vehicle

especially in the developing nations.

• Rising fuel price can act as restraints for the global luxury vehicle market especially in

the developing countries such as India.

• In an increasingly competitive space, OEMs are exploring new means of differentiating

their brand, and the study finds that new brand attributes and positioning will propel the

market.

• Customers started to pay more attention to sustainability and efficiency.

Lexus faces an intensive competition. A sustainable work with a customers, their needs and

continuous development will help a brand to lead.

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II. About Lexus

Lexus revolutionized the automotive experience with a passionate commitment to offering

the finest quality luxury vehicles, supported by dealers who create the most satisfying

ownership experience. Since its first cars hit the showrooms, Lexus has earned the respect,

receiving numerous quality and customer satisfaction honors from independent research firms,

as well as numerous awards from the automotive media, including Motor Trend and Car and

Driver.

Lexus recognizes that Lexus owners tend to be people who feel passionately about life and

appreciate new and rewarding experiences, and for this reason, Lexus sponsors a variety of

events that indulge the senses, engage the mind, and support charitable causes.

1983 Eiji Toyoda organized a very secret meeting in the company. He asked a question:

"Are we able to manufacture a luxury car that is able to compete with the best luxury sedans

of the moment?" The F1 CODE project was launched and more than $1 billion would be spent

to achieve the objective. 24 development teams, 1,400 engineers, 2,300 technicians, 220

workers, 60 designers and 450 prototypes were involved!

1986: Saatchi, Toyota advertising agency started a creative search of a name for the future

brand group in a luxury segment. 219 names were offered, finally “Lexus” was chosen,

expressing more luxury and elegance. The logo, chosen for the brand, represented a stylized

L in an oval, it was done precisely with a mathematical formula.

Meanwhile, Toyota teams travelled to California where they rent a house and lived in the

US, observing the daily life of Americans, their buying habits and expectations with respect to

the automobile.

January 1989: The car that had grown up under the name CODE F1 was presented at the

Detroit Motor Show. This was Lexus LS 400, Toyota V8 4 liter engine. It was sold "only" for

$ 38,000 and was considered by the US magazine CAR AND DRIVER better than the

Mercedes 420 SEL for $ 63,000 and the BMW 735i for $ 55,000 on performance and handling.

At the end of that year, Mercedes recorded a fall in sales of -19% and -29% for BMW.

Silence, comfort, ergonomics, performance, aerodynamics and low consumption defined the

LS 400. At the end of 1989 16,392 models were sold in the United States. In the same period,

8000 LS 400 were recalled by the manufacturer after complaints of two buyers on the electronic

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system. Technicians then addressed directly to individuals, taking their Lexus, then repaired

and brought back to their homes. This was the best advertising that the brand may had, this

work with customers was discussed throughout the automotive press.

From 1990 the brand moved to Canada, Switzerland, England and then the old Europe. 2

types of Lexus exist, those that is directly derived from, and other Toyota models that are

designed entirely by Lexus. It is this second category which is marketed in Europe from the

beginning.

Lexus International, heаded by managing officer Tokuo Fukuichi, coordinates the worldwide

operations of Toyota's luxury division. Other executives at Lexus' globаl headquarters, located

in Nagoya, Aichi, include Mark Templin, executive vice president of Lexus International, and

managers of the marque's Japan Sales & Marketing and global Product & Marketing Planning

divisions. While orgаnizationally separаte from its parent company, Lexus International reports

directly to Toyotа chief executive officer Аkio Toyoda.

Lexus sales operations vаry in structure by region. In mаny markets, such as the U.S., the

deаlership network is a distinct organizаtion from corporate headquarters, with separаtely

owned and operated Lexus showrooms. By contrаst, in Japan all 143 dealerships in the country

are owned and operated by Lexus. Severаl markets have a designated, third party regional

distributor; for example, in the United Arab Emirates, sаles operations are managed by Al-

Futtaim Motors LLC, and in Costa Rica, Lexus vehicles are sold via regionаl distributor Purdy

Motors S.A. Other officially sanctioned regionаl distributors have sold Lexus models prior to

the launch of, or in absence of, a dedicаted dealership network.

Success of Lexus is closely connected with the Toyota’s corporate culture. The Toyota Way

is a set of principles and behaviors that underlie the Toyota Motor Corporation's managerial

approach and production system. Toyota first summed up its philosophy, values and

manufacturing ideals in 2001, calling it "The Toyota Way 2001". It consists of principles in two

key areas: continuous improvement, and respect for people.

These principles help the strategic development of the company, which is penetrating

various international markets and the production quality vehicles at low costs. Most people

have worked for more than 10 years in the company and they like what they do and they are

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proud of what they do. Finally, there are two main factors which lead the Toyota Company to

success: technological innovations and qualified human resources.

III. Lexus Main Problems

Lexus, which is a luxury cars’ brand, has some difficulties to keep a stable image in the

minds of consumers. These difficulties are due to certain general factors:

1. Limited product portfolio in growing markets

2. Limited distribution & service network and spare part availability

3. Quality control, lack of which lead to automobiles’ recalls

4. Competition with other automobile giants

Despite of impressing results, particularly for Lexus in the US, the Japanese cars didn’t keep

the superiority of BMW, Audi or Mercedes.

But the biggest problems for Lexus were mechanical. The year 2009 was the most difficult

period for Lexus when a big amount of recalls happened. Here are the most important periods

connected with problems of the quality of cars.

• 2009 – in this year the first important case of cars returns happened. Lexus recalled 437

500 cars. The problem was with an accelerator pedal which could get stuck in the floor mat.

Lexus explained that it was not their fault. The subcontractor producing floor mats had a

production error that influenced the quality of Lexus’ cars. The international press did not give

a lot of information on this matter that is why it was not an image damaging case for Lexus.

There was no real decline in sales.

• 2010 was the worst year for Lexus and Toyota. Toyota recalled 8 million vehicles

worldwide, including 30% of Lexus. This time, the case had a high media reach because it was

a mistake of the company itself. Indeed, mistakes were recognized in the assembly lines. There

were two major problems in the same year.

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- First problem: General Control Stability problem (ABS, ESP, VSC). It was a general

problem with a system of stability. This mistake was not really dangerous but they

wanted to prevent a potential problem.

- The second problem was very dangerous for customers and this time the issue was

coved in many international media. Lexus recalled more than 1,5 million cars and Toyota

- more than 6 million. The problem was with brake malfunction (brake fluid leak) and the

accelerator blocked at the maximum.

This problem was very serious, it caused a lot of accidents and more than 80 deaths. All

important people of the company made media outlets as well as the CEO of Toyota. There was

a corrective action by announcing a plan to fix the faulty accelerators and brake. Top

management took part in communication with customers, this gave a huge impact on the public

perception.

For the most part, Toyota has received little to no positive publicity since the first accidents

and few deaths in late 2009 and 2010. In a major effort to repair their damaged reputation,

Toyota has made sure to address multiple publics through various outlets, as well live up to

their motto of “Moving Forward”.

Toyota has allowed for users to contact and interact with them in multiple media forms.

Toyota has been sure to implement traditional methods such as website and typical modes of

advertising, as well as creating the many social media profiles.

On each of the outlets, Toyota asks for feedback, input and information for users, all while

providing users with valuable information. Toyota has made sure to target specific publics by

segmenting groups by car brand.

Toyota has managed to appeal to a large group of people, but has been sure to create

individual messages for specific audiences. Toyota has made sure to tailor their information,

messages and social media to individual audiences versus creating one outlet for all of the

information.

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IV. International Management

Global marketing evolves from a domestic marketing practice due to a globalization

imperative. The necessity to globalize the marketing efforts derives from factors such

saturation of domestic markets, global competition, need for global cooperation, or even

including the internet revolution of electronic commerce. Also, there is a necessity to catch up

with the fast pace the world lives today in order to stay tuned and compete.

Companies tend to evolve in their internationalization process, from being a domestic

company, to start exports, international marketing, multinational marketing and globalization of

marketing efforts. On an international marketing level, the firm acknowledges local cultural

differences across markets identifying the need to tailor strategies (concerning product and

promotion) to suit differences. On a multinational marketing base, product planning may be

standard within a region, but not across regions.

Buyer behavior and consumer needs are largely driven by cultural norms. Global business

means dealing with consumers, strategic partners, distributors and competitors with different

cultural mindsets. Therefore, it is important to understand cultural difference as to understand

the complexity of foreign markets.

Here are some peculiarities of the biggest luxury cars markets for Lexus.

USA market

Lexus brand management in USA has proved successful. The brand originated from scratch

and 2 years after its introduction it overtook Mercedes Benz (number-one luxury prestige) and

BMW (number-one luxury performance) brands, becoming the best selling luxury import brand

in the market.

Brand awareness in the USA was achieved through media and customer events. Initial

advertisement played a key role in building brand awareness. The introduction of Lexus to the

public was communicated through a series of creative advertisements. Brand awareness

investment in the USA has been stopped since the brand achieved the desired recognition

levels, the brand invests in loyalty, instead. However, Toyota in USA runs some TV ads for

Lexus now.

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• The battle for luxury vehicle sales continues to grow in intensity as a larger percentage

of profits are coming from a comparatively small number of sales.

• One strategy which has gained traction among luxury automakers is the production of a

cheaper entry-level vehicle in order to gain sales from those who want a luxury brands

but are not willing to pay luxury price.

• Toyota Motor's Lexus has decided not to pursue this strategy for fear that it may diminish

or cheapen the perception of their luxury brand in the mind of the consumer. The

company values the long-term brand equity over the potential short-term sales bump.

• Nowadays, consumers place more emphasis on utility, performance and store of value.

Consumers want a brand they can trust. In these terms, Lexus has the highest loyalty

rate in the industry with 53% by the time Dawson’s book was published.

Lexus in Japan

Lexus was introduced in Japan in August 2005. The GS, SC and IS (starting one month

later) were the models picked to open business in Japan. The flagship LS was introduced the

following year. The LS model is core to the Japanese market, it is a premium and aspirational

product, and it is since its introduction that sales started to improve.

Toyota and Lexus are different, and for Lexus, creating brand equity has always been first

priority. Consequently now that Lexus is starting in Japan, brand image is first priority to

emphasize it. With regard to this, too much luxury and uniqueness is important, evidenced by

the luxurious show rooms. This caused Lexus some critics, but they are needed to achieve this

differentiation. Lexus dealership system stands alone, 100% exclusive, although it belongs to

Toyota. An article published by the New York Times states that Toyota does not try to challenge

Mercedes-Benz or BMW with the introduction of Lexus, but they are “rather looking to position

themselves in what they call a gray zone between the German makers and the top of their own

current line.”

According to interviews, when Lexus started in Japan, the demographics were mainly

Toyota owners. Inflow from import customers are only 1-2% in case of Toyota models, Lexus

is 10-15% from import customers.

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Loyalty programs implemented by the brand in Japan are reported to be the Lexus Care

Maintenance Program with 3 year free maintenance, concerts and golf. Brand awareness in

Japan is achieved through customer events and Toyota Japan also runs some TV ads for

Lexus in Japan, too.

• Attributes like luxury, status, performance, safety or technology, among others are of

importance to measure Lexus brand equity as well as customer satisfaction.

• Lexus pioneered in customer satisfaction in the USA, but these standards are already

high in Japan. For these reason, Lexus seeks to differentiate from the competitors by

means of a mix of customer satisfaction, atmosphere (created by Lexus stores) and the

G-link system, which provides the customer with an additional sense of safety; in

addition to the product, for which Lexus counts with Toyota’s hybrid technology.

Lexus in Brazil, as a case of brand management in developing countries

Toyota re-entered the Brazilian market with a wider offer in 1993 when the imports of Corolla,

Hillux, Rav4, Camry among others started. Corona was introduced in 1996. The Corolla

nameplate started to be produced in Brazil around 1998-99, and Hillux started production in

2001 in Argentina. Before 1993 Toyota was present in the Brazilian market with the locally

produced Bandeirantes pick up.

In Brazil Customers are basically large corporation businessmen (generally multinational

companies, but large Brazilian companies too, both Brazilians and foreigners), 50 to 70 years

old; who know the brand due to heavy traveling abroad. Contacts with the managers agreed

they are not the “new rich” type but traditional opinion leaders who have always belonged to

the upper tier of society. Wealthy people in Brazil, also owns other luxury (competing) brands

in the family.

Although officials declined to comment regarding pricing policies, one of the managers

interviewed commented that the final price in Brazil is estimated to be 105% over the price in

origin. This price contributes to a different positioning, aiming at a different consumer segment.

The public in general is not much aware of the brand, but the brand is very well known

among its users, who knew it before it was introduced in Brazil.

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• Brasil runs a production facility responsible for the manufacturing of many of the vehicles

Toyota commercializes in South America. Lexus, however, is imported from Japan.

• The main reason underlying a purchase decision is reported to be quality. In addition,

consumers value attributes like sophistication and luxury, but these seem not to be a

driving reason behind a purchase.

• Lexus customers have always owned top luxury brands, since they have always

belonged to the affluent segment.

• Toyota is growing fast in Brazil, and although Toyota is being very conservative with

Lexus, it has a potential to grow in the country.

Differences and similarities in the brand strategy across borders

• Lexus brand pyramid is based on superior quality, respect for time, personalized service

and the uncompromised pursuit of Lexus characteristics.

• Basic differences between Lexus position statement in USA and Japan may be that in

the case of USA, the statement has more elements of confidence in terms of wining the

race, while in the case of Japan the customer seems to be given more relevance

• Luxury associations may prevail over humility in Japan, while in the USA and Brazil

seems to be the opposite.

• The international presence of the brand, and mainly, its success in the USA, may

contribute to maintaining awareness levels in other regions, like Brazil.

• Lexus may imply American consumers are succeeding in their careers, but in the case

of Brazilian customers, the brand has not the same meaning, since they already occupy

high positions in the hierarchical system.

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V. Future Plans

Unlike its German rivals, Lexus has no heritage, no narrative. That is why it is more oriented

to the future. In 25 years of existing, customers already gain trust in brand name because of

their innovation, and they expect to get the best that the automobile industry has to offer.

Some of the future plans:

a) Wider range of cars

b) Focusing on East

c) Focusing on improving engines and hybrid technology

Wider range of cars

Lexus is reworking its sedan lineup as part of an effort to vault past Mercedes-Benz and

BMW and retake the luxury sales lead. They are also preparing to fill gaps in its range to

counter the avalanche of new models from European rivals.

It also aims to add sparkle to the lineup with a coupe based on the wild LF-LC concept and

possibly a coupe derived from the GS. The lineup also is likely to expand to include a smaller

five-passenger crossover. It is expected that Lexus will begin following the BMW routine as far

as cycle changes go, with a major re-do every two or three years, alternating between body

work and powertrain, so they would always have something new to brag about. Their plan is

to have car in every category of premium cars. They are already head to head with German

premium cars in the U.S and due to the highest consumer satisfaction range of any luxury car

makers there wouldn’t be a problem for success of new models.

Focusing on East

In 2005 Lexus started producing cars in their country of origin, Japan. Reason for that is the

same as the reason for launching it in America and Europe. The Toyota brand does not carry

enough cachet to allow it to compete against the likes of BMW, Mercedes-Benz and Jaguar.

The only difference is that rest of the World doesn´t see Lexus as Toyota and in Japan people

think of Lexus like Toyota with different badge so Lexus needed to improve their brand image.

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The other reason for returning to Japan is overall technological superiority. Japan doesn´t have

their natural resources of gas and oil so they are oriented to renewable source of energy, Lexus

hybrid technology might be a big advantage for them.

Except Japan they have tendencies of expanding on the market of China. China is a big

potential market due to the number of people who are living there and due to its economic

growth and tendencies of becoming a new world superpower. That is why Lexus was

presenting their new model in Auto Shangai and not in Europe or U.S like previous years.

The only problem they are facing is that there are no Lexus factories in China, so they are

facing big import duties which make them less competitive. Mark Templin, executive vice

president said “I think we’re still in the crawling stage˝ which means that they are worried about

developing the brand, making sure people know what they stand for and finally rolling out a

dealer network that’s capable of taking care of customers. The other reasons is that China has

poor copyrights laws and there is a risk of stealing intellectual property and know-how. But after

all there are tendencies of opening a factory in the future but it will be much harder to gain

significant market share.

Focusing on improving engines and hybrid technology

Toyota and Lexus has just unveiled two new small engines that it says are more fuel efficient

than previous engines thanks to a number of tricks and technologies pulled from its hybrid

powertrains. The engines, which are estimated to be up to 30-percent more efficient, are slated

to power a number of vehicles within the year and should spawn no fewer than 14 variations

in 2015.

First is the 1.3-liter engine that will achieve a thermal efficiency rating of 38-percent and a

15-percent increase in fuel efficiency compared to the engines it will replace. The second

engine is a 1.0-liter unit that features many of the engineering tricks as the 1.3-liter mill. Toyota

rates its thermal efficiency at 37-percent, but it is estimated to be 30-percent more fuel efficient.

That said, Toyota will attempt to improve the engines in its future hybrid models, with a goal of

increase the thermal efficiency in hybrid power plants from 38.5 to 42 percent.

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Lexus is also planning to produce hydrogen car based on a LS model and it should be

revealed in 2017. The company will purportedly revise the front end with bigger intakes to cool

the electric system. The biggest problem is locating a hydrogen tank. The plan is to put the cell

under the front seats and a hydrogen tank under the rear seats with a second tank under the

rear parcel shelf, eating into cargo capacity.

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VI. Conclusion

Lexus is the luxury vehicle division of Japanese automaker Toyota. First introduced in 1989

in the USA, Lexus is now sold globally and has become Japan's largest-selling make of

premium cars. The Lexus brand is marketed in over 70 countries and territories worldwide, and

has ranked among the ten largest Japanese global brands in market value.

Even though it is one of the most popular brand in luxury segment every year Lexus is facing

big problems with their models. In 2009 there was the first important case of cars return. Lexus

recall 437 500 cars. The problem was the accelerator pedal can get stuck in the floor mat, in

2010 there was a disaster for Toyota and Lexus, combined they needed to recall 8 million cars

and the problems were very dangerous. First problem was with General Control Stability

problem (ABS, ESP, VSC), and the second more serious was brake malfunction and gas pedal

stuck at the maximum. These problems caused more than 80 deaths. Despite all problems

they always managed to recovered and every year there is an increase in sales and still people

believe that Lexus can deliver the best that the automobile industry has to offer. So far Lexus

is doing really good job but for the premium car producers it is not acceptable to have so much

recalls. That is why they need to invest more in development and testing department.

Summing up all information, here are some important statements:

• Lexus is one of the leading world’s brands in luxury segment. To keep this position and

continue growing new consumers’ needs should be taken into attention, serious quality

developments should be done.

• In an increasingly competitive space, OEMs are exploring new means of differentiating

their brand, and the study finds that new brand attributes and positioning will propel the

market.

• To compete on the market, new models of cars should be developed for the most

important segments.

• There should be a focus on consumer’ needs, continuous “talk” with customers.

• There should be a quality management focus. Unique Customer Service.

• Use of new channels is important for the future - eRetailling and digital technology.

• There is should be a clear strategy for Lexus’s markets. SWOT analysis, ROI should be

determined.

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• Luxury segment customers have higher expectations. Cars’ recalls are not acceptable

for the company. Especially repeated cases.

For the future plans Lexus is planning to increase number of models so they could compete

with German competitors, they are oriented on establishing a brand on the East. China is a big

potential market but they are still in a ˝crawling˝ so they are not planning to open a factory there

in a close future.

There is a plan to build more efficient engines and to produce hydrogen car by the year 2017.

The basis of Toyota’s success is a perfect production system that leads to cost reduction

and to the production of quality vehicles. Furthermore, the company has two significant forces

that help it to evolve: technological innovation and “kaizen” human resources.

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VII. Sources

• http://www.forbes.com/companies/lexus/

• http://www.motorauthority.com/news/1096147_audi-bmw-and-mercedes-benz-all-

achieve-record-u-s-sales-in-2014

• http://www.fool.com/investing/general/2014/07/21/can-lexus-successfully-navigate-

the-competitive-lu.aspx

• http://www.toyota-forklifts.eu/en/company/tmhephilosophy/Pages/The-Toyota-

Way.aspx

• http://www.academia.edu/8968948/Toyota_Motor_Corporation_organisational_cult

ure

• http://feaa.ucv.ro/annals/v3_2010/0038v3-004.pdf

• http://de.slideshare.net/jitenhmenghani/marketing-strategies-plans-of-toyota

• 100 articles database collected by the working team