The automotive industry is a great example of what happens when a few competitors gain a strategic advantage by setting a high standard in a critical area. Toyota and Honda have been the quality leaders for more than two decades, attracting car buyers who had been Ford, General Motors, and Chrysler customers but who wanted better reliability in their vehicles. Toyota rode its quality wave to worldwide leadership in car sales, only to slip at the same time competitors’ quality matched and even surpassed it.

The Economist recently described the problems Toyota faces and how it is addressing them (“Losing Its Shine,” December 10, 2009). While the company seems to have fixed its quality issues—Toyota had 18 of the 48 leading vehicles in the recent Consumer Reports reliability study—quality is no longer a big differentiator in the automobile industry. Instead, Toyota’s “vehicles will inevitably be judged increasingly on more emotional criteria, such as styling, ride, handling, and cabin design.”

Akio Toyoda, grandson of the company’s founder and its president since June, recognizes the need for innovative design. He recently said, “I want to see Toyota build cars that are fun and exciting to drive.”

That may be a challenge. Toyota’s value proposition has been built upon quality and reliability. Its culture, defined by the Toyota Production System, completely supports that value proposition. Steering in a new direction using a system developed for a different purpose will prove difficult.

That’s the strategic challenge Toyota faces. It has set the standard for quality and reliability in its industry and rose to the top on these core competencies. It forced its competitors to catch up and most of them did. Now it must develop new competencies in design, innovation, and customer engagement to remain the industry leader.

To find out more about strategic challenges and advantages, read:

• Developing Critical Capabilities
• Being Good at the Right Things
• What Are Your Critical Success Factors?
• Identifying Capabilities Your Organization Needs
• What Are Your Organization’s Core Competencies?

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