The Smartest Company of the Year
And the Winner Is ... Toyota Hot cars. Hot brands. Hot technology. Here's how Japan's largest automaker keeps firing on all cylinders.
By Andrew Tilin

(Business 2.0) – What You Can Learn From Toyota

Nothing says smart like great results, and during the past year Business 2.0's smartest company certainly delivered. After leapfrogging Ford to become the No. 2 automaker worldwide, Toyota saw profits soar to a record $11.1 billion. Behind the numbers were intelligent moves in every corner of the operation, from product design and marketing to manufacturing and leadership. On the following pages, we spotlight some of the winning practices that put Toyota at the top of our list. Take a look—you might find an idea or two to make your own business smarter.

1. Know the limits of your brand.

It was a strange place to hype a new car: Last June, just outside iMi Jimi, a hipster clothing shop in Denver, stood four new coupes from Toyota, a brand better known for Camrys than cool. The hope was that young fashionistas would take time away from trying on Vans sneakers to go for a spin.

That's just what they did, by the hundreds, at iMi Jimi and other trendy clothing and record stores, cafes, and pubs nationwide. The attraction wasn't mega-rebates or zero-percent financing. It was the tC coupe, a stylish hatchback from Toyota's new youth-focused marque, Scion. Thanks to clever positioning, smart marketing, and a trio of edgy-looking, sub-$20,000 vehicles, Scion sold some 100,000 cars last year—about as many as Gen Y-targeted competitors Honda Element and Mini Cooper combined.

Toyota launched Scion because it recognized the limitations of its existing brands. The average Toyota driver is 50, and buyers of the company's big Lexus sedans are even older. But Scion is attracting an entirely new cadre of customers with a median age of only 35, extending Toyota's reach to the 63 million-strong "echo boomer" generation. "You have to be who you are," says marketing consultant John Winsor, author of Beyond the Brand. "If you're going to switch directions, you'd better start fresh."

That includes creating a completely new approach to selling cars. Because its target market is notoriously skeptical of advertising, Scion relies more on experiential marketing. Thus the informal test-drives at youth-centric hangouts as well as sponsorships of events like hip-hop concerts and graffiti art shows. Even Scion's showrooms look different: Tucked within larger Toyota dealerships, they're outfitted with flat-screen TVs and industrial-chic brushed metal. As a result, the new line isn't cannibalizing its parent: 85 percent of Scion owners have never purchased a Toyota. Of course, the company hopes that Scion drivers will become Toyota customers for life. "It's a good toe in the water," says Brian Bolain, Scion's national sales promotions manager. "Toyota gets a lot of experience with a group of consumers that's going to be around for a long time."

2. Making great products means going the extra mile (or 53,000).

An old Toyota proverb goes something like this: To make a better product, get off your rear end and experience the marketplace. Charged with revamping the Sienna minivan for 2004, Toyota chief engineer Yuji Yokoya did just that. To improve on the previous Sienna—small and underpowered—Yokoya embarked on a 53,000-mile North American minivan road trip that included five cross-continent treks, visits to every Mexican state and Canadian province, and loops around Puerto Rico, Hawaii, and the Virgin Islands. "When we asked Mr. Yokoya about his vision, he got very prophetic," recalls Mark Amstock, a Toyota marketing manager. "He said, 'The road will tell us.'"

Driving to the beat of the Pet Shop Boys' "Go West," Yokoya had many epiphanies. In Santa Fe, N.M., narrow downtown streets convinced him that the new Sienna should have a tighter turning radius. On the gravel of the Alaska Highway, he understood the need for all-wheel-drive. After squinting in the Mississippi sun along the Gulf Coast, he ordered roll-up sunshades for the second- and third-row side windows. There were small triumphs as well: On Utah's Bonneville Salt Flats, he tried to make the minivan fishtail. He was happy to report that "it's difficult to put the Sienna into a spin."

Soon after its debut, the 2004 Sienna became the car critics' darling. Through the first 11 months of last year, Sienna sales were up 60 percent over the same stretch in 2003, moving it into second place in the U.S. minivan race behind the perennial top seller, the Dodge Caravan. While Yokoya's trek took product testing to new extremes, it's also emblematic of Toyota's unswerving focus on the nitty-gritty of the user experience. "Occasionally he'd stop to take a breather or shoot a picture of something pretty," Amstock says. "But mostly it was to fix a flat or because he was lost."

3. Study their mistakes—and your own.

The first hybrid car sold in the United States, the wedge-shaped Honda Insight, certainly stood out. But weird looks plus a teeny cabin that could barely contain two early adopters added up to a tough sell. Between 1999 and 2004, Honda moved fewer than 13,000 of the vehicles. Figuring that consumers wanted something more conventional, Honda did somewhat better in the 2003 model year with a Civic hybrid that's indistinguishable from its gas-only twin. But it took Toyota's 2004 Prius, a car that walks the line between Honda's futuristic and familiar extremes, to make six-month waiting lists for hybrids a reality.

Mining niches pioneered by others is a Toyota specialty. In 1989, Toyota introduced its high-end Lexus line, which within three years outsold BMW and Mercedes-Benz to become the No. 1 luxury import. The company's family-oriented Camry sedan out-Taurused the Taurus in quality and function and is still a perennial chart topper. With hybrids, Toyota stumbled out of the gate: The first Prius, a four-door introduced in the United States in 2000, suffered from a lack of cargo space, poor acceleration, and plain-Jane looks.

But the slow and steady path to success is signature Toyota. For the 2004 Prius, Toyota set out to deliver the power and roominess of a family sedan in a design that screams eco-friendly. To make the $20,000 car perform better, Toyota engineers packed 50 percent more power into the electric motor and modified the engine so it could switch power sources 50 times faster. Meanwhile, the Prius's sloped, aerodynamic contours ensure that drivers look PC while they're getting high MPG. Soaring gas prices make the design seem all the more brilliant. "Honda's hybrid appeals on a rational basis," says Jim Hossack, a vice president at AutoPacific, an automotive market research firm in Tustin, Calif., "while the Prius says, 'Look at me!'"

As a result, the Prius outsells the Civic hybrid two to one and has ignited a mania for hybrids. Toyota's new Lexus RX 400h, scheduled to start shipping in April, already has more than 10,000 confirmed orders. Back in 2001, people laughed at Toyota president Fujio Cho when he predicted that Toyota would sell 300,000 hybrids by 2005. Turns out he wasn't far off: The company expects to sell 228,000 worldwide by the end of the year.

4. To export quality, first export company values.

Don't be fooled by the leather furniture, rich brown walls, and giant chrome Lexus symbol perched proudly on gleaming hardwood floors. This isn't a swanky Lexus showroom; it's the lobby of the automaker's new plant in Cambridge, Ontario. But the similarity is absolutely intentional. "It reminds our workers of what customers expect from Lexus," says Ray Tanguay, president of Toyota Motor Manufacturing Canada.

Toyota has long manufactured cars outside Japan. But to do so for Lexus, the company had to export the brand's culture of perfection—a level of expectation that surpasses even that of the exacting mother brand. On a Toyota, for instance, a 1-millimeter gap between hood and grille is acceptable; on a Lexus, the separation can't be thicker than an eyelash. Cambridge workers receive special training in Lexus manufacturing processes, and if no one on the floor responds to computer-detected manufacturing flaws within 15 minutes, upper management is paged by BlackBerry. "'Can I prevent it, can I predict it, can I see it?' That's the mentality we're always reinforcing to the staff," Tanguay says.

Before launching the new plant, Tanguay, a 13-year veteran of Toyota Manufacturing, toured every Lexus factory in Japan, looking for ways to improve on what he saw. The upscale entrance is one of his innovations, as are the quality-control systems that triple-check every stage of the Lexus-making process. Tanguay also extended the drive for improvement to suppliers, inspiring a Michigan-based maker of wood steering wheels to turn to a piano manufacturer for better lacquering techniques.

The impeccable execution of Cambridge's very first Lexus product—a 2004 RX 330 sport utility vehicle—should be the envy of any company competing in the global marketplace. That's because replicating manufacturing success across borders is easier said than done: When Nissan opened its Canton, Miss., plant in 2003, it experienced manufacturing glitches galore. Still, Tanguay believes that a better measure of his $470 million facility is how well it stacks up against other Lexus plants. An April 2004 J.D. Power & Associates quality survey showed that the differences are indeed minimal. "The only way to distinguish a Japanese RX 330 from a Canadian one?" Tanguay says. "The sticker."

REVVING THE GROWTH ENGINE

GLOBAL MARKET SHARE

[*] First three quarters. Sources: Automotive News; Business 2.0 estimates; company reports

2004 PROFITS

Note: Earnings for four quarters ending Sept. 30. Source: Company reports