COMPANY Case

Prius: Leading a Wave of Hybrids

Americans love their cars. In a country where SUVs have dominated the roads for more than
a decade and the biggest sport is stockcar racing, it seems unlikely that a small, sluggish,
hybrid vehicle would become such a hit. But against all odds, the Toyota Prius has become
one of the top 10 selling vehicles in America. Introducing a fuel sipper in a market where
vehicle size and horsepower have reigned led one Toyota executive to profess, “Frankly,
It was one of the biggest crapshoots I’ve ever been involved in.”Considering these issues, it is
nothing short of amazing that only five years later, the president of Toyota Motor Sales
U.S.A., Jim Press, dubbed the Prius “the hottest car we’ve ever had.”
THE NUTS AND BOLTS OF THE PRIUS
Like other hybrids currently available or in development, the Prius combines a gas engine
with an electric motor. Different hybrid vehicles employ this combination of power sources
in different ways to boost both fuel efficiency and power. The Prius runs on only the electric
motor when starting up and under initial acceleration.
At roughly 15 mph, the gas engine kicks in. This means that the auto gets power from only
the battery at low speeds and from both the gas engine and electric motor during heavy
acceleration. Once up to speed, the gas engine sends power directly to the wheels and,
through the generator, to the electric motor or battery.
When braking, energy from the slowing wheels—energy that is wasted in a conventional car
—is sent back through the electric motor to charge the battery. At a stop, the gas engine shuts
off, saving fuel. When starting up and operating at low speeds, the auto makes no noise,
which seems eerie to some drivers and to pedestrians who don’t hear it coming!
The Prius first sold in the United States in the 2001 model year. It was a small, cramped, slow
compact car with a dull design. Three years later, the second-generation Prius benefited from
a modest power increase. But it was still anything but a muscle car. However, there were
countless other improvements. The sleek, Asian-inspired design was much better looking
than the first generation Prius and came in seven colors. The interior was roomy and
practical, with plenty of rear leg room and gobs of storage space.
The Gen II Prius also provided expensive touches typically found only in luxury vehicles. A
single push button brought the car to life. A seven-inch energy monitor touch screen
displayed fuel consumption, outside temperature, and battery charge level.
It also indicated when the car was running on gas, electricity, regenerated energy, or a
combination of these. Multiple screens within the monitor also provided controls for air
conditioning, audio, and a satellite navigation system. And whereas the first Prius averaged
an astounding 42 miles per gallon, its successor did even better at 48.
A RUNAWAY SUCCESS
Apparently, consumers liked the improvements. In its inaugural year, the Prius saw moderate
sales of just over 15,000 units—not bad considering that Toyota put minimal promotional
effort behind the new vehicle. But sales for the carbon fuel miser have increased
exponentially ever since. In 2007, Toyota sold 181,000 Priuses in the United States alone, a
70 percent increase over 2006 sales. That makes the Prius Toyota’s third-best-selling
passenger car following the Camry and Corolla. Perhaps more significantly, in May of 2008,
Toyota announced that it had sold a total of 1,028,000 Prius cars worldwide since the vehicle
first went on sale in Japan in 1997.
The rapid increase in demand for the Prius created a rare automotive phenomenon. During a
period when most automotive companies had to offer substantial incentives to move vehicles,
many Toyota dealers had no problem getting price premiums of up to $5,000 over sticker
price for the Prius. Waiting lists for the Prius stretched up to six months. At one point, spots
on dealers’ waiting lists were being auctioned on eBay for $500. By 2006, the Prius had
become the “hottest” car in the United States, based on industry metrics of time spent on
dealer lots, sales incentives, and average sale price relative to sticker price. In fact, according
to Kelley Blue Book, demand for new Priuses became so strong that, even after one year and
more than 20,000 miles, a Prius could fetch thousands more than its original sticker price.
There are many reasons for the success of the Prius. For starters, Toyota’s targeting strategy
has been spot-on from the beginning. It focused first on early adopters, techies who were
attracted by the car’s advanced technology. Such buyers not only bought the car but found
ways to modify it by hacking into the Prius’s computer system. Soon, owners were sharing
their hacking secrets through chat rooms such as Priusenvy.com, boasting
such modifications as using the dashboard display screen to play video games, show files
from a laptop, watch TV, and look at images taken by a rear-view camera. One savvy owner
found a way to plug the Prius into a wall socket and boost fuel efficiency to as much as 100
miles per gallon. In addition to Toyota’s effective targeting tactics, various external
incentives helped to spur Prius sales. For example, some states issued permits for hybrids to
drive in HOV (High Occupancy Vehicle) lanes, even if they only had one occupant. Some
cities, including Albuquerque, Los Angeles, San Jose, and New Haven, provide free parking.
But the biggest incentives were monetary.

The federal government gave huge tax breaks amounting to thousands of dollars. Some state
governments gave additional tax breaks, in some cases matching the federal tax break. On top
of all that, some eco-friendly companies such as Timberland, Google, and Hyperion
Solutions also joined in the incentive game, giving employees as much as $5,000 toward the
purchase of hybrids. But after some time, the early adopter market had been skimmed and the
government incentives were slowly phased out. Just as these changes were taking place,
Toyota was already well into a $40 million campaign targeting a different set of consumers,
the environmentally conscious and those desiring greater fuel efficiency. With the accuracy
of a fortune teller, Toyota hit the nail right on the head. Gas prices skyrocketed, first to $3 a
gallon, then past $4. By the spring of 2008, Prius hysteria had
reached an all-time high. Just as demand for full-sized SUVs began to tank, waiting lists and
dealer mark-ups over sticker for the Prius once again became the norm. “I’m selling every
one I can get my hands on,” said Kenny
Burns, a general sales manager at a California Toyota dealer. With a 30-day waiting list for a
new Prius, “The day the car comes in is the day the car goes out.”

FUELING THE HYBRID CRAZE

The overall category of gas-electric vehicles in the United States is hotter than ever. Although
hybrids accounted for only about 3 percent of total U.S. car sales in 2007, their share is
growing rapidly. For the first quarter of 2008, hybrid sales were up 25 percent over the
previous year. In April of that year, sales jumped a whopping 58 percent. The Prius alone
commands more than 50 percent of the market and is largely responsible for category growth.
While various hybrid models have hit the market in recent years, it appears that consumers
like their green cars very green. Sales of the ultra-high-mileage Prius and Civic have grown
significantly each year since their introductions. But less efficient (and more expensive)
hybrid models such as the Honda Accord (now discontinued), the Ford Escape, and the
Mercury Mariner have not fared nearly as well. Some analysts believe it is because
consumers are doing the math and realizing that even with better fuel efficiency, they may
not save money with a hybrid. In fact, a widely publicized 2006 report by Consumer Reports
revealed that of six hybrid models studied, the Prius and the Civic were the only two to
recover the price premium and save consumers money after five years and 75,000 miles. But
as the price of gas rises, the break-even period for the price of a hybrid gets shorter and
shorter. That may just mean greater demand for all hybrid models as consumers perceive that
even the less efficient hybrids

Motors offers both the only full-sized SUV hybrid in the Tahoe and the lowest priced hybrid
option at $2,000 for the Saturn Vue and Aura. GM plans to extend the Saturn hybrid line to
almost every vehicle in the lineup while continuing to introduce hybrids in other divisions.
Ford plans to produce 250,000 hybrids a year by 2012. And while Subaru, Hyundai, and
Honda are all promoting upcoming hybrid models, Audi, BMW, and numerous others
are busy developing hybrid vehicles of their own. Even with all the activity from these
automotive brands, Toyota
is currently the clear leader in hybrid sales and likely will be for some time to come. It makes
6 of the current 15 U.S. hybrid models (including 3 Lexus models). And with market
conditions changing, Toyota is also showing its ability to adapt. In addition to the increased
level of competition, the Prius faces more internal competition from new Toyota models like
the Camry. Toyota faces a greater challenge in ramping up production to meet demand than
from external competition. All indications show that Toyota plans to maintain its hybrid
momentum, doubling its line to 12 models and increasing its worldwide hybrid sales to 1
million vehicles per year by the early 2010s. At that time, it plans to unleash an entirely new
lineup of hybrids based on next-generation lithium-ion batteries, which pack more power
than the current nickel-metal-hydride batteries. If the past is any indication, Toyota’s future
looks very green.

Questions for Discussion

1. What microenvironmental factors affected both the first generation and second generation
models of the Toyota Prius? How well has Toyota dealt with these factors?
2. Outline the major macroenvironmental factors—demographic, economic, natural,
technological, political and cultural—that have affected Prius sales. How well has Toyota
dealt with each of these factors?
3. Evaluate Toyota’s marketing strategy so far. What has Toyota done well? How might it
improve its strategy?
4. GM’s marketing director for new ventures, Ken Stewart, says “If you want to get a lot of
hybrids on the road, you put them in vehicles that people are buying now.” This seems to
summarize the U.S. auto makers’ approach to hybrids. Would you agree with Mr. Stewart?
Why or why not?