ABSTRACT
Innovation management literature has found that government policy can significantly affect, both directly and indirectly, the innovative activity of profit-maximising firms. This 'sixth force' of government policy affects the primary five forces of business strategy: threat of new entrants, threat of substitute products or services, bargaining power of suppliers, bargaining power of buyers, and rivalry among existing competitors. This chapter examines the role of the United States federal government in the shift of innovation focus of Toyota and Lexus to hybrid cars: the Lexus RX 400h and the Toyota Prius. It identifies the impact of two federal government initiatives: the Partnership for New Generation of Vehicles established by the Clinton Administration in 1993 to improve fuel economy and the Alternative Motor Vehicle Tax Credit enacted by the 2005 Energy Policy Act. The automobile industry has been the subject of many studies of innovation, starting with Abernathy's seminal study of productivity roadblocks.
