Why: Hybrid cars can significantly reduce gasoline consumption by using an electric motor alongside a gasoline engine.

Key innovation: A market leader with its Prius model, it is developing battery technologies that are helping to make these cars less expensive and more energy-efficient.

Technology:

Toyota engineers have spent a decade perfecting a hybrid drive system that uses an electric motor, a gasoline motor, and a regenerative braking system to power reliable and affordable passenger vehicles with high gas mileage. Next year, the company will add a larger battery pack and a charging system to its hybrid platform as it introduces a plug-in version of the Prius.

Market:

Ever since introducing the Prius, the first mass-market hybrid electric car, in 1997, the company has dominated the market, surpassing two million in cumulative sales last year. With its plug-in Prius, it hopes to capture a large share of a new market that analyst J.D. Power has estimated at half a million in annual sales by 2015.

Strategy:

While companies like General Motors and Nissan are building plug-in hybrid vehicles with all-electric ranges of 50 miles or more, Toyota is betting that the smaller, less expensive battery pack it is using in its plug-in Prius will be more appealing to consumers. The company partnered with Panasonic to develop the lithium-ion batteries that will power the new version of the car.

Challenges and Next Steps:

Toyota is introducing plug-in hybrid models slowly, but it can convert any of its current hybrid models into plug-ins quickly if demand is higher than expected. Last year, it introduced an all-electric concept version of its RAV4 SUV, but Toyota expects the market for these vehicles to be small.