This Homework Has One Question With Three Parts

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Source: Photograph courtesy of Toyota Motor Sales,
USA, Inc.

On the 28th of
August 2009 the emergency services in San Diego received a terrifying phone
call from the back seat of a Toyota Lexus. The car was accelerating out of
control. As the emergency services tried to get an understanding of the
situation, the caller was heard to cry, “We’re nowapproaching the
intersection! Oh, pray. Hold on and pray!”Then silence.

Everyone in
the car was killed. Toyota, lauded for its impeccable reputation for quality
and reliability, suddenly faced a huge crisis of trust. But they didn’t react
as such. Toyota’s belated recalls, belated communications and disclosure, and
belated public apologies did far more damage to its reputation than the
original tragic accident, losing them sales, market share, and investor and
consumer confidence (its pre-eminent reputation for quality plunged from 30% to
19% of respondents to a Consumer Reportssurvey).

“Central
to Toyota’s problem is its perceived delay in identifying and addressing the
situation in the first place… There is a sense that it ignored the problem
untilit was forced to take action”.

Recalls
happen every year, and affect every car manufacturer. They are usually
considered a bare minimum ‘distrust regulation’ effort. However, a series of
recalls from the same company, for different problems, mounts up to a series of
trust violations. Toyota had several (in 2004, 2005, 2007, and 2009-10)
fordifferent problems, including with accelerators, engines and braking, totaling
more than 8.5 million vehicles. This too, has damaged their trustworthiness.

Immediate response

Two days
after the San Diego crash, Toyota issued a statement, acknowledgingthe
accident, expressing concern and showing regret for the loss of life.
Toyotapromised a full investigation, working with the regulator (the National
HighwayTraffic Safety Administration – NHTSA), but declined to comment on
possiblecauses, to “avoid speculation and allow any investigation to run its
course”.

On the face
of it, this is a good example of an immediate response statement.However, our
model also calls for swift and decisive actions against knownorlikely
causes. Toyota appears to have overlooked this latter
intervention,disastrously. In the days after the San Diego crash, the company
did not issue acustomer warning about its all-weather floor mats, despite these
beingimplicated in fatal accidents two years earlier. Even when the
regulator’spreliminary investigation into the San Diego crash cited the floor
mats as thelikely cause, Toyota did not implement a precautionary rectification
until five dayslater when the NHTSA confirmed their analysis, 19 days after the
San Diegofatalities. Fortunately no new fatal accidents happened in that time.
Yet evenwith this tardy intervention Toyota dealers were instructed merely to
inspect anyreturned floor mats, rather than issue a direct customer safety
warning. NHTSAissued an alert about the floor mats on the 29th September 2009
and that day Toyota issued explicit warnings and advice to customers, and
finally announced a recall of 3.8 million affected vehicles – a month after the
San Diego crash (Theactual recall began a month later still.)

Diagnosis

All car
manufacturers must cooperate with authorities’ investigations into
fatalcrashes, and so the ‘diagnosis’ phase began immediately. When the
NHTSAreported on the San Diego crash (10th September 2009), Toyota USA
uploadeda statement, asserting that the findings were consistent with the
company’s floormat warning, and that their vehicle was “among the safest”on
the road. NHTSAcountered this apparent denial of culpability, and took the
unusual step ofcondemning the statements as “inaccurate and misleading”,
embarrassingToyota further. The American division issued a clarification
stating that they hadnot intended “to mislead or provide inaccurate
information”, and outlined thecompany’s “vehicle-based remedy”to
the sticky floor mat problem.For manystakeholders, the obfuscation undermined
Toyota’s original best intentions, andfurther dented the fragile trust with its
many stakeholders.In November 2009, Toyota admitted to a defect with the
accelerator pedal insome vehicles, promised this was the root cause, and issued
a recall of affectedvehicles. However, the installation of a ‘brake override
system’, intended toreassert the company’s trustworthiness, seemed to highlight
a different designdefect. Public skepticism meant that Toyota voluntarily
commissioned anindependent investigation to defend its electronic control
systems. These effortsfailed, it seems, because of stakeholders’ pre-existing
mistrust.

Although
design faults seemed at the time to be likely causes of the crashes,many argued
that the problems in the company went deeper. Commentatorspointed to Toyota’s
aggressive growth strategy, epitomized by a declaredambition to be the world’s
top automobile company within a decade, involvingrapid global expansion of its
manufacturing capacity beyond its native Japan.Even the company President, Mr.
Akio Toyoda, admitted as much:

“Growth overspeed”had impaired the
company’s culture of ‘kaizen’ (continuousimprovement) and ‘genchigenbutsu’
(inspecting problems at the source).

Its own
internal report noted Toyota’s tendency to dismiss customer complaints;poor
accountability for safety (as the adage goes, “when everyone is
responsible,nobody is accountable”); poor safety-response procedures, and
an “adversarial”relationship with regulators. Commentators also cited
the company’s previouslyrobust and widely admired corporate culture; efficient,
systematic and dedicated,but also conservative, rigidly centralized, and
mono-national. At the time, theexecutive board had 29 Japanese male nationals
and no foreigners. Japanesereluctance to concede to shame, and Toyota’s prized
reputation for excellence,may account for the firm’s hesitancy in acknowledging
the legitimacy of theemerging crisis. The company’s hierarchical and centralized
structure matchedthis culture, limiting the speed and accuracy of information
flow, stifling theagility of the corporation’s response. Even its vaunted lean
productiontechniques came in for criticism, with junior employees reportedly
fearful ofraising concerns.

Performing interventions

The
diagnosis stage didn’t finish fully until March 2010, but Toyota’s
reforminginterventions began during September 2009 with the floor mat safety
warningand the belated recall of 3.8 million vehicles. Their recall problems
persistedthroughout 2010, with a further 1.66million vehicles recalled over
other, newproblems. Many recalls were voluntary, and timely to prevent future
accidents,and Toyota was doubtless trying to demonstrate its ability in
tackling latent risks,its integrity in disclosing the possible lapses, and its
benevolence in prioritizing customer safety. However, the confusion from so
many recalls seemed to alarmexisting and prospective customers. The firm’s poor
immediate response haddone huge damage to its credibility, and set the tone for
the story (seized uponby the American media).

The first
apology came in early October 2009, when Akio Toyoda expressed hissincere grief
regarding the San Diego crash:

“Four
precious lives have been lost. I offer my deepest condolences…Customers bought
our cars because they thought they were the safest. But nowwe have given them
cause for grave concern. I regret and apologize for thisdevelopment. I cannot
begin to express my remorse”.

Interestingly,
a Professor of Japanese Studies, Ulrike Schaede, argued thatthese difficult
public apologies “were meant to send a message to companyemployees and car
buyers”that the company was planning a new direction (ouremphasis added to
indicate the trust repair targets in the statement).

Akio
Toyoda’s op-ed piece in the Wall Street Journal wrote of his commitment
tocustomer safety – his name is on the cars after all – and acknowledged
thecompany’s failings (mainly a preoccupation with technical responses
totragedies), and pointed to its recall response and internal and external
audits oftheir vehicles’ safety features. A torrent of similar apologies
followed,expressing “sincere regrets”and commitments to make “fundamental
changesin the way the company operates in order to ensure that Toyota sets an
evenhigher standard for vehicle safety and reliability, responsiveness to
customersand transparency with regulators”to “restore the trust”of
its customers. Theapologies were well received in the media, for the most part.
That month, AkioToyoda travelled to Washington to face Congress, and apologized
again inperson – although he insisted he had not been aware of the problems
until late2009, several months after the high-profile San Diego fatalities.In
terms of trying to reform Toyota, we found reference to the following keymoves:

• A declared
reversion to the “basics” of the ‘Toyota way’.

• A new
safety system, combining five accident-avoidance technologies –although other
automakers have offered these safety features for years.

• A major
restructuring, including a reduction in Directors from 27 to 11, and there-organization
of the departments charged with Corporate Planning andCorporate Social
Responsibility to quicken crisis responses.

A new
50-strong global quality taskforce, based regionally, and led by thecompany
President, to improve quality, increase communication, improveregional response
and autonomy, and seek support from outside experts.

• Two
quality advisory panels consisting of outside experts to evaluate
Toyota’ssafety and quality control processes, in 20 dedicated facilities
worldwide(although one was criticized for being a paid consultant for the
company), andthe appointment of a global Chief Safety Officer.

• In
September 2010, the company settled out of court with the family of the San
Diego victims (corporate ‘penance’).

• Top
management’s pay was docked 10% to help “atone” for the recallproblems,
and several Executives forfeited their bonuses for two years(individual
leaders’ ‘penance’).

• Commitment
to working with U.S. regulators “toward a common goal ofcreating a safe
automobile society”.

Evaluation

Toyota Motor Corporation (TYO: 7203) has often been
referred to as the gold standard of the automotive industry. In the first
quarter of 2007, Toyota (NYSE: TM) overtook General Motors Corporation in sales
for the first time as the top automotive manufacturer in the world. Toyota
reached success in part because of its exceptional reputation for quality and
customer care. Despite the global recession and the tough economic times that
American auto companies such as General Motors and Chrysler faced in 2009,
Toyota enjoyed profits of $16.7 billion and sales growth of 6% that year.
However, late 2009 and early 2010 witnessed Toyota’s recall of 8 million
vehicles due to unintended acceleration. How this could happen to a company
known for quality and structured to solve problems as soon as they arise? To
examine this further, one has to understand about the Toyota Production System
(TPS).

TPS is built on the principles of “just-in-time”
production. In other words, raw materials and supplies are delivered to the
assembly line exactly at the time they are to be used. This system has little
room for slack resources, emphasizes the importance of efficiency on the part
of employees, and minimizes wasted resources. TPS gives power to the employees
on the front lines. Assembly line workers are empowered to pull a cord and stop
the manufacturing line when they see a problem.

However, during the 1990s, Toyota began to experience
rapid growth and expansion. With this success, the organization became more
defensive and protective of information. Expansion strained resources across
the organization and slowed response time. Toyota’s CEO, Akio Toyoda, the grandson
of its founder, has conceded, “Quite frankly, I fear the pace at which we have
grown may have been too quick.”

Vehicle recalls are not new to Toyota; after defects were
found in the company’s Lexus model in 1989, Toyota created teams to solve the
issues quickly, and in some cases the company went to customers’ homes to
collect the cars. The question on many people’s minds is, how could a company
whose success was built on its reputation for quality have had such failures?
What is all the more puzzling is that brake problems in vehicles became
apparent in 2009, but only after being confronted by United States
transportation secretary Ray LaHood did Toyota begin issuing recalls in the
United States. And during the early months of the crisis, Toyota’s top leaders
were all but missing from public sight.

The organizational structure of Toyota may give us some
insight into the handling of this crisis and ideas for the most effective way
for Toyota to move forward. A conflict such as this has the ability to paralyze
productivity but if dealt with constructively and effectively, can present
opportunities for learning and improvement. Companies such as Toyota that have
a rigid corporate culture and a hierarchy of seniority are at risk of reacting
to external threats slowly. It is not uncommon that individuals feel reluctant
to pass bad news up the chain within a family company such as Toyota. Toyota’s
board of directors is composed of 29 Japanese men, all of whom are Toyota
insiders. As a result of its centralized power structure, authority is not
generally delegated within the company; all U.S. executives are assigned a
Japanese boss to mentor them, and no Toyota executive in the United States is
authorized to issue a recall. Most information flow is one-way, back to Japan
where decisions are made.

On the 20th
May 2010, the President of Toyota USA reviewed progress with thecompany’s
reforms to a Congressional committee. In July 2010, Toyotapublished a report
covering its evaluation of measures for improving qualityassurance and
preventing the recurrence of quality lapses, as well as improvinginternal and
external communications with regard to product quality. The externalreview
panel is scheduled to continue monitoring progress until 2012. Toyota has taken
serious actions to put things right. However, their sluggishand contradictory
reaction handling of the crisis incurred retribution in April 2010,when the
NHTSA fined Toyota a record $16.4m for “failing to react”in a
timelymanner, despite apparently knowing of the potential risk to consumers.
Thoughthey denied the allegation, Toyota accepted this ‘penance’, to avoid a
lengthydispute. IHS Global Insight, an automotive consultancy, said the company
was“paying the price for not taking the claims seriously at first”, and
attractingunusually negative publicity as a result. Multi-million dollar law
suits are still intrain.

A bitter
irony is that regulatory investigations in August 2010 found “driver error”to
be the most likely cause of all but one of 58 examined incidents. That
Toyotawas unable to recover much reputational credit from this revelation emphasizes
how much trust and goodwill had been damaged, and how the companysurrendered
control of the narrative with its tardy initial response. Even recently,
skeptics (and lawyers) remain unconvinced of the firm’s ethical stance.
Theypoint to evidence that the company has known about several design faults
foryears, and have even boasted of $100m in savings from a limited recall
in2007.One commentator put it:

“Nothing
erodes confidence in a company’s reputation so much as internaldocuments
subordinating safety concerns to the bottom line”.

It remains
to be seen how well Toyota recovers.