Thursday, March 25, 2010

Toyota on Test: Lessons for the Rest

This is my fiftieth post on my Blog: Strategy Musings. I see writing this post on Toyota Motor Corporation, one of the most admired corporations of the world ever, as a challenge in the context of the quality and recall problems that Toyota has been facing in recent months. My post is not on the rights and wrongs of the current situation faced by Toyota; there is little information in public domain to make any meaningful analysis. In any case, Toyota, its stakeholders, and the regulators are seized of the matter. Reasons and remedies are certain to emerge, and hopefully will serve to preserve and nurture the culture of quality, efficiency and harmony that Toyota sought to preserve.

The purpose of the blog post, on the other hand, is to view the Toyota happenings in a broader context and hypothesize certain lessons for the rest of the industrial world which could reinforce the quality, safety, and productivity movement of the world.

Toyota: Admired for achievements

Toyota was founded on August 28, 1937. After the World War II, Toyota reinvented itself and led Japan’s growth as a global industrial powerhouse, along with the likes of Sony, Matsushita (Panasonic), Hitachi and other Japanese mega corporations. In calendar year (CY) 2009, Toyota sold 7 million automobiles worldwide, 13 percent lower than the vehicles it sold in CY 2008, due to the deep global recession. Prior to the recalls issue hitting its reputation, the company hoped to sell 7.4 million vehicles in CY 2010, registering a 6 percent growth rate. The company employs 70,000 people worldwide. Together with its two of its Japanese automobile affiliates, Hino (truck and bus maker) and Daihatsu (small car and light vehicle maker), Toyota sold 7.8 million vehicles in CY 2009 and planned to sell 8.3 million vehicles in CY 2010.

Between 1950 and 2010, Toyota became the most admired company of the world for its path-breaking engineering initiatives and manufacturing achievements.

Toyota’s several pioneering innovations in automobile engineering cover engine, drive train, braking, suspension, body, electronics and overall automobile design concepts, over the years. Smokeless diesel engine, common rail direct ignition turbo diesel engine, lean burn engine, vehicle stability control system, electronics controlled throttle, navigation and safety systems, eco-friendly materials and electric and fuel cell as well as hybrid and plug-in hybrid cars helped Toyota consistently lead automobile design. Between 1990 and 2009, Toyota introduced over 150 individual innovations across its automobile range. Apart from consolidating the mainline product lineup with successive generations of Corolla, Camry, RAV 4 and Land Cruiser models, the company created competitive luxury through Lexus and energy efficiency through Prius designs. Toyota Corolla remains the most successful global model with over 30 million vehicles sold worldwide since launch.

It is, however, in the manufacturing domain that Toyota’s achievements acquired iconic status. Toyota’s Toyota Production System (TPS) transformed the way manufacturing is conceived, planned and executed. It demonstrated to the industrial world how more could be achieved with less. TPS itself was established on two core concepts. The first is called “jidoka” (defined as automation with human touch). Jidoka highlights and visualizes problems by stopping manufacturing when a defect is found until a solution is found. The second is the concept of just-in-time, in which each process produces only that is needed by the next process in a continuous flow.

Toyota’s role model achievements in engineering and manufacturing are matched by commensurate strides in quality. Over the years, Toyota built a seemingly impeccable reputation around its quality. TPS and quality circles helped Toyota build quality in its manufacturing. Since 1951, when Toyota introduced its famed suggestion scheme, thousands of suggestions helped the company to institutionalize “kaizen” (continuous improvement) and raise quality and productivity standards. Toyota was one of the first to win Deming application prize for quality control in 1965. Toyota’s in-house quality initiatives and positive association with Deming quality standards led other manufacturers view Toyota’s quality movement as important as TPS in keeping Toyota at the top of the quality curve.

In today’s globalized context TPS is being evolved into an ultimate global lean management system while multi-tasking robotics is being attempted to move manufacturing productivity to a higher level. On the cost-competitiveness front, the traditional item based cost innovation which has, in the past, yielded significant savings is being transformed into system based cost innovation for more breakthrough results.

It is interesting that even as Toyota grew into global automotive leadership, Toyota has also ventured into several non-automotive business areas which integrate the corporation further into human and planetary life. Toyota’s non-automotive businesses include housing, with focus on earthquake resistant and flexible construction technologies, financial services with focus on vehicle financing, information technology (IT) and IT solutions (ITS), semi-conductors, e-commerce automotive shopping mall, pleasure crafts and marine engines, aerospace, and biotechnology and afforestation. Some of these are also global initiatives.

McKinsey in its thought-leading work “The Alchemy of Growth” discussed how firms need to create new horizons of growth. Worldwide, automobile firms are notable for standing committed to only automobile business. Toyota, on the other hand seems to inherit the founder Keeichiro Toyoda’s vision of extending into future, which led him to creating an automobile business within textile spinning business, and spinning off Toyota Motor from its parent, Toyoda Loom Works. Decades later, once again into the future, Toyota’s current diversifications could demonstrate that innovation has no boundaries.

Toyota: Rebuked for recalls

It is inconceivable that Toyota, the corporation that stood by, and grew with, quality as a plank could face the unsettling quality problems and recall issues covering 14 car models. According to agency reports, Toyota recalled more than 9 million cars, a number significantly more than its intended annual sale for CY 2010. Over 1,500 Toyota dealers and over 172,000 team members across North America are stated to be working 24X7 over the last few months to handle the largest recall program ever in the history of the global automobile industry. It is no consolation that several other automobile manufacturers also started having recalls, albeit at much lower levels.

The quality problems which caused unintended acceleration of some Toyota vehicles, more pronouncedly in the North American region, leading to unfortunate fatalities in some cases, have been traced to defective pedals and sticky floor mats. This indeed is a surprise given that a typical automobile which has thousands of high precision components, two relatively simple parts have caused havoc. As if to compensate for this, a new wave of recalls, though smaller in scale, covers the software program that controls the antilock braking system (ABS) in its high technology hybrid and hybrid plug-in Prius models.

After months of hesitation, which some say can be traced to incidents even in 2002, Toyota swung into action in 2010 initiating the massive recall program. The US regulators have also moved into action seeking personal testimonies from the top executives of Toyota. In the prepared testimony dated March 2, 2010 to the US Senate Committee on Commerce, Science and Transportation, Yoshimi Inaba, President and COO, Toyota Motor North America, Toyota has stated that at the product level Toyota has developed effective and durable solutions for the recalled vehicles. He also stated that the company has carried out fundamental changes in the way Toyota operates to ensure that Toyota sets even higher standards for vehicle safety and reliability, responsiveness to customers and transparency with regulators.

The testimony stated that at a global level, Toyota has established a Special Committee for Global Quality, led by Toyota’s President to thoroughly review operations and ensure that problems of this nature do not recur. In the interest of openness, Toyota is also assembling a blue ribbon panel of distinguished, independent experts to confirm that the enhanced quality controls conform to best industry practices. Toyota is also putting a system in place to better share important quality and safety information across its global operations and to work more closely and transparently with government agencies, including NHTSA in the United States.

The testimony also stated that at a regional level, Toyota will ensure that its customers’ voices will be heard and acted upon in a timely manner. In the United States, Toyota committed to investigate consumer complaints more aggressively by deploying “SWAT teams” of technicians to make on‐site inspections of unintended acceleration, and reports of such incidents, as quickly as possible. Toyota is establishing the new position of Regional Product Safety Executive, and its North American operations will have more autonomy and decision making power with regard to recall and other safety issues. In addition, Toyota will establish a new Automotive Center of Quality Excellence in the U.S., where a team of its top engineers will focus on strengthening the quality control throughout the region.

At the customer level, Toyota is taking significant steps to bolster confidence in the safety and reliability of its vehicles. Toyota will be one of the first full‐line automakers to make brake override systems standard on all the new models sold in North America, including hybrids which have a system that achieves a similar result. Toyota is also installing brake override on seven existing models. This advanced system automatically cuts engine power when the accelerator and brake pedals are both depressed. In addition, Toyota has commissioned a comprehensive, independent evaluation of its electronic throttle control system by a world‐class engineering and scientific consulting firm. Toyota stated that in its own extensive testing, Toyota never found a defect that caused unintended acceleration. Toyota expressed confidence in the system but recognizing the need for additional reassurance promised to make the findings of this independent analysis public.

In renewing its commitment to customer safety as its top priority, Toyota committed, as part of its various testimonies to the US House Committees, to revitalize the simple principle that has guided Toyota since 1937 – to build the highest quality, safest and most reliable automobiles in the world.The company also engaged Exponent, Inc, a leading scientific and engineering firm to conduct a thorough evaluation of its electronic throttle control system. One recent study by Exponent disputed the conclusion of “unintended acceleration” by Professor David Gilbert of Southern Illinois University of the USA. Exponent concluded that Gilbert demonstration was based on “unrealistic sequence” and “manipulated faults” and replication of such sequences and faults in vehicles of other manufacturers created similar unintended acceleration in such cars. Evaluation by Exponent and tests by Toyota’s engineers are continuing.

If Toyota can falter, anyone can

Media reprimanding and corporate remedying apart, the episode of Toyota on test has several lessons for the rest. The fundamental lesson that the Toyota episode teaches is that if a company as technology and quality savvy as Toyota can falter, anyone can. This is a sobering thought for all companies, conservative or aggressive, and deliberative or opportunistic.

Speeding on business highway

Toyota has such robust and consensual systems with multi-hierarchy check provisions that faults cannot seep easily. Only speed could have altered Toyota’s organizational eco system. One could hypothesize that the carefully preserved Toyota values were challenged by the unprecedented global expansion that the company executed over the last 10 years. There has been an accelerated growth in capacity over this period. In 2000, Toyota produced 5.2 million cars; by 2009 it doubled the capacity to 10 million cars. In 2000, Toyota had 58 production plants; by 2009 it added 17 new plants, most of them outside Japan. Probably, Toyota’s famed systems could not keep pace with the scorching pace of growth.

In his prepared testimony dated February 24, 2010 to the Committee on Oversight and Government Reform, Akio Toyoda, President, Toyota stated, discussing the philosophy of Toyota’s quality control, “I myself, as well as Toyota, am not perfect. At times, we do find defects. But in such situations, we always stop, strive to understand the problem, and make changes to improve further. In the name of the company, its long-standing tradition and pride, we never run away from our problems or pretend we don’t notice them. By making continuous improvements, we aim to continue offering even better products for society. That is the core value we have kept closest to our hearts since the founding days of the company.”

Toyoda also stated, discussing the recall issues, “Toyota has, for the past few years, been expanding its business rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick. I would like to point out here that Toyota’s priority has traditionally been the following: First; Safety, Second; Quality, and Third; Volume. These priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before, and our basic stance to listen to customers’ voices to make better products has weakened somewhat. We pursued growth over the speed at which we were able to develop our people and our organization, and we should sincerely be mindful of that. I regret that this has resulted in the safety issues described in the recalls we face today, and I am deeply sorry for any accidents that Toyota drivers have experienced.”

The above two statements reflect the characteristic passion for quality and an uncharacteristic candor on growth, on the part of Toyota’s chief executive. These statements are relevant for all chief executive officers responsible for safety, quality and growth in an organization. Just as reckless speed could involve people in accidents on a highway, unmanageable growth can make companies skid on business highway. Prior to finalizing growth plans, corporate leadership teams should thoroughly discuss how the growth plans impact the safety, quality and environment aspects and agree on risk-mitigated execution plans, including heightened organizational preparedness to handle multi-product development, multi-site manufacture, multi-country marketing , and multi-environment usage of products.

Globalization risks

All companies, big and small, must view every challenge as an opportunity to review their product specifications, development methodologies, quality standards, manufacturing and supply chain processes, product usage conditions and customer use feedback. The challenge and urgency increase as a company enhances its global supply chain, manufacturing and marketing operations. The challenge would be even higher when companies resort to the Toyota model of producing “world products”. The concept involves more of models sharing more of components on a smaller number of platforms, with globally diffused procurement and production. While this model is the epitome of manufacturing efficiency, the risks of one sub-standard part blotching up global production are correspondingly higher.

It is perhaps not accidental that the problems for Toyota cars emerged in North America where the cars were manufactured, marketed and used. Only detailed internal Toyota studies can reveal if the North American plants completely absorbed the failsafe manufacturing processes that were always so successfully deployed in Japan, the faster highway speed conditions stressed some of the components more than a congested Japanese highway system would, the customer service organization failed to amplify the on-road signals to the regional and parent organizations, or simply the complex globalized corporate organization failed to listen to weak signals from a distant region. Globally organized companies would do well to institutionalize their best practices globally, stress-test the products to stringent operating conditions, strengthen their market vigilance organizations and provide the needed voice to their leaders in the corporate management.

Pharmaceutical industry in regulated countries works under a stringent regime of multi-country clinical trials, post-marketing studies and pharmaco-vigilance reporting established by food and drug administration agencies. Even this system is post-facto and does not customize medicines in the stage of development to genetic variations of ethnic groups or even better, to individuals. Though not to same scale environmental conditions and operating practices of different countries vary so much that global designs need to be customized for individual regional needs or need to be targeted for the most variable conditions and practices.

Outlining various steps taken to alleviate and avoid problems, which include greater regional decision making, keeping local customer safety first, setting up of US based quality advisory group and automotive center of quality excellence in the US, Toyota’s President observed, in a manner reflective of the Japanese Gemba Kaizen philosophy, “I believe that only by examining the problems on-site, can one make decisions from the customer perspective. One cannot rely on reports or data in a meeting room”. Pre-product development surveys and post-launch surveillance methodologies need to be strengthened immensely to develop globally sustainable products.

Electronics enigmas

The automobile is no more a pure mechanical equipment. In today’s automobile, electronics is as important as thermodynamics and software as vital as hardware. Electronics and information technology today control and manage the automobile as never before. In a Toyota automobile, over the last twenty years as many as twenty revolutionary electronic governance systems have been introduced. Electronically controlled throttle, piezoelectric common rail injection system, electric valve timing system, electronic start-stop and idling systems, all-wheel drive control system, GPS car navigation, radar cruise control system, lane monitoring system, crash safety system and telematic systems are some of the digitally controlled aspects of a Toyota automobile. Some special Toyota models such as fuel cell electric vehicle, fuel cell hybrid vehicle and Prius hybrid system vehicle represent a complete generational shift in the use of electronics and software in an automobile.
The unprecedented use of electronics and software brings in its wake the issues of robustness of performance in harsh and highly variable conditions caused by extremes of heat, dust, rain, bumps, and snow. Potentially it could be well nigh impossible to test and validate computer systems in such conditions with total operational infallibility. Unlike a fly-by-wire aircraft or an in-house computer, an automobile hardly gets the attention or time to check all the computer systems prior to start. The typical automobile driver is always rearing to zoom from the time he or she gets into the driver’s seat. Automobile makers need to develop ingenious ways to fail-proof the electronics systems in their automobiles. Potentially, they must establish dedicated software and electronic companies in a manner analogous to their nurturing dedicated component makers.

The lessons of the electronics enigma are not limited to only automobiles. Virtually every device today, from a bathroom shower which has electronic control of temperature to an electronic pacemaker which digitally regulates human heart, has plenty of electronics that could potentially risk runaway changes under certain unforeseen circumstances. Apart from thorough validation protocols for products pre-release, and incorporation of failsafe over-ride mechanisms, user friendly operating protocols could go a long way in ensuring equipment and device safety as well as user safety in operation. One would note that arising from the recalls Toyota has decided to make brake override systems mandatory on its models. Relevant warning signal and override systems need to be thought of for all equipment and devices that could impact safety.

Operational complexity vs organizational simplicity

Global operations are bound to be complex. Nowhere else is it illustrated better than in Toyota’s own case. Toyota’s global operations churn out 82 mainline Toyota car models and 10 Lexus car models which are sold in 170 countries and regions through 460 distributors (290 in Japan and 170 overseas). Toyota has 13 R&D sites globally (6 in USA, 4 in Europe and 2 in Asia Pacific, besides the mother technical centre in Nagoya, Japan). Toyota produces its highly customized product range out of its 65 manufacturing plants (12 in Japan and 53 in overseas countries, of which 12 are in North America, 4 in Latin America, 8 in Europe, and 25 in Asia, excluding Japan). Several of these are constituted as legal entities and subsidiaries. In addition, Toyota has 14 large group companies producing components and materials, each with its own subsidiaries and overseas ventures. Given the highly networked system of automobile production, and also migration of platforms, and plants from advanced markets to emerging markets the complexity of globalization can be overwhelming.

Toyota sought to overcome the complexity as much as possible by constituting overseas entities as corporate subsidiaries, with each manufacturing plant being a company in some cases (as in Europe or India) and with a holding company owning several manufacturing entities in some cases (as in North America). Yet, none of the overseas subsidiaries seem to have an organization that reflected the breadth and depth of the parent Toyota organization in Japan. The Toyota corporate organization, for example, has besides the chairman, 2 vice-chairmen, 1 president, 5 executive vice presidents, 18 senior managing directors, 2 directors, 50 managing officers, 23 advisors and 7 corporate auditors. The enormous product planning, engineering, manufacturing, quality and regulatory organization that exists in Japan is not prevalent in overseas subsidiaries despite the surge in overseas engineering, production and sales. Around 42 percent of total Toyota production is contributed by overseas units while 75 percent of sales is derived from overseas markets. Increasingly, more automobile designs are executed overseas. Yet, probably the gravitas remained in Japan. While there is nothing inappropriate in a Japan-driven strategy given that Japan has been the core of Toyota’s engineering and manufacturing creativity, the thin structuring of overseas organizations perhaps impeded complete transfer and absorption of parent’s hard and soft skills by the regional units on one hand, and transmission of the needs and usage patterns of local markets to the parent on the other hand.

Clearly, multinational corporations with global footprint and aspirations need specific structural strategies. The success of MNCs such as Unilever and Proctor & Gamble in countries such as India has been due to their early indigenization of management (while integrating global best practices) through understanding of the local pulse, and leveraging of local talent. Carlos Ghosn, global CEO of Renault-Nissan reflected similar principles while inaugurating the Indian car facility a few days ago. He stated that his company chose India not for cost but for a whole different way of conceptualizing highly cost-competitive projects and operations. While these skills and approaches would be more readily available with joint ventures, wholly owned subsidiaries need to be structured in a way that the soul and spirit of local enterprise is reinforced with the structures and systems of the global corporation.

Structure with process; the complete solution for globalization

From all accounts, despite the remarkable engineering capability that Toyota has, the company could not reach to the core of the recalls problem. In fact, from floor mats and sticking pedals (which appear to be too simple a reason) to electronic deficiencies (which are relatively inscrutable) the reasons for the safety problems have not formed a cohesive narration. An analysis in Los Angeles Times, February 23, 2010 asserted, quoting former Toyota insiders, that the mangled messages from Toyota had roots in the company's fractured organizational structure in the United States -- a design that put key decision making in the hands of executives in Japan and ultimately impaired its ability to prevent the burgeoning safety problems before they reached the crisis stage.

As Toyota has grown into a powerhouse of the auto industry over the last decade, it has built up a vast complex of engineering centers, test tracks, financial arms, sales offices and manufacturing plants that spread from California to New York, spilling over into Canada and Mexico as well. According to LA Times, Toyota lacks a single U.S. headquarters; its units can operate as fiefdoms that report independently to Japan. The complicated tasks of gathering information about sudden-acceleration incidents, analyzing the problems and engineering fixes, as well as reporting the issues to federal safety regulators, were handled by different Toyota subsidiaries, each managed separately in many cases from Japan, former Toyota managers and employees say. This analysis, if correct, provides an instructive insight that a structural solution of subsidiaries by itself does not help. Meaningful processes for management of parent-subsidiary structures relevant to local needs and capabilities are required. Dissemination of instructions from parent needs to be balanced by an amplification of feedback from subsidiaries.

Here again, successful multinationals in emerging markets led the way decades ago by constituting local corporations as complete organizations. The technical depth was perhaps lower, and technology ostensibly flowed from the parent given the state of Indian talent situation in the 1950s. Yet, such MNCs created integrated and viable structures which could benefit from equally responsive localized processes. In fact, the statement by the Chairman of the Indian subsidiary of Lever was, from the inception, a classic essay in thought leadership for Lever’s global needs as much as for its Indian operations. The talent pool, and professional enterprise in contemporary India are radically different, and in fact, world-class. As advanced countries take a new aim at India for both the market and skills that India offers, organizational structures and processes need to reflect a similar maturity.


No analysis can do justice to analyze, much less understand, in totality the automobile engineering and manufacturing phenomenon that Toyota is. It is painful, therefore, that certain structural and process deficiencies in the context of rapid global expansion should cast a shadow on Toyota’s famed technical capability and quality delivery. Contrary to the hypothesis by some columnists that Toyota’s problems signify the final decline of Japan itself, one can expect the engineering great to reassert its core skills and win back customer confidence. Toyota, on test today, offers several lessons for the rest on building up core capabilities and the nuances of managing growth and globalization with appropriate structures and processes. If the discussion in this blog post helps in developing these perspectives, it is perhaps because there could be no better vehicle than Toyota to stimulate, organize and present these thoughts.

Posted by Dr CB Rao on March 25, 2010

1 comment:

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