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With risk management high on corporates’ agendas, three simple ideas could put the brakes on other companies travelling the same unfortunate route as Toyota

This article was first published in the April 2011 UK edition of Accounting and Business magazine.

The last years of a great company generally follow the same script: the firm does all the right things for years, maybe even decades, then at some point grows fat, does something stupid, and falls apart. Exceptions do occur: IBM came back from the brink. So did Apple.

Toyota Motor Corporation’s spiralling brake-pedal crisis in the US last spring felt like the opening of just such a last act. Certainly a corporation that sold 3.7 million cars in the first half of 2010 can’t be written off, but selling a lot of cars wasn’t enough to keep GM out of bankruptcy. In other respects, such as overall quality levels and reputation, things have slipped. Even the president of the corporation has acknowledged this.

Top of the class

Perhaps the biggest reason for optimism about the corporation’s ability to turn itself around is the fact that Toyota has tended to be a corporation that knows how to learn.

In 1958, Toyota was only one-eighth as productive as US automakers. By 1962, it had caught up. By 1973, the corporation was twice as productive as the American companies, according to Steven Spear, a lecturer at the Massachusetts Institute of Technology and author of The High-Velocity Edge. Usually, credit is given to the corporation’s invention of the Toyota Production System, which took quality and efficiency to unprecedented new levels. But Spear argues that the true cause of Toyota’s success wasn’t so much the result of the influential production system, as the culture of innovation and relentless self-improvement that led to its creation.

In fact, Toyota president Akio Toyoda, has said that Toyota went wrong by departing from its old principles. He told the US Congress last spring that Toyota had become too caught up coping with its growth. ‘Priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before’ – a stunning admission for a corporation that once defined itself on its superior ability to keep finding better ways to turn every bolt.

Those familiar with Toyota have many suggestions about how Toyota can get the magic back, all of which can boil down to three simple ideas.

1. Mind the gaps

In its early years, Toyota was a tight-knit organisation. Suppliers were close to the main plant, near enough that they could make parts when they were needed, and under long-term contracts that kept the companies’ interests closely aligned, not just in production but planning and engineering.

The new Toyota spans the world, operating in 65 locations, and rapid growth has made the old supplier-next-door system difficult to sustain. ‘Once you start growing volume very fast, your suppliers cannot keep up,’ explains Serguei Netessine, a professor of technology and operations management at INSEAD in France.

There are also larger gaps in technical knowledge. Cars were simpler in the old days. Most problems could be worked out through mechanical engineering. Today, about half the value of a car is in its electronics, according to Spear, creating a whole new range of problems.

Not surprisingly, these new arrangements appear to have all put dents in Toyota’s ability to deliver quality. Toyoda has conceded in interviews that quality began to dip in 2003. At the same time, marketing efforts to fill gaps may have hurt the corporation too. Critics note that the range of niches Toyota was trying to fill kept expanding, which they say multiplied the numbers of models and added a lot of confusion to servicers.

Finally, a gap in demand could lead to new problems. Companies often use self-financing to boost flagging sales, as Toyota did in 2010, but the short-run gain in sales creates new risks for the corporation. The biggest risk is that people who are bad credit risks are sold cars they can’t pay for. But even successful credit arms can lead to difficulties: the financial success of GMAC, which diversified into mortgages and other kinds of loans, helped subsidise GM for years, perhaps postponing important reforms.

2. Keep an open mind

Toyota stumbled only after years of unbroken successes. Certainly, it’s often worked this way in the automobile business. Ford Motor Company is an example, according to James Lam, president of James Lam & Associates, a US-based risk consultancy. ‘Ford always got into trouble after periods of great success,’ Lam says.

‘Whenever it had great success, it was followed by a period of great complacency...It started ignoring customer sentiments, ignoring customer complaints, and they got into trouble. It was only after it got into trouble that it woke up and said, we’ve got to bring in a new CEO,’ Lam says.

‘Being successful can sometimes create a culture where you ignore the signals that something might be going wrong,’ Lam says.
To overcome that, it’s important to make sure people feel comfortable bringing up bad news, Lam says.

One case in point: Ford CEO Alan Mulally has traced his recent turnaround of Ford to a meeting in autumn 2006 when he saw a lone red light on an otherwise green dashboard: a group had admitted it had a problem. To the surprise of the other executives, he began to clap. The next week, other red and yellow lights began to show up. Once the problems were acknowledged, they could be addressed. ‘Just think if I’d been angry or disappointed,’ Mulally told one reporter recently. ‘The next week, it would all have been green again.’

3 Be careful what you wish for

Goethe, the German writer, once advised, ‘be careful what you wish for – because it will come true.’

For Lam, a lot of Toyota’s troubles go back to the corporation’s desire to become the largest automobile producer in the world. ‘When you set such a big hairy audacious goal (BHAG), there are unintended consequences,’ he says.

Focusing on a strategy goal as an end in itself seems to have created a lot of trouble for Toyota, particularly in so far as some critics say it caused the corporation to lose sight of goals such as safety, quality and efficiency.

Why didn’t anyone see this risk? Lam and other researchers have found that while companies think about their risk management mostly in terms of operational and financial risks, the larger risk is what he calls strategic risk, or the critical exposures related to the corporation’s formulation or execution of its strategy. In fact, he estimates that 60% of corporate crises are not operational or financial issues at all, but strategic missteps.

Risk managers also often don’t have much of a chance to point out potential pitfalls to the executive team. ‘Often, these folks, when they think about their BHAG, the last thing they want to think about is that it will get them in trouble,’ Lam says.

One typical barrier is that strategic planners and risk managers often don’t communicate very well, according to Lam. Strategic planning has tended to be a function much closer to the C-suite, while risk management has been something of a middle-management back-office function.

But they should listen. ‘Studies have shown that 70% of new anything – new products, new technologies – they fail. A key success factor for any organisation is to fail faster on those doomed initiatives,’ Lam says.

Will the corporation learn some of these lessons? Toyoda insists that it will. ‘We’ve learned a lot from this situation,’ Toyoda said in an interview last spring. ‘And if we can apply those lessons one at a time, it won’t be long until we’re back where we were.’

Bennett Voyles, journalist

Timeline

October 2009
Floormat/acceleration problems cause 3.8 million vehicles to be recalled in the US.

February 2010
Further safety concerns lead to 8.5 million vehicles recalled worldwide.

5 February 2010
Toyota president Akio Toyoda
apologises for the recalls (but
is criticised for not bowing
deeply enough).

February 2010
Another apology, with a deeper bow.

24 February 2010
Toyoda presents his apologies at US Congress and Toyota pays $50m in compensation to US government.

Last updated: 4 Apr 2014