What Undermines Global Leadership Suddenly? Real Crisis Management Lessons from Toyota

London, UK - 15th February 2010, 15:20 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

If assembly lines run like clockwork. Everything happens just-in-time! Dedicated workers are trained to look out for defects. Quality cars are churned out in their millions. How can things still go wrong? Since October 2009, Toyota has recalled 8.5 million vehicles around the world for accelerator, braking and floor-mat problems in the biggest recall in its seven-decade history. Given that Toyota is still one of the best manufacturing companies in the world when it comes to production management, it is now clear that workers have nothing to do with this recall and nor do the production processes!

So, what went wrong? With cars becoming:
. More complex in their features and functionality;
. Packed with computer-designed and computerised parts; and
. Myriad types of software;

fears are growing old-style quality controls over design and manufacture are rapidly becoming outdated in the 21st century. Toyota's case vividly illustrates this conflict between the old and the new world. The accelerator pedal and floor-mat defects were computer-aided-design errors in supplier parts, and the faulty braking in hybrid models was caused by a software glitch! Toyota clearly neglected absolutely crucial areas such as:

. Innovation in safety risk assessment and risk management;
. Man-machine interface;
. Computer-aided-design development;
. Mission critical software programming and testing;
. Connecting the dots; and
. Crisis management.

Safety Before Global Growth

Making the exact same product over and over again -- the basis of "quality control" in manufacturing -- isn't the same thing at all as ensuring safety. When the senior management's attention and oversight is focused on business profitability and the bottom line all the time, those objectives are essentially driving the quality control measures as well. Management was clearly not focused on driving innovation in safety risk assessment or risk management.

Toyota's President Akio Toyoda recently acknowledged the company had "failed to connect the dots" between the sticky pedals in Europe, surfacing as early as December 2008, and those in the US that culminated in the massive recalls. Coupled with unsteady and inexperienced leadership this has meant that Toyota’s market value has lost the equivalent of Latvia’s GDP -- USD 30+ bn -- in the last few weeks. In January, it lost 16 percent of its sales in the US alone. Did Toyota seek to grow too quickly at an unsustainable speed, which forced it to compromise its commitment to quality and led to the global auto giant's recent massive global recall of more than 8.5 million vehicles? Initial signs suggest that it did.

Brake Over-Ride System

Calls are now growing for Toyota to equip more models with a brake over-ride system, a mechanism that over-rides the accelerator if the accelerator and brake pedals are pressed at the same time. Including such a system, although not required, brings a vehicle safely to a stop even if a gas pedal is depressed -- or the central car computer thinks it is -- and is a good backup measure for the reported unexpected acceleration in some Toyota vehicles. While denying electronic or software problems, Toyota announced in November last year that it will install a brake override system in several models and is considering reprogramming more models. It has promised the system in new production of most Toyota and Lexus vehicles by the end of the 2010. At present, most car manufacturers do not offer brake over-ride systems as standard.

Most Significant Issue

The most significant issue for distinguished ATCA members is how quickly a corporate giant can fall -- and how often the severe wounds end up being self-inflicted. Once the benchmark of the global auto industry, many of Toyota's 'best practices' must now be re-evaluated by other global automakers. Toyota’s subsequent strategy of:

. Denial;
. Downplaying problems; and
. Avoiding the media;

have turned a safety problem into a complex scandal that will be examined and studied across the world for years. Toyota's predicament not only sheds light on where Japan finds itself in 2010 but it also goes a long way to explain the kinds of complex problems that large organisations -- corporate, government or NGO -- are facing at this stage of our technology-and-software led accelerating revolution in the 21st century with the simultaneous unfolding of two massive phenomena since 2007/2008: The Great Unwind and The Great Reset.

Early Lessons

As the challenging Toyota saga unfolds, it’s worthwhile taking stock of some early lessons for the corporate world. The salient points are:

. Fly by Wire Complexity

It is complicated to diagnose the cause of failure of electro-mechanical systems driven by mission-critical software as opposed to old-fashioned moving parts.

. Failing to Practice What's Preached

Toyota management simply failed to practice what they had long preached the rank-and-file.

. Growing at the Expense of Safety and Quality

The mandate to capture 15 percent of the global market share by 2015 became the priority for Toyota and this forced them to compromise safety and quality. Toyota took on too much risk in the development of their products which allowed safety and quality issues to become buried beneath the surface.

. Global Fallout

Problems surfacing in one market have an impact on sales in every other market. These are challenges that corporates increasingly face in a globalised and highly interconnected environment.

. Responding Late

The most effective crisis management takes place before the problem escalates out of control during the "incubation" phase. Toyota management did not respond to the early signals. That's when they should have identified the root causes and communicated a detailed global response.

. Cover Up

The cover-up can be worse than the problem itself. Design glitches happen. The key is to act quickly and boldly, especially when one is dealing with personal safety and negative newspaper coverage around the globe. Toyota got stuck in a crisis of its own making.

. Silence

There’s a perception that Toyota dragged its feet on its sudden-acceleration and braking-system woes. The fact the company’s president largely avoided public statements smacked of guilt to the observer. That the US Transportation Secretary Ray LaHood is spending more time at the microphone than top Toyota officials in presenting a coherent narrative demonstrates how poorly the company is playing things.

. Competition

Toyota's recall presents an opportunity to other automakers who will now gain the consideration of Toyota's once fiercely loyal consumers. Other car manufacturers marvel at the extent to which a once bullet-proof competitor is shooting itself. Corporate leaders stumble from time to time. The key is not delivering a massive windfall to rivals.

. National Microcosm

Japan’s economy is about to become number two in Asia as deflation worsens. Like Japan, Toyota succeeded in its headlong drive to become number one, got there and then let the forces of complacency seep in.

. Mitigation

While there are signs that Toyota was initially slow in waking up to the extent of the problem, they have taken steps to contain the impact and it remains to be seen if they will ultimately restore the trust that has become the hallmark of their brand. Steps taken include a full review of risk management strategy, computer aided design development and mission critical software programming and testing methodology, the introduction of brake over-ride solutions, as well as more flexible and responsive customer handling. However, there is a long way to go yet.

. Repairing Trust

Trust has an asymmetric quality: it is earned over a lifetime and can be lost in just one event. The most significant challenge for Toyota is to repair the loss of trust and reputation for quality that they have worked for decades to establish. In this case, Toyota has been hit with a series of increasingly damaging quality problems, and will struggle to restore its image and confidence of consumers around the world.

Conclusion

The role of chief executives is evolving swiftly in the 21st century as the implementation of computer-assisted-design, mission-critical software and new technology continues to accelerate. At the same time, customer expectations of transparent communications throughout the lifecycle of a relationship are becoming ever more demanding.

Chief executives must be expert crisis managers to ensure that an asymmetric breakdown of product quality or weak links in operations do not cause significant loss of customer trust, global brand value deterioration and a massive plunge in market capitalisation. Crisis management requires some type of explanation of what happened, what is underway and why it will not happen again. When the situation is no longer the question of a few people asking questions and everybody knows there is a problem, there is a need for a coherent story-line to explain the entire process including errors and omissions transparently. It is no longer sufficient to say that trust me, I am the CEO and I'll fix it, when that trust has clearly broken down. Once trust has been broken, then we can't rely on people to take our word. We have to tell the truth and in an easy to understand sympathetic narrative.

Some of the biggest potential crises have been identified and addressed before they ever escalated out of control: this is crisis management at its best. This requires an organisational culture that is vigilant for potential crises, has open lines of communication from staff to management, and a willingness to address unpleasant truths, ingrained bad habits and local cultural values that may not translate internationally.

[ENDS]

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