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Pitfalls in the Toyota Expansion Strategy
—The Essence of the Recall Issue

Isao Endo
Professor, Waseda University Business School

A recall of unprecedented scale

Currently, media coverage of the Toyota Motor Corporation recall (recalling and repairing vehicles free of charge) is pervasive. Some of the reports are emotional, and there are shades of Toyota bashing combined with the movements to politicize the issue.

Nevertheless, the fact is the current recall presents an extremely grave situation for Toyota, as the reigning King of Quality. In November of 2009 in the U.S., a problem involving the accelerator pedal getting caught on floor mats resulted in the recall of 5.55 million vehicles, across 13 models. In January of 2010 in the U.S. and Europe, a total of 4.2 million vehicles were recalled in response to a problem with accelerator pedals getting stuck when pressed down. And in February, problems with the brakes in the Prius were detected in Japan, the U.S., and Europe, resulting in a further recall of 430 thousand vehicles. As this amounts to a total recall of more than 10 million vehicles, it must be regarded as a remarkable situation.

The three pitfalls lurking in the occurrence of quality problems

The question is: how did such a large scale recall as this occur? The answer lies in the three pitfalls lurking in Toyota's business development up to now.

The first pitfall lies in the rapid expansion and global development that Toyota enjoyed. At its peak in 2007, Toyota's global sales figure reached 8.43 million vehicles, which constitutes nearly double the total over just ten years prior-just shy of 5 million vehicles in 1997. From 2004 to 2007 in particular, Toyota's annual increase in vehicles sold was equal to the total annual number of vehicles sold by Mazda.

In order to support such rapid expansion, the number of products must be increased and local sourcing and production must be expanded. In fact, there has been a shift toward local production and the number of new parts manufacturers abroad has been increased. Quality control has undeniably been insufficient for this rapid expansion of business.

The second pitfall lies in expanded standardization of parts. In order to reduce costs, the trend toward standardization was accelerated for parts that had traditionally been different for each model. As a result, when a problem occurred with one part, the scope of the recall increased all at once, which is directly connected to the rapid rise to an unprecedented number of vehicles recalled. In fact, in terms of Toyota vehicles manufactured domestically, there were four cases in 2001 where the total number of vehicles recalled did not exceed 50 thousand vehicles, but nine cases in 2004 where the total number of vehicles recalled grew to 1.9 million vehicles.

The third pitfall lies in development toward making vehicles electronic. These days, it is fair to say that vehicles are a mass of electronic components and software. Even Toyota, with its mechanical prowess, is nowhere near sufficient in terms of knowledge and experience when it comes to electronics and software. The current Prius recall, for example, was caused by an error in software settings with a discrepancy of 0.06 seconds. The automobile is a product which, as it evolves, renders the strengths and experience of the past obsolete.

From a pyramid structure to a network configuration

How should Toyota proceed going forward? This situation requires far more than superficial measures-nothing short of a radical overhaul of the business system. Up to the present, Toyota has operated under a pyramid shaped business system known as keiretsu, or, affiliated chain. Toyota was at the apex, the parts makers Denso and Aisin Seiki were directly below Toyota, and the next levels of makers continued in the same fashion down the pyramid to form a system of centralized power.

This All Toyota business system, as it is known, involved a common destiny for all stakeholders. In this system, it was relatively easy to unify and communicate intentions as well as to collect information from the field. It was a system which drew on tacit understanding, intuition, and reading between the lines, and it was this very system that led to Toyota's superiority up to the present.

But in an environment such as the current one, with more than half of sales and production done abroad, this system has its limits. As local sourcing and local production are expanded, relationships must be established with companies and partners different from those up to the present. And this applies not only to existing parts manufacturers, but to entirely new partners and affiliates supplying new parts such as batteries, software, and other components-widening the range of stakeholders.

In the current accelerator pedal case, the supplier CTS (of Indiana, U.S.) is not a parts manufacturer under the Toyota umbrella. It is no small feat to meet the Toyota code of values and rigorous quality standards, but as CTS is an independent company supplying other companies as well, Toyota is no more than one of them.

The way to create a new business system dealing with such parts manufacturers abroad-as well as the way to collaborate with affiliated companies-poses a significant challenge for Toyota. The way forward should not be based on the firm solidarity of family ties of the system up to now, but rather on shared goals and objectives, while ensuring the independence of and drawing on the respective strengths and characteristics of each stakeholder-a system that should be called a network configuration business system.

In the All Toyota way, it was crucial to create solidarity, but major changes are now required, including the goal setting and management framework, as well as the means of communication and training. It is not a matter of quality control by a homogeneous group, but rather how to create global quality by a heterogeneous group. This is the very challenge that Toyota faces going forward.

Isao Endo
Professor, Waseda University Business School; Supervisory Board Member of Roland Berger Strategy Consultants

Professor Endo graduated with an undergraduate degree from the School of Commerce at Waseda University and received an MBA from Boston College's Carroll School of Management. Professor Endo took up his current position after working for Mitsubishi Electric Corporation and for an American strategic consulting firm.

As director of the Waseda Business School MBA/MOT program, Professor Endo supervises the business school. The professor also serves as chairman of the Supervisory Board in Japan for the leading western strategic consulting firm, Roland Berger Strategy Consultants. More than just deciding on strategies, Professor Endo is highly esteemed for his consulting in support of implementation which gets results. Professor Endo is also on the Supervisory Board of the Roland Berger Headquarters in Germany and is an Adjunct Professor of Strategy at Cheung Kong Graduate School of Business in China.

Professor Endo's primary works include Forging Power in the Field, Visualization, Ultra-micromanagement, Premium Strategy, Restoring Power in the Field (all of the above from Toyo Keizai, Inc.), MBA Operational Strategy (Diamond, Inc.), An Introduction to Corporate Management (Nikkei, Inc.), Doubt “Conventional Wisdom” in Business! (PHP Bijinesu Shinsho), Competitive Source (PHP Kenkyujo), and Future Sketch (Asa Publishing Co., Ltd.)

Forging Power in the Fieldas selected as number one among the 2004 Reader's Choice of Best Books in the business book review journal, TOPPOINT. Visualization won the 2006 (Sixth) Nikkei Business Publications/Biztech Book Award.

Professor Endo's personal webpage:http://www.isaoendo.com