Toyota lncident

In August 2009, the improper installation of an all-weather floor mat from an SUV into a loaner Lexus sedan by a Toyota dealer led to the vehicle's accelerator getting stuck, causing a tragic, fatal accident and launch­ ing the most challenging crisis in Toyota's history. How did a company that become the world's largest and most profitable automaker on the back of a rock­ solid reputation for quality and dependability find itself at the center of the biggest product recall? And what does this mean for Toyota's brand image in its largest and most profitable market? Toyota's perceived delay in addressing the situation is central to the problems Toyota is now facing.'

TOYOTA HISTORY The company was founded by Kiichiro Toyoda in 1937 as a spin-off from his father's company, Toyota Industries, to create automobiles. Three years earlier, in 1934, while still a department of Toyota Industries, it created its first 'product, the Type A engine, and, iii 1936, its first passenger car. Toyota Motor Corporation (TMC) group companies are Toyota (including 'the' Scion brand), Lexus, Daihatsu, and Hino Motors, TMC is part of the Toyota Group, one of the largest conglom­ erates in the world.

The Corona, the first . popular Toyota in America, was designed specifically for .American drivers. With a powerful engine, factory-installed air conditioning, and an automatic transmission, Corona helped increase U.S. sales of Toyota vehicles threefold in 1966 to more than 20,000 units. The thrifty Corolla was introduced in 1968 and; like the Cororia, was a huge success with American drivers. Corolla has since become the world's all-time best-selling passenger car, with 27 million sold in more than ·140 countries.

As more Americans discovered the q\lality and relic ability of Toyota products, sales continued to soar. By July 1967, Toyota had!' become the third-best-selling import brand in the United States. In 1972, Toyota sold its one-millionth vehicle. By the end of 1975, Toyota surpassed Volkswagen to become the number

one import brand in the United States. Three years later, in 1978, Toyota won the "Import Triple Crown" by leading all import brands in sales of cars, trucks, and total vehicles.

In 1986, Toyota became the first import automaker to sell more than one million vehicles in America' in a single year, racking up sales of 1,025,305 cars and trucks. That year also marked the company's debut as a manufacturer in the United States, with the rollout of the first Toyota car built on American soil. The vehicle, a white CorollaFX16, was produced on October 7, 1986, at the New United Motor Manufacturing, Inc. plant, a joint venture with General Motors. By 2010, Toyota had the annual capacity to build about 2.2 million cars and trucks and 1.45 million engines in IS plants across North America. In 2007, the Toyota Camry was Car of the Year. The Toyota brand otitsold Chevrolet in 2008 to become the top-selling' automotive brand' in America, and the Camry retained its crown as thetop-selling car in the nation for the 11th time in 12 years. Toyota also passed General Motors in global. sales to become the world's largest auromaker for the first time in history.

In 1989, Toyota branched out by establishing a lux­ ury line of vehicles with the debut of the Lexus LS 400 and the ES 250. Highly acclaimed cars plus exceptional customer service quickly became the hallmark of Lexus. Toyota launched two all-new gas/electric hybrids in 2009: the third-generation Prius with an estimated EPA fuel economy rating of 50 miles per gallon and the first hybrid Lexus, HS 2S0h.2 .

Toyota ranked eighth on the Forbes 2000 list of the world's leading companies for the year 2005 but slid to 55 for 2011.

In a 2010 worldwide ranking of autornakers, the International Organization of Motor Vehicle Manufacturing ranked the Toyota Motor Corporation first on the list with .8.6 million units produced globally (market share based on OICA 2010 global total of 77,743,862).

SOURCE: This case was written by Susan C. Ronkainen and Ilkka A. Ronkainen for discussion purposes and not to. exemplify correct or incorrect decision making.

535

536 PART THREE • Cases

By the middle of 2011, Toyota had fallen to third place, with GM moving to first and Volkswagen second."

Top 3 Automakers Global, OleA, 2010 Group Units % Share

THE "TOYOTA WAY" /

The "Toyota Way" has seven distinct elements: (1) Kaizen, the process of continuous improvement, which has Toyota employees coming back to work each day determined to perform better than the day before; (2) Genchi genbustu, which expects fact-based consensus building on defining challenges; (3) Kakushin, which focuses on radical innovation in terms of technol­ ogies and models; (4) Challenge to get employees to see challenges not as something undesirable but as way to help reach improvements; (5) Teamwork to share knowl­ edge with others in the team and to put the company's interests before those of the individual; (6) Respect for other people, not just as people but for their skills and special knowledge; and (7) Customers first, dealers second-and manufacturer last with the realization that customers pay the salaries, not the company."

Ultimately, employees reach a point of "emotional fortitude," where their behavior is consistent with the organization's objectives. In the West, where individual­ ism is at a higher level, it is more difficult for employees to absorb this objective. Emulating Toyota is not about copying anyone practice; it is about creating a culture. It takes 1.2 American workers to do what one worker in Japan does. They have kaizen-ed and kaizen-ed and kaizen-ed in the jobs in Japan and there is very little waste.'

TOYOTA'S HANDLING OF THE CRISIS Toyota said it received the first complaint about the Prius in August 2007 but some reports go back. as far as the early 2000s. In October 2009, Toyota began send­ ing letters to certain Toyota and Lexus owners to notify them of a serious safety risk where improperly installed floor mats could interfere with the accelerator pedal and provoke very high vehicle speeds. As a precaution the company asked owners to take out the mats and not replace them with any other floor mat and to have cars be fixed by the dealers. Additionally there were two more recalls in order to address the potential for sticking accelerator pedals and to update the antilock brake sys­ tem (ABS) in certain Prius and Lexus 2010 models.

Installed Floor Mats

SOURCE: KAZUHIRO NOGI/AFP/Getty Images.

In February 2010,Akio Toyoda, president and CEO of Toyota Motor, made the first public appearance since the sudden acceleration problem started, in a press conference in Nagoya. The president expressed his regret for the inconvenience caused to customers and announced that he would command quality improvement around the world with the establishment of a global quality task force. The action plan of the task force included the enhancement of customer research, the improvement of regionalsubsidiar­ ies' autonomy, and the support from outside experts.

Later in February 2010, Toyoda, and Yoshimi Inaba, president and CEO of Toyota Motor North America Inc., appeared before the Committee on Oversight and Government Reform to give statements on the subject "Toyota Gas Pedals: Is the Public at Risk?" In this hearing, where family members from peo­ ple who died in a car accident involving a Toyota vehicle were present, the CEO took full responsibility for the safety of Toyota's vehicles and reminded the audience how seriously the company took the quality and safety of its vehicles. The CEO also explained how the company was going to manage quality control in the future.

Among the proposed measures were setting up a sys­ tem for customers' voices around the world to reach management in a timely manner and also of a system which will allow each region to make any decisions as necessary. Another measure was the establishment of a quality advisory group composed of respected outside experts from .North America and around the world. Finally the CEO announced the following measures in the United States: the establishment of an automotive center of quality excellence; the introduction of a new position (product safety executive); and the sharing of

Toyota's National Ad on Recall, January 31; 2010

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SOURCE: © Toyota Motor Sales, U.S.A., Inc. . ,

Toyota Incident 537

more information and responsibility within the company for product quality decisions, including defects and recalls. The ad says "A temporary pause. To put you first," in very big letters, followed by an explanation as to why the plants were temporarily shut down in compar­ atively tiny letters. The ad does not give any specifics about the recall, but it directs customers to the auto­ maker's website for information about the Toyota recall. 6

Additionally, the company also created a section on its website with information about the recall .process. The new section-included an option for customers to write down their Vehicle Identification Number (VIN) and figure out whether their cars were involved in recent recalls, and postings of all important messages about the recall process." Finally, Toyota also created the Toyota Safety Website in order to inform customers about the technology it is developing to keep its customers safe and the safety features it is implementing in its vehicles. 8

THE MARKET RESPONSE . .

The recall came at a difficult time for Toyota, as it was struggling to emerge from the recession and had already suffered from a resultant decrease in sales. Additionally, Toyota Motors as a whole announced that it could face losses totaling as much as US$2 billion from lost output and sales worldwide. Between january 25 and January 29, 2010 Toyota shares fell in value by 15 percent.

TOYOTA'S RE.SPONSE: ANALYSIS The key to good crisis management is being prepared for a crisis before it erupts rather than responding to it. The recent Toyota crisis was two-fold: its crisis prevention procedures and its response to the actual crisis.

Toyota's Worldwide Vehicle Sales per Region (in thousands of units)

SOURCE: Toyota Motor Corporation Annual Report 2010, p. 12, http://www.toyota-global.com/investors/ir_library/annual/pdf/201 O/pdf/ an O_e.pdf. Reprinted with perrnission,

538 PART THREE • Cases

Toyota's Worldwide Net Revenues per Region (in millions of yen)

2008 2009 % Change 2009-2008

% Change 2010-2009

SOURCE: Toyota Motor Corporation Annual Report 2010, p. 34, http://www.toyota-global.com/investors/ir_library/annuaI!pdf/201 O/pdf/ ar10_e.pdf. Reprinted with permission.

First, its hierarchical approach could be a major rea­ son for its lack of capacity to identify potential crises. If subordinate employees are hesitant about communicat­ ing bad news to senior staff, the company's ability to spot flaws will probably be severely hindered. Addition­ ally, the absence of an outside worker on the company's board could bea problem too because this could prevent top management from using fresh ideas to find creative ways to deal with any problem.

At the heart of Toyota's problem is its perceived delay in identifying and addressing the situation in the first place. There was a sense by the public that Toyota ignored the problem until it was forced to take action. It looked like the crisis 'Vas managing Toyota rather than vice versa. Corporate denial appears to have been the order of the day. The company was unable to perceive sudden acceleration as a problem due to Toyota's obses­ sion with perfection. At first, it identified the source of the problem with the improper installation of floor mats, but later it shifted the cause to sticking accelerator ped­ als. Moreover, the fact that the company executed con­ secutive recalls revealed that it did not have a defined strategy to manage this process.,

In regard to the communication strategy, Toyota's president, Akio Toyoda, made the first public appear­ ance more than threemonths after the first recall of vehi­ cles was made. Although the CEO should be the face of an organization, it may not be the best choice in a crisis. By August 2009, the National Highway Traffic Safety Administration had received. over 2,500 driver com­ plaints about sudden acceleration in Toyota's vehicles. The company spokesperson must be trained and prac­ ticed to be clear in a crisis and concise in crisis mode and not cause more confusion, as one Toyota spokesper­ son did in this incident.

During the crisis, Toyota's communication strategy was' not the best, especially since people representing it were not quite effective at clearing up the public's doubts and informing them of Toyota's measures to address the issue. With their reput~tion on the line, Toyota finally

2010

acknowledged sudden acceleration as a problem, whether real or perceived, to the high-quality image that is the core value to their brand. Understanding what is atthe heart of the brand and being especially vigilant is why the slow response to the crisis was even more damaging to T oyo­ ta's public image."

Key to effective crisis management is the wayan organization is perceived to have managed the crisis; get­ ting it right is the only option to surviving a crisis. In 2010, Toyota was the only large automaker to post a decline in sales in the United States, historically its most profitable market, indicating the damage that slow crisis management had caused the brand.

CONCLUSION In February 2011, the Federal Highway Safety Commission absolved the electronics in Toyota Motor Corp. vehicles for unintended acceleration and said driver error was to blame for most of the incidents. Three main ca uses for the sudden acceleration were found after a 10-month investi­ gation. Two of them were sticky accelerator pedals and '" floor mats that trapped the throttle in an open position. The third and most common problem was driver errors, called "pedal misapplication."

The report came as Toyota's profits fell 39 percent in the December quarter (2010). Its sales had been hurt by the recalls' and continued worries about its vehicles' safety. Ray Lahood, the transportation secretary, who had called previously for Toyota drivers to stop driving their Toyotas, now feels that Toyotas are safe to drive.

Electronically -controlled throttle braking, steering, safety, and vehicle stability systems are critical to modern vehicles. Computer-controlled electronic systems have replaced mechanical connections to save weight, improve fuel economy; and enable advanced safety systems such as automatic braking.l? The Alliance of Automobile Manufacturing hopes that these findings reassure the driv­ ing public. The exhaustive study should help Toyota fend

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off hundreds of lawsuits under litigation in federal counts that blame Toyota for the unintended acceleration that is currently hurting the company's image.

The reality is that Toyota is positioned for recovery about as well as it could be-owing, in large measure, to

QUESTIONS FOR DISCUSSION

Toyota Incident 539

the reputation for quality products and corporate responsibility it has developed over the last two decades. And that may be one of the biggest lessons for other companies as they study how Toyota emerges from this recall crisis.i '

1. Toyota had achieved the pinnacle in the U.S market by creating reliable, high-quality, fuel­ economic cars. The past three years have seen that brand's superiority erode. What can Toyota do now to recapture its market share? With Toyota's new brands Venza and Yaris, can Toyota attract a new, younger market with new social media? How does Toyota break out of the stodgy styling of past brands=-or should it?

ENDNOTES

2. Toyota is not only having a quality crisis but an internal battle as well, pitting the founding Toyota family against a group of professional managers each blaming the other for the automakers pro­ blems. Why?

3. Did the "Toyota Way" get in the way of corporate response?

4. Did Toyota make enough changes to further prevent sales damages and to get the company's reputation back on path?

1. Angus MacKenzie and Scott Evans, "The Toyota Recall Crisis," Motor Trend, January, 2010, http://www . mqtortrend.comlf6htures/auto_news/20 1 0/112.:..100 1 _toyota_recall_crisis. ,

2. Toyota, "Our History," http://www.toyota.com/about/ our_businessl our jiistory.

3. OICA, http.z/oica.net. 4. Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu,

"The Contradictions That Drive Toyota's Success," Harvard Business Review 86 (June 2008): 96-105.

5, Drake Bennett, "Toyota Bets on Japan," Businessioeek, May 9-15, 2011.

6. Chris Shunk, "Toyota Loses $21B in Market Share in One Week," Auto News, January 31,2010 .

7. Toyota Recall Information, http://www.toyota.com/recall. 8. Toyota Safety, http://www.toyota.com/safety. 9. Jonathan Hemus, "Accelerating Towards Crisis: A PR

View of Toyota's Recall," Guardian, February 9, 2010, 25. 10. Mike Ramsey, Josh Mitchell and Chester Dawson, "U.S.

Points to toyota Driver Error," Wall Street Journal, February 9,,2011, B1-B2.

11. Michael Connor, "Toyota Recall: Five Critical Lessons," Business Ethics, January 31,2010, http://business-ethics .coml20 1 0101l31/2123-toyota-recall-fiye-critical-lessons.