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Stewart Anderson

Quality Insider

Toyota: There Are Always Limits to Growth

Toyota is discovering that constraints to growth always exist.

Published: Wednesday, February 3, 2010 - 06:30

The latest Toyota recall, announced just last week, has sent analysts and pundits alike scurrying for explanations about what is wrong with one of the world’s largest automakers. The recall, ostensibly for sticking accelerator pedals, affects some 2.3 million vehicles in Canada and the United States and comes just months after the automaker issued a recall for some 4.3 million vehicles regarding concerns that some floor mats could entrap accelerator pedals.1 The recalls have prompted widespread comment and criticism of the automaker, with many commentators suggesting that the company is in serious decline with respect to the quality and reliability of its products.

The Toyota recalls took place amidst an upsurge in auto industry recalls for 2009. The Detroit Free Press reported on Dec. 30, that there were 15.2 million units recalled by the industry in 2009, and that Toyota led the pack with 4.87 million cars and trucks recalled, mainly due to the accelerator pedal issue. The 15.2 million units recalled by the industry in 2009 is nearly double the 8.6 million units recalled in 2008.2

Toyota has had an increasing number of recalls during the last five years or so—the period when the company began closing in on General Motors position as the world’s largest automaker. In April 2008, Toyota recalled 539,500 of its 2003 and 2004 models of Corolla and Matrix cars to fix a flaw that could cause the power windows to stop working. In August of 2009, the company recalled 95,700 of the 2009 and 2010 models of Corolla, Matrix, and Scion xD vehicles for a defect that could cause brakes to fail in cold conditions.3

Toyota’s biggest previous recall involved 1.53 million Hilux pickup trucks with faulty steering relay rods. The recall began in Japan in 2004 and was extended to overseas markets in 2005. The company’s largest U.S. recall before this year involved 978,000 vehicles in 2005, also to fix a steering-related flaw.4

I don't wish to offer any hypotheses about the causes of the latest recall problem in this article, nor do I wish to speculate on whether Toyota’s response to the crisis in terms of corporate responsibility have been adequate or inadequate. Rather, I am interested in looking at the general pattern that the trend of these recalls suggests, and present a hypothesis that may explain why the company has been experiencing difficulties as it grew to displace General Motors as the world’s largest automaker.

Simply put, I believe that Toyota’s current problems can be explained by appreciating that with any system there are always limits to growth. Nothing can grow infinitely, and at some point in a system’s growth, constraints to growth emerge and serve to retard or diminish the growth. In Toyota’s case, a primary system constraint appears to have emerged—namely, the company’s ability to support its growth with adequate development of its human resource base to problem solve and learn, thereby eroding its continuous improvement capability and product quality and reliability.

To develop this hypothesis, I first looked at several markers of Toyota’s growth throughout the last five years (historical corporate financial data older than 2005 is more difficult to come by). These markers included Toyota’s global sales volume growth, combined with sales revenue and profitability data, along with the growth in the number of employees that the company has added to support the high rate of growth. (See figures 1–3.)

 

Figure 1: Toyota Motor: global sales (units) 2005–2009 (Source: Toyota year-end financial reports)


 

Figure 2: Toyota Motor revenues and gross profits 2005–2009
(Source: MSN.money)


 

Figure 3: Toyota Motor: number of employees 2005–2009
(Source: CNNMoney.com)

Toyota’s growth peaked in fiscal year 2007 when the company sold a record 9.37 million units globally and took over the industry leadership in unit sales from General Motors. Since the 2007 peak, Toyota’s sales growth, as with virtually all automakers, has declined, mainly due to the effect of the global recession and the resulting depression of sales for all manufacturers. Indicative of the company’s strong growth has been the increase in the number of employees: In 2001, the company had 214,6315 employees, and in 2009 this number had grown to 320,808 6. This represented an increase in that period of 106,177 employees, a very significant number representing an almost 50-percent increase, and during the 2005–2009 period alone, the company added some 55,055 employees to support the sales growth.

Looking at this data, one can ask if there is a pattern or structure operating where the sales growth of the company might be correlated with the rise in defects and recalls that Toyota has experienced in the last few years? In short, might Toyota’s recent problems be largely self-inflicted, with the company’s growth eroding its long-standing capability for product quality and reliability?

The diagram in figure 4 explains this hypothesis in detail. There are essentially two basic patterns or structures that can be identified that explain Toyota’s growth as a business system. As with every system, these structures drive the behavior of the system. The primary pattern, which is called R1 in figure 4, is a reinforcing loop of growth. This loop is driven by management’s desire to grow the company by building market share through increased sales and revenues. This growth, in turn, requires an increase in the company’s resource base to support the sales expansion through additional capacity and people. As the resource availability increases, so, too, does the company’s capability to undertake continuous improvement through contributive kaizen activities. As the amount of contributive kaizen increases, product quality and reliability further improves, thereby increasing the market appeal of the company’s products and generating additional sales and revenues.

 

Figure 4: Systems model of Toyota’s growth

The reinforcing loop is what has driven much of Toyota’s growth. The company’s growth has, in large measure, been driven by high product appeal achieved through industry leading levels of product quality and reliability. These high levels of quality and reliability have been attained through a mature culture of continuous improvement, where there is widespread contribution for daily process and product improvements coming from the employee base throughout the company.

In a perfect world, this virtuous reinforcing cycle would operate indefinitely, causing compounded growth which would only be limited by the company’s ability to gain market share from competitors and attract new customers. However, no system grows indefinitely and, at some point, constraints or limits to growth begin to appear. In figure 4, this is the balancing loop identified as B1.

This balancing loop begins to take effect when the company’s capacity for training and developing its people to support continuous improvement and process excellence is no longer sufficient to keep up with the increased growth. As new resources are added to keep up with the growth, the company’s capacity to train and develop these additional resources in kaizen and problem solving is exceeded. This, in turn, begins to degrade the company’s process and continuous improvement capability, with a subsequent erosion in product quality and reliability. The reduced product quality, which we now see currently manifested as product recalls, then adversely affects the market appeal of the product and depresses sales and revenues—the very opposite of the growth that management set out to achieve.

It is important to note that, in the balancing loop, there is a delay—that is, a time delay is incurred before the effects of interaction among the variables in the feedback loop begin to manifest themselves. In Toyota’s case, this delay has taken the best part of ten years to manifest itself—since 1998, the company saw a large increase in international sales and production, and since 2003 the pace of growth has exceeded half-a-million vehicles per year. In that same period, Toyota’s recalls have increased, but at a much slower rate than the company’s growth rate. Until now, that is, when the number of recalls has escalated dramatically.

Credence for this hypothesis is given by remarks made during the last year or so by Toyota’s new president, Akio Toyoda. Appointed president by Toyota’s board of directors on June 23, 2009, Toyoda’s appointment came at a time when the company was experiencing difficulties with product quality and recalls. Commenting on the situation in a message to all Toyota employees, Toyoda said, “During the last 10 years, Toyota has seen a big increase in international sales and production. Since 2003, the pace of expansion has exceeded half a million vehicles a year. Since Toyota’s mission is to contribute to society through the manufacture of automobiles, I do not think we were wrong to expand our business in an attempt to meet the needs of customers around the world. But we may have stretched more than we should have, and that made us unable to capitalize on Toyota’s traditional strengths.”7

Toyoda’s reference to the company “stretching” more than it should have suggests that he at least was aware that the company had perhaps exceeded its capacity to support its growth by developing its people to sustain continuous improvement, learning, and problem solving. In hindsight, Toyota seems to have violated its “traditional strengths” of managing itself as a system and countering the sources of variation within that system. Instead, Toyota’s focus on growth introduced variation into the system—variation that the company was not able to successfully manage, and which stretched the system’s capability and eroded product quality.

It’s sometimes said that the only real choice is where we place our attention. Implicit in Toyoda’s message was the notion that the company may have strayed from its original purpose as it pursued a high growth strategy. Toyota’s emphasis on growth as the primary imperative may have cast the previous emphases on quality and reliability in subordinate positions. If a company forgets or alters its original purpose, then (what Peter Drucker called) “the theory of the business,” may also change, knowingly or unknowingly. According to Drucker, every company should have a theory of its business—the set of assumptions it makes about its environment, the assumptions it makes about its mission, and the assumptions it makes about the core competencies needed to accomplish the organization’s mission.8 The theory of the business outlines how a company will pursue its purpose.

In his message, Toyoda affirmed that Toyota must reconnect with its original purpose. “Since the birth of Toyota, the company’s philosophy has always been to ‘contribute to society.’ The first article of the Toyoda Precepts, our original statement of purpose as a company in 1935, states that we must contribute to the development and welfare of each country we operate in by working together—regardless of individual position—in faithfully fulfilling our duties. In other words, we must manufacture high-quality vehicles for the benefit of society. So, we must start again from the very bottom up.”9

The way forward for Toyota will involve reconnecting with its original purpose and ensuring that it can support its overall strategy with the required operational capabilities fully enabled by developing its people. In the systemic model presented in figure 4, the way forward is not to push harder on the reinforcing loop—this will only compound the problems. Rather, the solution involves focusing on the balancing loop, and addressing the limits to growth which are operative in that loop. This will mean improving the company’s ability to increase the “carrying capacity” of its human resource base to support and contribute to continuous improvement, problem solving, and learning. In the short term, growth may have to be de-emphasized as the company “catches up” and begins to close the development and learning gap that has opened up across its resource base during the last ten years.

Every business must grapple with understanding the nature and cause of variation within its system, as advocated by W. Edwards Deming. The lean movement has consistently held up Toyota as a paragon of excellence. Lean advocates have, at times, tended to adopt an unquestioning hero worship of Toyota as their de facto model for operational excellence. This has tended to promote an ethic where it has become fashionable for other organizations to try and copy the tools and techniques of the Toyota Production System, and even the thinking and behaviors of Toyota’s management system. Copying without understanding is not learning, and copying what Toyota does will not assure that the capabilities of Toyota can be replicated within another organization. Given Toyota’s latest difficulties, it is also important for the lean movement to recognize that Toyota as an organization is not without fault or blemish, and that even a mature system such as Toyota’s is fragile and susceptible to the effects of variation in all its forms.

Can Toyota bounce back? I remain optimistic—if any organization has the wherewithal to rebound from adversity, it is Toyota. More than any other organization, Toyota has shown the capacity to learn and adapt to adverse conditions and circumstances. The current challenge faced by the company may be the greatest in its history. The way forward has already been articulated by Akio Toyoda: “Rather than asking, ‘How many cars will we sell?’ or, ‘How much money will we make by selling these cars?’ we need to ask ourselves, ‘What kind of cars will make people happy?’ as well as, ‘What pricing will attract them in each region?’ Then we must make those cars.”10

Postscript

Following the writing of this article, Toyota Canada announced on Feb. 2 that the company had determined the cause of sticking accelerator pedals and was implementing an immediate corrective action in affected vehicles.11 According to the announcement, “Toyota has pinpointed the issue that could, on rare occasions, cause accelerator pedals in recalled vehicles to stick in a partially open position. The issue involves a friction device or lever, in conjunction with a spring in the accelerator pedal assembly, that is designed to help control the force necessary to depress the pedal and the return force necessary to release the pedal to allow for smooth operation of the accelerator pedal. Due to the materials used, wear and environmental conditions, surfaces may, over time, begin to stick and release instead of operating smoothly. In rare instances, the friction of the accelerator pedal may increase to a point where the accelerator pedal may become harder to depress, slower to return or, in the worst case, become stuck in a partially depressed position.”

References:

1. Toronto Star, Jan. 22, 2010.

2. Detroit Free Press, Dec. 30, 2009.

3. Bloomberg.com News, Nov. 29, 2009

4. Bloomberg.com News, ibid.

5. Cited from The Directory of Company Histories on Shmula.com (http://www.shmula.com/291/toyota-motor-corporation-company-history)

6. Listing for Toyota Motor Corp. on Hoovers.com

7. Akio Toyoda, message to Toyota employees on June 25, 2009 and posted on the Toyota corporate website (http://www2.toyota.co.jp/en/about_toyota/message/)

8. “The Theory of The Business” by Peter F. Drucker (Harvard Business Review, Sept. 01, 1994)

9. Akio Toyoda, ibid.

10. Akio Toyoda, ibid.

11. Toyota Canada web site announcement (http://www.toyota.ca)

 

 

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About The Author

Stewart Anderson’s picture

Stewart Anderson

Stewart Anderson is a partner with Anderson Lyall Consulting Group, a Toronto-based consulting and advisory firm that helps firms develop their competitive advantage. Anderson’s background and expertise includes competitive strategy and value chain engineering. He has advised companies in the manufacturing, service, and contract manufacturing industries. Anderson is completing his bachelor of arts in economics and he is a certified trainer in lean manufacturing principles and techniques.

Comments

You're right on the mark!

It sickens me as a Quality Professional to have to listen to all the "experts" in the media talk about the demise of Toyota. Slow response? Letting things go to long? Poppycock! They're response has been no slower than other companies of their size or complexity in my humble experience of 30 years in American manufacturing. The auto industry has grown leaps and bounds in terms of quality and reliability because of the likes of Toyota, Mercedes, Volvo, and others. I too believe that Toyota will rebound and no doubt learn some valuable lessons because that is their culture!

Toyota Recall

Although it may seem nit-picky, I remember a Toyota recall that involved their pick-ups. If your pick-up was one of the affected vehicles, you were issued a check on the spot and your truck was not returned to you. I don't know if the amount of the check covered whatever you may have owed Toyota Motor Credit.

I personally have lost my faith in the Toyota brand, because I find no more comfort in their latest analysis of the problem (friction?) as I did in the floor-mat theory (bumpkis). It's all very reminiscent of the Ford Explorer fiasco.

Wrong Numbers

The revenue data on the chart has got to be way off. 25 million yen is only about $275,000 U.S. Currently $1US = 91 yen.

Fixed Chart

Good catch Nebula. That chart has been replaced.