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Robert Cole's Observations on the Liker-Shook Dialogue regarding Toyota's Quality Crisis

John Shook
3/2/2010
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I have previously introduced readers of this column to Robert Cole, Professor Emeritus at Berkeley, former long-time professor at the University of Michigan, and currently Visiting Researcher at Doshisha University in Kyoto. I hope some of you saw the PBS video linked in last week's column that featured Bob in an insightful interview about the significance of NUMMI.

Bob is the first American academic to seriously study the inside workings of Japanese industry. To those of us who have studied the history of lean or TPS, Bob's work predates even the critical work of Doc Hall, Richard Schoenberg, Norm Bodek and the other American discoverers of TPS in the late 70s and early 80s. As part of his graduate research in the mid-1960s, Bob worked at two Japanese auto suppliers as a production worker, leading to learning that he later captured in numerous writings, including the seminal Japanese Blue Collar, (University of California Press, 1971). Bob's early work was an inspiration for me to study Japanese business, many years before I finally had the chance to meet him (at his favorite Chinese restaurant in the Shiba Koen area of Tokyo).

Bob took note of the recent dialogue in this space with Jeff Liker and we agreed that he would share his thoughts. Over the years Bob has followed the "quality movement" as it developed in Japan and spread around the globe (see Managing Quality Fads, Oxford University Press, 1999). Remarkably, just before the Toyota story broke, he published, along with Michael Flynn, "Automotive Quality Reputation: Hard to Achieve, Hard to Lose, Still Harder to Win Back," in the Fall, 2009 issue of the California Management Review (http://cmr.berkeley.edu/search/issueContents.aspx?issue=396&volume=52&Num=1&qtr=Fall&year=2010 ). He is a long-term member of the American Society of Quality and an elected member to the International Academy of Quality, an association of 60 global quality experts dedicated to quality improvement. So it is especially appropriate that Robert Cole share his thoughts now regarding Toyota’s current quality problems.


Robert Cole:
John, thank you for inviting me to share my thoughts. Let me start by commenting on the topic of quality that you and Jeff discussed.

With quality, perception is everything. By that criterion alone, Toyota has a serious quality problem. Customer trust in Toyota has been shaken. It doesn’t matter if the media have hyped the problems or the politicians have politicized it. It is what it is. To have a reputation for high quality, that is to say, strong perceived quality, is to have won the trust of the customer. I still recall an interview I had some 20 years ago with Nakatsuka Isao, Director of the TQC Promotion Office at Toyota Jidō Shokki (Toyota Industries Corporation, formerly Toyoda Automatic Loom Works), one of the original Toyota firms. "Our most important objective is to deliver superior products to satisfied customers whose trust we must win," he said to me, adding, "If we deliver a product to the customer whose quality creates trouble for them, this will affect their trust in us. If we betray their trust, they will not buy our products for a long time!"

His words may prove prophetic. Until recently, survey results showed that twice as many customers intending to purchase a new vehicle trusted Toyota (and Honda) as they did the Ford and Chevrolet brands. Toyota has now put that trust at risk.

Many factors are working against Toyota which will keep this issue in the public eye. Even Toyota insiders, for one, acknowledge that the response to their recent quality problems has been slow, which makes it easy for critics to claim they engaged in a cover-up, thereby eroding trust. Perhaps as a harbinger of events to come, The Chairman of the House Committee that questioned Toyota executives just accused the company of withholding documents while fighting lawsuits filed by crash victims. Second, it appears that Toyota kept selling specific models despite knowing about their problems. If this aspect becomes clearly framed in the public arena in this way, it will significantly add to Toyota's pain. Third, the ensuing litigation will keep the issue alive in the public mind for some time, reminding consumers of Toyota's culpability. Along with the litigation, lawmakers have signaled there will be continuing congressional hearings and probes over the next few months, again keeping Toyota's behavior in the limelight. Fourth, unlike the Ford Explorer/Mercury Mountaineer tire problem in the year 2000, Toyota's quality problems cut across many different models and there are multiple problems. This suggests that they do not have a specific model problem but rather this is a case of company failure-a far more damning blow. Moreover, because the problem affects multiple models, they can't quietly discontinue a particular faulty model and thereby make the problem disappear (as GM did with the Chevrolet Corvair). Fifth, the testimony by Toyota leaders at the congressional hearings did nothing to inspire trust on the part of consumers. At best, the company comes across as equivocal and not on top of the problem. Moreover, Toyota's responses to customer complaints, which were read at the congressional hearings, project an image of a company that treats its customer's callously. Sixth Consumer Reports (CR), calling it an unprecedented event, recently withdrew recommendations on eight Toyota models suffering from unintended acceleration despite their high reliability ratings. This is a powerful signal to consumers, from an organization that has had a love affair with Toyotas for some 30 years, and an organization which has the most influence on consumers when it comes to new vehicle purchase decisions. Seventh, while problems with unintended acceleration are hardly unique to Toyota, they are now the company most associated with this issue in the public mind. Toyota's handling of this extremely complex problem, thus, will be the continuing focus of the public's attention.

Finally, Toyota currently doesn't have all the fixes they need to make this problem go away. At the congressional hearings, Akio Toyoda claimed that Toyota vehicles are absolutely safe. Yet Jim Lenz, President of Toyota's U.S. Sales Operations, told a different congressional hearing the day before, that he couldn't be totally certain that all the problems that have led to sudden acceleration have been identified and fixed. They can't have it both ways. You can’t tell consumers your cars are safe but you don’t have all the answers. This is not a credible position and hardly inspires customer trust.

Until they do have all the fixes they need, Toyota's quality failures will be kept fresh in the public mind. In particular, if consumers conclude that, perhaps as a result of revelations in lawsuits, Toyota kept selling specific models despite knowing about their defects, then customer trust in Toyota will be severely impaired. All this suggests that the costs to Toyota's quality reputation are likely to be significantly larger than most analysts are predicting. It will take some time for them to fully regain customer trust. Fortunately, for Toyota, they have a long history of reliability with many long-term customers; that should make their task easier than it might otherwise be. Moreover, because of their low cost structure, they have the luxury of being able to aggressively price in order to win back customers.

None of this is to say that Toyota's quality or its quality reputation is in free fall. They still are an extremely strong quality performer. Yet, it is the trajectory that has to be worrying Toyota executives. Quite apart from the issue of recalls, we saw a fraying of Toyota's reputation in recent years. CR reported, in its April 2008 issue, that three Toyota models were being dropped from its 2008 recommended list. Whereas 100% of Honda's tested vehicles made CR's recommended list, Toyota's recommended percentage fell to 73%, down from 85% the previous year. Moreover, by some readings, Toyota's quality ranking in CR has fallen below Ford’s in recent years.

To try to minimize Toyota's quality problem by saying that Toyota customers misused aftermarket floor mats reminds me of way people responded to the Audi unintended acceleration problem years ago. Audi defenders argued that the problem was that clumsy drivers couldn't shift their foot properly between the brake and the accelerator. Blaming customers for quality failures is never a good idea! You need to design for all kinds of drivers including clumsy drivers. Similarly, if customers are misusing aftermarket floor mats, you need to give them incentives to acquire fool proof mats and find a way to warn them against buying those mats that don't meet your standards.

John Shook:
Yes, on the one hand it seems possible to assign the current specific problems to isolated, special causes. On the other, quality problems have been growing for years. Toyota wanted growth, but not that kind. One question to be explored is whether there has been a company-wide lapse in quality consciousness or was any lapse isolated organizationally.

Robert:
Indeed, this leads us to ask are Toyota's quality problems emanating from the manufacturing side of the business? It certainly appears that this is the case. Reports of unintended acceleration go back quite a few years and the Prius quality issue has been identified as a software problem. Note that no amount of kaizen on the assembly floor would have avoided these problems. These are not assembly problems.

Based on my own long term study of Toyota's approach to quality and the various experts I have consulted in Japan, the source of Toyota's quality problems lie in its hyper-growth and the growing complexity of autos (not unique to Toyota of course). I have addressed these issues in my recently posted Harvard Business Review blog (http://blogs.hbr.org/cs/2010/02/toyota_the_downside_of_hyper_g.html) , but I would like to pursue one theme here.

Toyota's hyper-growth has its origins in President Okuda's 1998 challenge to his managers to double Toyota's global market share to 15% by 2010. Toyota managers enthusiastically embraced that target and reached it early, a truly remarkable feat. Yet, it is difficult for any organization which elevates quantity to be a number one goal to simultaneously hold on to a focus of providing the highest quality. This is well recognized in the quality literature. If not managed carefully, a quantity focus will drive down quality. Organizational incentives, both formal and informal, have a way of skewing to the primary target. In the environment created by its aggressive pursuit of growth, quality mantras like Toyota's "Customer First," have a way of morphing from institutionalized commitments to empty slogans.

Toyota's philosophy has been Customer First, as exemplified in the popular term (in Japanese manufacturing firms) "QCD" - where quality (Q) is given priority over cost (C) and delivery (D) , with the understanding that a quality focus is not merely compatible with cost reduction and increased delivery but in fact will often enable both. Put more simply, the traditional Toyota view is that the successful pursuit of quality will enable volume increases and cost reductions.

No doubt, President Okuda never intended to reverse that formula. But aggressive top leaders like Okuda underestimate the way in which their directives get transmuted as they travel through an organization. So Toyota managers, for example, became so busy pressing their suppliers to increase capacity that in some cases they became less interested in listening to supplier concerns about what such rapid capacity expansion might do to quality. Engineers were so pressed to use common parts to reduce costs that they did not have the human resources to address all the design problems that this created. In a recent article, Prof. Takahiro Fujimoto notes a Japanese Ministry of Transportation study which concludes that "parts commonization is one cause of product recalls." In short, it was not only volume targets which now were driving their approach to quality but also cost reduction that was driving their approach to design quality. Both of these run counter to the Toyota philosophy.

None of these problems (deviations from the Toyota way) are insurmountable and indeed production slowdowns should give Toyota the time they need to return to their root practices.

John:
The company has acknowledged that they've been slow. We should point out, however, that the kind of problem being scrutinized is extremely complex and vexing. Not just for Toyota, SUA (Sudden Unintended Acceleration) and concerns about EMI (Electromagnetic Interference) have plagued the industry for years. Still, difficult problem or not, the slow response seems uncharacteristic.

Robert:
That raises questions of efforts by Toyota to sustain and reproduce its work culture. As you and Jeff discussed, Toyota has made an enormous investment in training, creating manuals, videos, and other forms. The rapid pace of global expansion, however, has made the task ever more challenging. In keeping with my previous comments, I want to suggest that organizational culture is no match for diverging incentives. What do I mean by that? Consider the following postulate: Show me what people are rewarded and punished for in an organization, and I will show you how they will behave. To borrow a term from Dr. Deming, this is profound knowledge. In referring to incentives I don't limit the scope to explicit performance incentives, but focus on less formal incentives such as individual recognition and criteria for awarding challenging assignments and promotion. For much of Toyota's recent history, its powerful work culture has been reinforced and sustained through its alignment with its incentive structure. However, the focus on hyper-growth led to a growing divergence between its culture and its incentive system. Under those conditions, culture always loses. It starts to be deinstitutionalized. (As an aside I note that the use of the term DNA in this context (as in: quality is in Toyota's DNA) is misplaced since it doesn’t allow for deinstitutionalization.) Going forward, Toyota will need to realign its incentives with its traditional work culture before it can regain its footing.

John:
While I'm uncertain of the degree to which the company's formal performance incentives may have gotten off track - your reference to informal incentives is insightful here - it seems that the translation of the high level objective of growth came to overshadow everything else. Whether intended or not, whether reflected in skewed formal incentives or not, the effect was the same: behavior that betrayed the company's long-standing values.

Thanks, Bob, for your contribution not only today but for the past five-plus decades of groundbreaking work. Readers, I encourage you go to back and read the seminal work of Robert Cole.

john

John Shook
Senior Advisor, Lean Enterprise Institute

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