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"What's your challenge?"

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Toyota can’t exist -- Toyota can’t be Toyota -- without a challenge. That’s true for each individual or work group and for the company as a whole. Micro and macro. The first challenge the company faced was learning how to build cars. That challenge wasn’t really all that challenging. In it early days, led by Kiichiro Toyoda, Toyota successfully copied the Ford/GM model but did so no better than many others. The second challenge for the company, after surviving the war and immediate post-war period, was to chase its dream to “catch up with the Big Three”. This is the challenge that spurred Toyota, led by Eiji Toyoda, to separate itself from the field. The company’s success in this regard was already a fait accompli by the end of the 1970s, and by the mid to late 90s Toyota was the unquestionable industry leader. That’s when the malaise began to set in. That’s when some quite “non-Toyota” decisions and behavior began to manifest. Back to that later -- that gets into Toyota’s deeper challenge.

What about the immediate challenge, which is to respond to the current crisis that has befallen the entire global economy, hitting the auto industry especially hard? I have no doubt that Toyota will weather this storm and in fact come out the other end stronger than ever. That’s what’s always happened in the past. Toyota was a relative unknown amongst Japanese companies until the oil shock of 1973. When that storm passed, industry leaders and academics noticed that Toyota had somehow weathered the storm unscathed, and was curiously stronger while others were mired in red ink if not going under completely. The same thing happened a few years later when the second oil shock hit in 1979. Same thing a decade after that when endaka (the “strong yen”, when the yen to dollar exchange rate doubled in a matter of months) hit in 1988. Same thing a couple of years after that when the Japanese economic bubble burst, spiraling the country into a decade-long tail-spin. It was the same scenario in each case: the economy tanks, competitors lose money, Toyota outdistances them even further. When I joined Toyota, there still wasn’t that much separating them from Nissan. By the late 90s, Nissan was on the brink of bankruptcy while Toyota was setting record profits.

So, figure the same thing will happen this time around, too.

Toyota’s deeper crisis

But, the bigger and somewhat ironic problem for Toyota is that the need and opportunity to respond to these immediate problems will come as a welcome distraction from having to face its true, deeper, crisis. That crisis is no less profound than facing fundamental questions such as who are we? What are we here for? What is our purpose? In short, an identity crisis that will manifest itself in practical matters such as how do we develop our people, maintain our principles, and/or adapt them going forward?

So what makes me say Toyota has been in a malaise, or identity crisis?

When it became clearly evident in the mid to late 90s that the company had succeeded in attaining its goal (meeting its challenge) to “catch up with the Big Three”, there emerged the need for a new challenge. The only company that could challenge Toyota was Toyota. So it began to set new goals to challenge itself. One of those was to tackle the environmental challenge -- hence the hybrid. That challenge was a real one, and one that all auto companies still face and will face in the future.

But, the other challenge the company chose was arbitrary, and even a bit desperate. It decided to chase “big”. To grow, grow, grow. From challenging to be the best car company, it decided to be the biggest. The reason Toyota decided to be the biggest was simply because it needed the challenge. But, the challenge to be the biggest turned out to be a bigger and different kind of challenge than the company thought.

I recall in the very early 90s a fascinating argument between two Toyota production executives about the urgency of developing more talent to manage global factories according to TPS principles and practices. One executive (and I took his side in the debate) argued that we were sorely lacking and slow in developing talent, both Japanese and local, to manage Toyota’s global growing footprint of factories. The other executive argued that there wasn’t really such a need for so many globally adept managers because, after all, “we’re not going to be making new factories like rabbits…”

And so it was until ten years ago. The company still had only the three major factories the company had worked methodically to establish and place on a firm footing starting with NUMMI 25 years ago. Then, in the next ten year span, the company built two additional assembly plants, two powertrain facilities, announced another assembly plant, and contracted for capacity at another. Quality problems began to appear leading to headlines that Toyota’s reliability was no longer bullet proof. A dearth of qualified Japanese managers meant that more responsibility was given to local managers. But, a dearth of fully developed local managers meant the company had to scramble to quickly rotate and transfer its limited pool of qualified talent and hire others from the outside, even from (take a deep breath) the Detroit Three.

The interesting part of this story to me is that some decisions seemed to violate long-standing Toyota thinking. To give one example, Toyota has always stipulated flexible capacity and a specific characteristic of the company was that it would always try to build more than one product in each plant, usually more than one on each assembly line (the technical capability to produce more than one model on one line is not uniquely Toyota -- the determination to always hedge your bets is). This was one way to maintain maximize flexibility against changes in demand (we talked about other ways in column #6). If you try to capacitize a factory precisely at your predicted market size, you expose yourself to huge risks to changes in demand -- a special hazard in the auto industry where decisions to install capacity are made far in advance.

So, Toyota’s installation of capacity dedicated solely to big Tundra trucks in San Antonio was on top of capacity already in place in Indiana. What happens if there’s a downturn in demand for Tundra trucks? Well, now we know happens. Toyota had to scramble the same way Ford had to scramble when demand weakened for the Taurus when it had two factories dedicated to building Taurus. But, any capacity installation mistakes Toyota has made in recent years are, after all, just mistakes. And mistakes, or the company’s attitude towards them and ability to learn from them, distinguish Toyota from its competitors more than any other visible characteristic. (As we’ve discussed frequently in this space, all the way back to column # 1. I should note, too, that Toyota will often start a new facility with one product, then ramp up, build capability and add a second, then third product later, so we need to be careful not to magnify too much the magnitude of those particular mistakes. But, there are others.)

Toyota will recover from its recent missteps and these kinds of problems. Responding to problems, to crises, brings out the best in Toyota. In Japan, Toyota people are sometimes referred to as “problem-solving junkies”. Hah -- come to think of it, that one descriptor says much of what I was trying to say above.

But, focusing on solving immediate problems may very well distract the company from its deeper crisis. Toyota has no one to follow anymore -- the Detroit Three no longer provide a rabbit to chase. So, what is its new challenge, really? If Toyota’s mission or purpose is to survive, it will probably adapt to do so (it’ll figure out what to do with the excess capacity). But, an intense drive to improve, or “relentless pursuit of perfection” to quote the Lexus ads, requires something more tangible than that. What will drive its pursuit of decades more kaizen and kakushin (revolution)?

What will drive yours?

See you back here, first week of the New Year!

John Shook
Senior Advisor
Lean Enterprise Institute

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