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2008 in Summary: A Large Enough Wave Swamps All Boats

12/31/2008
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We all know the phrase, "a rising tide lifts all boats", and this was true during the world economic bubble of the last few years. Almost any firm could survive, even with mediocre performance and no improvement.

Unfortunately, there is a corollary. A really big tide - a financial tsunami - can at least briefly tip even the sturdiest boat. The painful evidence for the Lean Community is the recent announcement that the world's most consistently successful and financially stable organization – Toyota – is now losing money for the first time in 70 years.

How can this be? And what does the financial tsunami mean for the lean movement?

The root cause of Toyota's current problems is the decision in the mid-1990s to step on the gas and gain number one position in the global auto industry. Toyota added enormous amounts of capacity around the world and by 2008 had passed GM as the global sales leader. However, doing this chewed up cash, required borrowing beyond Toyota's modest historic levels, and made the firm vulnerable to a steep drop in demand. A sales collapse was apparently not anticipated, but Toyota more than any firm should have respected its hard-earned knowledge that forecasts – particularly optimistic forecasts -- are usually wrong.

Despite the collapse in demand in every major market, Toyota is not in the desperate straits of many of its rivals. It still has a sterling credit rating and can borrow to keep its new product programs and R&D on schedule. Indeed, if things somehow get so bad that only one car company is left operating, that company will be Toyota.

But the happy era of boundless expansion is now over and Toyota has doubtless been spending a lot of time at the end of 2008 on hansei (critical self reflection.) John Shook, in his management column at www.lean.org, has been very articulate in observing that Toyota from its beginnings always wanted to be the best at solving customer problems using the least resources so it could survive. But in the mid-1990s it changed course to embrace the common view in business that growth of any sort is good and that being biggest is best. This is not the lean way and I predict a return to Toyota's traditional view of its purpose. I also predict that the current downturn will prove a blessing by giving Toyota time to replenish its stock of lean managers. Its breakneck growth seriously diluted its managerial experience level and was becoming a grave risk to its long-term success.

But what about the rest of us? The simple fact is that this adversity will force all of us to confront difficult issues in our organizations and in our markets, issues that we would rather avoid and probably have long avoided. For those who reflect carefully, determine root causes, and take focused, creative actions, the future will be brighter.

Let me cite Toyota's history as evidence. This is not the only financial wave Toyota has confronted, but instead is the latest of many:

  • The collapse in demand in the Japanese market in 1950.
  • The oil shock of 1973 that again depressed demand as the yen soared.
  • The world recession of 1981 when both North America and Europe imposed trade restraints that depressed Toyota's exports and required massive investments in foreign markets.
  • The yen shock of the late 1980s that dropped the value of the yen against the dollar from 240 to 120 in only a few months
    • The collapse of the Japanese economy leading to a decade of stagnation after the real-estate bubble burst in 1990.

By reflecting carefully, tracing problems to their root causes, and taking bold action, Toyota emerged stronger every time.

Despite the gloom of 2008, I therefore have an optimistic view of 2009: Toyota will be fine and will become an even better company. Although all of us will be severely tested in 2009 to determine what our values really are and how we make creative use of adversity, those in the Lean Community who confront root causes and take decisive action will be stronger and more vibrant once the storm subsides. And there will be more of us as desperate times cause many additional organizations to embrace lean.

With high hopes for creative lean thinking during adversity in 2009,
Jim

James P. Womack
Founder and Chairman
Lean Enterprise Institute

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