Toyota: Too big, too fast

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As a management guru-in-training, U.S. business lecturer Steven Spear embarked on pilgrimages to a shrine of industrial efficiency about 320 kilometres west of Tokyo.

His destination was Toyota City, an industrial centre of 400,000 dominated by its major employer, Toyota Motor Corp. From this base, the car company had spawned an industrial revolution - as well as rewriting the vocabulary of business to encompass terms like just-in-time, total quality and lean manufacturing.

As he observed the company up close, something nagged at Mr. Spear. Toyota had pledged in the late 1990s to become the biggest car company in the world. It embarked on extraordinary growth, spawning new models, entering new regions and enlisting new suppliers outside its traditional family.

But as it grew, its old system of mentorship broke down, Mr. Spear says, and the culture of quality was not extending to outposts far from Toyota City. While he admired Toyota and spent much of his career studying it, Mr. Spear sometimes worried the company was an accident waiting to happen.

"Capabilities are the source of their competitive advantage, and the gap between business growth and capability growth is the source of their vulnerability," says Mr. Spear, now an author and lecturer at the Massachusetts Institute of Technology.

That became jarringly clear over the past month, as Toyota careened from crisis to crisis, dealing with unsafe, defective parts and ordering the recall of 4.8 million vehicles. It led Friday to an abject apology by Toyota CEO Akio Toyoda, grandson of the car company's founder, who also announced the creation of a new quality committee led by himself -confirmation that there is, indeed, trouble in Toyota City.

"We are now sadly seeing that the capacity for developing people can be overstretched," Mr. Spear says. "It was not recognizing this, and succumbing to the temptation to make growth its first priority, that led to Toyota's current problems."

Mr. Spear, author of Chasing the Rabbit , a book that lauds Toyota as a "high-velocity company," displays the ruefulness typical of academics and consultants who have followed the company like rock-star groupies. The threat is not just to Toyota's once-vaunted reputation, but to the resilience of their future and existing book titles. If the era of Toyota supremacy is truly over, so go the themes that launched a million Power Points.

Asked if he is feeling a bit like a lover spurned, Mr. Spear says: "It's more like having a friend who you see stumbling and you feel bad for them."

In fact, the rapid growth that finally took Toyota to the top of the global car market, supplanting General Motors Corp. in 2008, proved to be its undoing. Toyota's expansion undermined the precise skills learned as an underdog on the way up - an unbending devotion to quality while competing on speed and cost.

"Any company knows that growth is sometimes their worst enemy. All your systems get stressed, and it happens from a financial and production perspective," says Chris Piper, a management professor at the Ivey School of Business at the University of Western Ontario

The sad fact is that Toyota appears to have seen the accident happening in slow motion. Its new president Mr. Toyoda signalled this awareness when, after taking office last June, he emphasized that quality would have to be rebuilt. "No one was prescient enough to say, 'Oh, it will be accelerator pedals in January, 2010,'" Mr. Spear says. "But they were aware enough that something was going to go wrong. It wasn't just clear what it was going to be."

While confidence is shaken, it has not entirely dissipated because Toyota's supply chain has displayed its customary ability to respond. The company is not paralyzed by denial, and has taken concrete action to shut down production of the affected models.

But while Toyota remains efficient as a production machine, it is clumsy and isolated in its communications, with defensive responses coming out in dribs and drabs as crises break out daily. While it is the most worldly company in design and production, so much of its culture is still locked in the corridors of Toyota City, which is both its strength and its weakness.

From upstart to colossus

The city was originally named Koromo, a sleepy textile town outside the bustling mainstream of Japan's industrial fabric. In 1959, the town leaders renamed it after a rising local car producer, a company that had its roots in textiles and weaving looms. It was the legacy of Sakichi Toyoda, whose inventions in the 19th century, including an automated power loom, made him the Japanese equivalent of Thomas Edison or Alexander Graham Bell.

His son, Kiichiro Toyoda, diversified outside the textile empire and started a car company in 1937. He changed one letter in his name - to Toyota from Toyoda - apparently to suggest the car-making initiative would grow beyond the family. (Another theory is that he was superstitious: Toyota has eight calligraphic strokes to Toyoda's 10, and eight is a lucky number.)

It is hard today to see Toyota as an underdog, but for years it lagged powerful Nissan, which was much better capitalized. Toyota dealt with that gap through innovative just-in-time manufacturing and design, which required less capital and space. As Toyota scaled up, it left behind Nissan, then Honda, then took on Detroit's Big Three, and in time roared past them.

A young management consultant named George Stalk was one of the first North Americans to grasp what made Toyota tick. He was posted to Tokyo by Boston Consulting Group in the late 1970s and began to visit Toyota City. It helped build his reputation as an expert in time-based competition.

He found a just-in-time production system that stretched to the tautness of a rubber band. Parts and labour come together at once, with no inventories, no waiting periods. When one part of the system broke down, it could be catastrophic because there is no slack - everything screeched to a halt. But the system also sent out danger signals very quickly and Toyota could jump on the problem.

"The Toyota production system has the characteristic that when it works, it works great," says Mr. Stalk, "and when it doesn't work, all hell breaks loose."

In 1997, fire swept through the factory in Japan that was the main source of a crucial brake valve used in most of its cars. Toyota had to shut down 20 auto plants in Japan, which built 14,000 cars a day. Some experts thought Toyota couldn't recover for weeks, but five days after the fire, the car factories started up again. The reason: Other parts suppliers in the Toyota chain knew the system and quickly filled the breach.

Mr. Stalk is now semi-retired and working on special projects for Boston Consulting, but still sees Toyota as a model of time-based efficiency. It was once known as a one-yen company, he says, because "they would do anything to take a yen out of the cost of a car." In recent years, "they are still hell-bent on improvement and productivity."

But this crisis is more than a production glitch - it involves the extra dimension of public relations, in which the company is less skillful.

"They've always tried to be very quiet and let their products speak for themselves" says Prof. Piper of the Ivey School. "This has been a problem - their PR has been terrible. "

'The Toyota Way'

While Toyota City was a comfortable cocoon, it's been tougher taking the culture to the wider world. Mr. Spear says that when all the manufacturing expertise was concentrated in Japan, the quality training system worked well because it was based on apprenticeships.

"It works if you have time and proximity as they did within Toyota City. But when you start expanding, you are dealing with suppliers who aren't next door and down the road. They may be thousands of miles away. You have got to come up with a very different approach to building people."

The parent company dispatched personnel from Toyota City to far-flung operations, such as the joint venture with General Motors in Fremont, Calif. Japanese managers acted as "shadows," following U.S. operators through their workday. Even as "the Toyota Way" became entrenched, Japanese nationals remained bosses of foreign subsidiaries, providing a physical link to Toyota City.

Now, that link has become strained, Prof. Piper says. Local nationals are running Toyota operations and the supply chain has broadened to companies not versed in the Toyota method. Toyota has developed standardized programs to teach to foreign nationals, but the philosophical connection is not there.

Now the company's malaise outside Japan is seeping into its home base, where it has been largely above criticism. On a Friday-night TV show in Japan - following Mr. Toyoda's apology - Masaaki Sato, author of books on Toyota and Honda, took the rare step of publicly criticizing the CEO's slow response. "He should have come out a week ago," Mr. Sato said. "After all the foot dragging, he was pushed into a corner."

In a rare criticism from the Japanese government, Japanese Transport Minister Seiji Maehara said Toyota's response to the issue of Prius brakes "lacked customer focus."

There are also signs Toyota's hold on Japanese consumers is loosening. An executive at a major auto maker says young Japanese are turning away from automobiles. "In the past, having a catchy car was considered to be a young man's dream. It is not the case," says the executive, who did not want his name used because of his company's dealings with Toyota. He says the Toyota recall would have also "a negative effect psychologically on the Japanese pride in industrial excellence."

It is also having a negative effect on the Toyota book publishing industry. Jeff Liker, a University of Michigan professor and author of a number of books on Toyota, has seen his recently written work on Toyota's leadership style shelved by the publisher. The working title of the book, co-written with a Toyota executive, is Building People Before Building Car s.

"It's a strange time to come out with a book that treats the way they develop leaders, and the philosophy, in a positive way when there is so much negative publicity," he says.

But he insists the production method has so many imitators that at least the Toyota book market will come back. Not so clear is the future of Toyota's place in the car market.

With files from freelance writer Christopher Johnson in Tokyo