Toyota Motor Company: Losing Its Quality Edge? CASE 20 Syeda Maseeha Qumer IBS Center for Management Research Debapratim Purkayastha IBS Center for Management Research “The recalls and sales and production suspension cast a negative light on Toyota's reputation for quality just as the company emerges from an unprecedented downturn in the auto industry. This could hamper ‘the company’s potential sales and profitability recovery, especially in the U.S. market.”" Jeong Min Pak, senior director, Fitch Ratings Ltd? in 2000. “{The lean production system} runs too deep in the Toyota culture and has been too successful and too effective. Would anticipate Toyota is going to get through this with a weakened reputation—but since the company made great cars for a great price for 50 years, they are on a much better platform for restoring the luster of their reputation because the platform was so strong to begin with.” Michael Useem, a management professor at Wherton Business School,‘ in 2010, INTRODUCTION n January 21, 2010, Toyota Motor Cor- Ors (feyora) ese 23 milion select Toyota Division vehicles in the US. The recall was done to fix sticking accelera- tor pedals which caused unintended acceleration, leading to accidents. Earlier in November 2009 too, the company had recalled 4.2 million cars in the US. to rectify accelerator pedals which were getting lodged under the floor mats of the vehicles. Subsequently on February 1, 2010, Toyota suspended the sales of eight of its popu- lar car models involved in the recall and discon- tinued production at six of its North American © 201,18 Cons fo Man- mesnen Resach Allegis ferred. Thiet woe wren RSMO Ter TED Oy Syeda Mase Quin ner ra {ie destin of Pot Drain - Purayasa TRS Centr or srgeret Rear I as compl fo pushed itd bee bari ier ha tee iter else or inulin handling of management stato, 91061723678 o wea TBS Center or ent Reseach (ICMR), FHE Campes Bontril Sunkuraply Road, Herd 30 04, Anda Peet nor assembly plants in response to growing customer concerns. The eight car models repre- sented 57% of Toyota's sales in the U.S. in 2009.° Talking about the recalls, Japanese Trade Minis- ter Masayuki Naoshima said, “The scale of the recalls is huge, The situation is serious. It points to the possible dangers a global economy can bring. | would like Toyota to respond properly to secure consumer confidence.” Toyota, an iconic car maker founded in 1937, ‘was known for its innovations, quality, and global competitiveness. Its business segments. mainly included automotive operations, financial vices operations, and other business operations. Automotive operations accounted for 89% of Toyota's total revenues in 2008, The company manufactured vehicles at 53 production sites in 27 countries around the globe, In the fiscal year 2008,* Toyota sold approximately 8.91 mil- lion vehicles in 170 countries and regions under the Toyota, Lexus, Daihatsu, and Hino brands North America was its biggest market followed by Japan, Europe, and Asia. For the third quar- ter ended December 31, 2009, Toyota's net rev hues totaled 5.3 trillion yen, an increase of 10.2! compared to the corresponding period of 2008. Vehicle sales during the same quarter amountedCase 20 Toyota Motor Company: Losing Its Quality Edge? C05 t0 2.07 million units, an increase of 227 thousand units over the same period of 2008. ‘According to analysts, delivering quality was one of the most fundamental principles of Toyota and the company’s success was led by unusual quality delivered at very competitive prices. The company recognized quality as one of the most important factors affecting customer satisfac- tion and strove to achieve excellence in manu- facturing quality products. The foundation of Toyota's strong quality was its efficient and much emulated manufacturing system known as the Toyota Production System (TPS). Through its well-organized production system, Toyota rap- idly captured market share, controlled cost, and launched better car models. Toyota employees world over practiced philosophies such as Kai- zen (continuous improvement), PDCA (plan, do, check, action), Pokayoke (mistake-proofing), and Just-in-Time (TT) to achieve excellence in’ pro- duction. To ensure zero defects in the finished product, Toyota set up quality assurance systems across various divisions, including development, purchasing, and production. Because of its com- petent quality process system, the Toyota brand had become synonymous with quality, reliability, and durability, experts said. However, some analysts felt that the Japa- nese company had succumbed to the pressures of rapid globalization and sacrificed its legendary ‘quality to reach the goal of becoming the number ‘one auto maker in the world. According to them, a series of recalls in the U.S., China, and Europe had tainted the automaker's image of manufac- turing reliable cars and trucks. According to Maryann Keller, senior adviser at Casesa Shapiro Group LLC," Toyota's “reputation for long-term quality is finished. People aren't going to buy Toyotas, period. It doesn’t matter which model. ‘What's happened is sufficient to keep people out of the stores.”"! However, some analysts were positive that Toyota would not lose its quality edge. Accord- ing to them, the fact that the car maker had discontinued sales of the affected models until the recall issues were resolved was proof of its ‘commitment to quality. They felt that in order to retain its reputation as a quality car maker, Toyota should try to gain the confidence of its customers and concentrate on the quality of its products rather than expanding its business and gaining market share. “They need to do some- thing warmer, something that demonstrates car- ing. I think they can recovet, but that window is closing. They will have to do something big and fast,” said Maurice E. Schweitzer, an associate professor of operations and information man- agement at the Wharton School. BACKGROUND NOTE Toyota was founded by Kiichiro Toyoda (Kiich- iro) in 1937. The history of Toyota goes back to 1897, when Sakichi Toyoda (Sakichi), father of Kiichiro, diversified into the textile machinery business from the traditional family business of carpentry. In 1926, Sakichi founded the Toyoda Automatic Loom Works, Ltd (TALW) which ‘manufactured automatic power looms. The looms stopped automatically when any of the threads snapped. This concept of designing equipment to stop so that defects could be immediately fixed formed the basis of the TPS. Kiichiro, an engineer from Tokyo University, ‘was more interested in automobiles and engines than the family’s textile business. In 1929, he trav- led to the USS. and Europe to study the manu- facturing processes in car factories there. After returning to Japan, he spent his time studying car engines and experimenting with better ways to manufacture them. In the early 1930s, Kiich- iro convinced his father to launch an automobile business and in 1933, Sakichi established an auto- mobile department within TALW. Kiichiro devel- ‘oped the first passenger car prototype A in 1935. In 1936, Sakichi sold the patent rights of his automatic loom to a company in England to raise ‘money to set up a new automobile business. With the £100,000 that Sakichi received from the sale, Kiichiro laid the foundations of the company. The company named Toyota was established on August 28, 1937, with a capital of 12 million yen. The name “Toyota’ was used instead of ‘Toyoda’ as it took eight pen strokes to write ‘Toyota’ in Japanese and eight was considered a lucky num- ber in Japan. Kiichiro was made the manag- ing director of the company. In the late 1930s, Kiichiro traveled to the U.S. to study the manu- facturing processes at Ford Motor Company (Ford).'* Armed with strong knowledge about the Ford production system, Kiichiro returned toJapan determined to adapt the system to smaller production quantities, more suitable to Japan. Following World War Il, international manu- facturers had begun concentrating on medium- sized and larger cars but Toyota kept its focus on small cars. Toyota faced tough competition from Ford and General Motors Company, LLC (GM), which were the top car manufacturers in Japan at that time, In 1950, after a major strike by labor unions, Kiichiro was forced to step down and his cousin Eiji Toyoda (Eiji), who was also an engineer from Tokyo University, was made man- aging director. In 1957, Eiji renamed Toyota ‘The Toyota Company’ Due to World War II, there was severe short- age of raw material in Japan and Toyota did not have enough capital tocarry huge inventories. The main challenge for the company was to produce the maximum units possible, given financial and other constraints and to reduce manufacturing inefficiencies. To overcome these problems, the ‘TPS was put in place by the then production chief of Toyota, Taiichi Ohno (Ohno). Ohno traveled to the U.S. in 1956 and came back with several ideas con which he based the TPS, The objective of TPS, also referred to as the lean manufacturing system, was to manufacture vehicles ordered by custom: ers in the quickest and most efficient way and to deliver them as quickly as possible. Though the TPS was not the handiwork of Ohno alone as it included concepts developed by Sakichi, Kiichiro, and Eiji, it was Ohno who streamlined the con- cepts and developed them into a formal system. He was also responsible for training a number of Toyota's engineers on how to use and implement the system. The TPS overcame limitations of production, while making the most of the available resources It made use of concepts like Just-in-Time (JIT) Kaizen, Kanban, and Jidoka'* to reach a high level of efficiency in production. The system formally came to be known as the TPS in 1977. Quality management experts opined that over the years TPS had developed into a model of industrial excellence, leading to the company’s manufaetur- ing methods being emulated by other players in the automobile sector. The TPS enabled Toyota to come out with many innovative models in a cost-efficient way, they added The company started its globalization in the 1950s and entered the U.S, market in 1957. Part2 Cases in Crafting and Executing Strategy It established its first overseas production unit, in Brazil in 1959 followed by its entry into the European market in 1963. Besides manufactur- ing, Toyota started a global network of design and R&D facilities covering the three major car ‘markets of Japan, North America, and Europe. The company underwent rapid expansion in the 1960s and 1970s and exported fuel-efficient small ears to many foreign markets, It focused ‘on lowering its production costs and on develop- ing more sophisticated ears. The Toyota Corolla, which went on sale in 1966, became Japan’s most popular family car. Toyota received a major boost in the late 1970s, when the oil crisis resulted in many peo- ple shifting to Toyota's fuel-efficient cars. The crisis also sent Japan into recession and most of the auto makers suffered losses. However, the efficiency and flexibility of the TPS helped Toyota bounce back. In 1978, a group of engi- neers from Toyota, under the guidance of Ohno, gave a presentation at Tokyo on the TPS. This further sparked interest in the system and many expressed keenness to learn more about it, Toyota brought TPS to the U.S. in the 1980s, when it set up a joint venture with GM called New United ‘Motor Manufacturing Inc. (NUMMD. By the early 1970s, Toyota's production was behind that of only GM and Ford. It also began to tap the markets in the Middle East. By 1974, Toyota Corolla had become the largest sell ing car in the world, and a decade later, Toyota ranked second only to GM in the total number of cars produced. By the end of the 1980s, Toyota began to build new brands and the luxury divi- sion, Lexus, was launched. During this period. Toyota continued to sirive for improvements and its manufacturing processes served as a model for other companies In 1983, the company's name was changed to Toyota Motor Corporation. In 1988, Toyota opened its own production plant in Georgetown, Kentucky. In 1990, to provide safe and innovative prod- ucts and safeguard the environment and culture of the local communities in which it operated, Toyota established the ‘Guiding Principles at ‘Toyota’. These principles highlighted the man- agement philosophy, values, and methods that the company had embraced since its founds- tion, (Refer to Exhibit I for ‘Guiding Principles at Toyota’). The Toyota Guiding Principles