Function of Management: Toyota Recent Massive Recalls

Controlling represents a very important function of management. Necessary at all levels and all aspects of the organization, controls should be applied to organizational design, planning, employee performance, etc., among many other functions. Level-wise, controls should be part of headquarters, of division, or departments.

Lack of control can lead to costly delays or financial losses, among others.

Toyota is a well known Japanese car manufacturer, well known for its quality, until relatively recently. Toyota has been in the news recently for quality problems

It has recalled millions of 2009-2010 Corollas, Camrys, Avalons, and more recently, even Priuses.

For this case study, we will read two articles about Toyota and analyze how its growth, with no apparent controls (such as structures, and implicitly strong quality controls0) may have lead to quality problems (among others).

But this case illustrates the importance of the controlling function.

Please read the following articles about Toyota cost-cutting and the interview with the CEO (few years back).

Solution Expectations

Write a detailed Solution that anwsers the questions with the information provided.

Has controlling and cost-cutting contributed to Toyota recent massive recalls?

Required Readings

The Man Driving Toyota

Katsuaki Watanabe made his name at the company with a cost-reduction program. As the new president, he's not about to slow down now

If Toyota Motor's recent growth is any guide, it seems more a question of when rather than if the Japanese giant will overtake General Motors to become the world's No. 1 car producer. It's easy to see why. Next year, Toyota (TM ) is expected to sell some 8.5 million vehicles -- just 400,000 fewer than GM's (GM ) projected sales.

Meanwhile, industry-busting earnings -- $10.7 billion in the year through March, 2005 -- are being reinvested in new production facilities the world over. Toyota's newest factories are in such far-flung places as the Czech Republic, China, and Texas, while further expansion is planned in Russia, Thailand, and Canada.

Yet for Katsuaki Watanabe, who succeeded Fujio Cho as president of Toyota on June 23, quality improvements and cost cutting are more immediate goals than ramping up output. Indeed, Watanabe, 63, recently claimed that despite some suggestions that Toyota could overtake GM as early as 2008, he doesn't expect Toyota to outstrip GM's sales during his tenure.

MATERIAL EFFECTS. It's no surprise that Watanabe is more focused on quality and cost savings. He made his name at Toyota as the brains behind CCC21, a cost-reduction program that has spawned $10 billion of savings in the last five years by squeezing lower prices out of suppliers. What's more, with rising raw-material prices taking their toll -- despite record annual profits, Toyota's profitability fell 17% in the quarter to Mar. 30 compared with a year earlier -- Watanabe is acutely aware of the dangers of complacency.

On July 19, Watanabe addressed these and other issues in an interview at the company's headquarters in Toyota City with BusinessWeek Tokyo correspondent Ian Rowley. Edited excerpts of their conversation follow:

Q: As Toyota's president, where will you expending most energy?
A: There are two points I need to mention. The first relates to the fact that the global deployment of our business has expanded very, very rapidly. We [need to look at] how we can best begin the projects that we have already planned.

The second thing is to assess our capabilities in design, production, engineering, manufacturing, procurement, quality, cost, and human resources. By doing so, we can enhance our strengths and make up our weaknesses.

Q: Shortly after being appointed president, you talked about the risks of "Big Company disease." What did you mean by this and how can Toyota avoid catching it?
A: Toyota has grown in the past few years, but [there's a risk] that a belief that the current status is satisfactory creeps into the minds of employees. That's what I'm worried about.

We should never be satisfied with the current status. In each division, function, or region, we still have numerous problems to cope with. We need to identify each one of those tasks or problems and fully recognize them and pursue the causes. This needs to be done by all the people working for Toyota.

A second risk is that as an organization grows bigger, there's a tendency to believe that one's own area [of the business] is always right and that problems are always somebody else's. Silos prevent good products from being created. Making cars cannot be completed by a single division.

The solution is to make the problems visible and expose them for everyone to see. For us in management, it's very important that we have the ability to identify those problems.

Q: How do you that in practice?
A: Management has to visit the shop floor and gain first-hand experience of what's taking place. We need to look at the manufacturing processes, listen to voices, and clearly recognize problems.

The same applies to quality and cost. Just by looking at something you can identify many problems, but [you must] watch and observe.

Q: Does it help that the current market environment is tough?
A: Yes, you could say that. The fact that profitability decreased indicates that there are problems. For each region, vehicle type, or function, we must analyze what's behind the decrease in profitability. There's always room for improvement.

Q: Given the strength of Japanese auto producers in North America, are you concerned over the possibility of a backlash?
A: As of today, there are no trade issues between Japan and the U.S. -- nor do I expect one in the future. Also, our relationship with the big carmakers in the U.S. is friendly, and I intend to make it even friendlier. The circumstances today are totally different.

For one thing, all the Japanese carmakers have aggressively promoted localization of operations in the U.S. The U.S. is a very important country for us, and we have to be mindful to avoid any restrictions or strains.

Q: Is that why Toyota recently increased prices of some vehicles in the U.S.?
A: No. Pricing is determined by a comprehensive analysis and evaluation of our product features, their attractiveness in the market, the cost of producing cars, and the profitability we would like to achieve. Taking these factors into account, we decided to make the changes.

Q: Is it correct that Toyota and GM will soon announce plans to co-produce fuel cells?
A: We're still at the stage where we're discussing this from different angles and we can't give any specific timing.

Q: What are your plans for increasing production in emerging markets?
A: We believe that BRIC [Brazil, Russian, India, and China] will grow into a very important market, and we'll have production bases in all of those countries. Given the size of the population and the prospect for a very large market in China, we've already made preparations for production bases from the north to the south. In Russia, we're [building a new plant] and in India we're already producing in Bangalore, where we're making 60,000 vehicles.

Q: Is it true you'll produce a car in India jointly with Daihatsu?
A: We have this in mind but it hasn't yet taken any concrete form.

Q: China's a hugely competitive market. What does that mean for profitability?
A: I know that competition in China is very intense, but if you can develop and produce vehicles that satisfy customers, the profitability will come.

Also, in terms of costs, there are still lots of areas for improvement because the local procurement rate is low [in China]. We're making extremely intensive efforts in this area.

Q: After the success of CCC21 how can Toyota continue to make cost savings?
A: With CCC21, we tried to reduce cost at the level of individual component parts, whereas with Value Innovation [Toyota's new cost-saving plan] we're going to pursue cost improvements across the whole system [of grouped components]. This means starting at the conceptualization stage and exploring new ways of making savings.

We must continue [cost cutting] indefinitely -- alongside improving quality, it's an eternal theme.
Toyota's Cost-Cutting Drive: Making the Tough Choices
Facing its first loss in 70 years, Toyota is trying to squeeze out an extra $1.4 billion in savings, and it looks as if nothing is sacred
By Ian Rowley

Asia
Chinese on Global Homebuying Spree
China Ratchets Up Inflation Fight
Chinese Home Sales Rise in May
Honda Forecasts Big Drop in Profit
China Deal May Not Save Saab

Toyota Motor (TM) is no stranger to cost-cutting. In recent years the automaker has slashed expenses by as much as $3.3 billion annually by implementing thousands of changes suggested by employees and keeping a tight rein on spending. But now, with global auto sales in a tailspin and Toyota expecting its first loss in 70 years, the push for frugality is entering overdrive: Last fall, the company formed an "Emergency Profit Improvement Committee" to ferret out an extra $1.4 billion in savings this year.

When the need for profit improvement reaches emergency status, apparently nothing is sacred. In Japan, the company is shedding 5,000 temporary workers and is likely to cut production by as much as 40% - 450,000 cars - over the next three months. According to reports in the Japanese media, Toyota is considering shedding 1,000 permanent workers in the U.S. and Britain. Toyota says nothing has been decided and that it does its utmost to preserve employment, but, if it happens, it will be only the second time since 1950 that it has trimmed permanent staffers.

No saving, it seems, is too small. Workers are being encouraged to take the stairs rather than elevators, to save electricity. The heat in factories has been turned down, so workers are now wearing extra sweaters to stay warm. And on Jan. 19, Lexus engineer Takayuki Katsuda and two colleagues drove from headquarters in Toyota City to Tokyo for the Japan launch of the Lexus RX sport-utility vehicle. Though the trip took four hours, vs. 90 minutes on the Shinkansen bullet train, they saved about $300 in train fares. "We're facing a once-in-a-hundred-years crisis," Akio Toyoda, a scion of the founding family, who will become president in June, told reporters on Jan. 20.

Even the announcement of Toyoda's promotion got hit by the cost-cutting drive. When he was introduced to the media, the company didn't rent a hotel ballroom as it normally does for such events. Instead, Toyota simply cleared a few Priuses and Corollas from a Tokyo auto showroom on the ground floor of its offices and brought out folding chairs.

Beyond the Downturn

Reflexive cost-cutting is a time-honored response to crisis at Toyota, but some of the current problems can be blamed on un-Toyota-like moves on the part of senior management. Sure, every automaker on earth has been hurt by the downturn. But the breakneck speed of Toyota's expansion in recent years, its continuing reliance on production at home, and slower decision-making as it has grown have all aggravated Toyota's woes.

Since 2001 the company has added production capacity of around 500,000 vehicles every year, building new assembly plants from China to the Czech Republic. After winning praise for its foresight in developing the Prius hybrid, Toyota opened a huge Tundra pickup plant in Texas in late 2006, just months before the subprime crisis exploded. With Toyota having invested so much in new factory space, some company watchers reckon the automaker needs to keep its plants busy 80% of the time to make a profit, higher than the 70% level preferred by most Japanese rivals. Toyota doesn't give figures on capacity utilization, but current President Katsuaki Watanabe has spoken recently of the need to be profitable even with volumes of 7 million. The company sold 8.9 million vehicles in 2008.

Toyota's Cost-Cutting Drive: Making the Tough Choices
(page 2 of 2)

Asia
Chinese on Global Homebuying Spree
China Ratchets Up Inflation Fight
Chinese Home Sales Rise in May
Honda Forecasts Big Drop in Profit
China Deal May Not Save Saab

As a result of the capacity glut, Toyota has put on indefinite hold a partially constructed new plant in Mississippi that was scheduled to make Highlander SUVs but was switched to the Prius.

In years past, Toyota was far more prudent when expanding into new markets. In China, for instance, it initially lagged Honda and Nissan, only surpassing them as the best-selling Japanese automaker there in 2007. As recently as 1994, Toyota made just 1 million vehicles a year overseas. In 2008, it made 4.3 million.

Growing Pains

Analysts say the rapid expansion made sense when it was planned. Until recently, Toyota was struggling to meet demand, and since it takes years to build plants and develop new models, there's always a chance that there won't be buyers for cars built by a new factory. Yet Japanese papers report that some top Toyota brass, including influential retired executives such as former President Hiroshi Okuda's a strong advocate of aggressive expansion outside Japan - urged slower growth. Toyota declined to comment on the reports.

The impact of the strong yen, another drag on profits, can also be linked to Toyota's expansion. One reason Toyota has built overseas plants was to reduce its vulnerability to the currency's rise, since shifts in exchange rates matter less when cars are built in the markets where they're sold. Yet even though Japanese car sales have been falling for years, it still made 4.9 million vehicles in Japan last year: 53% of its total production, and more than half of those were shipped overseas. In North America, where Toyota has six plants, it imported 42% of the cars it sold there in 2007, vs. 25% at Honda Motor (HMC) and Nissan Motor (NSANY).

That's fine - and highly profitable - when the yen is weak and global demand is strong. But it leaves Toyota vulnerable when those factors reverse. Toyota "couldn't have avoided the effects of the global slowdown, but foreign exchange, that's an avoidable thing - it just depends on where you build stuff," says Christopher Richter, an analyst at CLSA Securities in Tokyo. In the financial year that ends in March, the impact of the strong yen is set to cost Toyota almost $10 billion.

Others say Toyota, which last year overtook General Motors (GM) to become the world's biggest automaker, has grown too unwieldy. With dozens of factories worldwide, it's harder for Toyota to react to changes in the market, so its response to the current crisis was slower than some rivals', says Koji Endo, an analyst at Credit Suisse (CS) in Tokyo. "Deciding which shifts and models are to be cut and what programs have to be implemented takes time," Endo says. "It's a lot more difficult when you are making 8 or 9 million vehicles than for a company making a million." Adds Ashvin Chotai, managing director at consulting company Intelligence Automotive Asia: "The challenge for Toyota is now to create an organization structure that is more responsive both in terms of decision-making and action."

Help from Ample Resources

That's not to say Toyota will suffer as much as Detroit's giants. With some $20 billion in cash and a solid balance sheet, the company has ample resources to ride out the storm. And with the level of attention Toyota pays to the details of planning and manufacturing, the company has cut in half the time it takes to develop a new engine or launch a new car under current chief Watanabe, says Jeffrey Liker, a professor of industrial and operations engineering at the University of Michigan. "Compared with their competitors, they are incredibly well placed," Liker says.

And Toyota watchers are confident that Toyoda, who has been groomed for the top job for decades, has the right credentials and character to steer the company onto safer ground. A former member of Japan's national field hockey team, Toyoda got an MBA at Babson College near Boston and then worked in London and New York as a banker and consultant.

He joined the carmaker in 1984, and after some initial ribbing about his princely background, he has thrived. He launched a successful e-commerce venture called Gazoo.com, oversaw Toyota's operations in China, and managed a manufacturing joint venture with GM in California. Last year, Toyoda took on the task of reinvigorating sales in Japan, a market that has been in decline for years. "He has put in the time to learn the ropes and has not been given any special favors because of his name," says Alberto Lapuz, a vice-president at researcher J.D. Power & Associates (MHP). "Many senior board members point to him as 'one of us,' which is the ultimate compliment."

Toyoda may also help Toyota overcome its image for reliable but somewhat dull cars. An amateur racer, Toyoda fought to keep the Lexus LF-A sportster from being sidelined. It made its debut in May at the 24-hour endurance race in Nürburgring, Germany. And in November, Toyoda got behind the wheel for an exhibition run at the Fuji Speedway in Japan. Now, he says, he's ready to roll up his sleeves and confront the "heavy responsibility of navigating Toyota through an unprecedented crisis."

Helpful Hints!

Please first read in-depth the Background Materials.
Identify key concepts (main aspects of controlling, make a list of them, and study them.
Read Business Week articles in-depth and conduct additional research, if necessary.
Identify facts in the case that match concepts of controlling (organizational structure (or lack of them), decision-making, financial controls (cost-cutting) operating standards, culture).
Apply these concepts to facts in the case in order to develop your arguments.
Please also visit the company website and conduct further research.
Toyota has grown dramatically and (as per article) it does not seem to have developed structures. It has also followed cost-cutting strategies, which are financial controls.