The Wrong Toyota Way

Toyota has long been an icon in manufacturing circles, and I think that their recent troubles are both unfortunate and that it's unfair to "pile-on" while they are attempting to recover. They remain not only a great company, but also a great benchmark for manufacturing achievement -- you cannot be "best of class" for several decades without doing a lot of things right. I recently wrote about Toyota's problems for Forbes.com and several other publications. Here is the version that ran on Forbes.com on February 10, 2010:

For at least two decades Toyota has been the benchmark of manufacturing quality. Not only for automobiles but throughout the manufacturing world, the "Totota way" has been a model. The company's attention to detail and unrelenting expectation of perfect quality, its promise to the buyer that a car will be trouble-free and its building of an organizational culture that delivered on these promises over and over again--those have all been areas in which Toyota did better than anyone else on the planet.

Now, with the revelation that many Toyota automobiles are not as impeccably well-built or as safe as we had all assumed, the image is tarnished. Toyota has started to look like a lot of organizations that promise things they can't deliver and sell brands with little substance behind them.

In fact, if we reflect soberly, we realize that given the sorry state of the world's automobile industry, Toyota remains the benchmark. Despite its recent recalls of several million vehicles, apparently the largest recalls in history, Toyota still stands out for making cars that work and for innovating in ways that are likely to shape the future. However, while pursuing growth the company has failed by neglecting to pay attention to things it already knew as an organization.

One of the things that Toyota knew and yet forgot was that one must, in the words of Paul Ingrassia, the author of Crash Course, a new book on the auto industry, "never build … a new product in a new factory with a new workforce." Those "three nevers" are opportunity for trouble, because organizations must always combine knowing with growing if they are to succeed in a global marketplace. As we move into a knowledge-intensive era, knowing things will become as important as, if not more important than, making things. Knowing what to make, how to make it and who to make it for will be the key to success. The organizations that come out ahead will be the ones that know more than other organizations and have figured out how to know more. In other words, they will be smarter organizations. Toyota has always been among the world's smartest organizations, yet here, in its pursuit of ever greater global growth, it wasn't so smart after all.

The Toyota situation has been deftly analyzed by two IMD professors, Bala Chakravarthy and Peter Lorange, in their book Profit or Growth; Why You Don't Have to Choose. They argue that companies that are intent on growing, as opposed to protecting and defending their market positions, can expand either by opening new markets or by offering new competencies--but they cannot do both at the same time. Another way to put this is that global growth is based on building on what you know while selectively learning new things. Abandoning everything you know, be it about markets, technology, customers, offerings or anything else, is to proceed knowing very little at all.

One reason for the truth of the "three nevers" is the power of tacit knowledge. According to Ikujiro Nonaka, a scholar at Berkeley and at Hitotsubashi University in Japan and one of the founders of the field of knowledge management, knowledge can exist in a hard or formal form, such as in documents, books or memorandums, or it can be "tacit," such as when it's knowhow in the heads of people familiar with particular work arrangements. Formal knowledge is relatively easy to transfer, through documents; tacit knowledge only moves from one person to another with personal interaction.

We may not even realize we possess tacit knowledge until a conversation with a colleague crystallizes a thought and we recognize how much we know. The problem with violating the three nevers rule is that when we do it we lose all hope of tacit knowledge transfer. When we move into new product areas in new geographic markets and with new factories, we have no hope for a head start, for an advantage based on the strength of our existing knowledge.

Successful globalization is much too difficult to achieve without any knowledge that gives your organization a basis for advantage. You might use your prior knowledge by drawing on existing product offerings in new markets, or by making new products in existing factories with experienced workforces or maybe by using a seasoned team of veteran managers and workers to tackle a new problem in an existing market. But you must always keep some of the familiar while embarking on something new. To do otherwise is to risk following in Toyota's recent path.