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Toyota’s Recall Crisis: What Have We Learned?

• Jeffrey Liker

In August, 2009, the improper installation of an all-weather floor mat from an SUV into a loaner Lexus sedan by a dealer led to the vehicle’s accelerator getting stuck, causing a tragic, fatal accident and launching the most challenging crisis in Toyota’s history. This iconic company, synonymous with safety and quality, was vilified by the […]

In August, 2009, the improper installation of an all-weather floor mat from an SUV into a loaner Lexus sedan by a dealer led to the vehicle’s accelerator getting stuck, causing a tragic, fatal accident and launching the most challenging crisis in Toyota’s history . This iconic company , synonymous with safety and quality, was vilified by the American press , the government, and expert witnesses to plaintiff lawyers. Details usually unworthy of public attention, such as internal memos disagreeing over public relations strategy, became smoking guns that convinced the press and the public that Toyota vehicles had electronic problems causing runaway vehicles — and that the company was hiding this from the public.

• Jeffrey K. Liker is a professor of industrial and operations engineering at the University of Michigan and is author, with Timothy N. Ogden, of Toyota Under Fire .

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The Toyota Recall Crisis: Media Impact on Toyota's Corporate Brand Reputation

• Original Article
• Published: 12 April 2013
• Volume 16 , pages 99–117, ( 2013 )

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• David Fan 1 ,
• David Geddes 2 &
• Felix Flory 3  

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The time trend of public opinion about carmaker Toyota dropped precipitously in early 2010 following a series of quality issues and recalls. The mathematical model of ideodynamics could predict the fall and subsequent rise in Toyota's reputation from coverage of Toyota in blogs, in Internet forums, in print news, and in news websites from 1 January, 2009 through 31 March, 2011. Internet forums represented crowd sourcing in social media. The model performance was high for all these types of media with R 2 values in the range of 0.7–0.8. Information favorable to Toyota was about twice as persuasive as information unfavorable to the company. Blogs had negative coverage of Toyota in the fall of 2009 before other media types but had limited effects on opinion. Impressions of Toyota only showed a notable drop after recall information hit the majority of the other media. The good predictions showed that all the media studied moved in reasonable synchrony, so all could represent the information shaping public opinion even though the messages did not include advertising or broadcast content.

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Fan, D., Geddes, D. & Flory, F. The Toyota Recall Crisis: Media Impact on Toyota's Corporate Brand Reputation. Corp Reputation Rev 16 , 99–117 (2013). https://doi.org/10.1057/crr.2013.6

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Published : 12 April 2013

Issue Date : 01 June 2013

DOI : https://doi.org/10.1057/crr.2013.6

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In late 2009 Toyota became the subject of media and U.S. government scrutiny after multiple deaths and injuries were attributed to accidents resulting from the unintended and uncontrolled acceleration of its cars. Despite Toyota's voluntary recall of 4.2 million vehicles for floor mats that could jam the accelerator pedal and a later recall to increase the space between the gas pedal and the floor, the company insisted there was no underlying defect and defended itself against media reports and regulatory statements that said otherwise. As the crisis escalated, Toyota was further criticized for its unwillingness to share information from its data recorders about possible problems with electronic throttle controls and sticky accelerator pedals, as well as braking problems with the Prius. By the time Toyota Motor Company president Akio Toyoda apologized in his testimony to the U.S. Congress, Toyota's stock price had declined, in just over a month, by 20 percent---a $35 billion loss of market value.

Understand the strategic and reputational nature of crises Recognize the challenges of managing a crisis Learn the requirements for building trust in a crisis Understand the challenges of managing a crisis that may not be the company's fault Identify the strategic business problem in a crisis Understand how corporate structure may help or hinder effective crisis management Understand the media landscape and its impact on crisis management

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Austen-Smith, D. , Diermeier, D. and Zemel, E. (2017), "Unintended Acceleration: Toyota’s Recall Crisis", . https://doi.org/10.1108/case.kellogg.2016.000391

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Copyright © 2011, The Kellogg School of Management at Northwestern University

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CHALLENGES TO TOYOTA CAUSED BY RECALL PROBLEMS, SOCIAL NETWORKS AND DIGITISATION

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The recent recall problems that shook Toyota raised questions about the company's openness with the public. Media attention and the intervention by governments in Toyota's largest markets in North America, Europe, China, and Japan kept Toyota's management in the spotlight. The crisis also exposed the power of social media. Although authoritarian regimes can control social media, public companies cannot. They have to live with it by either countering effectively when a crisis begins to brew or suffering the consequences when it grows out of proportion. If Toyota manages social media strategically, can it overcome the recall debacle and protect the reputation it has built over decades as the top-quality automaker in the world? What challenges does the increasingly digitalised auto industry present to Toyota? These are the main subjects of this paper.

Keywords: social media, crisis management, Toyota, recall, social networks, Facebook, Twitter, digitisation

INTRODUCTION

Social media, including social networking sites (SNS) such as Facebook and Twitter, have added new meaning to the spread of news and information. Whereas traditional information channels, such as newspapers, radios and TV, are one-way mediums, the dawn of the Internet and social media has made communication a two-way medium. The lack of official control, supervision and regulation has fuelled a social media frenzy, which has proven to be an effective method of rallying crowds for any significant (or even insignificant) issue.

The recent bans on Facebook and other types of social media by certain governments are proof that social media cannot be ignored. Although authoritarian governments can resort to such drastic methods, public corporations cannot afford to do so. Corporations have no other option than to live with social media phenomena, either countering them effectively when a crisis begins to brew or suffering the consequences when it grows out of proportion.

In this context, it is interesting to explore how recall-troubled Toyota has handled social media and what options are available for Toyota to prevent the situation from going out of control and harming the worldwide reputation as a top-quality automaker that the company has worked for decades to develop.

Toyota's recall exposed some "digitisation" in the automobile industry as well. Digital technology in the music and video industries and its exploitation by Apple in the Internet and social media essentially pushed Sony, an old industry heavyweight, to the sidelines (Rajasekera, 2010; Chang, 2008). Could the same thing happen to Toyota? Could a newcomer exploit digitisation in automobiles, in conjunction with the Internet and social media, to dethrone an established giant such as Toyota?

The Recall Crisis at Toyota: Rise and Fall

Since its founding in 1937, Toyota Motor Corporation has strived to build quality automobiles. Capitalising on the Japanese concept of Kaizen, or continuous improvement, and Just in Time (JIT), the company has built a worldwide reputation for manufacturing affordable quality automobiles. Considered a conservative company, Toyota capitalised on quality and competed directly with established and well-known brands in Europe, the U.S. and elsewhere (Morgan & Liker, 2006; Magee, 2007).

After its entry to the U.S. market in 1957, it took Toyota more than 40 years to take a 10% share of its most important U.S. market. Toyota has seemed more focused on rapid growth since the beginning of the last decade (Figure 1). Almost 50 years after entering the U.S. market, the Japanese company surpassed Ford and Chrysler in 2007 to become the second most popular automotive brand in America. The year 2007 was also a landmark year for Toyota because the company earned US$15.1 billion in profits, the largest amount in the company's history and the largest ever for a Japanese company.

The next year, 2008, was a recession year worldwide, and automobile sales dropped everywhere. However, Toyota managed to increase its global market share and became the largest automaker in the world, a record held by GM for 77 years (Time Magazine, 2010a).

Although Toyota became the world's largest automaker, the No. 1 spot did not bring much solace to the company. After reporting a record profit the year before, the global recession of 2008 brought bad news to Toyota: the company reported the first loss, US$1.5 billion, in its corporate history.

Financial loss aside, the larger shock for Toyota was the seemingly unstoppable stream of recalls that accompanied a streak of emotionally charged accidents, including 52 deaths allegedly attributed to a sudden acceleration problem (CBS News, 2010).

Recalls are nothing new for the automotive industry, especially in the U.S., where the first recall law went into effect in 1966. Over a span of approximately 40 years, 400 million motor vehicles, including cars, buses and motorcycles, were recalled in the U.S. alone, according to U.S. government data (National Highway Traffic Safety Administration [NHTSA], 2010). Thus, approximately 10 million vehicles, on average, are recalled every year for various reasons. What made the Toyota case different was the significance of the image that the company had produced for itself over the years and the damage to the perceived notion that the name Toyota meant quality.

It was almost 50 years ago, in 1961, that Toyota addressed the importance of product quality in its adoption of "Total Quality Control" as a way to compete against well-established car manufacturers (Toyota Motors Corporation, 1961; Ohno, 1988). Damage to the reputation that Toyota had built since that time stunned the general public; especially the Japanese, for whom Toyota is the commercial face that proudly represents the country to the outside world.

The vehicle recall law divides recalls into two categories depending on the type of defect: a defect related to safety (one that can cause injury or death) and a defect not related to safety (such as a defective radio or air-conditioning system). The defects in Toyota vehicles that allegedly caused a number of deaths were related to safety and thus are considered serious (Figure 2). The unprecedented media coverage around the world was due to Toyota's brand name, its newly acquired title as the "No. 1 automaker in the world," and its rather lethargic response time to the incidents, some of which reportedly happened several years earlier.

On 21 January 2010, media around the world began presenting the stunning news of Toyota's recall of 2.9 million vehicles in addition to the 3.9 million recalled just a few months earlier. The reaction from all corners, including Toyota's own customers, the general public, politicians, and the financial markets, was unprecedented in Toyota's history (Figure 3). The total number of Toyota's recalls related to the serious safety defect connected to sudden acceleration would eventually climb to 8.6 million globally (Minto, 2010; CNN Online, 2010).

Toyota, the company that made "Total Quality Control," "Quality Circles" and the "Toyota Way" mantras for any CEO, suffered a severe setback to its longcultivated image.

In the U.S., where recalls of all types, from drugs to baby food to dog food, were nothing new, the media were quick with sensational stories linked to the nowinfamous "sudden acceleration" problem.

With the Internet and social media such as Facebook and Twitter in full force, the negative news spread at unprecedented speed to Europe, China, and around the world, including Toyota's home market of Japan. Toyota may be facing the greatest challenge to its future. The consequences could be severely damaging unless Toyota reacts prudently.

WHAT TOYOTA HAS TO PROTECT

The world's automobile industry is undergoing historic changes. In the U.S., the major story is the bankruptcy of two of the "Big Three" automakers amid a historic recession; both GM and Chrysler are operating under U.S. government control. For decades, these two companies, along with Ford, defined America's manufacturing prowess. However, almost half a century since its entry to the U.S. market, Toyota had become the top auto manufacturer globally and was on the verge of becoming the market leader in the U.S. by overtaking GM.

The auto industry has become extremely competitive, with new low-cost automobile manufacturers, such as Chery and Tata, entering the scene from China and India, respectively. Korea's Hyundai has built new factories in the U.S. and is competing aggressively with the established Japanese automakers (CBS News, 2010).

With significantly decreased sales due to the global recession, there is no room for any automaker, no matter how well positioned it has been, to make a mistake. Toyota's position as the global leader means that it has the most to lose from a recall as severe as the one that just occurred.

In the U.S., where hordes of lawyers are waiting eagerly to help victims or their families against Toyota, financial and punitive damages may be severe.

The usual apologies characteristic of Japanese companies can only go so far. As soon as the large recall of 2.3 million vehicles was announced in January 2010, Toyota ordered dealers to temporarily suspend the sales of eight models involved in the recall for a sticking accelerator pedal. Moreover, to maintain a balance of inventory, several factories had to be closed for specific periods.

Nonetheless, the greatest challenge for Toyota is to maintain the public trust. Voluntary recalls, if conducted in a timely manner, can help to boost trust in a company, as was the case in previous Toyota recalls. However, the situation was different this time because the company was forced by the U.S. government, which had received a significant influx of complaints. This forced recall did not create a positive image for Toyota's reputation, which had been created meticulously over several decades through a carefully planned strategy and public relations campaigns.

Since the days of so-called "Japan Bashing" in the U.S. during the 1980s, Toyota had endeavoured to create an image of an all-American company by designing and building its cars in the American heartland. Toyota's factories provide direct employment to 35,000 Americans and indirect employment to approximately 115,000 Americans through its 1,400 dealerships, according to company information (Toyota USA, 2010a). Over a 50-year period, Toyota claims to have invested US$17 billion in the U.S., and its dealerships have invested another US$15 billion. Toyota has aggressively promoted "social contribution activities that help strengthen communities and contribute to the enrichment of society" not only by itself but also through its suppliers and dealer networks (Toyota Motors Corporation, 2009).

Toyota has enormous brand value in the U.S. The reputed JD Power often ranks Toyota vehicles near the top in terms of quality. Even in its most recent ranking, Toyota received four first-place awards, more than any other automotive brand. Furthermore, the U.S. is Toyota's most profitable overseas market. Consequently, there are high stakes for Toyota if the recall is not handled carefully.

CRISIS MANAGEMENT

Since its founding in 1933, Toyota has weathered numerous crises. Although the present crisis did not force the resignation of Toyota's president, previous situations have led to the downfall of the company's upper management; for example, the founding president, Kiichiro Toyoda, resigned in 1950 to take responsibility for a labour dispute and sagging sales during a severe Japanese recession (Hosoda, 2009; Magee, 2007). Another crisis, Toyota's first corporate loss since the 1950 crisis, forced the departure of the then-president Katsuaki Watanabe, bringing Akio Toyoda, the current president, to the top post at Toyota.

With only one year of job experience as president, Akio Toyoda, armed with an MBA from a U.S. business school, faced perhaps the most difficult task in his business career when he was called to testify before the U.S. Congress on 23 February 2010. Already under fire by the U.S. media for not apologising early or sufficiently, his performance, broadcast live around the world, was a defining moment for Toyota and for corporate Japan. Did he apologise sufficiently? Was his performance sincere? Did it look like he was trying to conceal something? The verdict may be yet to come because the response is not delivered only by TV or newspapers.

In a survey conducted by the TV broadcaster CBS News in the U.S. following Mr. Toyoda's testimony, the public did not rate Toyota's explanation very positively: overall, only 27% believed that Toyota was telling the truth, and almost 50% said that Toyota was hiding something (CBS News, 2010).

In a case reminiscent of the Toyota crisis, Audi, the high-end German automaker, had to manage a recall catastrophe in 1986 caused by sudden acceleration of its automobiles sold in the U.S. Of course, the Internet was non-existent at that time, and television was the most prominent media. It was believed that Audi did not handle the media properly, and the public became distrustful of the company. It took fifteen long years for Audi to improve its sales to the level prior to the recall (Figure 4).

Toyota is quite a different company compared to Audi. Toyota is well established in the U.S. market and has a loyal customer base in the millions. With thousands of Americans designing and building automobiles within the U.S., Toyota has cultivated a loyal following that includes some key politicians from the heartland. In fact, several of these politicians came forward during this crisis to tone down the U.S. government's outcry against Toyota's allegedly slow response.

The media itself has undergone dramatic changes since the Audi debacle in 1986. With the explosion of the Internet, media has become much more interactive. Social media, such as Facebook and Twitter, have demonstrated that people rely on them during crises. As a corporate utility, social media is an excellent way to disseminate company messages to the public (Qualman, 2009). Alternatively, social media, if properly used, is a way to keep an eye on the public mood when a significant issue occurs that affects a large number of people, such as the present recall, which raised emotions among many of Toyota's customers.

POWER OF SNS

Social networking sites, or SNSs, are web portals that allow users to become members and create their own profiles. SNSs also allow members to form relationships. Members can post and share messages, photos, and videos instantly, and members have the option of making these postings available only to the member's friends or to general members of the SNS (Knoke & Yang, 2007).

Social networking sites can be used as community-based Web sites, online discussion forums, chat-rooms, and spaces to discuss a certain social topic. One recent example in which SNSs were cited as a playing a critical role is the socalled "Arab Spring," which saw many entrenched regimes in the Arab world fall due to popular uprisings fuelled by social media (Ghannam, 2011).

With more than 800 million active users around the world, Facebook is the most dominant SNS in existence today. If Facebook were a country, it would be the third most populated in the world, behind only China and India (http://www.insidefacebook.com). Facebook originated in the U.S. in 2004 and has grown dramatically. With more than 150 million active users, the U.S. is its largest customer base. Non-English-speaking countries, such as Indonesia, Turkey, Mexico and Brazil, each have more than 25 million active subscribers to Facebook (http://www.insidefacebook.com). Fearing the power of Facebook to gather crowds, some countries have censored access to Facebook.

Other SNSs that have gained wide popularity are YouTube and Twitter. YouTube allows videos to be shared. Owned by Google, it is said that YouTube receives more than 3 billion views per day, and close to 50 hours of videos are uploaded by members every minute (Henry, 2011). Twitter, which originated in the U.S. in 2006, has over 300 million active users worldwide. Twitter is an SNS for short messaging and has become quite popular in the case of disasters, such as earthquakes, when regular phone lines are disrupted (Sakaki, Okazaki, & Matsuo, 2010).

With the prominent role of SNSs as media where any popular topic can galvanise a movement, it would be wise for Toyota, with its large customer base worldwide, to consider using it.

TOYOTA'S SNS STRATEGY

With manufacturing operations in 27 countries and a dealer network in 170 countries, Toyota is a giant organisation. In any large organisation, media releases for newspapers, television, or SNSs such as Facebook, Twitter, or YouTube must be coordinated carefully to prevent public confusion. Indeed, Toyota seems to have realised the importance of SNSs early on. As soon as the recall crisis began receiving media attention, Toyota quickly put together an "Online Newsroom" and a "social media strategy team" to coordinate all the media releases from different organisations of the company, such as public relations, customer services and dealers (Toyota USA, 2010b).

The SNS sites Toyota is operating include the following:

1. Facebook: www.facebook.com/toyota

2. Twitter feeds: www.twitter.com/TOYOTA

3. YouTube: www.youtube.com/toyota

4. YouTube USA: www.youtube.com/user/ToyotaUSA

5. Pressroom Toyota: www.pressroom.toyota.com

In addition to Toyota's own efforts, anyone interested in expressing an opinion has the option of using any SNS media to exchange opinions. On Facebook itself, the author found ten active anti-Toyota social groups (more detail later in this section).

Reasoning that the company had not had a major backlash from its customers, especially in the U.S., where media was providing sensational coverage around the clock, Toyota stated that it had increased the number of customers on its Facebook page. It is true that Toyota fans to this SNS site increased by approximately 10% monthly. However, all of the other major U.S. brands had also been adding fans to their Facebook SNS sites (Figure 5).

In terms of the number of fans, GM is the leader on Facebook, followed by Ford, with Toyota at number three. However, the up-and-coming Korean automaker Hyundai is adding fans at the fastest rate. Thus, Toyota's claim that it does not observe customers losing faith or abandoning the company may be a premature judgment.

A key advantage of tapping into SNS is that a company can gather nearly realtime information about customers' feelings or complaints. According to a recent study, consumers use SNS when making decisions to buy automobiles (Chen, Fay, & Wang, 2011). However, the automobile industry in general has not significantly used SNSs as major communication media (MH Group, 2009), with the exception of fan clubs. A Toyota fan club, such as the one on Facebook, may not reflect all sides because the people who join the club are likely to already have a positive opinion about the brand or the company.

In fact, the recall process produced quite a few SNS groups attacking Toyota. The company may want to periodically tap into such groups to follow up on their messages. On Facebook itself, one can find more than ten such SNS groups, with revealing names such as "anti-Toyota," "anti-Toyota Prius Group!," and "antiPrius movement" (Facebook, data on 26 May 2010). However, the total number of members of these groups is quite small, less than 1% of the number on Toyota's official Facebook SNS. Toyota may be concerned about the growth of the membership of these SNSs and the rate at which members post messages as well as the content of these messages.

One SNS site that was in operation well before the current round of recalls threatened Toyota is a public site called PRIUSchat (http://priuschat.com/). It is interesting to observe the traffic and the number of SNS groups on this site (Figure 6).

The peak observed in the traffic line on this exhibit is the result of a sudden recall announcement associated with one of Toyota's most popular hybrid models, the Prius. A careful analysis of these messages can explain the seriousness of this concern.

LONG-TERM EFFECTS OF SNSs ON TOYOTA

A comparison of traffic to Toyota's SNS site and anti-Toyota sites on Facebook, as explained in the previous section, reveals that Toyota strategically managed its SNS media with regard to the current recall. However, associated problems with the recall have brought to light a more serious threat that is directly related to the digitisation of the automobile (Figure 7).

With the advances of the computer, automobile manufacturers around the world adopted many computerised methods to control and optimise the function and performance of their vehicles. This is very similar to what occurred when analog music devices gradually became digital. Sony was clearly the leader in analog music, but, by strategically exploiting SNSs and software, Apple came from nowhere to lead the digital music world. Could Toyota experience something similar?

Despite the long span of time that the recall problem has threatened Toyota, the cause of the problem or problems remains somewhat unclear. Blame has often been placed on a faulty electronic system. The National Highway Traffic Safety Administration has sought the help of NASA and the National Academy of Sciences in the U.S. to identify the problem (Time Magazine, 2010b).

A modern automobile has several systems that are controlled digitally by computer chips and software:

1. Electronic Throttle Control

2. Electronic Stability Control

3. Electronic Brake Control

4. Electronic Fuel Injection

5. Electronic Speed Control

Of course, there are many other functions, such as air conditioning and safety monitoring, that may be controlled by a computer mechanism. It is said that a modern automobile has, on average, 70 to 100 microprocessors and millions of lines of software code (Charette, 2009; ScienceDaily, 2010).

Although there are common electronic parts used across many manufacturers, some key control systems are proprietary. Whether a problem with these systems is hardware-related or software-related, customers have no choice but to take the whole vehicle to a dealer. In Toyota's sudden acceleration problem, some experts suggested that the problem could be a software problem. When such a software problem occurs in a modern electronic device, the solution can often be downloaded from the Internet quickly and easily. Although there are onboard diagnostic systems in vehicles, including Toyota's problem models, accessing them often requires taking the car to a dealership.

If a car behaves like a modern electronic gadget that is connected to the Internet - and automobiles are increasingly becoming web-enabled - the problems can be monitored to varying degrees in real time, and fixes can be accomplished cheaply and swiftly. This may present a threat to an established player such as Toyota.

In 2005, Toyota was embarrassed by several recalls. In Japan, the total number of recalls, including Toyota's, multiplied 40 times in comparison with 2001 levels, causing serious concern to the Japanese government. The government asked Toyota for an explanation, and the company promised to create a defect-reporting database so that it could monitor vehicle-related complaints from customers in a timely manner.

However, the current problems with Toyota revealed that either the company did not create a system to accumulate data into such a database or the company did not pay attention to the data gathered in this database in a timely manner.

In his testimony to the U.S. Congress, President Toyoda admitted that the company was growing too fast and that it may have focused on selling cars rather than paying sufficient attention to quality. According to a statement from a Toyota employee union, only 60% of vehicles are completely tested at the final stage, compared to 100% a few years ago. It is possible that Toyota did not pay sufficient and timely attention to customer complaints and may not have analysed the complaint database (if it had one) carefully.

For the company that pioneered Just-in-Time manufacturing, Toyota's response to the faults and problems was far from being JIT. This situation may present new opportunities for companies that have the means to observe customer behaviour almost in real time, such as through Facebook and Google.

Toyota's situation is similar to the situation at Sony. The company was growing rapidly in the areas of television and music CD players, but it did not realise the importance of the Internet and social media or that its customers were moving to such sites. Apple saw the opportunity and seized it, and the rest is history.

Whether a similar thing could happen to Toyota and whether Toyota can prevent a demise like the one Sony experienced remain open questions.

Although recalls are not new for automobile companies, including Toyota, the recalls since 2009 were the largest in Toyota's history. The historic crisis created by these recalls raised many questions about the openness of the company. In particular, the delay by the company's president Akio Toyoda in providing explanations raised public doubts about the company's sincerity. The crisis also exposed the power of social media. SNSs had recently gained prominence in rallying audiences around hot social issues, and Toyota seemed to have realised their importance early on. Based on the data collected on Facebook, Toyota did well; even during the crisis, Toyota managed to add fans to its Facebook site. However, observing one's own performance on an SNS does not tell the whole story. Toyota must carefully watch its competitors. As shown in this analysis, the Korean automobile company Hyundai is adding fans to its SNS at the fastest rate. There must be a reason for this growth, and Toyota will be challenged to find it. Another challenge to Toyota, as highlighted in this study, is the digitisation of automobile functionalities, which is increasing rapidly. Even the recall problems in Toyota vehicles were believed to be related to digitisation. The solutions for these problems are software issues. This is where SNSs can again play a key role. Apple used SNSs and software applications (called apps, in Apple's terminology) to unseat Sony from the music gadget industry. Unless Toyota realises this, it could face serious challenges to its supremacy in the world automobile industry from existing or new automakers.

ACKNOWLEDGEMENT

Author would like to express his sincere appreciation to Mr. Oscar Manuel Mendoza, MBA Class of 2010, International University of Japan, for the numerous and constructive comments made on a draft version of this paper.

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Jay Rajasekera

International University of Japan

Graduate School of International Management Minamiuonuma City, Niigata, Japan 949-7277

E-mail: [email protected]

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Toyota Recall: Five Critical Lessons

Jan 31, 2010 | Business Ethics , Corporate Social Responsibility , Economy & Society , Regulation & Legislation

by Michael Connor

Having already halted sales and production of eight of its top-selling cars in the U.S. – and recalled more than 9 million cars worldwide, in two separate recalls – Toyota faces the prospect of billions of dollars in charges and operating losses. The Toyota brand, once almost synonymous with top quality, has taken a heavy hit.

While all the facts are not yet in, it’s clear that Toyota’s crisis didn’t emerge full-blown overnight.   Fixing the problem and ensuring that something like it doesn’t happen again will require an all-out effort, from assembly line to the boardroom.  Even then, there are no guarantees. Maintaining a good corporate reputation in the 21 st century is tricky business indeed.

Toyota’s case offers a number of valuable lessons for other business people and companies to consider.  Here, for starters, are five:

Aggressive growth can create unmanageable risk. Toyota’s desire to supplant General Motors as the world’s number-one car-maker pushed it to the outer limits of quality control.

“The evidence that Toyota was expanding too much and too quickly started surfacing a couple of years ago.  Not on the company’s bottom line, but on its car-quality ratings,”   writes Paul Ingrassia , a Pulitzer Prize-winning former Detroit bureau chief for The Wall Street Journal.

Ingrassia , who has just authored a new book on the auto industry , notes that in 2005 Toyota recalled more cars and trucks than it sold; by 2007, Consumer Reports magazine stopped automatically recommending all Toyota models because of quality declines on three models.

One wonders if, when accepting management’s plan for aggressive growth, Toyota’s board of directors exercised appropriate diligence to ensure that growth could be achieved without betting the entire franchise.  Were quality control and safety part of the discussion?  Maybe gaining market share wasn’t worth the trade-off.  Quick tip to directors of other high-growth-oriented companies: read up on Merrill Lynch’s experience with dominating the sub-prime mortgage market.

Get the facts quickly and manage your risks aggressively. One of the more troubling aspects of Toyota’s recalls ( there have been two ) has been the company’s differing accounts of the source of the problem.  The current recall, covering 4.1 million cars, involves potentially sticky gas pedals.  Late in 2009, Toyota also recalled 5.4 million cars whose gas pedals could get stuck on floor mats.  Plus, Toyota says there are some cars affected by both problems.  (For an interesting technical analysis of some of the issues involved, go here .)

Uncertainty is not an asset, especially when lives could be at stake.  A Los Angeles Times investigatio n , for example, casts doubt on Toyota’s explanation, quoting one auto safety consulting group as saying, “We know this recall is a red herring.”  (Read Toyota’s position here .)

And the questioning is just beginning. A U.S. Congressional committee headed by Rep. Henry Waxman has already requested copies of emails and other documents from both Toyota and the National Highway Traffic Safety Administration, which regulates Toyota with regard to the recalls.   Congressional hearings are scheduled for Feb. 25.

In cases such as this, investigators almost always start with two time-worn questions.  What did you know?  And when did you know it? Answers to those questions provide the groundwork for analysis of a company’s response and handling of a problem.  Were employees encouraged to flag safety issues to senior management?  Were sufficient resources devoted to investigating the problems?   When did the board become aware of the situation and what did it do about it?

Companies generally can’t predict when crises might occur.  However, good internal risk assessment programs can help identify those areas of the business where management should be on the alert.   Robust risk management programs help a company address problems as they pop up on the internal corporate radar screen – and before they explode in public.

Your supply chain is only as strong as your weakest link. The reality is that auto companies make hardly any of their parts.  They assemble cars from parts made by others.  In this case, the offending gas pedal assembly was made for Toyota by a company called CTS of Elkhardt, Indiana.

It’s far from certain how much blame the parts supplier deserves.  In fact, CTS says Toyota’s acceleration problems date back to 1999, years before CTS began supplying parts to Toyota. (And the replacement gas pedal parts Toyota has announced as a fix for the problem will be made by CTS, suggesting a degree of confidence in the supplier.)

Nonetheless, “(if) you are outsourcing for your entire vehicle line, [and] the outsourced component is defective, the recall and the embarrassment is much greater,” iconic car company critic Ralph Nader told Toronto’s Globe and Mail last week. “The overall message is that quality control [means] daily vigilance,” Nader said. “You can’t coast on your reputation because it can fail very quickly.”

Supply chain monitoring is a critical factor for companies that rely on third-party suppliers. That’s increasingly true for a broad variety of industries, not just automobiles, as business grows ever more global.  Smart companies will know their suppliers and their respective strengths and weaknesses.

Accept Responsibility .  This is one area where Toyota seems to be doing a good job, albeit maybe a year or more too late.

Toyota's National Ad on Recall - January 31, 2010

Two decades ago, when Audi encountered a safety issue similar to Toyota’s, Audi took the position that “it was the driver’s fault,” David Cole, Director of the Center for Automotive Research, told Design News .  Coles says that reaction ultimately hurt Audi’s reputation.

Toyota seems to be avoiding the appearance of passing the buck.  When pressed by the New York Times about problems that might have been caused by supplier CTS , for example, Toyota spokesman Mike Michels said: “I don’t want to get into any kind of a disagreement with CTS. Our position on suppliers has always been that Toyota is responsible for the cars.”

Accountability matters enormously.   Johnson & Johnson’s 1982 recall of its painkiller Tylenol, following the deaths of seven people in the Chicago area, has earned it a permanent place in the annals of crisis management.  But that recall stemmed from the deadly act of an outsider (who has never been caught), not any problem with the product itself, as is the case with Toyota.

Take the Long View. The three leading factors burnishing corporate reputation these days are “quality products and services, a company I can trust and transparency of business practices,” writes public relations executive Richard Edelman, who last week released his corporate “Trust Barometer” survey for 2010 .

That’s unfortunate news for Toyota, given the hand that it’s currently playing.  But the company doesn’t have much choice.  By one estimate, auto industry recalls conservatively cost an average of $100 per car – suggesting that Toyota might be on the hook for at least a one billion dollar charge.   That doesn’t include lost revenue to Toyota and its dealers from the production shutdown.  And competitors are already trying to woo customers away and capitalize on Toyota’s misfortune.  Disgruntled investors and Wall Street analysts will make the company aware of their feelings; class action lawsuits are almost a certainty (one lawyer is already searching for Toyota customers as clients).

Reputation can be easily lost – and Toyota’s reputation is indeed threatened – but it’s highly unlikely the company will collapse completely.  And that may be one of the one of the biggest lessons for other companies as they study how Toyota emerges from this recall crisis.  The reality is that Toyota is positioned for recovery about as well as it could be – owing, in large measure, to the reputation for quality products and corporate responsibility it has developed over the last two decades.  That reputation is a valuable asset, and one that Toyota will undoubtedly be citing and calling upon, in the weeks and months ahead.

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Case Study Analysis of Toyota Motor Corporation Toyota Motor Company's Recall Debacle: Did Toyota Take a Wrong Turn

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Amarachi I . D . Simon

ABSTRACT The focus of internal corporate communication is gaining interest, particularly because it is very essential in all dimensions of the organization’s performance. Hence, effective communication has been linked to a number of positive outcomes like organizational success, financially and socially, higher levels of cooperation and employee job satisfaction while ineffective communication may lead to dissatisfaction, misunderstandings, lack of information, lower performances and more employee rotations. The inability of managers to effectively communicate with their employees leads to employee job dissatisfaction and poor performance. Hence, this study examines how internal corporate communication influences employees job satisfaction in selected organizations under study. The survey method was adopted to gather data; 296 copies of the questionnaire were administered on junior and senior personnel of the selected organizations under study while in-depth interview was conducted with selected management level personnel. Data were collected and analyzed in simple frequency tables and the responses were represented in frequency tables as percentages of the overall sample. Also the Pearson chi-square was employed to determine the relationship between variables for any significance. Findings from the study show that the channels of internal corporate communication operational in the selected organizations are: face-to-face discussions, e-mails, intercom units, intranet, reports, messengers, memos, newsletters, official letters, bulletin boards, departmental/management meetings, group/team discussions, in-house training sessions, management/employee briefing sessions, labor union meetings, suggestion boxes, notices, closed unit groups (CUGs), and assemblies. Further findings reveal that most of the employees perceive internal corporate communication in their organizations as very effective, positive and a necessary organizational tool for employee job satisfaction. Findings reveal a significant relationship between internal corporate communication and employee job satisfaction which further enhances employee job performance. Further findings from the study also reveal that organizations are faced with diverse internal communication challenges such as: distorted feedback, matching message content with appropriate packaging, inadequate information, uneven flow of information, messages with lack of clarity of purpose, inability to arrive at a homogeneous internal communication approach and complete communication breakdown. These challenges, when not properly tackled, can hinder many organizational processes, especially its efforts at achieving employee job satisfaction/performance and, ultimately, organizational success. Internal corporate communication plays a major role in influencing employee job satisfaction which significantly influences employee job performance hence; organizations that want to successfully retain a satisfied workforce must be willing to employ a communication style that is more participative and employee-supportive. Keywords: internal corporate communication, employees’ job satisfaction, employees’ job performance.

Tahal Kumar

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