Toyota Quality Crisis Case Study


Abstract:

The case study is about crisis management at the Japan-based Toyota Motors Corporation, one of the largest automakers in the world. In January 2010, Toyota was forced to recall millions of cars after problems with braking, floor mats and acceleration pedals in its vehicles. The recalls even led Toyota to halt sales and production of eight of its most popular models. Due to growing number of recalls, sales plummeted thereby affecting the company's position in the global automotive industry. Analysts began to question Toyota's legendary quality and felt that the recalls represented a major failure on part of the company. After the recalls, Toyota went into crisis management mode and announced a fix for the accelerator problem.


The case describes the various crisis management initiatives undertaken by the company to regain the trust of customers and restore its image as a quality automaker.

As part of its crisis management process, Toyota placed ads in print and television media, involved executives and used social media platforms to address its customers. However, some analysts felt that the crisis communication team of Toyota was weak which led to a delay in identifying and addressing the situation. The case concludes by discussing what the company planned to do in the future to contain the impact of the crisis. Crisis management experts were of the view that the image of Toyota would depend on how quickly it can fix the problems and how well it communicates with its customers.

Issues:

» Understand the importance of crisis management and various issues and challenges related to it.

» Analyze whether Toyota's response to the crisis was adequate.

» Explore the PR and crisis management strategies that Toyota should adopt to contain the impact of the crisis and retain its brand reputation.

Contents:

Keywords:

Crisis management, Public relations, Brand reputation, Brand image, Toyota recalls, Quality issues, Crisis communication, Brand equity, PR disaster, Cultural issues, Corporate governance, Risk management, Corporate Reputation, Consumer expectations, Global automotive industry, Toyota

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Provide a critical analysis of a crises event utilizing appropriate crises management theory and frameworks. You may wish to examine the event from different stakeholder perspectives, organizational learning, culture, system, crises typologies and/ or using models such as the 7Cs, DEPOSE and so on.

 

Introduction

In this article, a critical analysis will be performed to analyze the recent Toyota recall crises with relevant crises management theory. The Toyota recall crises is chosen as the case study for application of theories related to crises management because Toyota is a famous company and the Toyota recall crises recently is a hot corporate crises event debated by researchers as well as market observers. Besides, such crises is largely unexpected, given the fact that Toyota is a famous and respectable consumers brand according to several consumer research and branding survey. It is thus interesting to understand how the crises formed, and how Toyota, as a respectable and reputable company face such crises. Not only are that, Toyota is also chosen because it could be beneficial to understand the crises in greater details because as a famous and respected manufacturing company, it is surprise to see the role model, namely the lean and just-in-time production system, often called the Toyota Production System, that is widely researched and learned by other manufacturing companies around the world, can suffer from such serious corporate crises as well. There will be a lot of lessons to be learned from a study on the Toyota recall crises.

The article is arranged as follow. Firstly, company background of Toyota will be introduced. Then, a review of the literature concerning crises management will be performed. Later, upon reviewing the many theories and frameworks discussed in available literature, the many theories will be applied to analyze Toyota Recall Crises. Lastly, it is concluded that many lessons can be learned from the crises. The various lessons learned will be summarized as the references for manager in the future in handling corporate crises.

Company Background

Prior to the crises, Toyota is a famous and fast growing automotive company around the world. The brand name of Toyota is often considered as the benchmark or the very best manufacturing practices and quality to be copied, followed or learned by other manufacturing companies (Klefsjö, 2006). This is not something hard to observed, as there are a lot of books written about Toyota and the success stories of Toyota. Of particular famous phrases due to Toyota include: the Toyota Production System (TPS), the Toyota Way, just-in-time supply chain management and kaizen (Gallagher, 2005). According to consumer reports, it is found that Toyota is the best brand in the automotive industry for a few years around 2000 to 2010 (Thun et. al., 2010). Besides, Toyota is also gaining market shares around the globe fast, due to the high quality vehicles produced as a highly affordable pricing (Gibbs, 2009; Towill, 2007). However, in 2010, Toyota suffer from a reputation as well as financial loss crises, as the car manufactured, in which many of the vehicles are hot selling model, including Camry, Prius, and Corolla, have technical and safety problems. This is somewhat a big shock to the world, as Toyota is supposed to be a company producing the very best quality vehicles, at the highest standards. The efficiencies as well as quality management of Toyota manufacturing practices is supposed to be the role models to be learned by other automotive manufacturers. As a result of the crises, Toyota suffered badly, and apparently, consumers are losing faith on the once great automotive company. The crises management by Toyota concerning the vehicle recall crises will be discussed in greater depth in the next few following sections.

Literature Review on Crises Management

Crises Management is not a new subject in business management, as people do instinctively understand that crises will occur due to many different types of unforeseen circumstances. Crises can happen due to natural disasters or man-made errors. It is very hard to predict natural disaster nor can it be easily avoidable, but it is possible to mitigate crises due to human errors. In the recent years, it can be seen that man-made crises is becoming an important issue to be discussed due to the increase frequency of the occurrences of these crises, as well as the increasingly high damages done to the organizations involved or to the society. One such impactful event that bring huge damages or losses to the society in the recent years due to human related issues (example, ethical and greed issues) are the financial crises in 2008.

In the literature of crises management, it can be observed that the topic is about how the management, shareholders as well as other stakeholders can deal with the crises. In most of the literature, it is argued that crises can be mitigated through proactive measure, preventions mechanism or control system. In some other literature, it is about how crises can be handled in the most effective way, and if possible, how to utilize the occurrence of crises as the opportunity to act in an integrity manner or to treat the crises as a good learning opportunity. There are several useful theories that can be readily applied to understand crises management in an organization. Among these theories in the context of crises management include: (a) Crises Development Model by Roux-Dufort (2007); (b) the Five Phases of Crises Management by Mitroff and Pauchant (1993); and (c) the 7Cs of Crises Management by Smith (1990). All of these theories will be briefly discussed in the following paragraphs.

Crises Development Model. According to Roux-Dufort (2007), the formation of crises can be model via a four phases Crises Development Model. The first phase of crises development called anomalies and unnoticing. At this moment, only very weak signal on the crises can be observed. People largely are unaware that crises are bound to happen someday in the future. In the second phase, it is called vulnerabilities and normalizing. In this phase, stronger signals on the potential of crises happening can be detected. The situation presented organizational vulnerabilities to potential shocks or crises. Then, when that is left unhandled, or preventive actions are not performed, crises will be triggered by certain triggering event. That will lead to phase three of crises development, namely the disruptions and denying stage. In this phase, people may still deny that a serious crisis is underway, while the signals related to the happening of crises can already observed clearly. If the crisis is not handled appropriately in this phase, crises will escalate to phase four of crises development cycle, namely, the crises and escalation stage.

The Five Phases of Crises Management. A useful model on how crises can be handled in a systematic approach is outlined by Mitroff and Pauchant (1993). The very first step of crises management is to detect the signals. Before any crises happen, or when crises are becoming obvious, signals can be detected. Based on these early warning signals, attentive managers should be able to aware of the possible threats or risks to be caused by the crises. Thus, prevention measures to tackle the possible threats or to stop the crises from happening should be implemented. Besides, in order to effectively handle the coming crises, it is also crucial to prepare the solutions to handle the crises before it happens. Following that, it is also crucial to contain the damages done to the organization or the society. Damages containment or limitation is critical. When the harms are contained, then crises recovery measures can be implemented. The process of crises management does not end with crises recovery only, as it is also important for the organization to learn from the crises. There are many lessons to be learned from a crisis, whereby the existing organization control system can be further strengthen and improved.

 

Figure 1: The Five Phases of Crises Management

 

The 7Cs of Crises Management. The 7Cs framework of Crises Management by Smith (1990) is a useful framework to understand if a particular organization is susceptible to crisis. The 7Cs framework is fact is derived from the famous cultural web framework. Such a framework is powerful in capturing the various aspects of crises portfolio, and can be used in a crisis audit. The 7Cs framework is presented in Figure 2 below. The first C, namely “Coupling” is about the interconnectedness of structure in a system, whereby any undesired event can proliferate due to the connections within the structure of the system. “Coupling” is related to the concept of “Complexity”. A complex or complicated structure is more prone to unforeseen crises. In the context of manufacturing, complex interaction can be hard to analyze as there may be unplanned and unexpected sequences no easily visible by people. The second C is “Configuration”. Configuration refers to the organizational structure, whereby it is important to ensure the organization structure is formed in an internally consistent and mutually supportive manner. The various elements or aspects of configuration include the following: spans of control, formalized or decentralized organizational structure, the reporting structure in the organization, or how the various departments interact with each other. Crises are less prone to happen when all of the aspects are integrated in a harmonious manner.  The third C is about “Control”. Control is a widely popular topic in terms of crises or risk management. This is because in order to prevent or avoid crises or mitigate unnecessary risks, a relevant and comprehensive control system is needed. Through the control system, the many activities can be standardized, and unpredictable events can be eliminated most of the time. A good control system also provides a platform for management to manage the various risks faced by organization in the conduct of business operations daily. The fourth C is about “Culture”. It is undeniable and reasonable to believe that certain culture can be more prone to crises. For example, an organization having a loose discipline culture is more prone to crises. The fifth C is about “Contingency Planning”. Contingency planning is crucial in the crises recovery process, as when the plans on how a crises can be handled is determined prior to the crises, people may not stunned by the unexpected events, and more readily able to react to the unforeseen circumstances in a more prepared manner. The sixth C is about “Communication”. Communication in this context can refer to the communication within the organization, or communication between the organization to the external environment or the public. It is a very important aspect on how the organization can prevent or act after the crises. Lastly, the seventh C is about “Cost”. Very often, the pressure to produce profit or the pressure to cut costs is the root cause leading to crises in an organization. In hard times, people may find alternative solutions, but that alternative solutions may comes with higher risks that are more vulnerable to crises. Besides having a different time orientation will also affect if a firm is prone to crises or not. Firms that are having long term orientation are more conservative and stable, whereby crises is less likely to happen. However, short-termism firms are focusing on short term benefits, without considering the potential risks and problems bound to occur in the longer term. Thus, firms that are short-termism are more prone to crises.

 

Figure 2: The 7Cs of Crises Management

 

Discussions: Toyota Recall Crises

The recent Toyota Recall Crises is a good example and case study to be used in analyzing how crises are handled in the real world, and to learn practical lessons from the crisis itself. In order to analyze the crisis, several theories have been applied.

Stakeholders and Crises

In the case of Toyota Recall Crises, many stakeholders have been affected. In fact, in order to understand the seriousness or the whole picture of any crises, it is crucial to understand how the crises had affected, or will be affecting the many stakeholders involved. Thus, this section will perform an analysis to understand how the crises affected stakeholders. The stakeholders to be analyzed include: consumers, competitors, employees, shareholders, regulation agencies, as well as the public.

Consumers. Obviously, consumers of Toyota automotive are the worst affected group of stakeholder due to the crises. Firstly, the consumers may suffer badly from anxiety if the car that they are driving is safe. This is not unreasonable as any issues with the vehicle may cause losses of lives. Secondly, even Toyota will recall the car for free; the consumers are suffering from wastage of time, and are required to send the car back to Toyota. This will definitely create disruptions or disturbance to their normal life. Thirdly, as discussed by O’Rourke (2010), four users of Toyota’s Lexus car were killed in an accident due to unintended acceleration. Apart of that, all of these incidents have caused the resell value of used Toyota car to drop in the marketplace, creating further burden to the existing Toyota car owner (Minhyung, 2010).

Competitors. Of all of the stakeholders affected, competitors are the only one benefiting from the crises. Due to the crises, Toyota brand name is hurt badly, and consumers are expected to switch their purchasing decision for other equally famous competitors such as Honda, General Motors, Ford, or Chrysler. However, it is still early to judge how much the competitors can benefit from the recall crises. Besides, should Toyota able to use the crises as a way to enhance its brand name from effective crises recovery process; that will be a totally different story for the competitors in the long run.

Employees. The employees are affected adversely as well. Firstly, as Toyota suffer from huge financial losses (imagine that Toyota is forced to recall more cars in a single year in the United States, more than the overall amount of cars sold by the company worldwide, (Kello, 2010)), the financial rewards (probably in terms of bonuses, extra compensation or stock options) for the workforce will be reduced. Besides, it is also reasonable to expect that the employees will also face negative viewpoints from the society.

Shareholders. The negative impacts affecting shareholders are very direct and immediate. Due to the crises, the stock prices of Toyota plunge badly. As such, shareholders suffered financial losses in a very short period of time.

Regulation agencies. Due to the crises, regulation agencies are forced to carry out extensive investigation on Toyota’s vehicles, for the safety of consumers as well as the public.

The public. It may seem that the public is not affected, but that is simply not true. There are many Toyota cars moving around the country and the world. Thus, if these cars are not safe, then the safety of the other drivers will be affected directly. Their lives are put in danger as well. In fact, passengers or the normal people walking around the corner of a street may possibly be hit by a Toyota car as well due to brake or acceleration issues.

Crises Formation Process/ Crises Development Process

Similar to the crises formation process discussed above, the Toyota Recall Crises is not something happening all in a sudden as it may seem. There are weak signals in the beginning before the real crises trouble the company or shock the world in 2010. In fact, as commented by Piotrowski et. al. (2010), since 2007, Toyota had already experiencing a series of recall, albeit in small scale due to serious potential defects. At that point of time, for discerning observers, such signify that Toyota production or manufacturing is suffering from certain degree of vulnerability to serious defects or crises. For example, some of the problems due to Toyota best selling model in 2007 include: unwanted car acceleration issues, some software bugs, malfunction of steering, and certain issues due to car brake. However, as early in 2007, the problems is not as serious as it may seem in the year 2010, when all of the sudden, Toyota is forced to face realities, when the issues caught the attentions of the public as well as regulatory bodies (particularly in the United States). In the three years since 2007, it can be seen that Toyota is not handling the potential crises fast, as a degree of hiding and solving certain issues under the table can be suspected. Before the crises escalate, it can be seen that a certain degree of denial or ignorance is underway (or else, Toyota should be recalling all the problematic car models in 2007 or at least in 2008 for repairing purposes; and preventive measures and damages containment measures should have been implemented to ferret out the root causes of the problems). O’Rourke (2010) even pointed out that investigators had found internal document of Toyota bragging about initiating only a limited recall on problematic Toyota car model purely to save a total of USD 100 million (Thus, from such documents, it is found that the executives apparently are not sincerely recalling all those affected cars, but instead place cost cutting as more important priority than human safety and corporate reputation). As the many problems are largely hidden, ignore and undiscovered by the public, the crises proliferated, until in 2010, Congressional panel investigation on potential problematic Toyota cars were scheduled in March 2010. At last, the management of Toyota is faced to handle the issue directly, when the entire issues go uncontrollable as they caught the attention of media. Lastly, Toyota suffer badly, from both brand equity or financial performance perspectives, as more than 8 million cars are recalled, and the costs of that recall is estimated to be around USD 2 million. As discussed by researchers, the worst impacts to Toyota are in fact about the reputation issues. The crises had done quite huge damages to Toyota reputation or brand name in the marketplace. As discussed and surveyed by Piotrowski & Guyette (2010), atotal of 57% of the research participants in their survey concerning the crises felt that actions taken by Toyota in handling the crises is somewhat disappointing. Besides, a total of 50% of these research participants even have the opinion that Toyota is not acting ethically in the recall process. Worst, a total of 13% of the research participants have the opinion that Toyota may not able to recover fully from such crises.

The 7 Cs of Crises Management

Somehow, there are certain uncontrollable variables that cause certain organization prone to crises more than others. As reputable and quality conscious company as Toyota as it is, it can be seen that risks are not something can be underestimated. In this section, a comprehensive on Toyota situation can be performed with application of the 7Cs framework.

Coupling and complexity. In the automotive industry, vehicle recall is a relatively common incident. Many of the giant car manufacturers suffer from recall crises before, among them include: Ford, GM, Volkswagen and Honda (Minhyung, 2010). The complexity of car manufacturing is something widely acknowledged by observers, as the many electrical, electronics or mechanical parts from suppliers will be assembled in the final assembly plant. Thus, any issues, may couple from the suppliers to the final vehicle assemblers. Considering the complexity as well as the vast amount of suppliers to a car manufacturing plant, it is indeed hard to ensure everything is truly error free. It is no wonder that vehicle recall is not uncommon incident in the automotive industry. Indeed, the Toyota Recall Crises in 2010 is blamed to be the fault of the software suppliers of Toyota’s suppliers.

Configurations. The configuration, or more easily referred to as the structure of the Toyota Production System is something admired by the many competitors. Many of the structures are coordinated in an internally consistent and mutually supportive manner. In fact, Toyota is famous of just-in-time as well as lean manufacturing philosophy (Shook, 2009), which indicates that the corresponding configurations of Toyota are well designed and mature.

Control. Similar to the discussion above, the control system of Toyota is suppose to be top notch and of the highest quality in the industry. However, there are still some issues overlooked by the company. The issues of brakes and unintended acceleration issues are proof that the company is not having sufficient control system in checking the quality of parts supplied by the suppliers. Despite the many books argued on how Toyota is scoring well in quality control management, the recent recall crises show another totally different picture.

Culture. The Toyota corporate culture is often named as the Toyota Way. One of the famous attribute of Toyota culture is continuous improvement (Lander et. al., 2007). Logically thinking, such a culture should lead to tighter control system in the organization. However, that is not the case. As found out by researchers, Toyota is committed more to growing fast and gaining market shares in the past decades, as the competition in the automotive industry is becoming highly intense. Thus, as the company grows fast, certain areas are overlooked. The management of Toyota in US even warned the employees that the quality control system in the manufacturing plant is deteriorating due to a strong focus on revenue (Minhyung, 2010). This again shows that the company had sacrifice long term benefits for short terms rewards – a very common scenario whereby greed leads to crises at the end of the day.

Contingency planning. Company with strong and well-defined contingency plans is supposed to suffer less from potential crises. This is perhaps one area whereby Toyota may be weak at. As argued by researchers, in a review of the success stories of Toyota, it is found that very little had been found on how to deal with sudden surprise of unforeseen hard issues troubling the company (Mittal et. al., 2010). Perhaps it is because of long term track records of success, the company is ignoring the importance of contingency planning in dealing with unpredictable crises. Following that view, it is possible that Toyota did not have viable crises management tools or practices, and thus, when Toyota people are trouble by potentially huge recall issue, people just get stunned and never act fast enough to deal with the issues at the shortest possible time.

Communication. The communication process of Toyota to the mass public as well as the regulatory agencies had been slow. In fact, the communication within the executives is not showing signs of real integrity. This is because it is found that there are some document related evidences that the brake and car pedal issues are found out internally since 2007, and yet no massive recall is done until four people are killed in an accident due to unwanted car acceleration.

Conclusion

A review of Toyota Recall Crises shows that crises can happen even to the very best and respectable quality conscious and famous company. In fact, it can be concluded that successful company may be particularly vulnerable to sudden and unforeseen crises, as people are already accustomed to success and profitability, with little awareness on the importance of contingency planning. Besides, it is also found that many of the key problems of Toyota happens due to the desires and overemphasis to growth the company fast, to the extend the quality management and control of the firm is neglected. Besides, when crises started to occur, whereby weak signals can be detected that the safety of certain Toyota car models are questionable, management did not take corrective action, but instead focus on how to minimize the financial losses by planning for a very limited vehicle recall. Both these events shows that the short term needs to increase profit by revenue growth or aggressive costs reduction can hurt any firm in the long run. In the long run, reputation as well as the quality delivered by a firm is more important. Nonetheless, it is also fair to comment that car manufacturing is a very complex process, and this make the automotive industry particularly susceptible to vehicle recall. However, the consumers may not be provoked if vehicle recall is performed fast, and done at the shortest possible time. In Toyota case, the recall is done after three years the issues had been found. That is too long a time frame, and thus, such situation provoke people anger and questioning the integrity and crises management ability of Toyota. From the real life case study, it is very obvious that crises should be solved and faced at the shortest possible time frame. The longer the crisis is ignored, the bigger the issue may become in the later day. That is only possible when contingency planning is well-defined, and the management has the awareness and courage to face with any problem at the fastest possible time.

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