What is next for Toyota?

Maybe one of the most discussed business cases the last six months has been the situation at Toyota. I have therefore tried to analyze what exactly are the problems at once one of the most respected companies in the world, and it looks like there are more underlying problems at the organizations than simple floor maths and accelerators. 

First of all, it is interesting to see how Toyota has changed their strategic focus over the years; the company was near bankruptcy in the 1940s, but through an obsessive focus on quality in the manufacturing process (with the development of the famous “Toyota Way”), they managed to earn themselves a vital position in the automotive industry.

From the 1980s however, there seems to be a change in focus in their strategic direction; with market share as the indicator of success, they expanded their production systems into western countries – and this might be the root of the problem. And when the downturn in financial markets came around year 2000, they were forced to cost-cutting activities within manufacturing and human resources. Have Toyota finally paid a price in terms of quality for their increased quantity?

What is interesting is that Toyota tried to copy their success in Japan to other countries – completely ignoring cultural differences that are well documented. Already in the 1990s there were some signal of dissatisfaction from Toyota’s employees in the United States; a Tayloristic approach combined with arrogance from the top-management in terms of ignoring and accepting cultural and language barriers seem to split the organization.

It is interesting to see how a well-respected organization seem to completely have ignored basic management assumptions. Although sales are increasing at the moment, it will be interesting to see how they will prevent such a crisis to happen again; will they continue ignoring less quantifiable social benefits of an organization, or will they follow in the footsteps of Chrysler who, through a higher level of empowerment and less level of standardization, managed to reduce it’s time-to-market ratio at the same time as they managed to increase product quality significantly?  

What is the principal source of profits – Part Two

Continuing from my last post is the never-ending discussion of which factors drives organizational profitability. As mentioned earlier, the relative importance of industry in this context has been challenged by a series of studies in the later years.

For the sake of clarity: Such empirical studies take a large sample of firms and compare the extent to which variance in profitability is due to firms or industry (controlling for other effects). If firms within the same industry tend to bunch together in terms of profitability, it is industry that is accounting for the greater proportion of profitability and an external approach to strategy is therefore supported. The chief advocate of such an external approach is of course the well-known Michael Porter.

If firms within the same industry vary widely in terms of profitability, it is the specific skills and resources of the firms that matter most, and naturally an internal approach is most appropriate. An influential study of this was done by Richard Rumelt in 1991, and since world-famous strategists and researchers still haven’t come to some sort of conclusion, I am going to keep it all simple by comparing the two important studies done by Rumelt and Porter & McGahan.

As we can see, the two most important studies find that more of the variance in organizational profitability is due to firms rather than industries; in Rumelt’s study the organization’s resources, capabilities, structure and so on, counts for 47 % while Porter & McGagan suggest that the firm accounts for 31 %, but with higher industry effect as well (19 per cent)

It should also be noted that Roquebert, Phillips and Westfall published a meta anslysis where they compared Rumelt’s analysis up against Richard Schmalensee’s analysis from 1985. Their research does not only confirm most of Rumelt’s findings, but also suggest the existence of a corporate effect. If you have access to the Strategic Management Journal, it is a highly recommended read (Vol 17, pp. 653-664 (1996))

Such discussions will probably go on, but it will be interesting to see how the environmental changes in recent years (especially technology development, shorter life cycles and so on) will affect these factors in the future.