What Every Business Can Learn From Toyota's Fall
By Ed Hess
The recent deluge of recalls has made it all too clear: In its quest to become the biggest automaker in the world, Toyota wandered off the path of building the highest quality and most dependable cars.
Toyota is having a very bad year. In a matter of months, its once sparkling reputation for quality and dependability and its status as a respected leader in the auto industry were zapped. Replacing those accolades were a recall of over eight million automobiles, over 60 class action lawsuits filed against the company, and company president Akio Toyoda admitting that the company may have grown too quickly. What can every business–small or large, privately or publicly owned–learn from Toyota’s problems? The answer is simple: If you aren’t careful, you can grow your company to death.
Bigger is not always better. For decades, growth has been a determining factor for success–but the truth is growth can be bad. It can create serious business risks that if not properly managed can dilute a company’s brand and destroy its value.
In my new book, Smart Growth: Building an Enduring Business by Managing the Risks of Growth, I provide advice that Toyota executives could have used. In it, I debunk the three big myths about business growth:
Myth 1: All growth is good.
Myth 2: Bigger is always better.
Myth 3: All companies must “grow or die.”
And, replace those myths with the “3 Ps” for proper growth:
1: Plan for growth.
2: Prioritize the processes and controls needed to accommodate the growth.
3: Pace growth so as not to outstrip capabilities, processes, and controls.
Contrary to popular opinion, there is no scientific or business basis for the belief that growth is always good. Clearly, it isn’t. That belief is actually one that is perpetuated by Wall Street. Shareholders demand short-term growth, so that’s what companies deliver, even if what they’re doing is unsustainable in the long term.
My research shows that too much growth can stress a business’s culture, controls, processes, and people, eventually destroying its value and even leading the company to grow and die.
In Toyota’s case, it made a major strategy change in 2002 when it set out to be the largest automobile sales company. To accomplish that goal quickly, it had to open new plants globally, hire many new employees, expand its outsourcing suppliers, and design its automobiles for faster, cheaper production. The result? The quality of Toyota products began to decline.
Not only did Toyota products suffer, but its ability to fix those problems suffered. We see just how true that is through the conflicting reports from company executives over what exactly is causing the gas pedal problems and reports indicating communication issues between Japan and its U.S. and European operations. Bottom line: The company outgrew its quality controls and diluted its processes for effectively responding to customer complaints. Regardless of size, companies should assess the risks of growth using a Growth Risks Audit found in my new book prior to undertaking a major growth initiative and to develop a plan to manage those risks. Since managing risks requires a completely different mindset from managing growth, companies need to devise early warning systems to alert them to potential problems.
With Toyota, the cumulative effect of lots of small changes added together to create big consequences. In the heat of growth and in the heat of the battle to be Number 1, no one was able to “pull the cord and stop the Toyota line.” Being the biggest is a different goal from being the best in quality and dependability. When conflicts between speed, growth, and quality arise, no one wins in a “be the biggest” environment.
I suggest that large public companies like Toyota could learn a few lessons about growth from the private companies I have researched. I recently conducted a study of 54 high-growth private companies located in 23 different states. Through it, I found that CEOs with prior high-growth experiences acquired a healthy respect for the risks of growth and espoused the (ironically named) “gas pedal” approach to growth–letting up on the growth pedal to allow processes, controls, and people to catch up. They learned that a business, like an engine, can run at a red-line pace for only so long.
Many businesses strive for continuous high growth. Unfortunately, the research shows that sustained high growth is the exception, not the rule. Fewer than 10 percent of public companies are able to grow above industry or GDP averages for five years or more.
The moral of the story? Be realistic about growth–and understand that it is a complex change process dependent on human behavior.
Humans, like markets, are not efficient or rational actors all the time. Growth can be good and it can be bad. You can increase the probability of a good outcome if you assess the risks of growth and proactively manage those risks simultaneously as you grow. Grow for the right reasons and grow smart.
Professor at the University of Virginia’s Darden Graduate School of Business and author of the new book Smart Growth: Building an Enduring Business by Managing the Risks of Growth (Columbia Business School Publishing, 2010, ISBN: 978-0-2311505-0-7, $27.95), Hess spent over 30 years in the business world. He began his career at Atlantic Richfield Corporation and was a senior executive at Warburg Paribas Becker, Boettcher & Company, The Robert M. Bass Group, and Arthur Andersen. He is the author of seven books, over 40 practitioner articles, and over 40 Darden cases dealing with growth systems, managing growth, and growth strategies. His current research focuses on the Darden Growth/Innovation Model, The Challenges of Managing Private Company Growth; and Building Enduring Organizations.
Alec Baldwin Urges Judge To Stand By Dismissal Of Involuntary Manslaughter Case In “Rust” Shooting
Alec Baldwin urged a New Mexico judge on Friday to stand by her decision to skuttle his trial and dismiss an involuntary manslaughter charge against the actor in the fatal shooting of a cinematographer on the set of a Western movie.
State District Court Judge Mary Marlowe Sommer dismissed the case against Baldwin halfway through a trial in July based on the withholding of evidence by police and prosecutors from the defense in the 2021 shooting of cinematographer Halyna Hutchins on the set of the film "Rust."
The charge against Baldwin was dismissed with prejudice, meaning it can't be revived once any appeals of the decision are exhausted.
Special prosecutor Kari Morrissey recently asked the judge to reconsider, arguing that there were insufficient facts and that Baldwin's due process rights had not been violated.
Baldwin, the lead actor and co-producer on "Rust," was pointing a gun at cinematographer Halyna Hutchins during a rehearsal when it went off, killing her and wounding director Joel Souza. Baldwin has said he pulled back the hammer โ but not the trigger โ and the revolver fired.
The case-ending evidence was ammunition that was brought into the sheriff's office in March by a man who said it could be related to Hutchins' killing. Prosecutors said they deemed the ammunition unrelated and unimportant, while Baldwin's lawyers alleged that they "buried" it and filed a successful motion to dismiss the case.
In her decision to dismiss the Baldwin case, Marlowe Sommer described "egregious discovery violations constituting misconduct" by law enforcement and prosecutors, as well as false testimony about physical evidence by a witness during the trial.
Defense counsel says that prosecutors tried to establish a link... Read More