Toyota's initial mistake was thinking about the issue as an engineering problem rather than a management problem, says Daniel Diermeier of the Kellogg School of Management
As Toyota (TM) faces costs that could run as high as $2 billion and braces for a U.S. Congressional hearing about massive vehicle recalls necessitated by design issues with multiple models, the Japanese automaker is still in the early phases of crisis management, according to Daniel Diermeier, IBM Professor of Regulation and Competitive Practice at the Kellogg School of Management. Professor Diermeier recently spoke with BusinessWeek.com Management Editor Patricia O'Connell about how Toyota has handled the situation and what the company should do going forward to restore the public trust. Edited excerpts of their conversation follow. What do you make of Toyota's handling of its problem with vehicle recalls? The fact that the company president, Akio Toyoda, apologized [on Feb. 5] and talked about personally heading a task force that would deal with quality issues is the first thing they've done that I like. They are finally responding to the true nature of the problem. They have conceptualized the whole problem as an engineering one. This isn't about the accelerator, or the brakes. It's about a much more fundamental question: Has the company lost its way with respect to quality? It's a management problem, not an engineering problem. They are finally moving away from seeing it solely as an engineering problem. But when people believe that something isn't going to work properly with their car, or you actually have cars that aren't functioning properly, you do need an engineering solution to the problem. Absolutely. But that's not the whole solution. The engineering solution will not solve the problems with brand perception. So they should have dealt with these things in tandem—the engineering problem and the perception problem? The recall was necessary but not sufficient. A full-force reputation-management campaign should have come sooner once they started talking about recalls and fixing design issues. How does a company manage reputation when there has been such a bit hit to it, and that hit goes to the very core of the company's value proposition, which in Toyota's case was design and quality? This situation escalated because of what the company didn't do early on—which was try to rebuild trust. And there are different aspects to that. Take transparency, for one. That it took 10 days for the president to deal with the issue and that it was originally in the hands of the U.S. head of sales sends the message that there isn't the right level of accountability. Toyota has to re-establish the belief among customers that quality is the most important thing for the company. What do you think Toyota's president should be doing and saying in public? I like that they've put the task force in place, and this is something that has to be sustained over the next few months—maybe even the next year. It should have started sooner, but now that the president is heading the task force—which is a very important thing—this has to be something that he owns. This is a life-threatening situation from the company's perspective. They need to have a sustained campaign that focuses on quality, safety, durability, for weeks, maybe months. Advertising has to be an important component of that as well. What would your time frame would be about how long it would take them to manage this story? The next thing they have to do is survive the Congressional hearing, which will keep this issue alive for a while. If there is any suggestion, any perception, that arises from the hearing that the company didn't act with transparency, it will be a problem. I don't know if this is how Toyota perceives the situation, but many companies have the misperception that once the headlines die down and are displaced by the next crisis—by someone else's crisis—that it's a good thing. But it's not. What people remember when the stage is no longer lit is the last thing they heard about Toyota. So Toyota has to keep the issue open in a positive way to change people's perceptions, and that will require sustained involvement from the president. He needs to emphasize that the company is going back to its core—looking at the processes, having an ongoing task force, and then dealing with any other quality and safety problems convincingly. From your perspective, Toyota did a lot of things wrong. Can you think of a similar crisis that was managed well? Everyone talks about Tylenol as the gold standard for crisis management. Tylenol is the gold standard. But the Tylenol example isn't relevant anymore in this case because Johnson & Johnson (JNJ) did all the right things from the beginning to get out in front of the problem and regain public trust. Toyota didn't do that, so now the question is how do you recover from that? The brand has already suffered significant damage. An example I would highly recommend that Toyota look to is the crisis Mercedes had in the European market about 12 years ago with the A class. There were questions raised about whether the car might roll over. That concern went right to the heart of Mercedes' value proposition—that it was a safe, well-designed vehicle. Mercedes basically relaunched and remarketed the car, with an entirely new campaign. The whole thing was extremely well done, even after some initial missteps that are reminiscent of Toyota's. You said before that this is life-threatening for the company. Can Toyota recover? Absolutely. But they have to think about it the right way, and they have only started to do that. In a case like this, how is it possible that a company would not realize that the real issue was one of reputation? It's a mystery of my profession. Part of it is when you are an extremely engineering-driven company, like Toyota, you tend to look at it only through that lens. It's your comfort zone, the area that you feel most confident talking about, even though it was the source of your problem. Also, the company structure could be an issue. They may not have a governance structure in place that allows for decision-making on a global scale, and that's something they need to re-examine as well. Daniel Diermeier is the IBM Professor of Regulation and Competitive Practice, a professor of managerial economics and decision sciences at the Kellogg School of Management, and a professor of political science at the Weinberg College of Arts and Sciences, all at Northwestern University. He serves as the director of the Ford Motor Company Center for Global Citizenship. Diermeier is a co-creator and academic director of the CEO Perspective Program, Kellogg's most senior executive education program. His teaching and research focuses on political institutions, the interaction of business and politics, crisis leadership, and issue and reputation management. For more information about the Kellogg School of Management, including its MBA and its executive education programs, visit www.kellogg.northwestern.edu.