Staying Paranoid At Toyota

Fearful of big-company disease, the No. 1 carmaker keeps scrambling to retool itself

If there's one thing a company can learn from Toyota Motor Corp (TM )., it's the power of paranoia. Consider that Toyota just two months ago overtook General Motors Corp. (GM ) as the world's biggest carmaker. As Detroit bled, Toyota pulled down a record $15 billion in profits last year. Still, its executives in Japan and North America are worried that they'll be spoiled by success. "The scariest symptom of 'big-company disease' is that complacency will breed," Toyota President Katsuaki Watanabe told BusinessWeek in an interview.

So Toyota is giving itself a dose of strong medicine, meant as both an elixir for current ills and as preventive maintenance. The company's U.S. management has just launched its most far-reaching initiative in 50 years of doing business here. Called EM2, for "Everything Matters Exponentially," it's a total re- examination of product planning, customer service, sales and marketing, and even the car dealers the company doesn't directly own. Simultaneously, Toyota is retraining all of its U.S. factory workers. Company executives also expect sales growth to slow. The concept of continuous improvement, or kaizen, remains part of Toyota's DNA. But "the challenge is [how to] sustain that paranoia," says Ranjay Gulati, a professor at Northwestern's Kellogg School of Management.


The corporate world is littered with once-unassailable companies done in by arrogance and inertia, from Blockbuster (BBI )to Kodak (EK ). Toyota needs only to look at its Big Three U.S. competitors for evidence. Executives inside Toyota talk about the example of Ford Motor Co. (F ), which in the late 1990s threatened to overtake GM and reaped massive profits, yet lost its focus on products and customers and is now fighting to survive.

Toyota, too, has real reasons for concern. The company's headlong stretch for sales growth is creating quality issues. Recalls have tripled over the past three years, and the top-selling Toyota brand slipped in the latest J.D. Power & Associates (MHP ) Inc. study of quality. Dealerships continue to score poorly in customer satisfaction surveys that rate the overall car-buying experience. And despite hits like the Prius, Toyota's customer list is gradually getting older, which is the sad fate that befell struggling Detroit brands such as Buick and Oldsmobile.

Toyota is light-years from following Detroit into ruin (see, 6/7/07, "Toyota, Take the Wheel"). Still, for more than a year Toyota executives at the North American headquarters in Torrance, Calif., have been thinking hard about how to stay unsatisfied. A brainstorming session last July in the office of James Lentz, executive vice- president of Toyota Motor Sales, produced EM2. Lentz and his team have spent the 12 months since figuring out where problems could emerge and where they can improve. They tapped 50 managers from every discipline in the company's U.S. operations. These "EM2 experts" are now charged with examining budgets, looking at where people are deployed, and what's getting top results.

Since EM2 launched only a couple of months ago, the company is ironing out the details, says Jack Hollis, who leads the drive. But already some priorities have emerged. One glaring problem: customer satisfaction. Toyota owners love their vehicles. But they gripe about what happens when they're buying the car and getting it serviced. Toyota ranked 28th out of 36 vehicle brands on the overall customer experience in J.D. Power's 2006 ranking. "We're still not retaining a large number of customers," Hollis says. "We're trying to figure out why."


Over the past few months the company has taken the unprecedented step of directly surveying car salesmen to see how they handle customers. They're also asking them about the customer-service attitudes of their bosses, the dealers. The move has raised hackles. "I hate it when they do that. They try to micromanage us," says John Symes, who owns the Symes Toyota dealership in Pasadena, Calif. "I'm from the school that says: 'They build 'em, and we sell 'em.'"

But in at least one case, it's working. Earl J. Hesterberg, the chief executive of Group 1 Automotive Inc., one of the nation's largest dealer chains, offered up for examination World Toyota, a shop in Atlanta that routinely did poorly in customer-satisfaction surveys. In March, Toyota sent five people to observe the dealership and survey employees, down to the guys who wash the cars. They concluded that the dealer wasn't doing a good enough job of inspecting cars before delivering them--sometimes handing the buyer keys to a car with dents and scratches--and that there was too much emphasis on the sale and not enough on the customer. For the past two months, says Marty Collins, Group 1 vice-president for the Southeast region, employees there have had their compensation tied to customer-service scores. Top managers inspect every car before delivery. Now, Collins says, the dealership has top scores in every category of customer satisfaction.

It marks a change in Toyota's attitude toward its dealers, says Hesterberg. Because of Toyota's lofty sales targets, dealers have typically leaned on buyers to get them to take a model they don't want--just to make the numbers. Toyota hopes emphasizing customer satisfaction and loyalty rates will keep sales growing without the hard sell.

Increasing loyalty, however, means that Toyota's customer base will keep getting older. The average buyer of a Toyota-branded car today is 47, says J.D. Power, about the same age as for Chevrolet and 10 years older than for Toyota's Scion brand. As part of EM2, Toyota's product planning group decided it needed to take a page from the success of the youth-oriented Scion group and go where the young people are. Rather than sit in their offices in California all day, Toyota's product planners ventured into the cities where young people are buying and renting loft apartments in newly gentrified areas. What they saw was that these young urbanites need smaller cars to fit into cramped parking spaces.

Separately, Toyota is taking a hard look at its vaunted factories. The progenitor of lean manufacturing, Toyota is the corporate gold standard for quality and efficiency, and its methods have been studied and copied by giants like GM and Boeing Co. (BA ) But rampant growth has stretched the company's engineers and workers, and recalls have begun to occur more frequently in Japan and the U.S. Since the company has grown so fast, the engineers who once trained factory supervisors and workers are too busy to make house calls in every country where Toyota makes cars. "Toyota has grown too fast," says industry watcher Maryann N. Keller, who sits on the board of Dollar Thrifty Automotive Group Inc. (DTG ), "and it's causing them problems."

Toyota still ranks among the top makers in quality studies, but it is slipping. So its people are going back to school. At a new training center outside Toyota's manufacturing headquarters in Georgetown, Ky., even workers with 15 years of experience are being retrained on a mocked-up assembly line, says LaTondra Newton, general manager of the Team Member Development Center. There, she says, Toyota will take its workers, Japanese-style, through the nitty-gritty of "putting a bolt into an air gun and putting it into a car." Toyota has hired engineers at locations nearer factories, so they can drop in on the plant floor to solve problems more often.

The attention to detail is fanatical. In one exercise, workers must put on a glove and massage the door of a Camry in a soft, circular motion in search of about a dozen dents and dings. They have to locate each one, even the subtlest defect, or else it's back to school. All 30,000 of Toyota's North American workers must either go through the training or learn from someone who did. Says Newton: "This may take a few years."

With Detroit on its knees, Toyota has time to work on its problems. But top executives believe the key is relentless reinforcement of a culture that shuns the pitfalls of U.S. carmakers, which became too mired in business as usual to break out of bad habits. Take the team of five Toyota engineers who recently flew from Japan to see Blauvelt (N.Y.) dealer Neale Kuperman. They spoke to his mechanics to figure out what tires they should put on Toyota's cars. "They listen, and they care," Kuperman says. "You don't see that from the domestic manufacturers."

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By David Welch

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