Toyota Was in Denial. How About You?

In the past weeks we have learned two things about Toyota. First, when it comes to crisis management, the company stinks. Second, when it comes to manufacturing automobiles, Toyota isn't what it was cracked up to be.

It is that second item that came as the real shocker. Anyone questioning this company's level of quality a year ago would have had difficulty finding an audience. But today, Toyota finds itself having to recall more than 8 million vehicles, and it may soon have to pay the maximum fine the U.S. Transportation Dept. can levy for concealing safety information. As you surely know, a wide array of Toyota's vehicles must undergo repairs for a potentially deadly accelerator problem. Indeed, it has already cost lives.

Manufacturing defects can crop up at the best of companies. And Toyota was certainly counted among the best of the best. Anyone still interested in reading about the company's vaunted production system can go buy a book like The Toyota Way or The Machine that Changed the World. But evidence is starting to indicate that we were living in a "Toyota reputation bubble," comparable in its own way to the dot-com and housing bubbles.

In 2005, Toyota recalled more vehicles in the U.S. than it sold. Worldwide, nearly 1.5 million Toyota vehicles were recalled the following year. Why was there not a spate of articles about Toyota no longer being the company people thought it was? Outsiders writing about Toyota fell victim to what John Kenneth Galbraith many years ago called the conventional wisdom. We all saw Toyota through the prism of its supposed manufacturing superiority, a prism that distorted reality. When the accelerator recalls were followed by Prius recalls over faulty brakes, the jig should have been up. But to this day I know people who do not plan to take recalled Toyotas back to the dealer. They are still in denial.

Evidence of trouble was available to Toyota long before American consumers were told. The gas-pedal problem appeared in Europe a year before it started causing accidents in the U.S., as the company's brass knew full well. Acknowledging as much in congressional testimony, Toyota's top U.S. executive, Yoshimi Inaba, characterized the company's response this way: "We did not hide it. But it was not properly shared." What on earth were they thinking? Did they believe that the failure of this most public of products would pass by unnoticed?

I believe I know the answers to these questions. Toyota's top people were in denial, just as the public was. By denial, I mean that they stopped being honest with one another. And they stopped being honest with themselves. If Toyota's products were as fatally flawed as they were, that would be too awful to be true. Therefore, the awful truth was brushed away. I've seen this happen in so many companies that I was compelled to write a book about it.

There's a highly valuable lesson for all businesspeople in the tragedy at Toyota: If denial can destroy the reputation of a company that was once so admired, it can destroy the reputation of your company, too. Unfortunately, organizations (and people) that are in denial have a hard time seeing through their own smokescreens. Here are some questions you should ask yourself to help you avoid Toyota's fate:

What happens to the bearer of bad news? Does your company shoot the messenger rather than heed the message? There are indications that this may have been the case at Toyota.

Do the real issues of the day only come up in the hallways after meetings are finished?

Are you trash-talking your competitors' products? If so, how sure are you that yours are superior?

Is your company building a new large headquarters to celebrate itself? There is some evidence of the "edifice complex" at Toyota.

Would you rather be conventionally wrong or unconventionally right? Toyota's top people chose the former.

If your answers to these questions make you a bit uneasy, think about how Toyota President Akio Toyoda must be feeling right about now.

    Before it's here, it's on the Bloomberg Terminal.