The Toyota Phenomenon Fujimoto Takahiro 01 June 2004 Japan Echo8 Volume 31; Issue 3; ISSN: 03880435 English

Copyright (c) 2004 Bell & Howell Information and Learning Company. All rights reserved. As a symbol of Japanese business strength, Toyota Motor Corp. has won repeated encomiums-and has also taken its share of brickbats. Now, early in the twenty-first century, we are witnessing yet another "Toyota boom" as the automaker reaches new heights of business performance. Much of the current praise for Toyota is an after-the-fact response to its increasing profits and market share. Unless observers come to grips with the extreme complexity of the Toyota phenomenon and achieve a multifaceted, multilayered understanding of the company at a more profound level, I fear that their enthusiasm will end up being just a passing fancy. We now face a pressing need to enhance the competitive strength of Japanese industry as a whole, a task that involves more than just the automobile industry and even transcends the framework of the manufacturing sector. This, I believe, makes it more crucial than ever before to diligently probe Toyota's compound organizational strengths. With this in mind, I would like to share some of my own observations of this company. A BIT OF CONTEXT Before discussing Toyota specifically, I think we need to consider the strength that the Japanese auto industry has built up in the decades since World War II. This is because Toyota's organizational prowess is largely the product of its forging in the crucible of this industry. In general terms, the two key elements to look for in a strong industry are good fit and fierce competition. "Good fit" refers to individual companies having a collection of products that match their particular organizational abilities. Complementing this is the rivalry

among companies that drives them to improve these abilities. When these two elements are present, both the companies and the industry to which they belong are in a good position to develop their strength. In postwar Japan motor vehicles-especially passenger cars-were the set of products that offered the greatest potential for Japanese companies to build their competitiveness at the shop-floor level, because these products matched their organizational abilities so well. And this remains true even now. A car is a structurally complex product put together from literally hundreds of functional parts. And on top of this structural complexity, there is the extreme complexity of consumers' desires. When people buy cars, they are generally looking not just for a machine that will carry them from one place to another; they also want the machine to carry a good brand name and to be attractively designed, and to some extent they are also looking for a toy. Furthermore, all the functions and parts are heavily interdependent, requiring meticulous adjustment to make them fit together as a unit. Most auto parts are thus tailored for a specific model. I refer to products of this sort as "integral-architecture products," where "architecture" refers to the conceptualization of a product's design. This is in contrast to "modular" products put together largely from interchangeable parts, such as personal computers and bicycles. Another point about mechanical products like cars is that, no matter how splendid the blueprints are, they cannot be manufactured successfully without a precise balance between the dies and machine tools on the factory floor and the expertise of the workers using them. In other words, input from skilled workers on the front lines of the production process is crucial. In this respect cars differ greatly from products like advanced semiconductors and software, which can be produced in good quality with relative ease as long as the design, equipment, and materials are good. In the postwar period in Japan, people, goods, and funds were all in short supply, and companies were forced to do their best to retain and make optimal use of the employees they recruited, the equipment they acquired, and the suppliers they found. It became economically rational for them to adopt a long-term employment system and to establish long-term business relationships. And these arrangements in turn led to the emergence of superior teamwork on the front lines of production, both within companies and between

companies. The organizational strength embodying this teamwork is sometimes called a product of Japan's culture, but it is more a product of particular historical circumstances. Companies were able to tap this strength most fully in turning out products like automobiles, which are based on integral architecture and require skilled input from production workers. Producing a single car involves a high level of teamwork among hundreds of engineers and thousands of employees, whose efforts must be combined into a single performance-rather like that of an orchestra. In this respect, these products offered an especially good fit with the organizational capabilities of the postwar Japanese corporation. By focusing in this way on the concept of product architecture emerging from the front lines of manufacturing, a concept that has received rather little attention in economics up to now, I believe that we can gain new insight into the structure of industrial competitiveness. TOYOTA WITHIN THE AUTO INDUSTRY Along with the idea of the fit between products and organizational abilities, the other key element I mentioned was fierce competition. Companies in the automobile industry have been earnestly engaged in intensive rivalry in areas not directly visible to consumers, such as productivity and manufacturing quality. I refer to this as "capabilitybuilding competition." In many Japanese industries during the post-World War II decades competition has been hobbled by regulatory constraints and by collusive practices. The lesson the auto industry provides us is the matter-of-course one that competition builds competitiveness. But I should note that the competition to which I am referring here is not the price competition traditionally featured in economic textbooks, which is visible on the surface, but the competition at building capabilities, which takes place at a deeper level. When it comes to the honing of shop-floor capabilities, all of Japan's auto companies are excellent, not just Toyota and Honda. Even firms like Nissan, Mazda, and Mitsubishi Motors, whose financial performance is or has been weak, rank among the world's best automakers in terms of production-site prowess. The poor performance that they have recorded is due to blunders by corporate headquarters in such areas as product strategy, sales

policy, and financial policies; it does not reflect the collapse of their abilities at the shop-floor level. So these companies should not be discussed in the same breath as problem firms in industries where competition has been hobbled. Toyota is special because its sustained strength stands out even within this industry made up of strong companies. It may be labeled a real master at capability-building competition. As such, it has put together world-leading systems covering every aspect of manufacturing, including company-wide quality control, purchasing management, and product-development management. In the field of integral product development and manufacturing, Toyota's systems have become the global standard, and they will probably hold on to this position for some time to come. Even American and European automakers, now that they have emerged from the spell of the information-technology bubble, are turning back toward the basics of manufacturing and starting to look once again to Toyota as a model. It is fair to say that Toyota achieved its present position by building up a set of integrative (teamwork-based) organizational capabilities for manufacturing that excelled even among postwar Japanese companies and by concentrating on integral-architecture products. The organizational capabilities of its corporate headquarters were admittedly not the world's best, but they were at least good by Japanese standards, and the company made relatively few major strategic mistakes. As a result, while its profits have certainly not been outstanding from an international perspective, it has achieved the globally remarkable distinction of going for a half century without a single year in the red. EVOLUTIONARY LEARNING CAPABILITIES Toyota's superior organizational capabilities for manufacturing include various aspects. Here I would like to look at them on three separate levels. First is the level of routine manufacturing capabilities. The company is able to consistently turn out more than 5 million cars a year at world-leading levels of productivity, speed, and manufacturing quality. This set of capabilities, epitomized by the Toyota Production System, is what I call "integrative organization capabilities for manufacturing." At the core of these capabilities lies the company's focus on increasing the share of "net operation time." This involves looking at

every activity on the factory floor and determining whether or not it is part of "net operations"-in other words, whether or not it adds value for the consumer. Thanks to this focus, Toyota has achieved a lead over its rivals in paring wasteful inventory and operations and ensuring that information that adds value for consumers flows smoothly through the organization. The second level is that of routine improvement capabilities. Toyota applies its company-wide problem-solving power to the unceasing improvement of its manufacturing capabilities, using tools including a torrent of suggestions numbering close to a million a year. The company has established arrangements designed to force shop-floor problems into the open and has thoroughly inculcated its standardized problem-solving methodology in all its employees. This has set in motion a company-wide problem-solving cycle that raises the competitiveness of frontline production activities. In this respect Toyota stands out globally. What appears to be even more important than the above two levels of capabilities, however, is the third level, Toyota's dynamic "capability-building capabilities." These represent the company's ultimate organizational power, and they are what have allowed it to take the lead over its rivals in developing the routine capabilities I have just mentioned. I call these "evolutionary learning capabilities." They have not been the object of much discussion by outside observers, but I believe that over the long run they represent the most important element of the company's organizational strength. If we look back over the history of manufacturing from early times in countries around the world, we find that the process of building organizational capabilities has not been one in which everything goes according to plan. Instead it has involved a messy process of trial and error and fortuitous discoveries alongside the deliberate advances. Evolutionary learning capabilities represent the ability of an organization to persist in tracking this messy creative process and to apply what it learns to the improvement of its own corporate systems in advance of its competitors. The essence of Toyota's nature-what people have recently been referring to as "Toyota's DNA" and what the company itself calls "the Toyota Way"- lies, I believe, in these evolutionary powers.

NOT juST BY DESIGN In order to determine whether Toyota has actually been tapping evolutionary learning capabilities, I believe that it is necessary to research the history of its shop-floor capability-building efforts over the course of the seven decades since it was founded. This is a tremendous task, involving much more than looking through the official corporate history. It also requires gathering narratives about people like Ohno Taiichi who served as leaders in the company's formative years and digging up various documents that are not included in the official chronicle. I am only part of the way through this process, but what I can say based on what I have learned so far is that the Toyota Production System and the various other key elements of Toyota's organizational capabilities for development and production are the outcome of an ongoing process of what we might call "messy evolution." If we check the origins of the specific individual practices that form Toyota's current organizational capabilities, such as the kanban (information card) system and the system of flexible operations by multiskilled workers, we find that they cannot be explained as the expected outcome of rational advance planning based on careful choices of winning approaches. Instead, they turn out to have involved the working of various elements, including good luck and chance encounters, in unforeseen ways. Even at Toyota, which looks like a company that proceeds on the basis of full knowledge, a perspective that spans decades reveals the operation of this process of messy evolution. Let me offer one concrete example. In manufacturing automobiles, which, as I have noted above, are complex, integral-architecture products, it is now commonly accepted that companies can gain a competitive advantage by having "heavyweight" product managers, people who conceptualize the product and exert forceful integrated control of the project as a whole. This is an approach that became a global standard during the 1990s. And it was originally established at Toyota some 50 years ago. However, the reason Toyota adopted this approach was to take advantage of the unexpected influx of expertise that happened after World War II when Japan's airplane industry was closed down as part of the drive to eliminate the country's military potential, at which point many of the engineers who had been designing aircraft took jobs with automakers. This development affected all the

companies in the auto industry, but among them it was only Toyota that displayed the ability to respond to it by setting up a solid system to perpetuate the advantage. Here is another example. The Japanese auto industry commonly uses something called the "approved-drawing system," which involves collaboration between automakers and their suppliers in the development of parts. This is said to be one of the sources of the industry's competitive strength, and in recent years Western automakers have been adopting similar joint-development systems. But if we trace the origins of this system, we hear accounts suggesting that it was originally adopted for reasons unrelated to competitiveness. For example, at one point many years back, when Toyota seemed to be on the verge of bankruptcy, the company was forced to spin off its electrical equipment division, including its staff of engineers. In one view, this was what induced the company to rely on design cooperation from its suppliers. Another explanation is that during the 1960s, when car sales to the general public took off in Japan, auto companies simply did not have enough in-house engineers to meet the demand for new car development, so they had no choice but to turn to the engineers of their parts suppliers for help. So it seems that this system, which has been a wellspring of competitive strength, emerged as a blessing in disguise. But here again, among all the companies in the auto industry, it was Toyota that turned it into a rational arrangement aimed at improving competitive strength. The process of emergent evolution continues to this day at Toyota. For example, the process design at the company's assembly plants is now quite different from what it was during the 1980s. And over the past 10 years the Toyota production lines have seen a further round of changes in such areas as improvement of operating conditions, streamlining of equipment, greater flexibility in processes, improvement in workers' sense of job satisfaction, environmental measures, and shortening of production times. And if we examine the details, we find that these evolutionary changes have also involved a considerable degree of "messiness." The efficiency of Toyota's contemporary production lines reflects an ongoing process of evolutionary change. CHANGING, SELECTING, AND PRESERVING What are the features of the organization underlying Toyota's evolutionary learning capabilities? I cannot claim to have identified

these in full, but allow me to cite a number of characteristics that I believe to be important. In general, the power to evolve, whether in a living organism or in a corporate organization, involves three aspects: change, selection, and preservation. First of all, let us consider Toyota's power to change. This is grounded in the fact that it is an "organization that learns"-that is to say, one in which everybody is involved in improvement activities. This is not just a matter of incremental, day-to-day improvements, either. Sometimes the company runs into a major unanticipated problem, and when it does, ideas for solving it pour out from all levels of the organization. The culture of lively discussion within Toyota tends to be overlooked, but this is actually what sustains the organization's power to change. Manufacturing systems undergo emergent changes in unexpected forms, and keeping up with such changes requires a tenacious ability to learn even from totally unanticipated developments. Next is the power to select. Here Toyota's firm focus on its customers and on competitiveness come into play. Whenever some change occurs in the company's systems, people in the organization are quick to ask, "What will this mean for our customers? Will it enhance our competitiveness? Will it help to improve quality, lower costs, or shorten delivery times?" These questions serve as a common yardstick for deciding whether a particular change should be retained as a part of the company's regular setup. The same criteria apply to judging the value of a change, whether it is one that is being deliberately planned in advance or one that has happened and is being dealt with after the fact. In the case of major choices, the company's senior executives have the job of tying up the discussions and making the final determination, but in practice it seems that ideas are unlikely to get adopted if they do not have the backing of the leaders at the shop-floor level. Every sort of new system that the company acquires is subject to the same process of selection based on the criteria of customer value and competitiveness, which are applied at every level of the organization. Finally comes the power to preserve. In Toyota's case this is seen in the culture of moving quickly to spread new systems and practices throughout the company and of entrenching them in the form of work rules and operating standards. At Toyota the former is called yokoten, or "horizontal deployment," and the latter "follow-up"; both terms are often heard within the organization. Employees

internalize the company's new organizational capabilities by reading and rereading the company's rules and standards. Though an emphasis on the written word might be termed "bureaucratic," this is an essential element inasmuch as the process of organizational evolution requires that changes stick and that there is no reversion. This seeming paradox that organizational evolution requires bureaucracy is actually a key to a deep understanding of Toyota. I believe that both the best and the worst of today's large organizations are bureaucracies; Toyota clearly falls into the former category, being a "bureaucracy that learns." ISSUES FOR THE COMPANY For some time to come, the automobile will probably continue to maintain its present architecture as a complex, integral product. To be sure, dramatic advances are underway in areas like information technology and fuel cell technology, but I do not believe that they will substantially change the nature of cars and transform the structure of industrial competitiveness at least within the first quarter of the twenty-first century. In other words, I doubt that there will be a revolutionary shift that will render the auto industry's current store of organizational capabilities obsolete anytime in the near future; the era of cumulative evolution will probably continue. If that is the case, then Toyota's powerful combination of strengthsits manufacturing capabilities, its capabilities for improvement, and its evolutionary learning capabilities-should continue to function, and its shop-floor-level competitive might should remain solid. Given the harshness of the competitive environment, however, not even Toyota can rest on its laurels. The company faces many issues requiring its attention. One is the fact that its earning power, as revealed by figures like its profits-to-sales ratio, is still far from the top internationally, in contrast to its acknowledged global leadership in the field of shop-floor capabilities (its behind-the-scenes competitiveness). This is due in part to the rise of the yen and to the sluggishness of the domestic economy, but clearly there are also problems to be dealt with in such areas as corporate headquarters' power of strategic conceptualization, brand development, and domestic sales. Another area in which Toyota must keep up its efforts is in maintaining its overall cost competitiveness with its international rivals, a task that is made more difficult by the strength of the yen

against the dollar, high domestic wages, and other high costs that limit the economies of scale from mass production. The company must naturally continue to work on design rationalization and further improvements in shop-floor productivity, but it will also need to give detailed advance consideration starting at the development stage to its cost planning, including such elements as wages, the cost of parts, and overhead. Needless to say, it must do this while maintaining the strengths it has developed in its system of developing multiskilled workers and its Japanese-style relationship with parts suppliers. Third, assuming that the domestic production level, which is currently somewhat above 3 million vehicles a year, will continue to vary, the company needs to develop domestic production plants that are capable of taking such variations in stride. Overseas, meanwhile, it will probably be extremely important to build a production system that is profitable even at low volumes, given the likelihood that, as a part of the company's global expansion drive, it will be necessary to keep setting up new local plants with annual production levels running only in the tens of thousands. The key will be to save on overhead expenses through further cost cutting and standardization of production equipment. Fourth is the need for Toyota to internationalize its evolutionary learning power. At present this power is concentrated in Japan, and the company needs to keep sending people from Japan to lead the evolutionary process at its plants overseas; otherwise the process tends to grind to a halt. But if the goal is to achieve a 15% global share through ongoing growth in international operations, at some point the company's overseas production level will top the domestic level. So unless the plants outside of Japan achieve their own evolutionary learning capabilities, eventually the company will run out of support staff to send overseas. Transferring these capabilities, however, will be no easy matter. A fifth issue is the improvement of the domestic sales system. In particular, for many years there has been talk of the need to break away from the opaque system of discounts offered by dealers, but this has yet to be accomplished. I believe that the key to this will be to switch to a system of built-to-order production for the majority of the company's domestically manufactured vehicles. To succeed, it will have to be a system that avoids making customers impatient. This can only be done as a cooperative effort between a strong manufacturer and a strong set of dealers. No automaker is yet

capable of pulling this off at this point, but Toyota is probably closer than any of its rivals. Sixth is to come up with more exciting products. Toyota is unmatched when it comes to satisfying customers with the quality of its cars, but it is not as successful at producing cars that turn customers on. In Europe, where drivers demand excitement from their cars, Toyota and other Japanese automakers are not doing well. Generally speaking, producing cars that are free of annoying defects is a matter of good organizational capabilities, but producing cars that generate enthusiasm tends to depend on individual genius. The company may need to take bold, unprecedented steps, including the fast-track promotion of especially talented designers, to shake up its design teams for some of its models. This may seem like a lot of tasks requiring attention, but given Toyota's mastery of the art of finding problems, it is quite aware of all of these issues, and in fact it has apparently already started to tackle them. BEYOND STRENGTH The way forward for Toyota is to go beyond being a strong company-and also to transcend the notion of placing shareholders first-by turning itself into a respected company. This means winning the well-balanced approval of all its stakeholders, including customers, shareholders, employees, parts suppliers, local communities, and the general public. Toyota itself has a vision of its future as a strong company that is also "kind to the weak" and easy to understand from outside. This will not be easy to accomplish, but over the past decade or so the company seems to have been shifting its course gradually in this direction. Meanwhile Toyota has recently come to face a sharp increase in the demand for instruction in the Toyota Way from organizations outside the auto industry. In order to respond to such needs, it requires a much greater number of professional instructors than it now has. The Toyota Group must step up its efforts to train such instructors, but even so it is unlikely to be able to satisfy the tremendous latent demand. In addition to increasing the ranks of its instructors, therefore, I believe that Toyota should also work to turn its particular expertise in automaking into a more general system of knowledge

transcending industrial lines, building up its intellectual infrastructure in such a way as to allow people from outside the auto industry to learn a great deal from Toyota's organizational capabilities even without professional instructors. Collaboration with academia may be useful in this connection. I have begun my own tentative efforts in this area, including the establishment of a research unit. Translated from "'Tsuyosa' no himitsu wa 'dorokusai shinka purosesu' ni aru," in Chuo Koron, December 2003, pp. 56-64. (Courtesy of Chuo Koron Shinsha)

Copyright Japan Echo Inc. Jun 2004 | FUJIMOTO Takahiro | Received his PhD from Harvard Business School (1989). Is now a professor at the University of Tokyo and a faculty fellow of the Research Institute of Economy, Trade, and Industry. His works include The Evolution of a Manufacturing System at Toyota (coauthor) and Product Development Performance: Strategy, Organization and Management in the World Auto Industry.