The Toyota Success Formula

Travel nearly anywhere around the globe and certain brands are virtually inescapable. Coca-Cola. McDonald’s. Starbucks. And then there’s the Toyota Corolla. Since the day in 1966 when the first Corolla inauspiciously rolled off the assembly line, car buyers worldwide have clamored for the Corolla, just this past year making it the best-selling passenger car in history, with 25 million units sold in 142 countries. Positioned end-to-end this cavalcade of Corollas would create a traffic jam 23 cars wide stretching from New York to LA.

The Corolla is just one part of the remarkable Toyota success story, however. Emerging from the ashes of devastated postwar Japan in 1945 only to face the brink of bankruptcy after a crippling strike just five years later, Toyota somehow not only survived, but by 1957 had begun its assault on the vast-but-daunting U.S. market. Today Toyota is both Japan’s largest automaker and number three in worldwide sales (behind GM and Ford). During the past seven years, Toyota’s sales and profits have continued to climb while the fortunes of the Big Three declined. As Toyota cars claim a higher value after years of use, Toyota Motor Corporation’s $95 billion market cap is 26 percent higher than the combined market value of GM, Ford and DaimlerChrysler. Toyota’s extraordinary financial performance makes experts smile while competitors shake their heads in disbelief. At the core of Toyota’s consistent success is an unwavering commitment to creating value for the customer, a high respect for people, a fierce determination to improve every business process, and a healthy philosophy of growing in good times and bad.

ONE-WAY TICKET

Since the company’s founding in 1933, countless other automobile manufacturers have either gone on to the great scrap metal heap in the sky or, failing that, ridden the kinds of highs and lows that would induce nausea in a stunt pilot. Yet for more than 50 years, Toyota has been nearly bulletproof – steadily growing, expanding its product line, developing new markets and continuing the upward climb. Ask anyone affiliated with Toyota what the company’s key to success is, and you’ll likely receive a simple three-word response: “The Toyota Way.”

What’s the Toyota Way? Some might say it’s equal parts manufacturing genius, a management philosophy focused on developing people and fostering relationships, a hyper-awareness of changing market forces, and a near-obsessive corporate focus on constant improvement. But current Senior Vice President and General Manager Toyota Motor Sales [TMS] USA Don Esmond prefers to use an anecdote about his experience as a newcomer to the company, fresh off a 12-year stint with Ford, to describe how he first came to understand that the Toyota Way was different from anything he’d ever experienced.

“This was in 1982,” he recalls, “and we were marketing the Starlet, an overpriced model with old technology, terrible fuel economy – it was going nowhere. The following year we were going to get the Tercel, which was a great product. TMC [Toyota Motor Company] wanted us to take 10,000 Starlets, but no one at TMS wanted any of them. I sat in meeting after meeting, and as the new guy I didn’t say a whole lot. Finally, I asked one of Japan’s staff why they were so insistent on us taking these 10,000 Starlets. He said, ‘Well, if you can take the 10,000 Starlets, we won’t have to lay off anyone at the plant. Next year we’re going to be producing the minivan in this plant, so if you take the 10,000 no one gets laid off.’ I about fell on the floor, because in other corporate cultures that would have been a no-brainer – lay ’em off. So in the next meeting I raised my hand and said, “OK, tell you what. I’ll take all 10,000 of the Starlets and sell them fleet. I don’t know how, but I’m going to do that.’ And my staff did extraordinary things to get those 10,000 units sold. But we did it, and we did it for that reason.”

ALL TOGETHER NOW

The mutually supportive relationship between the corporation and its employees that Esmond describes may seem out of place in an era where such stories as Enron’s and WorldCom’s dominate the headlines, but for Toyota there has never been any other way. Denny Clements, vice president and general manager of the company’s Lexus division, explains that fundamental to the Toyota philosophy is the notion that for Toyota to succeed, all Toyota’s partners must succeed as well.

“Take, for example, a situation we might face on the manufacturing side,” he says. “It’s no secret that many suppliers lately have been told to cut prices. So a company in Detroit might say to the supplier, ‘We need a 15 percent price cut.’ What Toyota would say is, ‘We need a 15 percent price cut, but we will help you find a way to get that 15 percent, and we’ll share in it.’ We’ll find a way to get that increased cost efficiency, but not at the expense of one of our partners.”

Clements adds that even in the automotive industry, where relationships between manufacturers and dealers can be downright antagonistic, Toyota manages to maintain unusually harmonious partnerships with the folks who sell the company’s cars.

“Our first consideration on the sales and marketing side is always the success of our dealers and the welfare of our customers,” he says. “We have great products, but we don’t have a monopoly on great products. We have great dealers, but we don’t have a monopoly on great dealers, either. So that’s not why we’re successful. The difference is that we have advocacy with our dealers. Our dealers will do things for us they won’t do for other manufacturers because they know there’s a trust level and that, at our core, we’re with them. There’s never an adversarial relationship, because they know that the power and might of Toyota Motor Corporation is dedicated to their success every day. That is probably 180 degrees from where most manufacturers are and, frankly, it represents a huge competitive advantage for us.”

GROW YOUR OWN WAY

Deliberately differentiating itself from other manufacturers has long been a hallmark of the Toyota Way. Ramping up production after World War II, company executives surveyed the international car-buying marketplace and quickly surmised that Toyota would soon be overwhelmed if it chose to directly take on the European and American automakers with their economic and technical superiority. So instead of matching the other manufacturers’ focus on medium- and larger-size vehicles, Toyota went with a smaller lineup.

The strategy worked, and as the Japanese economy recovered, Toyota increased production and began to diversify the range of products offered to domestic consumers. To promote car ownership Toyota even created a driving school that helped citizens acquire drivers licenses. The next task was to convince a nation of Americans in love with their own cars to drive Japanese cars instead.

THE AMERICAN PROVING GROUND

Today, with the benefit of hindsight, Toyota’s success selling to the American market may seem preordained and inevitable. And certainly the Japanese manufacturer’s ability to respond to the growing interest on this side of the Pacific in fuel-efficient cars, combined with U.S. carmakers’ legendary hubris and complacency during the ‘60s and ‘70s, sent droves of American consumers into Toyota dealerships. Yet as Esmond explains, contrary to the popular image of Japanese car manufacturers methodically plotting the execution of a plan to run Detroit off the road, in fact the U.S. market first had to prove itself to Toyota’s executives before they would commit to developing products just for stateside drivers.

“The T-100 was our first effort with a full-size pickup,” Esmond says, “and that was an example where we weren’t fully prepared. It was produced in Japan, and they didn’t want to give us an eight-cylinder engine, because where else could they sell an eight-cylinder engine? So it didn’t work here. It wasn’t what customers wanted. The same thing happened with the first minivan, which Toyota produced even before Chrysler had one. It was mid-engine, rear drive, with a short turning radius – basically designed for the domestic Japanese market. I remember time after time sitting down with chief engineers and asking for a V-6, front-wheel drive vehicle where you didn’t have to lift the front seat to check the oil. Eventually we got the Previa, which was a great vehicle, but still mid-engine; they’d turboed the four-cylinder but still didn’t give us a six. But now we have a next-generation Sienna that’s built here and targeted for this market.

“I can probably attribute most of that success to Toyota’s deciding to finally produce products in this market. We had to prove to the Toyota Motor Corporation that we had the capability and the dealer strength to sell product here. And that gave the engineers the confidence to start designing products targeted to what the U.S. customer wanted. That’s why today we have the Camry, Corolla, Tundra, Sequoia and Avalon – all products designed for the U.S. that are doing very well.”

BEGINNER’S LUXURY

Introduced to the American market in 1989, the Lexus marked a Japanese manufacturer’s first foray into the import luxury-automobile battleground then dominated by such Teutonic titans as Mercedes and BMW. Predictably, critics reacted to the news with a mixture of ridicule and disbelief. Sure, the Japanese could build perfectly serviceable economy cars, the thinking went, but luxury?

Not only did Toyota build a luxury car to compete with the best Germany had to offer, but the Lexus in fact redefined the concept by setting a new standard for both European and American automakers to match – or be left in the dust. But as Clements emphasizes, what truly made Lexus different wasn’t the comfier seats, better handling or features no one had ever thought to put in a car before. The difference, he explains, was in the service.

“The LS400 was a phenomenal success for the first four or five months,” Clements says. “One of the articles said that the Lexus had gone ‘from a question mark to a benchmark.’ That helped dispel the notion that the Japanese couldn’t build a genuine luxury car and luxury channel. But then we ran into a quality problem – our first recall. At that time the people here elected to do something that no one else had ever done before. They had a massive recall, went out and picked up every customer’s car, made the repair, washed every car and then gave every owner a gift. Nobody had ever done that before – taken a recall and turned it into an opportunity to build customer loyalty. And what it did was give our dealers a level of authenticity – it showed that we were for real, that we meant it when we said we are all about a superb customer experience. So out of that initial adversity, we were very fortunate.”

DISCRETION: THE BETTER PART OF VALUE

The goal at Lexus, says Clements, is not simply to offer good customer service, a concept so bland that it has almost lost all meaning, but to “surprise and delight” customers in a way that no one else does. That requires an unexpected level of commitment, something the company calls “discretionary effort.”

“Discretionary effort is when a company representative does something for a customer when no one is looking that he or she doesn’t have to do,” he explains. “You can’t pay people to do that. They have to really want to give it. And you can only get that kind of effort from loyal associates. You get loyal associates by having people who believe that this is a company that really cares about them as individuals and is going to give them the tools and training they need to be successful. And it’s not about money, although we have a lot of people here who are very successful. But money doesn’t get you a story like the one about the sales rep who was willing to drive 140 miles round trip to a customer’s house on a Friday night to demonstrate a car that the rep would have had no trouble selling to someone else the next day. That only happens when you have the loyalty of the people, when they believe that Lexus is a great place to work, a place where they can achieve their goals.”

In a business environment where for many companies customer advocacy is more about public relations than genuinely expending the effort to put customers first, Toyota represents a refreshing departure. And rather than buying into the mentality that every corporate decision should be made with one eye nervously affixed on the stock price, Esmond says, Toyota focuses its attention on smart growth that’s grounded in giving customers what they want and staying true to core company values.

“Growth depends on how well you listen to your customers,” he says. “So the better the relationships you have with your dealers and your customers, the more likely you are to grow. You don’t get too greedy. You set your own internal targets and objectives and then play true to them. And in today’s day and time, you don’t read the newspaper, except maybe the sports pages.

“From our perspective, it’s a real simple business. Our job as a manufacturer is to produce good quality products the customers want. Our dealers’ job is to sell and service the needs of customers. And, as long as we clearly separate that, it’s a partnership that’s going to work. When you start getting into trouble is when you start forgetting what your job is. Even though it’s not written anywhere into the Toyota Way, one thing I’ve found very clearly here is that the customer comes first, the dealer comes second, and then we come third. So as long as you always make your decisions with that order in mind, you should be all right.”

ENVIRONMENTALLY ALERT

Esmond admits that simply listening to what customers have to say can only get a company so far, however. Sometimes more of a push-pull relationship is required to simultaneously move products and consumers forward. This is precisely the scenario Toyota has faced with its revolutionary hybrid vehicle, the Prius, he says, which was the first mass-produced automobile to combine a gas engine with an electric motor to deliver unprecedented gas mileage.

“The Prius is an example of a product the consumer doesn’t know he wants yet,” he explains. “As we look at it, we believe we have both a social responsibility and a business responsibility. Right now there are close to 700 million cars operating in the world and 150,000 new ones are added a day. Toyota feels we have a responsibility to conserve fuel and do something about the environment. At the same time, we have to balance that attitude with what consumers are willing to accept, when they’re willing to accept it, and what makes good business sense. Fuel cells are probably in our future, but short term it’s not going to get us there. The hybrid technology is an example of being socially conscious but at the same time practical from a consumer’s point of view.”

In fact, the Prius represents just one aspect of Toyota’s move toward so-called “green manufacturing.” Today the company currently recycles 99 percent of the scrap steel at company plants and has moved to water-based paints on many vehicles. According to company chairman Hiroshi Okuda, Toyota plans someday to produce a fuel cell-driven vehicle that converts hydrogen to fuel, thereby producing zero exhaust emissions.

“Many technological problems remain,” he said in a recent message from the chairman, “but in the midst of fierce competition we are steadily nearing our goal. Just imagine – if we succeed we will make an enormous contribution to the preservation of the global environment without sacrificing the valuable method of transportation that is the automobile.

“As a leading manufacturer, Toyota must outline a unique vision for the role of automobiles and the future of the industry and take concrete steps to realize that ideal. I am convinced that unless the automobile industry develops in harmony and prosperity with society and individual lifestyles it will be impossible to preserve our stable long-term growth.”

The chairman’s sentiments on a long-term, intelligent approach to growth reverberate throughout Toyota. That also helps keep everyone at the company focused on constant improvement, Clements says, and minimizes the chances for complacency.

“If your focus is always that the customer needs to win, then there is a certain limit to how much you should grow,” he explains. “Yes, you can take a short-term view and say, ‘We’re going to build as many cars as possible and just sell them.’ Or you can stay true to your core values and say, ‘We’re going to grow, but we’re going to do it at a level that sustains or even improves customer relationships.’

“Because of this mind-set that all our business partners must be successful, we can’t become arrogant. It isn’t a matter of ‘We build great cars, we’re selling everything we’re making, and our market share is going up.’ The reality is, I have 200 Lexus dealers to worry about, to make sure they’re successful. This attitude keeps you from changing, growing and improving. A colleague once said to me, ‘You guys are a lap ahead, but you always act like you’re a lap behind.’ Success can be deadly because you forget what got you there, or you begin to feel like you’re entitled to it. That doesn’t happen here.”