The issue: ‘Settling the score with defective business models’
Text: Gert van der Ende / Photography: Ronald van den Heerik
The year is barely two months old, yet it is already impossible to count the stream of recalls by car manufacturers on two hands. The perils of the gas pedal in the Toyota Prius especially are receiving extensive coverage in the media. Is that simply attributable to the failure of the company? That is the question we asked Dr. Mignon van Halderen, university lecturer Corporate Communication and Reputation Management at EUR.
Approximately 8.5 million Toyotas were recalled this year; Tuesday March 2 another 934,000 in the US. How can something like this happen? “In my view there are three ways to look at the Toyota story. First of all from a supply chain management perspective. The car manufacturing business model is very complex; there is the operation that assembles the cars, the so-called OEMs – the original equipment manufacturers – who in turn are supplied with parts from first, second and third tier suppliers. Toyota was always strong in applying this model; it had durable relationships with many parties based on trust; mutual contacts were intensively maintained. Due to Toyota’s strong growth, and also under the influence of economic pressure, those relationships probably loosened up, causing communication to flow less smoothly, the information flow to be far less consistent and on time, and transparency to be reduced. The deteriorated communication flow of course leads to the possibility that errors may creep into the production process, an area on which top management has less of a grip. It would appear that this was an important cause of the events that took place. Indeed, the same thing happened to BP when in 2004 a refinery exploded in Texas and a leak was discovered in a pipeline. There too it was evident that, although its leaders had a grand vision, the size and complexity of the business caused kinks to appear in the information conduit; there are therefore dangers inherent in this.
Second, there is the leadership and cultural aspect. Toyota is a company that grew rapidly and their model is admired everywhere within the company’s own sector. Psychological theories suggest that such successful situations can make leaders blind to signals coming from their environment. They become self-congratulatory (see how well we are doing things), internally focused and narcissistic. I can imagine that internal noises were ignored and downplayed within Toyota as well. One of the examples is that during the summer they apparently recalled one of the car models in Europe, while they only did this in the US when things went completely awry. The question of course is why; Toyota is now being criticised on this point. I read an article with Toyota’s response: ‘We didn’t hide the info, but it was not properly shared.’ That already says a great deal as far as I am concerned. On the one hand, the company underestimated what was wrong and on the other hand there were hitches in the communication paths in their supply chain model.
And finally there is the reputation management aspect. That reputation is dependent on different reputation platforms, such as product and services, new corporate governance, social responsibility, etc. Product and services is a very important one, however; if something goes wrong there, it touches the essence of a company’s reasons for existence.”
Alright, but there were no less than eighteen recalls this year in the auto industry by thirteen manufacturers. Citroën even had four recalls. "Indeed, you can ask yourself, why is there so much fuss about Toyota and, for example, none about Daihatsu and Suzuki, that were also forced to recall their cars. This is because Toyota is a major player, particularly in America, where its ambition has always been to become at least as big as and better than General Motors. They did this extremely well. They have a very large market share and tremendous visibility. This is why they are now being singled out – this is also evident at Shell and BP – because they are the easiest target.”
Is the fuss about Toyota not also politically motivated? Things are going badly for the American auto industry and Toyota is a major competitor from Japan... “Social-political issues are always linked to the operation of global companies such as Toyota. The auto sector is important to the American economy, so of course it is politically motivated. There are all kinds of speculations in this context, however it is a gray area in which it is always difficult to ascertain what type of lobby and influences are at play.”
In other words, the tremendous scale of media attention is primarily due to the fact that Toyota is a major player? “Not just that alone. Because whenever something like what happened at Toyota occurs, it is judged by people on the basis of three factors: first the seriousness of the problem. Now in this case the problem is pretty serious; according to The Wall Street Journal dated February 27, 34 people lost their lives in the US in accidents that could have been related to defects in the car.
Second, it is important to know whether the cause was internal or external, and whether there is then something structurally wrong with the company. For example, the pharmaceutical company Johnson & Johnson in 1981 had a major problem with Tylenol headache tablets. The issue centred on an employee who deliberately tampered with production. You could say that the cause was internal, but that nothing was really structurally amiss with their operations, but rather in particular with a single specific employee. The company got off easy – for that matter in part due to the proactive strategy pursued by the company following the discovery of the problem.
Third, it is important to know whether the cause was intentional or not. In case of Toyota it is safe to assume that it was not, although you could ask yourself whether they should not have deliberately intervened earlier.”
But is there therefore something structurally amiss? “We are currently in the midst of times in which it would appear that the score for defective business models is simply being settled. This was evident in the financial crisis, fifteen years ago with Shell and in the Netherlands with ABN AMRO. How does this happen? Business models must first crash before there can be any settling of scores – apparently that's the way it works. Perhaps this is unpleasant for such a company, but you could say that from an ethical and moral perspective it is a good thing that these things happen. The only thing is that it is often only in this type of situations that we sense the urgency that something must happen and that we must all join hands on a social, political or financial level to create a healthier system. The importance for organisations and especially top management to spend more time on self-reflection is a topic of increasing attention in the management literature today. It seems so simple, but it is not really as easy as all that, particularly not for top managers with big egos. We are currently in the midst of a so-called ‘sorry culture’; everyone thinks it is of the utmost importance that bankers and CEOs say that they are sorry. I find this sorry culture terrible; fine that the CEO says he is sorry, but this must be sincere, however. I would much rather see it transition as quickly as possible to a serious culture of proactive self-reflection in which top managers are more open to external signals and use them as a basis for taking proactive action as a way of heading off major crises, such as the one at Toyota. That is a question of personality, one manager may be better able to do this than another, but a management style can also be acquired at universities and business schools. Furthermore, managers must also be given the opportunity for reflection, at a legal, financial and communicative level. This is often difficult. It is a field of tension that managers have to contend with.”
What is happening in terms of the long term damage of the recalls? Last year Philips recalled seven million Senseo appliances, at one time there were defective Nokia batteries, and there was a tea (“Sterrenmix”) that caused people to become ill. I am not under the impression that this is harming sales. “The intensity of the long term effect is primarily related to the intensity of a crisis. For example, the company Merck five years ago was forced to recall the drug Vioxx, which caused its share to drop from $45 to $33 – a substantial impact, although I don't know how long this persisted. The company Tops at one time was forced to recall so many frozen hamburgers that it went bankrupt. But I am not aware of any theory that can predict the level of probability that a company will go bankrupt due to a recall. There almost always is reputation damage, but as you can see, for example, with Ahold which went through a major crisis, a few years later it has almost fully recovered.”
What should Toyota do now? “First it should completely accept all responsibility and cooperate everywhere. Then it must work full out to restore its quality and safety system. To a level of which – and this is key – especially credible parties, such as quality inspectors, in a few years will say that Toyota's quality system has become superior to what it was prior to the recalls. It is important to ensure that you work with external auditing parties in this regard: they can give you the necessary credibility back.”
But will sales first decline? “Yes. According to the de Volkskrant daily newspaper, Toyota sold 16% fewer cars than the year before due to the publicity surrounding the recalls. If I were in the market for a car, my intuition would also incite me to say: ‘no Prius for me just yet’. The question is how long things will stay like that and this is a question of what Toyota is going to do in terms of crisis management, how it will go about regaining confidence, whether it will externally communicate a rational and credible story for the future.”
On March 2, General Motors also had to recall 1.3 million Pontiacs and Chevrolets in the US. One day later it was Kia’s turn with its Venga model. Are people not simply shrugging it all off? “Everything has of course become more transparent and the media is immediately on top of everything. But people also take that with a grain of salt. However, this does not obviate the fact that in case of a serious incident, consumers protect themselves and adjust their buying behaviour.”
Friday, March 12th 2010 (week 10).
The issue is a section in Erasmus Magazine, the opinion and information magazine of Erasmus University Rotterdam, in which an EUR-academic responds to a current-social issue.