5_The Toyota Phenomenon

- 1 - Ernst C. GlauserTHE SWISS DEMING INSTITUTE

The Toyota Phenomenon

SummaryAfter the Second World War, the distribu-tion of World economic power was totallyrearranged. Before the war, Europe and theUSA ruled the world market. The manage-ment of Western companies was based onthe "Scientific Management" by FrederickWinslow Taylor (1856-1915) and on "Mo-dern Sociology" by Max Weber (1864-1920). This intellectual basis characterizesthe begin of industrialization, led to massproduction and to tremendous productivi-ty increases.

Yet after the war, new players appeared onthe playground, whose work was based ona philosophy, on methods and rulesunknown before. Whilst Western mana-gers turned to short-term thinking to satis-fy shareholders and to endless restructu-ring, the new actors concentrated on con-tinual improvement in the quality of pro-ducts, uniformity of processes and qualifi-cation of employees.

Toyota is one of these new players, whichdespite the fierce competition due to ex-cess production capacity in the automobi-le industry of around 25 % outperformsWestern competition in every aspect, intechnological innovation, in customer sa-tisfaction, in continuous growth and in pro-fit. In 2004 Toyota passed Ford to becomethe second largest automobile producer.Before long, Toyota will overtake GeneralMotors becoming the biggest car compa-ny in the world probably having no lessthan 15% of the world market. Toyota willprevail. Most others will have the choicebetween shrinking or sinking.

This paper tries to shed light on the rootcauses of the Toyota Phenomenon, whichfor some reason or another Western com-panies find so hard to understand and muchless on how to apply, despite their strugg-le for survival.

IntroductionSome of the headlines in recent editions ofthe influential news and business publica-tion “The Economist” indicate that the Eu-ropean and American automobile industryfinds itself in deep trouble. Here are just afew samples:

• General Motors pays FIAT to walkaway

• Raw nerves in Motown: Makingmoney remains tough for America's bigthree carmakers

• Divorce Italian-style: Is Fiat's marriageto General Motors coming to a bloodyend?

• Stuck in the rough: America's car gi-ants, General Motors and Ford, findEurope hard going

• Detroit's big three in the slow lane

• The three Fs: Ford, Fiat and Failure

• The also-rans: Mitsubishi and Mazdastruggle, despite Western partners

• The End of Detroit: Shape up or shipout

• One hell of a birthday, Bill: Ford cele-brates its 100th anniversary, fightingfor survival

• Extinction of the car giants: WhyAmerica's car industry is an endange-red species

In 2004, Volkswagen with its brands VW,Skoda and Bentley lost • 44 millions. Du-ring the same period, the Volkswagen groupincluding also Audi, Seat and Lamborghinilost in North America alone • 907 millions.Bernd Pischetsrieder, CEO of Volkswagen,attributes theses problems to the econo-mic slump in Europe resulting in a low de-mand for cars, the fierce price fights withhuge discounts and incentives in the USand so on. Are these indeed the true rea-sons or is it deliberate self deception or ajustification for blunt mismanagement?

Despite the fierce competition among theautomobile producers due to excess pro-duction capacities of around 25 %, Toyotaoutperforms its competition in every aspect,

in technological innovation, in customersatisfaction, in continuous growth and inprofit. In 2004 Toyota passed Ford to be-come the second largest automobile pro-ducer. Before long, Toyota will overtakeGeneral Motors becoming the biggest carcompany in the world probably having noless than 15% of the world market. Toyotawill prevail. Most others will have the choicebetween shrinking or sinking.

Toyota will continue to focus on patientexecution of sensible, but ambitious plansto expand their sales. They will continue todevelop a steady stream of new models andmake them with remarkable efficiency: the-re are no takeovers, no dramas or miraclecures, just relentless, grinding professio-nalism with, increasingly, an enticing dashof design flair to boot. And when they hitone target, they immediately set another.

However, there is one extra ingredient thatis somewhat mystical, if not exactly magi-cal. There is such a strong corporate cul-ture that every employee knows the “Toyo-ta way” of doing things. Put it down onpaper and it sounds as flaky as a typicalmission statement. But Toyota preaches tothe converted and it works.

Since the fifties, an uncountable numberof Western automobile production specia-lists visited Toyota to find out the secretbehind the success. Since they did not havea method, they did not know what questi-ons to ask. They copied what they belie-ved essential but were unable to advanceto the core of Toyota’s truly extraordinarycompany culture even after Toyota startedto produce automobiles in the Americanbackyard in December 1984 in a joint ven-ture with General Motors (New UnitedMotor Manufacturing NUMMI). Eventhough Western Automobile producersturned out better products, they are stillfar behind Toyota and the gap widens.

The intellectual foundation for Toyota’ssuccess was laid from 1950 onward by W.Edwards Deming. In June 1950, Demingpresented to the very top managers of theJapanese industry his view on what musthappen to make Japan successful in theworld market. Kiichiro Toyoda, the found-er of Toyota Motor Company, was among

The Toyota PhenomenonHow come the world's second largest automobile manufacturer grows continuously and

makes large profits whilst its biggest competitors fight for survival?

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THE SWISS DEMING INSTITUTEErnst C. Glauser

the audience. The managers listened, un-derstood and went straight to work. Theydid not have a choice.

In no more than five years, Japan floodedthe world with products of unparalleledquality. Western economies did not andstill do not posses the means to withstand.

Observing the complacency of the West,Deming formulated his First Theorem: “No-body gives a hoot about profit.” With pro-fit, he meant long-term profit. The Westtalks about it, but does not do anythingabout it. Deming's Second Theorem was:„We are being ruined by best efforts, doingthe wrong thing.“

The following paper uses the automobileindustry as an example to show that thereis no substitute for leadership and qualityto survive. Fortunately, survival is not com-pulsory.

Automobile Industry andits Problems

The industry as anIndicator for Welfare andSuccessThe industry produces nearly 60 millioncars and trucks a year and employs milli-ons of people around the world. Its pro-ducts are responsible for almost half theworld's oil consumption, and their manu-facture uses up nearly half the world's an-nual output of rubber, 25% of its glass and15% of its steel. No wonder the car indu-stry accounts for about 10% of GDP inrich countries.

But the industry that has pioneered theforms and weathered the storms of 20th-century capitalism is now over 100 yearsold and struggling. Average profit marginshave declined from 20% or more in its youthin the 1920s to around 10% in the 1960sand less than 5% now, and some volumecarmakers have actually been losingmoney.

A century ago the car industry more or lessinvented modern industrial capitalism. Thecar started life in Germany, and early de-velopment of the industry began in France(hence automobile, originally a Frenchword) in the 1900s, but it was in Americathat it came of age.

Henry Ford's adaptation for car making ofthe moving assembly line he had seen inChicago slaughterhouses marked the birthof mass production. But Mr. Ford applied

those techniques to a vehicle that resem-bled a horse-drawn carriage, with a bodylaid on to a separate chassis.

Modern cars have a monocoque steel bodyin which the strength is built into the pres-sed steel floor, sides and roof. It was in-vented by Edward Budd, taken up byDodge and then by Citroën in Europe, andthen by all volume carmakers.

Around the same time as modern car ma-nufacturing was born in the mid-1920s, Al-fred Sloan's ideas for running General Mo-tors provided the model for the great cor-porations that grew up to dominate thesecond half of the 20th century. GM soonswept past Ford as Mr. Sloan revolutioni-zed the young car industry and Ford hasnever regained the dominance it enjoyedin the infancy of mass production.

The car industry has been ahead of its timein many respects. Peter Drucker, a manage-ment writer who first made his name with astudy of GM in 1945, coined the phrase“industry of industries”. The company wasalso the leader in “planned obsolescence”,the frequent changes in design that temp-ted customers to switch to a new modelevery year or so. It was the first to feelconsumer anger with the publication in the1960s of Ralph Nader's attack on the safe-ty record of the Big Three Detroit manu-facturers, “Unsafe at Any Speed”.

In the 1970s, as the oil price quadrupled,

the industry found itself under attack fromenvironmentalists outraged by its pro-ducts' gas-guzzling habits. It was alsoamong the first to come under careful go-vernment scrutiny, from safety concernsto environmental issues to antitrustworries in the days when General Motorshad 60% of its domestic market and couldsnuff out competitors with a few well-cho-sen price cuts. But it also received morewelcome government attentions. Whensmall, economical and reliable Japanese carsstarted to eat into Detroit's market share,the American government imposed res-traints on those imports. Soon afterward,the industry in Europe came under similarpressures.

The car industry also found itself at thecutting edge of capitalism in another sen-se. As mass production techniques de-veloped in the 1920s and 1930s, its workersincreasingly pushed for unionization. Attimes, it seemed as though the car facto-ries of the Detroit area, the British Mid-lands or the huge plants around Paris werethe main battleground of the class war. Eventoday, the United Auto Workers union(UAW) still dominates Detroit, even thou-gh trade union membership in America'sprivate sector as a whole is well below 10%of the workforce.

Today the motor car is the epitome of massproduction, mass marketing and mass con-sumption, with some of the strongest

General Motors

Toyota

Ford

Volkswagen

DaimlerChrysler

PSA/Peugeot Citroën

Hyundai Automotive

Nissan

Honda

8.59

6.78

6.54

5.02

4.36

3.29

3.05

2.97

2.91

2.39

185.5

153.1*

164.2

98.4

171.9

61.2

38.9

65.8*

77.2*

42.4

23.3

136.4

24.8

12.2

41.8

14.3

9.0

47.1

46.4

22.1

2'712

20'118

3'792

2'430

9'587

4'347

2'951

15'859

15945

9'247

Global vehicleunits sold in

millions

Sales in billionUSD

Latest MarketCapitalisation in

billion USD

Latest MarketCapitalisation

per units sold inUSD

Sources: Automotive News, Company Reports, Thomson Datastream

The World’s Top Ten Car Manufacturers 2003

Renault

*Year ending March2004

Figure 1: The World’s ten largest automobile manufactureres in terms of number of unitssold, sales and market capitalisation



brands in the world. For most householdsin rich countries, it is the second-biggestpurchase after a house or flat. Few otherconsumer-goods industries depend soheavily on a thriving second-hand marketfor their products. And yet there are power-ful forces at work that could profoundlychange the industry.

Limits to GrowthRight now, though, the biggest force forchange is the fact that most of the volume-car industry is broke and needs fixing. Themarket in America, Europe and Japan, whe-re over 80% of the world's cars and trucksare sold, has been running out of growth.

In America the arrival of European, Japa-nese and South Korean makers has crea-ted overcapacity. Moreover, as America'sown carmakers constantly improve theirproductivity to catch up on these new ri-vals, their greater efficiency itself increa-ses capacity by about 3% a year.

In Germany and France, rigid labor lawshave inhibited the closure of redundant oldfactories, although Renault has set a goodexample, and Ford Europe and GM Europehave been trying to follow it.

In Japan, the close industrial partnershipsknown as keiretsu have proved too rigidfor some manufacturers. Only Toyota andHonda remain in purely Japanese hands.The smaller Japanese producers make littleor no profit at home and are struggling toget into the black in Europe. Even for thebig companies America provides the besthopes for growing profits.

All the car companies think that if only theytry harder, they can somehow regaingrowth at the expense of rivals. But in rea-lity they are like Scott Fitzgerald's “boatsagainst the current, borne back ceaseles-sly into the past”. Add the growing pensi-on and health-care bills of traditional pro-ducers such as America's Big Three andthe Europeans, and it is easy to see whythe industry is feeling under siege.

Today Toyota leads a select band of volu-me car manufacturers that make real pro-fits; the others are Nissan and Honda. Evenwhen GM, Ford, the Chrysler end of Daim-lerChrysler and European firms such asRenault and Volkswagen are in the black,they usually do not earn more than the costof their invested capital.

But the worldwide market is a cruel place.There is capacity in place to produce about80 million cars and other light vehicles (pick-ups, SUVs and so on). Yet production is

running at barely 60 million a year, so thefactories are only three-quarters full in anindustry where utilization rates need to top80% to ensure decent profits. It is not muchof a gap, but the effect on weaker carma-kers is painfully evident.

Of course, much of this excess capacity isbeing installed in China and other parts ofthe Asia-Pacific region in anticipation ofgrowth prospects that are awesome. Ac-cording to a forecast by PriceWaterhouse-Coopers, the region will account for almosthalf the increase in world car output (over18%) that is forecast by 2011.

But too much of excess capacity lies inNorth America and Europe, where too manyproducers are producing too many cars andselling them at too little profit. Detroit keepsits factories at full tilt only by offering hugediscounts and other sales incentives to“move the metal”, as they say there. Hencethe profitless prosperity offered by strongcar sales in recent years. The same is incre-asingly true in Europe.

The End of DetroitMicheline Maynard's crisply written book,“The End of Detroit: How the Big ThreeLost Their Grip on the American Car Mar-ket” [1], coolly analyses the causes of thelatest fall of Detroit.

Many in the American car industry havebeen slow to appreciate how serious theproblem really is. The big three manufac-turers were used to hard times; they justhoped to make more money in booms than

they lost in busts. But their current pro-blems are different.

Car sales are still at historically high levels;it is just that Detroit's share of these saleshas slumped. Japanese, South Korean andGerman models (whether imported or madein the 17 car factories that foreigners haveopened in America in the past 20 years)account for half of car sales, and are ad-vancing on Detroit's last redoubt—the gas-guzzling minivans, sport utility vehicles andpick-ups so beloved of suburban cowboys.

In 1960, GM alone had 60% of the Ameri-can market; today it can count on barelyhalf that and the foreigners' share of thelight-vehicle market is already 40%.

Ms Maynard pinpoints the difference bet-ween the men who run the big three andthe leaders of successful foreign car com-panies. She contrasts the financial back-ground of those at the top of GM and Fordwith the car knowledge of Toyota's boss,Fujio Cho, who cut his teeth running oneof the company's first American factories.

But there is more to Detroit's weakness.The big three manufacturers have to dealwith the powerful United Auto WorkersUnion, which has won its members greatbenefits while employers are saddled withpension and health-care costs that top$1,200 per vehicle.

Ms Maynard concedes that Detroit isfighting back, with a new emphasis on thequality and attractiveness of the products.But she still sees Toyota becoming the big-gest car company in the world, overtakingGM, and probably having no less than15% of the world market, its stated aim. Sheis right: Toyota will prevail. Detroit's choiceis between shrinking or sinking.

Fiat's Struggle forSurvivalThe recent controversy between GM andFiat Auto illustrates the desperate strugg-le the Western automobile industry findsitself in.

In 2000, GM had bought 20% of Fiat Autofor $2.4 billion. In return, Fiat took a 6%stake in the American car giant. At the timeGM feared being left behind in the mergerwave that was sweeping the car industry.Since the DaimlerChrysler merger in 1998,the industry had consolidated rapidly. Tobecome a global force, GM felt it neededthe expertise of foreign companies to sa-tisfy the differing tastes of the world’s carbuyers and to share development costs.

Figure 2: Cover of Micheline Maynard’sbook, „The End of Detroit, how the bigthree lost their grip on the car market“

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GM’s greatest rival, Ford, was building aglobal network. In Europe it eventually ac-quired Jaguar, Volvo and Land Rover. Re-nault had teamed up with Nissan. Daim-lerChrysler would go on to forge allianceswith Hyundai of South Korea and Mitsub-ishi of Japan.

Since GM took a stake the problems havemounted. Greater foreign competition inItaly, Fiat’s biggest market, arrived as go-vernment schemes to help Fiat faded away.Fiat’s high costs and the lack of success ofthe Palio (Fiat’s “world car”) and the Stilo,a bigger and supposedly more profitablemodel, proved a drag, sucking money fromFiat’s successful truck and tractor busi-ness.

In 2002 Fiat was forced to seek refinancingin the form of •3 billion in convertible loansfrom banks. The souring relationship withits American partner was exemplified byGM’s refusal to contribute. Fiat also soldits stake in GM and its financing arm toraise cash. This diluted GM’s holding inFiat to 10%, which according to GM invali-dated the put option.

GM has also had its share of troubles since

its link-up with Fiat. In January 2000 itsshares were worth over $80 and it made aprofit of $5 billion that year. Its shares nowtrade at around $37 and although it made$3.6 billion in 2004, $2.9 billion came fromits finance arm. GM’s bonds are at a recordlow, hovering just above junk status and ithas been saddled with mounting “legacy”costs from its employee health-care andpension plans.

European and Asian producers dominateAmerica’s luxury-car market and the incre-asingly bold and innovative South Ko-reans are attacking the market for cheapercars.

On Sunday, February 13th, 2005, it wasdecided that GM will pay Fiat •1.55 billion($2 billion) to cancel a “put” option thatthe firms had agreed as part of a tie-up thatwas concluded in happier times for bothGM and the Agnelli family, the founders ofthe Fiat industrial empire.

ManagementCompensationThis issue has stirred up much controver-sy during past years. Since this topic, be-sides being of general interest, is also lin-ked to the performance of automobile ma-nufacturers, it must be addressed here too.

Over the past few years, the salaries ofmanagers in Europe and the US have goneout of control. They became so outrage-ous, insane and beyond common people’simagination, that the Swiss business ma-gazine “CASH” of February 25th, 2005, sim-ply called this development “The New In-sanity”.

It is especially shocking for the public torealize, that the salaries are not linked tothe quality of leadership and company per-formance, which again are directly relatedto the capability of a company to meet cu-stomer expectations.

Daniel Vasella, both chairman of the boardand CEO of a Swiss pharmaceutical com-pany was able to multiply his salary ten-fold up to a stratospheric level of $ 18 mil-lion per year, whilst on the other hand thereturn to the shareholders stalled.

The Hay Group, a consultancy, reckonsthat a European chief executive's basic sa-lary is much the same as that of his coun-terpart across the Atlantic. According to arecent study by a human-resources con-sultancy, German executives are the bestpaid in Europe, but the component of theirbonuses linked to short-term targets is hig-her even than that of their counterparts inAmerica. This has put pay and performanceout of line. In one case, while Daimler-Chrysler's market value fell by 60%, its topexecutives' pay rose by 40%.

In the US the differential between the payof top executives and their workers hasgrown. In 1991 the pay of the average Ame-rican large-company boss was about 140times that of the average worker; by lastyear, it was over 500 times, and growing.

Executive compensation packages in Ja-pan, where pay scales are also largely de-termined by tradition, are much more downto earth. In Japan, the CEOs, on average,get only 17 times what the workers earn.Even in companies employing up to 400’000people, the salaries of CEOs are typicallyless than $ 1 million a year. Indeed the me-dian in these huge companies lies somew-here between $300’000 and $ 600’000 a year.Even when receiving retirement allowances,these CEOs would be fortunate to take

1990 1995 2000 20040 %

5 %

10 %

15 %

20 %

Addio Fiat?Share of the European Car Market in Percent

Source: Association des Constructeurs Européens d’Automobiles

Volkswagen

PSA Peugeot Citroën

Renault

Fiat

Figure 3: The contribution of Volkswagen, PSA Peugeot Citroën, Renault and Fiat tothe European car market



much more than an extra $ 1.5 million homewith them.

It is believed that this issue has tremen-dous implications on employee motivati-on, trust of potential customers and re-spect paid by the public. Who wants towork for or buy a product from a companywhose top management demonstrates overand over again that its actions are divertedfrom the customer and the employees byselfish greed.

Management sets the standard with respectto every aspect of corporate behavior.Countless examples have shown in thepast that managers, which do not live upto these standards as observed by boththe employees and the public damage andeven ruin a company. In any case, the da-mage will be a multiple of what a manage-ment claims in excessive compensation.

Toyota MotorCorporation

The Ultimate inManufacturingExcellenceIt will be an important moment in industrialhistory: in only a few years Toyota willtopple General Motors from the number oneslot among the world's carmakers, as itgrows relentlessly towards 15% of the glo-bal market. It makes a net profit far biggerthan the combined total for Detroit's Big

three; its market capitalization towers abo-ve them; its productivity has grown seven-fold in the past 25 years, twice as much asDetroit's finest, despite their efforts to keepup.

The financial performance of Toyota isenormous (Figure 5).

There is the world car industry, and thenthere is Toyota, the outstanding pheno-menon. Since 2000 the output of the globalindustry has risen by about 3 million ve-hicles to some 60 million. Of that increase,half came from Toyota alone. While mostattention over the past four years has fo-

cused on a spectacular turnaround at Nis-san, Toyota has undergone a dramaticgrowth spurt all round the world. Japan'sindustry leader will soon be making morecars abroad than at home. It has overtakenFord in global production terms and is setto pass Chrysler in sales to become one ofAmerica's Big Three. In an industry strewnwith basket cases, where hardly any volu-me producer makes a real return on its ca-pital, Toyota is exceptional in that it consi-stently makes good returns.

Toyota's ebullient chairman Hiroshi Oku-da has made little secret that he wants thecompany to win 15% of the global car mar-ket, snatching leadership from GeneralMotors. Having reached Global Ten (10%of the world market) Mr Okuda has his eyesfocused on his new goal. “It's just to moti-vate employees,” says Fujio Cho, Toyota'smore downbeat president. “Somehow newsof the banners in our factories leaked out,”he says disingenuously, as if you couldkeep such a secret after it has been blazo-ned to 264'000 workers around the world.

Market capitalization says it all (Figure 1).Toyota is worth more than the AmericanBig Three put together, and more than thecombination of its successful Japanese ri-vals, Nissan and Honda. Last year (2004)Nissan may have outperformed Toyota interms of operating margin, but over the longhaul it has been the provincial powerhousefrom Aichi prefecture near Nagoya that hasconsistently shown the way.

Hiroshi Okuda, Chairman

Toyota is turning challenges intobusiness opportunities by acceleratingthe pace of its innovation to achieve

new growth.

Fujio Cho, President

We intend to raise corporate value bypursuing even higher levels of growth

and efficiency.

Figure 4: Hiroshi Okuda, chairman od the board and Fujio Cho, President of theToyota Motor Corpration and their policies for the future development of the company

in million USD exceptshare data

2003 vs 2004 Changein Percent

163'637 +11.6 %For the Year 2004

Net Revenues15'772 +31.1 %Operating Income10'995 +54.7 %Net Income15.2 % +11.6 %Return on Investment

Per Share Data3.24 +62.3 %Net Income (Basic).43 +25 %Cash Dividends

23.24 +19 %Shareholders’ EquityAt Year-End

208'537 +9.4 %Total Assets77'383 +14.9 %Shareholders’ Equity

Share Performance (March 3136.71 +47.2 %Price per Share

132'527 +47.2 %Market Capitalisation

Toyota Motor Corporation Annual Report 2004Fiscal Years ending March 31st

Figure 5: Key figures showing the performance of the Toyota Motor Corporation for theyear beginning 1st April and ending March 31st

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Toyota ProductionSystem TPSFirst, of course, it taught the modern carindustry how to make cars properly. Fewhad heard of the Toyota Production Sy-stem (TPS) until three academics in the carindustry study programme run by Massa-chusetts Institute of Technology (MIT)wrote a book in 1991 called “The Machinethat Changed the World” [2].

It described the principles and practicesbehind the “just-in-time” manufacturingsystem developed at Toyota by TaiichiOhno. He in turn had drawn inspirationfrom W. Edwards Deming, an influentialstatistician and quality-control expert whohad played a big part in developing therapid-manufacturing processes used byAmerica during the second world war.

At the core of TPS is elimination of wasteand absolute concentration on consistenthigh quality by a process of continuousimprovement (kaizen). The catchy just-in-time aspect of bringing parts together justas they are needed on the line is only theclearest manifestation of the relentlessdrive to eliminate muda (waste) from themanufacturing process. The world's motorindustry, and many other branches of ma-nufacturing, rushed to embrace and adoptthe principles of TPS.

Toyota's success starts with its brilliantproduction engineering, which puts quali-ty control in the hands of the line workerswho have the power to stop the line or sum-mon help the moment something goeswrong. Walk into a Toyota factory in Ja-pan or America, Derby in Britain or Valen-ciennes in France and you will see the samevisual displays telling you everything thatis going on. You will also hear the samejingles at the various work stations tellingyou a model is being changed, an operati-on has been completed or a brief halt cal-led.

Everything is minutely synchronized; thework goes at the same steady cadence ofone car a minute rolling off the final assem-bly line. Each operation along the way takesthat time. No one rushes and there are cuteslings and swiveling loaders to take theheavy lifting out of the work. But there ismuch more to the soul of the Toyota ma-chine than a dour, relentless pursuit of per-fection in its car factories.

Another triumph is the slick product-de-velopment process that can roll out newmodels in barely two years. As rival Carlos

Ghosn, chief executive of Nissan, notes inhis book “Shift” (about how he turnedaround the weakest of Japan's big three)[6], as soon as Toyota bosses spot a gapin the market or a smart new product from arival, they swiftly move in with their ownversion.

The result is a bewildering array of over 60models in Japan and loads of different ver-sions in big overseas markets such as Eu-rope and America. Of course, under the skin,these share many common parts. Toyotahas long been the champion of putting oldwine in new bottles: over two-thirds of anew vehicle will contain the unseen partsof a previous model. But TPS alone wouldnot justify the extraordninary success ofthe company in the world market.

The "Toyota Way"Many firms have tried to install the ToyotaProduction system TPS. They set up theKanban system, which is a tool for mana-ging the flow and production of materialsin a Toyota-style “pull” production system.They plug in the andon, which is a visualcontrol device in a production area thatalerts workers to defects, equipment ab-normalities or other problems using signalssuch as lights, audible alarms, etc. Finally,with all these devices the workplace lookslike a Toyota plant. Yet over time the work-place reverts to operating like it did before.

And this is exactly what many Westernorganisations have experienced.With theset up of TPS, the real work of implemen-ting TPS has just begun. In the Toyota Way,it’s the people who bring the system to lifeby working, communicating, resolving is-sues and growing together. The ToyotaWay encourages, supports and in fact de-mands employee involvement.

The Toyota Way is much more than a setof improvement and efficiency techniques.It’s a culture depending on worker attitudeto reduce inventory, identify hidden pro-blems and to fix them with a sense of ur-gency, purpose and teamwork.The ToyotaProduction System can be copied, the Toyo-ta Way cannot. It has to be built, maintai-ned and refined over decades.

The roots of the Toyota Way go back to1926, when Sakichi Toyoda (1867 – 1930), abrilliant engineer, later referred to as Japan’s“King of Inventors”, founded Toyoda Au-tomatic Loom Works.

His work ethics was significantly influ-enced by the book of Samuel Smiles, “Self-Help”[5], first published in England in 1859.

The book grew out of the devotion, to helpyoung man in difficult economic circum-stances by improving themselves. Thebook chronicles inventors whose naturaldrive and inquisitiveness led to great in-ventions that changed the course of hu-manity. When looking for instance at thesuccess and impact of James Watt, Smilesconcluded, that both were not the result ofnatural endowment but rather trough hardwork, perseverance and discipline.

These few words summarize the spirit,which Sakichi Toyoda handed over to hisson Kiichiro Toyoda (1894-1952), the foun-der of Toyoto Motor Company, his sonShoichiro Toyoda, Honorary Chairman anddirector of Toyota Motor Corp., and on tohis nephew Eiji Toyoda (*1913), Presidentof Toyota from 1967 to 1994.

Spend some time with Toyota people andafter a time you realize there is somethingdifferent about them. The rest of the carindustry raves about engines, gearboxes,acceleration, fuel economy, handling, ridequality and sexy design. Toyota's peopletalk about “The Toyota Way” and aboutcustomers.

In truth, when it is written down the Toyo-ta creed reads much like any corporate mis-sion statement. But it seems to have beenabsorbed by Japanese, European and Ame-rican employees alike.

Mr. Cho thinks that something of theunique Toyota culture comes from the factthat the company grew up in one place,Toyota City, 30 minutes drive from Nagoyain central Japan, where the company hasfour assembly plants surrounded by thefactories of suppliers. In this provincial,originally rural setting, Toyota workers inthe early days would often have small plotsof land that they tended after their shift.

Mr. Cho, who made his career in the com-pany by being a pupil of Mr. Ohno andbecoming a master of production control,thinks that the fact that Toyota managersand their suppliers see each other everyday makes for a sort of hothouse culture—rather like Silicon Valley in its early days.

Jim Press is boss of Toyota's sales in Nor-th America. He left Ford in frustration 35years ago, because he did not think it hand-led customer relations properly and he su-spected that the upstart Japanese compa-ny making its way in the American marketmight do better. He was right.

Toyota shares a production plant in Cali-fornia with GM. Identical cars come off theline, some badged as GM, the rest as Toyo-



tas: after five years, according to one stu-dy by Boston Consulting Group, the tra-de-in value of the Toyota was much higherthan that of the American model, thanks tothe greater confidence people had in theToyota dealer and service network.

Mr. Press talks with a quiet, almost reli-gious, fervor about Toyota, without men-tioning cars as such. “The Toyota cultureis inside all of us. Toyota is a customer'scompany,” he says. “Mrs Jones is our cu-stomer; she is my boss. Everything is doneto make Mrs. Jones's life better. We all workfor Mrs. Jones.”

But not even the combination of its world-leading manufacturing, rapid product de-velopment and obsessional devotion tocustomer satisfaction is enough to explainToyota's enduring success. There is onemore ingredient that adds zest to all these.

Tetsuo Agata doubles as general managerof Toyota's Honsha plant in Toyota Cityand as the company's overall manufactu-ring guru. The magic of Toyota's winningculture was summed up for him by an Ame-rican friend who observed that Toyotapeople always put themselves “outside thecomfort zone”: whenever they hit one tar-get, they set another, more demanding one.That relentless pursuit of excellence cer-tainly explains much of what has been hap-pening to the company in recent years, athome and abroad.

The strain of goingglobalLife started changing for Toyota when theeconomic bubble burst in Japan at the startof the 1990s. First it had to work hard toimprove its competitiveness as the yenstrengthened. Mr. Okuda, president in themid-1990s, launched a program of cost-cut-ting to make the company's exports com-petitive even at a yen level of only 95 tothe dollar. When costs fell and the yen sub-sequently weakened, Toyota reaped adouble reward.

But the company also had to face up to acar market at home that slumped from near-ly 6 million sales a year to just over 4 mil-lion. And Toyota has had to respond torenewed competition in its domestic mar-ket, after an aggressive push by Honda andthe revival of Nissan. One reaction by Mr.Cho to tough competition at home has beena further round of cost cuts that have hel-ped Toyota re-build market share in Japanfrom 38% in the mid-1990s to 44.6% lastyear, helped partly by windfall sales after

the implosion of Mitsubishi Motors.

But European imports of Volkswagens,BMWs and Mercedes cars have moppedup 7% of the Japanese market, mostly forpremium models, and forced Toyota to in-troduce its luxury Lexus brand into Japan.

Until now, cars that Americans and Euro-peans have known as Lexuses have beensold as plain old Toyotas in Japan. NowMr. Cho has decided, as part of a widerreorganization of Toyota's distribution net-work, to sell these vehicles separately withthe Lexus badge and support from theirown up-market retail outlets.

One of Toyota's strengths has been itsarmy of privately owned car dealers, longorganized into five competing channels,each one more or less specializing in diffe-rent parts of the range. The multiplicity ofdistribution channels arose simply becau-se of the rapid growth of the Japanese mar-ket and Toyota sales from the 1970s on-wards. But in February 2003 Toyota admi-nistered what was called the Valentine's Dayshock. It streamlined the number of chan-nels down to four, including a new one ai-med at the young people turned off bymainstream Toyota's staid image. (It is ha-ving to go even further in America with aseparate sub-brand called Scion to appealto young consumers.)

Like all car companies Toyota in Japan hashad to get used to a fragmentation of themarket, which means there are no longerhuge runs of a few bestselling models. Theboss of the Tsutsumi plant, where the firm'strendy Prius hybrid cars are made, recallsthe good old days when all they had to dowas churn out half a million Camrys andCoronas. Today's lines have been adaptedand made flexible so that no fewer thaneight different models can be manufactu-red simultaneously. The Prius—despite itsrevolutionary engine—still has to share anassembly line in the Tsutsumi plant withseveral conventional models.

Seeds of successMaking all these changes at home is rela-tively easy compared with Toyota's big-gest challenge, now that it has set itselfthe goal of making more cars outside Ja-pan than at home. Apart from seeking toswitch production to exports, Toyota alsochased growth outside Japan by buildingthree more plants in North America and twoin Europe, starting with Derby in Britain,followed by Valenciennes in the north ofFrance. Between 1993 and 2003, overseas

production more than doubled to 2 millionunits, while in Japan it declined from 3.5million to 3 million before recovering in thelater years to its old level, boosted by ex-ports; about half of domestic productionis exported.

This globalization process has transformedthe size and shape of Toyota. In 1980 Toyo-ta had 11 factories in nine countries; in 1990it had 20 in 14 countries; today it has 46plants in 26 countries. In addition, it hasdesign centres in California and in Franceon the Côte d'Azur, and engineering cen-ters in the Detroit area and in Belgium andThailand.

Although Japan remains its biggest singlemarket, sales topped 2 million in NorthAmerica for the first time last year, and inEurope Toyota is passing through the 1million mark, with 5% of the market, after along period of slow growth. The openingof plants in Turkey and France and the in-troduction of the European-designed Ya-ris small car have done much to make Toyo-tas more appealing to Europeans, while inAmerica its entry (not without a few hit-ches) into the enormous market for pick-up trucks and sport-utility vehicles hasbeen responsible for its steady march tobeyond 10% of the market. It is now brea-thing right down the neck of Chrysler.

Mr. Cho acknowledges that such interna-tional growth and globalization is the big-gest change happening to the company.He sees his greatest challenge as maintai-ning Toyota's high standards in such are-as as quality while it grows so fast acrossthe globe. For Toyota has only recentlystarted to transform the way it is run tomake itself a truly global company ratherthan a big exporter with a string of over-seas plants. Its top-heavy all-Japaneseboard has been drastically slimmed and fivenon-Japanese executives, including Mr.Press, have been made managing officers,which means that they sit on the executivecommittee in Tokyo, but are also left free torun their overseas operations on a day-to-day basis without deferring to head office.For Toyota, that is a big step away fromcentralized rule by Toyota City.

Another leap has been the creation of aToyota Institute, not just for training Japa-nese managers, but also for developinggroups of executives from all over theworld. The centre is expressly modeled onthe Crotonville Centre that has played sucha big part in the success of General Elec-tric. By having squads of managers mo-ving through development courses, head

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office can keep tabs on the potential of itspeople, whilst ensuring that they are tho-roughly steeped in Toyota's way of doingthings, whether it be in manufacturing, re-tailing, purchasing and so on.

But globalization and the rapid growth ofproduction now in places such as China isalso straining the learning process furtherdown the hierarchy.

Toyota has a flying squad of line workerswho move around the world to train localsat new factories or move in to help out whenthere is a model change going on. Theseline supervisors train local workers.

Toyota has also made astute use of joint-ventures to ease the strain of manning over-seas operations: apart from its original onewith GM in California, Toyota now hasanother with a local company in Turkey,with PSA Peugeot Citroën in the CzechRepublic and in China, which is the fastest-expanding part of Toyota, in line with thecountry's rapid motorization. Toyotareckons that it will learn much aboutpurchasing more effectively in Europe fromits French partner in the new joint-venture,which is preparing to unveil a budget carfor the European market at the beginningof March 2005 at the Geneva Motor Show.

But the company is finding there are limitsto the number of Japanese managers andforemen who are prepared to work as expa-triates, either on a temporary or permanentbasis. So it has opened a Global Produc-tion Centre in a former production area inToyota City. Here, on a given day you cansee Filipino and Chinese workers beingtaught how to assemble Toyota cars. Toget round obvious language barriers theinstruction makes heavy use of video re-cordings and inter-active DVDs, a sort ofautomated, virtual version of watching howNelly does it.

The best gets betterPerhaps the best single example of Toyotamanagers' aversion to taking it easy in thecomfort zone is back where it started—inthe mysteries of the TPS. Mr. Agata, one ofthe firm's manufacturing experts, regardshis job as inculcating the virtues of the TPSin a younger generation. But he has con-cluded that the company has to raise itsgame. “We have always proceeded bysteady improvement,” he says. “But nowwe need to make step changes as well tokeep ahead.” That means finding radicallydifferent ways of manufacturing things likebumpers or doors, reducing the number of

parts, and developing new machines to formparts more economically.

As GM's bonds sink towards junk status,and as Japanese carmakers steadily over-haul America's Big Three, it must be a chil-ling thought that Detroit's nemesis is wor-king on ways to improve its performance.No wonder one GM planner mused priva-tely that the only way to stop Toyota wouldbe the business equivalent of germ warfa-re, finding a “poison pill” or “social virus”that could be infiltrated into the companyto destroy its culture.

What else could stop Toyota? Soon it willhave the scale to outgun GM. A technolo-gical revolution will not threaten it, sinceToyota is leading the way with hybrid elec-trics en route to full-scale fuel-cell electriccars.

Toyota spends regularly around 4 % of itsrevenue on research and developmentR&D. In 2004, the expenditure on R&Damounted to $ 6.5 billionr, which is 3.94 %of this years total revenue of $ 165 billion.This effort was spent on R&D of anticipa-tory, advanced and environmental techno-logies with a central focus on the develop-ment of a fuel cell battery and the impact ofexpanding new models to promoteToyota’s strength in a competitive globalmarket for the future.

Consumer preference for exciting designs?Toyota has shown that it can play that gamealso: there is a stylish edginess in recentmodels such as the Prius, Yaris, the newAvensis and even its venerable LandCrui-ser SUV. At least the man from GM put hisfinger on the key to Toyota's success. Pro-

vided its culture can be sustained as it goesfrom being an international Japanese com-pany to a global one, then Toyota's futureseems secure.

Why the future is hybridToyota began development of a new carfor the 21st century, which eventually tur-ned into the Prius, as early as in September1993. The goal was to develop a small, butnevertheless spacious car with a fuel eco-nomy better than 47.5 miles per gallon (4.95liter per 100 kilometer).

The design efforts led to the world's firstmass-produced petrol-electric hybrid car,powered by both an internal-combustionengine and an electric motor. The second-generation Prius, launched in 2003, wonsome of the industry's most prestigiousawards—it has just been named EuropeanCar of the Year 2005—and generated a buzzout of all proportion to the car's prevalenceon the roads.

The success of the Prius has taken Toyotaby surprise. The average wait at Americandealerships is currently six months, eventhough the company increased its salestarget for North America from its initial esti-mate of 36,000 units to 47,000 for 2004.

To meet demand, Toyota announcedanother increase in August, saying it wouldpush monthly global production up nextyear by 50% to 15,000 cars, and double itsallotment for America to 100,000 units.

While that number is still only one-quarterof last year's sales for America's most po-pular Toyota model, the Camry, it shows

Figure 6: Toyota Prius, a four door limousine with a 1.5 liter four cylinder internal-combustion engine with 58 hp and an electric motor with 41 hp and a nickel-metal-hybrid battery. The car was launched in December 1997 and replaced by a new modelin Spring 2003



that consumers are willing to pay a premi-um for clean, environmentally friendlycars—as long as there is no need to com-promise on performance.

Japan experimented with the combinationof a combustion engine and an electricmotor since the sixties. The German carmanufacturers did not think this to be aserious alternative and thus did not payattention, even after the first edition of thePrius entered the market in 1997. Expertsare now convinced that ignoring this de-velopment in automotive technology canbe compared to the „Worst Possible Acci-dent“ in the nuclear field. GM Chairmanand CEO Rick Wagoner now openly ad-mits that at present hybrids are the bestpossible contribution of individual trans-portation to the protection of the environ-ment. GM Vice Chairman Bob Lutz confes-ses at the Detroit Motor Show 2005 thatWestern manufacturers „missed the train“and everybody present agreed.

Other carmakers are scurrying to catch up.Besides this year's new Ford Escape andHonda Accord hybrids, Toyota will add twosport-utility vehicles (SUVs) to its hybridline-up early next year.

DaimlerChrysler recently announced thatit will introduce a Mercedes hybrid withinthe next five years, and Porsche is consi-dering a hybrid version of its Cayenne SUV.Even General Motors, one of the strongestproponents of hydrogen fuel-cell cars, hasjumped on the hybrid bandwagon with twopick-up trucks, a sedan and several SUVsto follow. The US industry announced thatit will launch at least two dozen gasoline-electric hybrid cars within next five yearsor so. But until these cars are ready, Toyo-ta and Honda will continue to make thedeals in the showrooms.

Ingredients of Toyota’sSuccessThere are many books that provide insightinto the tools and methods of Toyota’s Pro-duction System (TPS). One of the most re-cent and also the most extensive book waswritten by Jeffrey K. Liker, Professor of In-dustrial and Operations Engineering at theUniversity of Michigan in Ann Arbor, USA[4]. Ann Arbor also hosts the Toyota Tech-nical Center (TTC), where significant por-tions of the Camry and Avalon sedans andSienna minivans for the U.S.-market aredesigned and engineered.

Gary Convis, Managing Officer of Toyotaand President of Toyota Motor Manufac-

turing in Kentucky, USA, describes hispersonal experience in the foreword of thisbook as follows:

"When I joined Toyota after 18 years inthe U.S. automobile business, I didn’tknow exactly what to expect. But I washopeful. I knew that I wasn’t comfortablewith the direction that American automo-bile manufacturing was taking, and I feltToyota might be different. In no time at allI noticed a fundamental difference bet-ween Toyota and my previous employers.At a Toyota/GM joint venture plant in Fre-mont, California, called NUMMI (NewUnited Motor Manufacturing), I witnes-sed the transformation of a workforce fromone of the worst in the General Motorssystem to one of the best manufacturingfacility in the United States.”

Through his research, Liker identifies four-teen principles of the Toyota Way, whichhe divided into the following four sections.He does not comment on whether the ana-logy to Deming’s famous fourteen pointsof management is intentional or acciden-tal.

Long-Term PhilosophyToyota is about long-term thinking. Thefocus from the very top of the company isto add value to customers and society. Thisdrives a long-term approach to building alearning organization, one that can adaptto changes in the environment and survi-ve as a productive organization. Withoutthis foundation, none of the investmentsToyota makes in continuous improvementand learning would be possible.

The Right Process Will Producethe Right ResultsToyota is a process-oriented company.They have learned through experiencewhat processes work, beginning with theideal of one-piece flow. Flow is the key toachieving best quality at the lowest costwith high safety and morale. At Toyota thisprocess focus is built into the company’sDNA, and managers believe in their heartsthat using the right process will lead to theresults they desire.

Add Value to the Organization byDeveloping Your People andPartnersThe Toyota Way includes a set of toolsthat are designed to support people conti-nuously improving and continuously de-veloping. For example, one-piece flow is avery demanding process that quickly sur-faces problems that demand fast solutions,or else production will stop. This suitsToyota’s employee development goals per-

fectly because it gives people the sense ofurgency needed to confront business pro-blems. The view of management at Toyotais that they build people, not just cars.

Continuously Solving RootProblems Drives OrganizationalLearningThe highest level of the Toyota Way is or-ganizational learning. Identifying root cau-ses of problems and preventing them fromoccurring is the focus of Toyota’s conti-nuous learning system. Tough analysis, re-flection and communication of lessons lear-ned are central to improvement as is thediscipline to standardize the best-knownpractices.

Differences between theJapanese and Wester BusinessPracticesToyota’s business practices differ from tho-se of Western automobile manufacturersin a number of aspects:

• Operations are strictly governed by asustainable business policy, which ispassed on from one generation to theother and not by short-term decisionmaking or by the attitudes of changingmanagement teams and variable custo-mer tastes.

• Growth comes from the inside out andnot through mergers and acquisitions,in other words, growth through conti-nual improvement of products and ser-vices and not through continued re-structuring.

• Production is controlled by customerdemand (“pull” system) not by produc-tion capacity (“push” system).

• Qualified employees are attracted withthe possibility to participate in thecompany’s striving to meet and exceedcustomer expectations with productsof unparalleled quality and not withcompensation schemes. Toyota em-ployees work for a winner. Who wantsto work for an employer, whose pro-ducts have to be forced onto the cu-stomers with discounts and incen-tives? Who wants to work for a loo-ser?

• No unions are admitted which forceboth management and employees todefend their own interests and by sodoing distract from the shared respon-sibility to satisfy customers.

• For more than 50 years, Toyota experi-enced an extraordinary history of con-tinuous growth without major layoffs

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despite the ups and downs of nationaland global economies.

• Compensation schemes in line withtraining, experience and responsibilityacross all the ranks from top to bottominstead of skyrocketing salaries unre-lated to company performance for afew.

How much do Germanslike the cars they aredriving?Since 1968, J.D. Power and Associates hasbeen conducting quality and customer sa-tisfaction research based on survey re-sponses from millions of consumers world-wide. We do not rely on "expert opinion",says J.D. Power. Our product and servicerankings in no way reflect the opinions orpreferences of the firm, and we do not re-view, judge or test products and servicesourselves.

We represent the voice of the customer bytranslating survey responses into informa-tion that companies worldwide use to im-prove quality and customer satisfaction,as well as to help consumers make betterdecisions. J.D. Power and Associates hasdeveloped and maintains one of the large-st, most comprehensive historical custo-mer satisfaction databases in existence,which includes feedback on virtually allaspects of the shopping, buying, and pro-duct and service ownership experience.

Up to now, J.D. Power and Associates hasconducted three studies on the satisfac-tion of German car owners. Studies similarto those of J.D. Power are conducted allover the world by marketing and consumerorganizations.

The results are always more or less thesame. Year after year, Toyota ranks first inreliability and customer satisfaction with asignificant lead over other Japanese ma-nufacturers leaving all others far behind.Over decades of consistent performanceToyota accumulated an immense capital interms of public trust motivating customersto return and to take their friends along.Toyota does not need to offer huge dis-counts and other sales incentives to “movethe metal”. The result immediately showsup under the bottom line. Even thoughToyota is not yet the biggest producer ofcars, its market capitalization stands highabove all others as shown in Figure 10.Toyota ranks highest in every of the threestudies conducted with German customersin 2002, 2003 and 2004. In the 2004-study

Toyota models are at the top in three out ofseven new-vehicle segments. Two other Ja-panese manufacturers, Honda and Mazda,along with Porsche and Peugeot, each havetop-ranking models in one segment.

The top-ranked models in each of the se-ven segments are:

Small Car: Honda Jazz

Lower Medium Car: Toyota Corolla

Upper Medium Car: Toyota Avensis

Executive/Luxury Car: Peugeot 607

Sports Car: Porsche 911

MPV: Mazda Premacy

SUV: Toyota RAV4

The study analyses customer satisfactionbased on responses encompassing 77 at-tributes grouped into four key measures(the importance of each measure is shownas a percentage): quality and reliability(30%); vehicle appeal (25%), which inclu-

Figure 7: Extract from the JD Power Report 2004 on the satisfaction of the German carowners as expressed by the Customer Satisfaction Index CSI. Shown are the ten mostsatisfactory makes, the ten best sold German cars and the ten least satisfactory makesout of 119 classified models.

the

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isfa

ctor

y M

akes

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erm

an C

ars

the

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65 70 75 80 85 90

119--Mercedes V-Klasse

118--Fiat Seicento

117--Chrysler Voyager/Grand Voyager

116--Mercedes M-Klasse

115--Fiat Brava

114--Chrysler PT Cruiser

113--Fiat Doblo

112--Citroen Berlingo

111--Kia Carnival

110--Fiat Multipla

101--VW Polo

84--VW Passat

77--VW Golf

69--Mercedes A-Klasse

42--Mercedes C-Klasse

39--Opel Astra

40--VW Bora

30--Audi A4

25--BMW 3er

26--Mercedes E-Klasse

10--Mitsubishi Carisma

9--Mazda 626

8--Saab 9-3

7--Toyota Jaris

6--Mitsubishi Galant

5--Peugeot 607

4--Toyota RAV 4

3--Honda Jazz

2--Toyota Avensis

1--Toyota Corolla

Customer Satisfaction Index CSI



des performance, design, comfort and fea-tures; service satisfaction (23%); and ow-nership costs (22%), which includes fuelconsumption, insurance and costs of ser-vice/repairs. The top four brands in theoverall ranking are Japanese. Toyota sco-res 84.4 points out of a possible 100, pla-cing it significantly ahead of Mazda, Suba-

ru and Honda, which score 81.6, 81.5, and81.1, respectively. German manufacturersBMW, Audi, Mercedes-Benz and, for thefirst time Opel, perform above the industryaverage.

The 2004 Germany CSI study is based onthe responses of 24,483 vehicle owners

who rated their experiences with their ve-hicles, their dealers and the cost of ow-nership after two years. In total, 28 brandsand 119 models are included in the study.

J.D. Power and Associates conducts CSIstudies throughout the world. In somemarkets, like the United States, the studyis primarily focused on dealer service sa-tisfaction.

The results of the JD Power Report 2004give raise to some comments:

Mirror for VW’s economicproblemsThe VW Golf, Germany’s by most popularcar, stands on place 77 of 119 classifiedmakes. In 2003 the car ranked 100th of 115classified and in 2002 82nd of 132 classi-fied. The introduction of the brand newGolf V turned out to be a disaster. Potentialcustomers could only be enticed to by thecar with discounts and incentivesunknown before. The statistics of the re-liability of automobiles as established bythe Swiss Drivers Association TCS 2004(Figure 9) shows, that the reliability of VWautomobiles continuously deterioratedsince about 1990. With popular cars as badas the VW Golf it does not surprise thatthe market capitalisation of VW is but asmall fraction (8.9 %) of Toyota’s worth.

What happened with MercedesBenz?The products of this producer are ranked24th (Mercedes S-Class), 26th (MercedesE-Class), 33rd (Mercedes CLK), 42nd (Mer-cedes C-Class), 69th (Mercedes A-Class),78th (Mercedes SLK), 108th (MercedesVaneo), 116th (Mercedes M-Class) and fi-nally as the red light on the list 119th (Mer-cedes V-Class). No other automobile pro-ducer has products which vary so much incustomer satisfaction, say quality. Unifor-mity is an important aspect of quality. Fromthis viewpoint Mercedes is indeed theworst of all.

Since the foundation of Mercedes-Benz onJune 28, 1926, the cars with the three-poin-ted star on their hoods became objects ofpride for their well-to-do owners and allthose that wanted to look alike. The mega-lomania of Mercedes-Benz gambles withthe trust of a large clientele that was builtup over decades.

Not long ago, Mercedes was top in presti-ge and a symbol for quality and reliability.The moment a customer of a Mercedes re-ceived a new car, he had to order the nextone, when he wanted to have it deliveredwhen when turning the old one in. Dis-

Figure 8: Extract from the JD Power Report 2004 on the satisfaction of the German carowners as expressed by the Customer Satisfaction Index CSI. Shown is the ranking ofthe 28 brands as considered by the study. Especially emphasized is the bandwidth of theCSI-values of each manufacturer’s models.

65 70 75 80 85 90

28--Daewoo

27--Chrysler

26--Fiat

25--Alfa Romeo

24--Mini

23--Smart

22--Peugeot

20--Kia

21--Volkswagen

19--Citroën

18--Seat

17--Suzuki

16--Hyundai

15--Renault

14--Ford

13--Daihatsu

12--Opel

11--Mercedes-Benz

10--Nissan

9--Skoda

8--Audi

7--Volvo

6--Mitsubishi

5--BMW

4--Honda

3-- Subaru

2--Mazda

1--Toyota

Customer Satisfaction Index CSI

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counts and other sales incentives were outof discussion.

Since Jürgen E. Schrempp founded his„Welt AG“ in 1998 to satisfy his ambitionto become one of the key players in theautomobile industry, not one year passedwithout a fire somewhere in his diverseconglomerate (Mercedes-Benz, Chrysler,Maybach, smart, Mitsubishi Fuso andothers). He had to act as a fire-fighter in-stead of looking after the quality of the pro-

ducts and the development and the laun-ching of innovative, attractive and reliablecars.

The statistics of the reliability of automo-biles as established by the Swiss DriversAssociation 2004 TCS (Figure 9) showsthat the reliability of the Mercedes cars de-teriorated after the launching of the Mer-cedes C-Class in 1985 and worsened dra-matically since then.

On Wednesday evening, 9th February,

2000, ARD (Association of the Broad-casting Corporation of Germany) screeneda remarkable documentary film with the tit-le “The Fairy-Tale of Made in Germany".

The preview of this documentary had thefollowing comment:

„At the beginning of the 1990’s a studyshowed that Toyota made the Lexus withthe same number of man-hours that Mer-cedes had to spend on warranty alone.The film showed how German companiesare shunting the previous world champi-on exporter into a siding with sloppy work,expensive procedures and poor customerrelations ".

The film closes with a little song that saysa lot about the present situation in Europein general and in Germany in particular.

„Good night Germany, only a singlestar is shining, Are you in the deca-dency too?

Without you, how will our great indu-strial nation ever find salvation fromthe chaos that surrounds you.

Good night Germany, when will youunderstand that industrial perfectionrequires a new direction.”

(liberally translated from the Lyric of NickBenjamin.)

The song describes a gloomy vision ofGermany’s future. When this film was airedon ARD, nobody was yet willing to acceptthat this depressing scenario could everbecome reality.

In the meantime, Germany’s unemployedworkforce rose to 5.2 million (March 2nd,2005). All sorts of countermeasures arebeing discussed, most of them merely ad-ministrative in nature. Yet nobody is wil-ling to openly admit that the film “The Fairy-Tale of Made in Germany" revealed the rootof the problem.

Obviously, the situation has to aggravateeven further for decision makers to over-come their complacency and become acti-ve.

W. Edwards Deming andToyota

40

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Source: Breakdown Statistics of the Swiss Drivers Association TCS 2004

Market Capitalisation of the Ten Largest Automobile Manufacturers

23.3

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24.8

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Figure 9: Extract from the breakdown statistics of the Swiss Drivers Association TCS2004. The study only considers cars with more than four years of age. Shown are theresults for Subaru, Toyota, BMW, Audi, Mercedes and VW over the period 1982-2000

Figure 10: Market Capitalisation and number of cars sold of the world’s ten largestautomobile manufacturers as a mirror for the quality and reliability of their cars



Deming in the eyes ofhis contemporariesAt the 1991 Deming Prize ceremony, keypersonalities of the Japanese industryused the following words to recognize thecontribution of W. Edwards Deming to therecovery of Japan after World War II.

Shoichiro Toyoda, Honorary Chairman anddirector of Toyota Motor Corp.: “There isnot a day I don't think about what Dr. De-ming meant to us. Deming is the core ofour management.”

Koji Kobayashi, chairman emeritus of NEC:“Deming made a great contribution to therecovery of Japan's economy after the to-tal war. We needed his authority. He fasci-nated the Japanese people.”

Yoji Akao, engineering professor at Tema-gawa University: “He’s the person whointroduced quality control after the deva-station of the war and who was the star-ting point of the whole development ofquality control in Japan. Japan owes a greatdeal to him.”

The DemingManagement PhilosophyFrom 1950 onward, Deming explained to topmanagement in quality and productivityseminars his quality philosophy.

The impact of these seminars on the cour-se of worldwide economy cannot be ove-restimated. Their influence developed toone out of the 10 most significant turningpoints (“History’s Hidden Turning Points”)in human history during the past two mil-lenniums. Apostle Paul, who carried Chri-stianity to the Roman Empire, was the first,Deming the last.

This assessment was made by Daniel J.Boorstin, Historian, Pulitzer Prize-winningjournalist, Director of the US Library ofCongress from 1975 until 1987. The sameopinion is expressed by John O. Whitney,Professor at the Columbia University Gra-duate School of Business and the HarvardBusiness School.Back to Contents

The Systems ViewDeming taught the Japanese that produc-tion is a system and not a sequence of un-related mechanical processes. The Japane-se had knowledge, great knowledge, but itwas in bits and pieces, uncoordinated. Thisflow diagram (Figure 11) directed their know-ledge and efforts into a system of produc-tion, geared to the market - namely, predic-

tion of needs of customers. The wholeworld knows about the results.

Supplies come in from various sources e.g.A, B, C and D. They go through variousstages. They come out as a product, whichmight be semi-finished. The product is dif-ferent from what went in. The product goesinto distribution, it goes to one or morecustomers. Consumer research tries to dis-cover what improvement or innovation inproduct or service might help the custo-mer in the future and will entice him to buy.That may call for different inputs, designor redesign of product or service.

Everybody knows what a system is butnobody can define it.

1) A system is a whole consisting of twoor more elements, each of which candetermine the behavior of the whole.

2) How one element influences the beha-vior of the whole depends also on whatother elements are doing.

3) No matter which way elements aregrouped, every group influences thebehavior of the whole.

These three definitions are included in thefollowing statement:

The system is a whole, which cannot besplit into different parts without losing itsdefining properties.

One of the best known systems and alsothe most complex is the human body.

Systems cannot be understood throughanalysis, e.g. by separating the parts and

looking at the parts separately, a methodwhich served man so well over centuries.

It can be rigorously proved that improve-ment of the parts will not improve the be-havior of the whole, since the behavior ofa system is not the sum of the behavior ofits parts but the product of its interactions.

Systems can only be understood throughsynthesis, where synthesis is the exactopposite of analysis, e.g. by looking at asystem as a part of a larger system not assomething which can be divided into se-parate parts.

Systems scientists are convinced that thestep from the analytic thinking to the sy-stems thinking means a total change ofimagery comparable to the change of theimage from the world being plane to beingglobe.

Japan proved from 1950 onward that thistotally new view, the systems view, canhave tremendous implications.

Based on the systems view of production,late Dr. Shigeru Mizuno and Dr. Yoji Akaodeveloped a method called QualityFunction Deployment (QFD). QFD links theneeds of the customer (end user) with de-sign, development, engineering, manufac-turing, and service functions. It helps or-ganizations seek out both spoken and un-spoken needs, translate these into actionsand designs, and focus various businessfunctions toward achieving this commongoal.

The same systems view led Dr. GenichiTaguchi to the development of the "Tagu-

A

D

C

B

Receipt andTest ofMaterials

Production, Assembly, Inspection

Distribution

Tests of Processes,Machines, Methodsand Costs

Consumers

ConsumerResearch

Designand

RedesignSuppliers ofMaterials andEquipment

Figure 11: The revolutionary new view of looking at production as a system and not asequence of unrelated mechanical processes was the basis for the success of Japaneseproducts on the world market.

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chi loss function" or "quality lossfunction". The loss function estimates thesocial loss produced by a deviation or va-riability of any design parameter from theideal or target value. The greater the devia-tion from target, the greater is the loss.

Taguchi devised a special methodology,now called the “Taguchi methodology”, toarrive at designs which produce minimumloss to the customer. In an automobile, eve-ry defect means a loss to the owner. Theextraordinary dependability of Japaneseproducts is attributed to the systematicapplication of this concept to all phases ofdesign, production and maintenance.

Taiichi Ohno also had the systems view inmind, when he screened the entire produc-tion process at Toyota to eliminate as faras feasible all the activities which did notadd to the value of the product as experi-enced by the customer. He identified 8 ca-tegories of such activities or waste:

1) Overproduction

2) Waiting

3) Unnecessary transport or conveyance

4) Overprocessing or incorrect proces-sing

5) Excess inventory

6) Unnecessary movement

7) Defects and

8) Unused employee creativity.

Over 30 years of intensive planning andexperimenting to improve production, theToyota Production System TPS, evolved,which allowed the production of many dif-ferent models in small quantities with un-paralleled efficiency.

The inventor of TPS himself describes thesystem in his book, "Toyota ProductionSystem, Beyond Large-Scale Production[3].

TPS is the next major evolution in efficientbusiness processes after the mass produc-tion system invented by Henry Ford and ithas been documented, analyzed and expor-ted to companies across industries throu-ghout the world.

The Deming ChainReaction Deming explained to his audience the chainof actions and its consequences knowntoday under the name of the “DemingChain Reaction”.

Quality improvement leads to cost decrea-ses and improved productivity, it capturesthe market, keeps the company in businessand provides jobs and more jobs.

It is interesting to note, that Deming stres-ses the social function of a company andnot the interest of the shareholders. Jobsactivate the creative potential of humanbeings, generate income and provide wel-fare not just for a few, but for everybody.Unemployment is a waste, a terrible waste,which no nation should tolerate. Think ofwhat the 5.2 million unemployed Germanscould do for the nation.

Quality can always be improved and im-provement can only come through humaningenuity combined with action managedby competent and responsible managers,which focus on customer satisfaction andthe welfare of the employees instead oftheir own bank account.

Deming promised his audience that whe-never Japan will provide the world marketwith products of unparalleled quality, wi-thin five years manufacturers the worldover would be trembling and would beginto scream for protection.

Deming later was told by top managementthat at the beginning he was the only manin Japan who believed it. Finally, after all,Deming was wrong. Japanese industry ac-complished this goal within only four years.

Other Elements of theDeming PhilosophyMuch more could be said about the De-ming management philosophy and its in-fluence on the success of Japanese pro-ducts in the world market.

Known the world over are the Plan-Do-Stu-dy-Act (PDSA) Cycle for continual impro-vement, the 14 Points for management andthe System of Profound Knowledge(SoPK).

The SoPK is comprised of the four majorparts:

1) Appreciation of a System

2) Theory of Variation (right back to whe-re it all started with Shewhart’s break-through)

3) Theory of Knowledge (how do weknow things, how do we learn things,how do we improve that learning andknowledge?) and

4) Understanding of Psychology (the un-derstanding of people and the way thatthey interact with all that surroundsthem).

This a very human philosophy.

First the Employee, thenthe ProductDeming advocates that man stands at thecentre of every activity, be it as an indivi-dual, the team or the organization. His crea-tivity, his vigor, his energy cannot be re-placed by anything else.

The more an organization is capable of ac-tivating the complete mental an physicalpotential of its employees, the more suc-cessful it will be.

Deming expressed his view on the uniquevalue of man in the form of the followingquotes:

• „If you destroy the people of a compa-ny, you do not have much left.“

• „Monetary rewards are not a substi-tute for intrinsic motivation.“

• „All anyone asks for is a chance towork with pride.“

• „There will be quality of work life

improve quality

cost decreasesbecause of less rework, fewermistakes, fewer delays, snags,better use of machine-time and

materials

capture the marketwith better quality and lower price

productivity improves

stay in business

provide jobs and more jobs

Figure 12: The „Deming Chain Reaction“shows the conclusive consequences ofquality improvement measures for the la-sting success of a company.



when people take pride in what theydo.“

• „People are entitled to joy in work.“

• „The transformation can only be ac-complished by man. A companycannot buy its way to quality“

• „There is no substitute for know-ledge.“

• „Whenever there is fear, you will getwrong figures.“

• „Innovation comes from people whotake joy in their work.“

• „If someone can make a contributionto the company, he feels important.“

Toyota demonstrates through actions, notonly by words, that the convictions be-hind these quotes are implemented.

This short extract from the commemorativespeech by Dr. Shoichiro Toyoda, Honora-ry Chairman of Toyota Motor Corp., on theoccasion of being awarded the honorarydoctorate by the Asian Institute of Tech-nology in August 2003 summarizes the va-lues and believes Toyota Motor Corp. isbased upon.

“We at Toyota have long cherished theidea that "making things" requires "de-veloping human capability." Since it takeshuman beings to make things, naturallyyou would have to build human capabili-ty before you'd start making products.

I believe that the same thing applies alsoto building services, building society, andbuilding nations. I have long been con-vinced that the capability for makingthings is the motivating force for the de-velopment of industry, the economy, andtechnology, and constitutes the foundati-on for any nation's growth.

I can cite three reasons why it is importantfor us to focus on making things.

First, building of products is a great sour-ce of added value for the economy andsociety. The bulk of human endeavors ineconomic fields are revolving around use-ful added values, primarily in the form ofmaking things.

Second, capability for making things in-duces and supports technological pro-gress. Today, many Japanese argue fordevoting ever more efforts to developingsophisticated kinds of fundamental tech-nology. In many instances, however, thiswould tend to generate disregard and in-attention toward the capability for ma-king things, namely, development enginee-

ring and manufacturing technology. AndI personally have grave concerns aboutthis trend.

To begin with, technology cannot advan-ce on a broad scale if you isolate basictechnology from applied technology. The-se two aspects of technology must be pre-sent to work with each other, to stimulateeach other, and to be fused into amalgamon occasions, while exchanging their re-spective needs and seeds between them,for ultimate advancement in both.

Third, making things is important becau-se it brings excitement and joy to the peop-le involved. Human beings are instinctive-ly capable of perceiving beauty in pro-ducts of high quality and high perfor-mance. You must not forget that the act ofmaking things brings joy to your heart andsuch an act is enjoyable in itself. To exer-cise your mind, exert your limbs, and spendyour time, all for the purpose of makingnew things, represent a process that youcan find gratifying; and when finally theproduct is complete at the end of yourmental and physical exercise, you will benaturally filled with a sense of joy and ful-fillment.

Additionally, I would like to say that buil-ding products does build people, or helppeople grow. The issue we have to dealwith is how to develop good people formaking good products. We have to prepa-re people and help people develop them-selves through the accumulation of expe-rience by performing round and round ofwork day after day.

In other words, we are building humanbeings by going through the process ofbuilding products; and skilful people thusdeveloped can then rise up to yet greaterproduct-building challenges. This is acontinuous process of building humancapability through OJT, or on-the-job trai-ning.

What is important here is the fact that buil-ding human beings means more than justletting them acquire necessary skills,know-how, or techniques.

When we say we "build people" at Toyota,it doesn't just mean that we have peopleskilful enough to build high-quality pro-ducts on a timely basis. It also means thatour people will have a strong sense of re-sponsibility so that they abide by rules forsafety and honor agreements made amongteam members for joint work; and it alsomeans that every member of the Toyotaorganization is strongly motivated to im-

prove oneself to aspire for ever higher skilllevels.

Let me cite an example: We at Toyota havealways been very attentive to what we call"Four S's." The four S's here stand for sif-ting, sorting, and spick and span. Tho-rough attention to them helps us identifyglitches on shop floors and visualize trou-bles caused by overburdening, non-value-adding activity and unevenness.

We have made a full use of ideas and expe-riences of our people directly engaged inproduction so that we can eliminate pro-blems arising out of disregard of the 4-S'sin every part of our manufacturing opera-tions; and as a result, we have been ableto build and refine the Toyota ProductionSystem, including the "just-in-time" systemwhich many of you may be familiar with.This type of down-to-earth approaches inmanufacturing have helped us constantlyimprove our sensitivity to such factors assafety, quality, efficiency, and costs, andare inherited from generation to genera-tion as the DNA, as it were, of Toyota.

Global competition is growing increasin-gly fierce, and we are right in the middleof it. For Toyota to maintain and improveits competitive capability as a businessentity, it is crucially important that we findsuitable ways to pass on our "manage-ment philosophy" firmly rooted in the ideaof making things, to later generations ofToyota workers and also to share our phi-losophy with Toyota's local members out-side Japan.

As part of the source of Toyota's competi-tiveness, we have selected and arrangedsets of fundamental beliefs and approa-ches. In other words, sets of values andcodes of conduct that will have to beshared by all members of Global Toyota,in the form of the "Toyota Way" for world-wide application.”

References

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[1] Micheline Maynard, “The End of De-troit: How the Big Three Lost Their Grip onthe American Car Market”, Doubleday, adivision of Random House, Inc. October2003

[2] James P. Womack, Daniel T. Jones, Da-niel Roos, "The Machine That Changedthe World : The Story of Lean Production",Rawson Associates, a division of McMil-lan Publishing Company, 1990

[3] Taiichi Ohno, "Toyota Production Sy-stem, Beyond Large-Scale Production",Productivity Press, Portland, Oregon,English Translation 1988

[4] Jeffrey K. Liker, "The Toyota Way, 14Management Principles from the World'sGreatest Manufacturer", McGraw-Hill,2004

[5] Samuel Smiles, “Self-Help”, in Englanderstmals im Jahre 1895 veröffentlicht, Neu-ausgabe durch Oxford University Press,Oxford, 2002

[6] Carlos Ghosn, "Shift: Inside Nissan'sHistoric Revival", Bantam Dell Pub Group,2004

CH-8126 Zumikon, 1st April 2005

THE SWISS DEMING INSTITUTE

P.O. Box 71, Langwisstrasse 22

CH-8126 Zumikon

Telephone: +41 44 918 11 19Telefax: +41 44 918 11 70E-Mail: [email protected]

Internet: http://www.deming.ch

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5_The Toyota Phenomenon