The Toyota Recall Crisis

Written by  Thursday, 14 April 2016 12:25

Background

In 2009, Toyota Motor Corporation recalled some of its cars following unintended acceleration that led to the death of innocent citizens (Klewes & Wreschniok, 2009).  Ultimately, Toyota recalled millions of automobile due to floor mat problems, "sticky" gas pedals and brake problems. This case was because of potential issues with the gas pedal system that caused the accelerator to become sticky despite whether the car had a floor mat. Toyota acknowledged that occasionally, the gas pedal system could wear down and cause the accelerator to become harder to press, stuck or slower to return. This implies the gas pedal was poorly designed.

In 2010, the company initiated a massive recall globally to address the issues that were linked to faulty accelerators, brake issues, and floor mats being stuck. The problem started in 2009 when a police officer and his family, using a Toyota Lexus unexpectedly accelerated and crashed into another car, tumbled and burst into flames resulting to the death of the driver. Initially, the company claimed that the vehicle might have been fitted with inappropriate floor mats that may have slipped, trapping the accelerator pedal (Klewes & Wreschniok, 2009).  Complaints about Toyota increased since this incident. Critics accused Toyota of covering up defects instead of addressing safety issues seriously. Be February 2010, Toyota had recalled nearly 10 million cars (Ray, 1999).  Despite efforts to cope with a crisis, a company still faces a secondary crisis that might be more threatening than the initial one by failing to communicate with the society and causing misunderstanding.

Significance of the problem and issues

This case is significant in the sense that a crisis may occur in any industry thus organizations must understand the various crises and the ultimate consequences on the business. This case represents a specific type of rhetorical exigence in the sense that it created a scenario in which companies must respond to ongoing threats. Crisis threatens an organization’s image, reputation, identity and creates uncertainty (Fronz, 2011). Therefore, organizations in all sectors cannot ignore this case. For businesses, this case demonstrates that strategic planning to respond to a crisis is the most appropriate option to eliminate the risk and uncertainty thus a business will have more control over a crisis and the outcome. Immediately after a crisis, this case notes that corporations must retain the public’s positive identity, image, and reputation it had prior to the crisis.  

Analysis of organization and operating environment-affecting preparation for and reaction to crisis

Central to the vehicle recall issue is Toyota’s delay in identifying and tackling the situation (Ray, 1999).  However well Toyota acts, and whatever it says now, it is perceived that they ignored the problem until they were compelled to take action. It seems that corporate denial is the order of the day with Toyota following the Japanese saying: "If it stinks, put a lid on it." The most successful crisis management occurs before the issue escalates out of control in the "incubation" phase (Fronz, 2011). Crisis management at its best had identified and addressed some of the biggest potential crises before they escalated out of control. This demands an organizational culture, which is vigilant for possible crises, has open communication lines between management and staff and has the willingness to handle unpleasant truths.

Contrary, Toyota’s culture was ill-equipped to identify and address flaws in a quick manner. Two aspects of their culture fostered this organizational environment: an obsession with quality meaning that anything less than perfection is considered embarrassing and shameful (Ray, 1999).  Consequently, quality defects are literally inconceivable, and denial dominates. The second interrelated aspect of Toyota’s culture is their hierarchical management approach and the absence of open communication lines. Under such an environment, junior subordinates who are strategically positioned to identify early signals of crisis feel unable to point flaws. In the end, issues go unnoticed and unaddressed until they explode into a main crisis.

Another element affecting Toyota’s preparation for and reaction to a crisis is that the crisis struck at the essence of their reputation. Studies indicate that when a crisis strikes at the heart of brand values, it holds the potential to do the most damage. The reputation of Toyota brand is built on reliability and quality and anything that questions this is particularly threatening.

Key publics

Stakeholders

Toyota’s loss in sales is merely shot term impact and can be solved, but the effect on key publics can be detrimental. The product recalls did not only affect Toyota’s manages but also its stakeholders. With a reduced financial position and profits, the company investors have departed, and employees are worried concerning their jobs. The recall was generally detrimental to the entire automobile sector. However, it improved market and financial positions of rivals such as Ford and General Motors (Fink, 2013).

Consumers

Toyota’s recalls had minimal impact as far as consumers are concerned because only a tiny fraction of consumers experienced the problem. For most owners, the most significant effect would be the inconvenience of taking the car to the dealer to be fixed. Besides, the high vehicle recalls affected other owners trying to secure a dealer appointment (Klewes & Wreschniok, 2009).  The effect on consumers will greatly rely on how well Toyota and the dealers manage this process. However, consumers are somehow expressing concerns about the reliability of Toyota’s cars and the possible effect on the resale value. Nevertheless, the effect on consumers is generally less profound that was expected. As such, Toyota cannot risk its highly valued image by releasing the faulty cars before the issue is clearly identified and fixed.

Toyota Dealerships

All Toyota dealerships experienced a decline in business than expected and since then, the future is not looking great for an auto dealership. The brand continues to melt in the limelight and is pilloried by major comedians such as Jay Leno: "It was a beautiful day in Los Angeles. It was so nice that a lot of people walked to work--at least the Toyota owners"  (Fronz, 2011). Therefore, these dealerships are the most obviously and directly affected by the crisis. Of course, they are feeling the effects many ways passed 2010. On social networking sites, the proof that Toyota’s reputation has suffered cannot be disputed. Prior to the crisis, the marketing agency Zeta Interactive estimates the buzz around the company’s brand at 80% (Pangarkar, 2011). However, today, it is estimated at 70% behind various rivals such as GMC, Kia, Subaru, and Chevrolet.

Rental Companies

Rental firms have not been left out of this crisis either. At least in the short term, rental companies appear to profit from Toyota’s debacles because plenty of vehicles are stranded at dealerships, waiting to be fixed. This ripple effect if projected to end, perhaps in months or years to come, as some angry, sue-happy customers and a giant, humbled car company warrant a mediator.

Communication

Immediately following the crisis, Toyota reacted by recalling all the faulty car models and stopped the manufacturing of these models. Toyota’s primary objective is to restore the trust customers used to have in its products and get back investors. The company has taken additional steps to persuade consumers to stick with the brand. This includes providing free services to people to persuade them to bring in affected automobiles for appropriate recall repairs. Extension of the manufacturer warranty also signifies a powerful move (Pangarkar, 2011).

Toyota has taken sweeping and swift actions on all digital fonts; company website, social media and blogs. It is maximizing on the power of social media such as Twitter and Facebook to handle this branding menace in a whole-hearted way. Toyota is using its Facebook page to reach out to its nearly 70,000 fans. The Japanese giant automaker is also using Twitter to pass news to its 14,000 followers (Fronz, 2011). This is what is expected of any brand in crisis management mode.

Another important step that Toyota has taken is creating a crisis management system and supply chain management system. The aim is that given that such a situation arises, the company will be adequately prepared and that employees and suppliers are looked and managed. Currently, crisis management is underway, and Toyota is following what Johnson and Johnson did following the Tylenol case.

Evaluation and Impact

A ruined business reputation drives down organizational value (Fink, 2013). In the US, when talking about business value, there is a propensity to focus on shareholder value. However, corporate managers in Japan are more aware that the value of their organization also has an effect on the company’s organizational and social principles, as well as its financial principles, such as the value of shareholders. For this reason, they feel that a general loss of these principles will eventually impact the company’s upcoming financial value. Toyota’s recall crisis, taken as a whole, ruined its business reputation, which then triggered a loss of Toyota’s organizational and social values as well as their financial value (Fronz, 2011). The company’s financial value is shown by their stock prices, earnings and the apparent worth of upcoming cash flow. It is advisable to look at how Toyota’s stock prices responded to the recall crisis. Their stock prices constantly declined after attaining an optimum of 8,400 yen, in 2007, and decreased to an all-time low of 2,600 yen in 2008, amplified by the failure of Lehman Brothers in 2009 (Ray, 1999).  

Remarkably enough, Toyota’s flagging stock cost, however, progressively started to rise after the organizational President attended the US public hearing in 2010, reaching 3,700 yen as of 2010 (Pangarkar, 2011).  In early 2009 a trend of stable improves in Toyota’s operating income, earnings and net profit instantly changed. As a cause of their reduced working income for 2009, in their formal declaration, the company revealed a reduction of 1,480 billion yen due to the effects of product composition and the reduced number of automobiles sold plus a loss of 800 billion yen due to the impact of exchange rate variations (Fronz, 2011).  Nevertheless, popular Japanese critics agree with the fact that the fundamental cause of financial loss was because Toyota’s global expansion strategy had failed in accomplishing sales of 10 million automobiles globally (Pangarkar, 2011).

Lessons learnt

Toyota’s recall case serves three valuable lessons about crisis communication. First, we learn that aggressive growth can lead to unmanageable risk (Fink, 2013). Toyota’s aim of surpassing GM as the leading carmaker in the world pushed it outside the limits of quality control. As is evidenced in The Wall Street Journal publications, “The evidence that Toyota was expanding too much and too quickly started surfacing a couple of years ago.  Not on the company's bottom line, but on its car-quality ratings” (Klewes & Wreschniok, 2009).  Experts observed that in 2005, the company recalled more trucks and cars than it sold. As of 2007, Consumer Reports magazine automatically halted recommending all Toyota car models following quality declines on three models (Fronz, 2011). This makes us wonder whether when approving management’s plan for expansion, the company’s executives exercised proper diligence in ensuring that they could achieve growth without gambling on the entire business. It seems acquiring market share was not worth the cost. This serves a quick warning to the executives of other high growth-oriented corporations.

The second lesson is to obtain the facts fast and manage risks aggressively. In the Toyota recall, one troublesome aspect is the company’s differing accounts of the same incident (Pangarkar, 2011). The recall involved 4 million vehicles whose gas pedal and floor mats had issues. Companies cannot predict when they might face crises. Nevertheless, proper internal risk assessment mechanisms could help identify business areas where management must be alert. By implementing robust risk management plans, companies can tackle such issues as they emerge on the internal organizational ladder screen. This would help contain them before they explode in public.

Another lesson is to accept responsibility whenever crises occur. It seems Toyota is good at this area. Some years back, when Audi faced issues similar to Toyota, their position was “it was the driver’s fault.” This reaction ultimately ruined Audi’s reputation. It seems Toyota avoided a situation of passing the buck as in an interview, one of their spokesman said  “I don’t want to get into any kind of a disagreement with CTS. Our position on suppliers has always been that Toyota is responsible for the cars” (Klewes & Wreschniok, 2009).

 

With such statements,  it seems accountability is a key issue. The case of Johnson & Johnson’s recall of its Tylenol painkiller in 1982 that caused the death of seven people in Chicago earned the company a permanent position in the spheres of crisis management (Fink, 2013). However, this recall emerged from the dreadful act of an outsider, as there were no issues with the product itself.

 

Recommendations

Besides, the recalls seem to have exposed issues within Toyota company. Although their in-house workers can produce high-quality products, it is argued that the company's unwillingness to outsource is the cause of their competition. The fast speed of their international development and improved number of manufacturing facilities, however, will make more issues than can be coped with by their Japanese workers. Specifically, there is also a view that since around the time when Toyota’s North America President and Vice President shifted to other manufacturers, there was a faltering of communication between Toyota Northern America and Toyota head office (Ray, 1999).  

Toyota must embark on a large-scale re-structuring of their company, among them their Japanese team organizations such as Hino Motors and Daihatsu (Fronz, 2011). At present, each of Toyota’s 18 team plants in Asia produces several different types of cars. By this summer, however, the manufacturing of each plant must be divided by kinds of car, such as into huge vehicles, small vehicles, and minivans. It is advisable for Toyota to foster a more convenient environment for performing and enhancing quality by optimizing its manufacturing of each kind of car. It must also create a hybrid version of its vehicle designs. Further, by implementing common car bodies and parts for the Vitz, Corolla, and other designs, Toyota should seek to achieve a yearly cost reduction of 200 billion yen in the next five years.

 

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