Case Study Of Toyotas Vehicle Recall Management Essay

This study focuses on the risk of reputational damage from an emergency situation and uses the Toyota recall crisis as a case study. The study examines Toyota's actions - as relates to preserving its reputation - as more than 8 million of its automobiles are recalled from 2009-2010. In order to do this, Toyota's actions are benchmarked against critical risk factors discovered in the Roads to Ruin report conducted by Cass Business School for Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC).

The findings from the situation revealed that a serious breakdown in Toyota's culture and a violation of its plainly stated principles of quality and customer-focus were the root factors behind its reputational decline. Upon closer study of the Toyota case, we find that the Toyota crisis escalated majorly because the company seemed to haven't any plan whatsoever to get ready for an emergency of the magnitude it faced and hence didn't protect its reputation. The case goes on to highlight various risk management that may be incorporated by businesses, managers and CEOs to preserve their reputation in crisis situations and prevent common pitfalls that lead to reputational decline.

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Executive summary

This paper explores the subject of corporate reputation and the chance an emergency situation poses to a company's reputation. The main objective of this study is to extract risk management lessons from an emergency situation that may be employed by managers and CEOs to avoid reputational decline in similar circumstances. The paper is structured as a case study that targets Toyota Motor Corporation as it faced the best threat to its reputation - the recall of its vehicles in '09 2009. It explores key factors that made Toyota vulnerable during the recall and explores the consequences of the recall on Toyota's reputation.

In order to determine the underlying risk factors that exacerbated the crisis, Toyota is benchmarked against critical risk factors discovered in the 'Roads to Ruin' report - a research report on risk management by Cass Business School for AIRMIC. The report was chosen since it offers a rich way to obtain lessons about risk, risk analysis and risk management by detailing over one hundred specific 'lessons about risk' from different case studies of companies in reputation-damaging crisis situations.

Upon closer examination of the facts of the Toyota case, we find that Toyota's reputation was damaged because the company seemed to haven't any plan whatsoever to prepare for a crisis of the magnitude it faced and hence didn't protect its reputation. Amongst other known reasons for Toyota's reputational decline were these factors: management were not communicating effectively with stakeholders during the crisis; decision making was centred in Japan where in fact the company was head-quartered making the crisis response very slow. We also discover that Toyota shelved its corporate values which made it symbolic for quality in its search for growth.

In order to understand the Toyota crisis, the paper starts off with a brief introduction of Toyota Motor Corporation, highlighting its businesses and its own reputation before the recall crisis. A timeline of the recall is also included to provide an overview of the flow of events through the period under review. Literature on corporate reputation, its importance and ownership is reviewed in the second part of the study whilst chapter three sets out the methodology used in this study. Chapter four and five represent the crux of this work - examining Toyota's actions in greater detail. The study work ends with important tips for managers for preserving reputation in a crisis situation.

Table of Contents

CHAPTER 1: Introduction

"Glass, China, and reputation are often cracked, rather than well mended. " -Benjamin Franklin.

A couple of years ago, if we talked about companies with good reputations, the Japanese carmaker Toyota might have been mentioned. 2008 specifically was a good year for Toyota; Toyota was arguably one of the very best brands worldwide, scoring high points for reliability and product quality on various reputational studies. It had been the 6th top brand in the world according to interbrand's 'Top 100 brands in the world' list and was highly reputed for its reliability, customer-focus, and world-class quality. Because of the 27th of February, 2009, Toyota had moved up to third put on the "World's Most Admired" list, behind only Apple and Berkshire Hathaway. The company had the coveted 'AAA' rating from Fitch and customers and car-enthusiasts alike had come to equate Toyota with quality. Even the business's philosophies, visions and promotional initiatives were unequivocal in stressing its commitment to quality

However as Toyota recalled vehicle after vehicle in 2009 2009, its pristine reputation for quality was badly damaged. Toyota literally drove into a reputational crisis enjoy it had never seen before; the crisis was exceptionally damaging to the business's reputation as it struck its perceived core competence - safety and quality.

Company Background

TOYOTA MOTOR CORPORATION is a Japan-based company mainly engaged in the automobile and financial business. THE BUSINESS operates through three business divisions. THE AUTO segment is engaged in the look, manufacture and sale of car products including passenger cars, minivans and trucks, as well as the related parts and accessories. The Finance segment is mixed up in provision of financial services related to the sale of the business's products, as well as the leasing of vehicles and equipment. The "Others" segment is mixed up in design, manufacture and sale of housings, as well as information and communication business.

For its automotive functions - which is the focus of the study- Toyota produces and sells passenger cars, minivans and commercial vehicles, such as trucks. Toyota's vehicles can be classified into two categories: conventional engine vehicles and hybrid vehicles. Toyota's product line-up includes subcompact and compact cars, mini-vehicles, mid-size, luxury, sports and specialty cars, recreational & sport-utility vehicles, pickup trucks, minivans, trucks and buses. THE BUSINESS'S subcompact and compact cars are the four-door Corolla sedan and the Yaris.

In North America, Europe and Japan, Toyota's luxury line-up consists mostly of vehicles and other luxury sport-utility vehicles sold under the Lexus brand name. Toyota sport-utility vehicles available in North America also include the Sequoia, the 4Runner, the RAV4, the Highlander, the FJ Cruiser and the Land Cruiser, and pickup trucks available will be the Tacoma and Tundra. Toyota also sells the Century limousine in Japan. Toyota's product line-up includes trucks (including vans) up to gross vehicle weight of five tons and micro-buses, which are sold in Japan and in overseas markets. Trucks and buses are also manufactured and sold by Hino, a subsidiary of Toyota. Hino's product line-up includes large trucks with a gross vehicle weight of over 11 tons, medium trucks with a gross vehicle weight of between five and 11 tons, and small trucks with a gross vehicle weight of up to five tons.

More than its cars, Toyota is well known for its 'TOYOTA WAY' - a couple of principles and behaviours that underlie the Toyota Motor Corporation's managerial approach and production system. These principles have been taught in a variety of business schools and adapted in a variety of organisations. The principles are summarised in the figure below

Figure : The Toyota way (Source: Hispage TONOway)

1. 2 The Recall Crisis

Toyota's recall fiasco took a disastrous start the 28th of August 2009 in San Diego, California. According to news reports, Mark Saylor and his wife, daughter and brother-in-law (Chris Lastrella) were killed when their Lexus, on loan from a dealer, careened uncontrollable at more than 100mph, collided with another vehicle, and crashed into a ravine, setting the car ablaze.

Figure : Inset is an image of the vehicle after the accident (Source: PowayPatch)

The family's high-speed tragedy was captured with a 911 call; worries in the caller - Chris Lastrella's voice was apparent as he said 'there are no brakes we have to pray' and lastly, their high-pitched screams as the car crashed.

Over the next six months third, incident, Toyota would issue three separate recalls related to vehicle speed control for over 8 million vehicles; costing the business hundreds of millions of dollars in sales and immeasurable reputational damage. As the crisis intensified, Toyota became the target of adverse media attention with criticisms via various stakeholders for its actions during this period, and because of its delay in identifying the fault and recalling the damaged vehicles.

1. 3 Timeline

This section provides a chronological flow of the events leading up to and surrounding the recall crisis

2000 A cost cutting exercise called "Construction of Cost Competitiveness for the 21st Century" is launched by Toyota with the aim of reducing the expense of 180 car parts by 30% and saving $10 billion by 2005.

31-12-04 Toyota's vehicles accounted for approximately 20% of all unintended acceleration complaints filed with National Highway Traffic Safety Administration (NHTSA), up from 4 percent in 2000.

26-09-07 First "floor mat" recall in US of 55, 000 vehicles to improve possible driver's floor mat creating accelerator pedal entrapment.

28-08-09 Off-duty California Highway Patrol officer Mark Saylor is traveling on Highway 125 in Santee, California (northeast of NORTH PARK), with three members of the family, when the 2009 2009 Lexus ES350 he is driving suddenly accelerates out of control, hits another car, tumbles down an embankment and catches fire. As the car is careening down the highway at speeds estimated to exceed 100 mph, his brother-in-law calls 911 and reports that the car has "no brakes. " All four are killed in the ensuing crash.

14-09-09 Preliminary reports from Toyota and local authorities indicate that the Lexus, which have been on loan from Bob Baker Lexus of NORTH PARK, where Saylor's personal Lexus vehicle was being serviced, may have had the incorrect floor mats installed, interfering with the gas pedal.

29-09-09 Toyota announces it is recalling the ground mats on 4. 2 million Toyota and Lexus vehicles.

2-10-09 Newly installed Toyota CEO Akio Toyoda publically apologizes to the Saylor family members killed in the accident and every customer influenced by the recall.

30-10-09 Toyota begins sending letters to owners notifying them of the unspecified upcoming recall to repair the unintended acceleration issue. In the letters Toyota says "no defect exists. "

2-11-09 NHTSA takes the highly unusual step of publicly rebuking Toyota, calling a firm news release re-iterating the statements manufactured in the 30 October letter to owners "inaccurate" and "misleading, " noting that the ground mat recall was an "interim" measure and this it "will not correct the underlying defect. " Toyota publicly apologizes.

02-11-09 Second "floor mat" recall in US of 3. 8 million Toyota and Lexus vehicles to correct possible driver's floor mat causing accelerator pedal entrapment.

25-11-09 Second recall of 3. 8 million vehicles amended to additionally reconfigure accelerator pedal.

26-12-09 A Toyota Avalon crashes into a lake in Texas after accelerating uncontrollable. All occupants die. Floor mats are ruled out as a cause because they are found in the trunk of the car.

21-01-10 Toyota recalls another 2. 3 million Toyota-brand vehicles because of a problem with the gas pedal. Toyota says "a rare group of conditions which may cause the accelerator pedal to be harder to depress, slower to come back or, in the worst case, stuck in a partially depressed position. " The company says the new recall is unrelated to the ground mat recall, but also announces 1. 7 million Toyota vehicles would be afflicted by both recalls.

26-Jan-10 Toyota stops selling eight models in america after being sanctioned by the NHTSA to halt selling vehicles with acknowledged defects. Toyota will not say why it includes waited five days to avoid sales after announcing the recall.

29-Jan-10 Recall extended to at least one 1. 8 million Toyotas in Europe and China.

02-Feb-10 U. S. Transportation Secretary Ray LaHood sharply criticizes Toyota's response to the accelerator pedal concerns, telling the Associated press that Toyota may be "a little safety deaf" and this "while Toyota is taking responsible action now, it regrettably took an enormous effort to get to this aspect. "

09-Feb-10 Recall of 437, 000 Prius vehicles and other hybrid vehicles worldwide to improve possible faulty hybrid anti-lock brake software

23-Feb-10 Public hearings of various committees of the U. S. House of Representative regarding the Toyota safety issue. In the hearing, Toyoda publicly apologizes before Congress and pledges renewed commitment to quality and safety from Toyota.

24-Feb-10 Akio Toyoda, president and CEO of Toyota, issues the following statement at the congressional hearing

"Toyota has, for the past few years, been expanding its business rapidly. To be honest, I fear the pace of which we've grown might have been too quick. I would like to point out here that Toyota's priority has traditionally been the next: First; Safety, Second; Quality, and Third; Volume. These priorities became confused, and we were not able to stop, think, and make improvements up to we could actually before, and our basic stance to hear customers' voices to make better products has weakened somewhat. We pursued growth above the speed of which we were able to develop our people and our company, and we have to sincerely keep an eye on that. I regret that has resulted in the safety issues described in the recalls we face today, and I am deeply sorry for any accidents that Toyota drivers have experienced. Especially, I would like to increase my condolences to the members of the Saylor family, for the accident in NORTH PARK. I would like to send my prayers again, and I'll do everything in my own capacity to ensure that such a tragedy never happens again. "

1. 4 Aims and Objectives

The Toyota research study can be an insightful one as it involves the overview of management response in a crisis situation that involved major loss of lives and regulatory action. By concentrating on Toyota's management response, the purpose of this study is to provide useful recommendations for preserving corporate reputation in an emergency situation. The work will give attention to Toyota's response, its crisis management and the result of the crisis on the business's reputation. In so doing, the author aims to extract essential risk management lessons from the truth.

The objectives of this study are to

Trace the underlying cause of the crisis using the risk factors determined in the Roads to Ruin Report by Cass Business School for AIRMIC.

Evaluate the impact of the incident on the ratings, profitability and reputation of the business.

Evaluate the actions of the CEO, highlighting what he did well and what he did not achieve this task well.

Outline the key consequences of the crisis for shareholders and other stakeholders

Outline the main element risk management lessons to be learnt.

Every reputational crisis differs and there is no panacea for a reputational crisis but this research work seeks to give a valuable tool for protecting and managing reputational risk when a crisis occurs.

In order to fulfil the objectives in the above list, the following research questions will be answered

What made Toyota particularly vulnerable during the recall crisis?

How did the recall crisis and its own ensuing consequences affect the budget and trustworthiness of the company?

How was the recall handled?

How could it have been better handled?

What lessons can be learnt such that a future crisis is managed better?

What was the impact of failing woefully to meet its stakeholder's expectations on Toyota's reputation?

CHAPTER 2: Literature Review

O wad some Power the giftie gie us

To see oursels as ithers see us!

It wad frae monie a blunder free us,

An' foolish notion

Robert Burns

Every individual, every company, every organisation - whether it is a big multi-national or a tiny food kiosk by the corner- have a very important factor in keeping; a reputation. As time passes, 'every contact, every media mention, every rumour, every leak, every piece of gossip (whether true or not) will play its part in forming a standard impression of organisation's standing'. This developed reputation not only has a substantial impact on share price; but also influences the strength of the brand and determines its competitive advantage between its peers. As Bill Margaritis puts it: 'a strong corporate reputation is a life preserver in a crisis and a tailwind when you have an opportunity'

2. 1 Corporate Reputation: An Overview

In modern times, the thought of reputation as a strong business asset has received increased recognition in general management literature. Series of publications have appeared dealing with the advantages of positive corporate reputations, risks to reputation, and reputational risk management. This increased interest grew out of any realization an organization's reputation is a major determinant for its short run and long haul success and differential advantage in any business environment. Furthermore, the last decade has seen lots of the world's most admired companies descend using their company once lofty positions. In light of all these, it is not a surprise that corporate reputation has began to feature prominently on Swiss Re's and Aon's study of the most notable ten risks determined by corporate executives. This emphasises the idea that management and other stakeholders have started to see the importance of corporate reputation and the many factors that make up the trustworthiness of their firm.

Fomburn (1996) defines reputation as the 'overall estimation in which a company is held by its constituents' that can be formed predicated on 'the net perception of your company's ability to meet the expectation of most its stakeholders'. This perception will most likely be based on both organisation's actions and inactions in a way that 'everything an organisation does, and will not do, has a primary impact on their reputation' Dolphin (2004). Other authors, such as Bromley (2001) emphasize the differing nature of reputation and describe reputation as 'the distribution of opinions in regards to a person or organisation'

A more balanced view of corporate reputation according to (Warwick, 1992) is the view that corporate reputation is alone an aggregate evaluation created by stakeholders of how well a corporation is meeting stakeholder's expectations based on its past behaviour. (Atkins, et al. , 2006), also address corporate reputation and reputational risk from this perspective and define reputational risk as the 'threat to a company's reputation caused by a failure to meet stakeholder's reasonable expectations of any organisation's performance or behaviour'. 'Corporate reputation should (also) be considered in conditions of its historical context, i. e. a corporation's track record. A company's standing in the community and available on the market all help condition its reputation' Fomburn (1996).

A 'reputation is much more than brand image, and includes factors such as trust in the organisation's integrity and exactly how it'll conduct itself in the future, both at the organization level and through the actions of its management and staff. '. (Atkins, et al. , 2006). Additionally it is an important form of corporate capital that determines to a sizable extent the business's worth, quite simply, it is 'an index of an company's worth or value' (Bromley, 2000). In determining corporate value, most authors have come to concur that a reputation is an indicator of the company's future performance. 'A favourable reputation is powerful enough to convince the undecided to choose a certain service or product and dissuade existing customers from moving to a competitor; whereas a damaged reputation can be irreparable and in extreme cases, lead to a company's down fall' (O'Rourke, 2004). 'In order to create a favourable reputation, four attributes need to be developed: credibility, trustworthiness, reliability and responsibility'.

Reputation is alone intangible, untouchable & most times immeasurable. 'Reputation often can not be quantified, compared against hard benchmarks or analysed in the same way as financial or other numerical data. Its management requires softer skills such as sound judgement, an ability to anticipate future trends and requirements, understand stakeholder concerns, listen carefully, consider dispassionately and respond constructively. ' (Rayner, 2003). A 'good' corporate reputation can take many long years to develop; it could be destroyed immediately via an ill-considered 'off-the-record' remark, a lapse in personal behaviour, an ethical blunder in the supply chain or an inadequate respond to a crisis. In what of Warren Buffet who's considered the most successful investor of the 20th century 'it takes two decades to create a reputation and five minutes to destroy it'.

An area where authors share different views is as regards 'ownership of reputational risk'. The first approach argues that one individual or a group of individuals be appointed with the only real responsibility of preserving the business's reputation. It is probably due to the inefficiencies of some CEOs through the years in safeguarding reputation that some authors argue that a reputation officer or a reputation department be charged with the responsibility of handling and sustaining the organization reputation. Others have criticised this view for various reasons, the primary one been that, appointing a chief reputational office tends to remove the knowing of the value of safeguarding corporate reputation from the Board of Directors and other top executives.

Another approach is the one which states that every person in the organisation is responsible/accountable for the corporate reputation. As good as this argument might sound (it can make some sense for everybody in the organisation to understand maintaining the organisation's good name), the loophole is in the danger that leaves the accountability for corporate reputation as everyone's task which generally in most times equals no one's task.

The third approach argues that the responsibility for corporate reputation should rest on the CEO. According to the school, various studies show that CEO's understand the value of an good reputation and hence should safeguard it. However, studies have also shown that few CEOs put any structure in spot to safeguard the reputational asset of the organisation. It is disappointing to notice that many CEO's who are supposed to be the custodians of the company's reputation have actually been the villains responsible for tarnishing the company's reputation. (This is certainly the truth with AIG's Hank Greenberg).

One important reason CEOs should be in charge of reputational risk rests on the actual fact that when people think of your company, they're usually thinking of the CEO, with his actions/inactions invariably contributing to the reputation of the organisation. As Dr Leslie Gaines-Row pointed out within an interview, failure to keep a good reputation should rest squarely on the shoulders of the CEO because in her own words

'CEOs increasingly end up in the spotlight during crises and are without question a strategic player in reputation recovery. Their success in managing reputational difficulties is one of the determining factors in whether stakeholders retain confidence in the business and believe reputation will eventually be restored. Because of this, failure to keep a good reputation rests squarely on the CEO's shoulders. (Studies show) that practically 60 percent of the blame is related to the CEO when crisis strikes. As the company's public face during times of crisis, and the business's chief reputation officer, the CEO should remain visible, and communicate honestly, transparently and proactively. CEOs must present themselves to stakeholders, whether it's customers, financial analysts or employees, regularly with the business's vision, code of conduct and values. By taking responsibility, acting quickly and compassionately, listening carefully, and establishing clear priorities, the CEO can set a good example for reputation recovery for the entire organization. '

'Reputation is the main asset entrusted to a CEO' (Schreiber, 2011). Not absolutely all CEOs recognize that, but a growing number do. Within a 2009 global study, AON Insurance asked 551 CEOs to rank the relative need for 31 risk factors. Reputation was ranked No. 6. In past AON studies before the current financial meltdown, reputation was the top-ranked CEO risk factor. But, what's troubling is the fact that two-thirds of the respondents had no "formal reputation risk plan" set up, and that figure has not changed substantially'.

2. 2 Ramifications of a Favourable Corporate Reputation

Strong reputations act as cushions in case there is a crisis and have the ability to protect a business from harm the effect of a crisis. 'A favourable prior reputation protects the organisation's reputation throughout a crisis in two aspects: it gives the organisation the advantage of doubt, which means that when a consumer holds a general favourable view of the company, the buyer might assign the business less crisis responsibility which in turn result in less reputational damage from the crisis; secondly, it acts as a shield, which serves as a part of the larger psychological phenomenon of expectancy confirmation, emphasizing that stakeholders will concentrate on the strengths of the organisation and disregard the recent negative information created by the crisis (Coombs and Holladay). In these ways, a good prior reputation perceived by consumers has the potential to lessen attributed crisis responsibility and dismiss the impact of the crisis. Strong, trustworthy reputations will usually always mean greater resilience in crisis situations. 'The occasional lapse of an reputationally strong company is likely to be regarded as a one-off aberration, since it has a good track record and its values and business ethos are plainly understood' the reaction will most probably be a shrug and a 'that's not like them' rather than a 'there they go again' (Rayner, 2003).

A typical case is that of oil companies who were ranked rather lower in public opinion. In cases where oil companies have faced major crisis, consumers have been less sympathetic with these corporate group. The BP case and the Exxon Vladez case are typical examples. A study in the late 1990s of the performance folks companies through the 1987 stock market crash found out that the shares of the ten most admired companies dropped less and recovered faster, as the shares of the ten least admired companies plunged 3 x as far - an extremely strong indication that creating a good corporate reputation pays real dividends.

Various authors have identified several benefits of a good corporate reputation
(Atkins, et al. , 2006) declare that a good reputation is 'highly valuable and will benefit a company enormously. Potentially, it can lead to
Banks being willing to supply loans on more favourable rates and terms

Good employees being drawn to improve the organisation, and their services being retained

Investors being more likely to place their capital in the firm;

Improvement in sales

Maintenance and enhancement of market share

Public perception of the organisation as a secured asset to the society in which it operates

(John & Croft, 2003), identify similar benefits

Securing profits and future cash flows

Attracting home based business partners

Securing investment

Attracting new customers - word-of-mouth

Inuencing political and legal affairs

Human capital: retaining good staff and attracting the best employees

Allowing easier entry to new markets and brand extensions

Enabling successful mergers and acquisitions

Helping to bolster relationships with suppliers and distributors and other direct stakeholders

Enhancing relationships with NGOs or corporate activists that potentially could be aligned against you

2. 3 Portion of Further Research

One area of interest for future research work recognized while carrying out this research work is on handling reputation risks from social networking sites and other online media sources - the so called blogging platforms 2. 0. Web 2 2. 0 allows users to interact and collaborate with one another in a social media dialogue and the mediums include social media sites like Facebook, blogs, twitter and other mediums which allow visitors to freely air their opinions. This area is important because in recent times, a lot of companies have had their reputation damaged through blogging platforms 2. 0 mediums. What makes blogging platforms 2. 0 dangerous is that response time is not a lot of; the most time an organisation has to squelch rumours or avoid a reputational disaster is a day. It would be immensely helpful if further research is done into helping companies and different organisations handle the potential risks from these mediums.

CHAPTER 3: Data Collection and Research Methodology

3. 1 Data Collection

Data has been collected from a wide range of secondary sources; newspaper articles, academic journals and online resources. This study was also based on documents from five categories of media: (i) print newspapers, (ii) online editions of print newspapers, (iii) the Associated Press newswire, (iv) Blogs, and (v) Internet forums.

3. 2 Methodology

The research is tailored as a case study. This method provides multi-perspective approach, incorporating the views of direct stakeholders, indirect stakeholders and the interactions between both of these groups.

This research study will be based mainly on secondary data. The paper will comprise the collection of secondary data from a broad variety of sources such as business academic journals, books, reports, newspapers and internet articles on the Toyota vehicle recall crisis. All information will be taken from the public domain and the writer has placed into consideration the probability of errors in press reports and other sources.

The research use various underlying risk classifications discovered in the 'Roads to Ruin' report by Cass Business School for AIRMIC to trace the underlying cause of the crisis. The 'Roads to Ruin' report is a highly valuable guide for this research as it investigates the origins and impacts of over twenty major corporate crises of the last decade. The report was chosen since it offers a rich way to obtain lessons about risk, risk analysis and risk management detailing over one hundred specific 'lessons about risk'. This will be particularly helpful when i develop my recommendations on this subject. An emergency communication framework produced by (Lukaszewski, January/February 1999) would also be utilized to analyse Toyota's crisis response.

CHAPTER 4 Overview of the Recall Crisis

In this chapter, the writer shall based on the research objectives, test the effectiveness of Toyota's reputational risk response to seven key risk areas recognized in the Roads to Ruin report and in so doing trace the deeper reason behind the crisis.

According to the report, these key risks areas include

Board skill and Non-Executive Directors (NED) control risks -risks due to the limitations on board competence and the ability of NEDs to effectively monitor and if necessary, control the executives.

Board risk blindness - the failure of boards to activate with important risks, including risks to reputation and licence to operate' to the same degree that they engage with reward and opportunity

Poor leadership on ethos and culture.

Defective communication - risks arising from the defective flow of important info within the organisation, including to board-equivalent levels.

Risks due to excessive complexity

Risks arising from inappropriate incentives - whether explicit or implicit.

Risk 'glass' ceilings - due to the shortcoming of risk management and internal audit teams to report on risks originating from higher levels of their organisation's hierarchy.

Primary risks

Secondary risks

Toyota checklist

Board skill and NED control

The risk posed by a board and NEDS who are not in effective control of the business

The risk that neither leaders nor NEDS as a whole have the skills essential to understand and run or, in case of NEDS, independently oversee the business.

the risk that NEDs are blinded by charismatic leaders

A1 and A2:There is a wide cultural disconnect between the Board in Japan and the American market. The American market obviously had a different culture from the familiar Japanese culture and demanded an alternative response. The board appeared to overlook this difference and the effectiveness of the board in dealing with the recall was compromised by this insufficient knowledge of the American market. Hence, the board didn't ask all the right questions and to understand

and evaluate the adequacy of answers they received.

Board risk blindness

the risk that the board fails to identify and guard against threats to the organisation's reputation and 'licence to operate'

the threat of failing to question the foundation of success

risk can emanate from anyone inside or outside

the organisation, including its top management

the risk of failure to strategically set and control appetite

Risk of failure to discover change in the chance environment.

risks from deficient crisis strategy

B1: The management's crisis response was more reactive than proactive showing that the board failed to prioritise the safeguarding of Toyota's reputation for safety and quality. Toyota's board's initial inactions showed so it didn't appreciate how

the company's reputational capital could be compromised

by its handling of the crisis. Toyota's board seemed to have given no thought

to dealing with a safety/quality issue, nor had it devised a technique to deal with this kind of problem even though its twelve-monthly report showed which it recognised the chance of such occurrence.

B2: Perhaps if Toyota had not been blinded by its success in 2008 and taken a crucial overview of its processes and performance, questioned its success, it may have discovered the gradual breakdown in its safety and quality processes.

The idea that Toyota's vehicles accounted for approximately 20% of most unintended acceleration complaints filed with the NHTSA must have raised warning flag on the potency of its quality controls.

B3: Top management's perceived indifference and defective communication strategy was also a significant risk factor- there is no public apology to the Saylor family from Akio Toyoda until the 2ndof October 2009, one full month following the accident. Akio Toyoda should have been more assertive in his role as Toyota's ultimate spokesperson to safeguard his company's reputation.

B4: Growth is a tricky issue; CEOs have to comprehend that organisational growth can lead to decline and perhaps, even death, hence the term 'grow and die'. CEOs need to understand that the complexity that growth brings is itself a way to obtain risk. Toyota's growth technique to be the main carmaker in the us, outrunning General Motors and Volkswagen played a part in its inattention to safety and quality. Toyota became so blinded by growth that it failed to safeguard and preserve its reputation for quality, safety and customers focus.

B5: An enormous reputational risk emanated from the board's failure to recognise the highly litigious and demanding American business environment.

B6: Even though the recall was announced, Toyota had no solution at hand to fix the issues. There is no information available on how or when Toyota was going to deal with the issue. The company could have benefited immensely if it had a recall crisis strategy beforehand. Frequent crisis simulation drills to prepare for this kind of event and other contingency plans must have been devote location to help Toyota deal with a recall. (especially as this is a frequent occurrence in the auto industry)

Secondly, Toyota's crisis response was too 'Toyota-focused' and merely reactive. The business showed no control over the press, and didn't react to the negative news releases it got every day. Everyone seemed to have something to state about the crisis except Toyota. There was too much focus on setting it up right, addressing the root of the challenge and incredibly little customer-focus. There is too little give attention to what information customers would like to hear and on safety measures to safeguard customers.

Toyota clearly forgot that the 'Customer is often King' and therefore failed to meet the expectations of this important stakeholder group.

Inadequate leadership on ethos and culture

the risks that boards havent set and universally applied on enough and coherent business and moral compass

the threat of failure by boards to set-up, and embed, throughout their organisation, a coherent strategy on safety that covers both physical and organisational safety

the threat of failing woefully to ensure that their moral compass and safety strategy are also implemented throughout its supply chain

the risk of perceived double standards

C1 and C2: Although Toyota is reputed because of its strong company ethos and culture, the business admitted to having shelved its ethos and culture in light of its growth strategy. Toyota didn't implement its guiding principles during the recall crisis. For instance Toyota's genchi genbutsu, or "go to see"which demands that management find out for themselves the root cause of the condition was ignored. Akio Toyoda sat in Japan for too long and failed to go and seewhat was happening in the us. Another Toyota principle nemawashi; "implement decisions rapidly" was also reserve, decision making was slow, implementation was even slower. Toyota failed to recognize that in crisis situations, reputations decline or improve by the seconds. Hence the necessity to move quickly to defend reputation.

C3:Toyota that was known for its ability to selectively choose and monitor its suppliers fell short in this specific case. The 'sticky' pedals accountable for the unintended acceleration in its vehicles were manufactured by its supplier CTS. However, true to its culture, Toyota accepted responsibility and avoided the finger-pointing game.

C4:Toyota had always been perceived as an organization that put customer safety first. Its respond to the crisis greatly disputed Toyota's claim of commitment to safety.

Defective communication

The risk that information will not flow freely everywhere - up and sideways as well as down - from the bottom to the very the surface of the organisation.

risks in a culture that does not listen or learn from experience

D1: One thing quite evident in cases like this, is the defective flow of information between your American arm and the Japanese headquarters. Toyota was too centralized -too much power was concentrated in Japan - to permit a quick response to the challenge in its American region.

In spite of Toyota's tremendous growth about the world, core engineering and design, postproduction engineering, quality and safety remained centralized in Japan. This centralisation meant that decisions such as the recall of vehicles could only be produced in Japan; hence the united states executives hands' were tied to make any recall decisions.

In cases of product safety where there appears to be a defect, it is always better to make an instant recall decision to enforce the business's commitment to safety and quality, Toyota stalled in this regard.

Secondly, there was an enormous gap in the understanding of local conditions and the urgency of the problem. In Akio Toyoda's words, "There is a gap between your time our U. S. colleagues realized that was an urgent situation and enough time we realized within Japan that there was an unexpected emergency happening in the U. S. it took 90 days for us to discover that this had converted into a crisis. "

Toyota had to learn that whatever reputational strategies have employment with an organisation must be tailored to fit the culture of the particular business environment it operates. To reach your goals, companies must learn to play to numerous audiences.

Risks from organisational complexity and change, including acquisitions

E:In his speech before congress, Akio Toyoda admitted that the fast pace of growth and the ensuing complexity was one of the chief causes of the recall. In his words, "to be honest, I fear that the pace of which we have grown may have been too quick. safety, quality, volume these priorities became confused and we cannot stop, think and make improvements just as much as we are able to before and our basic stance to listen to customer voice to make better products has weakened somewhat, we pursued growth within the speed of which we were able to develop our people and our organisation. "

Risks from incentives, whether explicit or implicit

Risks'Glass ceiling'

4. 1Review of Toyota's communication's strategy

In any reputational-damaging situation, communication plays a major role. We examine Toyota's communication strategy in the following table using a communication framework developed by (Lukaszewski, January/February 1999)

Urgent Reputation Preserving Responses

Toyota's Damaging Responses

Correct Approaches

Candor

Open Outward recognition through promptly verbalized public acknowledgement a problem exists; that people or sets of people, the environment, or the public trust is affected; which something will be done to remediate the situation.

Toyota insisted that 'our cars are perfect. We are sure there is nothing wrong'. In an emergency situation such as Toyota's where there was lack of human lives, people would much rather see Candor and sympathy than a defensive stance of the quality of products and services.

The company appeared to be absent during the crisis, merely reacting to the sway and toss of the media and its own news releases. Management didn't recognize that misinformation and fear is hard to erase once it starts circulating through the media.

No one appeared to be answering the questions in what was going on and the business appeared very reluctant to speak about the problem. Akio Toyoda's initial reluctance to appear before congress also disputed the business's willingness to stand up and answer questions about their cars.

Even though Toyota is reputed as a very quiet and private company, it should have made its efforts to help the affected families more public.

"It's our fault. "

"It shouldn't have happened. "

"We live helping the families through these terrible times. "

"We will relentlessly examine every aspect of your business to discover what happened, to fix it, talk about it, and discover that it will not happen again. "

Stand up and answer the questions.

Act to find the cause.

Explanation(no matter how silly, stupid, or embarrassing the problem creating error was)

Promptly and briefly describe why the problem occurred and the known underlying reasons or behaviors that led to the problem (even if there is only partial early information).

Talk in what was learned from the problem and how it will influence the organization's future behavior.

Unconditionally invest in regularly report more information until it is all out, or until no public interest remains.

Although Toyota was spending so much time behind the scenes to repair the trouble, it appeared as if the company was not doing anything since it was not communicating its efforts to its stakeholders.

Created conflict -especially through its recall notification letter ("We don't know what the cause is, but Toyota cars are safe, there is nothing wrong with this cars, but we have been recalling them because we were asked to) resulting in public confusion.

The company through its inactions put itself able to be perceived as a victim, its supplier as the perpetrator, the federal government and media as persecutors.

Initially refused to admit which it had not been prepared for what could easily be named a crucial vulnerability to customer safety.

Took a stance that implied a "We can't act until we have all the facts".

Did not stop the sale of cars before NHTSA ordered it to do so eight days after it issued the first recall.

Find the truth.

Take conclusive action: stop the sale of the cars.

Talk about the victims and their own families.

Act such as a neighbour.

Commit to the most obvious, e. g. , we weren't ready for this.

Keep focused on solving the neighborhood problem.

Release information constantly to inform and assure stakeholders.

Immediately correct erroneous information with more current, more accurate information.

Declaration

A public commitment and discussion of specific, positive steps to be studied conclusively address the problems and resolve the situation.

Waited too much time to produce a declaration.

Initially failed to conduct serious, credible, independent external investigation.

Toyota's failure to communicate created a void that made people believe it wasn't doing anything, when the company was actually working behind the scenes to create things right.

Should have recalled vehicles when the accident occurred and the safety of its vehicles were involved.

Media response was more Toyota-focused instead of customer-focused.

Talk from the victims'point of view.

Minimize the technical "stuff. "

Be explicit about doing whatever it takes for the victims.

Avoid disingenuous phrases

". . . these things happen, regrettably. . . "

". . . we didn't want to cause panic. . . "

". . . the media sensationalize everything. . . "

Contrition

The continuing verbalization of regret, empathy, sympathy, even embarrassment. Take appropriate responsibility for having allowed the problem to occur in the first place, whether by omission, commission, accident, or negligence.

Toyota constantly verbalized its regret, empathy, sympathy, and embarrassment. The Toyota CEO, Akio Toyoda took full responsibility for having allowed the situation that occurs.

Talk and become someone that you care about has been hurt.

Meet with families.

Let employees speak for the company.

Involve employees with each victim family.

Use empathetic language.

Express unconditional sympathy.

Consultation

Promptly ask for help and counsel from victims, government, and the community of origin - even from opponents.

Directly involve and request the participation of those most directly affected to help develop more permanent solutions, more acceptable behaviors, also to design principles and approaches that will preclude similar problems from occurring.

Never requested input from the victims.

Did not may actually ask suppliers to participate or donate to the resolution of the trouble.

Toyota must have partnered with the regulator rather than appearing to be at loggerheadswith the NHTSA.

Announce an unassailable panel of independent experts to study, recommend, and report publicly.

Let government agencies do the talking, when you focus on solving the condition.

Help victims speak out and make suggestions.

6. Commitment

Publicly set organizational goals at zero. Zero errors.

Zero defects.

Zero dumb decisions.

Zero problems.

Publicly promise that to the best of the organization's ability similar situations will never occur or reoccur.

Kept on selling cars even after announcing a recall.

Committed to ensuring no future mistakes, increased customer-focus, safety and quality.

Establish a permanent, broadly representative advisory group to make sure the public of the business's intentions on an on-going basis

7. Restitution

Find ways to quickly pay the price.

Make or require restitution.

Go beyond community and victim expectations and what would be needed under normal circumstances to remediate the challenge.

Adverse situations remediated quickly cost far less and are controversial for much shorter intervals.

Toyota decided to pay the NHTSA fine, even though it was the utmost fine allowable and the business promptly settled with the affected families after the court set the settlement.

Toyota dealers were given financial support to cushion the consequences of the recall on their productivity.

4. 2 Overview of CEO - Akio Toyoda's actions.

As explained earlier,

'CEOs increasingly find themselves in the spotlight during crises and are without question a strategic player in reputation recovery. Their success in managing reputational difficulties is one of the identifying factors in whether stakeholders retain confidence in the business and believe reputation will eventually be restored. As the business's public face during times of crisis, and the business's chief reputation officer, the CEO should remain visible, and communicate honestly, transparently and proactively taking responsibility, acting quickly and compassionately, listening carefully, and establishing clear priorities. . '

Akio Toyoda didn't fulfil the characteristics listed above at the critical stage of the crisis. Where he must have been visible, he was noticeably absent and failed to defend his organisation assertively. His slow response in addressing the general public particularly after the tragic death of the Saylor family in NORTH PARK was regarded as a lack of ability to lead, indecisiveness and unpreparedness. His major fault lay in his failure to discover the urgency and importance of the situation and this lead to significant reputational damage for Toyota.

The situation was aggravated when Toyota executives were called before Congress and Akio Toyoda initially refused the invitation to seem before Congress. Toyoda already had a trustworthiness of being media averse and his unavailability during the initial stage of the crisis escalated this view of him, and feed the perception that the media projected of him; that of been incapable to lead at an extremely crucial time in the business's existence. From his statements, it appeared that Akio Toyoda didn't understand that his occurrence was expected which was interpreted as indifference on his part and disrespect to the Congress and the general public at large. The public wished to hear from and become reassured by him, yet he didn't start to see the invitation as an chance to rebuild public trust in Toyota. A problem that was identified in Liker and Ogden's book "Toyota under Fire" (2011) was the gap in understanding and communication between the regions and headquarters. The Cultural misunderstandings compounded the President's initial response because the Japanese way of leadership is more subtle and less aggressive than what's expected in the United States.

Furthermore, Akio Toyoda and his board members didn't seem to obtain any crisis management strategy planned out and came across as incapable as the crisis unravelled. He didn't set up a crisis management team in the afflicted regions to report to him at any hour and monitor the problem, nor did he appear to realise that he needed a powerful communication technique to reassure global stakeholders and tell them of developments as they unfolded. This suggested that he didn't understand the public's expectation of daily or hourly updates to help ease uncertainty about Toyota's cars.

Although Akio Toyoda's response to the crisis was not immediate, he did respond in earnest. His repeated public admissions of falling short of expected standards, apologies, admission of personal responsibility and efforts to resolve the problems was a useful step in alleviating worries of varied stakeholders. His apologies were backed by actions showing commitment to resolve the condition by seeking input from outside experts, setting up and personally overseeing a quality improvement task force. The President addressed the shortcoming of not listening to customers and respecting their concerns and perspectives by going back to the basics to develop its staff and properly embed the Toyota culture in to the organisation. According to him, this was what brought the business its 50 years of fame, reverence and recognition prior to the distraction of growth amidst other factors managed to get lose its underlying principles. As he got to grips with the seriousness of the crisis, he went ahead to set up an internal committee called "Special Committee for Global Quality" to improve the quality inspection process, augment customer research and increase communication with regional authorities among other things. He engaged support from recognised external quality experts; creating an external panel to review most of Toyota's quality processes, provide feedback and flag out areas for quality practice improvement.

He also created a chief quality officer role in every region to oversee quality related issues before and after production; this is to encourage self-reliance, autonomy, decentralise quality control and bring Toyota closer to its customers. The chief quality officers become representatives of each region in the global quality committee. This also positions those to disseminate information or issues uncovered among the various regions, thus enabling a more powerful flow of information.

The most significant consequence of the recall crisis for senior management was a change in attitude towards their regional operations. Because of this, on March 30 2010, a "Special Committee for Global Quality" chaired by Akio Toyoda announced a six-point plan, namely

Improve the quality inspection process;

Enhance customer research by establishing customer information research offices in each region to accumulate information faster;

Establish an "automotive centre of quality excellence" in key regions to further develop quality professionals;

Engage support from outside experts by creating an external quality review panel.

Increase communication with regional authorities;

Improve regional autonomy, listen carefully to every single customer, and improve quality predicated on that.

Although there's a lot to criticise about Akio's response, we find that he upheld Toyota's philosophy of accepting responsibility. He accepted all responsibility for his company's actions and didn't apportion blame to customers, staff, suppliers or dealers, during the crisis.

Consequences of the Crisis

Toyota formerly the world's largest automaker slipped into third place behind General motors and Volkswagen. As the crisis intensified, significant market share was lost to opponents GM and others who quickly create incentives to attract Toyota's customers.

As seen from the table below, vehicle sales reduced by 13% from 2008

Market share in the U. S. A. market fell as vehicle sales were reduced drastically.

Source: Yahoo Finance

Toyota's UK market share tumbled. It fell completely from 18. 3% in 2009 2009 to 12. 9% in 2011.

Source: Yahoo Finance

Over 9 million Toyota vehicles were recalled worldwide.

The recall announcements had a direct negative influence on Toyota's share price. Stock prices went southbound and almost one-fifth of the company's value was wiped off the Tokyo stock market. Following a crisis Toyota's share price dropped to $72 a share by February 4 2010, representing a 21 % drop, and by August, the share price fell to a minimal point of $68 a share. However, by February 2011 the share price exceeded $93 a share, the rise in share price was related to a written report by NASA exonerating Toyota of fault for the crisis.

The recall was announced on September 29, 2009.

Pre-Crisis Stock Price: September 10, 2009 - $85. 46

Post-Crisis Stock Price: October 5, 2009 - $75. 07

Decrease: 12. 16%

Pre-Crisis Stock Price: January 21, 2010 - $90. 42

Post-Crisis Stock Price: February 2, 2010 - $71. 78

Decrease: 20. 61%

Note: The fact that decrease in share price was higher following second recall announcement, showing an additional drop in confidence in Toyota.

Toyota lost its competitive advantage - its reputation for exceptional quality

Toyota incurred incredible costs

Costs are the lack of potential operating income as vehicles were recalled - Toyota reported a $233 million operating loss from its North American region for 2010 2010.

The compulsory sales suspension also caused Toyota to lose huge sales opportunity; on May 11, 2010, Toyota revealed it had lost about $800 million in sales worldwide as production was completely halted in January 2010. Toyota estimated a recall cost of about $2 billion as at February 2010 and on May 11, 2010, Toyota revealed it had spent $1. 1 billion on recalling 8 million vehicles. Analysts' including JP Morgan's Kohei Takahashi estimated future costs to be much higher, stating that the recall would cost Toyota about $5. 5 billion. This is including recall-related costs and litigation settlements as various class actions were filed against Toyota alleging death or injury due to unintended acceleration. (At least 89 class-action lawsuits were filed against japan automaker). Initial costs to get each recalled vehicle repaired at the dealership stood at $20 per vehicle, 30-45 minutes repair time and hourly wage stood at $45-$50

Toyota's sustained growth was immediately truncated.

Toyota was fined $16. 4 million by the NHTSA (highest federal fine imposed by the agency)

A report by Allison Clarks on corporate reputation says when the crisis slowed down, more than 93 people had died; more than 8 million cars were recalled and production completely halted in Jan 2010.

Trust in Toyota and in its vehicles on the list of American clientele almost vanished during the recall, with a few customers reported to be 'too afraid to drive their Toyotas'

4. 3 Ratings

05/02/2010 - Standard & Poor's Ratings Services put its 'AA' long-term corporate credit and senior unsecured debt ratings on Toyota Motor Corp. on CreditWatch with negative implications. The CreditWatch placements was said to reflect Standard & Poor's increased concern above the potential negative impact on Toyota's business risk profile of unfolding developments related to recent quality-related issues. According to Standard & Poor's, the developments may affect the business's reputation for quality, weakening its competitive position.

By 22/04/2010, Moody's cut its credit history on Toyota Motor Corp by one notch. Moody's Investors Service lowered its senior unsecured rating on Toyota to Aa2, its third-highest ranking, from Aa1. It said the outlook was negative, leaving open the likelihood of an additional downgrade in the foreseeable future. Moody's predicted an extended slump in profitability and potential litigation costs from the massive recall that had tarnished the Japanese automaker's brand. According to Thomas Reuters, the ratings downgrade could make it more costly for Toyota to secure funding and service its $36 billion in outstanding debt, almost all of which matures between 2010 and 2012.

4/03/2011 - Toyota Motor Corp. , had its long-term debt rating cut by Standard & Poor's, which cited the company's "weak" profitability. Toyota's rating was reduced one step to AA-, the fourth- highest level, from AA. According to Moody, "The downgrade reflects our opinion that Toyota's profitability is unlikely to recuperate in the next one to two years to an even that people view as befitting the rating, "

4. 4 Consequences for Other Stakeholders

Customers;

The immediate consequence for Toyota's customers was mainly economic damage. Customers lost the utilization of the vehicles for a large amount of time during periods of the recall and the resale value of the cars dropped by 4-5%. Customers were also confronted with the inconvenience of taking their vehicle to the dealer to be fixed. The high volume of recall work also damaged other owners trying to get dealer service appointments. Because of this, some customers brought class actions against Toyota claiming damages for financial loss.

Following the recall, Toyota recognised and accepted that they had lost touch using their core value of putting the customer first. The urgency of the crisis created an opportunity to push through changes in their attitude towards their customers that could have otherwise taken years to attain. In order to achieve this, Toyota took steps to decentralise its procedures in order to communicate effectively and respond to its customers concerns. Also, the special committee on quality established "Customer First" training centres across operating regions. Another initiative taken by Toyota was to provide audience zero-interest rate financing on lots of models, reduced leasing rates and free two-year improved maintenance. This meant improved interaction between the customers and dealers in the first 2 yrs. Ultimately, customers benefited from the recall by Toyota's improved customer support, shorter user interaction cycles, targeted and efficient product design and responsive product recall.

Dealerships;

The immediate consequences of the crisis for the dealers were loss of revenue, panicked customers and logistical issues involving repairs. Dealers were reported to own lost an estimated $ 1. 2 million to $ 2 million dollars a month during the crisis. Almost all dealers extended their service hours, with most of them staying open 24 hours a day through the first week of the recall. However, Toyota cushioned a few of the immediate effects of the crisis by offering the dealers direct financial support and providing funds to compensate their customers. Toyota paid the eye expense on the cars the dealers had in inventory through the sales stoppage and also paid for the recall repairs. Due to the measures taken by Toyota, no dealership closed down; however, Toyota's reputational damage led to a drop in sales volumes for the dealers.

Chapter 5: Recommendations and Conclusions

5. 1 Risk Management Lessons Learnt

Crisis Management Must Be Proactive

'Crises aren't like fine wines, they don't improve with age. ' - Ronald J. Alsop.

In today's world of twenty-four hours media coverage and social networking sites, news travels like wild fire making the speed of response a lot more critical to preserving corporate reputation from damage. In order to prevent a media onslaught, companies should always be prepared with an emergency technique for the

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