Organizational Structure and Design at Toyota

Toyota Motor Corporation (TMC) has been enjoying the enviable position of being referred to as the gold standard of the automotive industry. As of 2014, the company was the largest automaker in the world, had over 300,000 employees, and was among the top 20 companies in the world based on revenue. Headquartered in Tokyo City, Toyota Motor Corporation is the maker of Toyota, Lexus, and Scion, with its hybrid electric Prius brand becoming a status symbol in affluent and environmentally conscious neighborhoods.

Toyota owes its success largely to its manufacturing system, based in large part on the Total Quality Management (TQM) principles W. Edwards Deming brought to Japan shortly after the Second World War. Toyota Production System (TPS), originally named “just-in-time” production, allows Toyota to deliver raw materials and supplies to the assembly line exactly at the time they are to be used. TPS is now commonly known as lean manufacturing, and its principles transformed businesses including the retail giant Amazon, hospitals, banks, and airlines. The system has a lot of components, including Kaizen, or the idea of continuous improvement and always questioning how things are done; Kanban, or just-in-time production; and the Andon Cord, where assembly line workers are empowered to pull a cord and stop the manufacturing line when they see a problem. What this mean is that at the company’s plants throughout the world, every worker is empowered to shut down the production line if there's a problem, no matter how small. Ultimately, the fundamental idea behind TPS is respect for customers and employees, where front-line employees are empowered to provide the best products and services with minimum waste.

The belief that good enough is never enough permeates all levels. One Toyota executive attributes that mindset to paranoia about what the competition is doing. It is a healthy paranoia that is valuable to an organization, even when it has reached the top, as Toyota did when it passed GM to become the world's largest car manufacturer.

A big part of the Toyota system is being a learning organization. Management seeks input, listens, and spreads knowledge quickly throughout the organization to make improvements. When its plant in Vietnam found a less-costly way to keep the parts of a car together as it is being welded, Toyota installed the new assembly process in its factories around the world within six months.

In the end, though, production systems are only as good as company cultures, and the success of a business requires both. The years 2009 and 2010 were fraught with safety crises for Toyota, resulting in the recall of more than 6 million vehicles due to accelerator pedals that got stuck. The resulting criminal investigation led to an eventual settlement of $1.2 billion in 2014 with the Justice Department. The recall crisis (and the slow response to it) was a major hit to the reputation of the company. The year 2011 saw Toyota struggle with the aftermath of an earthquake in Japan that derailed production. The global financial crisis was a hit to the company’s profits as well.

What happened? One key issue was the rapid growth of the company. Expansion strained resources across the organization and slowed response time. Toyota’s CEO, Akio Toyoda, the grandson of its founder, conceded, “Quite frankly, I fear the pace at which we have grown may have been too quick.” The company had begun to put growth-related goals in front of quality goals, rewarding those who reached their growth-related metrics. Rapid growth also meant that the company had to hire new employees quickly with little time spent on training them on the “Toyota way,” and had to hire a large number of contract employees. These changes in the composition of employees meant that communication, coordination, and trust suffered.

Another key problem was the centralized, Japanese-controlled organizational structure. At the time of the crisis, Toyota was a highly centralized organization that did not delegate much authority or decision making power to its operations in the United States, even though the U.S. market provided two-thirds of its profits. Every time there was a quality issue that necessitated a recall, the problem needed to be communicated to headquarters using a highly bureaucratic process, and then headquarters would provide the solution. All U.S. executives were assigned a Japanese boss to mentor them, and no Toyota executive in the United States was authorized to issue a recall. Most information flow was one way, back to Japan where decisions are made. Often, the upper management dismissed quality concerns raised by lower management. In short, Toyota had become too bureaucratic, too centralized, and too big for the challenges it was facing.

Assignment: You are a management consultant who specializes in helping companies determine how best to design their organizational structure and, as such, you have been hired to evaluate Toyota’s current structure and make a recommendation as to which structural design will be most appropriate now and in the future as changes in the external environment affect the company. Your analysis should yield at least two alternatives for Mr. Toyoda to consider, but you must recommend one to him. The recommended design should be the one you believe will help the company operate more efficiently and effectively without disrupting its current TQM-based culture.