1. Impossible goals: Toyota sets goals for itself that most would consider impossible to achieve, and it does this knowing full well that the means to achieve them may not yet exist.
2. Experimentation: Toyota encourages a high level of experimentation and learning from failure.
3. Local customization: Toyota customizes products and operations to incorporate the sophistication and diversity of local markets around the world.
These expansive methods can also lead to rigidities that interfere with necessary modifications or the adoption of new practices that could improve operations.
Toyota embraces these pressures to instigate continuous change and improvement, resulting in expansion and diversification of its activities into even more layers of complexity.
Impossible goals infuse the organization with the motivation to break free of established routines and try new things.
A solution must be found that is not a compromise or an easy way out of conflicting demands but is optimal. It is accomplished by seeing the problem from new perspectives and developing new approaches that transcend contradiction.
Toyota’s eagerness to experiment is an expansive force that has helped it scale the hurdles in achieving its impossible goals. First, it breaks down the big goal into manageable challenges. Then it tries to come up with new initiatives, practices, and processes for handling the more difficult challenges in each component. The goals may be audacious, but the experimentation is pragmatic and limited in scale.
These initiatives become opportunities for exploration and learning. They operate on the premise that every original plan for a project is imperfect and incomplete, and will only be completed by the project’s successors. If the original plan does not work, they learn from the experience, modify the plan, and try again. If it does work, they create a new routine from this successful practice and share it across the organization, aware that even new routines eventually will become obsolete. The organization then turns to chasing another challenging goal.
The force for experimentation underpins two sets of paradoxes in Toyota operations: gradualism versus the big leap, and stability versus paranoia. It tackles impossible goals through small, incremental experiments to achieve a significant evolution and institutionalizes new routines into existing, stable practices, fully aware that they will become obsolete. This approach drives the continuous search for new practices. The force of experimentation fosters learning and the willingness to try new things — key factors that continuously push Toyota out of its comfort zone toward new horizons.
Local customization acts as an expansive force on Toyota in ways that are different from other firms because it doesn’t just adapt to local needs. It customizes its products and operations to match the level of consumer sophistication in each locale. The opposite approach to localization is global standardization as practiced by Porsche of Germany. This method achieves lower production costs, increased profits, and a strong brand image by minimizing local customization and selectively satisfying only those customer demands that are common across markets. Porsche has benefited from this approach because of the economies of scale derived from standardizing products and operations, and it has yielded high levels of profit for the company. The determining factors for a successful global standardization strategy are simplicity and efficiency.
In contrast, Toyota’s strategy of local customization increases operational complexity because it addresses specific customer needs unique to each market and centralizes that process. A quicker way to implement local adaptation is to acquire an existing local manufacturer and allow it to function autonomously, as General Motors has done. This approach seeks to reduce complexity but increases redundancy and operational costs. Toyota’s customization approach concentrates product development and manufacturing preparation processes at its headquarters in Japan, while bringing in a high level of local input to tailor products for each market. This increases the operational complexity of the organization exponentially, while expanding the boundaries of Toyota’s knowledge base as it incorporates intelligence gathered from the various markets into the central process.
Does Toyota achieve local customization without sacrificing economies of scale? The numbers say yes. In 2006, Toyota led the Japanese market in units sold per model (24,700 units per model). In North America, Honda led but Toyota ran a close second with 90,300 units per model, over 40 percent more than third-placed Ford. In Europe, Toyota led its Japanese rivals by a margin of over 20 percent with 33,400 units per model. Toyota sells both locally customized models and “global cars” or standardized models like the Corolla, the Yaris, and the IMV Hilux, achieving more production units per model than its rivals while offering a broader product line through customization.
All three expansive forces have encouraged Toyota to find new customers, try new processes, and develop and use new technologies. Along the way, it becomes a more complex organization as it internalizes a greater variety of perspectives from the growing numbers of employees and customers in its many markets. A drawback of exponential expansion is that effective communication deteriorates, and it becomes increasingly difficult and costly to efficiently coordinate operations. How does Toyota cope with the hazards of constant expansion and growth? What is the glue that keeps it together? We had to dig deeper inside Toyota to find out.
4. Founders’ philosophies: Historic words of the founders represent the core values, shared and practiced by all, that are the foundation of Toyota’s unique corporate culture.
5. Nerve system: Toyota’s intricately layered network of open communication promotes a cross-pollination of knowledge and practice that ensures “everyone knows everything.”
6. Up and in: Toyota’s human resource management policy guarantees job security while emphasizing continuous development of individual creative potential through learning and improvement. This approach is in stark contrast to the more conventional “up or out” management policy where those who fail are out the door.
While the expansive forces extend Toyota’s organizational and knowledge boundaries, a set of integrative forces weave the company together and keep it from spinning out of control. These are: the founders’ philosophies, the nerve system, and up-and -in human resource management. These forces combine to center Toyota and perpetuate its culture while stabilizing its continuous expansion and absorption of new perspectives.
Toyota Founder share a common trait: they cultivated and passed on the practices and values that define Toyota’s corporate culture. These include the mindset of kaizen or continuous improvement, the values of respect for people and their individual capabilities, teamwork, humility, putting the customer first, and genchi genbutsu or seeing things firsthand. These simple philosophies are the basis of Toyota’s corporate values and have profoundly influenced its evolution.
While Toyota is not alone in having core values originating with its founders, it is unique in the way it inculcates and ritualizes them in practices designed to test and reinforce their relevance every day. The Toyota Production System, with its emphasis on kaizen, epitomizes this practice. The values are disseminated in stories and on-the-job training, and the accumulated anecdotes are retold and reflected on through history. Toyota began to organize and document these stories as global expansion accelerated, and it eventually published them in The Toyota Way 2001 handbook as a tool for instructing employees worldwide in the company’s core values. The continual retelling of these stories and their reinforcement in practice help Toyota employees cope with the uncertainties of constant change, providing a common framework to guide strategic decision making.
The nerve system refers to an intricately layered network of open communication, through which Toyota tries to preserve a small-town feel throughout its vast organization by ensuring “everybody knows everything.” Employees often work in cross-functional teams requiring communication that traverses departmental layers and functional reporting lines. This creates multiple layers of formal and informal communication that interconnect organizational units in myriad and often geographically dispersed ways. This tendency is encouraged by the company philosophy that sends all employees to the frontlines to see things firsthand, as well as by product development teams making frequent visits to customers and dealers to improve their understanding of markets (genchi genbutsu).
The internal structure of Toyota supports the free exchange of ideas, emphasizing the communication of differences to improve operations and resolve problems. Toyota executives are seriously committed to listening to all stakeholders and continuously have their ears to the ground. Every stakeholder’s opinion is respected and taken at face value in line with the core philosophy of respect for people. Their example facilitates the free movement of information among all employees. In essence, the nerve system of Toyota serves as the human version of the World Wide Web by which it senses and becomes aware of what is going on in all parts of the organization. By enabling effective listening and action, the nerve system has helped fine-tune Toyota’s sense of the different markets and their peculiar needs. And it synthesizes all this input to offer both customized and standardized “global cars.”
In the conventional up-or-out human resource management practice, employees are expected to achieve, and poor performers are weeded out. Toyota’s up-and-in treatment of employees guarantees them the long-term employment that was once typical of Japanese management practice, and it emphasizes continuous development of employee skills and experience. Individual skills are developed to serve long-term goals. This means employees are allowed to fail, and performance evaluation emphasizes learning over immediate results.
Toyota is committed to developing the potential of every employee. Junior staff are routinely trained on the job, paired with superiors who assign their tasks and coach them. The performance evaluation system is unique, even among Japanese companies doing long-term team-based evaluations. It assesses the ability to handle issues creatively, resilience, and jinbo or trust from other employees, among others.
So how do the three integrative forces work together to keep the company on a stable footing? First, they strengthen the existing corporate culture. Continuous sharing of the founders’ philosophies instills a sense that the company’s values are permanent and will stand the test of time. Up-and-in human resource management ensures the stability of the work-force and fortifies corporate memory, as employees stay longer within the organization. Second, Toyota’s culture of information sharing and open dialogue makes sense of an increasingly complicated reality through knowledge sharing and coordinated decision making. This is supported by multilayered and intricate face-to-face communication that serves as a powerful integrator of ideas and opinions dispersed throughout the organization. These three integrative forces — founders’ philosophies, the nerve system culture of dialogue, and up-and-in management — maintain the organic whole in its endless pursuit of expansion and transformation.
Six Forces Working Together
As their natures suggest, the six forces complement each other in their opposition. When expansive forces become too strong, integrative forces are triggered to maintain cohesion. It becomes more difficult for the nerve system to function effectively when expansive forces are adding new markets at greater distances across the globe. Toyota’s accelerated expansion after 2002 saw increased investments aimed at nourishing the nerve system to increase opportunities for employees to meet, get to know each other, and work together in formal and informal ways. Toyota also published its handbook, The Toyota Way 2001, to reinforce the founders’ philosophies of genchi genbutsu, respect for people, the customer first, and kaizen in the behavior of global managers.
Generally, the six forces, in combination, create complex dependencies that strengthen each of the forces and keep Toyota in a state of disequilibrium, where radical contradictions coexist, generating healthy tension and instability within the organization. Any change in the predominance of one of the forces disrupts this state, pushing the organization away from the comfort zone and sending it off on a new trajectory. The trajectories change along with the combination of forces, as is the case at any organization over time. The difference is that Toyota instigates this process of continuous instability interrupted by continuous change.