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How the Mighty Fall

The inside workings of Toyota Motors was featured in a 2007 New York Times Magazine article1; unsurprisingly, the article presented a picture of a company riding high and ready to take its perch as the number one car maker in the world. Peter Drucker says the best time for management to ask "What business[es] are we in?" is when things are going well. That might have been good advice for Toyota.

While companies are not subject to the laws of the S-curve a cycle doomed to eventual decline most of the best companies are not able to remain on top despite immense advantages of capital, talent and iconic brands. These downfalls are often explained by inability to adapt to changing customer preferences and disruptive technologies, or an inability to manage growth, or simply an inability to implement new ideas inside a previously successful structure.

The corporate perspective focuses on markets, positions, and capability so that the company can succeed in times of inevitable change. This article will explore what the corporate perspective is and why it is so critical.

Toyota became muddled in the markets they entered. As reported in 2007, "[Toyota's] enormous cash reserves allowed it to spend billions on the pursuit of market share." With established success in fuel-efficient cars, including the hybrid Prius, Toyota chased share in American markets through its entry into the already entrenched truck and SUV markets.

Perhaps worse, Toyota shifted its focus from quality to growth, leading to disorganization and failed communication about serious quality issues. This has stressed the quality position that Toyota owned and that its customers expected.

Underlying this pursuit to do everything were competing priorities for production efficiency and design quality (i.e., design sophistication and customization). The need for efficiency led to cutting corners on production of cars. After all, most of Toyota's car markets (except the hybrid) were mature, and cost control is always a management imperative in these markets. Again, signs of this conflict were seen in 2007 as the company's intense focus on growing share "sparked a tremendous internal concern about quality-control problems." Toyota's once iron-clad capability of production quality suffered from its focus on growing capacity.

Staying on top is always difficult because it breeds attitudes of smugness that stifle innovation. Take Microsoft. Like Toyota it enjoys high market share with products like Office still reaping healthy profits. Yet over the last decade, the company has seemed lost in figuring out what to do next. As a result most new products have failed or merely been equal competitors. Says one insider, "Microsoft never developed a true system for innovation."2 In fact, the great success of Windows and Office have helped create a structure that not only inhibits innovation but cannibalizes it. For example, when developing a tablet PC in early 2000s the project was gobbled by the powerful Office division; the device's functionality was then compromised based on the design constraints of Office, not the design required for the tablet.

While the priorities of individual businesses must always revolve around gaining and retaining customers, the corporate perspective is critical in determining the long-term success of a company. Corporate executives must, as Drucker says, always ask what businesses the company should be in. There are several things that can help answer that question:

  • Ask what the company is good at doing. While UPS delivers packages, it is really good at logistics. While Amazon.com sells books, it is good at managing information. This should also include what the company needs to be good at doing, since changes to the environment may necessitate developing new capabilities (e.g., a new distribution channel, a new production process or a new product). Corporate should look at what the core technology is and direct investment there.

  • Monitor the markets that the firm plays in. Toyota let its scope get too broad, entering questionable markets. Markets change as well, and from the corporate perspective, no market is sacred.

  • Understand the positions the brand and its products hold in the minds of consumers. Toyota became successful because of its quality position. Nearly all car companies have recalls, but for Toyota the current problems are intensified because questionable quality violates customer expectations.

  • Look ahead all the time. Survival depends on someone looking ahead and considering contingencies that are one, two, or five years ahead.

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1"From 0 to 60 to World Domination." New York Times Magazine, Feb. 18, 2007. By Jon Gertner. http://www.nytimes.com/2007/02/18/magazine/18Toyota.t.html

2"Microsoft's creative destruction." New York Times, Feb. 4, 2010. By Dick Brass. http://www.nytimes.com/2010/02/04/opinion/04brass.html



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