The Toyota Recall

Most introductory textbooks in introduction to business, management, and organizational behaviour describe the philosophy of continuous improvement and emphasize the importance of quality management. Continuous improvement means that everyone in an organization is thinking about ways to improve operations, even if the company is already doing well. Quality management means producing products that are fit for consumer use and reliably do what they are supposed to do. If these two ideas are implemented, so the argument goes, the result will be the production of reliable, high-quality goods for consumers.

During the last decade, many companies have adopted the continuous improvement philosophy. One of the most highly publicized companies is Toyota, which recently overtook General Motors as the largest car manufacturer in the world. Toyota has received a lot of positive publicity about "The Toyota Way," which emphasizes efficient production methods, continuous improvement, and the production of high quality products. Toyota’s production system is so impressive that executives from other automobile companies regularly tour Toyota’s manufacturing plants in an attempt to discover Toyota's secret.

But some big problems have arisen for Toyota during the last few months. The trouble started in November 2009, when Toyota announced that it was recalling more than five million cars because some accelerator pedals were getting jammed in the driver’s side car mat and causing cars to surge forward uncontrollably. That was bad enough, but on January 21, 2010 Toyota announced another recall, this one involving 2.3 million vehicles (270,000 in Canada). This second recall was also precipitated by problems with accelerator pedals, not because they were getting jammed in floor mats, but because there was something wrong with the pedal itself. Toyota was forced to take the dramatic step of halting production and sales on eight of its most popular vehicles: Corolla, RAV4, Camry, Avalon, Matrix, Highlander, Tundra, and Sequoia. These models account for 60 percent of Toyota sales in Canada.

On February 4, 2010 Toyota was hit with a third public relations problem when safety regulators in the U.S. opened a formal investigation into consumer complaints about braking problems on the Toyota Prius, the top-selling hybrid automobile. The National Highway Traffic Safety Administration (NHTSA) said it had received over 100 complaints about braking problems after the Prius hit bumps or potholes. It was alleged that four crashes had resulted from the braking problem, but it was not immediately known whether this latest problem would result in yet another recall. A government committee has asked Toyota to provide data on the complaints the company received regarding braking problems.

These three problems have created anger and concern among Toyota owners, who are suddenly scared to drive their cars. Toyota worked frantically with its supplier, CTS Corp., to figure out a way to solve the accelerator pedal problem. On February 1, 2010 Toyota announced that the problem would be fixed by inserting a steel reinforcement bar into the accelerator pedal assembly to reduce the tension that was causing the pedal to stick. CTS began producing the redesigned pedal a few days later. Toyota admitted that the accelerator had a design flaw and that CTS was not at fault (CTS also produces accelerator pedals for Honda and Nissan and no problems have been found in those cars).

CTS began shipping the new accelerator pedals to automobile dealers, along with parts and technical manuals to guide the work of technicians. Dealerships also geared up for the massive job of fixing millions of accelerator pedals. Many dealers said they would extend their hours in order to accommodate customers. Toyota also gave instructions to consumers about what to do if their car suddenly accelerated: step on the brake with both feet, shift the car into neutral, then steer the car to the side of the road and turn off the ignition.

In an effort to reassure the public, senior executives from the company went on TV to tell customers that they were going to quickly fix the problem and get the redesigned accelerator pedals on the recalled cars. A letter signed by Jim Lentz, the CEO of Toyota's U.S. operations, also appeared as a full-page advertisement in newspapers. In the letter, Lentz apologized for the error and explained how hard Toyota was working to get its automobiles refitted with new accelerator pedals. Lentz also appeared on NBC's “Today” show to explain how the company was going to fix the problem. The president of Toyota admitted that the company was in crisis, and also made a very public apology for the quality problems that were causing consumers so much concern. The value of Toyota's stock declined about 20 percent in the immediate aftermath of the recall announcement.

These quality problems have created a public relations nightmare for Toyota because the company has always emphasized its reputation for producing reliable, high-quality automobiles. Many consumers in Canada and the U.S. do, in fact, have the perception that Toyota produces higher quality cars than those produced by Ford, Chrysler, and GM. But these three incidents may change those perceptions. A survey conducted by HCD Research found that 56 percent of respondents said they were less likely to buy a Toyota after watching Jim Lentz on the “Today” show. Toyota's competitors now sense an opportunity to gain back customers. For example, Ford and GM have introduced a $1,000 rebate program for Toyota car owners who want to trade in their Toyota and buy a Ford or GM product.

Toyota is probably going to have to spend considerable time and money trying to deal with the fallout from these problems. A Canadian class-action lawsuit against Toyota and CTS Corp. claims that Toyota knew (or should have known) that there were design defects in the electronic throttle control system. A typical case is that of John James, who was driving on the Trans-Canada highway in B.C. when his 2009 Toyota Corolla suddenly surged out of control. Shortly thereafter he rammed into the back of a pickup truck at 125 kilometres an hour. Surprisingly, no one in his car was injured. James is now part of the class action lawsuit against Toyota. One Toyota owner in Toronto is suing, not because his vehicle was involved in a crash, but because he feels that his Toyota RAV4, which cost him $40,000 is now worthless because of all the publicity about Toyota's quality problems.

Toyota also faces several class-action lawsuits in the U.S. because of 19 deaths allegedly caused by jammed accelerators that caused cars to crash. In the U.S. lawsuit, the plaintiffs are claiming that Toyota knew about the accelerator defect, but didn't do anything about it.

Questions for Discussion

1. How could quality problems like these occur at a company that had such a good reputation for producing high-quality automobiles?
2. Do you think that this problem will have lasting negative effects on sales of Toyota vehicles? Explain your reasoning.

Sources: Gordon Pitts, "Too Big, Too Fast, and an Apology Too Late," The Globe and Mail, February 6, 2010, p. B1; "Toyota CEO Apologizes for Recall," Business News Network, www.bnn.ca/news/15560.html, accessed February 5, 2010; Jeff Gray, "Canadian Toyota Owners Seek Their Day in Court," The Globe and Mail, February 3, 2010, p. B8; "U.S. Probes Toyota Prius Brake Problem," Business News Network, www.bnn.ca/news/15531.html, accessed February 3, 2010; Ken Bensinger and Robert Channick, "Toyota Reveals Plans to Fix Pedal Problem," The Orlando Sentinel, February 2, 2010, p. B6; Greg Keenan and Jeff Gray, "Toyota Faces Class-Action Suits," Business News Network, www.bnn.ca/news/15452.html, accessed February 1, 2010; Greg Keenan, "Toyota Executives Plan Media Blitz," The Globe and Mail, February 1, 2010, p. B1; Greg Keenan, "Toyota Scrambles for Remedy as Recall Grows," The Globe and Mail, January 30, 2010, p. B3; Paul Vieira, "Toyota Finds a Fix; Pedal Maker Speeds Up Output as Recall Grows," National Post, January 29, 2010, p. FP1; Greg Keenan, "As Toyota Stumbles, Rivals Eye Gains," The Globe and Mail, January 29, 2010, p. B1; John Greenwood, "Toyota Faces Massive Recall," National Post, January 28, 2010, p. FP1; Greg Keenan, "Toyota Suspending Sales of Models Involved in Recall," The Globe and Mail, January 27, 2010, p. B12.

Answers to Questions for Discussion

1. How could quality problems like these occur at a company that had such a good reputation for producing high-quality automobiles?

There are several possible reasons why quality problems might have arisen at Toyota, even though the company had a good reputation for quality. First, the fact that a company has produced high-quality products in the past is no guarantee that it will continue to do so in the future. In recent years, several highly respected companies have experienced quality problems and the negative publicity that goes with such problems (Maple Leaf Foods, Mattel, and Firestone are companies that immediately come to mind).

Second, a continuous improvement philosophy that is properly implemented will probably increase the likelihood that a company will do well in relation to its competitors, but it does not guarantee that there will be no quality problems. Put another way, continuous improvement facilitates relative improvements, but does not provide absolute guarantees. Companies are run by people, and people make mistakes.

Third, continuous improvement means that managers and workers must continually question the way things are done, even if the company is successful. Many people find it difficult to focus on improving the way things are done when the company is doing well. In Toyota’s case, it is possible that managers found it difficult to maintain a continuous focus on continuous improvement.

Fourth, in the late 1990's, Toyota set a goal to overtake General Motors and become the world’s largest carmaker. Perhaps the company became too fixated on this goal, and that caused an undue focus on quantity and a reduced focus on quality. In earlier years, Toyota’s culture of continuous improvement and high-quality production was tightly controlled. But as the company became larger and began operating production facilities in Canada and the U.S., it apparently did not export its culture of continuous improvement to its overseas operations. (For a more detailed analysis of the corporate culture issue, see Gordon Pitts, "Too Big, Too Fast, and an Apology Too Late," The Globe and Mail, February 6, 2010, p. B1.)

2. Do you think that this problem will have lasting negative effects on sales of Toyota vehicles? Explain your reasoning.

Student answers will necessarily contain some speculation, but that speculation must be supplemented with some analysis. One useful approach is to look at what has happened to other companies that have received negative publicity about quality problems. Maple Leaf Foods (meat recall), Mattel (toy recall) and Firestone (tire recall) all experienced difficulties during the last. These cases are instructive since they all involved quality issues that threatened the lives of customers who used the companies' products.

Reaching a conclusion about the long-term effects of the negative publicity associated with product recalls could obviously be a major research project, but students can easily do some basic research on the issue. The first question is this: Does the company survive the negative publicity? If so, what is the effect of the negative publicity on the company’s revenues and its stock price? In the Firestone case, for example, one of the outcomes was that Firestone ended its 100-year relationship with Ford after the two companies became embroiled in a dispute about who was really at fault when Ford Explorers rolled over. Firestone sales declined 20 percent in the immediate aftermath of the recall, but its stock price returned to pre-recall levels within 5 years. (An article that provides some interesting data on this issue is Marialuisa Gallozzi and Seth Tucker, "Insuring Against Disaster: Coverage for Product Recalls," The Insurance Coverage Law Bulletin, October, 2007.)

Students should examine the annual reports of companies to determine the trend in company sales and profits before and after the negative publicity. This will give some idea of the impact of the negative publicity on the company’s financial performance. Students can also find a wealth of information on the Firestone recall issue by Googling "aftermath of Firestone tire recall" or similar key words. That case is instructive because it has now been 10 years since it occurred and the impact of the recall can be assessed with some clarity. Note: Firestone also was forced to recall a large number of its tires in 1978, and Bridgestone (the company that bought Firestone in 1988) said it had spent 10 years trying to rehabilitate the Firestone brand before the problems arose in 2000.

While data from previous recall cases gives some insight into the long-term effect of negative publicity, other factors (that would have been at work even if the recall had never happened) must not be ignored. The most obvious factor is the general state of the economy. For example, if a company experiences problems in a boom period, it may not suffer as much as it would have if the negative publicity occurred during a recession.