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Mon Midterm Simon Fraser University


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									                             MIDTERM Bus 478 D200 (Monday) 1127 (Fall 2012)
                           A tale of two giants: GM and Toyota in the battle for the top
                        Shamsud D. Chowdhury                     Jerry Paul Sheppard
                          Dalhousie University                Beedie School of Business
                    School of Business Administration          Simon Fraser University
       General Motors (GM) was the market leader in the                  quality problems that it dropped back to No. 2, and then
global automobile industry from 1931 to 2007. After 77                   to No. 3, by the end of 2010? What does the future hold
consecutive years at the top, GM lost this title to Toyota               for each organization? GM and Toyota demonstrate
Motors (Toyota) in 2008. To achieve its goal of becom-                   different ways to fall from the top spot, in part because of
ing the No. 1 carmaker on earth Toyota had amassed                       the differences in their history and executive orientation.
over 300,000 employees and 53 production facilities in
26 countries (Seijts & Bigus, 2011).                                                         General Motors
       Yet at the time of Toyota’s ascension the auto world                    The century-old history of GM can be divided into
began to collapse. The financial crisis in 2008 severely                 three uneven time periods: 1908-29, 1930-80, and 1981-
hit the auto industry. In the U.S., for example, automobile              2010. The first two periods represent GM’s founding
sales declined 18% from 16.1 million units in 2007 to                    followed by increasing growth and market leadership.
13.2 million units in 2008 (Jones, 2009). The credit crisis,             The last period represents the opposite; a declining
coupled with an already declining market share, customer                 market share and resulting financial loss so colossal that
perceptions about poor quality, redundant product offer-                 GM ultimately went into bankruptcy protection in 2008.
ings, and huge legacy costs1 pushed GM into bankruptcy                         In 1908, William Durant founded GM by bringing
court protection. Toyota reported a $4.8 billion loss in the             together over a dozen car companies including Cadillac,
first quarter of 2009, the largest quarterly loss in Toyota’s            Oakland (which later became Pontiac), and Oldsmobile.
72-year history. Although Toyota’s setback was in line                   By 1910, Durant was financially overextended and his
with its competitors, what was to follow in the months to                bankers forced him from the management team. Durant
come was not. Revelations of Toyota’s quality control                    then went into partnership with race-car driver Louis
problems were so disturbing many found it hard to recon-                 Chevrolet. After buying out Chevrolet in 1914 he merged
cile with such callous ignorance of persistent quality                   the firm with Buick. The company was so successful that
problems on the part of the world`s largest automaker.                   Durant he was able to buy enough shares in GM to regain
The New York Times (Eckel, 2012) summed it up neatly:                    control and he became its president again in 1916.
       “As Toyota returned to the black in late 2009,                          GM’s only other competitor at that time was Ford.
       its reputation for safety and quality were bat-                   By improving upon existing mass production technology
       tered by a series of recalls. The issue of unin-                  and developing standardized parts, Ford created a mass
       tended acceleration would lead the company                        market for the Model T. As a result, Ford became the
       through a bruising gantlet of government                          industry leader and continued its dominance until 1931.
       investigators, lawsuits from crash victims and
                                                                               Following Durant’s ouster by the board in 1921,
       one of the heaviest fines ever imposed on a car
       manufacturer in the United States.”                               Pierre S. du Pont, then a big stockholder, assumed GM’s
                                                                         presidency until 1923 when he handed the post over to
      The result was that, what Toyota did with a struggle
                                                                         Alfred P. Sloan. A brilliant visionary, Sloan, aided by
stretching over 71 years it lost within two years to GM.
                                                                         legendary designer Harley Earl, was responsible for the
Moreover, Toyota had embraced a risk for significant
                                                                         reinvention of the motorcar as a work of style and design,
loss of brand equity and market share. This fall in
                                                                         in contrast to Ford’s one-type-only Model T. More im-
Toyota’s fortune could arguably be attributed to its ob-
                                                                         portantly, Sloan had a reorganization plan for GM’s op-
session with growth and its departure from age-old tradi-
                                                                         erations. He organized GM’s range of activities into five
tions and values. Their stories present an interesting
                                                                         car divisions (Chevrolet, Pontiac, Cadillac, Buick, and
contrast: Why did GM lose market leadership to Toyota
                                                                         Oldsmobile,) for five broad market segments. Sloan’s
after 77 years, and why did Toyota encounter so many
                                                                         reorganization gave operational autonomy to each inde-
1                                                                        pendent division, while centralizing planning and finan-
    Legacy costs are historic costs related to accumulated pension
    fund burdens, unionized workers and deep vertical integration.       cial operations at the corporate level. Each brand was

priced so the top of the line of one brand cost just a little       went on massive but questionable acquisition binges in
bit less than the lowest priced model of the next most              related and unrelated industries, as well as joint ventures.
expensive line. This strategy of broad differentiation,                   GM’s joint venture with Fujitsu-Fanuc in 1981
coupled with a self-contained multi-divisional structure,           made GMF Robotics the world’s largest robot manu-
made GM the undisputed market leader in 1931. Sloan’s               facturer. In 1984 Smith saw a need for a single data-pro-
deep understanding of GM, and the effective implemen-               cessing unit that would standardize the computerized
tation of a broad differentiation strategy (a product range         record-keeping of all GM units. With the hope that Elec-
that included all kinds of car models) under a multi-               tronic Data System (EDS), then the largest data pro-
divisional structure set GM on the road for dominating              cessing firm in the U.S., would give GM programming
the U.S. automobile industry for many decades to come.              ability in computer-aided manufacturing (CAM), he
       Although GM remained the industry sales leader               acquired EDS for $2.5 billion. While this acquisition
until it sought bankruptcy protection in 2008, its struggle         made GM the world’s largest data-processing company,
to keep up with Japanese competitors started in the                 it turned out that EDS had little or no experience in CAM
1970s. The energy crisis of the 1970s, the emergence of             and, therefore, was not able to deliver what GM needed.
low-cost Japanese vehicles with ever-improving quality              Given that GM could simply have hired EDS on a
and design, and U.S. federal regulations demanding                  contract, analysts wondered why GM had bought the
better fuel efficiency and safety standards conspired to            company. The money could have been better spent de-
deal a harsh blow to U.S. automakers, especially GM.                veloping GM’s core capabilities in auto manufacturing.
The combination of a shift in consumer demand and the                     Smith was obsessed with microelectronics, since car
capability of the Japanese to dominate the small car                manufacturing was going increasingly electronic. In
market precipitated a crisis for GM. Demand for its large           1985, GM acquired Hughes Aircraft, an aerospace manu-
sedans plunged, and growing consumer awareness of                   facturer, for an estimated $5.2 billion. GM’s announced
quality problems in many GM models helped contribute                intention in buying Hughes was to employ its radar and
to eroding market share (Main, 1987). From 1980 to                  satellite technology. Again, analysts wondered why GM
1992, by far the most crucial period that determined how            would spend so much money on a risky venture. More
the destiny of GM was to unfold for the ensuing century,            strangely, Smith also bought two major mortgage
CEOs Roger Smith and Robert Stempel demonstrated                    companies that overnight turned GM into America’s
the utmost hubris. Consider that in 1972, GM was the                largest home-mortgage holder (Monks & Minow, 2008).
fourth largest corporation in the world with a market                     Product cannibalism and brand dilution, which
valuation of over $23 billion. By 1992, it slipped to 40th          started in the 1970s and continued until GM’s bankruptcy
with a market valuation of $22 billion, one billion less            protection in 2008, also demonstrate chronic CEO hubris.
than it had 20 years earlier (Monks & Minow, 2008).                 For cost reduction, GM introduced sharing parts across
       Despite basic structural changes in the U.S. auto in-        divisions (a term referred to as “batch engineering”). In
dustry that affected GM negatively, its top executives              1983, GM introduced four new cars: Chevy Celebrity,
dealt the most critical blows to its competitive standing.          Pontiac 6000, Oldsmobile Cutlass Ciera, and Buick
From 1970 onward, when GM should have paid attention                Century. GM put colourful, fancy ads for the cars on the
to belt-tightening, efficiency, and compact cars, it went           back cover of Fortune magazine, claiming the cars were
for alliances, acquisitions, and investments that made              “the embodiment of innovation and sophistication”
little sense. With the desire to maintain its market leader-        (Magee, 2007: 118-19). Although their prices differed, all
ship by thwarting Japanese competitors, GM embarked                 four cars looked alike. In 2008, Chevrolet, GMC, and
on generations of X-cars and J-cars that signified a move           Saturn debuted crossover vehicles based on the same
from rear-wheel to front-wheel drive. Due to flaws in               platform, but the three crossovers looked exactly the
engine and transmission designs and unattractive appear-            same (Jones, 2009). Thus, most of GM’s new cars
ance, these cars proved to be disastrous. In 1980 alone,            proved to be big disappointments in the market.
GM lost $700 million, its first loss since 1921, a sales                  Smith’s successor in 1990, Robert Stempel, fol-
drop of 26% (Monks & Minow, 2008). Roger Smith,                     lowed Smith’s footsteps and decided against paring the
who became GM’s chair and CEO in 1981, was deter-                   number of manufacturing plants and the size of the
mined to keep GM the world’s largest car company. He                workforce even though market share was steadily de-

clining. From 1980-92, GM spent nearly $100 billion                defects and raised yields of usable fabric. The notion of
reforming itself: an amount that could easily have bought          designing equipment and processes to stop automatically
both Toyota and Honda (Jones, 2009). GM kept losing                and call attention to problems at once became crucial to
money throughout the 1980s. For instance, its market               Toyota’s production system. To adapt U.S. mass produc-
share fell from 50% in 1978 to 35% in 1992, but GM                 tion to small volumes of Japanese auto production,
remained a high-cost, inefficient dinosaur. The firm’s             Kiichiro designed a system that provided different pro-
continued decline set the stage for a massive downsizing           cesses with only the kinds and quantities of items needed,
in 1991, and the unusual ouster of Stempel in 1992.                when they were needed, a just-in-time system that came
      From 1992 to 2009, two other CEOs (Jack Smith                to be known later as the famous JIT inventory system.
and Robert Wagoner) led GM. They initiated and im-                       During the 2nd Sino-Japanese war, which started in
plemented a great many changes to maintain GM’s mar-               earnest in 1937, Japan needed domestic vehicle produc-
ket leadership with limited success. Yet, nothing seemed           tion and the state encouraged TALW’s development.
to reverse, or even stop, its downhill spiral, the main rea-       Foreign-made cars, especially from the three major U.S.
son being that neither CEO had the ability and willing-            automakers, dominated the Japanese market. To thwart
ness to confront and solve the problems resulting from its         this dominance, the Japanese government authorized
prosperous past. Although GM did not make any profit               Toyota, Nissan, and Isuzu to produce automobiles
since 2004 and nearly ran out of money at the end of               (Shimokawa, 1994). Though this move halted U.S. domi-
2008 before the Treasury Department provided emer-                 nance, Toyota’s automotive operations grew only mod-
gency loans, Wagoner took home more than $14 million               erately until the commencement of World War II. The
in 2007, a 41% raise over 2006 (Bissonnette, 2008).                outbreak of the war prompted the Japanese government
                                                                   to compel Toyota to manufacture military vehicles. The
                         Toyota                                    war brought about extreme economic difficulty, leading
       Toyota’s history can be conveniently divided into           the entire Japanese economy into recession. Although
four uneven time periods: 1937-56, 1957-84, 1985-2000,             Toyota nearly went bankrupt in 1950, it survived and
and 2000-2010. The first three periods represent Toyota’s          made a comeback largely due to an increased demand for
founding followed by, except for a couple of hiccups,              cars during the Korean War in 1950. Since this recovery,
ever-increasing growth based on a “fastidiously tended”            Toyota never lost money until the recession of 2008.
reputation for quality and reliability. In contrast to the               Toyota set up its first foreign headquarters in Hol-
first three periods, the last is plagued by a systemic and         lywood in 1957 to sell the imported Toyopet Crown
widespread scandal. A series of recalls involving faulty           (Toyota’s flagship car in Japan) and the Land Cruiser.
floor mats and balky gas pedals sullied Toyota’s                   These vehicles sold dismally in the U.S. Japanese cars in
reputation for quality. Critical is the fourth stage, which        general were poorly designed and made, and Toyota was
spanned approximately 10 years. To bring the last stage            no exception. As Toyota began to design and produce
into context, a brief history of Toyota follows.                   cars specifically for the U.S. market sales improved.
       Kiichiro Toyoda founded Toyota Motors in 1937.              Toyota sales doubled almost every year from 1965 to
The spelling was altered since Toyota was clearer to               1971: Toyota’s sales reached 71,000 by 1968, and
pronounce and luckier to write; eight strokes in                   300,000 vehicles per year in 1971 (, 2012).
Japanese, versus ten for Toyoda (Toyoland, 2012).                        With years of experimentation, Toyota perfected its
     After graduating in engineering from the University           production system by the 1970s. Taiichi Ohno was the
of Tokyo, Kiichiro Toyoda had taken a job with Toyoda              key player behind Toyota’s manufacturing system, the
Automatic Loom Works (TALW), which was founded                     Toyota Production System (TPS). TPS refers to a stand-
by his father, Sakichi. In 1929, Kiichiro toured Europe            ardized process that encourages unique and creative em-
and the U.S. to study automobile production. He was                ployee contributions to its unified goals and objectives
impressed with Ford’s assembly line production, which              (Magee, 2007). TPS resulted in the reduction of waste
formed the basis for Ford’s unique ability to produce af-          and the maximization of efficiency. TPS contributed to
fordable cars for the American masses (Magee, 2007).               “lean production,” a system in the assembly plants that
     In 1902, Sakichi Toyoda had invented a loom that              was based on innovations that reduce set-up times for
stopped automatically if a thread snapped. This reduced            machinery and making shorter production runs eco-

nomical. TPS can be considered a corollary of Toyota’s            family’s values and orientations still influence its direc-
longstanding commitment to kaizen – or the ongoing                tion and posture today. Humility of top management, as
process of continuous improvement through the elimi-              opposed to managerial hubris, has transcended time and
nation of waste, or muda, in the workplace. TPS is not            guided the purpose and practice of Toyota. “With a phi-
just a manufacturing tool, but a set of enduring principles       losophy based on serving people, including its employ-
that guided and supported Toyota’s steady rise since its          ees, its customers, and the wider public, Toyota’s corpo-
founding in 1937. The resultant tradition came to be              rate structure is allowed to grow and change in support of
known as Toyota Way, which mandates planning for the              its service oriented goals” (Magee, 2007: 24). Eiji
long term, highlighting problems instead of hiding them,          Toyoda, Toyota’s president from 1967-82, kept Toyota’s
encouraging teamwork with colleagues and suppliers                profile low even as it rapidly expanded and dramatically
and, perhaps most important, inculcating a self-critical          increased quality. Similarly, Shoichiro Toyoda, president
culture that fosters continuous and unrelenting im-               from 1982-92, increased Toyota's manufacturing plants
provement. The Toyota Way, which is more of a mind-               around the world and brought Toyota’s technology to the
set than a collection of management tools (Stewart &              forefront without much fuss and publicity.
Raman, 2007), lowered costs, improved brand quality,                    Toyota’s product planning tended to be conserva-
and gave Toyota an enduring competitive advantage,                tive; debuting cars that would have great appeal and sell
allowing it to grow faster than its rivals.                       steadily (Shimokawa, 1994). This approach contradicted
      Toyota made major inroads into North America                GM’s frequent introduction of new cars, which became
when oil prices spiked in 1973 and again in 1979. The             known as ‘a stick on the bumpers and roll them out of the
demand for better fuel efficiency and increased safety            door’ strategy. It took Toyota a long time to debut Lexus,
standards, as mandated by federal regulation, led to a            its luxury line. In 1983, Eiji Toyoda, Toyota’s Chair,
record demand for smaller, lighter, and more efficient            thought the opportunity was ripe for creating a luxury
cars, which only companies like Toyota were positioned            vehicle to compete with the Americans and the Germans
to meet. In the 1980s, Toyota started to build production         in a lucrative segment of the auto market. From its launch
plants in the U.S. In 1984, the first Toyota Corolla was          in 1989, it took Lexus barely a dozen years to become
built in the U.S. at the New United Motor Manufacturing           America's best-selling line of luxury motor vehicles.
(NUMMI) facility in Fremont, California, a joint venture
with GM (, 2012). The joint venture was                         GM and Organizational Inertia
an effort on GM’s part to learn production techniques                   For the last three decades, GM rested on its laurels,
from Toyota and Toyota wanted to gain a manufacturing             and its top executives, especially the CEOs, did every-
base in the U.S., learn to work directly with American            thing that seemed consistent with its legacy. Historically
workers, and make itself a part of the local community.           GM set the labour terms for the U.S. automobile indus-
All senior managers at the NUMMI plant were from                  try, signing generous contracts with the United Auto
Toyota. Toyota achieved a revolution in NUMMI, in that            Workers (UAW), and making labour expensive for Ford
it proved lean production could be successfully replicated        and Chrysler (Magee, 2007). GM later found itself victim
in US manufacturing facilities in the U.S. (Womack,               of its own folly when, in many cases, it was unable to
Jones & Roos, 1990). In 1986, Toyota established its first        downsize or close plants because of its contractual
wholly-owned subsidiary in Georgetown, Kentucky –                 obligations to UAW members (Jones, 2009).
Toyota’s largest manufacturing plant outside Japan.                     When many American customers began switching
      Toyota achieved record growth under the leadership          to smaller, more fuel-efficient cars, GM was not capable
of three non-family presidents. These were Hiroshi                of providing such vehicles to its customers. Even after
Okuda (1995-99), Fujio Cho (1999-2005), and Katsuaki              the automotive landscape changed drastically in the
Watanabe (2005-09). In 2008, Toyota replaced GM as                1980s and 1990s, it was the mindset of GM’s CEOs to
the world’s largest auto manufacturer.                            remain the biggest and do everything that would sit with
      Like GM, Toyota is a publicly traded company, but           this posture. GM was focusing mainly on the differenti-
unlike GM, it started as a family venture with humble             ated appeal of its cars. “A car for every purse and every
roots. Because the Toyoda family controls about 40% of            purpose” helped Sloan elevate GM to its leadership role
the company’s voting stock (Magee, 2007), the founding            in the industry, which it held for many decades. Even in

the early 2000s, under Wagoner’s leadership, instead of            government made foreign direct investment a key
buying state-of-the-art technology to build high quality,          priority to revitalize its sluggish economy. As a result,
reliable, and low-cost vehicles, GM continued to bring-            Japanese companies, Toyota included, became
out premium car brand names. Being the No. 1 carmaker              increasingly internationalized with overseas production
was of paramount importance to Rick Wagoner, who is                facilities and operations (Jackson & Miyajima, 2007). In
quoted as saying, “I think our people take pride in that, so       1995, there were 26 Toyota factories, but by 2007, that
it’s not something that we’re going to sit back and let            number, had risen to 63 (Stewart & Raman, 2007). In
somebody else pass us by” (Magee, 2007: 28).                       order to accomplish such explosive growth, cost cutting
                                                                   took on a new dimension, taking TPS to extreme levels.
    Toyota and a Failure to Maintain Tradition                     Various programs aimed at drastic cost cutting resulted in
      Despite Toyota’s ascension to the top spot, prob-            savings of more than $10 billion from global operating
lems with electronic and physical systems of its cars              costs over the period 2000-2005 (Ohnsman, Green, &
morphed into a disease in early 2010 and caused a hail-            Inoue, 2011). Under pressure, Toyota suppliers also cut
storm of recalls and bad publicity. At least 34 deaths             corners in the design of parts. In combination, those
were attributed to problems related to unintended accel-           changes dulled Toyota’s commitment to quality
eration and brake failure in Toyota and Lexus vehicles             embedded in its organizational culture.
(Bunkley, 2010). In three separate events, a total of 11                 Toyota’s existing infrastructure and resources could
million2 Toyota and Lexus vehicles were recalled, by far           barely support this accelerated speed of growth and the
the most extensive recall in automobile history. The               corresponding push for cost reduction, with the result that
timeline for recalls is presented in Table 2. Toyota at-           quality became unsustainable, and was clearly slipping.
tracted intense scrutiny, rebuke, and public outcry. Its           “The parable of Toyota is that the tortoise became the
failure to notify the U.S. Department of Transportation            hare” (Saparito, 2010: 1). Toyota moved away from its
(DOT) of the problems made its closely guarded values              famed Toyota Way, with which senior executives in
very questionable. The obvious outcomes were a sense of            overseas operations had little or no experience. MIT
betrayal among loyal customers and fear and mistrust               operations expert, Steven Spear, having trained in Toyota
among potential buyers about the safety of Toyota vehi-            factories, said, “the Toyota Way – in which knowledge
cles. It is difficult to say exactly how the future will un-       accumulated by élite cadres of engineers and assembly
fold for Toyota. However, Toyota lost $21 billion of its           workers over many years is shared across the company –
market capitalization in a single week in January/ 2010            got diluted by the demands of production” (Saparito,
(Saporito, 2011). For the first half of 2011, Toyota had           2010: 1). Contrary to its vaunted commitment to lifetime
fallen to third place, with GM and Volkswagen first and            employment, Toyota started to rapidly increase the num-
second, respectively (Kreindler, 2011).                            ber of temporary workers in 2004 (Aoki et al., 2011), and
      Problems leading to Toyota’s fall from the top spot          was replacing seniority-based pay with ability-based pay
can be ascribed to its departure from its organizational           (Jackson & Miyajima, 2007). Compare this to Toyota’s
traditions and values. Over the last decade, Toyota de-            unwavering support for its permanent workforce only a
veloped a pattern of reacting slowly to safety concerns,           few years earlier – a commitment that caused it to be
and was failing to notify customers or the DOT of known            downgraded by international bond rating companies im-
defects in its previously sold vehicles. Besides battering         mediately after the Asian financial crisis (Aoki, 2007).
Toyota’s reputation, this failure showed a marked                        The last 10 years of Toyota clearly illustrate how it
departure from its commitment to uncompromising                    waivered from an established, age-old path – built around
quality and near perfect reliability of its vehicles. Over         the Toyota Way or kaizen – and embraced a totally dif-
decades, Toyota built its reputation and market share in           ferent path – radical and fast growing or kakushin. An
tiny increments, which is best captured by the Japanese            overzealous pursuit of growth had led Toyota executives
word jojo, meaning “slowly, gradually, and steadily”               to jettison the basics of the Toyota Way. If willingness to
(Stewart & Raman, 2007). Starting with the 1990s, the              disclose failures is an innate quality of good manage-
pace of internationalization grew rapidly, as the Japanese         ment, then Toyota could have avoided the dire events
                                                                   leading to a record number of recalls and a record penalty
    Estimates vary; this figure is from the New York Times.        of three fines totalling $48.8 million. Arguably, this is not

a huge amount for Toyota, but it had enormous symbolic              2008), destroying the stockholders’ value. It is, therefore,
consequences for brand equity and customer trust.                   obvious that growth and profitability remained incon-
Though problems had persisted for a decade, Toyota did              sistent firm objectives in the case of GM for 30 years,
not take them seriously, nor did it inform involved                 with obvious losers being GM’s stockholders.
parties, especially the DOT. Toyota executives might                      Although Toyota’s ambitions significantly grew to
have become “insufferable” (Stewart & Raman, 2007),                 lead the global auto industry in the mid-1990s, its ap-
believing problems were too minor to dent its image and             proach differed greatly from GM’s. Executive hubris, if
reputation. Executive hubris that had been brewing at               any, did not play a role in the strong decline of Toyota. A
Toyota for years replaced its founding precepts of                  good indicator of stewardship is the CEO’s belief that his
humility and respect (Stewart and Raman, 2007).                     or her decisions are in the best interest of the organization
                                                                    (Davis, Schoorman & Donaldson, 1997) and Toyota’s
         A Fall from Grace in Either Case                           three presidents lived up to this requirement. With per-
      GM and Toyota competed in the auto industry for               sonal integrity and humility, they appear to have taken
many decades. While GM held the No. 1 spot longer than              actions for the overall performance of Toyota. Even
any other automaker, it had to relinquish its position to its       around the time when Toyota became No. 1, Katsuaki
formidable rival, Toyota, in 2008. It took Toyota 71 years          Watanabe and other senior executives were routinely
to beat GM, but GM bounced back to No. 1 again in                   found “inconspicuously seated among the general public
2011. Depending on how decisively and smartly GM and                making the trips back and forth” on the bullet train
Toyota act to stay ahead in the global auto industry in the         (Magee, 207: 51). With Japan’s bullet trains being the
years to come, their standings will change.                         most efficient means of transport, and Toyota standing
      Growth being a natural generator for profit, both             for efficiency and profitability, Watanabe considered
should move hand in hand to realize stockholders’ inter-            such rides a sign of Toyota’s consistency of purpose.
ests, as well as the interests of other stakeholders. During        Toyota had consistently out-earned all car makers in
the last 30 years of GM’s history, growth and profit had            Japan, yet its top executives earned an average of slightly
led to inconsistent firm objectives, as demonstrated ear-           more than $500,000 in 2006, as opposed to an average of
lier. Due to lack of board oversight, GM CEOs – Smith,              two million for top executives in Nissan (Magee, 2007).
Stempel, and to some extent Wagoner – manifested                    Moreover, Toyota never abandoned its core business –
extreme hubris, leading to the gradual deterioration of             the automobile – in favour of diversifying into other
GM. CEO hubris went unfettered and gave GM                          related or unrelated businesses to inflate its size or to be
unnecessary product cannibalization backed by dazzling              the largest. These principles, as well their pursuit, appear
advertisements and empty boasts, and businesses as                  more in keeping with the tenets of stewardship theory.
unrelated as robotics, data-processing, radar and satellite               Toyota overreacted in overseas markets to over-
systems, and home mortgages. If anything, weak board                come criticism involving its slow entry in new markets or
vigilance accentuated large-scale executive hubris. A few           its slow incorporation of new technologies in their vehi-
key measures – strong presence of independent, outside              cles (Stewart & Raman, 2007). In this bid, it deviated
members; split of board chair and CEO positions; not                from its fundamental belief that “bigger is not necessarily
allowing the CEO to be the nominating committee chair               better,” the relentless pursuit of which made it the most
could possibly have prevented the downfall of GM.                   profitable car company in the world. In other words, for
      The external environment of the auto industry had             Toyota, growth and profitability went hand in hand.
drastically changed since the 1970s, yet GM’s legacy for                  Toyota’s fall also stemmed from increased pressure
large, comfortable cars prodded it into moves that were             to adopt international governance standards, coupled with
“inevitably ego-involving” (Hayward & Hambrick,                     Jackson and Miyajima’s (2006) argument for institu-
1997: 120), with a clear potential for keeping them No. 1.          tional isomorphism. Japanese auto manufacturers were
An overwhelming executive belief that it was GM’s “di-              trying to contain costs by replacing permanent employees
vine right” to remain the No. 1 car manufacturer locked it          with temporary and non-regular workers. Because of
in for three decades of disaster. Actions consistent with           increasing internationalization with overseas production
keeping up with past legacy had cost the company tens of            facilities and operations, Toyota was trying to increase
billions of dollars in its last 30 years (Monks & Minow,            internal transparency and global standards to satisfy

stakeholders abroad (Jackson & Miyajima, 2007). These                      for change. The board failed to reverse this path as well.
attempts led to the adoption of a series of changes in                           In contrast, ownership was concentrated in Toyota,
Toyota’s highly vaunted HRM practices. The outcome                         and its CEOs were committed to its overall performance.
was the abandonment of traditional knowledge-sharing                       The stewardship of the CEOs was not able to keep
among individuals from boardroom to the assembly line.                     Toyota locked-in to its traditions, and their personal
      One issue that needs clarification is the cause-effect               humility was of no avail. Despite a 30-member board
relationship between executive hubris at GM and                            with all inside executive directors until 2007 (Larcker &
executive humility at Toyota. Although the cause-effect                    Tayan, 2011), Toyota’s departure from its institutional
is undetermined in both cases, it can be triangulated with                 values and traditions supports this point. Explanations
the intervening role of both companies’ corporate boards.                  again point to the failure of Toyota’s board. Infighting
In GM, a clear separation of ownership from control                        between family and non-family executives among
allowed its executives to exercise extreme hubris in                       Toyota’s decision-makers, coupled with an influx of
almost every decision they made, and strange as it may                     short-run oriented professional stockholders (Ohnsman et
seem, the board failed to intervene. The executive hubris                  al., 2010), and a sympathetic board yielding to the
also seemed to facilitate GM’s locking-in to its past                      pressure of these forces appeared to have derailed Toyota
traditions when environmental demands dictated the need                    from its tradition of quality.

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                        APPENDIX: Some Key Dates in the Toyota Recall Timeline
Sept.     2007 Toyota issued a Lexus recall to fasten floor mats to car floors to avoid acceleration problems.
Aug. 28, 2009 Uncontrolled acceleration crash of a Lexus killed 4 people near San Diego including a highway patrol officer.
Sept. 14, 2009 Preliminary reports indicate a Lexus may have had the wrong floor mats installed, interfering with the gas pedal.
Sept.     2009 Toyota issued a safety advisory and recall on floor mats for 4.2 million Lexus and Toyota vehicles.
Oct. 25, 2009 NHTSA and local inquiries revealed rubber floor mats designed for the Lexus RX 400 SUV had been placed over
               ES 350 carpeted floor mats and accelerator pedals jammed against them causing the car to accelerate out of control.
Oct. 29, 2009 New CEO Akio Toyoda apologized for the deaths in California, and to every customer affected by the recall.
Oct. 30, 2009 Toyota notified owners of an upcoming recall to fix the acceleration issue. Toyota claimed no defect exists.
Nov. 16, 2009 Japanese media reports claimed Toyota had made a deal with NHTSA over a recall. Toyota denied any agreement
               had been reached, but the company admitted it had already set aside $5.6 billion to deal with the issue.
Nov. 25, 2009 Toyota dealers were instructed to remove the gas pedal and shorten it so it could not interfere with the floor mats.
Dec. 26, 2009 A Toyota Avalon accelerated into a lake in Texas; 4 occupants died. Floor mats were found in the trunk of the car.
Jan. 11, 2010 Toyota announced its brake override software fix will be made global by 2011.
Jan. 21, 2010 Toyota recalled another 2.3 million Toyota-brand vehicles because of a problem with the gas pedal.
Jan. 23, 2010 Agence France Press reported that Toyota might recall 2 million vehicles in Europe for the same problem.
Jan. 26, 2010 Toyota halted sale of all models affected by the Jan. 21 pedal recall, and that it will shut down assembly lines for
               those models at five North American plants for one week beginning Feb. 1 to assess and coordinate activities.
Feb. 1, 2010 Toyota announced a plan to fix sticky gas pedals. The part was shipped to dealers.
Feb. 5, 2010 The Toyota president apologized at a news conference.
Feb. 23, 2010 Congressional investigative hearings of Toyota began.
May 18, 2010 Toyota paid a $16.4 million fine to settle charges it was too slow to issue a recall for the acceleration problem.
July      2010 Toyota recalled 280,000 cars for engine problems.
Dec.      2010 The Motor Vehicle Safety Act stalled on the House floor.
Adapted from: Meisenbach & Feldner (2010) and MacKenzie & Evans (2010).

You should do additional research to answer the following questions. You need not provide sources at this time (but you
might want to bookmark them). Eleven page double spaced limit (12 pt. Times, with 1” margins). Number each question
and include the underlined text below in the first line of each answer. This is due October 15th at 9:30 A.M.
1. Present an overview of likely conditions in the external environment, using the six environmental forces that may
   impact the industry over the next five years (25%).
2. Analyze the industry environment using Porter’s five forces (25%).
3. Sloan made GM the classic case of a broad differentiation strategy in its victory over Ford’s Cost Leadership, yet
   GM was unable to make a quick transition to an integrated cost leadership differentiation strategy. What do you see
   as the three most critical reasons why it was hard for GM to make the transition to an integrated strategy (12%)?
4. What do you think is the most critical reason Toyota’s quality faltered so badly (5%)
5. GM historically used a corporate level strategy of vertical integration to supply its own components. Rather than
   pursue vertical integration, Toyota pursued a cooperative relationship with parts suppliers. Why might Toyota’s use
   of a cooperative strategy have allowed for superior performance (8%)?
6. Using specific examples, what are the kinds of international entry strategies has each company employed (15%)?
7.   While GM overtook Toyota in 2011, Toyota’s production was hobbled by natural disaster. It looks like Toyota will
     regain the top spot in 2012. Who do you think will be the world’s largest automaker five years from now – use
     points from your above answers, and any other relevant facts you wish to include, to support your choice (10%)?


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