Toyota Crisis and the Recommendations Needed for Improvement of Risk Management - Case Study Example

Toyota Case Study: Risk Management Name Institution Course Date Toyota Case Study: Risk Management Executive Summary This paper focuses on the lesson learnt from the Toyota crisis and the recommendations needed for improvement of risk management and development of resilient capabilities. It explores the concept of corporate reputation and the risks associated with poor risk management. The main purpose of the paper is to study risk management lessons from Toyota crisis situation that other companies can use to avoid reputational risks. The paper is based on a case study of Toyota crisis of 2009. It explores the poor decisions made by the company and describes the lessons that can be learnt from their mistakes. Upon closer examination, we find that the challenges facing Toyota resulted from their poor decisions regarding risk management. Amongst other reasons, the company did not communicate effectively to the public when the crisis occur and leaders made poor decisions to expand which impacted the quality of its products. In order to avoid future crisis, Toyota should improve its leadership structure, ensure effective risk communication and train and develop its employees to improve the quality of its vehicles. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Lessons Learned from Toyota Crisis 4 Crisis can be Escalated Fast 4 Internal control of organization environment 5 Culture Determines the Success of Risk Management 5 Accept Responsibility 6 You can’t have a global Operation and keep Power in one Country 6 Recommendations for Toyota Corporation 7 Risk Assessment and Communication 7 Adaption of Triple Bottom-Line Strategy 7 Improvement of Leadership Strategy 8 Training and Development 9 Conclusion 9 References 11 Introduction Companies today are characterized by divisive and interdependent environment that increases business risks (Hopkin, 2014). The top risks facing companies today include damage to reputation, economic slowdown, increasing competition, regulatory changes and cyber-crimes. One company that has suffered the damage to reputation is Toyota Corporation. In 2009, Toyota suffered a huge crisis that engulfed the brand for months (Heller and Darling, 2011). Today, the embers caused by the crisis are still flickering in the minds of consumers. Crisis often calls for immediate attention in order to prevent adverse effects. Crisis management should entail systematic strategy to deal with crisis in order for companies to continue functioning as normally as possible. It does not involve quick-fix solution, but instead it should entail forecasting, identifying and acting upon a crisis effectively and efficiently. According to Slovic et al. (2004), poor crisis management often damages the reputation of an organization. Therefore, companies should often be prepared for crisis and found ways to mitigate them. This is the case of Toyota, a leading automobile company in the market. This paper is based on Toyota to show how a reliable and innovative brand can be damaged by poor crisis management. This paper will provide some lessons that can be learnt from Toyota crisis. It will also offer a number of recommendations that Toyota can use to enhance its risk management and develop its resilience capabilities. Lessons Learned from Toyota Crisis Crisis can be Escalated Fast One lesson that companies should learn from the Toyota crisis is that a crisis can be escalated fast and the way an organization responds to the problem determines how consumers behave afterwards. For companies, understanding how risks and crisis inform general perception is required for an effective response. When a crisis occurs, it is very hard for organizations to convince the public and rebuild trust with consumers and the general public (Ropeik and Slovic, 2003). Crisis is often followed by uncertainty which result from lack of information or insincerity of the information. Since it is very difficult to predict what will happen after a crisis, it is very paramount for companies to utilize different strategies to inform the public and the stakeholders. The impacts of Toyota crisis were huge. According to O’Rourke (2010), customers often lose trust with companies that act outside their character. There is a discrepancy between what consumers and the public expected from the company and the reality. In reality, Toyota is expected to offer high quality products with high reliability and safety. Due to the crisis, the number of customers who used to buy Toyota vehicles has declined causing a huge challenge to the company (Piotrowski and Guyette, 2010). Therefore, it is important for companies to understand that the result of a crisis depends on how well they respond and inform the public. Internal control of organization environment One of the major lessons is the need to utilize COSO – Internal Control-Integrated Framework (2013) principles. This framework comprises of 5 main components of internal control which includes control environment, risk assessment, control activities, information and communication and monitoring activities (Sarah, 2013). From a Toyota crisis perspective, this framework plays a significance role in crisis management (Sarah, 2013). One of the major lessons from utilizing the framework is that it enables an organization undertake a risk assessment and identify risks to its objectives’ attainment hence reducing the chances of crisis occurrence. The organization is also able to analyse risk as a way of determining the way risks need to be managed (Sarah, 2013). According to the framework, there is as well a major lesson on the need to fully address the need for organizations to take into consideration fraud risk when designing the process of internal control in achieving the objectives. This is a key aspect towards managing and controlling the occurrence of crisis like that which faced Toyota (Sarah, 2013). Control of activities within the organization as well as effective information and communication management play a key role towards reducing crisis occurrence. If Toyota had effectively controlled its internal environment by taking into consideration the framework main components and principles, then the effects of the crisis would likely have less effect or not occur at all (Sarah, 2013). Culture Determines the Success of Risk Management Toyota has a culture that is obsessed with ensuring company’s goals are achieved by focusing more on the profit margins. This led to the abandonment of other important aspects of their operation. According to Dollinger (2005), overall sustainability should be focus of businesses today if they want to succeed in the long-run. Nevertheless, measuring the degree of sustainability of organizations can be very difficult. There is a new framework for measuring sustainability in business, called the triple bottom line. The triple bottom line theory goes beyond the ordinary measure of profits to contain environmental and social dimensions. Triple bottom line involves a comprehensive focus on profits, people and the planet. Triple bottom line is a measure of social, environmental and financial performance of an organization (Cochran and Wood, 2004). Organizations that put emphasis on the environment, the community and the profits equally are considered sustainable. However, with increasing competition due to globalization and technological advancements, many organizations focus only on maximizing shareholders’ needs through profit making. Their culture promotes focus on profits which may result in challenges in other areas such as quality of products and environmental degradation. Toyota downfall was as a result of their focus on profit maximization which led to quality challenges resulting into the crisis. Accept Responsibility It took a long time, almost a year, before Toyota accepted fault. This led to the escalation of the crisis which could have been prevented with early acceptance (Mittal, Sambandam and Dholakia, 2010). Companies should learn that when crisis happens and it apparent that it could be avoided, they should be quick to accept responsibility. The prevailing options when a crisis happens are for a company to own up to its mistakes and be transparent about the situation. Owing to a crisis instills a sense that an organization is likely to rebound from the situation since they are aware of it and have accepted responsibility. Nevertheless, failure to do so will result in distrust from the public and the media (Heller and Darling, 2011). During the Toyota crisis, the company tried to shield itself from the frustration of the public by passing around the blame up to the last minute. The situation became worse and affected its image. Therefore, companies should acknowledge the importance of owning to their mistakes and working towards regaining the trust of the public and the customers (Heller and Darling, 2011). You can’t have a global Operation and keep Power in one Country Over the last years, Toyota Company gave a lot of promises about delegating power and authority to people in different nations. Nevertheless, the 2009 crisis reveled otherwise. As the company grew and expanded to other countries, the power was stilled coagulated in Japan where the mother company was (Dollinger, 2005). Although the company has a mantra of equal power distribution, the reality was that power came from one country. More than half of production and operations was outside Japan which made it difficult for the company to delegate duties. Companies should therefore understand that global operation requires distribution of power and authority to different locations in order to ensure smooth operations (Dollinger, 2005). Since the appointment of Toyoda as the CEO who was educated and trained in the United States, more steps have been taken to ensure power is distributed across global regions. Recommendations for Toyota Corporation Risk Assessment and Communication According to COSO – Internal Control-Integrated Framework (2013), two of its 5 major components are risk assessment and, information and communication (Sarah, 2013). One way Toyota can enhance its risk management is through risk assessment and proper communication and relay of information (Sarah, 2013). According to O’Rourke (2010), risk communication is considered an insurance policy for companies. This means that risk communication should be planned well in order to prevent any undue harm. In many instances, many companies often wait until a crisis becomes serious before acting causing a snowball effect which makes it hard to contain. Therefore, it is important for Toyota to implement effective risk communication to prevent such a situation. Toyota overlooked many aspect of the crisis during the stressful situation (Ropeik and Slovic, 2003). The company needs to be perceived as trustworthy and unbiased by offering credible and relevant information to the public. How companies frame an issue may determine its acceptance or opposition. Therefore, for Toyota to be successful in changing the perspective of the public, they should consider the dynamics of the public’s image of them. With growing interconnectedness between people as a result of social groups on social media, effective risk assessment and its communication has become easier for companies (Ropeik and Slovic, 2003). According to the earlier stated framework’s information and communication component, Toyota need to generate and use relevant information to upkeep the working of internal control according to 13th principle (Sarah, 2013). Adaption of Triple Bottom-Line Strategy Being a multinational organization, Toyota corporation is a powerful entity to a point that it neglects its responsibility towards the environment and the community. The company has enormous responsibility towards the environment and the public. While achieving its objectives towards the shareholders, Toyota Corporation should do corporate social responsibilities as well. Companies that accomplish their responsibilities towards the shareholders, people and the planet often receive positive response from the consumers (Cochran and Wood, 2004). Toyota has done well in achieving its responsibility towards the shareholders and the environment. However, it lags behind when it comes to satisfying the needs of the customers through quality of its products. Therefore, Toyota should focus on satisfying the needs of its customers by focusing on improving the quality of its vehicles. This can be done by increasing skilled labor level. The quality issues could be attributed to lack of enough skilled employees who focused on the quantity of vehicles being produced rather than the quality (Mittal, Sambandom and Dholakia, 2010). Improvement of Leadership Strategy The improvement of leadership strategy by Toyota Corporation can result in the development of resilient capabilities and improvement of risk management. The development and institution of effective leadership strategy can lead to future effective crisis management. According to Norhhouse (2001), there is a huge difference between management and leadership. Management involves accomplishing the responsibility given by managing people and activities while leadership means influencing people and guiding their directions towards predetermined goals. Differentiating between the two is important in successful crisis management. Moreover, being committed to the integrity and ethical values by leaders is key towards improving leadership strategy according to control environment component in COSO – Internal Control-Integrated Framework (2013) (Sarah, 2013). Effective crisis management required leaders who do not focus on hierarchy or subordination (Heller and Darling, 2011). Leaders are people who assist in influencing people and building their capacity. Effective leaders should nurture the skills of their subordinates that are fundamental during crisis prevention and management. In addition, effective leaders are expected to interact with the subordinates rather that giving directions from far. In this regard, employees will feel they are part of a team and will acquire crisis management training from the leaders that are essential during tough situations. Toyota’s ambitious growth led to its detriment (Minhyung, 2010). Toyota wanted to grow and expand beyond their abilities by raising leaders who pushed employees beyond their limits. This decision affected their bottom-line as well as the quality of its cars. This raises an important insight- the leaders have the ability to prevent reputational crisis by asking questions when presented with aggressive plans of expansion. Therefore, the board of directors of Toyota Corporation should work closely with the subordinates and have an in-depth discussion about the safety and quality of its vehicles when pushing for growth plans (Mehri, 2006). Training and Development One important way Toyota can improve its capabilities is through training and developing its employees. The employees and managers at Toyota lacked the necessary skilled to ensure they produce high quality products (Pollitt, 2010). The quality crisis may have been amplified by lack of experience in the part of the employees. To counteract this weakness, the company should implement training program for the employees and seminars for the entire stakeholders where discussion of the change in production process can take place. All employees need to be trained in order to ensure that they have the necessary skills and knowledge in the production and handling of high quality products. In addition, the managers should undergo training in communication skills (Pollitt, 2010). In order to ensure effective operation, managers should undergo communication skills training in order to enhance their interpersonal skills and learn to effectively communicate to the stakeholders in case of any challenge (Pollitt, 2010). According to control environment component in COSO – Internal Control-Integrated Framework (2013), its fourth principle emphasizes on the need for the organization to show compulsion to attract, improve, and retain capable employees in line with set objectives (Sarah, 2013). Conclusion Toyota is among the leading companies in the automobile industry. Nevertheless, the 2009 reputational crisis has threatened to destroy its image. Like most companies, Toyota Corporation developed its business with a focus on expanding fast. This approach led to quality problems that led to the crisis. Companies and managers can learn from the mistakes of Toyota and work towards avoiding the decisions the company made. For instance, companies can learn to accept responsibility in case of a crisis. They can also learn how a crisis can escalate very fast and how culture determines success of a risk management crisis. This research has revealed that reputation risk can affect the overall image of a company. In order to avoid future crisis and enhance resilient capabilities, Toyota should improve its risk communication, train and develop its employees, and change its leadership strategy. The utilization of COSO – Internal Control-Integrated Framework (2013) will also play a key role in guiding the company towards thriving business environment with low chances of crisis occurence. This effort will be able to rescue the tarnished brand image of the company. References Cochran, F.L and Wood, R.A 2004, Corporate social responsibility and financial performance. Academy of Management Journal, 27(1), pp. 42–56. Dollinger, M 2005, The Toyota Way: Fourteen Management Principles from the World’s Greatest Manufacturer. Business Horizons, 48(1), pp. 89-90. Heller, V.L. & Darling, J.R 2011, Toyota in Crisis: Denial and Mismanagement. Journal of Business Strategy, 32(5), pp. 4-13. Hopkin, P 2014, Fundamentals of Risks Management, New York, Kogan Page Publishers. 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Harvard Center for Risk Analysis, 11(2), pp. 1-4. Sarah, L 2013, An overview of COSO's 2013: internal control-integrated framework. McGladrey LLP. Retrieved from http://rsmus.com/pdf/wp_coso_2013_internal_control_integrated_framework.pdf Slovic, P., Finucane, M., Peters, E. and MacGregor, D 2004, Risk as Analysis and Risk as Feelings: Some Thoughts about Affect, Reason, Risk and Rationality. Risk Analysis, 24(2), pp. 311-322. Read More