Home >

The Toyota Way: Using Operational Excellence as a Strategic Weapon

We place the highest value on actual implementation and taking action. There are many things one doesn’t understand and therefore, we ask them why don’t you just go ahead and take action; try to do something? You realize how little you know and you face your own failures and you simply can correct those failures and redo it again and at the second trial you realize another mistake or another thing you didn’t like so you can redo it once again. So by constant improvement, or, should I say, the improvement based upon action, one can rise to the higher level of practice and knowledge.

—Fujio Cho, President, Toyota Motor Corporation, 2002

Toyota first caught the world’s attention in the 1980s, when it became clear that there was something special about Japanese quality and efficiency. Japanese cars were lasting longer than American cars and required much less repair. And by the 1990s it became apparent that there was something even more special about Toyota compared to other automakers in Japan (Womack, Jones, and Roos, 1991). It was not eye-popping car designs or performance—though the ride was smooth and the designs often very refined. It was the way Toyota engineered and manufactured the autos that led to unbelievable consistency in the process and product. Toyota designed autos faster, with more reliability, yet at a competitive cost, even when paying the relatively high wages of Japanese workers. Equally impressive was that every time Toyota showed an apparent weakness and seemed vulnerable to the competition, Toyota miraculously fixed the problem and came back even stronger. Today Toyota is the third-largest auto manufacturer in the world, behind General Motors and Ford, with global vehicle sales of over six million per year in 170 countries. However, Toyota is far more profitable than any other auto manufacturer. Auto industry analysts estimate that Toyota will pass Ford in global vehicles sold in 2005, and if current trends continue, it will eventually pass GM to become the largest automaker in the world.

Every automotive industry insider and many consumers are familiar with Toyota’s dramatic business success and world-leading quality:

  • Toyota’s annual profit at the end of its fiscal year in March 2003, was $8.13 billion—larger than the combined earnings of GM, Chrysler, and Ford, and the biggest annual profit for any auto maker in at least a decade. Its net profit margin is 8.3 times higher than the industry average.
  • While stock prices of the Big 3 were falling in 2003, Toyota’s shares had increased 24% over 2002. Toyota’s market capitalization (the total value of the company’s stock) was $105 billion as of 2003—higher than the combined market capitalization of Ford, General Motors, and Chrysler. This is an amazing statistic. Its return on assets is 8 times higher than the industry average. The company has made a profit every year over the last 25 years and has $20-$30 billion in its cash war chest on a consistent basis.
  • Toyota has for decades been the number one automaker in Japan and a distant fourth behind the “Big 3” automakers in North America. But in August of 2003, for the first time, Toyota sold more vehicles in North America than one of the “Big 3” automakers (Chrysler). It seems that Toyota could eventually become a permanent member of the “Big 3” U.S. automakers. (Of 1.8 million Toyota/Lexus vehicles sold in North America in 2002, 1.2 million were made in North America. Toyota is rapidly building new production capacity in the U.S., at a time when U.S. manufacturers are looking for opportunities to close plants, reduce capacity and move production abroad.)
  • In 2003 the Toyota nameplate was on track to sell more vehicles in the U.S. than either of the two brandnames that have led U.S. sales for the past 100 years—Ford and Chevrolet. Camry was the top-selling U.S. passenger car in 2003 and five of the years prior. Corolla was the top selling small car in the world.
  • Toyota not long ago was known for making small, basic transportation vehicles, yet in ten years leaped out to become the leader in luxury vehicles. Lexus was introduced in 1989 and in 2002 outsold BMW, Cadillac, and Mercedes-Benz in the U.S. for the third year in a row.
  • Toyota invented “lean production” (also known as “the Toyota Production System” or “TPS”), which has triggered a global transformation in virtually every industry to Toyota’s manufacturing and supply chain philosophy and methods over the last decade. The Toyota Production System is the foundation of dozens of books on “lean” including two bestsellers: The Machine That Changed the World: The Story of Lean Production (Womack, Jones, Roos, 1991) and Lean Thinking (Womack, Jones, 1996). Toyota employees are sought out by companies in almost every industry throughout the world for their expertise.
  • Toyota has the fastest product development process in the world. New cars and trucks take 12 months or less to design, while competitors typically require two to three years.
  • Toyota is benchmarked as the best in class by all of its peers and competitors throughout the world for high quality, high productivity, manufacturing speed, and flexibility. Toyota automobiles have consistently been at the top of quality rankings by J.D. Powers and Associates, Consumer Reports, and others for many years.

Much of Toyota’s success comes from its astounding quality reputation. Consumers know that they can count on their Toyota vehicle to work right the first time and keep on working, while most U.S. and European automotive companies produce vehicles that may work when new but almost certainly will spend time in the shop in a year or so. In 2003 Toyota recalled 79% fewer vehicles in the U.S. than Ford and 92% fewer than Chrysler. According to a 2003 study in Consumer Reports, one of the most widely read magazines for auto-buying customers, 15 of the top 38 most reliable models from any manufacturer over the last seven years were made by Toyota/Lexus. No other manufacturer comes close. GM, Mercedes, and BMW have no cars on this list. Not a single Toyota is on the dreaded “vehicles to avoid” list, while a handful of Fords, almost 50 percent of the GMs, and more than 50 percent of the Chryslers are to be avoided, according to Consumer Reports.

Here are some other statistics from Consumer Reports’ 2003 annual auto issue:

  • In the small car category (Toyota Corolla, Ford Focus/Escort, GM Cavalier, and Chrysler Neon), Toyota won each of the last three years for overall reliability, as well as the prior three years, and predicted reliability for the 2003 model year.
  • For family sedans, the Toyota Camry beat out the Ford Taurus, the GM Malibu, and Dodge Intrepid, winning in the last three years, the three prior years, and predicted reliability for the 2003 model year.
  • More than half of all Toyota used cars are singled out as “recommended for purchase,” compared with less than 10 percent of the Fords, 5 percent of the GMs, and none of the Chryslers.
  • Toyota/Lexus has also dominated the J.D. Powers “initial quality” and long-term durability rankings for years. Toyota’s Lexus was again the #1 most reliable car, according to the J.D. Powers 2003 quality survey, followed by Porsche, BMW, and Honda.

What is the secret of Toyota’s success? The incredible consistency of Toyota’s performance is a direct result of operational excellence. Toyota has turned operational excellence into a strategic weapon. This operational excellence is based in part on tools and quality improvement methods made famous by Toyota in the manufacturing world, such as just-in-time, kaizen, one-piece flow, jidoka, and heijunka. These techniques helped spawn the “lean manufacturing” revolution. But tools and techniques are no secret weapon for transforming a business. Toyota’s continued success at implementing these tools stems from a deeper business philosophy based on its understanding of people and human motivation. Its success is ultimately based on its ability to cultivate leadership, teams, and culture, to devise strategy, to build supplier relationships, and to maintain a learning organization.

This articles describes 14 principles which, based on my 20 years of studying the company, constitute the “Toyota Way.” These 14 principles are also the foundation of the Toyota Production System (TPS) practiced at Toyota manufacturing plants around the world. For ease of understanding, I have divided the principles into four categories, all starting with “P”—Philosophy, Process, People/Partners, and Problem Solving .

Toyota was unveiling its own internal “Toyota Way” document for training purposes. This document greatly influenced my thinking about the 14 principles and consequently I have incorporated the four high-level principles from that document (Genchi Genbutsu, Kaizen, Respect and Teamwork, and Challenge) and correlated them to my four principle categories of Philosophy, Process, People/Partners, and Problem Solving .

The Toyota Way and the Toyota Production System (Toyota’s manufacturing method) are the double helix of Toyota’s DNA; they define its management style and what is unique about the company. In this articles I hope to explain and show how the Toyota model of success can be applied in any organization, to improve any business process, from sales to product development, marketing, logistics, and management. To assist you in this journey, I offer numerous examples of what Toyota does to maintain such a high level of achievement as well as explore companies from a variety of industries and service operations that have effectively applied Toyota’s principles.