Q: If you look at the numbers, there is no question about Toyota’s strength among all Japanese corporations. But when asked “Why are they so strong?” I can’t think of anyone who gave us a straightforward answer. In your book, you said it is definitely “product development.” Could you tell us why there have been no books like yours in the past?
I subtitled this book “The biggest global company in Japan that the Japanese are not aware of.” One of my SNS friends (a Japanese living in Japan) quickly sent me question, “Is Toyota really a global company?” It may sound strange but to talk about Toyota in Japan, I have to start explaining from there.
Toyota’s sales is US$270 billion with an operating income of a little less than US$30 billion. It produces 4 million automobiles in Japan and 6 million overseas. Half of those made in Japan are exported. In other words, of the 10 million produced, 80% of them are built and sold to the overseas market. The Japanese are buying only 20% of what they make. The foreign employees in the Toyota headquarters outnumber the Japanese employees. You can probably see why the company’s president, a grandson of the founder, started to say “made by Toyota.” Probably we sense nothing global about the brand name Toyota and Toyota made cars because they are just part of our daily lives. They are part of our lifestyle. This story is not just unique to Japan. In fact, not just in Japan, but Toyota has made its way into the American society that there are even some Americans that think Toyota is an American company.
Some Americans boast about their Toyota saying “Maybe it started out as a Japanese company but Toyota is now an American company with American workers building cars to meet the American needs.” Its undefeated strength comes, first of all, by providing cars that meet the needs of the people over the world.
Let me go back to your question of why Toyota is so strong. Most analysts in Japan still talks about Toyota Production System (TPS) and its strong sales force. Their reasoning comes from looking at Toyota factories that give images that clearly show what they are doing, or at least they make people think they can see the production system, and sales strategies are more obvious. In fact, if you step in the business section of a bookstore, almost all books about Toyota talk about TPS. The topics are always about Kaizen, Kanban, Andon, 5S, and Jido-ka .
But let’s take a moment to think about it. The Japanese style quality control system (QC) developed mainly in post-War Japan put together with TPS, i.e., “TPS + QC” is now common sense in manufacturing all over the world. TPS + QC is now in action in the US, China, Korea, and even in factories in Mexico and Brazil. The production floors are so highly automated that hardly any work remain in the hands of human workforce.
This TPS + QC is the very know-how that the media called MADE IN JAPAN, but now it is in practice at Ford, Mazda, GM, and even Hyundai. The level of achievement may vary with different companies, however, today, you cannot expect fundamental differences in factory manufacturing. You are out of the game if you do not have TPS + QC in place, in other words, you are not fitted to compete globally.
Some Japanese contribute Toyota’s strength to its sales force, but 80% of its sales is made overseas. There is no doubt that Toyota sales are working hard in foreign countries as well, but the competitors are equally hard workers with similar strategies.
Then why is it that only “Toyota” continues to keep its overwhelming advantage? The secret is in its product development, i.e., what has been called the “Toyota Product Development (TPD).” The power of Toyota is in its TPD and this fact has not changed for over half a century. In addition to TPS, Toyota keeps a great advantage in TPD.
TPD, started in 1953 by Eiji Toyoda, then an executive director, and an aviation engineer Tatsuo Hasegawa, is product development based on Toyota’s Shusa (Chief Engineer) system.
Then, why is this important TPD not well known to the general public?
For one thing, TPD was hard to explain compared to TPS. Unlike TPS, which is all about how to run the factory, TPD is invisible and is a knowledge-intensive concept. To understand Toyota’s TPD, you need to know how Toyota creates new values, its technical knowledge for driving the cost down, and ways of Toyota design (Toyota design is discussed in the answer to the next question). In the past, such concepts have not been explained to the general audience.
The subject is hard to explain unless the audience has knowledge in technology, design, and economics. In short, the concept is a bit complicated.
The difficulty of explaining TPD to people probably led to the attitude that, as long as those that need to understand it do, then let it be that way.
Maybe for this reason, the rest of the world caught on TPS alone and TPD ended up being hardly known to people.
Toyota, from long time ago, is a company of “TPD + TPS.” When they say, “Produce selling products in the right order and quantity at the right time,” TPD, i.e., product development defines and creates “selling products” and the factory TPS takes the remaining role of producing “in the right order and quantity at the right time.”
Historically, the TPD contribution to value and profit grew each year, and in 1970 or so, the TPD contribution took over that of TPS, and now both value and profit are completely generated in the TPD phase. In other words,
“The cost structure that produces sufficient profit for the company while providing products with merchantability for the consumer (value) who can afford it and thus actually makes the purchase” is now almost all generated by TPD. This does not mean that TPS is no longer necessary. TPD and TPS are systems that produce mutual effects when combined together. TPS, as I explained earlier, is now common sense for the world, and the days to compete in that arena are over.
The world learned about TPS because Toyota wanted its keiretsu companies to learn about it, and maybe because the inventor or TPS, Taiichi Ohno published a book “Toyota Production System (publisher Diamond)” in 1978.
Q: What interests me is how Toyota defines designers. In most companies, isn’t it rare for the designer to take responsibility in profit and how it is made?
Absolutely. The “Toyota designer” is in fact, the real meaning of a “designer.” Yotaro Hatamura, Professor Emeritus of the University of Tokyo, at Hatamura Institute for the Advancement of Technology, said, “When they say designer, they misunderstand them to mean people that produce drawings” and he is definitely right. A real designer is someone who is in charge of the following three aspects:
(1) Value for the consumer to make purchase . . . Merchantability
(2) Profit (= price – cost) . . . Merchantability in (1) determines the price
(3) How to realize (1) and (2) . . . Involves technology development
Sometimes this designer is called the “designer in the broad sense”. When these three tasks are complete, i.e., when they are finished, the work of drawing lines is literally just drawing lines.
In case of Toyota, the Chief Engineer works with Concept Designers of each subsystem (such as body, chassis, engine,) leads the design to “develop merchantability that the consumer can afford with a cost structure that produces profit.” In other words, the Chief Engineer, who in Toyota is understood as “President of the Product,” is the designer that develops value for the product and, at the same time, is responsible for “Toyota cost planning.” or “Toyota way GENKA-KIKAKU.”
This style of business is not just unique to Toyota, For example, many Japanese may already have a hunch that Steve Jobs in fact assumed the similar role of a Toyota Chief Engineer. They are designers in the broad sense, and Jobs was also a designer in the broad sense who happened to take the role of a corporate president. Kiichiro Toyoda, Soichiro Honda, and Morita and Ibuka that started SONY were all this type of talents. You probably know that Jobs respected Morita, who started SONY, as a mentor. They were all designers in the broad sense.
Q: I believe that designers generally design product shapes and functions, however, many of our readers may be surprised to learn that designers also work on reducing cost, and that cost reduction is almost complete in the design stage.
The designer’s work, in the original sense, means to increase the level of how a product meets the consumer’s needs and to develop such a product that the consumer will actually purchase. It is a matter of course because the buyer purchases the designers intended value. We can say that corporate competition now means “to economically produce design information with higher level of matching between the consumer’s needs and the product value.”
It is common to pursue technology development to raise the merchantability (value) but Toyota is also actively involved in “product technology development for cost reduction.”
For example, if you look at the fuel cell vehicle Mirai, now on the market, its principle and technology were established 10 years ago. The vehicle back then, however, simply could not have been built in quantity for a regular household to afford. In other words, built in the lab and made into a “product” at a price that we can actually make purchase are totally different things.
In case of Mirai (its price-tag is still a bit high), Toyota have been after “technology development for cost reduction” to build a fuel cell vehicle that regular consumers can afford.
Also, if we think of “degrees of freedom,” anyone can easily tell that value and cost are determined in the early stages. Later in the process, e.g., in the mass production stage, it is impossible to lower the cost with major design changes. Let’s say you were preparing a family Christmas dinner of roast beef and chicken salad and when you were done chopping up all the ingredients, suddenly someone insisted on having a traditional roast chicken. You cannot put the chicken pieces back together for a good roast, and going for low cost canned tuna to put on top of the salad would spoil your dinner plans!
This is not only with manufacturing but if you want to make changes in later processes, the degrees of freedom is less, in other words, what changes you can make are limited. The values are constrained as well as cost. What to produce is almost all determined in the planning and early design phases with all information you can gather and with the help of the best people around. It is still possible to drop the cost with efforts in the later processes but in reality what you can gain is probably 2 to 3%.
Q: In terms of human resources, is it true to say that Toyota is not especially successful in gathering high quality people?
Of course, I believe so. People like me that grew up in Mikawa area have no disappointment against living in “uh oh, the City of Toyota.” Toyota is located in a remote land from Tokyo and I hear that in the past, only few people would apply to work for Toyota as their first choice.
I heard from one of an elderly former employee saying “Growing up in Tokyo and working for Toyota made me feel like being banished from the city and when I was commuting on Mikawa line, at times I had tears in my eyes.” Mikawa line is a local railway that runs through the City of Toyota. The City, however, is now the richest local community in Japan and I hear that in recent years, Toyota has been the most popular company to file applications with among the engineering students at the University of Tokyo. That is “the bigger the tree, the better the cover” and it is just the trend of calculating students. It makes me a little worried about the future of Toyota.
In fact, when I graduated from school, there were hardly any differences in terms of quality among students that went to Toyota, NTT, or Hitachi. Nevertheless, there are big differences in corporate business performances. The reason evidently is the management itself.
This book will give you hints about the secret of Toyota. I am not saying Toyota is perfect, however, the results show that it is superior at a high level compared to companies like Hitachi or NTT that failed in its globalization and came down the hill. Maybe I have to, instead of saying that Toyota is good, say the other Japanese companies are weak and the weaknesses are the results of man-made disasters.
Some foreign capital corporations are making their moves now. Many now say that the once popular MBA style operations devastated corporate organizations to make the American people poor except only a few at the top. They are studying the Toyota ways of training human resources and leveraging talents.
I hear that top business school in the US now teaches a number of case studies of Toyota. But I also hear that people at those school do not have a good understanding of the Toyota ways and they just repeat discussions that are off the point.
It may sound strange, but schools of economics in Japan never really studied or understood the management of the biggest Japanese global corporation and kept preaching about styles that were off the mark. Hardly any Japanese know the Toyota way of business except a few that work in the Toyota group. Employees of the Toyota group are kept busy working on their assigned tasks and many of them will not come across chances to learn or study about the total Toyota system. Those in related companies or factory workers will never know the business process at the heart of the main Toyota business. I explained the reason in “The Secret behind the Success of Toyota” that the company has a system only to “pass necessary information to those in need (and are capable of understanding them) at the right time.”
A number of ex-Toyota engineers responded to my previous book “The Age of Talents” saying “It was the first time I really understood the company I worked for all my 40 years.” It is so easy to get lost in large size corporations without knowing what the overall picture is about. This corporate policy was probably inherited from the founder Kiichiro Toyota’s code of action “not to say things unless you need to” or the traditional values in Mikawa area.
Q: I believe it is the basics for every company to “build things that sell,” but are you saying that Toyota was the only one that worked it into its “system”?
I am afraid that is the conclusion. This book will introduce the concept of “design quality” to you, i.e., the mechanism of “pursuing higher level satisfaction about the consumers’ real needs that even the consumers themselves do not know or understand.”
Toyota is a company of TQM and it is after “design quality” at the same time it pursues “production quality.” Production quality, in other words, the quality of the factory is mostly “quantitatively” measurable by means of science. Design quality for consumer product such as passenger car, on the other hand, has “qualitative” factors, e.g., to what extent the products meet the consumer’s needs. In other words, the value of the product now involves, the product’s value as contents, and the value in “buyer as a person” v.s. “designer as a person.” Among those on the production side, the design quality requires, from the product development group, work that is essentially different from what are required to the factory.
The discussion is leading me to talk about “’Human factors in TPD.” Let’s see what this means:
The factory transfers or maps design information into products, i.e., the input and output are set. An input is design information and the output is product. In other words, the factory operates under the precondition that what it makes sell, therefore, TPS is a simple system, i.e., the task for TPS is fully known from the beginning. It has been commoditized for quite some time now.
In contrast, on the other hand, the product development group has an input like a product concept, and the output is “design information” of an attractive product that can lead factories to perform mass production. Designs that are the same with old ones can only produce the same products, therefore, TPD has to mix something new in its output and perform new tasks that are not routine.
It is not so hard for a product development group to explain its business process. The difficult part is to turn knowledge and creativity of their members into values of products or processes. Many Japanese companies struggle in building systems that start from knowledge and talent that people have and turn them into economic value.
In case of Toyota, Tatsuo Hasegawa, a former aircraft engineer during the War, adopted the Chief Designer System into the Chief Engineer System in automobile development. This was in 1953. His call was in response to the idea of producing a passenger car fully designed and built with Japanese brain and craftsmanship. Toyota probably understood the qualifications required to a Chief Engineer since Kenya Nakamura, the first Chief Engineer responsible for the first Japan made model Crown and that human network is still carried on today.
After all, Chief Engineers assume the responsibility to “produce products that make sales” in the saying, “produce selling products in the right order and quantity at the right time”
Many have tried to explain the Chief Engineer System, however the discussions lead to what the system expects about work by the “people.” To discuss about their work is an important aspect, however, it is more important, and at the same time most difficult, to explain the people. To discuss about product engineering groups means to discuss about the people that perform systematic intellectual labor.
Toyota has a system, since the past and still today, to compile, in the company, the know-how of efforts and tracks of trial and error by all members including, workers and talents at every level. While the knowledge and talent of each worker have their bounds, the system, without wasting any, transfers them into product or process values.
Q: We have the success of Toyota on one hand, but why is it that other corporations in Japan (except the automobile industry) do not even try to learn TPD style Product development system from Toyota?
That is the mystery. For example, the Chief Engineer System of Toyota is called Lean Product Development (lean meaning no waste and it means Toyota-style in the English speaking communities) and it is a subject of researches. Studies about Toyota Product Development in the US and Europe are imperfect with many misunderstandings and inaccurate information because lack of information. But I must say that is much better than not knowing it at all.
The Toyota way has affected the software industry in concepts of Lean, Agile, Scrum, XP, and Kanban. Most of the techniques are inspired by TPS rather than TPD that is partially known in the west. The concept left traces in the Silicon Valley in Lean Startup, and Lean LaunchPad. The requirements for talents of (Heavy Weight) Product Managers in the Silicon Valley startups are in fact, the requirements for Chief Engineers of Toyota.
When I spoke at the Lean Product and Process Development Exchange Conference (LPPDE) in Texas in 2015, a former US automotive manufacturer executive I met said that the biggest reason of the American auto industry’s defeat was its “arrogance.” What he said meant that the American auto industry lost sanity with its success during its golden days, and forgot how to humbly learn from others. The current situations with Japanese loser companies, especially those in home appliances, semiconductors, and communication is very much like that with the American auto industry back then. Some even question if such companies, like SHARP acquired by Foxconn, or Toshiba with a series of serious accounting scandals, are looking at themselves objectively. In fact, their announcements hint that they are not looking at the problems as their own failures.
After all, we have to scientifically study “the system that is going well.” Emotions, beliefs, and dreaming about the past just hinders our proper judgement.
Q: Toyota’s relations with keiretsu companies seem quite different from the general idea of affiliation don’t they?
Correct. I grew up in Mikawa area and I know the mechanism of how affiliated companies produce profit since my childhood. All my friends in the neighborhood had parents all working for companies that were related in some way to Toyota. Related companies in Mikawa, in contrast to those in Tokyo, easily make huge profits. The systems are quite different.
Anyone can easily figure it out. For example, Toyota’s “periodic request to keiretsu companies for price reduction” sounds that it would have choked Denso, but the fact is the opposite with Denso having an annual sale of 4.3 trillion JPY. Denso is now bigger than the entire NEC family or Mitsubishi Heavy Industry, not to mention its bigger than 1 trillion JPY sale margin over other automotive manufacturers of Mazda, Suzuki, or Fuji Heavy Industries (maker of Subaru). It is about time for the Japanese to find out the real mechanism of how Denso can make so much sales. Suppliers to Ford or GM are now itching to enter relations with Toyota. The reason is simply because they want to make more profit. Then how is that possible? The book “The Secret behind the Success of Toyota” reveals the answer.
Denso with sales bigger than 4 trillion and Aisin with over 2 trillion are both world-class companies. If you ask if they hired extremely talented people, the average employee is not any different from those at NEC or Mitsubishi. Then what makes this difference in the results? Use your head and think about it.
The Japanese media often write like “Toyota is just bullying their subcontractors” but what I have been seeing from my childhood are pictures that are quite different. Maybe the old-fashioned Japanese media companies, structured to exploit their contractors, are just imagining that the same Japanese company group Toyota and its affiliates must be the same. Going out to the field and watching the reality, Genchi-genbutsu, would certainly change the way they look at the Toyota group. I know a newspaper reporter that use to write about “Toyota bullying” and he made annual interviews with Toyota subcontractors. Year after year, he witnessed the interviewees advancing their living conditions better than himself and he finally said that he could not write bullying articles any more.
Japanese affiliated company groups are called “Keiretsu” and what goes on inside them are quite different with the Toyota group and similar sized NTT or Hitachi groups.
I recently heard that the Toyota group had bad influence from those old timers of Hitachi or NTT, however, in principle, the Toyota Keiretsu will avoid the exploiting structure that NTT or Hitachi Keiretsu has. The Keiretsu formation might be the same, but what goes on inside, including how human resources, is handled completely differently. The book touches this topic without giving you the whole picture. It will be a subject that I can explain at another occasion.
You can easily guess there are differences in the Keiretsu systems if you see how the subcontractors of Hitachi and NTT have not grown big like those in the Toyota Keiretsu.
Q: What makes it difficult is the fact that people have to evaluate other people. Many companies are struggling with this method. Is it correct to say that Toyota has a corporate culture to make the “correct evaluation”?
Well, even in Toyota, it is human act and thus it cannot be perfect. It seems that Toyota has its own serious problems. I can at least clearly say, however, that the people, Eiji Toyoda and others, who built the foundation of the Toyota group made excellent work.
My book starts out describing the region where the Toyota Headquarters are now located. It is a land where foxes and raccoons used to live and public safety was marginal. In other words, Toyota started up from nothingness. After all, Toyota grew with its people with knowledge, wisdom, and creativity that built products that the market made actual purchases. Just like Eiji Toyoda, the third President Taizo Ishida once said, “People are the most difficult.”
What is the most difficult for all companies including Toyota is the human resource and talent management that leads to people’s work that produce value.
Management of factory workers and administrative white collars that perform routine work is clear and practically established by now. On the other hand, how to handle others that perform talent, creativity, and intelligent inspirations is the most difficult topic now. Unless you can manage this part, your company can quickly disappear.
A big mistake in assigning resources in top management can lead to devastation like the case with SONY. That is because, like I wrote in my previous book, “fools tend to chain.” The word “fool” here is the fool in the book “The Wall of Fools” by Takeshi Yoro (Professor Emeritus, the University of Tokyo). I will suggest you to read my previous book “The Age of Talents” in which I systematically describe “Talent management perspective of TPD.”
Q: When other companies want to learn from Toyota and make changes to themselves, what will be the first step?
Companies in Japan, especially manufacturers, are strong in TPS and QC of mass production processes. They have made advanced studies in production engineering and their production control are still at high levels in the global competition. Reaching the highest level in manufacturing may lead you to the top with giant factories and state of the art facilities, however, if you are producing things that do not sell, you will end up being subcontractors for some other country’s companies like with the case of SHARP. Or you may build huge research centers with astounding budgets, but throwing around grant money for researches have not led to products with world-class merchantability. It is about time we understand the reason, i.e., the relations among technology, merchantability, and economic profit. I would like the people to learn the essence of TPD to solve these problems.
The Toyota system seems not to be understood properly. It is not only the Japanese businessmen but even the administrative officials and politicians do not understand Japan’s best global company. The situation is the same with not understanding how the modern manufacturing industry is like. It is a shame. Like many ex-Toyota people say, the School of Economics or Business Administration at the top University in Japan is to be blamed, but at the same time, the School of Engineering is also responsible. Japan has to stop teaching the wrong theory of design and manufacturing that confuses the business world and start teaching the correct theory of design and manufacturing. Especially the fields of engineering must understand that technology and research can have economical value only when they reach product value at the end.
When they say to “produce selling products in the right order and quantity at the right time,” the most important phrase is “products that make sales” and theories about Toyota production system that cannot explain how to produce products that make sales are nonsense. An old saying in Mikawa goes “It is a crime to make things that do not sell.” To produce things that do not sell is “the ultimate waste.”
Recently, we came across talks, that are off the right track, about Toyota in Japan, especially by sociology scholars, and they are causing damages. For example, “Integral Architecture” by Takahiro Fujimoto is one of such strays. Many former TPD practitioners at Toyota who read my previous book asked me “We are annoyed by the development of wrong explanations and we would appreciate it if you, Sakai-san, could point out the mistake,” and this book touches on this subject.
Toyota has made its success through its long history of planning “selling products (TPD)” and producing them “in the right order and quantity at the right time (TPS).” This is what it means when all the presidents of Toyota from the past to the present say, “rationally and firmly carry out what is rational.”
TPD is in charge of creating selling products and TPS is responsible for producing them in the right order and quantity at the right time.
TPS alone without TPD leads to nowhere. We Japanese must understand the total Toyota system of TPD + TPS as our culture.
Japanese companies that lost grounds in the global market competition have to keep applying TPS but in addition, they must learn about system of TPD. Then they will be ready to enter the global market again.
“The Secret Behind the Success of TOYOTA.” By Takao Sakai