Product recalls: Reputation of Toyota

In the start of 2010 Toyota in three separate instances recalled more than 6 million vehicles in the United States and 8.5 million cars worldwide because of acceleration problems and braking flaws. Initial estimates suggest Toyota’s losses to be $2 billion that do not take into account the lawsuits and marketing costs Toyota will incur. It was only a year ago did Toyota beat GM into the top slot in the automaker’s industry. But now Toyota is facing losses of billions and a huge dent in sales and image of the company. One of the reasons for such huge numbers is the philosophy Toyota follows and use of the same manufacturers for parts used worldwide. With the current economy, uncertainty in the auto-industry and lack of consumer confidence the largest recall for Toyota would only be detrimental as it would Toyota’s financial position and its reputation. Also it would be significant to see the world leaders in the automotive industry would respond to such a downfall?

Research Question –

To what extent does the recall of cars have an impact on Toyota’s financial position and image? And how should Toyota regain their reputation post-recall?

Background Information –

Industry

The automotive industry designs, develops, manufactures, markets, and sells the world’s motor vehicles. In 2009, more than 60 million motor vehicles, including cars and commercial vehicles were produced worldwide. The industry is made up of many manufacturers [3] .

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Company –

With 43% market share, 61.20% long term growth rate, 321,274 employees, $120.39 Billion worth market cap and $214.31 Billion worth Enterprise value Toyota Motor Corporation is the world’s largest automotive company [4] . Toyota Motor Corporation was founded in 1933 and is headquartered in Toyota City, Japan. The company engages in the design, manufacture, assembly, and sale of passenger cars, minivans, and trucks and related parts and accessories.

Toyota’s Product Portfolio –

TYPE OF CAR

PRODUCTS

Hybrid vehicles

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Cars under the Prius brand

Subcompact and Compact cars

Corolla sedan, Corolla Rumion, Yaris, iQ, Scion xB, and Scion xD brands

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Mid-size vehicles

Camry, REIZ, Mark X, Premio, Allion, Blade, and Avensis brands

Luxury vehicles

Lexus, Crown, and Century limousine

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Sports and Speciality vehicles

Lexus SC, Scion tC brands, Sequoia, 4Runner, RAV4, Highlander, FJ Cruiser, and Land Cruiser brands

Minivans

Alphard, Vellfire, Corolla Verso, Wish, Hiace, Regius Ace, Estima, Noah, Voxy, Sienta, Isis, and Sienna brands

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Trucks and Buses

The company also provides retail and whole financing, retail leasing, and insurance services to dealers and its customers. Additionally, it engages in the design and manufacture of prefabricated housing and information technology-related businesses, including intelligent transport systems and an e-commerce marketplace, called GAZOO.com.

Toyota’s global competitive advantage [5] is based on a corporate philosophy known as the Toyota Production System, a production system that is steeped in philosophy of the complete elimination of all waste and that imbues all aspects of production with this philosophy in pursuit of the most efficient production method. The fundamental reason for Toyota’s success in the global marketplace lies in its corporate philosophy – the set of rules and attitudes that govern the use of its resources. Toyota have successfully penetrated global markets and established a world-wide presence by virtue of its productivity. The company’s approach to both product development and distribution is very consumer-friendly and market-driven. Toyota’s philosophy of empowering its workers is the centerpiece of a human resources management system that fosters creativity, continuous improvement, and innovation by encouraging employee participation, and that likewise engenders high levels of employee loyalty. Knowing that a workplace with high morale and job satisfaction is more likely to produce reliable, high-quality products at affordable prices, Toyota have institutionalized many successful workforce practices. Although many car manufacturers have earned a reputation for building high-quality cars, they have been unable to overcome Toyota’s advantages in human resource management, supplier networks and distribution systems in the highly competitive car market [6] . Much of Toyota’s success in the world markets is attributed directly to the synergistic performance of its policies in human resources management and supply-chain networks.

Word Count – 329 words

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METHODOLOGY –

Due to the impact of the Toyota recalls concentrated in the United Sates I could not carry out primary research. So the only source of data was secondary research which due to the importance and size of Toyota was available in vast numbers. So due to the significance of the case the data found from websites, journals and interviews was very detailed, up-to-date and accurate. Also the data was rechecked with multiple resources to see if it is valid. Secondary research was used for the following purpose –

Impact of Recall on –

Sales and stocks

Image

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Quality

Competitors

Other Stakeholders

Reasons why the recall happened

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Analysis of financial position of Toyota

Market Analysis

What Toyota did post-recall

Business Techniques used –

Stakeholder Analysis

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Financial Techniques – Profit and Loss

Comparison of Companies through market share, sales and market capitalisation

Quality Management and Lean Production

SWOT analysis

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Porters Five Force Analysis

Crises Management

Word Count – 66 words

DATA FINDINGS, ANALYSIS AND EVALUATION –

Short Term Impact of Recall

Impact on Toyota’s Sales and Shares [7] –

With over 100,000 cars in lost sales in the first quarter of 2010 Toyota’s position does not look good. With the sales loss Toyota has to pay for repairs (an hourly wage of $45-$50 per hour) of nine recalled car models which together add up to approximately a loss of $3-4 billion. Furthermore Toyota has to resolve about 100 lawsuits and go through more than 3 congressional hearings that lead to another $3 billion in losses. Add to this the cost of advertising and public relations, and we can already see the company struggling to meet its Q4 earnings outlook for FY2010. The following graph shows the models impacted and estimated loss of sales post-recall.

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Figure [8] 1 –

Stock [9] prices of Toyota have been southbound ever since news of the recalls hit the stands, with the TSE shares losing 22% of their value or approximately $30 billion. The company announced a fix for the sticking pedals on its cars and is trying to fix all affected models through dealer service networks. However, media storm and customer dissatisfaction have put the company in a very tight spot to respond to its trouble. Toyota’s suspension of sales of eight models in the U.S. and competitors being at a more financially stable position have led to large volumes of Toyota shares being traded and large number of investors divesting their Toyota shares. However this is a short term impact as analysts are suggesting that Toyota is capable to fight back from this position and would come back stronger and so labelling the shares to be medium risk and to be held ad not sold.

The following data shows the change in share prices and trading volumes during and after the recall (2009-10). We can see how the shares have reached their lowest value in past five years during this period.

Long-Term Impact –

Impact on Quality [11] –

It often takes decades for a company to build brand awareness and this is certainly the case for Toyota vehicles in the United States. While the company has been in business since 1937, it was not associated with high quality until the 1980s. But one misstep in 50 years has brought tremendous publicity damage on Toyota’s brand image, and destroyed the salient qualities of the brand and harms the foundation of trust and reliability of the brand. Owners’ concerns range from loss of re-sale value to their vehicles to loss of confidence in the brand association of Toyota to safe and reliable cars. The losses could escalate if Toyota does not quickly counter the losses the image and if not addressed the loss in sales and shares could spiral downwards.

To see the impact in consumer perception for Toyota a survey [12] was taken among 301 viewers of a news clip highlighting the Toyota recall. It revealed that 56% % indicated that they are not likely to purchase a Toyota vehicle after watching the news clip. Also the favourability rating of the Toyota brand declined from an average rating of 4.9 to 3.9 on a scale from 1 to 7, after viewing the video. In addition, the percentage of viewers who indicated that they were somewhat likely to purchase a Toyota as their next car dropped from 63% before viewing the video to 44% after viewing the video. This showcases the drastic fall in the perception of the brand. Another survey showing the change in consumer sentiments showcased how post-recall customers were less likely to buy a Toyota product [13] –

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But from the survey we can also see that the shoppers after the recall in March have again started to consider Toyota. This may have happened due to the incentives Toyota have started to offer and a fast fix Toyota has come to resolve the car problems. Dealerships are open for longer hours, television campaigns that re-iterate the strong quality record of the company, and an outright apology combined with commitment to fix things are some of the damage control steps being taken by Toyota. [14] 

Why Did The Recall Happen?

Reasons for quality problems is an amalgamation of various factors which are –

Aggressive growth strategies where quality control [15] and management were overlooked. The rapid expansion of production requiring use of suppliers who do not meet the high production standards of Toyota, and high-cost reduction pressure on components supplied by suppliers have also impacted product quality. [16] 

Globalisation [17] and growth into unknown markets has led to language barriers and lack of expertise in quality management leading to cracks in the quality system. Also the outsourcing [18] of the whole production line and lack of supply chain monitoring led to complacency internally for Toyota and fall in quality. [19] 

So overall the managers were tempted to cut costs and achieve short term growth objective overlooking quality and their philosophy of quality as the main objective of production. Also the use of standard and benchmarked techniques the recall caused problems in Toyota’s system worldwide as same manufacturers were used and they were unable to grow their production capacity as big as what Toyota demanded.

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Word Count – 680 words

MARKET ANALYSIS –

Stakeholders Impacted by Recall –

The loss in sales is only a short term effect and can be remedied but the impact on reputation and image of Toyota can be detrimental. The impact of the recalls is not only on the managers of Toyota but on all its stakeholders [20] . With a reduction in profits and financial position of company investors have flown away and employees are worried about their jobs. The recall by largest auto-manufacturing company is detrimental on the whole industry as seen from the Porters Five Forces [21] analysis [22] . The recall has also improved positions of competitors like GM and Ford [23] . Toyota would also need to evaluate and look at its own position after the recall (Through a SWOT [24] analysis [25] ).

Toyota’s plight will be a setback for green products in general and green vehicles in particular as the Prius – the darling of environmentally minded consumers – has now been tarnished as unsafe [26] .

Actually the recall could be beneficial to Toyota. According to a study [27] at a website that calculates a Social Influence Marketing (SIM) Score for different companies, the SIM score for Toyota, shockingly, saw an uptick in January. The reason for this could be that the increased number of conversations about Toyota is building greater awareness for the brand even though many of the mentions may be negative. While this may seem unusual, the fact that people are talking about the brand a lot more and sometimes in a neutral light (not just negatively) is increasing its exposure.

Word Count – 140 words

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STRATEGIES AND RECOMMENDATIONS [28] –

What Toyota needs to and should do?

The first thing Toyota did was to recall all faulty car models and stop the production of these models. The main objective of Toyota should be to rebuild the trust consumers used to have in its products and get back investors. The company should consider taking additional steps to encourage consumers to stick with the brand. This might include giving away free services to consumers to encourage people to bring in affected vehicles for timely recall repairs. An extension of the factory warranty would also represent a forceful action. [29] 

Toyota should take swift, sweeping action on all digital fronts: social media, blogs and company websites. Toyota has the opportunity to utilize social platforms, such as Facebook and Twitter, to manage this branding crisis, but has shown a half-hearted effort. Facebook, the largest social network, is not being utilized by Toyota to reach out to its nearly 70,000 fans. The Japanese car manufacturer is also under-utilizing its Twitter account to get the news to its 14,000 followers. Toyota has posted a mere six tweets regarding the recall – not as much as you might expect a brand in crisis management mode. [30] 

Another important step for Toyota is to create a supply chain management system and crisis management system so that if such a situation occurs Toyota is well prepared and that all external suppliers and employees are looked and managed. Currently crisis management should be done and Toyota should follow what Johnson and Johnson did during the Tylenol case [31] . They should [32] –

Word Count – 130 words

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CONCLUSION

In short run we can see Toyota’s sales and stock prices going down significantly and Toyota would need to carry out effective marketing especially social marketing to counter the fall in sales. Also Toyota would need to consolidate their objectives of aggressive growth by incorporating a consistent quality management system. Toyota should introduce a supply chain management and train outsourced production lines so that their philosophy is not diluted and they do not have safety issues again.

In the long run Toyota would need to improve the reputation and image that has been spoilt. Also most likely due to the size of Toyota they would be able to do so due to their large marketing budget and the expertise and skills they have at disposal. Toyota would also need to channelize all the publicity they have been getting into something positive. Toyota would also need to carry out an effective crisis management and set up a taskforce for the future so they are prepared in the future.

In the end yes the recall has impacted Toyota’s sales and shares, hence their financial position and their reputation but due to the already existing uncertainty in the auto industry and world economy the recall could only be one of the reasons why the sales have fallen. Due to the size of Toyota as the industry improves Toyota will also grow and move to a better position.

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