Toyota’s way is to measure everything—even the noise that car doors make when they open and close as workers perform their final inspections on newly manufactured automobiles. By any measure, whether esoteric or mundane, Toyota Motor Corporation has become one of the most successful companies in the world today. This year marks the 70th anniversary of Toyota’s founding, 50 years since the Japanese company started exporting cars to the United States, and a decade since it launched the world’s first commercial hybrid, the Prius. If, as Toyota officially forecast last December, it sells 9.34 million vehicles in 2007, it will overtake America’s General Motors to become the world’s biggest automobile manufacturer.
Toyota is, arguably, already the best carmaker on the planet. For almost 15 years J.D. Power and other research firms have consistently rated Toyota and its luxury line, Lexus, among the top automotive brands in terms of reliability, initial quality, and long-term durability. Toyota is also the most profitable car manufacturer: In the financial year that ended in March 2007, it made a profit of $13.7 billion, whereas GM and Ford reported losses of $1.97 billion and $12.61 billion, respectively, in 2006. In fact, Toyota’s market capitalization on May 10, 2007—of $186.71 billion—was more than one and a half times GM’s ($16.60 billion), Ford’s ($15.70 billion), and DaimlerChrysler’s ($81.77 billion) combined.
In the history of the modern corporation, Toyota’s march to the top from its humble beginnings as a textile machinery manufacturer in the mill town of Koromo—now Toyota City—is one of the most remarkable examples ever of managing for the long term. Toyota’s rise wasn’t quick or inevitable. Even in the early 1980s Ford and GM marketed bigger, better-looking, and plusher cars than Toyota did—although its soulless creations were more reliable and fuel efficient. The Japanese manufacturer closed the gap little by little, improvement by improvement. In 1970 GM had a 40% chunk of the U.S. car and light-trucks market, whereas Toyota had only a 2% sliver. Toyota’s market share inched up to 3% in 1980, to 8% in 1990, and to 9% in 2000, entering double digits for the first time only in 2006, when it rose to 13% and GM’s fell to 26%. Toyota’s ascension is best captured by the Japanese word jojo: “slowly, gradually, and steadily.”
Every executive has two questions about Toyota today: What can my company learn from the world’s greatest manufacturer? and (sotto voce) How is Toyota handling success? The answer to the former is obvious (plenty), but the jury is still out on the latter. Toyota is more confident than ever in some ways. The company is proud of the fact that its management principles are different from those taught in B-schools. Senior executives take great pleasure in explaining that other companies find it difficult to emulate Toyota because its management tools matter less than its mind-set. To some observers, the company has become insufferable. For instance, after it unveiled the Lexus LS600h L at the New York Auto Show in April 2006, the influential blogger Peter DeLorenzo complained, “The tone, the language, and everything about the presentation confirmed to me that the ‘creeping’ arrogance that has been brewing at Toyota for years has finally blossomed into full bloom for everyone to see.”
A long and deep look at Toyota, especially in Japan, reveals a different picture. The company appears to be running scared. Toyota’s executives were blindsided last year by a series of problems with its automobiles that blemished the company’s reputation for manufacturing quality products. They are worried about always being the second (or the sixth, according to the 2006 Formula One standings) to enter new markets and to incorporate new technologies in vehicles. They are also gravely concerned about not having enough people to sustain their global growth. In fact, almost every aspect of Toyota is straining to keep pace with the company’s rapid expansion and with technological change.
These pressures are compounded by three factors. First, in order to meet demand, Toyota has added the capacity to produce 3 million automobiles over the past six years. Perhaps the only other automaker to boost production that fast, according to industry experts, was the Ford Motor Company, under Henry Ford in the early 1900s. Second, Toyota’s ambitions have dramatically expanded. The company wants to develop Lexus into a big luxury brand in Europe, attacking European carmakers’ biggest source of profits; to grow sales of its full-size pickup truck, the Tundra, in the United States, thereby assaulting American automakers’ last redoubt; and to develop a new breed of vehicles for emerging markets such as China and India. Third, the rate of technological change both in manufacturing processes and in products is unprecedented. For instance, Toyota’s vision is to develop “dream cars” that are revolutionary in safety and environmental benignity.
A series of interviews with Katsuaki Watanabe, Toyota’s 65-year-old president, and several executive vice presidents revealed that Toyota’s future will depend on its ability to strike the right balance—between the short term and the long term; between being a Japanese company and being a global company; between the manufacturing culture of Toyota City and the design culture of Los Angeles, where some of Toyota’s cars take shape; between the cautiousness of Toyota’s veterans, who are worried about growing too fast, and the confidence of its youngsters, who have seen only success. And Watanabe, who is using the Toyota Way to remake the company, told HBR’s editor, Thomas A. Stewart, and senior editor Anand P. Raman that Toyota must also balance incremental improvements with radical reform. What follows is an edited version of our interview with the company’s president that incorporates (and identifies) some comments by Toyota executive vice presidents.
