Learning From Culture Mistakes at Toyota, J&J

Oh, how the mighty have fallen—or at least seen their reputations for quality products and “doing the right thing” for customers badly damaged. Let’s take a look at two recent high-profile cases.

Toyota Motor Corp., long known for the high quality of its automobiles and resulting loyal customer base, and the envy of car manufacturers around the world, has stumbled badly. You know the story. This once-proud company with the superb brand is now viewed by many as producing defective cars. Worse: it is also seen as failing to inform car owners of life-threatening flaws with accelerators and breaks.

Regulators and industry observers say the company reacted much too slowly to dangerous safety issues, making changes in parts for new vehicles without advising existing customers of flaws in cars they were currently driving. Media coverage of the crisis suggests a clear and troubling pattern. Years ago, Toyota had an excellent approach to dealing with problems; somewhere along the way, that attitude has changed for the worse. For example, when troubles first appeared in early Lexus models way back in 1989, the company arranged to go to owners homes to pick up the cars and make the fix. And now? Well, reported problems include:

In 1996, Toyota found problems with the steering mechanism in its 4Runner model, but for some reason began to put a design change only into new models. Not until 2005 did the company finally decide to recall the older cars still on the road. At that time the Japanese government stepped in, ordering the company to revamp its recall system.

In 2002, customer complaints flooded in saying car engines became clogged with sludge. Toyota promptly claimed it had done nothing wrong; rather, car owners simply weren’t changing their oil often enough. The company finally agreed to extend warranties, but after customers found the claims filing process too challenging, a class-action lawsuit was filed.

In 2007 the now well-publicized problem of accelerators in Camry and Lexus models sticking under floor mats arose. That led to a relatively narrow recall that later expanded to a much larger one.

More recently, in 2008 a new problem surfaced with accelerator pedals sticking. Here, too, Toyota made design changes only in newly manufactured automobiles. Only months later, under fierce consumer, regulatory and political pressure, did it agree to recall millions of vehicles.

And most recently we’ve seen problems with the brakes on Toyota’s highly touted Prius hybrid model. Ordered by the Japanese Transport Ministry to investigate, the company said it fixed the problem on newly built cars—and was then pushed by the U.S. National Highway Traffic Safety Administration to expand the recall.

With these disclosures, along with additional problems resulting in recalls of Tacoma pickup trucks for driveshaft problems and Corollas for steering malfunctions, many once loyal customers have become disenchanted. Compounding the problem with customers, regulators have been furious with Toyota’s reaction. According to media reports, in a closed-door meeting with U.S. regulators, Toyota executives admitted that when they blamed accelerator problems on floor mats, the company had known for more than a year that the gas pedals had problems as well.

So, what do we see here? Some would say Toyota is a highly centralized company with a secretive culture, acting independently and with contempt of regulators. A Japanese automobile industry academician recently said: “At Toyota, all information flows to headquarters. It’s that kind of company.” And the company executive in charge of quality reportedly said recently, “We did realize that it was not good that pedals were not returning to their proper positions, but we took some time to consider whether we needed to take market action.”

The spotlight now shines powerfully on these serious problems and how the company reacted to them; company president Akio Toyoda or other company executives have already been grilled by no less than three Congressional committees. In that setting, Toyota has pulled back on prior statements that the electronic systems were not at fault, now saying the repairs might “not totally” solve the sudden acceleration problem, and that the company is examining whether that is the case. And it’s not just the 8 million cars that have been recalled (6 million in the U.S.), but ongoing questions of just how safe Toyota cars are, and how much the company really cares about the well being of its customers.

Johnson & Johnson

J&J set the gold standard in crisis management nearly 30 years ago, when it deftly addressed the threat of poisoned Tylenol products by immediately pulling its entire product off pharmacy shelves. This textbook case (literally; J&J's behavior is taught in business text books) notes how the company’s mission statement, and indeed its culture, made the decision extraordinarily simple: it was the right thing to do for its customers. Customers continued to have confidence in the company and its Tylenol product, and we continue to see the positive reaction today in the safety-wrap packaging of pharmaceutical products.

Well, something seems to have gone wrong along the way. When batches of its Tylenol, Motrin and other products recently made people sick, we would have thought the company, with its sterling reputation for handling such matters would have immediately pulled every such bottle from the shelves. It didn’t.

The desired corporate culture—based on a foundation of integrity, ethical values, customer sensitivities and compliance with laws and regulations—must permeate an organization.

Instead, according to the Food and Drug Administration, J&J's McNeil Consumer Healthcare Products executives knew of the problem in early 2008 but made only a limited investigation. “When something smells bad, literally or figuratively, companies must aggressively investigate and take all necessary action to solve the problem,” said the FDA’s Office of Compliance. The company has been warned by the FDA for violating manufacturing standards and failing to report and investigate the problem in a timely manner.

Interestingly, the very same day this matter hit the headlines, the media also reported that Johnson & Johnson was accused of breaking the law by paying kickbacks to a large nursing home pharmacy, violating the federal anti-kickback statute. There is a whistleblower suit against J&J and two subsidiaries, Ortho-McNeil-Janssen Pharmaceuticals and J&J Health Care Systems, claiming tens of millions of dollars in payments. The company is denying any improper activity.

But back to the product that made people sick. Why is the company now accused of failing to report and investigate the matter? Has there been a fundamental shift in corporate culture? Is there no institutional memory? Or is this a case of a subsidiary with a different culture than its parent?

Lessons to Be Learned

What can we glean from these two proud companies that previously had some of the finest reputations for product quality? Well, a few important lessons.

Reputations take years to develop, but only days (or hours) to damage. In the case of Toyota, the damage accumulated over many years, and the effect on customer loyalty and current and future earnings may be tremendous. With J&J, we don’t know whether there will be any long-term effect. In any event, reputations for product or service quality must be carefully nurtured and protected; they are too valuable to do otherwise.

It is not in a company’s interest to mess with regulators. Yes, a company might be able to fend off a regulator’s inquiry for a while, and continue on the company’s predetermined path. But usually it’s not in the company’s, or its customers, long-term interests to stonewall an investigation or strong-arm a regulator. Lawsuits and resulting judgments, directives or settlements can be burdensome, in the short run and long term. And while turnover in regulatory staffs can be high, memories are long; getting on the wrong side of the sheriff unnecessarily can be a costly mistake.

The desired corporate culture—based on a foundation of integrity, ethical values, customer sensitivities and compliance with laws and regulations— must permeate an organization. This doesn’t happen by edict, but rather by the right actions and processes accompanying the right words. I’ve written often in this column about how this can be implemented successfully, so suffice to say the attention to getting this right must be a priority. That includes drilling down to every subsidiary and business unit in an organization, as well as sourcing and other partners whose actions can and will reflect on the company.

A corporation’s culture evolves over time. As employees turn over and new leadership rises, along with different strategies and mindsets, the tone at the top and culture of the organization indeed will change. Company leadership cannot take for granted the positives of what once was in place, and must work to ensure the desired focus on integrity, ethical values and the fabric of the organization is strongly held in place.

For these two great companies, which have enjoyed sterling reputations and market and financial success, the effects of these missteps may well be overcome in time. Right now Toyota seems to have a longer road to recover its reputation than J&J, but hopefully both companies will consider what fundamental changes might be needed. Indeed, the senior management team of every organization may well think about lessons that might be applicable to their companies, and take necessary actions to protect its assets and future prospects.