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Is Your Company Headed for a Crisis Like Toyota?
Among the many skills that CEOs need these days is the ability to spot a potential disaster, like the one that recently hit Toyota. This vigilance, of course, must be performed at the same time the CEO is busy motivating staff, delivering products and services and building sustainable profits for shareholders. Nonetheless it must be done. The Toyota safety crisis is a good reminder of how quickly public confidence can fall.
Toyota has been a star auto manufacturer for decades. Just pick up any Consumer Reports magazine published in the last 20 years and look at Toyota’s ratings. It delivered stellar products and performance year after year!
Because of its well-deserved reputation, its precipitous fall from favor is all the more startling and a great disappointment to many of its loyal customers -- including me. My dad bought the first Celica model imported to the US. My first car was a 1971 Toyota Corona. Later in life I purchased two more Celica models and I have owned two Lexus cars, too.
While it's too early to know that really happened at Toyota, it's not too early to examine some of the major reasons companies, like Toyota, run into trouble. Besides the usual suspects -- not delivering quality products and services, treating employees and customers poorly, or failing to make reasonable profits -- there are three other defects that can lead a company into a crisis: poorly designed incentive plans, weak leadership skills, and a crippling corporate culture.
These defects can be avoided when companies take the necessary time to hire excellent CEOs and other senior management members – individuals who understand the implications and consequences of badly designed compensation plans, inadequate leadership and a corporate culture that rewards the wrong performance. When the Toyota story is finally told, I predict that these three issues will have played a role. Let’s take a closer look at them:
1. INCENTIVE COMPENSATION
Money drives behavior. The success of manufacturing companies depends on quality products, productivity, employee safety AND profits. However, incentive compensation that favors profitability over quality in a manufacturing environment can lead to a "Toyota" outcome.
One of my client companies, unhappy with the performance of its sales force, recently took a closer look at its incentive structure. The company discovered that its program provided incentives to sell volume as opposed to rewarding the profit margin on sales. The result was increased sales with poor profit margins. By changing the focus of the incentives, the company changed the value proposition for the sales force and improved the bottom line.
Here are some questions to consider when you review your incentive compensation program:
2. LEADERSHIP SKILLS
Mr. Toyoda, the third-generation CEO of Toyota, said during his apology tour in the US and China that the company had changed its focus from quality to profits. This public window into Toyota's strategy showed the world that there was a willful change of corporate values driven from the top.
One question management pundits will ask about Toyota’s situation is: Did Mr. Toyoda promote open discussion and listen to his management team members who may have disagreed with this change of direction?
Maybe it’s time for you to take a closer look at your company in the same way. Are you driving your company in a direction that few others on your team agree with? Are your executives willing to “take you on” if they disagree with a change in the company’s direction? In your company, how are disagreements handled?
Recently a client of mine made a unilateral decision to interview and possibly hire a new executive who would join a newly formed senior management team. His mistake in taking this action was that he didn’t consult with his management team beforehand. A bomb went off. Every one of his executives resisted the move. They wanted the CEO to follow the hiring process that had successfully brought each of them into the company – a process that had resulted in moving the company forward in productivity, cohesion, morale and profits.
The CEO, who also owns the company, stopped dead in his tracks. It was, after all, his company and he felt he could do as he pleased. But when he stopped to think about it, he realized that he had amassed the best management team the company had ever had. So why should he not listen to them? In the end, he chose to heed the input of his team and put off the hiring decision.
Some might call this capitulation, or a sign of weakness. I call it leadership. As a leader, listening, hearing the advice of your senior team, and heeding it--even when the other path is calling--demonstrates strength. This is the strength of knowing you may be wrong and admitting it.
A leader who discourages constructive conflict and divergent points of view will someday pay a great price for the illusion of harmony and unanimity. As the saying goes, the unchallenged ego is a powerful mistress, but a mistress nonetheless.
Are you the kind of CEO who doesn’t listen? When things go badly, have you been warned by people on your team ahead of time? Have you listened to these warnings? In some organizations, these individuals are called Whistleblowers, but they play a key role if the CEO is a good listener.
Organizations convey culture by rewarding certain behaviors and punishing others. This reward/punish cycle can be formal (incentive compensation, promotions) or informal (poor reviews, scolding, excluding executives from social gathering, etc).
I recently saw a company make a series of management decisions that looked more like random choices made from a conveyer belt of mediocrity. As a result of this lack of attention, at a company meeting the HR VP played a vignette that was nothing more than an internal display of negativity, much to the dismay of the COO.
Here are some questions to ask about your company’s culture:
While leadership and culture are interconnected, they play out differently. Culture takes time to change but without consciously understanding what your culture is, you may find your company headed toward a Toyota-type crisis.
In the future, we will know what happened at Toyota. Books will be written about the company, its mistakes and lessons learned, just like recent books on the Bernie Madoff scandal and the Wall Street debacle.
The key to avoiding a Toyota crisis is to hire the right CEO and management team members – individuals who will not only perform the usual activities but will also examine your company’s incentive compensation policies and your organization’s leadership style and instill a positive, healthy culture. Being proactive and bringing in the right talent is always better than being reactive. Waiting for a crisis to happen just isn’t good management practice.
Many more articles in Creative Leadership in The CEO Refresher Archives