The Role of Sacred Values in Managing Risk

by Robert N. Charette, Fellow and Director, Enterprise Risk Management & Governance Practice, Cutter Consortium

In June of this year, Toyota and its Lexus brand took the top spot in 11 out of 19 vehicle categories in the J.D. Power and Associates' automotive quality survey. Yet less than a month later, Toyota President Katsuaki Watanabe bowed deeply in front of the world's press, publicly apologizing for the numerous quality problems that recently have been plaguing Toyota automotive products. Toyota, which is on the verge of becoming the world's largest automotive manufacturer, has had several problems with its Prius hybrid model, its Lexus line, as well as its popular Tacoma pickup truck, among others. In addition, the number of Toyota automobiles that have had to be recalled in Japan has jumped nearly 41-fold since 2001.

"I take this seriously and see it as a crisis," Watanabe said. "I want to apologize sincerely for the troubles we have caused. The world-class quality that we've achieved is our lifeline. There can be no growth without quality improvements."

The extent of the problems have been so alarming that Toyota has appointed Executive Vice President Akio Toyoda, the grandson of the company's founder, to be responsible for improving corporate quality. In addition, the company has reportedly decided to delay the introduction of some of its models by up to six months -- an absolutely huge amount of time in a company that has prided itself on the constant reduction of manufacturing time by the application of lean manufacturing, which it pioneered. Furthermore, Toyota is accelerating its approach to preventative engineering -- i.e., using defect information to try to predict where quality problems could arise. Moreover, the company has said that it will be more open in its disclosure of quality problems to ensure that the results of its actions are transparent to the company as well as the public at large.

The majority of problems at Toyota are not with its manufacturing or assembly lines, but with something more fundamental: the design of some of their automobiles. Some 68% of Toyota automobile recalls in 2004 and 2005 have been attributed to design defects and flaws. Many of these, in the words of one senior Toyota engineer, were "bonehead" mistakes.

The causes are varied: over the past decade, Toyota has depended more on computer-aided design (CAD) tools to reduce the number of physical prototypes it needed to build to test components. The CAD tools have helped slash new automobile development time by up to 50%, however, as Toyota is now finding out, the CAD tools have subtle limitations that allow design flaws to slip through.

Exacerbating the problem was that Toyota used the same component across many different automobile models: thus the ripple effects of a design flaw were widely felt.

In addition, Toyota, like many car manufacturers, is substituting computerized systems for what were once mechanical systems. These computerized systems have proven to be much more prone to error -- no surprise to us in the IT profession. (As an aside: GM predicts that by 2010, its cars will have more than 100 million lines of software in them: see my article in the September 2005 issue of IEEE Spectrum, "Why Software Fails.")

Furthermore, as Toyota has expanded its market share, it did not expand its pool of automotive engineers; partially to save money and partially because Toyota management thought that its investment in productivity aids like its CAD systems would make each engineer more productive. However, as each engineer became responsible for increasingly more tasks, quality per task performed began to drop. Toyota has begun hiring more engineers as part of its new quality improvement focus.

From an enterprise risk management perspective, Toyota appears to be taking the appropriate steps in keeping a major current problem from turning into a future company-killing risk. It must have been very hard for its management to look at itself -- just as it was approaching its long-sought goal of becoming the leading car company in the world -- and see that many of the problems being encountered today rest squarely with its own decision making, as well as core beliefs such as the near infallibility of its lean manufacturing approach. How many other companies would do what Toyota has done at its moment of ultimate triumph?

I attribute the actions of Toyota to the fact that quality of its products is seen as a "sacred value" for Toyota. A term coined by University of Michigan professor Scott Atran, a sacred value is an ideal that is "so transcendent that it has no equivalent in anything material" [1]. As one Toyota executive said recently, "Quality is in our DNA."

Being a sacred value, the existence of the quality problems at Toyota in essence act to publicly repudiate its self-worth and its honor. If allowed to fester, then organization hypocrisy -- i.e., decisions and actions that are inconsistent or conflict with previously stated ideals, values, or performance measures -- would have taken hold to disastrous effect (see my article in the May 2006 issue of Government Executive, "Organizational Hypocrisy"). As I wrote last week (see "Don't Make Out Checks You Can't Cash," 31 August 2006), BP is struggling to contain a growing public perception of organizational hypocrisy that is damaging its once sterling reputation.

The lack of a sacred value in many companies, I believe, is what makes enterprise risk management -- or any type of holistic risk management, whether it be security risk management, safety risk management, and so on -- extremely hard to take hold. For, as at Toyota, a sacred value defines the context of company decision making; in effect, it sets the risk threshold that defines what is and is not considered an acceptable risk. When a sacred value is threatened, it is easier to act against risk, even in good times.

Compare Toyota actions to Ford Motor Company, for example, which has had the slogan "Quality is Job One" for 20 years. Given Ford's response to its problems over the past several years, I doubt many believe outside or even inside of Ford that quality is a corporate sacred value. Similarly, the recent debate on the launch of the space shuttle Discovery raises doubt as to whether safety is a true sacred value at NASA. And as Sarbanes Oxley has shown, sacred values cannot be imposed by dictum either.

Most close observers of Toyota say that it will take at least four years before the company's present actions will have any major effect and that it is likely that the next year or two will see even more problems with Toyota automobiles as more effects of past decisions surface. However, Toyota's recommitment to its sacred value of quality will likely see it through the next few years of rough water.

-- Robert N. Charette, Fellow and Director, Enterprise Risk Management & Governance Practice, Cutter Consortium

Reference

[1] Begley, Sharon. "The Key to Peace in the Mideast May Be "Sacred Beliefs," Wall Street Journal, 25 August 2006, page A9.