Toyota Organizational Structure: Balance Between Centralized and Decentralized Control

Continuing our coverage of the Toyota Recommendations from the Quality Advisory Panel, today we highlight the first recommendation, and it’s one that all corporations struggle with at some point:

  • How does one balance between global control and local control?

The report states the obvious that Toyota has become a global player, but then adds this bit of caution:

But with globalization comes an inevitable tension between global and local forces. Benefits of operating in a more globally centralized fashion are greater economies of scale, tighter operational control, and greater consistency. These are in direct opposition to the benefits of operating in a more locally-driven, decentralized fashion, which generates better adaptation to local markets, more flexibility, and quicker responsiveness to quality and safety problems. So Toyota, like all of its major competitors, must choose how best to balance global and local imperatives —and make trade-offs in doing so.


Please read our series on the findings from the Toyota Quality Advisory Board:

  1. Toyota North American Quality Advisory Panel Conclusions: The high-level summary of the findings from the quality advisory panel.
  2. Balance Between Local and Global Management Control: How can Toyota best balance decision making between Toyota Motor Corporation in Japan and its regional operations in the North America and the world?
  3. Responses to Problems Raised by Internal and External Sources: The panel found that problems raised by sources external to Toyota were not treated as seriously as those found within Toyota. The panel claims that this violates the tenets of the Toyota Production System.
  4. Management Responsibility for Quality and Safety: Because Toyota treated Safety as a subset of Quality, the panel believes that this has led to the blurring of the lines and makes the question “Who is Responsible?” more difficult to answer; consequently, this has led to the old adage of “if everyone is responsible, then nobody is accountable”.
  5. The Challenges of Integrating Electronics and Software: Has the integration of software led to safety problems?
  6. Management of Supplier Product Quality: As Toyota becomes more and more decentralized, has Toyota maintained the rigorous supplier quality requirements it once had?

According to the Quality Advisory Panel, Toyota has remained too much on the side of an organizational structure that is too globally centralized. In the Panel’s words:

In the Panel’s view, Toyota has erred too much on the side of global centralization and needs to shift the balance somewhat toward greater local authority and control.

Toyota has traditionally structured its global operations to maximize control by TMC in Japan. Decision-making structures involving everything from recalls, communications, marketing, and vehicle design and development have historically been centrally managed and tightly controlled by TMC.

To accomplish this, Toyota has structured its global operations around functional “silos,” each of which reports separately to TMC. In North America, Toyota does not have one chief executive in charge of all its divisions (e.g., sales and marketing, general corporate, engineering, and manufacturing). Instead, there are individual heads of each division, each of which reports directly to TMC in Japan.

Apparently, strategy and structure go hand-in-hand and Toyota’s lack of a strategy led to it’s organizational structure. The outcome has, in large part, led to the public relations nightmare that Toyota has had to deal with.

In its review, the Panel has determined that this structure contributed to several of Toyota’s quality and safety issues in North America. Specifically, Toyota’s tightly-controlled global structure:

  1. hindered information sharing and contributed to miscommunication;
  2. and delayed response time to quality and safety issues, fueling criticism that Toyota was being unresponsive to regulators and customers.

The Quality Advisory Panel provides specific recommendations for Toyota on how it can change its organizational structure to better allow quicker decision making and faster flow of information:

  1. Work to further break down the regional “silo” structure in North America and consider appointing one chief executive for North American operations with responsibility for all regional functional organizations.
  2. Identify additional critical cross-silo processes and organize decision-making teams around them. Toyota’s inclusion of senior executives from North America in decisions regarding product recalls in North America appears to be a model for this. However, Toyota must be ever mindful that when responding to critical and emergent safety issues, decision making by committee can be inefficient and time-consuming. Toyota should consider what other decision-making models might be employed in emergency situations.
  3. Strengthen communication among global regions, especially regarding reports of vehicle safety issues in vehicles that may share parts across regions. It is not enough to improve the channels of communication between Toyota’s regional operations and TMC. Toyota should also find ways to facilitate communication across regions, especially regarding critical safety issues. As part of that effort, Toyota should consider appointing a director from one of its key regional markets such as North America.
  4. Develop clearer lines of communication, authority, and decision making between North America and TMC. This is especially important as it relates to gathering and responding to direct feedback from customers, lawmakers, regulators, and other stakeholders. This will allow North America and other regions to benefit from the additional autonomy and authority they have been granted.
  5. Continue to increase North American involvement in the product development and design process for vehicles in North American markets.

Comments

On the one hand, I find it surprising that Toyota deals with problems that one would think they would have overcome a long time ago. But, it goes to show us that people-problems (as such with communication and decision making) are common and rampant in organizations. Indeed, no matter how mature the company, it remains a problem for many.

Comments

  1. John M. says

    Pete,

    In my (limited) experience, the tradeoffs between centralization and decentralization are tremendously complicated. I’m probably not the first person to point out that all large enterprises are highly dysfunctional, and I think the problems that lie at the heart of the centralization/decentralization question are the reason. You rightly point out that they fundamentally come down to people problems. And people problems are the hardest ones to solve. :)

    -John

    • says

      Thanks for your comment, John.

      Yes, indeed very complicated and the larger the company, the more challenging the question becomes of how to balance between centralized and decentralized control.

  2. Hugh Alley says

    I am not surprised that Toyota is dealing with these issues. It is not just the size, although that is part of it. It is also how fast it has grown. I’m not aware of anything in nature that grows 10% a year on a sustained basis. Yet that is what Toyota has had to deal with. It is very hard to get that many new people on board in a new culture, so processes that may have worked informally for many years in a company growing more slowly may be torn asunder by the growth. Anyone who remembers growing pains from their teen years knows how painful it can be when one part of the body grows faster than the connecting tissue! I recall a commentator, and I think it may have been Womack, observing that growing enough people with deep knowledge of the TPS was probably going to be the fundamental constraint of the organization.

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