Toyota News Article

AHC Group, INC.
Experts in Environmental Strategy and Corporate Governance

Automaking and the New Century:
Social Response Product Development
in the New Age of Corporate Environmentalism

By Bruce Piasecki

President and Founder of the AHC Group, Inc.

PREAMBLE

I do not believe environmental protection and economic growth are mutually exclusive. Economic growth that ignores environmental consequences is in my view reckless, but on the other hand, attempting to resolve global environmental issues without recognizing the need for economic growth is unrealistic. I believe our objective should be sustainable growth.

— Hiroshi Okuda, President, Toyota Motor Corporation

The automobile is the premier example of a 20th century product. Ever since Henry Ford introduced the Model T, Americans have been infatuated with the grace, force and splendor of these products. More than simply providing transportation, the automobile offers freedom, mobility, convenience, power, status and comfort. In the 21st century, the notion of personal transport will undergo profound changes in response to environmental, social and economic pressures. One clear sign of this emerging trend is that nine global companies have embarked upon a $10 million international study on the future of mobility.

"The project aims to provide a strategic direction for the many industries associated with mobility and to create ideas for next-generation systems that will address social, environmental and economic concerns about the transport sector," pronounced a statement signed by Harry Pearce, vice chairman of General Motors, and Dr. Shoichiro Toyoda, honorary chairman of Toyota. "What makes this project uniquely different from previous analyses is that it is being undertaken by the industry itself, through companies that will need to be at the forefront of sustainable mobility development."

The automobile industry is the world's largest manufacturing enterprise. Each year it produces more than 44 million cars and trucks, a figure larger than the population of most countries. While part of this is due to the attractiveness of owning a personal vehicle, a much larger part is due to the built-in need for cars that has been systemically assembled since World War II by leaders of all nations in cooperation with the petrochemical, development and tourism industries. In industrialized nations, the automobile plays a central role in the daily lives of the population, providing the functionality of movement and the means for enjoyment.

Yet automobiles are also a primary contributor to environmental degradation. Consider that there are 700 million vehicles in operation worldwide, with 150,000 more added every day. Just in America cars and trucks produce roughly one-third of the nation's smog, and Californians alone are estimated to lose more than 400,000 hours each workday due to traffic congestion.

The 21st century will witness major changes in the ways cars are manufactured, designed, fueled and operated. This will occur because of advances in technology, such as gas-electric hybrids and fuel cells propelled by new fuels, that enable today's much maligned auto industry to close the gap between a car's environmental performance and traditional consumer performance and safety expectations.

American car buyers demand performance and safety characteristics that first-generation environmentally responsible cars simply could not meet. On freeways crowded with SUVs going 70 miles per hour, consumers have refused to accept the compromises inherent in such vehicles as the Saturn EV1 from General Motors, including two-passenger capacity, sub-### mile ranges before recharging, anemic acceleration, and lethargic handling. In the trade-off situation, efficiency is sacrificed. This differs from much of the rest of the world, where gasoline subsidies are not as prevalent and a gallon of gas can cost the equivalent of four US dollars. But in America, there has simply been no economic incentive to put resource efficiency — on it own — ahead of performance and safety.

However, recent product introductions in other industries have shown that when linked with characteristics that provide desired value, energy efficiency can be a strong cooperative selling point. An example is the success of Maytag's premier Neptune line of clothes washers. Maytag touts the environmental friendliness of these high-end machines as part of an integrated package of benefits that will get clothes cleaner, faster, while also saving money and water.

In a recent study by Wirthlin Worldwide, Americans ranked the automotive industry third from the bottom on a list of industries perceived to be helping solve environmental problems. This in spite of the fact that the automotive industry perceives itself as providing more green technology, more jobs, more freedom and wealth than any other business in the history of the U.S., and in spite of the estimated $13 billion the auto industry spent on advertising and $35 billion devoted to purchase incentives and discounts in 2000.

The only automakers that will thrive in the global marketplace of the 21st century will be those that embrace the notion of sustainable mobility development by practicing the theory known as "social response product development."

SOCIAL RESPONSE PRODUCT DEVELOPMENT

The automaker that wins the race to build and sell the superior car will shape consumer preferences, thereby boosting sales and profits. The winning firm will fashion a corporate strategy that drives auto emissions to near zero while simultaneously providing high levels of performance, safety and comfort.

Social response product development means that instead of manufacturing products solely in response to consumer preferences as discerned through market research methodologies, companies must restructure their operations to actively shape market desires by creating new products — supported by new manufacturing, quality control and resource management techniques — that bridge the gap between traditional expectations of performance, safety and environmental responsibility.

The model of social response product development is built on four dimensions, like the structure of a house:

knowledge depth — the ever-growing basement
knowledge durability — the expanding sides
knowledge dependence — the ceiling of use
knowledge floors — the ground base

KNOWLEDGE DEPTH

Knowledge depth reflects the idea that applied information — knowledge — develops cumulatively. The expertise it takes to manufacture, distribute and sell a car is constantly increasing. Picture this as depth — the foundation on which all other activities occur. Companies are constantly solidifying their foundations by digging deeper and deeper. The gross number of patents held in U.S. markets, for example, has increased by over 70 percent in the last 10 years alone. The knowledge depth of some firms is astounding. Motorola, for example, allows employees 40 days of training per year. Federal Express expanded training requirements for front-line and second-level managers to look into its basement of evolving knowledge at least 10 of each year's 52 weeks — or nearly 20 percent of their time at work.

KNOWLEDGE DURABILITY

Knowledge, especially technical knowledge, tends to lose its value quickly. The walls keep receding as new bricks are added. The expected lifetime of consumer electronics products in high-saturation markets like Japan can be less than three months. Jonas Ridderstrale at Stockholm's School of Economics notes why the concept of knowledge durability itself, at times, seems ripe for a Kafka story. Michael Eisner of Disney now claims his company introduces a new product — such as a video, T-shirt or compact disc — every five minutes.

Whether referred to as knowledge durability or "accelerated planned obsolescence," this issue now reigns supreme. It is the mechanism by which firms discover better products and better ways of making them, which in turn contribute to a better world. The core of knowledge durability in a company may reside in a small team of executives, as at Toyota. It may also reside in a set of computers, like at Intel. The strength of a company can be measured by how well it evaluates the billions of pieces of knowledge accumulating within it and chooses which are worthy of attention and which can be safely ignored.

KNOWLEDGE DEPENDENCE

Like an expertly written book that is never read, knowledge by itself is close to nothing. It is only when companies put their knowledge durability to use that the information becomes actionable. The breakthrough of social response product development is the ability of corporate leaders to not only effectively apply their existing knowledge to today's challenges, but also to reach forward into the near future and create new ways of approaching problems that will result in fundamental shifts within industries. While the Internet itself had the capability of being a transformational technology, it was used almost exclusively by academia for close to 20 years. The potential of the Internet to underlie a fundamental new architecture for business and social communication was tapped only when, in the mid-1990s, a group of computer visionaries capitalized on their knowledge dependence to introduce new software and hardware tools that were ahead of their markets.

KNOWLEDGE FLOORS

Decades ago automakers realized they could significantly reduce their costs by capitalizing on research and development for one vehicle to be applicable in many others. The outgrowth of this idea was the creation of product platforms, which underlie the heart of today's vehicle manufacturing systems. When specifying a platform, executives are codifying their decisions about how that range of vehicles will be sourced, designed, produced, and — to a significant degree — how those vehicles will perform. Embedded within the platform are thousands of decisions regarding material composition, resource consumption, production schedules, tooling requirements, and supplier interactions. Once a platform is finalized, the choices it contains will be reflected in every vehicle built upon it.

Within the theory of social response product development, the knowledge floor is the sum of these platform choices. It both constrains and supports all other actions a company takes to acquire and use its knowledge. Similar to a paradigm, the knowledge floor shapes how executives approach their task of accomplishing seemingly disparate goals — in the auto industry, for example, delivering both resource efficiency and customer-demanded performance — in their products.

THE APPLICATION OF SOCIAL RESPONSE PRODUCT DEVELOPMENT BY AUTOMAKERS

The breakthrough at Toyota was recognizing that new technologies mean that a new knowledge floor can be laid, one that makes it possible to meet all consumer expectations of performance, safety and environment (fuel efficiency, emissions, resource efficiency, alternative fuels) — without the tradeoffs previously required. Toyota has changed the rules of the game by leveraging its knowledge depth to introduce superior new cars like the four-door, five-passenger Prius. The Prius achieves fuel efficiency rates of 50 miles per gallon, twice the regulated corporate average fleet requirement of 25 mpg.

The move to hybrid cars — those that can run on multiple fuels, most commonly, gasoline and electricity — will be understood as truly exceptional when the realization sinks in how absolutely ordinary it will make the hundreds of millions of cars now littering the current knowledge floor. This floor — containing everything from gas-guzzling SUVs and commercial trucks to Europe's newest smart cars that are still dependent on the ordinary hundred-year-old combustion engine — has been permanently superseded.

Today every car company is strategically positioning itself to deliver an increasing diversity of products to a global market torn in different directions by the needs of the environment, consumer behavior, and unprecedented opportunities to gain a competitive edge at a time when reputations and bottom lines are increasingly tenuous. The frankness with which some car companies discuss long-term strategy involving social and environmental concerns was on display when Jim Press, Chief Operating Officer of Toyota Motor Sales, USA, addressed the J.D. Power International Automotive Roundtable in Las Vegas in February 2000.

"We are being attacked by three mega-forces from outside the industry, which are fundamentally reshaping everything we know," acknowledged Press. He went on to identify these three mega-forces as the rising tide of social concerns, coping with economic realities, and the growing empowerment of consumers. Of the three, his initial emphasis was on concerns.

"You've already seen the plight of other industries that have failed to listen to public concerns about their products. Fortunately for us, America has always had...and still does have...a love affair with the automobile. But our standing with the public could soon become much more precarious if we don't start addressing some serious issues that affect everyone on this planet. For starters, we need to deal with health, safety and quality of life issues associated with air pollution and traffic congestion."

He continued, "Cars used to be associated with the freedom they provided, and the good, old Sunday drive. Now critics and trial lawyers are portraying our products as smog-belching safety hazards that cause gridlock.... The public is already showing alarm about our inaction. In the future, we could see very high emissions premiums or even the need to obtain permits to purchase vehicles that use hydrocarbon fuels."

A NEW WAY OF THINKING "GREEN"

In addition to comments by Toyota's Press and the 2001 U.S. launch of the Prius, this change in thinking is evident in the hype surrounding other new "green" motor vehicles:

Ford claims its TH!NK city, a two-passenger electric vehicle, is being sold faster than they can be built.
GM proudly displays the sleek, aerodynamic Precept, which features one of the lowest drag coefficients ever. It is a hybrid vehicle that may ultimately be powered by a hydrogen fuel cell.
Nissan's Sentra CA (Clean Air) is being trumpeted as the only gasoline-fueled vehicle in the world to receive California Air Resources Board certification as a super ultra low emissions vehicle.
Volvo, which a decade ago embarked on voluntary environmental initiatives that focused on improvements in manufacturing and design efficiency, recently unveiled the S80.
Honda's Insight, a hybrid coupe, boasts a range of up to 700 miles — enough to get almost from Chicago to Atlanta on a single tank. The Insight was the first car to receive the Sierra Club's Excellence in Environmental Engineering Award.

Of the American automakers, GM seems to be the furthest along in recognizing the auto industry's unique role in providing solutions to daunting challenges such as global climate change. GM took the lead on developing electric vehicles, a technology once touted as the primary path to environmental excellence in the auto industry. Apparently, the firm has no regrets about pushing a technology that failed to live up to consumer expectations regarding range, fueling infrastructure and comfort.

"Our view is that, as a developer and manufacturer of motor vehicles that have a direct impact on the environment, we have a special responsibility to find a way to continue to reduce those emissions... We have spent literally billions of dollars over the years reducing emissions and we continue to look for more innovative technology solutions, hybrid technology being one example," commented Harry Pearce, Vice Chairman of GM.

"Think about the risk that General Motors took — the financial risk and market risk — with respect to the EV1 back at a time when nobody was really pressing us to do that," Pearce continued. "We invested a half-billion dollars in that program. We knew, quite frankly, that we weren't going to get the right kind of return on that investment, but we were investing in a base propulsion system that was going to be the foundation for all hybrids, the ultimate fuel powered vehicle. Every one in the business today would concede that it is the world-class propulsion system set of controls. It clearly positions us extremely well with respect to the future of these high-tech vehicles."

Even Ford, long considered by consumer groups to be among the most secretive, obstructionist and compliance-driven car companies, is changing its tune thanks to its new Chairman of the Board, William Clay Ford, Jr. The company has abandoned the Global Climate Coalition, a cross-sector corporate entity that discredits the global climate change threat. In a startling admission, Ford admitted its sales of gas-guzzling SUVs were contributing to global climate change and were a safety concern to smaller vehicles on the road.

One of Ford Jr.'s top priorities is transforming The Rouge Plant, a primary source of pollution in Michigan's Rouge River, into a model of sustainable design, a factory that cranks out cars that can by completely taken apart and recycled.

"His great grandfather gave us the Assembly line," said world-renowned green architect William McDonough, "and Bill Ford is going to give us the disassembly line." Ford's vision of the future of automaking moves from the selling of products, to the providing of a transportation service. "We're not in the car business or the truck business. We're committed to the personal mobility-business," Ford said.

According to an industry consultant who works with both Ford and GM, the edge currently goes to Ford. GM has the performance, he says, but not the visible leadership on environmental matters. "Frankly, Ford doesn't have the performance yet — but, oh, what a leader. He's way out in front of everybody."

TOYOTA: A PROBABLE WINNER

By 1913, Henry Ford's efficient production system for cars launched the revolution that changed the remainder of the century. Ford understood that standardization and productivity were essential for achieving a dominant, ubiquitous product. Ironically, Henry Ford was the primary source of inspiration for Mr. Toyota, the founder of the Toyota production system and companies. Toyoda took the American drive for production efficiency and made it into a science based on material reduction. Without once using the word environment, Mr. Toyoda created a global empire of firms that now embodies efficiency and lean manufacture.

Toyota's first foray into the American market, in 1957, was a disaster. Without analyzing and understanding the market, Toyota exported a successful model in Japan, the Toyopet Crown, to the US. The relatively small car was well suited for Japan, but it did not meet the US market conditions and expectations. The Crown was too small for American drivers and its fuel efficiency was not much of a selling feature in the US market where gasoline prices were not an issue. The vehicle was also less sophisticated and reliable than American models.

From this experience Toyota learned important lessons about the need to thoroughly understand the American market, where comfort and reliability reigned supreme, before launching a new venture. Starting with those lessons, Toyota began a long, steady journey toward becoming a world-class manufacturer.

Contemporary corporations behave in a fashion that either meets current market conditions, or shapes those conditions. Toyota focuses on shaping, not following, market conditions in America. Exceeding environmental standards by introducing bridge technologies like the Prius electric/gas hybrid has put Toyota in the driver's seat when it comes to environmental excellence.

THE TOYOTA PRODUCTION SYSTEM

Toyota uses a radically effective product development process to reduce the cycle time for developing new models by a third compared to its rivals, from 36 to 24 months. This agility gives Toyota a competitive edge in a business environment driven by significant changes in market trends and government mandates. The five-passenger Prius, introduced in Japan in 1997, was the first mass-produced electric/gas hybrid in the world; more than 35,000 are already on the road. Its introduction to the US market in 2001 — with more horsepower and cargo space than the Japanese version — follows the rapid and successful launch in 2000 of three other Toyota eco-cars: the Echo, Rav4 electric car, and compressed natural gas Camry.

Toyota's edge on the environment stems from the Toyota Production System (TPS). The philosophy is to determine the needs and desires of customers — before they knows to express those demands — and then to be ready with the right product at the right time. Instead of looking backward to produce to current market demand, Toyota an ticipates market requirements and builds production capacity and inventory for the expected demand.

The approach is deceptively simple. While it acknowledges regulatory and environmental drivers, it translates all key purchasing variables to eventual customer preferences and societal needs. Each process produces only what parts or products the downstream process or customer requires for the next sequence. This just-in-time production system — now universally recognized as a benchmark — is described as a "pull system" as opposed to the "push system" of mass production[1].

The reduction in inventory across the system resulted in significant reductions in operating costs, as well as providing Toyota with the flexibility to produce what societies came to want. Only now are experts beginning to realize this emphasis on societal needs, not just ephermal customer preferences, allows for more rapid progress as well.

Another advantage of TPS is the capability to detect abnormalities and take corrective action immediately. Quality control is built into the production line, and workers on the line (rather than a small cadre of quality control professionals) determine quality assurance by stopping production as necessary to eliminate defects. This approach, called "Total Quality Control," empowers the entire work force to prevent defects from progressing, one step to the next, by determining the quality achieved at each step. This prevents waste by finding defects immediately and curing the problems before additional steps are performed.

The success of TPS is more than quality and productivity. It is based on the philosophy of involving people in the solution mechanism, identifying waste and discovering means to eliminate it, and striving for continuous improvement. The concept of eliminating waste is pivotal, since it encompasses the main drivers in the system. Waste causes environmental concerns, economic losses, quality problems, safety issues, deterioration of customer value, and complexity. Minimizing waste produces a lean system that is simple and agile. Toyota is the first to use this obsession with eliminating waste transform the 100-year plus legacy of the car.

MEANINGFUL RESULTS IN THE MARKETPLACE

In spite of the charisma of Bill Ford and the technical achievements of GM and Honda, it is Toyota's grasp of the nature of knowledge dependence that offers insight into how better products make a better world. Hybrid technology in automaking will become the knowledge platform upon which all future cars depend. While all of the major car companies are now pursuing green technologies, Toyota is the only one with a product available today that delivers on the promise of a better world while meeting American consumer expectations on range, performance, comfort and safety.

General Motors, Ford and Daimler-Chrysler focused in the late 1990s on mergers and acquisitions for improving their business positions to meet future challenges. Toyota, meanwhile, centered its business strategy on technological innovation and persistent environmental product development.

Recent books by the Sierra Club and Island Press emphasize the rising importance of eco-cars, including Honda's Insight and Toyota's Prius. But these cars are only the first steps in a long-term strategy that, when fully integrated into public policy and consumer choice, will have Toyota blanketing North America with a full new family of high-efficiency cars, still unknown and unnamed by dealers and citizens, but already designed and ready for release in the near future.

HYBRID CARS — THE NEW KNOWLEDGE FLOOR

The last fundamental shift in the knowledge floor of automobile manufacture was in the 1970s, when Japanese companies seized the initiative from Detroit during the oil crisis and began acquiring market share by focusing on fuel efficiency and simple, reliable transportation. The strategy worked, and forced GM, Ford and Chrysler (now Daimler-Chrysler) to change as Americans shifted from buying what Harper's writer William Tucker called "dinosaurs in our driveways" to the plethora of Camrys, Corollas, Accords and other increasingly high-quality products.

Toyota has begun driving a new revolution, this time towards hybrid technology. Hybrid technology combines the existing technology with the new. It is a quintessential hedge. The profound uncertainties of the near future are intelligently contained by the knowledge of the existing technology and the platform that it provides. The changes are substantial, but the underlying structure has many common features and functions with the conventional designs. The commonality of parts and components and the familiarity of customers with the characteristics of the vehicle make the investment into transitional technologies a little easier to justify.

In short, hybrids offer both the old and new at once. They appeal to the early-adopter technologists while also being understandable to today's soccer moms.

The five-passenger Toyota Prius — designed for today's infrastructure and consumer demands but certified by the California Air Resources Board as a super ultra low emissions vehicle — is the first significant blow to the dominance of the internal combustion engine as the sole and primary source of automotive power. At today's gas prices, the average driver would save $300 per year at the pump driving a Prius rather than a typical sedan; consumers would also enjoy the convenience of traveling 600 miles between fill-ups as they reduce emissions by as much as 84 percent. While Honda has bragging rights to introducing the first hybrid to the US, the Insight is a two-seater vehicle in a market where the majority of consumers tend to prefer additional seating space.

By changing the knowledge platform on which it builds its vehicles, Toyota is able to integrate requirements from numerous constituencies, including the environment, performance, comfort, reliability, safety, size, and government regulations. Toyota has the advantage because its corporate culture and design and manufacturing processes are structured to quickly respond to changing market demands. Its factories are smaller and more nimble, enabling the company to produce smaller runs of vehicles customized for multiple individual markets, while leveraging its knowledge depth to apply those lessons worldwide.

IMPACTS IN THE NEAR FUTURE

Not all auto executives believe that such radical change is right around the corner.

"Car companies have discovered they can get an image boost by introducing one of these cars — even if they may not be feasible," remarked Fred Aikins, Manager of Product Communications at Mazda. "The internal combustion engine has been with us for more than a century. It is not going to go away overnight" Aikins added that "even if alternative fuel technologies were introduced by a major car company today, the shift could take a quarter of a century a nd require billions in infrastructure investments."

"There will be no radical design changes in the next 10 years," confidently proclaimed Art Garner, Public Relations Manager for Honda, a car company that purports to be No. 1 when it comes to the environment. Garner backs up this claim by ticking off a list of how Honda was the first in delivering low, ultra-low emission vehicles, nickel-metal hydride battery, and the Insight gas/electric hybrid to the US market. "Our decision to be environmental leaders was not customer-driven back then and still is not customer-driven today," Garner continued. "The cars of the future will be cleaner, but they will still run on gas-fired internal combustion engines."

Despite the better cars, there are also signs of schizophrenia within the auto industry. How environmentally responsible is four-ton, 10-mile-per gallon SUV? Corporate Watch, a web-based group dedicated to corporate accountability, recently awarded the Ford Motor Company its grand prize "Greenwash Award" because of the gas between the eco-image it was projecting and the environmental performance of its SUVs.

While the death of the internal combustion engine may have been greatly exaggerated, Dennis Minano, GM's Chief Environmental Officer, claims insiders all know its days are ultimately numbered: "Five years ago, a hydrogen economy seemed like a distant fantasy. Today, the fuel cell is evolving and there is an enormous potential for energy savings and environmental performance. And all of a sudden, the hydrogen economy looks like it is 30, maybe 50 years away. There are real numbers behind these projections. All car companies now believe that fuel cell technology can be a very significant factor in the evolution of cars, but they are very quiet about it, they don't want to discuss it."

Representatives of Honda and Mazda downplayed opportunities for technological innovation in the developing world. Minano disagreed. "The challenges to the auto industry have not yet been answered in the developing world," Minano acknowledged. "How do government and industry introduce environmental technology, especially when the customer is resisting?" Nevertheless, he argued the world's developing countries have good conditions for introducing new technologies. "In China, for example, just introducing unleaded fuel, just that one step (and catalytic converters) can generate important environmental gains with first generation technologies," Minano remarked.

The Prius and Insight are clear signs that hybrids represent an attractive bridge technology with broad, immediate appeal and application. They represent a balanced approach to anticipating the future. They must make the best of traditional infrastructure while paving the way for alternative fuels.

The automakers that will win the race to build the superior car of the future will have to fashion a corporate strategy that drives emissions toward near-zero while providing the owner with performance and comfort. An intelligent blend of bold vision and practical incrementalism will be necessary to bridge the gap between today's traditional car systems and the new systems based on the alternative fuels that will power our cars in the not so distant future.

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FOOTNOTES

[1] Toyota Production System, publication of Toyota Motor Corporation, Toyota City, 1992.