Enterprise Risk Management at Toyota


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Case Details:

Case Code : ERMT-006
Case Length : 15 Pages
Period : 2003
Pub Date : 2003
Teaching Note :Not Available
Organization : Toyota
Industry : Auto and Ancillaries
Countries : Global

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction

Toyota, the world's third largest car manufacturer after General Motors and Ford, was rated as the most efficient car maker in the world. Toyota's major business segments were automotive and financial services.

In 2002, the automotive segment accounted for approximately 90% of Toyota's total revenues and 96% of Toyota's operating income. The company's manufacturing, vendor management and product development practices were considered best in class. Toyota's primary markets (based on vehicle unit sales) for the year ended March 31, 2002 were: Japan (40%), North America (32%) and Europe (13%).

Overview of Major Risks

Toyota believed the profitability of its automotive operations was affected by factors like
• Vehicle unit sales volumes,
• The mix of vehicle models and options sold,
• The levels of price discounts and other sales incentives and marketing costs,
• The cost of customer warranty claims and other customer satisfaction actions,
• The cost of research and development and other fixed costs,
• The efficient use of production capacity,
• Changes in the value of the Japanese yen and other currencies in which Toyota did business,
• Intensifying competition,
• Regulatory issues.

Risks in Product Development
Product development in the automobile industry was highly capital intensive and time consuming. Yet, automakers had to keep coming up with new models from time to time. They had to standardize the core product, the platform and build features around a small number of platforms. Toyota was a pioneer in lean product development, a philosophy which believed in coming up with new products, using minimum resources. In 1955, when the product development process for Toyota's model 'Crown'started, the practice of appointing 'susha'(an empowered project manager) to head a project from its inception was initiated.

In 1965, Toyota formally established a product planning division to organize and support sushas. The structure used by Toyota was essentially a matrix, with functional specialists reporting both to a functional manager and the susha. The matrix structure helped Toyota to combine the best features of both functional and divisional organizations. At that time, there were 10 sushas and 5 to 6 staff members under each susha. Except for replacing the name susha by 'chief engineer' in 1989, the company did not change the structure of its product planning division till the early 1990s.

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