Toyota Recall Crisis

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Corporate Risk Management Coursework – Toyota Recall Crisis Report to Senior Management


Over the last few years Toyota has been under a lot of pressure as a result of the increasing number of complaints over defective accelerator pedals being reported. Various events and decisions led to the largest recall in the company’s history. The way that Toyota managed the crisis affected not only the company’s reputation but it also disrupted the car industry as a whole.

The aim of this report is to analyse how Toyota handled the crisis, identify the main issues in their crisis and risk management, and give recommendations/point out important aspects in their strategy that need to be improved.

a) Why Toyota failed to identify the risk factors that led to the recall crisis?

In this section we are going to discuss the main mistakes Toyota made that prevented the company from identifying important risk factors. By looking at the key types of risks to which the company is exposed, we are going to analyse how Toyota failed to coordinate its activities with regards to risk.

Being the most efficient car manufacturer in the world, Toyota is, nevertheless, exposed to a wide range of risks. Therefore, a main objective for the company should be to identify what lies in the heart of the business, and how the risks associated can be eliminated or mitigated effectively.

The root cause of the company breakdown was ultimately due to their pursuit of growth. Since Toyota wished to supersede General Motors as the world’s leading automotive manufacturer, this drove them to expand their business at such a rate which in turn led to the neglect of important risk factors.

Operational risk

Product development – For a leading car manufacturer it is of paramount importance to ensure products are manufactured at the highest standard possible and then thoroughly tested before being released on to the market. However, Toyota apparently failed to conduct enough analysis and tests on new vehicles before introducing them on the market. As found by the NHTSA, floor mat entrapment has been the cause of a crash involving a 2007 Toyota Camry in September 2007. Events of this type, happening in the course of a few years, raised questions on how such flaws have not been recognised originally and how they passed quality control.

Reputational risk

• Presence in the public eye – Being one of the leading car manufacturers in the world, Toyota has built an image of a company with values, such as accountability, performance and efficiency. However, they appeared to neglect those principles, when the complaints about their vehicles started arising. Instead of taking responsibility for the situation at first in front of the public, they were too confident, encouraged by their increasing sales on the US market. They failed to address the issues, and thus started losing consumer trust. Moreover, the CEO, Akio Toyoda, did not appear much in the public eye, further undermining the company’s reputation and his own. Media, consumers and regulators were left to make their own judgement for the events to come, which soon resulted in decreasing sales and market price for Toyota.

Strategic risk

• Capital/Resource allocation – In 2000 Toyota launched the ‘Construction of Cost Competitiveness for the 21st Century’ program. The idea of reducing costs led to significant savings for the company but at the same time it exposed it to various risks. For instance, lower costs sometimes are associated with reduced quality of the parts used in the cars.

Human capital

• Internal Communication/Coordination - Often, when there is a lack of open communication between staff and management problems can be ignored until they transform into a major crisis. In companies such as Toyota there is a hierarchical approach to management. Junior employees are usually most likely to spot early signs of a crisis but they are often unable to...
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