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Two Paths to Mastery

(originally published by Booz & Company)

Along just about every dimension, the Toyota Motor Corporation is considered the world’s superior manufacturer. In a difficult global automobile market, rife with overcapacity and cutthroat competition, Toyota’s market capitalization exceeds $212 billion. Its operating profits are almost as great as those of all the other major carmakers combined. And it will soon become the number one manufacturer, by volume, of light vehicles in the world.

Toyota’s business success is driven by advantages in both price and cost. The company commands about a 20 percent price premium over equivalent vehicles (of the same size, power, and interior appointments) offered by its competitors. This premium reflects, in part, the generally recognized high resale value of Toyota cars and trucks. When this price advantage is combined with the cost advantages from the company’s lean production system, the impact is staggering. Depending on the vehicle segment, Toyota might earn 20 percent gross margins while competitors struggle to break even. Toyota then invests these profits in the next generation of product development. This cycle, repeated year after year, helps explain Toyota’s remarkable innovation record. (It may also help explain why, in strategy+business’s most recent annual R&D performance study, Toyota was the only company among the 20 highest global R&D spenders to also make the list of “high-leverage” innovators with outstanding performance per R&D dollar. (See “Smart Spenders: The Global Innovation 1000,” by Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia,” s+b, Winter 2006.)

No wonder this company’s practices have been studied so exhaustively. Toyota’s managers have been uncommonly open, in fact, allowing outsiders not just to observe them, but to build in-depth partnerships, starting with the renowned New United Motor Manufacturing Inc. (NUMMI) joint venture facility that Toyota and General Motors have operated in Fremont, Calif., since 1984. Many books and articles describe all or part of the Toyota approach; several influential practices, from lean production to total quality management, have drawn insights and cachet specifically from Toyota’s methods.

And yet the mysteries of these methods remain uncracked. The rest of the automobile industry, in particular, has so far been unable to replicate Toyota’s mastery — or, for that matter, Honda’s. Thus, in 2005, a group of researchers at Booz Allen Hamilton undertook an in-depth analysis of this challenge. They asked: What can companies do, not to copy Toyota, but to find their own path to similar success?

Many observers focus on Toyota’s manufacturing production system — now generically called “lean manufacturing.” This is certainly important for any manufacturing company that wants to succeed. But if a company’s goal is to transform itself, there are two other places to start: sourcing and innovation.

Both these paths can yield quick dividends (the proverbial low-hanging fruit), but their most significant value emerges after a year or two. It takes that long to produce fundamental changes in innovation and supply chain practices. The benefits of improved design, productivity, and quality emerge only as suppliers and engineers commit themselves to a new approach. Thus in both sourcing and innovation, the essential task is to create a developmental path: a deliberate and well-considered way to build the organization’s collective capabilities over time. (That, in fact, has been Toyota’s primary corporate imperative since its postwar reorganization in 1947.)

A true developmental path represents fundamental changes in management practice, but it doesn’t require a company to endure the shock treatment of rebuilding methods from scratch. Instead, it starts with recognizing the company’s strengths and goals, and then follows by shifting the attitudes and ingrained practices that have kept it from building its own distinctive form of mastery. The following two articles provide a road map.

Author profile:

Art Kleiner ( is editor-in-chief of strategy+business and author of Who Really Matters: The Core Group Theory of Power, Privilege, and Success (Doubleday, 2003).

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