Toyota and its massive recall has been very much in the news lately but what can be learned from their experience? This is the question that Edward D. Hess takes up in a recent piece in Forbes, entitled Bigger Is Not Always Better: What the Toyota shutdown can teach us about growth.
Hess, who is the author of the forthcoming Smart Growth: Building an Enduring Business by Managing the Risks of Growth, argues that what Toyota learned, put simply, is that “growth can be good and growth can be bad.” More precisely as Toyota grew they failed “to analyze, identify, and manage the risks of high growth” which led to a systemic problem as well as the more obvious gas pedal problem.
Countering the conventional wisdom of “grow or die,” Hess calls for companies to be driven by “smart growth.” Hess explains:
Smart growth rejects the assumptions that all growth is good and that bigger is always better. It appears that Toyota did not understand that growth is bad if it creates material risks that are not properly managed. Growth can stress people, processes and quality controls. It can lead to bad management decisions. It can even dilute one’s culture, customer value proposition and brand.
Hess suggests that CEO’s perform a “Growth Risk Audit,” which “tailored to the unique goals and operations of a particular company, forces management to think about how opportunities as well as risks can be managed to achieve smart growth. Management teams then have to be measured and rewarded as much for managing the risks of growth as they are for generating growth.”
Hess concludes by writing:
Toyota will certainly recover, but the effects of mismanaged growth are likely to linger. Toyota’s unfortunate breakdown should serve as a wake-up call for every CEO. It’s time to reject the old mental models about growth and replace them with more realistic, empirically based growth concepts that promote the building of enduring companies. Growth is a complex change process that is dependent upon the behaviors of individuals, who like markets do not always act efficiently or rationally. Growth can be good, but it also can be harmful if the risks of growth are not properly managed. Business leaders need to recognize that.