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5. Act. Improve. Repeat.
By Fujio Cho

(Business 2.0) – Since Fujio Cho became its president in 1999, Toyota has been riding an unprecedented wave of prosperity. Sales are up 39 percent, and profits a whopping 141 percent to more than $11 billion. After joining the company in 1960 at age 23, Cho transplanted Toyota's famed manufacturing process to American factories in the 1980s. Known for spotting opportunities—the Prius hybrid and the youth-oriented Scion brand debuted under his watch—Cho says smart companies are always striving to do better. — INTERVIEW BY MARIKO MIKAMI

What makes Toyota so smart? I'm not sure the term "smart" really suits Toyota. Rather than dealing with problems neatly in our heads, we execute. If our solutions don't work, we try something else. I like to think of Toyota as a company that's not afraid to get its hands dirty. If you want to call that smart, OK.

Let's use your definition then. How does Toyota stay smart year after year? Toyota grew out of Sakichi Toyoda's invention of automated looms, and the spirit of the inventor is alive and well. It's a focus on results, where action is key. I learned when I was young that you had to get out into the field—you're always surprised by what you find. And I learned not to give up. If I failed at some project, my bosses never talked about blame. Rather, they sent me back to the drawing board. Good managers never say, "Do what you're told," because that tells subordinates that it's OK not to use their heads.

Companies worldwide are studying the Toyota Production System. Can they become as smart as Toyota? Some people think that if they just implement our techniques, they can be as successful as we are. But those that try often fail. That's because no mere process can turn a poor performer into a star. Rather, you have to address employees' fundamental way of thinking. At Toyota we start with two questions: "Where are we wasting resources like time, people, or material?" and "How can we be less wasteful?" Take conveyor belts. Some manufacturers use them to move a product from worker to worker on an assembly line. But belts can actually waste time because workers have to take the product off the belt at each manufacturing step. It's faster to keep the component stationary and have workers approach it as necessary. The Toyota we know today is the result of challenging ourselves to get rid of waste for more than 40 years.

How does Toyota maintain quality as it expands globally? This is a big problem, and something we have to conquer. We have strict standards, but sometimes those standards are not met. So we need a culture that is not afraid to halt production. When I worked in America, people were afraid to stop the line at first because they didn't want to upset their managers. But within a year, they became really skilled at knowing when to do it. Last year we opened our global support centers, where plant managers from around the world go for training. Our 40 or so factories worldwide compete on quality, and some from overseas are starting to give those in Japan a run for their money.

What other companies do you think are smart? You can learn a lot about brand image from Shiseido, the cosmetics company. Canon is a model for global expansion. And I have long admired GM: When it moved into Europe in the 1950s and '60s, its subsidiaries there became truly European. For students of success, every company can be a teacher.