Where Toyota went wrong

NEW YORK (Fortune) -- When Toyota gets around to doing one of its famous "root cause" analyses of the Great Accelerator Recall, it should start by looking in the mirror.

As the company grew to become the world's largest automaker, it failed to adjust its corporate structure to accommodate its altered scale. And in its zeal to deliver profits as well as revenue, it may have overlooked fundamental principles that used to underpin its business.

Toyota, in other words, forgot what the Toyota Way was all about.

Start with the part being blamed: an accelerator pedal mechanism. It is produced for Toyota (TM) both by Denso of Japan and CTS (CTS) of Elkhart, Indiana. Toyota used to run with just one supplier for a given part, with whom it had close ties and a long relationship. But ever since a fire at a Japanese brake supplier in 1997 shut down the company's production at 20 plants for five days, it decided that it needed a second source as a backup.

With the accelerator, though, it neglected to make the parts from the two suppliers interchangeable. According to one report, the Denso and CTS mechanisms use different wiring harnesses. In other words, Toyota, the master of communization, neglected to ensure that identical parts from two suppliers were, in fact, identical. Even if they were identical in design, the fact that the CTS part apparently developed defects and the Denso part did not, suggests there were other differences.

Such mixups are not surprising because Toyota still uses lines of reporting that date back to its first days in North America a half-century ago and which is rarely found in U.S. business today.

The management style is one where everything has to do be dealt with at the top, a chimney approach in a networked world. The result is a system in which problems can get lost and solutions get delayed.

Here's how the system might have worked in this case: when Toyota Motor Sales in California began to get complaints from customers about sticky accelerators, the news would have traveled first to sales headquarters in Japan. There executives would have had to have send the issue to product engineering for a design fix, and then to manufacturing for implementation. Only then would it have found its way back to the U.S.

Talk about connect the dots. If Toyota had an integrated headquarters in North America, with one person in charge of sales, engineering, and manufacturing, the complaints might have been communicated almost instantaneously -- and fixed nearly as quickly.

And then there is the controversial topic of cost-cutting. As recently as December, Toyota was asking its suppliers to reduce parts costs by 30% over the next three years. That followed an earlier program begun in 2005 that grouped automotive components into categories and tried to lower costs on each one.

CTS said it manufactured the accelerator mechanism exactly to Toyota's standards, and undoubtedly it did. But it was also noted by executives that the parts subject to failure had experienced excessive wear. Both CTS and Toyota stated that they are working together on pedals that meet "tougher" specifications.

Was Toyota so zealous in its cost-cutting that its specifications weren't robust enough? That's one of the questions facing new CEO Akio Toyoda as he plunges in to this debacle. How he decides could set a tone for his entire administration.

Today, Toyota employees are feeling shell shocked. They believe they have done the right thing by recalling millions of cars to fix faulty carpets that may interfere with the accelerator pedal, and another several million to repair the accelerator itself.

But the scale of the recall is huge, and the decision to suspend both sales of existing cars and production of new ones is creating enormous problems for dealers, private customers, and fleet buyers. Meantime, the 24-hour news cycle has pummeled the company, and the automotive press, much of it based in Michigan, is having a field day.

Whatever happens, the solution to this affair is going to be expensive. Toyota will be paying for repairs on all those cars and the damage won't stop there. One dealer tells Fortune he is essentially writing off his Toyota new car business for 30 days and another says he is planning for 60 to 90 days of no sales.

In the end, though, the money will be well-spent if Toyota, famous as a learning corporation, can take some lessons away from the episode. It needs to modernize its corporate structure, revisit the basic elements of its product development system, and reconsider the impact of its aggressive cost-cutting. That should help to realign this remarkable company to "the Toyota way."