After an unbelievable 50-year run, Toyota has hit a rough patch, with some commentators categorizing Toyota’s situation not as a dip, but primed for a “turnaround” -- language normally reserved for the kind of calamities General Motors or Chrysler have endured. What is necessary to restore Toyota’s luster?

Toyota’s future success depends on generating the same internal dynamics that led to its initial triumphs. Toyota grew from obscurity and succeeded by fostering and sustaining broad-based, unrelenting culture of improvement and innovation. It ran into trouble when the natural growth of its business outstripped its ability to scale the practices and capabilities that had made it successful. A change in direction for the company will require innovation and improvement on top of innovation and improvement, which includes not only how to get ever-better product and process designs, but how to inculcate those skills with more speed and certainty.

The Toyota Toyopet was a failure in 1959, noteworthy for going uphill better in reverse than forward. From that low point, it was success-after-success. In the ‘60s, Toyota closed the productivity gap with American rivals, and by the ‘70s, it rocketed away with inexpensive, fuel-efficient reliability. Next were more mid market models, then trucks, SUVs and minivans, followed by new brands---such as Lexus and Scion---before technological leadership with Prius. Outsized growth resulted, with profits and market cap surpassing that of its major rivals combined.

Recently, there were hits. Opening a large pickup plant with a plummeting economy was bad timing, and 30% industry decline led to its first loss in decades. Worse than macro economic struggles were alarms about quality and safety that tarnished the brand’s image.

Regaining Traction

How did Toyota lose traction and how does it regain it? Having spent 15 years studying Toyota---including apprenticing with a Toyota supplier development team; testing what I learned with other companies; and collaborating with Toyota colleagues on North American leadership development at suppliers--- here are my perspectives:

Toyota caught up and passed its rivals by fostering incredible rates of discovery in identifying customer needs, configuring products and services to meet those needs, and building and operating production systems that successfully delivered those offerings to market.

There are countless stories of how this was accomplished. Facing saturation in the middle market, Toyota didn’t satisfy itself with marketing studies to understand the luxury end. An engineering team moved to Los Angeles, stayed at the Beverly Hills Hotel, ate at the Four Seasons and shopped on Rodeo Drive to understand the experiential definition of luxury. The result was Lexus, within in two years, the leading brand in the USA.

Likewise, upgrading the Sienna mini van was informed by a chief engineer driving tens of thousands of miles in every state, experiencing the delights and disappointments of existing products. The Scion positioning of letting young people personalize their cars like they personalized their music and clothing was honed with tiny pilots in Toyota City. Dealerships were given body shop support to test post factory modification. My own shop floor experience with Toyota was marked by constant admonitions to “think less and do more” when solving a problem. Not that I shouldn’t be thoughtful or disciplined, but problems existed precisely because we did not understand enough. Only by experimenting could we advance our understanding.

Internalizing Innovation

Problems would arise when those lessons about innovation were not internalized. For example, when I was in a meeting about the design of a new plant, two former employees came to verbal blows about providing parts to assembly workers. Should parts needed for each sub assembly arrive kitted together, or should there be a line-side “supermarket” so workers could pick and choose? Each had a cultish devotion to a particular solution because of what he had used and where he had worked. Both lacked deep understanding about why one worked in one circumstance and the other was better in another.

Problems also arise when lessons about innovation are internalized too slowly. Traditionally, the core capabilities were taught in an apprenticeship fashion. Depending on the craftsman mentor, the experiential learning process could be opaque and arduous. My friends had a phrase for that sort of learning: Being pulled through the keyhole.

Restoring a Competitive Advantage

But what does this mean for restoring Toyota’s competitive advantage?

The company’s success depended on broad based capabilities for improvement and innovation. The rates for developing those capabilities were outpaced by the company’s business growth. One alternative is to slow down growth to match the rate at which it can solidify its internal capabilities. The downturn may be a mixed-blessing in that regard, giving the company’s most expert leaders breathing room to develop existing employees and suppliers with less pressure to onboard new hires and expand and create new supply networks.

That is only temporarily attractive, however. When markets pick up, Toyota will want to stay ahead of rising demand, with the high quality, affordable products for which has been known. That leaves only one viable alternative. It needs to accelerate the pace at which it can develop people’s skills across the spectrum of its work and in various regions in which it competes. This means focusing on teaching, training, and developing people to be expert discoverers in their own right in a fashion more reliable than the being-pulled-through-the-key-hole approach.

There are some promising signs. Some years ago, Toyota created its Global Production Support Center. The idea was to draw together experts in critical production skills such as welding, paint, assembly and shop-floor management. Their mission was to codify those skills and codify how to teach those skills in a repeatable, higher speed, more reliable fashion than the traditional apprenticeship model. Then this GPS was cloned with satellites in the various regions. Efforts to move other skills in design and delivery from craft apprenticeship to reliably teachable will help. The ascension of a Toyota family heir, with a stated commitment to quality first and growth second is also promising. It reinforces the message that success in the marketplace is a derivative measure, the result of what goes well (or not) internally. Critics have pointed to quality, cost and product-offerings as evidence of Toyota’s newfound vulnerability. As bad as those might be, one doesn’t manage those measures directly. One manages people and the key is managing them so the broad based, relentless improvement and innovation once characteristic of Toyota is reinvigorated. If that happens, more success lies ahead. If not…well that’s another story.