Toyota and Starbucks have a lot in common: The reason behind why both have recently been humbled.

How could the great fall so fast?

Many were surprised by the stumble of Toyota in February, manifest by, for the company at least, a most unusual vehicle recall for defective parts and design.  Similarly, in 2009, Starbucks underwent a most unexpected down-sizing, calling into question how sustainable the successful, long-term trajectory of the firm might actually be; since then the firm [as noted in yesterday’s post Starbucks figures out it's its people, not the coffee, that makes it successful] has had to impose layoffs, sell-off properties, and cut overhead—all to stay alive. 

The answer is in what they each decided to do at the expense of core values.

So the obvious question is:  What explains the downfall of two business giants in the face of such impressive track records?  One man thinks he as the answer—and what he says makes perfect sense.  University of Virginia’s Darden School Professor, Ed Hess, says the problems that the car manufacturer and the coffee company shared in common was the failure to plan—and then manage—smart growth.  Indeed, they focused on misguided, mismanaged growth at the expect of key, core principles that made the company excellent in the first place!  

I’ve been paying attention to his new book, Smart growth:  building an enduring business by managing the risks of growth [Columbia Business School Publishing] and what he proposes seems to explain the mystery shared by so many business observers:  how could the apparent corporate fortune of firms of such attainment, size, and success fall so fast.  Here’s what he'd say….

The need to question first strategic principles!

First, what to some are accepted truisms, for him are dominant strategic myths:  All growth is good, bigger is better, and businesses either grow or die, none of which he says is true. Instead he argues that all growth creates risk and needs to be carefully managed; indeed, he proposes that growth is good only if properly managed.  One way to do this is through a growth-risk audit that assess how the contemplated corporate growth may stress its people, processes, and culture. 

Hess proposes that what happened to Toyota was that it decided to go for growth instead of protecting and cultivating the corporate values it held for so long—and to which it rightfully could attribute it’s marketplace success, from being the most dependable auto manufacturer to being the biggest.  This decision resulted in Toyota abandoning what made it successful in the first place, all to pursue what seemed like a promising opportunity to grow. 

Here's what happened at Toyota and Starbucks.

Early in the low 2000s, Toyota, in effect, began the process of striving to be first in auto sales, but leading to big problems as a result of a large magnitude of change exacerbated by speed.  In doing so, the firm had to build a lot of plants, hire and train a lot of people, and sub-contract a lot of parts, all leading to what turned out to produce subtle-but-critical problems for the firm.  

Starbucks, similarly, struck out on a mission to grow at an unprecedented rate—and in some ways which now seem so obvious—in way that was incongruent with their central mission of providing a good product [coffee and service] in a distinctive setting, attended to by service personnel that was distinctive.  In the process, Starbucks expanded at a topsy-turvy rate that lead to locales that cannibalized the clientele of pre-existing properties, a decline in many instances in service—all of which caught up with Starbucks when the economic downturn hit. 

Companies are a lot like people in this way.

So, what does a threatened car company and a cut-down coffee company--both once the focus of countless case studies in success--have in common?  Hess would argue that they both failed to adequately plan, prioritize, and then pace their growth in the pursuit of corporate performance other than the core values that made them successful in the first place.  They overlooked the need to keep in check the controls and cultural processes that made them great in the first place.  [Is Hess' explanation the right one?  Toyota's president, Akio Toyoda, admitted as much in early March and as Harold Schultz implied in yesterday's post.]

In effect, companies, like people, can engage in only so much change at a rapid rate, without running the risk of losing their corporate souls--what made them prized to begin with. 
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