The perils of growth

Managing For Society, The Manila Times

June 15, 2010

Why do companies pursue growth? Traditionally, it’s been to achieve so-called “economies of scale”. By spreading overhead and other fixed costs over a larger volume of business, average unit costs go down and the company achieves more competitive pricing and profit at the same time. The resulting larger market share also gives the company more clout for gaining even more competitive advantage in the future. Investors love this idea and are often more than willing to pitch in the capital needed to finance growth. Bigger is better.

But the impact of company growth is not this simple. The downside of growth is “diseconomies of scale”. Beyond a certain healthy point, company growth becomes harmful to a company and those it serves for a host of related reasons: internal communication becomes too complicated; decision-makers get isolated from the front-line situation; and the company’s ability to respond to issues slows down.

The recent problems of Toyota in the US market make up a textbook case on the perils of growth. The giant Japanese car company has recalled more than 8 million cars in the last three years due to safety problems involving many of its models. The company has been working very hard to address the issues under its new CEO, Akio Toyoda, of the founding Toyoda clan.

An important question is how Toyota, famous for its vaunted Toyota Production System and among Fortune magazine’s most admired companies, ended up in this situation. The jury is still out on the complete story but it appears that badly managed growth is a major culprit.

It will be recalled that Toyota overtook General Motors in 2008 as the leader in world auto sales with 8.97 million vehicles sold annually versus GM’s 8.35 million. By Toyoda’s admission during his US congressional testimony, the company may have wrested sales leadership from GM at the expense of its ability to solve quality problems. The back-story on how this phenomenal growth was achieved reveals important lessons.

Firstly, the growth came mainly from sales outside of Japan. Following its globally-distributed production system, this meant that the company had to produce cars where the demand existed. Increasingly, this meant producing more cars outside Japan and, especially, in the US. As a result, the number of overseas employees grew very rapidly, more than doubling from about 60,000 in 2000 to above 120,000 in 2005. How is it possible to communicate Toyota’s home-grown quality culture well to so many foreigners in such a short time? Takeshi Uchiyamada, Toyota VP, was quoted in 2008: “If our overseas production grows at this pace, we have to figure out how to ensure the quality and quantity of our overseas human resources.” It seems the company still has to figure this out.

Secondly, the company’s ability to quickly respond to customer issues seems to have been impaired by its size. Statistics from the US National Highway Traffic Safety Administration showed that complaints had been escalating steadily from 2000 to 2009. Surprisingly, many found the speed of Toyota’s decisions on these issues wanting. In fact, Jim Lentz, head of Toyota Motor Sales in the US, testified that he had no power to order the recall of a vehicle. Such a decision had to be made in Japan. (Toyota has since improved the speed of recall decisions.)

What can we learn from the Toyota case? A company pursuing growth as a business strategy needs to ask key questions: Can the right kind of people be recruited, trained and deployed in time to support the higher volume? Can decision-makers stay informed about customer needs and concerns well enough to make effective and timely decisions?

If the answer to both questions is not a “yes”, growth is not a sound business strategy to pursue.

Dr. Ben Teehankee is an associate professor in the College of Business of De La Salle University. He may be emailed at