When Toyota (TM) tripped and did its recent -- and ongoing -- faceplant, it became the latest company to fall victim to an old problem. Toyota was making the same strategic mistake that derailed Starbucks (SBUX) and fashion company Coach (COH) in the past decade.Fidelity vs. Convenience
Each of the three companies thought it could be both a "high-fidelity" and a "high-convenience" company at the same time, and that's always a dangerous strategy. A high-fidelity company offers a fantastic, special experience that consumers love. A high-convenience company offers something that's easy for the masses to get and use, and it often becomes a ubiquitous brand, like Walmart (WMT) or McDonald's (MCD).
However, a powerful tension comes between those two polarities. If you add too much convenience to a high-fidelity product, it makes the product less special, less cool. Try to add a lot of fidelity to a high-convenience business, and you'd get McDonald's offering fine wine and white-jacketed waiter service.
Starbucks started out as a high-fidelity coffee company, which is why it could charge a few bucks for a cup of coffee. Starting around 2000, when longtime CEO Howard Schultz left, Starbucks grew at breakneck speed, trying to be both high-fidelity and super-convenient. The company grew so fast that The Onion satirized it with the headline, "New Starbucks Opens in Rest Room of Existing Starbucks."
By 2007, automated machines and poorly trained baristas were making coffee people didn't like as much. Smaller neighborhood coffee shops seemed cooler. And Starbucks sales started to slip, sending its stock into a dive. The share price had been near $40 in 2007 but plunged to $7 in 2008. The tension between fidelity and convenience was too great. Schultz came back as CEO and has since been driving Starbucks back toward fidelity, even closing 600 stores.
Coach made the same strategic mistake. Long the marketer of high-priced bags that women coveted, the company in the last decade expanded broadly and started carrying cheaper stuff. Sales took off for a while, but then the tension ate away the prestige of the Coach brand. Customers abruptly turned away, and that led to a tanking of Coach's share price.
So what about Toyota? The carmaker built its reputation on quality -- certainly on being higher-fidelity than U.S. auto companies. Through the 1980s and 1990s, Toyota's executives ran it on the principle of kaizen, or "continuous improvement." It's a method of building in total quality management while making employees more effective.
But in 1999 Toyota listed its shares on the New York Stock Exchange and made growth an imperative. In the 2000s, Toyota found itself in a race to become the biggest automaker on earth. Toyota made 4.8 million cars and trucks in 1999, and nearly twice as many -- 8.5 million -- in 2008. The company set a goal of making the Camry the best-selling car in the U.S. – a title it won in 2003 and has held since. In 2008, Toyota passed General Motors to become the world's biggest automaker. GM had held the ranking for 77 years.
Toyota, built on fidelity, drove to become the ubiquitous, super-convenient carmaker. To get there, it expanded manufacturing, spreading it all over the world. Along the way, Toyota officials recognized the danger to its own brand. They knew that fidelity could be harmed. "Toyota is so big now," Teruo Suzuki, a Toyota general manager told Fortune in 2005. "We make so many cars in so many different places with so many people. Our greatest fear is that as we keep growing, our ability to maintain the discipline of kaizen will be lost."
Oh, What a (Sinking) Feeling
Now we see that's exactly what happened. The discipline that kept Toyota high in fidelity for decades was getting worn away underneath by the race for ubiquity. The gas-pedal issue that's triggered its massive recalls has apparently been hidden for years, and now more problems are surfacing with the Prius and other models. The U.S. Congress has scheduled hearings to look into Toyota's problems. Toyota president Akio Toyoda has pronounced, "We will redouble our commitment to quality." But to most consumers, the promise sounds shallow.
"Toyota could have shined by jumping on the issue and correcting it, but instead looks more like the domestic maker's approach from the pre-quality era of the 90s," says Ron Whitbread, a manager in the auto-sales industry for years, and now an executive at Sysco.
As Starbucks and Coach found out, once you wound a carefully built image of fidelity, healing it can be very difficult.
Take the first steps to building your portfolio.View Course »