Toyota: Business Decisions Based on Economics, the Law and Ethics

Brian Weinstock

By Brian Weinstock

Recently, Toyota executives were hauled before Congress to explain growing questions regarding quality and safety issues for their vehicles. Within the last three months, Toyota has recalled over 8 million cars worldwide for gas pedal accelerator problems in several models and break pedal issues with regard to the 2010 hybrid Prius. Moreover, the car manufacturer announced a voluntary safety recall for 8,000, 2010 Tacomas to inspect the front drive shaft. Businesses, such as Toyota, are economic organizations which are required to operate pursuant to certain laws. Moreover, businesses have a fiduciary duty to attempt to produce as much profit as possible in order to create value for their shareholders while staying within the law. On the flip side, businesses have a fiduciary to refrain from destroying shareholder value. Therefore, economics and the law are critical when it comes to making business decisions. A view that economics and the law are the only key aspects with regard to making business decisions can be toxic. The relationship of ethics to economics and the law is complicated but crucial when making business decisions.

With respect to economics, the sole choice is to maximize profits to create shareholder value. Firms attempt to maximize output for the least amount of input which can lead to deficiencies in quality, safety and reliability. In addition to economic issues, quality, safety and reliability also create shareholder value, which assist in the process of increasing profits. Ethics considers many other kinds of reasons outside of economics including rights, justice and non-economic issues such as social issues. With respect to the law, businesses must operate within a certain framework in order to remain in business. Some believe that the law operates within pubic life while ethics operates solely within private life. Laws are clearly defined and necessary to establish a common framework for a level playing field for all entities. Meanwhile, many believe ethics are personal ideas which tend to reveal how a person operates their life. Laws are not enough when it comes to making business decisions. It can be extremely dangerous when business executives only consider economics and the law when making business decisions; especially, when the product in question is a motor vehicle which can injure or kill a person even when there is no operator error. One reason why a business manager should not be making business decisions based solely on the law is because not everything that is considered to be immoral is illegal under the law.

Every dangerous product can be made at a cheaper cost which can ultimately impact quality and safety. Therefore, manufacturers of dangerous products have an ethical duty to ensure product safety; especially, if they built their reputation on quality, reliability and safety such as Toyota has done. In order to keep their reputation Toyota has to be able to walk the talk.

Recently, Toyota executives announced that their current problems were a direct result of the company growing to big to fast. Over the last several years, Toyota knew American car manufacturers were vulnerable. Toyota sensed a prime opportunity to grab market share to increase overall revenue and value for their shareholders. In order to do this, Toyota had to quickly increase production which resulted in a worldwide expansion. Prior to the massive global expansion, Toyota would try to minimize quality issues by not building a new vehicle in a new building with new labor. In the mid part of this century, Toyota was building new vehicles in new buildings with new labor which resulted in quality control issues. It appears Toyota had sacrificed some of their own principles with respect to quality, safety and reliability to grow revenues. The growing too big too fast excuse can easily be interpreted as though Toyota sacrificed quality, safety and reliability (ethical standards) for economic issues such as growth or essentially market share and revenue.

So did Toyota make business decisions on how to grow the firm based solely on economic and legal issues? Regarding economics, Toyota noticed the competition was having problems so that moved into rapid expansion which generated more worldwide sales, i.e. increasing overall revenue. Regarding the law, Toyota may have performed a cost benefit analysis to compare overall profit to the cost of recalls and personal injury or class action lawsuits whereby they chose overall revenue. Whatever the case may be, Toyota clearly left behind some of their core beliefs and values with regard to manufacturing processes when they decided to rapidly expand the company. Although, Toyota does deserve some credit for announcing a production shut down along with recalls even if Toyota was experiencing quality issues in 2006 and 2007 with respect to gas pedals in at least one of their vehicles. Going forward, Toyota would be best served to refrain from making business decisions solely based on economics, laws or a combination of both if they truly want to be a world leader in quality, safety and reliability and avoid being associated with the Pinto or other quality and reliability issues which played a significant role in the downfall of the American car industry over the last twenty years.

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