297. How Toyota And Kodak Changed Decision-Making
Empowering employee decision-making can transform company culture and lead towards massive success. It's time to learn a little from how Toyota bucked the trend.
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In the 1960s, corporate decision-making was mostly hierarchical. Leadership made the decisions, employees did what they were told.
Knowing that, it makes Toyota’s 1966 policy changes all the more surprising.
You see, Toyota leadership decided to let their lowest-level employees make the types of decisions that could cost the company a massive amount of money
Specifically, they empowered the assembly line workers to pull the Andon Cord.
<cue foreboding sound>
The Andon Cord is an emergency stop system. When you pull the cord (or press the button, as the case may be) it immediately shuts down production in the auto plant.
Stopping production in an auto plant is a huge friggin deal.
To put it in perspective, it costs car manufacturers nearly $40,0001 every minute that production is stopped. That adds up very quickly.
Keep in mind that the average auto assembly line worker makes only $40k per year2. That means just 60 seconds of stoppage will cost the company more than the entire salary of the very worker who initiated the stop in the first place.
That’s a lot of pressure to put on front-line workers.
Imagine if it cost your company an employee’s entire salary every minute they made a glaring mistake and stopped the team’s productivity.
You’d probably be watching every single thing those employees were doing. Maybe you’d even be a borderline micromanager. I mean, it would make sense, right?
Toyota dared to think differently.
In a world of top-down leadership, they decided to believe in the distributed decision-making power of their employees.
Their thinking changed the world.
We will get to that in a minute, but first, we have to kibitz about Kodak.
How Decision-Making Can Kill A Company
Back in the late 20th century, Kodak was synonymous with camera film. At their peak, they owned 90% of the film market3. Nobody even came close to competing with them.
Kodak was also at the forefront of technological innovation at the time. In fact, in 1975 they were the first company to invent the digital camera.
Unfortunately, Kodak’s decision-making structure was far from revolutionary. While businesses in the 1980s were moving towards a more distributed decision-making process, Kodak was stuck in a hierarchical model.
Senior leadership made all big decisions, but, like most senior leaders, they didn’t have their ears to the ground. I’m not sure if they had anything to the ground.
Kodak’s leadership decided to bury the future of digital cameras in order to maintain its current market share in non-digital film.
You know how this story ended.
Canon, Sony, and Nikon invested heavily in R&D for digital cameras.
By 2003, digital cameras outsold traditional cameras.
By 2010, Kodak’s $20b in yearly revenue had plummeted 70% to $6b.
In 2012, Kodak filed for bankruptcy.
Why?
Poor decision-making.
Distributed Decision-Making
Innovation, agility, and growth come from effective decision-making processes. Effective decision-making is not hierarchical.
Quite a few studies have shown that every new generation wants to be more empowered with decision-making than the previous one (check out Deloitte’s 2024 Growth Human Capital Trends report)
But let’s get back to Toyota and their Andon Cord experiment for a hot minute.
It turns out that Toyota’s move to empower front-line workers not only transformed their culture, but it transformed their industry.
By empowering the workers, Toyota immediately experienced better quality-control and fewer manufacturing errors. More importantly, they created an entire culture focused on constant improvement.
Toyota’s “lean manufacturing” process has since become the standard for all car manufacturers.
All that from simply empowering employees to make decisions.
How to Distribute Decisions
Do you want your team to be more innovative, agile, and growth-minded?
If you answered yes (which happens to be the correct answer), the solution is simple: you need to define the decisions each employee is empowered to make.
For most companies, there are only a few areas of decision-making authority. Here are five common categories:
Finance
Strategy, Rules & Priorities
People
Partners
Process
Let’s review each one.
1. Finance-based Decisions
Every employee should be given a clear understanding of their spending authority.
For instance, Ritz-Carlton prioritizes their customer’s happiness. To show this, they empower employees to spend up to $2000 to resolve customer issues or improve a guest’s experience4.
2. Strategy, Rules & Priorities
Sometimes employees are confronted with decisions that may challenge the strategic direction or the priorities of their job. Which employees can change the rules on their own?
Check out this example.
Nordstrom department stores are legendary for accepting returns at any time for any of their products - even if it has already been worn.
One time a person tried to return a set of car tires to their local Nordstrom. The customer insisted they bought the tires at Nordstrom. There was only one problem: Nordstrom doesn’t sell tires5.
Famously, the Nordstrom employee gave the person a full refund and, in doing so, helped catapult Nordstrom’s brand as a leader in customer happiness.
3. People
Periodically, people may need to have their roles and responsibilities reevaluated or changed. It could be for a variety of different reasons, none of which I’ll get into now.
When it happens, who has the authority to make those decisions?
What people in the company can make decisions that impact other people’s responsibilities at work?
It’s important to clarify this.
4. Partners
Companies have different types of partners. There are SaaS partners, strategic partners, investment partners, sponsors, and many others.
What decision-making authority do different employees at different levels have with different types of partners?
Can they change a partnership structure?
Eliminate the partnership?
5. Process
Finally, processes are both the daily tactics employed by workers to achieve their goals, as well as the company processes employees follow to conduct business.
Who owns these processes? Who can alter the way things are done? Who is empowered to make changes to the problems they see?
Empowering Decision-Making
In our world where agility, innovation, and adaptability are the building blocks for success, it is essential to empower employees to make decisions.
By allowing employees to make their own decisions, you build a team that feels valued and inspired.
Toyota was one of the first companies to understand that. Now, the fastest-growing companies are the ones that get it.
So tell me:
How are you teaching your team to make decisions?
How are you empowering the employees to feel ownership in what they do?
The question isn’t about how much money it will cost to address the poor decisions, the question is how much it will cost if you don’t let them decide in the first place.
Maybe it’s time for you to pull the Andon cord.
Do you want help strengthening your team’s decision-making and accountability processes? Let’s talk
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In 2024 US dollars
Also in 2024 US dollars
Check out the article on Kodak by Olga Melnyk.
Feel free to read more about Ritz-Carlton’s $2k rule in this article
The Nordstrom tire return story is true
Excellent, vivid examples and helpful, simple breakdown of the key areas leaders should consider to design their distributed leadership model. Love it!
Really cool examples with Toyota and Kodak. This article reminded me of something Jocko Willink defines as "decentralized command". He also talks about how the key to accomplishing decentralized command is company culture, which you tie in as well. Awesome article, appreciate you sharing.