Hybrid Car Creates Hybrid Organization: Development of Toyota's First Prius Model and Limits that Traditional Development Organization at Toyota confronted

The manager of each function-based department holds private information about his or her respective department's fields of expertise and technological advances. Given this understanding, it may be advisable for the company's headquarters to delegate decision-making authority to the managers of these individual departments. However, if decision-making authority is delegated to individual departments or to the managers representing the interests of each of those departments, those departments may pursue their own interests even at the expense of the company's interests as a whole. By contract, the product manager does not have private information but is thinking about the new product under development as a whole and thus does not have a biased preference. The question then, is, what kind of governance structure will serve as the optimal solution? When each manager possesses a biased preference for his or her own department, it is important to consider the impact that the allocation of formal authority and the information flow within the organizational hierarchy has on the organizational capacity for innovation. This theme is developed and illustrated, using the case of development of Toyota's "Prius". In the case of Toyota Motor, too, this point has been an important issue for a long time when planning its development organization structure. The development of the world's first mass-produced hybrid vehicle, the Prius by Toyota is one of the most successful examples of innovative product development in recent years. However, it has been hardly studied as to how such architectural innovation was possible within the largest organization in Japan. This paper argues at length the development process of the Prius and transfiguration of Toyota's development organization structure from the viewpoint of organizational economics framework. Development of the first Prius model by Toyota set the stage for adoption of a new development organization structure : the term-limited implementation of the new "Big Room" approach, which did bring about lasting changes to Toyota's organizational framework for vehicle development. It will be noted that concept design, or in other words interdepartmental coordination, was more important in the initial phase of development (the first six months), and thus, the "Big Room" structure was the development organization structure of choice for implementation. By contrast, after the initial six months, work on the concept design of the product development had been almost completed and interdepartmental coordination had become less important to the company compared with advances in the technologies for the engine and other component systems. For that reason, the development organization was transitioned to a more decentralized structure of governance, the conventional “chief engineer” structure. The new development organization is a kind of hybrid organization, which lies between "centralization" and "decentralization". Furthermore, we touched upon the point that delay is costly in decision problems because it increases the lag upon which decisions are based, and evaluated the new development organization structure from that viewpoint, too. The arguments made in this paper will presumably be of value as generalized recommendations for the shape of the development organization within large established corporations.