"Reversible Systems" Protect Your Business More Than "Foresight"

Hiroshi Okuda, former president of Toyota Motor Corporation, has passed away. Media outlets are praising his "visionary management decisions and bold execution." Indeed, the leadership that guided Toyota to global dominance in the 1990s deserves admiration.

However, what we as SME owners should learn from him is not the "bold decisions" themselves. Rather, it's the fact that those decisions were supported by "reversible systems." In this article, we'll unpack the essence of "reversible management decisions" from Okuda's approach.

"Foresight" Is Merely a Retroactive Label

The assessment that someone "had great foresight" is only assigned after results are achieved. No business leader at the time could see the future with certainty—Okuda was no exception. What made him exceptional wasn't his ability to predict the future accurately, but his constant preparation of systems that allowed him to turn back when predictions failed.

For example, Toyota's shift to overseas production wasn't driven by the slogan "localization" alone. The company thoroughly standardized parts and production lines, accumulating "reusable assets" that could be leveraged in other markets even if one market failed. In other words, while individual investment decisions appeared large, their internal structure was composed of finely divisible units.

The "Bold Decision" Misconception Among SMEs

Many SME owners tend to view the decisions of "charismatic leaders" like Okuda as all-or-nothing gambles. They admire success stories like "we invested all at once and it paid off," and try to make similar "big bets" in their own companies. But this is a profound misunderstanding.

Truly excellent management decisions define the "range within which you can retreat if things go wrong" before making a move. This is something I've consistently emphasized in my work supporting over 38 clients. When I was forced to pivot the business as a board member of EYS-STYLE during the COVID-19 pandemic, I first defined the "non-negotiables" and then moved experimentally within that boundary.

Three Conditions for Implementing "Reversible Management"

The implementation conditions for "reversible management" that we can learn from Okuda's approach can be organized into the following three points.

1. Invest in Processes, Not People

When starting a new venture, do you immediately decide "who will be in charge"? This is a decision that significantly undermines reversibility. When you fix roles and expectations to a person, failure forces you into the difficult-to-reverse choice of "replacing the person."

Instead, break down the work into small components and run a trial using external resources or a time-limited project team. Observe the actual results, then decide whether to bring it in-house as needed. Simply following this sequence dramatically reduces exit costs.

2. Define "Exit Conditions" Before Signing Contracts

When partnering with external parties for a new venture, are you signing long-term contracts based on the assumption of success? This is the most common cause of becoming unable to turn back. Contracts should prioritize "how to exit" over "how to enter." Keep terms short and clearly define conditions for early termination. If results are achieved, you can always extend.

When I established our Malaysia entity, I defined the exit conditions before entering the market. Ultimately, we did have to withdraw, but thanks to that initial design, we were able to turn back without legal risk. This experience deeply reinforced my conviction in the importance of "reversible management."

3. Set Evaluation Timelines and "Return Points" in Advance

Every experiment needs "by when will we evaluate" and "to what point will we revert" decided in advance. For example, in a new business venture, after three months, measure the "gap between the original plan and reality" and choose among three options: continue, scale down, or exit. At that point, also decide which prior state you'll revert to. If you've deployed staff, where will those staff return? If you've leased equipment, what are the termination conditions?

Without a defined "return point," failure forces ad-hoc responses that generate further losses.

The Culture of "Structuring Failure" Made Toyota Strong

Toyota under Okuda didn't have a "hide failures" culture—it had a culture of "structuring failure." When problems arose, instead of assigning personal blame, the company thoroughly analyzed which part of the business process was at fault. This is precisely why bold decisions were possible. Even if they failed, the lessons learned could be applied to the next experiment.

SMEs can implement this culture too. Set aside time in regular meetings to share "this month's failures." However, there's a caveat: failures must never be attributed to "someone's mistake." Treat them strictly as "structural process issues." If you can't do this, the culture of reporting failures will disappear overnight.

Sharpen "Resilience" Over "Foresight"

Among the tributes to Okuda, the word "foresight" appears frequently. But what we should strive for is not the ability to see the future with perfect clarity. Rather, it's the resilience to restart from anywhere when a decision proves wrong.

No one can know the future. That's precisely why management design that builds in uncertainty is what matters most. Before making a big decision, first design "how you can turn back." If you get this order right, bold challenges are possible even for SMEs.

Okuda's decisions are called "visionary" simply because they turned out to be right. What he was truly excellent at was always thinking about what to do if things went wrong. Isn't that perspective exactly what today's SME owners need most?

"Reversible management" is by no means timid management. On the contrary, it's the most realistic management strategy—one that generates the courage to try again and again.