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ICG Risk Blog - [ Ejecting executive automotive management may or may not help; energizing the usually inert and risk averse middle management can ]

Ejecting executive automotive management may or may not help; energizing the usually inert and risk averse middle management can

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Part 1: US auto sector must immediately perform a critical path supply chain risk review

 

The calls for GM's Wagoner and others to resign are akin to the murmurs in the Coliseum for more Christians to be fed to lions. Satisfying spectacle perhaps, but in my experience, it induces lockdown in the already risk averse junior and middle management whose credo becomes one of hoping to be the last inept to be discovered and removed. As far as I can ascertain, the focus is on a few individuals and not the corporation.

 

Were I to fault Wagoner, it would be for three reasons:

  1. First in arrogance during the first trip to congress on 18 November. Yes, there was ample tone deafness from all the Detroit Three, but Wagoner's testimony and demeanor unfortunately became the lighting rod of animas against the domestic auto industry. That misstep alone may be enough to require his removal: "What exposes us to failure now is not our product lineup, is not our business plan, is not our employees and their willingness to work hard, is not our long-term strategy. What exposes us to failure now is the global financial crisis, which has severely restricted credit availability and reduced industry sales to the lowest per-capita level since World War II."
  2. Failure to more quickly redress an increasingly losing struggle by engineering against the increasingly winning efforts of finance to secure profit at the expense of innovation. Worse, when innovative programs such as the EV1 and the Saturn did secure initial backing and funding, they were later starved and fell behind. (One of the seven core members of Saturn told me that they escaped much of the control common at GM as the expectation was that they would fail and so most did not want to associate with them. (Saturn's success was apparently a surprise to many in the company.) Conversely, he noted that many in the company were all too glad to attach cost to the Saturn project under the guise of achieving the operational changes needed to 'support' Saturn.
  3. Failure to more quickly streamline GM’s too many brands (now some seventy models across eight brands) in the face of excess capacity, falling demand and changing tastes.

Yes, GM and the Detroit Three have made significant strides, many of which are unknown or overlooked by their critics. Yes, the new Chevrolet Malibu is a remarkable family sedan, all the more so in that it targeted the market leading Toyota Camry and Honda Accord on cost, features and quality. The distress of analysts like myself is that GM could have easily done the Bu a decade earlier. No new technology emerged in order to build it; the new Bu was a long overdue matter of will, focus and good process.

 

I have had long time GM employees tell me that hybrids, for example, had long been around GM design but that a cost decision kept them off the market. In contrast, Toyota made a marketing decision to launch hybrids even as they negated the environmental value of the cars by employing larger engines to achieve customer-satisfactory acceleration. (Also here.) Toyota buyers failed to notice this exquisite bit of bait and switch.

 

GM retirees and insiders have flagged Alex Taylor’s GM: Death of an American dream to me as a sympathetic but critically accurate picture of GM’s decline: 

Ford executives tend to be scrappers skilled at bare-knuckle office politics, while the top brass at Chrysler traffic in bravado and charisma. Not at GM. Guys like Wagoner set the tone: smart, sincere, diligent - modern-day Eagle Scouts.

 

But in working for the largest company in the industry for so long, they became comfortable, insular, self-referential, and too wedded to the status quo - traits that persist even now, when GM is on the precipice. They prefer stability over conflict, continuity over disorder, and GM's way over anybody else's. They believe that hard work will overcome adversity, and that tomorrow will be better than today - despite four decades of evidence to the contrary.

 

In many ways the story of General Motors since the 1960s is a tale of accelerating irrelevance. Customer preferences changed, competition tightened, technology made big leaps, and GM was always driving a lap behind. It became a red-state company, its Buicks and Pontiacs seldom seen in California or New York City. GM has been losing market share in the U.S. since the 1960s, destroying capital for years, and returning no share price appreciation to investors...

 

Wagoner's biggest flaw may be that he has been too forgiving. Here is a company that has lost more than $72 billion in the past four years, and yet you can count on one hand the number of executives who have been reassigned or lost their job. After spending $1 billion to shut down Oldsmobile, Wagoner has allowed GM's other weak divisions to live on despite their fading resonance in the marketplace. (A competitor says Wagoner is "too fundamentally decent" to cut off dealerships and put their employees on the street. GM says closing divisions isn't cost-effective.)

It was not the financial crisis that nicked GM; Taylor cites Carol Loomis’ 2006 The Tragedy of General Motors that already saw GM facing bankruptcy. It was the slowness in reversing too little innovation, too much capacity and too many vehicles across too many badges. Wagoner is not, as they say, a "car guy". Yes, he (re)hired Bob Lutz, and for that GM owes Wagoner a great favor, but there remains a disproportionate number of finance as opposed to design and engineering resumes at GM.

 

When longtime GM employees describe the parallel accounting organization that shadowed every operating unit, I remark that it sounds remarkably similar to the Soviet political commissars and political officers (also here) assigned to oversee and, in certain conditions, countermand military orders. In each case, I find wide agreement. Innovation and prudent risk taking have suffered in GM’s quest for profits.

 

This note is a companion piece to US auto sector must immediately perform a critical path supply chain risk review. Its purpose is to describe what I have seen as a significance resistance to change below executive level and what I would prescribe as criteria for reversing it.

 

Driving everyone with the same whip

 

Bureaucracies absorb change. They suffocate change. They perpetuate themselves at the expense of the companies that house them. Achievement of divisional and functional metrics accentuates the problem; I have seen managers knowingly make the 'wrong' decision for their companies solely because a poorly or inappropriately defined metric benefits them. As I like to say, money moderates behavior.

 

Performance and reward metrics work best when everyone shares the same metrics; in other words, everyone sees the problem in similar terms and gains a similar reward for the performance of the entire group and not their respective unit. HP chose the inclusive metric by tying each individual’s bonus to the performance of the entire firm. Such a wide metric reduces competition and withholding. Motorola at one time allowed - and may still allow - employees to pass on the fit and competence of a prospective employee. Properly formed key performance indicators (KPIs) (also here) comprised of leading indicators prompt good behavior and early detection and preemption of problems.

 

I would meld these approaches with a key modification: all fixed salaries change to base plus performance, much like the compensation for most sales forces. Yes, the risk averse would leave but there are many that would leap at the chance to join. Everyone in the firm tracks to the same metrics, assuming the same risks. Congress can mandate these and other criteria in exchange for loan guarantees.

 

I would further mandate that before congress specifies any silly or unworkable metrics on the automotive OEMs that all members, no exceptions, pass through two of W. Edwards Deming’s tests: Red Bead Experiment and Funnel Experiment:

  • The Red Bead Experiment shows all participants that managers can often tamper rather than manage their processes when they act without understanding the systems under their control. Managers see that they may make silly demands, even damaging demands, of the people in their organizations. "In less than an hour, the demonstration exposes people to some high-level concepts... It allows an environment for examining how we use data, common ways it’s misused and the pitfalls of those processes." Graduates of the Red Bean learn such insights as:
    • Typical illustration of bad management, e.g., too many employees, inspectors involved, rigid procedures bar worker suggestions for improvement.
    • System variation is found to be present in any process, operation or activity.
    • Knowledge of one source of system variation does not determine the total effect of system variation.
    • Workers perform in a system beyond their control.
    • Some workers, through no fault of their own, will be above the average while others will be below the average.
    • Workers' positions in the ranking will likely vary.
    • Workers shouldn’t be ranked as what is being measured is a "ranking of the effect of the system on the workers."
    • Only management can change the system.
  • The Funnel Experiment shows the damage that tampering can do to a process; it demonstrates that a process in control delivers maximum results if left alone. 'Adjusting' a controlled process always has the undesirable result of increased process variability. Online simulator of the Funnel Experiment here.

Immediately after congress comes automotive executive management who must take the tests and then teach them to their subordinates. One rarely manages the same way again after the red bead and the funnel.

 

Following are two examples of institutional drag that were never overcome:

 

Inability to overcome the one trick pony addiction to trucks and SUVs

 

All the Detroit Three suffer from this affliction; this is one example: By 1998, we had observed that much of the usable vehicle benchmarking data at Ford was in the hands of senior management or limited engineering groups. The working vehicle program engineer did not have a comparative benchmarking process for current model and forward model programs that captured best features, design, packaging and costing of Ford and competing vehicles. Extrapolating processes we had earlier done for Japanese badges, in early 1999 we proposed a process that sequentially dismantled and analyzed Ford and competitor vehicles by subsystem, seeking applicable costs savings without impacting functionality, quality and robustness. The pilot was set up at arm’s length so that in the event of failure only we and the participating plant would be held accountable.

 

Proving highly successful, the process was formally rolled out in both North America and Europe as the Competitive Analysis Benchmarking (CAB) process. Originally estimated to have an 18-24 month usable lifespan, the CAB process was used for more than six years until diminishing returns undermined the process. (The second half of the CAB process, the gap analysis and feature projection based on competitors’ development directions, was never implemented.) In response to the May 22, Ford's trouble: $4 gas is here to stay, I commented to colleagues:

Our question posed to many CPEs (chief program engineers) at Ford regarding the salability of large frame SUVs and trucks has come to pass: We had designed a process called Competitive Analysis Benchmarking (CAB) to put current full vehicle benchmarking data into the hands of working engineers on forward (future) models. Ford SUVs were using truck frames, in fact, both SUVs and trucks were decked (body mated to chassis) on the same assembly line. Customers were buying for the capacity, the elevated "command seat" visibility, presumed safety, and other features, even as they were beginning to complain of "truck-like steering" as they asked for passcar (passenger car) handling. (Frame-based SUVs and trucks can be "tricked-out" with suspension componentry to improve handling but at the offset of increased cost and weight and diminished gas mileage.)

 

Frequent CAB events, each involving many current competitor vehicles, were, however, began to show foreign badges incorporating SUV designs into passenger car suspension and chassis elements, i.e., producing an "SUV with car handling," better on-road performance (despite the ads, these vehicles "only went off-road when they missed the driveway"), and better mileage. As the CPE was the ultimate client of each CAB event, we took each opportunity to mention this to each CPE, recommending that Ford shift to a similar design. Each time, the CPE would explain to us the cost and lead-time required and that it was too costly to Ford. Each time, our reply was the same, "How costly will it be when you can’t sell these anymore." [email distribution]

Sisyphian exercise to overcome inertia, conflicting measureable metrics, and turf protection 

 

We were invited to attend Business Leadership Initiative (BLI) meetings for a number of Ford forward model programs in 2000. One, for what became the Ford Freestyle Crossover SUV (D219) and the Ford Five Hundred sedan (D258), gave us hope that Ford was moving beyond its one trick pony luck with trucks and SUVs. In retrospect, it demonstrated how difficult it is to affect change within large organizations.

 

Having facilitated Hoshin Kanri (Policy Deployment) (also here) interventions to create actionable corporate mission statements such that each management and operational tier knows how to make the statement actionable in their area of responsibility, measure results and apply correction, we know how hard it is to execute this class of change. Too often, the most critical message one learns from such efforts is, "The more an organization has been washed over by successive managerial 'isms,' the only 'ism' that sticks is cynicism.":

There was straightforward conversation to mixed Ford and Supplier management regarding Morgan Stanley Dean Witter (MSDW) speech by Auto analyst Steve Girsky, a few weeks ago - and whose comments knocked down the stocks of the Big Three - 'This is as good as it gets. From now on it will be more difficult for all three OEMs. Ford is making no serious effort in cars, Europe and South America. The US is a one-legged stool of North American trucks and SUVs.' They continued with the responses from Noel Tichy's BLI awareness for the International Supplier Advisory Council (some 15 supplier CEOs): 

  • Alignment and relationships are essential to success
  • Ford is worse than Chrysler in terms of teaming and relationships between OEM and supplier [Chrysler was then basking in the glow of Tom Stallkamp’s Extended Enterprise, since declined]
  • Ford is worse than Toyota in terms of program execution
  • Ford is "maybe, maybe, better" than GM - and this really hurt
  • Ford is not their #1 or #2 customer in terms of interface and relationships - thus we don't get first choice, best people, or new ideas
  • They agreed that there is a Definitive Competitive Advantage in our supplier relationships.

Mike O’Sullivan said that 'We must have this to survive.' He went on to reinforce the same message that I see coming out of Saab, Vauxhall, Rover, etc., regarding the halving of the [Tier One] ranks in the supply chain. Mike added, 'It used to be that when the OEM caught cold, the supplier caught pneumonia. Today, if either of us catches cold, both suffer an infectious disease.'

 

If the 60s were Safety, the 70s were Fuel Economy, the 80s were Quality, then the 90s may go down as Affordability. The OEM that wins will have the best Affordability. Having seen the targets for these programs, this affordability is tough love for many supplier folks, but it is long overdue. Remember that great line - The only people that don't think cars cost too much are those people that make them.

 

They spoke of joint design/total cost teams where even if suppliers build supplier owned tooling, that Ford had an obligation to help them become efficient, and that serious attention must be paid to extending this effect to T2s. Is this really the early stirrings of an Extended Enterprise... [It was not to be.]

 

[It was refreshing to hear] the CPE, Trevor Rudderham, discuss Program Attribute Targets, and 'Who is the Taurus customer?' by noting that we turned a corner by training senior management and senior program management to ask, "What would Kathy and Lewis want in their Taurus?" and not, "What do we want?" If this company can break the habit of Voice of Engineering replacing Voice of Customer, it will be a banner day for Ford and its customers.

 

I head the whole Happy Land discussion (from Larry Sullivan's analysis of characteristics of successful and unsuccessful firms) tracking average revenue growth and return on sales: The only Ford vehicles that fall into Happy Land quartile are trucks and SUVs. The only marginally profitable car line, although not in that quartile, is the Panther CV/GM. Most of Ford's vehicles cluster in the worst quartile.

 

I loved [Jacques Nasser's] film clip in which he says that, We are earning a failing grade in terms of almost any criteria. Failing in terms of resource allocation, in terms of creativity, in knowing the market and our customer, and in knowing the capital market. We are spending 9 billion dollars to feed sick cats and we work like dogs when we do it. We have an incredible attachment to "bad business." ... I could have waited beyond the first few months of assuming my current position, but I moved against lines that were hemorrhaging money. The capital market said, "About time!" The customers couldn't care less - those vehicles had low customer satisfaction to begin with (such as Thunderbird, Cougar, Mark VIII). Dealers said, "We were losing money, too." Suppliers didn't like slow-moving lines that shut down and started up (intermittent).

Business Week's cover story showed little improvement to Ford a year on. Girsky painted a demanding picture of the Big Three in November 2003 that was largely unchanged a year later. Some snippets from 2003:

Auto Outlook: It’s not how many cars you sell, it’s how much money you make

  • Global Dilemma: Most participants spending for growth yet the industry does not grow.
  • North America; Economic & Demographic factors suggest auto sales may be bottoming, but the recovery is likely to be modest.
  • Big Three profit recovery is likely to lag

Excess Capacity at 25%-30% or 20mm units

Conclusion: Zero Sum Game

  • Slow growth and excess capacity suggest deflation/revenue pressures likely to continue.
  • Everybody can’t be a winner.
  • Winners will be low cost producers who deliver a good product that consumers are willing to pay for.

Price Reductions Pressure Manufacturers

  • Every 1% Decline in Prices is Worth
    • $1.0bn at GM
    • $850mm at Ford
    • $550mm at DCX 

Excess Capacity & More Is On The Way

Every 1% Pt. of Market Share Translates into $1.0bn in Profits

1.1mm Units of Added Capacity is 6.3% of NA Capacity, or $6bn in Pretax Profits

 

The Big Three

Each Company Faces Unique Challenges

Foreign OEMs are likely to continue to add capacity in NA. Imports are likely to rise.

On the bright side, the Big Three product is the best its ever been.

 

Supplier Update

  • Supplier stocks have rallied YTD despite:
    • Lower volume
    • Challenging pricing environment
    • Lower margins
  • Investors have focused on the prospects for an economic recovery in 2004.
  • While the economy is likely to recover, suppliers face several challenges including:
    • Tough pricing
    • Declining operating margins
    • Declining ROIC
    • Higher spending to support current/new business
    • Threat of competition from emerging markets.

Girsky's 2004 presentation adds (both are worth reading):

  • Detroit Three dogged by revenue disadvantage in Actual vs. Perceived Quality by Brand
  • Detroit Three market share slides continue
  • Ford remains a "one product company"
  • Toyota’s Asset Turns vs. Operating Margin are stunning in comparison to GM, Ford and DCX.

The bibliography of this note contains ample evidence of slow action or insufficient action in the face of competitive pressure by all of the Detroit Three. Problems described two decades remain with the industry today. I maintain that economic crisis did not get the Detroit Three; it merely caught them in the middle of a very slow turn.

 

[Revised 14 December, 2008]

 

G.M.'s Lutz: Wagoner Is Being Made a 'Sacrificial Lamb'

From Micheline Maynard, a DealBook colleague

Deal Book

December 8, 2008, 11:32 am

 

Dodd Says GM Chief Should Step Down

By Lori Montgomery

Washington Post

December 7, 2008; 2:50 PM

 

At G.M., Innovation Sacrificed to Profits

By MICHELINE MAYNARD

New York Times

December 6, 2008

 

Democrats Set to Offer Loans for Carmakers

By DAVID M. HERSZENHORN and BILL VLASIC

New York Times

December 6, 2008

 

Chrysler's Friends in High Places

By LOUISE STORY

New York Times

December 6, 2008

 

7 myths about Detroit automakers

BY MARK PHELAN

Detroit Free Press

December 5, 2008

 

Get Back in Your Jets and Go Away

by Rich Galen

Townhall.com

December 05, 2008

 

Big 3 car executives agree to take orders from Washington

Senators skeptical but open to $34 billion auto bailout

By Rex Nutting

MarketWatch

Last update: 3:37 p.m. EST Dec. 4, 2008

 

U.A.W. To Modify Contracts in Bid to Help Detroit

By BILL VLASIC

New York Times

December 4, 2008

 

Pursuing U.S. Aid, G.M. Accepts Need for Drastic Cuts

By BILL VLASIC and DAVID M. HERSZENHORN

New York Times

December 3, 2008

 

Lead Director Pins G.M.’s Hopes on Federal Rescue

By BILL VLASIC

New York Times

December 3, 2008

 

GM: Death of an American dream

General Motors was the Great American Company. But by clinging to the attributes that made it an icon, GM drove itself to ruin.

By Alex Taylor III, senior editor

Fortune

VOL. 158, NO. 11 - December 08, 2008

Last Updated: November 25, 2008: 4:32 PM ET

 

Big 3 plead for aid, get no traction

By Jim Puzzanghera and Richard Simon

LA Times

November 19, 2008

 

Text: GM CEO's prepared remarks to Congress

Detroit News

November 18, 2008

 

An Open Letter to Thomas L. Friedman

Steven J. Harris

GM Vice President, Global Communications

GM FastLane Blog

November 18, 2008

 

UAW forms an army to get its piece of GM merger

by Douglas McIntyre

BloggingStocks

Posted Nov 3, 2008 8:30AM

 

Debt Rattle, November 3 2008: Y O'Bama

The Automatic Earth/Silobreaker

11/03/2008

 

PE exec to help UAW on potential GM/Chrysler deal: source

By Megan Davies

Reuters

Mon Nov 3, 2008 4:52am EST

 

Hoshin Kanri

The Strategic Approach to Continuous Improvement

Chapter 1

David Hutchins

Gower

ISBN 978-0-566-08740-0

September 2008

 

Ford's trouble: $4 gas is here to stay

Gas prices are causing consumers to shun pickups and SUVs, leading to losses at the car maker's North American auto unit.

By Chris Isidore

CNNMoney.com

First Published: May 22, 2008: 9:49 AM EDT

Last Updated: May 22, 2008: 2:23 PM EDT

 

Comparison Test: 2008 Four-Cylinder Family Sedans

Revitalized Malibu Takes on Accord and Camry

By Erin Riches, Senior Editor

Edmunds

Date posted: 01-01-2008

 

New 2008 Toyota Camry Hybrid Performance Review

US News Rankings & Reviews

 

Chrysler Suicide Watch 14: Tom LaSorda: From Zero to Hero and Back

By Frank Williams

The Truth About Cars

May 8, 2007

 

The Tragedy of General Motors

The Detroit giant is a weird, scarred combination: a carmaker doing poorly, and an insurance company engulfed by its obligations. It's heading for a wreck -- which is why CEO Rick Wagoner has the toughest job in business.

By Carol Loomis

Fortune Magazine

February 6, 2006: 12:09 PM EST

From the February 20, 2006 issue

 

Hybrid Cars Burning Gas in the Drive for Power

By MATTHEW L. WALD

New York Times

Published: July 17, 2005

 

G.M.'s Brands to Cut Back on Variety

By DANNY HAKIM

New York Times

May 20, 2005

 

Tough Times at U.S. Makers of Auto Parts

"Unemployment prevails at U.S. Makers of Auto Parts."

December 28, 2004 (Press Release) -- By DANNY HAKIM and JEREMY W. PETERS

Published: December 24, 2004

 

Can GM Be Saved?

Stocks by Will Swarts

Smart Money

Published March 23, 2005

 

Review and Preview

Ted Wieseman/David Greenlaw (New York)

Morgan Stanley

Jan 10, 2005

 

Auto Parts & Auto Dealers: Follow the Food Chain

Presentation to the OESA

Stephen Girsky 914 225-4811

Morgan Stanley Autos Team

November 9, 2004

 

Changing Dynamics of the Automotive Industry

J.D. Power III

J.D. Power and Associates

AICPA National Auto Dealers Conference

Las Vegas, Nevada

October 22, 2004

 

Bill's Brand New Ford

It was panic stations at the start, but Bill Ford never doubted he had the right stuff to revive his great- granddaddy's car company. Now he has to prove that his controversial strategy will keep Ford in business for another 100 years.

By Alex Taylor III

FORTUNE Magazine

June 28, 2004

 

Is Ford Back in Top Gear? The stock price says yes. But the automaker still has a long way to go before it can regain its old strength

By Cybele Weisser

MONEY Magazine

March 1, 2004

 

Ford Automotive Strategy Conference

Original Equipment Suppliers Association

Stephen J. Girsky

November 2003

 

Noel M. Tichy: The Thought Leader Interview

By Randall Rothenberg

Strategy + Business

Spring 2003

 

The Chrysler Extended Enterprise System

Allpar.com

 

Is Wall Street Losing Its Clout?

Kevin Kelly

Ward's AutoWorld, Jan 1, 2002 12:00 PM

 

Ford: Why It's Worse Than You Think

Quality, morale, and market share are down. Can Jacques Nasser get this company out of reverse?

By Joann Muller

Business Week

JUNE 25, 2001

 

Grassroots Leadership - Ford Motor Co.

"We want people at all levels who will take risks and who can make decisions."

By: Keith H. Hammonds

Fast Company

Issue 33, March 2000

 

Building the Teaching Organization

by Noel Tichy, Ph.D. and Patricia Ricci

Innovative Leader Volume 8, Number 9

September 1999

 

Chrysler's "Extended Enterprise" Philosophy and Supplier Relations

Supplier Relationships Key to Computer Program Generation And Analysis (C.P.G.A.) Development, Reports Chrysler

Auto Channel

11 May 1998

 

Hoshin Kanri: Policy Deployment for Successful TQM

Yoji Akao, editor

Productivity Press

ISBN 0915299577

1991

 

Political commissar

Nation Master

Source: The Soviet Military Encyclopedia

 

Party Control in the Armed Forces

Soviet Union – a country study

Data as of May 1989

 

Gordon Housworth



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