Reinventing the Automakers

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It’s refreshing to hear President Obama talk about the need for the American automakers to reinvent themselves to become more competitive. Politicians, business leaders, writers and newscasters continue to talk about the need for General Motors and Chrysler to fundamentally change in order to survive. My concern from what I have seen so far, however, is the idea that “getting smaller” is considered fundamental change.

If we look at the dictionary, the term fundamental is defined as, “serving as, or being an essential part of, a foundation or basis.” Following this definition, selling off divisions, laying off workers, closing plants, and shedding dealers does not constitute fundamental change. They are ways to cut costs, and may be necessary because of decisions made and actions taken in the past, but it has nothing to do with changing the philosophy and basic approach to business.

In my opinion, fundamental change for American automakers begins with getting back to the basics by clarifying and communicating the purpose of these companies. At one time, the Big 3 had very clear missions that involved offering safe transportation that provided value for their customers. Somewhere along the way they forgot about this and got the idea that their purpose was financial – e.g., related to profit or earnings for shareholders. When this happens in any business, decisions become much more focused on the short-term and the company’s overall health begins to break down.

Valuing Employees

Another area requiring fundamental change is the relationship between management and workers. There have been problems for years between the union and management, and it appears that the problems are still not being addressed. Unions don’t trust the intentions of management and the situation needs to be addressed immediately. And recent conversations with the union have been completely focused on concessions, with little or no discussion about improving the relationship.

If the relationship is to improve, the union needs to be involved in planning at the highest level and management needs to improve its communication with the workers throughout the company. This may work itself out because of the large stake unions are taking in the companies, but it can’t be assumed – it must be acted upon quickly.


Supplier Relationships

Another relationship that has been severely strained over the years is the one between the automakers and their suppliers. Surveys of tier 1 suppliers have shown a very small percentage of them feel they have a “good” or “very good” relationship with the Detroit 3. These surveys also show that suppliers feel that the automakers have little or no concern in the success of their supply chain. Lengthened payment terms and continual pressure to reduce prices has left many suppliers on the verge of bankruptcy and forced others into other industries because they just could not afford to continue to do business with the U.S. automobile manufacturers.

From a business perspective, it is crazy for any company to disrespect its suppliers. Unfortunately, large organizations in the U.S. and Europe have somehow come to believe that pressuring suppliers and shifting business around to keep prices down is good practice. Suppliers are a part of a company’s overall system – they just happen to be external to the organization. The effect they have on the quality, cost and delivery of the company’s products are just as important as employees inside the company. In this way, it would seem crazy to pressure employees to reduce their pay, increase the time between paychecks, and continually look for new workers in order to reduce pay by getting people to compete with each other for existing jobs. This is exactly how suppliers are treated.

Any supplier relationship must be based on mutual success. Analyzing suppliers must be done on the total cost of doing business with them; not just price and payment terms. In this way, all costs must be included – including inspection costs, inventory costs (due to defects, late deliveries and leadtimes), defects, design support, and extra labor due to variation in incoming products, in addition to price and payment terms. Unfortunately, price and payment terms seem to be the only components measured.

Better Cars

Whatever the change looks like for the U.S. automakers, it absolutely has to include offering better cars. The latest J.D. Power survey results regarding initial quality have been released and American cars are the noticeable minorities on the list. With all the publicity surrounding the improved quality of American cars, the survey results show that, unfortunately, they still lag behind those from Japan, South Korea, and Germany. This has got to change.

The processes for designing and building cars requires overhaul to give U.S. producers a better chance against foreign competitors. Anyone who has read, The Toyota Way by Jeffrey Liker has to wonder what it must be like to compete against a company like Toyota. Their methods are so different from traditional Western manufacturers, that it’s difficult to know where to start. What is important, though, is that the Detroit 3 actually “start.” They have got to start doing things differently and not believe that survival will come from cutting back.

Will it Work?

I know that something had to be done to keep the Detroit automakers afloat during the recession. Letting GM or Chrysler close down at this time would be devastating to the unemployment rate, the economy, the automotive supply chain, and the auto industry, in general. What I can’t help but wonder, though, is that giving GM and Chrysler billions is just delaying the inevitable and they are going to disappear anyway. The fundamental change that is needed to stave off closure just doesn’t seem to be happening . . . or happening quickly enough.

I hope I am wrong.

Managing Costs Instead of Managing the Business

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If there is one thing certain as a result of recent events, it is that the world of business is going to change. After a fairly long period of economic growth, companies are finding themselves in the midst of shrinking markets, increasing costs, falling profits, and a highly competitive environment. The choice for a company during these times is either to be defensive by implementing cost cutting measures, laying off employees, and shrinking in size, or go on the offensive and use the slowdown to attack problems and become more focused on innovation and improvement of products, processes, and services.

An offensive strategy is actually nothing new to business. Companies like Toyota, Samsung, Honda, Apple, and Nucor Steel have used innovation and improvement for years as a way to strengthen their abilities to compete. For a variety of reasons though, most other companies have had little success with these philosophies or rejected them altogether. Over the last few decades, American business leaders have increasingly taken the easy route and implemented cost cutting moves to deal with economic challenges; announcing the layoffs as if there was no other alternative. And recent actions have shown that the response to the current recession is magnified, but no different.

One of the biggest problems with a defensive approach is, when the recovery does begin to occur, the companies that have ‘cut to the bone’ will not be able to quickly respond to the growth. When they do finally catch up with the increased level of business, they will do so with the same level of inefficiency and waste that they have in the past. Those organizations that go on the offensive, however, will be in a much better position to take advantage of the recovery to profit and grow quickly.

As an example, the U.S. automakers have been shedding massive amounts of workers in an effort to show Congress that they are managing their costs. Unfortunately, by losing tens of thousands of workers, they are also losing the experience and knowledge that the people have in these companies’ processes and how to improve them. Those who manage to keep their jobs will likely not have the time (or the enthusiasm) to work on improving operations. It is amazing that Congress has no problem giving taxpayer money to companies that manage costs instead of managing their businesses. Rewarding organizations to layoff workers only increases the number of people who will cut back on spending, thereby increasing the length and severity of the recession. If anything, bailout money should go to those companies that choose to not lay off their workers.

One of the positives that could result from the auto bailout, however, is that the Detroit 3 may be forced to reduce the current level of outsourcing work to low cost countries and bring jobs back to the U.S. If this does happen, they will have no choice but to find ways to innovate and improve in order to compete with foreign automakers.

The Difference Between Talking and Doing

Knowing that innovation and improvement are necessary for survival and actually doing them well, however, are two different things. Continual improvement and innovation require more than training people in the latest methods and then telling them to go innovate and improve. Most organizations require a drastic cultural shift in order to enable improvement to take hold and become a part of the way the company operates.

There are unfortunately very few people in business who truly understand that lean manufacturing and kaizen are business philosophies rather than sets of tools to reduce waste. Managers read about the success of the Toyota Production System and rush to copy the tools instead of looking deeper at the company to comprehend how the system was developed and why it works.

It’s In The Culture

Changing a company’s culture is a complicated process because of the psychological and sociological issues – both of which are rarely taught in any depth in business schools. When you startup a company and are the only employee, culture is not an issue. As soon as you add one person, though, the culture gets more complex and the complexity grows exponentially as more people are added.

So how can an organization’s leader change the culture to make it more likely to succeed with improvement initiatives? In effect, we need to rewire western organizations in order to continually identify and remove the barriers to improvement. And, just like changing a personal habit, once a barrier is removed, it must continue to be watched to make sure it stays removed.

There is an organized way to approach the cultural aspects of improvement. The key is for the leader to be serious about the need for improvement, and understand that it will require work on the indirect or softer issues in an organization. A leader who writes off psychology and/or sociology as too theoretical and not practical has little chance of implementing a change initiative of this magnitude.

The Necessary Elements

The elements that are necessary for initiatives like lean, six sigma, or kaizen to be successful in achieving sustained levels of improvement are listed below. Assuring that these components exist within the organization requires constant effort to prevent returning to old patterns and behaviors. You must continually strengthen and develop the elements until they get to the point where they build on themselves.

None of these elements are new to the world of business. They have been written about in one way or another for many years. Unfortunately, many leaders both don’t believe in their importance or find them to be too much work and abandoned or ignore them. It is common to write these issues off as too theoretical because they are not easy to manage. In reality, however, those companies that have been successful with improvement and innovation have spent considerable effort to align their cultures with their visions, thereby setting up the organization to succeed.

In no particular order, the items that require continual reflection and focus include the following:

• Clear Purpose An understanding of why the organization exists and what its future holds;

• Consistent Values A clear understanding of the team DNA and screening new hires to assure they share the same values;

• Enthusiasm for improvement People within the organization need to be obsessed with improvement and possess the humility to realize that there is always a better way of doing things;

• Openness A culture where people feel comfortable telling management when decisions and actions conflict with the purpose and/or values;

• Trust Workers must trust that nobody will lose their job as a result of the improvements made. Also, management must trust in the knowledge, experience and intelligence of workers;

• Focus on People/Processes/Customers More attention must be given to people, customers and processes than spreadsheets and financial reports;

• Training & Development of People and Teams Training and developing of team members must be a high priority within the organization. Leaders need to be developed from inside the company rather than hiring in from the outside;

• Pride Throughout the Organization People must be proud to be associated with the company and truly care about its success;

• Understanding Internal Customers/Suppliers Everyone must clearly understand their role in the company, including whom they serve and what these people need. Whatever the company provides its customers defines its main processes (whether it is a product or service). Anyone who is not directly involved in a main process is in a support role and his or her purpose is to serve those who are directly involved;

• Walking the Talk Improvement initiatives require attention, commitment, and involvement of executive managers;

• Aligned Measurement & Reward Systems Reward systems must support improvement initiatives. This requires rewarding teams instead of individuals, and tying promotions to success, enthusiasm and commitment to improvement and change initiatives;

• Proper Organizational Alignment The process focus required for improvement initiatives is difficult to achieve within a traditional functional organizational structure;

• Clear Objectives Without close alignment to organizational objectives,
  improvement projects will be fragmented and have very little chance of succeeding;

• Patience Changing culture takes time. People tend to want change to happen rather quickly, but in most organizations, it just doesn’t happen,

People tend to be much more open to change during a recession than at any other time. The willingness to try new things and not be looked at as standing in the way of change increases dramatically when people are worried about their jobs and the jobs of their coworkers. In other words, if you are a leader and ready to implement lean manufacturing, kaizen, or any type of improvement initiative, your chances of success may never be higher.

U.S. Financial System in a Death Spiral

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Our financial system along with our stock markets are collapsing. There also is currently no plan to get us past this crisis. Why, then do I feel better than I have in years about our future? After years of disappointment about the lack of the Government’s unaccountability to the American people, the failure of the $700 billion bailout actually gave me hope that we can force our representatives to vote against a bill that is not in OUR best interest – even with the pressure from the administration to pass it.

Instead of writing about the details of the $700+ billion bailout, I thought I would just list the 2007 compensation of the executives associated with the companies involved in the collapse. As you look at the table, keep in mind that these people took home millions of dollars while the rest of us are left to clean up the messes they left behind.

COMPANY	TOP EXECUTIVE	2007 COMPENSATION
FNMA (Fannie Mae)	Daniel Mudd	$ 12.2 million
FHLMC (Freddie Mac)	Richard Syron	$ 19.8 million
Lehman Bros	Richard Fuld	$ 22.1 million
Morgan Stanley	John Mack	$ 41.7 million
AIG	Martin Sullivan	$ 13.9 million
Goldman Sachs	Lloyd Blankfein	$ 68.5 million
Merrill Lynch	John Thain	$ 83.1 million
Merrill Lynch	Stanley O’Neal	$161 million
Washington Mutual	Kerry Killinger	$ 14.4 million

I think it’s important that these guys (along with the Board members of the institutions they destroyed) go down in history as the group that led to the collapse of the United States financial system (along with the economy, in general). We may never recover from the effects of their greed and self-centered actions. But, as is typical in these types of situations, they will attempt to retire rich and comfortably while millions of Americans struggle to keep or find jobs, make mortgage payments, and watch their investments continue to shrink.

Another Failure of Leadership

The executives listed above failed in their absolute number one priority of leadership: to improve the long-term health of the organizations they lead. I understand that this is not necessarily in line with the traditional American system of management, but it is absolutely necessary for the survival of our businesses and way of life. The greed that has developed in the board rooms and executive offices in U.S. companies has got to be stopped or the economic decline that began 30 years ago – and has grown to become a full-fledged crisis in recent months – will continue to send us into a death spiral. Although I’m actually happy that the people are forcing Congress and the President to develop a plan that will result in a true fix to the financial system – instead of another band-aid on an arterial wound – I am afraid about the fall-out in terms of jobs over the next several weeks. When American companies need to shed large costs quickly, they fire people. I can only hope that we don’t get that that stage in this crisis.

Leaders in U.S. companies need to start paying attention to their fundamental responsibility to the organization and the people they lead. There are top executives who do not display the level of greed exemplified by the gang that destroyed the country. Executives at companies like Toyota, Honda, Nucor Steel, and Hillerich & Bradsby (makers of the Louisville Slugger baseball bats) have shown over the years that a focus on the long-term health of the organization instead of their own bank accounts leads to sustained positive results and financial success for everybody.

Rewarding Greed

I recently got into a discussion with the Chairman of the Board of a $400 million U.S. company on the subject of executive bonuses. He was adamant that executives need to be rewarded on results and nothing else because it removes subjectivity in bonus calculations. Well, this looks like a sensible concept on paper, but as current events have shown, it is not in the best interest of the organization.

I have been saying for years how destructive traditional executive compensation plans are to business and the investment firms involved in the crisis have proved me correct. Rewarding executives on “results” turns them into short-term, greedy tyrants. I have personally witnessed personalities of managers change when they are given targets that are tied to monetary rewards. Remember Maslow, Kohn and Hertzberg? These guys have hundreds of articles and papers that discuss the link between intrinsic and extrinsic rewards and the type of behavior associated with each (possibly a future blog entry, but not enough time to get into it here).

First of all, rewards need to be given based on areas that strengthen the long-term health of the organization. Things like lowering employee turnover, training hours, quality levels, customer satisfaction, and even supplier satisfaction will lead to behavior that strengthens the organization. Secondly, executive bonuses need to be capped – an executive must never receive grossly high compensation while others in the organization are not rewarded (or rewarded at token levels). Bonuses should also not drain the organization of capital that can be used for future downturns or improvements like employee development, new products, new technologies, etc.

The most important thing to remember, though, is to appoint, hire, or promote people who have the proper values and understand that the job of a leader is to serve those he or she leads. This is critical to strengthening the organization and making it able to withstand downturns.

So as we go forward (and I’m assuming we will move forward), I appeal to the U.S. Government to take whatever time is necessary to truly fix the problems that exist today. Do not worry about re-election and today’s stock market and PLEASE do not let Sarbanes or Oxley get involved.