Reborn in Dearborn Imagine the scene: Alan Mulally took over as Ford's CEO in September 2006 and organised a meeting of senior executives. 'How are things going?' he asked. 'Just fine', was the reply. 'But we are forecasting a loss of $17 billion, and you say there are no problems!' exclaimed Mr Mulally. The combination of parlous finances and complacent executives meant that Mr Mulally was facing a rather difficult task if he was going to fix things at Ford. In 2010, just four years later, Ford was making record profits and the old managerial mindset was a thing of the past. Not only were profits up but the capital structure was greatly improved: the debt of $33 billion was cut by $13 billion in 2009 thus lowering interest cost by $1 billion. Mr Mulally achieved this the hard way, unlike Chrysler and General Motors who went bankrupt and were able to restructure under bankruptcy protection. His resolve was hardened by the prospect of being summoned to Washington with the bosses of the other big three - Chrysler and General Motors - to be publicly humiliated. How did he do it?

Some history Ford's troubles went back a long way. When Jac Nasser was appointed CEO in 1998, Ford was making a profit of $7 billion, but by 2001 this had turned into a loss of $5 billion. Mr Nasser formed the Premier Automotive Group (PAG) by combining the Lincoln and Mercury brands, the British Jaguar (bought in 1989), Aston Martin (acquired in 1994), Land Rover (bought from BMW in 2000) and Sweden's Volvo (bought in

1999). The idea was that a wider product range would stabilise earnings given the volatility of the mass- produced lines. PAG was intended to generate one-third of global profits, but this did not materialise and PAG

came to be regarded as a diversion from Ford's core business of mass production. Mr Nasser was fired in 2001 and William Clay Ford, great grandson of Henry Ford, took over as CEO. Mr Ford initiated a 'back to basics' plan to return Ford to being a mass producer. But several factors stymied this move. First, Ford had always stood for quality, but European and Asian cars were demonstrably more reliable, which had a huge impact on sales. For example, the Ford Taurus was once the best-selling car in the US and by 2000 was mainly a rental vehicle. Second, Ford, like GM and Chrysler, had been making huge profits from sports utility vehicles (SUVs) partly because foreign producers were subject to import duties; but they started to produce from their own factories in the US. Third, the rising oil price and 'green' awareness led to a significant drop in demand for SUVs. The net effect was that Ford had excess capacity.

Graduate School of Business Examinations

3

Mr Ford decided to cut capacity rather than offer discounts to maintain market share, but this ran into problems because senior executives could not agree on where cuts should be made, and union opposition slowed things down. By 2006 Mr Ford decided to restructure by raising bank loans secured against the company's assets but by this time Ford, and GM and Chrysler, lacked credibility because of the frequency of failed 'turnrounds'; he began therefore, to search for his own replacement and looked outside the motor industry. Alan Mulally had been in charge of Boeing's commercial aircraft division and had dealt with the slump in air travel after September 2001, the SARS scare and the Iraq war; but he was passed over as CEO in 2005.

What Mr Mulally did first Mr Mulally credits his success to some key decisions. He decided to concentrate on the Ford brand and sell off the PAG businesses, even if it meant taking a loss. There were two issues involved. First, Mr Mulally pointed out that the demands on top management of running disparate businesses like Jaguar, Aston Martin, Land Rover and Volvo were impossible to handle effectively. Second, whatever had been paid for these businesses was in the past and had no bearing on the future. Ford's designers had to cope with 97 different models; he decided that there would be a much narrower range of cars, and all would carry the blue oval logo in all segments of the market. Mr Mulally raised the concept of quality. Instead of trying to be 'competitive' with other brands, the emphasis was changed to being 'best in class'. This was achieved, for example, by 2010 when the Focus and Galaxy were almost class leaders in Europe. Further, according to the J D Power Vehicle Dependability Study 2010, the Ford brand was eighth in the world. When Mr Mulally arrived, he saw that Ford was run like a collection of principalities rather than a global business and he set about demolishing these management divisions. Executive rivalry was largely replaced by collaboration and cooperation and Mr Mulally feels that this was the most important precondition for turning Ford around.

How things worked out It was important to ensure that regional successes, such as the Focus and Galaxy, could become global successes. This had been tried before in the Ford 2000 initiative, but it turned out that so many changes were made to the 'world car' that only two parts remained the same in the versions sold in America and Europe. According to Mark Fields, the boss of the Americas businesses, this was because decisions that were meant to be global were actually taken in Dearborn. Under Mr Mulally, eight out of the ten Ford platforms were

Graduate School of Business Examinations

4

made global. This has the advantage that Ford can build different models on top of the platforms which take into account different regional preferences and regulations. Thus, the small car Fiesta platform will be used for 1.4 million units, so that although they may look different about two-thirds of their parts will be shared; the larger Focus platform will support production of 2 million units with four-fifths common parts. It needs to be borne in mind, however, that Toyota, Honda, and VW had been doing this for many years. Mr Mulally pursued with a vengeance the restructuring required to match demand and supply. By 2010 he had cut the shop floor work force by 50%, office staff by 30% and closed 17 factories, including parts' makers. This resulted in a reduction in the US work force from 128,000 to 75,000. This has cut annual operating costs by $14 billion so that Ford can compete with Japanese transplant factories. In addition, the platform strategy means that production can be shifted from one version to another as popularity changes. The number of dealers was cut by 20% to simplify distribution channels. Technological advances, such as computer virtual design, have helped to reduce the time required to bring new models to market. Ford's design engineers now work in parallel with production engineers so that problems can be identified at an early stage; of course, this has also been implemented by GM and Chrysler and has been implemented by Japanese car makers for many years. Between 2005 and 2010, Ford completely renewed its range and was reckoned to have the freshest fleet in the industry; but it will have to keep moving merely to keep pace with competitors. The 'tough road' of avoiding bankruptcy could have been to Ford's advantage in that it has boosted Ford's image, and Jim Farley, head of Ford marketing, reckons it has been worth $1 billion in favourable publicity and has attracted many appreciative Americans into Ford showrooms.

What of the future? By 2010 carmakers claimed to be focusing on market growth rather than market share. The peak US market was 17 million cars and by 2010 it was 12 million, so there was plenty of scope for increasing sales as the market recovered. Ford's US market share was 17% but it was facing increasing competition from Toyota, as it recovered from the public relations disasters arising from its handling of quality problems in the Prius range (and other models), and South Korean companies Kia and Hyundai whose sales were increasing by about 20% per year. China was the next big foreign market, but GM had established a market of 2 million cars against Ford's 0.5

million. Mr Mulally reckoned that Ford would be able to carve a significant market share out of the fast- growing China market without too much trouble. Some observers feel that this is wishful thinking.

Graduate School of Business Examinations

5

Ford was actually starting to make a loss in Europe by the end of 2010 because the big producers such as Renault, Peugeot and VW had not reduced capacity and many cars are being sold at below cost. So, given that the growing markets are China, India and Brazil, Mr Mulally is going to have to look further afield for profitable markets.

Did Mr Mulally really provide the basis for Ford's long-term success? Use the Strategic Process to frame your answer.