Energizing the Corporation
People have the capacity to stand by nonchalantly witnessing a miracle, then walk away as if nothing unusual had ever happened, taking the incredible for granted. That has been the typical response of managers to Chrysler's dramatic recovery. Everyone knows about it, appreciates it, and admires it, but how many really understand how it happened? Much attention has been given to Lee Iacocca's sudden rise to fame, the government loan guarantees and their early repayment, the success of the K-car and the minivan. But these are only the external trappings and results of a process that should be of intimate concern to all managers—the process by which corporations are energized and launched on the road to enduring corporate success. The facts surrounding Chrysler's remarkable achievement are known, but the process itself remains shrouded in a veil of obscurity and confusion.
Of course, Chrysler's miracle is not the first or only one to occur in the American automotive industry. Sloan performed an equal or greater miracle at GM in 1920, when it was on the verge of succumbing to a crisis precipitated by the postwar recession. Sloan created a new, decentralized organizational structure at GM and performed magic in the marketplace. During the eight years from 1921 to 1928, the company's unit sales volume grew more than eightfold, and its market share increased from under 15 percent to over 45 percent. From then on GM has never looked back.
Ford Motor Company performed an equally dramatic miracle after the Second World War, when Henry Ford II took over control of the ailing company, which had lost two-thirds of its market share over the previous 20 years and found its very survival in question. Within lO years Ford recovered its No. 2 position in the industry and was transformed into a major growth company.
These three miracles are all expressions of a single process, a process that governs the growth and development of every company, regardless of its size—the process by which corporations are energized and evolve. How is it that these companies, which were on the verge of extinction, were able to recover so rapidly and grow so dramatically after coming so close to collapse? Where did the energy come from to fuel their recovery? What was the mechanism they employed to convert a life-threatening problem into an opportunity for growth? In another year or two, Chrysler's accomplishment will become a part of history. While it is still fresh in our minds, it is worthwhile learning all the lessons it has to teach us.
A sudden fall in market demand had a devastating effect on the company, which was already plagued by poor-quality products and poor management. Manufacturing cars without dealer orders and in spite of the plummeting sales, the company accumulated enormous inventories of poor-quality cars on its lots. The company tried unsuccessfully to force the dealers to buy the unwanted stocks. Concerned bankers pressed for reform.
A new president was appointed. He cut the price on the unsold cars to clear the inventory, drafted outside talents to upgrade quality and improve design, persuaded creditors to wait and bankers to lend the company more money. Within five years all the outstanding debts were repaid, nine years before their due date. one journal called this remarkable recovery "the biggest reclamation project the automobile industry has witnessed and practically the christening of a new business."1 The new president was Walter Chrysler. The year was 1925.
Everyone knows the story of Chrysler under Lee Iacocca, when te company struggled for its survival between 1979 and 1984. But few people are aware of how this story mirrors the saga of Chrysler under its founder, Walter P. Chrysler, when the company struggled to be born between 1920 and 1925. These were the "auspicious" circumstances under which the corporation assumed its present name but inherited a past that it is still unable to shake off, even after 60 years.
The crisis in 1920 and the crisis in 1980 are remarkably similar. In some essential way, Chrysler remains the same after 60 years of alternating growth and decay. The same corporate character and personality still preside over its destiny.
Crisis is a natural, though not an inevitable, part of growth. In Chrysler's case it was a birth sign and a ruling planet. The United States Motor Company, of which Chrysler is the ultimate descendant, was constituted in 1910, bringing together a number of independent car manufacturers, wistfully described as "a collection of pronounced failures."2 The new conglomerate did not fare any better than its several parents. Two years later it declared bankruptcy. Soon afterward it re-emerged under the name Maxwell Motors, prospered briefly during the boom that followed World War I, and then collapsed along with the market in 1920.
When Walter Chrysler was called in by the bankers to save the company, there were 26,000 unsold cars crowding company lots and freight yards. When Iacocca joined the company, there were around 80,000 unsold cars in what the company euphemistically called its "sales bank," and the figure soon passed 100,000. Walter Chrysler instituted a policy of building cars only against firm orders from dealers, a system Iacocca had to reintroduce 60 years later. In 1920 the company had $33 million in debt obligations. Chrysler persuaded the bankers to lend it another $15 million. The company recovered so rapidly that all the debts were liquidated by January 1925, nine years ahead of schedule. A few months later Maxwell Motors was taken over by the newly christened Chrysler Motors Corporation, and the company was launched on a period of rapid growth that saw it reach the position of the nation's second largest automaker, a position it held until 1953.
In the 1980s the debt was much bigger and the government was directly involved in saving the company, but here, too, the recovery was incredibly swift and the loan guarantees were retired seven years before they were due. Once again there was talk of a new Chrysler Corporation; although the name did not change this time, there was a widespread conviction that the nature of the company had somehow changed. However, the remarkable Chrysler Corporation was and still remains somewhat of a mystery.
The Leaning Tower
The origin of all Chrysler's problems through the decades was an imbalance in the constitution of the company resulting from the conditions of its birth and the personality of its founder. Unlike most leaders of large business in his day, Walter Chrysler rose from the ranks of manual labor. After graduating from high school, he declined an opportunity for a college education and went to work in a grocery store. How apropos was Iacocca's remark that Chrysler was still being run in 1978 "like a small grocery store"!3
Walter Chrysler became an apprentice machinist on the railways, then a mechanic, and eventually a superintendent. When he joined Buick as works manager in 1912, he brought to his new job his experience with large-scale metalworking for utilitarian purposes and introduced improved processes and greater efficiencies into the nascent auto industry. By 1916 he had become president of Buick where he remained for four years.
Chrysler's humble origins and lack of education made it extremely difficult for him to appreciate the revolution in management and organization that was taking place. In keeping with his experience as a mechanic, Chrysler, like Ford, approached automaking as essentially an engineering job, to produce the best technical design most economically. He recruited talented engineers to create a company with "an extraordinary engineering intelligence,"4 placed heavy emphasis on research, and built up a strong tradition of technological innovation and engineering excellence.
Technology is an inexhaustible resource. There are innumerable ways that technology can be improved, modified, or adapted to make it more competitive, to widen the existing market, or to create entirely new markets. Ford reduced the price of the automobile through technological innovations in production and thereby created a new market among those who could never before afford a car.
At Chrysler technological innovations like the high-compression engine, hydraulic brakes, and automatic transmission provided a constant source of fresh energy to nourish the company's life and spur its growth. Over time, engineering excellence became the primary value, the mission of the company, which it pursued in preference to all other values.
But technology is only one of the key components of corporate existence and not, as Walter Chrysler believed, the only key. His strong bias for engineering was accompanied by a failure to develop the other essential components in equal measure—a failure that sometimes amounted to gross negligence. The potentials of technology were often tapped at the expense of the other components and to the detriment of harmony between them. As a result, the company developed in a partial and unbalanced manner. It grew into a leaning tower.
Technology for Technology’s Sake
The most visible effect of this imbalance was on Chrysler's approach to the market. The market contains unlimited potentials. It consists of all the needs, desires, interests, fashions, and fads of society. They are innumerable. There are basic physical needs like transporation, which can be met in an infinite variety of more convenient, comfortable, and attractive ways. There are also social needs, such as for recognition and status, which generate greater demand for material objects. There are psychological needs, as well, such as security or dominance, which create demand for products and services.
In the early days of the automotive industry, the car was primarily a means of transportation that met a physical need for a faster, more convenient, more comfortable way to travel. The challenge faced by the car manufacturers was to produce the most mechanically advanced vehicle in the largest numbers at the lowest price.
But gradually a shift took place in the market. Having accommodated itself to the newfangled invention, the public started to look for more subtle refinements in styling and design. The automobile began to appeal to social needs for status and attention and psychological needs for power, a sense of self-importance, and even masculinity.
William Durant was one of the first to see this new trend. He conceived of a company that would manufacture a wide variety of cars that appealed to the public's social as well as physical needs. Durant created GM and gave it the mission to build cars for every purse and purpose. When he took over at GM, Sloan, too, recognized that styling had become the most important marketing consideration.
As Walter Chrysler was introducing his very first model, based on the new high-compression engine, Ford's Model T was nearing the end of its days. Chrysler understood that people wanted something new, but he thought they wanted new and improved technical design, when in fact what they wanted was new styling. In the mid-1930s the company introduced a new, aerodynamically designed model with the first automatic overdrive transmission. It was an engineering masterpiece but a marketing disaster. Chrysler was in tune with the latest advances of technology but already losing touch with the market.
Chrysler's bias for engineering rather than marketing considerations continued unabated after the Second World War. The company's management insisted on practical, mechanical advances with a "disdain for whimsical fashion" at exactly the time customers were eagerly awaiting new annual style changes.5
Over the years, technology came to dominate market considerations. Engineering determined the size, styling, content, and cost of the cars that the company made. When Chrysler's management wanted to build a rear-engined compact in the late fifties to compete with GM's Corvair, the engineers refused, because they could not design one to meet their own standards of styling and comfort. The company's former chairman, Lynn Townsend, remarked, "There was no way this management could have even ordered that engineering department to do a rear-engined car."6 In the late sixties, a similar fate befell plans for a subcompact. As recently as 1975 Townsend commented, "The engineering department is the most dominant influence in this company."7 Fortune wrote at the time: "Overreliance on engineering as the company's strategy has had calamitous consequences. Chrysler responds to its engineers' inventions, not to the wants of its market."8 Instead of developing new technology to meet a market need, Chrysler developed technology for the sake of technology.
The market was not the only thing that took a back seat to engineering at Chrysler. Organization did, too. Perhaps Walter Chrysler believed that building factories, making engines, and assembling cars were all there was to creating an organization, but that is far from the truth. Chrysler was essentially an engineer rather than a manager or an organizer. The company he built focused primarily on engineering design and assembly of parts produced by suppliers. Except for the engines, Chrysler did little manufacturing of its own in the early years. Even a managerial task like negotiating with the union was handed over to a law firm. The organization Chrysler created was small in size, simple in structure, similar to that of much smaller and less complex businesses, with himself and a few associates at the center personally managing all key operations. Chrysler was one of the early breed of empire builders, who, like Henry Ford, utilized vast material and human resources but "had relatively little interest in devising schemes to assure a more efficient over-all management of these resources."9 In other words, Chrysler believed in the power of technology and production but ignored the enormous power of organization.
By contrast, Alfred Sloan was a builder of organizations. While Walter Chrysler was concentrating on technology, Sloan was building up a powerful, decentralized organization at GM with autonomous operating divisions coordinated and controlled by a centralized executive staff, interdivisional committees, and a sophisticated system of controls. Sloan did not have specialized technical talents, but he created an organization that attracted all the design, production, and marketing skills he himself lacked. GM's decentralized organizational structure became a pillar of strength for the company and a model for American business. Organization proved more powerful than technology.
In the early 1950s both Chrysler Corporation and Ford Motor Company attempted to reorganize along the lines Sloan had established at GM. Ford succeeded in great measure, although Henry Ford II perpetuated something of the autocratic tradition established by his grandfather.
By this time, Chrysler's organization had crystallized into a group of independent and isolated divisions, each in contact with the executive offices at the center but with little communication or coordination between them. The division heads possessed little authority and were responsible primarily for sales, purchasing, and cost control. There was no overall system for coordination, as at GM. The original corporate character was so well entrenched that it successfully resisted the attempt at reorganization. The net result was a move toward ever greater centralization of authority and control rather than decentralization—an organization held together by the strength of the chief executive rather than by internal cohesion. After Walter Chrysler's retirement, the organization lost the centripetal force that united its parts. It became what Iacocca termed "these little states—duchies. They would not report to central authority.…Everybody had his own little empire. Twenty little companies and nobody to pull them together."10
The company did acquire a decentralized character, but it nearly lost the character of being an organization. Organization means first and foremost coordination, but at Chrysler everyone was "working in a vacuum," as Iacocca remarked. "All of Chrysler's problems really boiled down to the same thing: nobody knew who was on first. There was no team, only a collection of independent players.…"11
With or without a strong coordinating organization, the primary components of a company are indissolubly linked together and inter-dependent. The failure to fully develop the powers of organization ultimately had repercussions that seriously affected Chrysler's most precious possession, its reputation for engineering excellence. In the late 1950s and then again in the mid-1970s, the company was faced with a serious problem of poor quality. Many of the defects could be directly attributed to "poor coordination between engineers and manufacturing"—that is, lack of organization.12
The original bias for engineering had introduced a crack in Chrysler's original organizational structure. As the company grew, the crack became wider, until it represented a nearly unbridgeable gulf between the different parts of the firm. The basic principle of a central organizational will directing and controlling all the parts was undermined from the start by the inordinate importance and freedom given to the engineering division.
Untapped People Power
Chrysler not only failed to tap the potentials of the market and organization; it failed to release the boundless energies and talents of its people as well. People have an infinite capacity for development. They can be disciplined to work harder and more efficiently. They can be motivated to be enthusiastic and cooperative. They can take on greater responsibilities and exercise authority constructively. They can acquire greater knowledge and skill. They can become innovative and creative, loyal and dedicated. Their work can be made an opportunity for personal growth and fulfillment. When any of these potentials of people is enhanced, the productive power of the company increases enormously.
Chrysler failed at the very first step—discipline. Executives using the president's office as a passageway from one office to another and factory workers who do not bother to use the trash barrels for their garbage are clear signs that the most rudimentary form of discipline is lacking. Iacocca called it "a state of anarchy."13
Chrysler's ideas on labor relations were as outdated as its concept of organization. Long after the UAW was an established power in Detroit, recognized and accepted by GM and Ford, Chrysler refused to cooperate with the union. The bitter feelings generated in the early days set the tone for the labor unrest that pursued Chrysler in later years. Absenteeism, low morale, racial tensions, disputes between workers and managers, and wildcat strikes were more common than at GM and Ford. These recurring problems seriously affected the efficiency of operations and the quality of the cars. Workers at one plant failed to punch in and out for lunch hour and then broke the time clocks when management insisted. As one UAW official commented, "Inside the Chrysler plants there was just about every kind of problem you could imagine"—theft, gambling, protection rackets, prostitution, and even a murder.14
The absence of a strong central authority made it difficult to control people and impossible to harness their full capacities for productive work. Talented individuals were assigned to jobs that they had not been trained for. Potential talents were ignored or suppressed rather than being actively encouraged. A rich pool of human resources was neglected for want of an organization to develop it.
In the absence of a well-developed organization, the productive potentials of capital cannot be mobilized. The efficient use of money by elimination of unnecessary and wasteful expenditure is one way to release its productive power. The use of cost accounting to determine the optimal pattern of investment and the precise gain or loss from each activity is another. But these potentials relate only to the use of money. There are also creative financing techniques that make capital available far more readily than in the past—techniques like lease-purchase, credit cards, venture capital, stock offerings, bonds, and so forth.
Chrysler neglected its financial potentials as much as it did its human and organizational ones. Until 1957, when a comprehensive cost-control program was introduced, one division head complained that he could not find out the cost of the cars built by his division. Twenty years later Iacocca found that there was still no overall system of financial controls.
The productive potential of creative financing techniques was dramatically demonstrated in the sixties. In 1962 Chrysler introduced the first 5-year or 50,000-mile warranty, at a time when Ford and GM offered only 12 months or 12,000 miles. Two years later Chrysler Credit Corporation was established to provide funds to dealers and retail customers. Between 1962 and 1968 the company's market share in the United States grew from 10.3 percent to 18.1 percent, and sales tripled, from $2.5 billion to $7.4 billion.
The impressiveness of this achievement is only mitigated by the fact that GM had established a similar credit organization 43 years earlier, in 1919, and Ford had followed suit in 1950. The gains made by Chrysler in the sixties from creative financing could have come much sooner and been cumulatively much greater if only it had imitated what had proved successful for its competitors long before.
The company's greatest error with regard to finance was to intensively pursue profit as a short-term goal, producing cars it did not need in order to meet budget targets, juggling figures to make it look as if cars in the sales bank had actually been sold, adjusting accounts to conceal the financial weaknesses of the company, and sacrificing long-term investments and essential R&D expenditures to boost present profits.
Of course, the greatest error a company can make is to run out of cash. And Chrysler did this several times—once as the United States Motor Company; once as Maxwell Motors; again in 1958, when it had to rush to the banks for a $120 million emergency credit line; and yet again in 1979. Each time disaster had been averted it has returned in far greater proportions, until finally only the U.S. government could save the company from collapse. If the cycle is allowed to repeat, next time even the government may not be able to help.
The Second Resurrection
This was the constitution of Chrysler when Lee Iacocca became president. Its problems were gargantuan and seemingly insurmountable. The company owed $1.3 billion, had no cash, and, in the collective opinion of Chrysler and its bankers, its assets could not be sold for anywhere near the amount of its debts. As if this were not enough of a problem, there were others: some 100,000 unsold cars valued at $600 million in the sales bank that were poorly made and deteriorating outdoors; enormous overheads and declining sales that were generating millions in losses every day; a dissatisfied and alienated customer base, which was discouraged from further purchases by the growing public conviction that the company would not survive long enough to service its own warranties; and an undisciplined, demoralized work-force frightened by the specter of unemployment. The voice of the financial experts was nearly unanimous. Chrysler will not survive.
Chrysler not only survived the crisis but posted one of the most incredible recoveries in corporate history. The company that had lost $1.7 billion in 1980, the largest loss of any corporation till that time, earned an estimated $2.4 billion in 1984, more than it had earned in all of the previous 59 years of its existence. When Chrysler made a stock offering in early 1983, the entire 26 million shares, with a market value of $432 million, were sold within an hour. The company's stock, which had fallen below $4 a share a year earlier, rose to $36 a few weeks after the offering.
How was such a dramatic recovery possible? Where did the energy and resources come from to accomplish it? What was the process by which a crisis was transformed into an opportunity for growth?
The simplest answer to these questions is to give all the credit to Lee Iacocca or the government's $1.5 billion in loan guarantees. Whenever we do not understand an event, it is easy to explain it away as the work of a genius or superhuman leader or the obvious result of the indomitable power of money.
However great Iacocca's achievement, he frankly admits that he lacks either intellectual genius or superhuman power. The extraordinary thing about him is the commitment and effort he made and the good commonsense knowledge of organization he exhibited. Iacocca is a hardworking, dynamic, experienced automobile executive, a charismatic person with a keen sense of the market, but he is not, as he is the first to admit, a superman.
As for the loan guarantees, certainly Chrysler would not have survived without them. But it would have been no surprise to anyone if the company had failed even after receiving them. In fact, it almost did. Eighteen months after the guarantees were issued, Chrysler ran out of cash—it came down to its last $1 million at a time when daily expenses were $50 million—and in 1980 and 1981 its total losses were $2.2 billion, which was more than the value of the guarantees. Money alone was certainly not the answer. Then what was?
Steps to Success
The steps taken by Iacocca at Chrysler, the changes made within the organization, and the dramatic reversal of the company's fortunes are expressions of the process we have been presenting in this book, the process by which corporations evolve. The advantage of examining a case like Chrysler's is that the enormous pressure of dire external circumstances forced the company to intensify its effort for change, so that the process was accelerated and is therefore easier to perceive.
In the previous chapter we stated that the individual is a microcosm of the organization. The process of individual growth is one of releasing and converting energy into productive power. That process begins with an awareness of a weakness to be overcome or a higher goal to be achieved. It commences with a decision by the individual to grow, a commitment of the will, and enthusiasm for the effort. Then it passes through several more stages, which culminate in the development of the individual's personality to incorporate new personal values.
Corporations are individuals, too. They develop inwardly in their capacity to generate, transmit, and utilize energies for productive work. The process that governs their development is the same as that which governs the development of the individual. It is the process by which personality grows.
The first step in that process is to acquire knowledge of the growth that needs to be achieved and of the weaknesses that have to be overcome. By weakness, we mean an inadequate or below-average capacity in some particular area, which has to be strengthened. Weaknesses occur in areas where the personality is not developed.
But there are some personality defects that are the result of wrong development rather than no development, wrong organization rather than disorganization. The problems faced by Chrysler were not those of an immature corporate personality that had not yet developed a distinctive character. They were expressions of a personality that had developed, but developed in an asymmetrical manner. There was a formed character, but it was based on many bad corporate habits. Because the personality was developed, it was able to successfully resist the attempts to modify it in the 1950s.
Iacocca's immediate task at Chrysler was not to build up the organization, but to forcefully eradicate innumerable negative habits that had become entrenched. The first necessity was not soul-searching and self-scrutiny, but just plain discipline. Energies that were being squandered and resources that were being wasted had to first be brought under control before they could be utilized productively. A lack of discipline pervaded Chrysler, and the only possible remedy was "a dose of order and discipline."15
Iacocca's first act at Chrysler, and probably his greatest, was not his plant closings, cost cutting, or appeal to the government. It was a decision—a decision so momentous that it sapped all his energies and left hi "seeing double." It was the decision to eliminate this lack of discipline, to remove the entrenched negative habits that had generated the crisis in the first place. Without that, no growth was possible, and even the company's survival was highly doubtful. That decision—made progressively as the true nature of Chrysler's problems became fully evident to Iacocca, reaffirmed and strengthened by each additional revelation of disorder, and solidified into a complete determination and commitment of his entire personality—was the indispensable prerequisite and essential seed of all that followed. Because the obstacles were so large and the resistance so great, nothing less than a total commitment commensurate with the weight of the task could be effective.
Once that decision had been fully made, it had to be communicated to all levels of the organization, accepted by them, and converted into a commitment of the entire management, and it had to generate a willingness and enthusiasm for change. Even Iacocca's total determination could not have been fully effective if he had attempted to fulfill it through authority alone, because the organization lacked the authority required to correct its own misguided course. Iacocca chose to rely on education and persuasion rather than force in order to enlist the sympathies of his people and convince them in turn to make commensurate decisions at their own levels to eliminate substandard behavior and poor performance. He succeeded in winning the support of his people and persuading them to confirm his decision in their own minds and actions.
Iacocca's decision called forth all his energies and threw them into action. It also released the energies of those around him. He had not merely to communicate a decision to his associates; he had to inspire them with confidence, make them commit themselves, and release their energies and enthusiasm. The fact that many highly placed executives sacrificed secure positions at Ford and other companies to join Iacocca shows that he did succeed in releasing their enthusiasm for a challenge and an adventure. "My mother was horrified when I left a good job at IBM to join Chrysler, and so were the mothers of some of the others who joined the Iacocca team at that time," recalled Frederick W. Zuckerman. Zuckerman joined Chrysler in October 1979 as assistant controller/financial controls and today is vice-president and treasurer. Walter Chrysler was known as an energetic and courageous risk taker. The tradition still lives at the company.
Revitalizing the Organization
Energy was released by a decision and reinforced by the commitment of a determined management team. But in order to become effective, it had first to be converted into a force or will of the corporate character. The decision had to change the structure and functioning of the organization.
This change was accomplished in several ways. The organization was restructured along more rational lines, eliminating such anachronisms as having a single executive responsible for both manufacturing and sales operations. Separate operations were isolated from one another so that they could be individually evaluated. There was a massive reshuffling of the organization chart. Nearly the entire executive team was replaced by new faces, mostly recruits from outside. Talented individuals were promoted from below, and an effort was initiated to uncover and encourage latent talents that had been suppressed by the old, encrusted organizational setup. Highly competent and trusted people were brought in to head priority operations like finance, quality control, and marketing.
The reorganization instilled a sense of discipline at the higher levels of management, where it had been sorely lacking. New policies were instituted, new standards of performance were established, and new rules were formulated to eliminate the grosser violations of corporate self-restraint.
The sales bank for unsold car inventory had engendered a lack of discipline in the sales force, since production could continue even when orders flagged, and the cars could be stored in the sales bank until they were disposed of on a clearance sale. The abolition of the sales bank and the introduction of a make-to-order production policy forced the sales department to sell cars in order to keep the plants open instead of just to keep the sales bank from overflowing.
A significant aspect of the reorganization involved closer coordination and greater cooperation with the UAW, necessitated by the requirement for union wage concessions in order for the company to qualify for the government loan guarantees. The appointment of the UAW president, Doug Fraser, to Chrysler's board marked a reversal of the company's historical efforts to distance itself as far as possible from the union. This reversal not only won the necessary wage concessions but also enabled the company, in cooperation with the union, to tighten labor discipline. For instance, they worked out new rules to reduce absenteeism at the plants. "Putting Fraser on the Board was symbolic that we are all in this thing together," Zuckerman said.
The decision of the CEO and commitment of top management energized the company. The reorganization transformed that decision into a force for change. But in order for that force to be effective, new systems were required to convert force into organizational power.
One of the most basic of these systems was for reporting financial data. Discipline requires control, control depends on monitoring of activities, and monitoring is done most effectively through information systems. Those that existed earlier at Chrysler were incomplete and only partially operative. The new management insisted on analyzing the performance of each separate operation in terms of timeliness, quality, and financial viability. A comprehensive reporting system, a centralized system of financial controls, and a quarterly performance-review system were among those introduced.
For conversion of this organizational power into corporate results, the company needed the right skills at the right place. But over the years Chrysler had developed the habit of shuffling managers so frequently that very few were found in positions they were actually qualified to manage. Iacocca found it necessary to fire or retire most of those who had been associated with lax operations and bring in strong, experienced executives to insist on disciplined functioning.
While elimination of undisciplined behavior was an essential prerequisite for any positive achievement, it represented only a part of the momentous decision Iacocca made and implemented. In moves of as great or even greater significance, he defined, communicated, and implemented several key values. Foremost among these values were quality of product, efficiency of production, punctuality of scheduling, coordination among departments, cooperation with dealers, and harmony with the market. The process of implementing each of these values followed the steps outlined earlier in this book.
Chrysler had been plagued by quality problems for years. Poor quality was taking a heavy toll on the company's market share and hiking up warranty costs. Everyone was aware that quality was a weakness. The decision to improve was essential to recovery. "From day one, Iacocca drove home the message that you must never scrimp on quality," Zuckerman told us. "Iacocca pounded this message over and over. It gave him a great opportunity to make a `Let's Win One for the Gipper' speech, which he does very well."
The first step was to evolve a strategy, the Quality Improvement Program, and then to create an organizational structure to implement it. Iacocca brought in a retired quality-control expert as a consultant, established a new department to oversee quality, and hired 250 people to staff it. In order for the program to be effective, many systems had to be introduced or upgraded. Purchasing was an area where quality control was very lax. Paul Bergmoser was hired away from Ford to head the department, and a team of skilled quality-control people was added to the purchasing department.
Many quality problems were introduced by the inordinately large number of parts the company used on its various models. New policies were introduced, which reduced the number of parts from 70,000 to 40,000, and a streamlined inventory system was installed.
Poor quality also resulted from the lack of coordination between design and manufacturing. The designers were specifying parts that could not be produced. Systems for coordination between these two departments eliminated design errors before they became production defects. The company coordinated with the UAW on a quality-circles program that significantly reduced manufacturing errors.
Independent studies undertaken before the quality program was introduced found that Chrysler typically had 30 percent more customer complaints than Ford or GM. As a result of the program, the quality of Chrysler's cars improved dramatically. Between 1978 and 1980, one study showed a 32 percent improvement by Chrysler. A confidential GM marketing report in 1980 indicated that customer satisfaction was higher at Chrysler than at any of its competitors. By 1983 Chrysler's warranty costs had fallen by 40 percent.
Another problem area had been delays in the introduction of new products. Punctual introduction of new models required precise timing, close coordination, and tight discipline from the point of conception to the completion of production. Punctual development timing was a priority value for the new management.
Specific standards were established and deadlines set for each phase of the development schedule. Standards had existed earlier, but they had often been ignored. Bergmoser called it "a matter of discipline."16 Now clear lines of authority and decision-making responsibility were established for approval of design concepts, and a master system was introduced to ensure proper coordination between all participating departments, especially design and production.
As a result of the development-timing program, new-product scheduling was radically improved. Three years is the standard development cycle for new models in the automotive industry, even when they do not involve major changes in the engine and transmission. In 1983 Chrysler released three new models on which the time from approval of design to release ranged between 6 and 12 months. Such quick reflexes were a direct result of the improved discipline and streamlined systems.
The decision to acquire greater production efficiency was not a choice. It was a compulsion. It was compelled by the company's financial crisis. Discipline alone was not enough to achieve it. It required a comprehensive strategy for value implementation that touched every aspect of the company's functioning. It involved a major restructuring of the organization—the closing of 23 plants—a drastic reduction in the workforce and all levels of management, elimination of the sales bank, centralization of accounts payable (which was previously handled from 30 different offices), creation of oversight committees, reorganization of the controller's office, and other structural changes.
The organizational will for greater efficiency was empowered by a multitude of systems that coordinated quality control, purchasing, inventory, design, and manufacturing functions to achieve greater economies. All these operations were integrated with the controller's office by the improved reporting and financial control systems.
Coordination between purchasing and manufacturing alone enabled the company to cut inventory costs by $750 million with a "just in time" inventory system and a reduced number of parts. For decades Chrysler's engineering department had been boosting production costs by the addition of sophisticated design elements the customer was unwilling to pay extra for. Now coordination between engineering and marketing helped produce economies such as the reduced transport costs for the K-cars achieved by limiting their length so that more of them could fit on a standard freight car.
The net result of this value-implementation program was a 23 percent reduction in fixed costs over five years and a reduction in the company's breakeven point from 2.3 million cars to 1.1 million.
Implementing Harmony Without
One of Iacocca's major objectives was to overcome Chrysler's loss of contact with the market, to re-establish harmony between what the engineers designed and what the market wanted, and to restore customer confidence in the quality of Chrysler cars and the stability of the company.
First he had to reverse a corporate habit of cutting new-product development funds whenever money became tight. At the height of Chrysler's financial crisis, he committed $700 million three years in advance to fund development of the highly successful minivan.
At the same time, he had to restore market confidence in the company and its products in order to ensure that they would even be around three years later. To restore public faith, the company engaged the advertising firm of Kenyon & Eckhardt. Breaking all precedents in the industry, Chrysler established extremely close coordination with the ad agency, even allowing agency representatives to sit on the company's marketing and production-planning committees. Together they developed a series of newspaper advertisements that openly acknowledged all of Chrysler's problems and effectively communicated management's commitment to rectifying them. The words by themselves would not have inspired the market, but they were backed by a radically new policy (new for the industry—but which Sears had popularized 80 years before)—a 30-day money-back guarantee on the purchase of new Chrysler cars. The policy instilled faith where words alone could not. Sales soared, and less than 0.2 percent of the cars sold under the guarantee were returned.
Of course, advertisements and guarantees would have been of little value if the company's new K-car had not been what the market wanted. But under the pressure of a crisis, Chrysler's development engineers had uncharacteristically bent their ears to the market and heard correctly what it wanted. After his arrival Iacocca took personal charge to ensure that they continued to do so.
The right car was not enough. Chrysler's dealers had been mistreated by the company for years. Their cooperation was essential for elimination of the sales bank and restoration of customer confidence. The new management made a major effort to improve relations with the dealers, to listen to their grievances, assure them that quality would improve, and inform them of the internal changes taking place. At the same time it had to deal firmly with dealer discontent over abolition of the sales bank, which had been a continuous source of discount-priced cars for the dealers.
The response of the market to these initiatives was remarkable, especially in view of the competition from Japan and the leveling of demand. In 1978 Chrysler sold 1.2 million passenger cars in the United States and the percentage of Chrysler car owners who intended to buy a Chrysler as their next car dropped to 36 percent, just half the 72 percent figure of GM. By 1984 volume had risen to 2 million cars.
In addition to the good design of the K-car and Iacocca's TV advertisements, there was another factor responsible for the improved market response. Energy attracts, and intense energy attracts powerfully. During the last five years, Chrysler has released an enormous amount of potential energy to ride out the crisis and spur recovery. That energy has not only wrought changes within the company; it has evoked a response from the market as well.
Chrysler has not just survived a crisis. It has grown substantially and is a stronger company today than anytime in the recent past. Crises followed by growth are common enough in all fields of life. Growth depends on energy, and the effort made to survive a crisis often releases far greater energy than is required for ere survival. Crises generate an intense pressure that compels people and organizations to make greater efforts than they would otherwise be motivated to make left to themselves. As we saw in Chapter 1, regardless of whether it is generated externally by a crisis or an opportunity or internally by a determination to grow, the effort—if sufficient—energizes the organization and spurs its growth. The process of that growth is the same in all three cases.
We can identify all the major steps of that process in Iacocca's work at Chrysler. They are similar to the steps taken by our manager in Chapter 11 to become a significant individual.
1. Identify weaknesses and eliminate them. Knowledge of imperfections and a willingness to remove them are a prerequisite to growth. Often it requires a crisis to motivate companies to such an effort. In Chrysler's case the problems were so deeply entrenched that only a crisis could generate sufficient pressure to overcome them.
2. Decide on your values and goals. Knowledge of one's weaknesses and problems is essential for remedial action, but knowledge becomes powerful only when it is accepted and endorsed by the will and converted into a decision to act. It is not enough to know what needs to be done. There must also be a resolute decision to do it. That decision releases energy.
After understanding Chrysler's problems, Iacocca identified some of the essential corporate values necessary for its recovery and success: discipline first; then quality, economy, and efficiency; punctual product development; standardization and systemization; internal coordination and communication; cooperation with the union, dealers, and suppliers; integration of the company's operations around a central organizing and controlling executive team; harmony with market needs; and public confidence. His decision, in effect, was to do everything within his power and the company's resources to improve performance in all these areas.
3. Make a real commitment to change. For the decision to influence others and enlist their cooperation, it had to be backed by a genuine personal commitment to achieve what had been decided. Since Iacocca was asking everyone else to sacrifice, he began by sacrificing his entire salary for a year. Since he was asking others to work harder, he committed himself to sacrifice personal leisure and comfort to see that the job was done. More than his words, that personal commitment persuaded others to leave secure jobs to join him at Chrysler and evoked the respect and cooperation of company employees.
4. Generate enthusiasm. When people obey an order, they contribute their physical energy to the work. When they understand the importance of the work and decide it should be done, they lend their mental energies for its accomplishment. But when their emotions are aroused and they become enthused by the challenge and eager to accomplish it, the entire energies of their personalities are released and pour forth into the work.
A task as onerous and difficult as Iacocca faced at Chrysler could never be accomplished by a grim or half-hearted determination. It demands a total commitment of energy and an enthusiastic effort. The most effective way to release enthusiasm in others is to be genuinely enthusiastic oneself. Because Iacocca really believed in what he was doing and really wanted his program to succeed, his full energies and enthusiasm were released. His enthusiasm spread to others, instilled confidence, released their energies, and enlivened the organization.
5. Create the right structures. Every value needs a structure for its implementation. Values without structures are like precious jewels without settings. You can keep them in a drawer, but cannot put them to any use. The structure may be one job position, a team, or a whole department. Iacocca created innumerable new structures and altered many existing ones to give greater form and force to the values he sought to implement. He restructured the engineering, manufacturing, marketing, purchasing, accounts payable, and controller functions. He established a new quality-control department. He also eliminated unproductive operations that were dragging the company down.
6. Set standards and establish rules. Values cannot be properly implemented unless they are translated into specific standards of performance with respect to each and every aspect of work to which they apply. Standards must be supported by rules. Standards tell people what you want, but in many cases you have to tell them exactly how to do it, too—and, more important, how not to do it. Clear rules backed up by authority are critical to success.
Iacocca introduced higher standards in areas of operations such as discipline, product quality, efficiency, return on investment, time-liness, and worker productivity. New rules were formulated to define appropriate conduct, like the more stringent rules to reduce worker absenteeism.
7. Recruit the right people. People are the real raw material of business. They are loaded with hidden talents, capacities, and unexpressed energy. Tapping that resource is like a free pass into Fort Knox.
Iacocca brought in several dozen talented and experienced people to constitute his new management team—people he felt he could trust. He also retired or fired almost the entire front line of existing executives, who had become entrenched in or habituated to the old ways of functioning and would find it difficult to adjust to radical change. He delved deeper into the organization and discovered a rich reserve of dynamic, young, talented people, "people with fire in their eyes,"17 raised them to the light of day, and gave them freedom and responsibility to express their capacities in their work.
The true significance of Iacocca's accomplishment can be fully perceived only when it is realized how much of it was fashioned out of the company's existing resources—particularly its people—which the earlier management had not properly utilized.
8. Create systems for everything. There is no business activity that cannot be reduced to a system. There is nothing a dynamic CEO or a skilled manager can do that cannot be done much better by a system. The enduring successes of IBM and GM are testimony to this truth. Every company has hundreds of systems, but that still covers only about 60 percent of their activities.
Iacocca was shocked to find some key systems missing at Chrysler and many existing ones fallen into disuse, which amounts to the same thing. For every value he sought to implement, he introduced new systems or modified existing ones. A reporting system, financial controls, and systems for purchasing, inventory, product development, scheduling, sales, and quality control all had to be revamped and upgraded to achieve a higher level of value implementation.
9. Train for every skill you need. If you make a list of all the skills needed to do the job of a CEO effectively, the skills that can be acquired by training, it will come to more than 100. Every executive, every manager, indeed all the people in an organization need all these skills to be fully effective at their jobs.
Chrysler Corporation had achieved its original prominence in engineering largely because of the Chrysler Institute, established by Walter Chrysler in 1930 to train automotive engineers. The institute supplied talented staff not only to Chrysler but to the entire industry.
Iacocca found that there were a lot of other people at Chrysler who needed training—training to meet quality standards and time schedules and to operate systems. For instance, a training program had to be instituted to teach the sales force how to use the new ordering system.
10. Make all the right connections. A company is like an army. Unless you coordinate every activity and integrate every level, you end up firing on your own troops or starving them to death. The departments at Chrysler were doing both.
Improved coordination between engineering and production cut product-development time, reduced quality problems, and helped eliminate impractical designs before they reached the production phase. Similar gains were made by coordination between engineering and marketing and between production and purchasing, as well as between the company and other organizations, such as its and agency and suppliers.
11. Communicate. Disseminating factual information, sending clear messages, issuing clear instructions, listening to what others have to say, and spreading better understanding are necessary to ensure that the decisions made by top management are understood by those below and that the greatest possible measure of acceptance, commitment, and enthusiasm is evoked for their implementation. Ultimately, value implementation depends on the actions of the lowest level of workers in an organization. Communication is the means for creating awareness, willingness, and enthusiasm at that level.
12. Institutionalize the values. The first 11 stages outlined above are steps that can be taken by management to release the energies of an organization, instill higher values, and utilize the energies to implement those values in work.
In Chapter 3 we spoke of three further levels of value implementation that begin after the organized effort is completed. When the values become so deeply ingrained in the people and the organization that external systems of enforcement are made obsolete because appropriate conduct is enforced by peer pressure, then the values have become institutionalized as a part of the corporate milieu. At a later stage the values are accepted by the individuals in the company as an essential part of their jobs and are implemented even in the absence of peer pressure. They have become customs in the organization. Finally a stage can be reached when the individuals identify with the company's central values as personal values in their own lives. A mature corporate culture develops.
Institutionalizing Value Implementation
The transition from the first 11 steps to the three stages of the last step in value implementation usually takes a long time. But time is not the only thing necessary, for in many companies that transition is never made at all. There are other conditions. First, the active effort at value implementation through stages one to 11 must be fully completed, without the omission of any step. If any element is missing, the process does not mature; and it may even lose ground later on, as it has many times at Chrysler after a period of energetic effort and progress. Second, the effort at value implementation must itself become an institutionalized activity of the organization. It must become a conscious goal of the entire company, supported by the appropriate decisions, structure, systems, skills, and continuous, ongoing activities.
At Chrysler value implementation is still a personal activity of top management, compelled by the external pressure of a crisis situation, propelled by the dynamism and commitment of Iacocca and his staff, imposed on the organization by force of circumstances, managerial authority, and persuasion. How far these values have actually been accepted at lower levels of the company, how deeply the effort has penetrated the corporate character, and what will happen after the external pressure recedes and Iacocca retires remain to be seen.
In spite of its size, Chrysler has always functioned more like a personal company than an impersonal organization. Walter Chrysler ran it like an old-time proprietor trained in a corner grocery store. Iacocca found it was still that way 60 years later. Observing the quick, personal decision-making process at Chrysler, Fortune very recently commented that it is still run "more like a corner grocery store"—even today.18
History shows that the Chrysler corporate personality strongly resists change except in times of crisis, and that corporate personality remains largely intact. Unless that personality is changed at its core, and unless that change is carried down into the smallest acts and attitudes of the company, sooner or later the old personality will reassert itself and the old problems will re-emerge.
The Process of Development
The revival of Chrysler is a remarkable achievement, but it still remains a revival, not a transformation. That achievement follows a process—the same process that enabled Bata to emerge from the risis of 1922 and grow into a multinational corporation, the same process that enabled Marriott to take advantage of the opportunities presented by an increasingly mobile American public and convert a local group of Hot Shoppes into a worldwide chain of hotels. This is the same process that enabled Apple, Coca-Cola, Delta, General Mills, IBM, Merck, Northwestern Mutual, Sears, and so many others to rise from tiny origins, grow and grow, multiply and expand in a movement of corporate development that need never end.
In Chrysler and most or perhaps all of the others, the process is only partially conscious. It is largely directed by common sense, life experience, and trial and error. It is haphazard, fraught with omissions and false starts, subject to considerable delays—though everyone will gladly acknowledge that Iacocca took a remarkably short time to accomplish his task at Chrysler. This means that the process can generate even greater results, more quickly and with a less taxing effort, if it is fully understood and implemented systematically.
The science of management has developed many powerful tools and techniques for increasing the productive efficiency of an organization. To be efficient is to fully utilize the available resources. But today many corporations are no longer preoccupied with problems of efficiency. They have mastered the skills and techniques for smooth organizational functioning and are searching for ways to accelerate the pace of growth. What they need are not more efficient operational tools but more powerful energizing processes for continuous expansion and rapid development.
In this chapter we have looked at the process by which the activities of a corporation are energized for growth. In the previous chapter we looked at the same process with respect to individuals, how their lives and work can be energized and made an occasion for personal growth. Both are expressions of the same process. Not only individuals and corporations but every single action they undertake can also be energized.
Individuals become significant by identifying themselves with the values and interests of the organization and serving the organization through the work. That work becomes a field for their personal growth. They grow by giving. Corporations achieve enduring success by identifying themselves with the values and needs of the society and serving the society through their work. That work becomes a field for corporate development. They grow by giving, too.
In the same way, every action and activity performed by an individual or a corporation is an opportunity for growth, provided it is approached in the right way. Every act can be done either in a sub-standard manner or in an efficient manner or in a way that energizes and generates growth. The key is to approach the act from a wider perspective.
When C. E. Woolman decided to leave a Delta flight so that one more passenger could have a seat, he was not just being polite. He was sending a signal to everyone in the entire organization to look at their work from the customer's point of view. The Delta flight attendants who today share their food with hungry passengers are acting as Woolman did—thinking of the customer first. As a result, many airline passengers are constantly thinking of Delta, too.
When Woodruff encouraged a policy of trying to provide the maximum profits to Coca-Cola bottlers, he was viewing his work from their point of view. The bottlers not only earned enormous profits; they were also energized to spread Coke to the distant corners of the world and send home untold wealth to the parent company. Woolman's was a small, insignificant symbolic act. Woodruff's was a lifetime policy. They both had a similar effect.
When the Northwestern Mutual agent tries to find a way to help a policy owner whose policy has lapsed, when a Sears manager exchanges five-year-old Craftsman hand tools with a smile, when a Merck representative spells out the negative qualities of the firm's newest product, when a young General Mills product manager is given exceptional freedom to plan out an advertising campaign for Cheerios, when a Du Pont gate guard reminds departing drivers to buckle their seat belts—these are all tiny, insignificant acts carried out by looking at things from another person's point of view. They may be tiny, but they are incredibly powerful acts, energizing acts.
In every company there are hundreds of functions—replying to a letter, cleaning a machine, answering a phone, addressing a subordinate, meeting a customer, making a product, paying a bill, arranging a purchase. Each and every one of them can be done in a substandard or efficient or energizing way. Sears has energized purchasing by identifying with the interests of its suppliers. Apple has energized its people by giving them maximum freedom for self-expression.
Energizing the Corporation
All the components of a company—people, organization, technology, markets, and money—can be energized in this way. When a manager focuses on getting work done through people, that manager acts efficiently. When a manager concentrates on relating to the people as individuals through their work and trying to foster their personal growth, that manager is energizing them (and, incidentally, raising efficiency to peak levels). Attention to people is an expansive movement that releases their energies and potentials and stimulates corporate growth.
When an organization is structured to carry out each separate task systematically, it is efficient. When it views each task as part of a greater whole and coordinates it with all other related activities, those activities are energized. Creation of smooth, harmonious interrelationships is an expansive movement for the activities and the organization.
When technology is evaluated in terms of its design and productivity, more efficient technology is developed. When it is viewed in terms of the needs of the market and continuously refined to improve customer satisfaction, the vast potentials of technology reveal themselves. Looking at technology from the customers' point of view is an expansive movement that energizes the corporation.
When an intensive and comprehensive effort is made to exploit every conceivable means to increase sales of a product, the market for that product is efficiently utilized. When every effort is made to understand the needs of the society and serve those needs by providing a product or service, the market is energized. Serving the society through the market is an expansive movement that unleashes enormous energy and opens the way for unlimited growth.
When money is properly utilized and carefully accounted for in order to minimize wastage and maximize profits, it is used efficiently. When money is viewed as a measure or index of corporate development rather than as the ultimate goal to be pursued, money has a great power to energize the organization. Working for the development of the company utilizing money as a tool or an index is an expansive movement that generates the maximum growth and the maximum profits in the long term.
Relating to people through work in order to help them grow rather than to take more from them; coordinating and integrating all the activities and systems of an organization; viewing technology from the customers' point of view; working for the benefit of suppliers, distributors, customers, and society at large; using profits as an index of growth rather than a goal—these are all expansive movements that release latent energies and potentials.
Conversion of Energy into Power
The growth of a corporation, like the growth of an individual, depends on the continuous release, transmission, and conversion of fresh energies into work. The energy has to be generated and released, mastered and harnessed, directed and controlled, and transformed into productive power.
The process begins with the generation of fresh energy. The generation of electrical enegy in physics depends on the creation of a voltage differential between two points. The greater the differential, the greater the energy generated. The same principle applies to an organization. Here the differential is created between where the company is now and where it wants to go, between the values and goals it is committed to achieve and its present level of performance. The higher the values and goals that are genuinely accepted, the greater is the energy released. Profit is a very limited goal, which can inspire only top-level executives. The psychological values listed in Chapters 3 and 11—harmony, personal growth, service, and so on—are ones that can inspire and release the maximum energy from all the people in the organization.
The energy released has to be transmitted through the structure and systems of the organization. The will of the organizational character acts like a relay or booster station. The systems are the transmission lines. The efficiency and speed of transmission depend on the extent to which organizational values like discipline, coordination, and teamwork are present. Without these values, the energy released is not properly directed, controlled, and utilized. It is dissipated in unproductive friction or wasted in uncoordinated activity.
The energy released and transmitted has to be converted into action by people and machines. The amount of electrical energy that a bulb converts into light is limited by the wattage of the bulb, no matter how high the voltage is in the line. The conversion of energy into work in an organization is limited by the skills and attitudes of the people and the condition of all the elements of the corporate body. The greater the skills in the organization and the higher the level of physical value implementation—cleanliness, punctuality, maintenance, quality, efficiency—the greater the energy that is converted into work.
Each time any value is raised to a higher level, greater energy is released, transmitted, or converted by the organization. That energy can be used to build up all the parts of the corporate personality and establish a new harmony at a higher level. As the corporation grows, the level of energy continues to increase, and more and more of it is institutionalized as the intensity of the corporate personality. That constant conversion of fresh energy into greater intensity infuses life into the organizations and makes it come alive.
Every company adopts certain values that it recognizes as important and seeks to implement. As we have tried to illustrate through the examples from successful American companies, there is really no limit to the scope for implementing each value. Training at IBM, systems at Marriott, safety at Du Pont, teamwork at Northwestern Mutual, family feeling at Delta are all taken to a level far beyond that even conceived of by most companies. But there are many values, not just one or two, that can be raised to these peak levels, so that even the biggest and the best have an infinite scope for further growth.
When an individual succeeds in life, often that individual and other people are unaware of the process by which that success was accomplished. The same is true when people fail. We usually ascribe success to either talent, luck, or efficiency and failure to one of their opposites. But always there is a process behind them that we overlook.
The process that Iacocca followed at Chrysler is the process by which all companies evolve, consciously or unconsciously. When knowledge of the process is fully conscious and complete, the process can be vastly accelerated and infinitely extended. It can be reduced to a program and converted into a specific action plan for implementation by any company.