To find out what will work in today’s auto industry, we have to carefully examine what has worked in the past. For investors looking into GM and Ford, "Guts: The Seven Laws of Business that Made Chrysler the World’s Hottest Car Company" by Robert A. Lutz, former President of Chrysler, is a fascinating read about the intricate strategies that made Chrysler a story of success. Here is a summary of what worked for one automaker:
Split Strategies Powered a Turnaround
In Mr. Lutz’s book, business success comes only from a strategy of opposites: tough financial controls coupled with provocative and creative product development. Mr. Robert A. Lutz believes that every organization must cultivate this split personality, combining common sense with unbridled creativity. The leader’s role, he says, is maintaining the balance between the two. The dynamic tension between these two elements enables companies to introduce new products and achieve record profits.
On May 7, 1998, Chrysler and Germany’s Daimler Benz (owner of Mercedes) shocked the international business world by announcing their merger, the largest industrial merger to date. Chrysler recovered from its second near-death experience and not only enjoyed record profits, but was named Forbes Magazine’s Company of the Year.
The man who led the car company’s historic renaissance was its product-development genius and iconoclastic leader, Robert A. Lutz, then Chrysler’s president and vice chairman. He credits the firm’s turnaround to its embrace (at his urging) of a deliberately schizophrenic corporate culture: tough financial controls coupled with a rock-the-boat, provocative, highly creative product development process. Mr. Lutz translated his accumulated wisdom into Seven Immutable Laws of Business:
1. The Customer Isn’t Always Right
Customers don’t have visions about the future of an industry. Customers' wishes are often misleading and, on surveys, they often tell you what they think you want to hear or what will make them look good. Listening to customers' so-called preferences has landed many carmakers in trouble.
2. The Primary Purpose of Business Is Not to Make Money
Everyone wants to make money. None of the failed companies sets out a goal of making as little money as possible. Companies that do make a lot of money almost never have that as their goal. Instead, they tend to be run by enthusiasts who come up with incredible products and services that make customers want to “rip their trouser pockets reaching for their wallets.” To make money, a business must come up with products and services that demand attention.
3. When Everybody Else Is Doing It, Don’t
Whether you are operating in industries or in markets, it’s hard to resist fads, especially when those who profit from them invite you to play. You can and should resist their influence. Make your decisions based on the factors that really count, not on trends or fads.
4. Too Much Quality Can Ruin You
People often confuse means with goals. Few of the chasers really know what they’re chasing. They assume that their idea of quality is the same as the customer’s. It may not be. When it’s not, consumers are bombarded with quality they never asked for, didn’t want and aren’t about to pay for (let alone pay a premium for). An overzealous pursuit of quality has even, on occasion, been known to jeopardize the reputations of brands already known for their excellence. Quality actually has less to do with getting rid of negatives than it does with adding strong positives.
5. Financial Controls Are Bad
Cost cutting is over-hyped in turnaround situations. The financial side of business is much too obsessed with imposing the tight controls that Wall Street loves. If they believe tight controls cut waste, they’re wrong. Tight controls harm in three ways:
1. They can jeopardize an organization’s ability to exploit big opportunities.
2. Because measurements are based on past performance, controls tend to sanctify the status quo. They promote a false sense of order and predictability. This gives the impression that the future is solely a matter of extrapolation, prompting managers to say such foolish things as, “That can’t happen; it’s not in the five-year plan.”
3. With financial controls, looser frequently is better — but if you make your controls too loose, you’ll find yourself in the midst of chaos.
6. Disruptive People Are an Asset
Corporate America loves to fire disruptive employees. Corporate culture prefers people who don’t make waves, who don’t suggest new ideas, who don’t voice any concerns — in short, “yes” men and “yes” women who just follow orders, don’t think and keep their mouths shut. Yet, so-called disruptive people are actually change agents. They create change, but since people most often resist change, change agents are rarely liked. They are, by definition, innovators and catalysts. Every breakthrough or invention in history has been at the hands of a change agent who would, ironically, be seen by today’s corporate culture as a pain in the behind who ought to be fired as a poor team player.
Dr. Ernst Fuhrmann, Porsche’s CEO in the '70s, noted, “Great employees are often the most difficult employees. But not all of the most difficult are great employees.” Collectively, though they’re “a pool from which pearls emerge. Even the greatest change agents — those who, if given free rein could take the organization to the top — have to learn to temper their behavior or they could self-destruct. You need to be just irritating enough to set change in motion, but not so irritating that superiors and colleagues conclude that they’re better off without you.”
7. Teamwork Isn’t Always Good
Committees and teams can hinder excellence. Teamwork isn’t always the answer. Harnessed properly, teams can do miracles, but usually teams are not harnessed properly. Teams prefer the safe, the familiar, the middle of the road. They fear originality.
Teamwork demands compromise, and breakthroughs do not come from compromise. Most groups end up devoting far more time and effort to the practice of teamsmanship than they do to working. Consensus usually kills innovation, instead of creating it. Innovation can’t survive the permission process that’s part of teamwork. Fear, coupled with some team members’ inability to put ego aside and understand an innovative vision, can quickly kill anything daring. If everyone has to agree to the idea before it can be considered viable, progress and innovation will always suffer. Teams are bad at initiating provocative ideas and, when entrusted with someone else’s great idea, teams usually mess it up.
Mr. Lutz’s insights about teamwork explained why most value investing teams didn’t work too well and why independent thinking is the key. The more important question is: Are GM and Ford practicing what worked for Chrysler? This would be your turn to post your thoughts about what you have found in their annual reports and presentations.
- By XUAN GUO and BRIAN ZEN
(Disclosure: Brian Zen has a position in GM.)