A Golden Opportunity for Ford and GM

Originally Posted in the Harvard Business School Working Knowledge on March 1, 2010.

Toyota’s tragic automobile recalls offer a historic opportunity for Ford’s CEO Alan Mulally and General Motors’ new CEO Ed Whitacre. After years of decline, they can reestablish the preeminence of American-made autos if they are wise at leading through this crisis.

In the past month Toyota has recalled almost 9 million vehicles—more than the entire number it sold the past three years. The irony is that Toyota gained significant market share in the past decade at the expense of its American competitors by offering superior quality vehicles. Now quality has become Toyota’s Achilles’ heel.

No doubt Toyota will regain some of its lost market share in the short term, to the extent the automaker’s production systems can respond by increasing production rates without incurring problems of their own. The bigger question is, will Ford and GM be able to capitalize on this opportunity for the long term?

I was with Whitacre when he initially learned that Toyota was suspending sales of 57 percent of its autos sold in the United States. He responded immediately by directing his executives to ramp-up production as quickly as possible.

While Whitacre and Mulally maximize current sales, taking advantage of this opportunity in the near term is not a long-term strategy. All too often, both GM and Ford have squandered similar opportunities by simply raising prices and profits, as they did during the three-year import quotas in the mid-1980s. They must recognize that no matter how wounded Toyota is in the short term by its quality problems, this company is a very tough and able competitor that will move quickly to revamp its quality and its product offerings.

On the march

GM and Ford need to move aggressively to secure their market share gains by investing windfall profits to make their auto lineups more competitive for the next decade. That means introducing new designs that offer attractive features, improved fuel efficiency, and better customer value along with superior quality. This will take enormous effort, ingenuity, and discipline along with massive investments.

In this regard, Ford has the jump on GM. When Mulally was hired from Boeing in 2006, Ford was in trouble. The company was stretched thin with too many product lines spanning too many countries and appealing to too few consumers. Mulally’s first act was to borrow $23.5 billion by mortgaging the entire company to give Ford the runway necessary to retool its aging lineup.

Mulally moved fast, trimming unpopular lines, cutting management layers, and insisting on an R&D overhaul that hurt short-term profits. Having weathered the 2008 crisis without U.S. government support, Ford has $23 billion in cash in the bank and a lineup of eco-friendly automobiles to which U.S. consumers are gravitating.

GM only emerged from bankruptcy last July, when Whitacre was installed by the Obama administration as its new board chair. Since that time, he has acted decisively, removing Fritz Henderson as CEO and assuming the mantle himself. Whitacre quickly reorganized the company from top to bottom, cut out layers of middle management, initiated new product development programs, and revamped GM’s international sales and marketing. He also put himself on the firing line, publicly taking ownership for GM’s turnaround and appearing in a series of advertisements challenging consumers to compare GM autos with its competitors.

Glimmers of Ford’s and GM’s potential shone brightly at the Detroit Auto Show last month. Mulally showcased his new model range. Car experts and reviewers alike agreed the new models revitalized Ford. Whitacre also unveiled a new line of cars, admittedly trailing Ford, particularly in hybrids. He boldly predicted GM would be profitable in 2010 and would pay off its government loans.

January sales for Ford and GM jumped 24 percent and nearly 14 percent, respectively, year over year, in spite of high unemployment and low consumer confidence.

Chrysler falls further

In contrast, look at Chrysler and its new CEO, Sergio Marchionne. He ambitiously projected that Chrysler would become profitable in 2010 on an 18 percent increase in sales. Instead, Chrysler sales dropped 8 percent in January. Marchionne has not been aggressive in revamping Chrysler vehicles, repositioning the company’s brand, or reorganizing its beleaguered management. As a result, it is falling further behind and missing this golden opportunity.

The last and perhaps most important lesson for leaders going through a crisis is that they cannot just play defense by cutting costs and waiting for the crisis to pass. They have to go on offense simultaneously by transforming their organizations and investing heavily in revamping their products and their marketing to focus on winning now.

That’s precisely what Mulally and Whitacre are doing. They may not be automobile industry veterans, but they are highly competitive leaders, skilled at winning in the marketplace. The American automobile industry is a lot stronger today because of their decisive, visionary leadership.