by Lee Iacocca
The lesson: Innovation can be much more important than size. Often, when companies get big they tend to grow sluggish. It takes a constant infusion of fresh ideas and leadership to prevent that.
TOO BIG FOR THEIR BRITCHES
Merger-mania hasn’t just infected the auto industry. These days, everybody wants to merge. Too often they’re just blindly gobbling up as many players as they can, in the false belief that bigger has to be better. It kind of makes you wonder if merger-mania isn’t really just ego-mania. Or something even more destructive. If you look at it objectively, most mergers do not revitalize companies. Rather, they provide short-term gains for a relatively small group of people, usually Wall Street bankers and lawyers.
Look at the AOL–Time Warner merger in 2000. Everyone praised it as a brilliant marriage of old and new media. It lasted three years. The downfall of the AOL–Time Warner merger has sometimes been blamed on unexpected market forces—like the bursting of the Internet bubble. But the root cause of the failure was our old friend synergy—as in, there was none. It’s hard to imagine Steve Case and his band of technology buffs in the hushed corridors of the stodgy old Time Warner building. Jerry Levin may have loved the idea of all that new technology, but he hadn’t considered how he’d integrate his movie, TV, and magazine businesses with the Internet.
Lest you think I’m advocating a “small is beautiful” philosophy of business, let me assure you that the situation is more complex than just saying big is bad, small is good—or vice versa. The real choice isn’t between big and small. It’s between efficient and inefficient, profitable and unprofitable. That’s where the ball gets dropped. Almost two thirds of all mergers fail to improve the value of the surviving entity’s stock.
So, if the merger bug is buzzing around your company, here are a few things to look for:
Merger of equals? Don’t fall for it. In my opinion, there is no such thing. Think about it. When have you ever seen a true merger of equals—in business or in life? Someone is always in the one-up position. If you don’t believe me, think about your marriage. Can you honestly say it was a merger of complete equals? Usually one of the partners has an advantage. I think that’s where the term “a good catch” comes from. Well, it’s the same with businesses. As the saying goes, “All people are equal, but some are more equal than others.” Proclaiming a merger of equals is usually just an attempt to put a good face on an acquisition.
It’s all about synergy. The purpose of a merger is to create a stronger entity than each of the two parts. It’s sort of a 1 + 1 = 3 equation. The new entity should be leaner, more efficient, and more profitable. That can only happen if there’s synergy. Now, it’s easy for the top dogs to put on rose-colored glasses and imagine all the synergistic benefits of a merger. But it’s a good idea to check with the line—the people who actually have to make it work. As DaimlerChrysler learned, synergy doesn’t automatically exist just because you’re in the same industry.
Don’t forget the customer. At the start of a merger, while you’re busy counting heads, cutting costs, and watching the stock market, don’t let the important things slide—like meeting the needs of your customers. I don’t care what kind of business you’re in, if you lose the customers, you’re dead.
Bigger can be better—but not always. There can definitely be advantages to bigness. But you have to beware of the deadly mentality that tends to creep into big organizations. Executives start thinking, “We’ve got it good. Why take any chances?” Well, the lessons of history should apply. Whether you’re talking about the fall of Goliath, the fall of Rome, or the fall of IBM, there are just too many stories of the ambitious little guy overcoming the fat, sluggish big guy. If you’re big, you’ve got to find a way to stay lively and creative.
When I was in business, I always believed that my legacy should be to make things better. In 1987 Chrysler had achieved a comeback and business was great. But I thought we were getting a little flabby around the middle. We needed a fresh infusion of creativity and a new challenge. I decided to buy American Motors, the venerable maker of the Jeep. When I put it to a vote among my top management, they voted it down. They couldn’t understand why we’d mess with AMC when things were going so well.
Even my mother thought it was a lousy idea. “Why would you take on someone else’s headaches?” she asked. “Why do you need that? Aren’t things good enough?”
“Hey, Mom,” I reminded her. “You know what Pop used to say: ‘If you stand still, you’ll go backward.’”
She didn’t buy it, but I actually believed Pop was right. So I went ahead with the deal to acquire AMC. We paid half a billion in cash and some stock and earned $1 billion in the first year. The profit was gratifying, but more gratifying still was the renewed energy we felt. The acquisition kept us in fighting trim.
Merge because of your hopes, not your fears. It’s a fact of life that when people or companies make decisions out of fear, they’re already losing. There are a lot of fears driving corporate mergers these days—fear of globalization, fear of raiders, fear of the volatile stock market. But when you run a business based on fear you’re no different than the animals in the jungle that act on the fight-or-flight instinct. Humans have brains—at least most of us do—and that means we can act based on reason and hope and possibility.
I don’t pretend to know all the answers. Every business is unique. But I have a little quiz for any company that’s considering a merger or an acquisition. It’s just three questions:
Will it build a better mousetrap?
Will it ultimately create jobs?
Will it stand the test of time?
If you can answer YES to all three, go ahead and merge.
Otherwise, resist the urge.
XIV
Can anyone around here run a car company?
I remember when Detroit really meant something to America. I’m not just talking about the economy. I’m talking about the future of democracy. Now, most of the people reading this book were not alive to hear Franklin D. Roosevelt herald Detroit as “the arsenal of democracy” during World War II, but those words made a lifelong impression on me. Even as a kid I felt such tremendous pride. Those were our factories, our workers, our determination to save the world. That was our arsenal building the combat vehicles and equipment that won World War II. When called to serve, Detroit responded. It was the American way—and it was a big reason I went into the car business.
Wouldn’t it be something if Detroit could once again be the great arsenal of democracy? I don’t mean building tanks. I mean saving our way of life and our communities. Remember, in World War II we took on Germany and Japan and we beat them—and then we rebuilt them. Now we must rebuild our own country. We must resurrect the hopes and dreams of the middle class.
In the 1980s, General Motors advertised Chevrolet as “the heartbeat of America.” The slogan caught on, in part because it reflected the way we felt about our car industry. The pulse of America’s Big Three was strong and steady. Detroit was the engine that drove our economy and the world. Today, the pulse is growing fainter. So what happened?
Well, for one thing, there is no American Big Three at the moment. After Chrysler became DaimlerChrysler, with decision-making coming out of Stuttgart, there were only the Big Two. Then Ford slipped behind Toyota in American car sales, and there was just the Big One—GM. With Toyota poised to overtake GM, I’m worried that we’ll wake up one morning to read the headline, “And then there were none.”
How did this happen? How did General Motors go from 60 percent of the market to 25 percent? How did Ford get out-paced by Toyota on its home turf? How did Chrysler come to press a panic button during its best sales year in history? And more important, what are these companies going to do now?
Times of crisis require bold moves, and this is where America has failed the great industry that created its prosperity. Last year the heads of GM, Ford, and Chrysler tried to meet with the President for months, and the White House kept c
anceling. Bush had time to meet with the winner of American Idol, but he couldn’t squeeze in the leaders of the auto industry. Meanwhile, he was blowing them off in the press, saying things like, “Detroit needs to learn how to compete,” and “They have to start building a product that’s relevant.” Thanks a lot, Mr. President.
By the time Bush finally gave the CEOs forty-five minutes in late 2006, their agenda was pretty serious. The Big Three asked for help in three crucial areas that require government cooperation: the trade imbalance—especially Japan’s manipulation of the yen and its closed markets; the health care crisis, for which the car companies bear an unfair burden; and the need to develop alternate fuels such as ethanol. The President’s response was polite, but it was obvious he wasn’t about to roll up his sleeves to help solve these problems. It was more like a photo op than a work session.
It’s a good thing the industry doesn’t have to depend solely on the executive branch for support. Now that my good friend Michigan congressman John Dingell is chairing the Committee on Energy and Commerce, auto manufacturers can count on a listening ear on Capitol Hill.
I can’t believe I’m still talking about this almost twenty years after I accompanied the first President Bush to Japan to urge the Japanese to open their markets to U.S. products. In all this time what’s happened is nada, nothing, zip. Twenty years later it’s the same old song. No help with trade, no health care plan, no commitment to alternative energy.
When America needed the Big Three to be its arsenal of democracy, Detroit came through. Now, when Detroit asks the government to be its partner in revival, the White House gives it forty-five minutes.
Now, you might say to me, “A lot has changed since 1940,” and you’d be right. But I don’t believe that America is less capable of greatness than it was then. You’ll never convince me that the spirit and genius we invested in inventing the greatest industry in the world can’t be used to reinvent it. All it takes is the will to do it, and the leadership to set the course.
THE LEADERSHIP TO REBUILD
I get asked all the time, “Lee, if you were running a car company today, what would you do?” It’s something I wonder about a lot. When you’ve spent your life in a business, it’s hard not to play out the scenarios in your head, especially when the Big Three are constantly in the news.
So I’ll take a stab at it. There is no question that the problems in Detroit are complex. But there are some basic steps any leader has to take if the American car industry is to survive. If you’re faced with the challenge of heading up an American car company today, here are the things you must do:
Create a sense of urgency
You’re up against the wall, and you’re getting hammered. Instead of hiding in the corporate offices, get out there and communicate. Tell it like it is: “We have a tough task ahead of us. The challenges are formidable. But together we can do it. It’ll take everyone—the employees, the dealers, the suppliers, the union, the government—and we’re asking for your help.”
Communication is the lubricant that makes an organization run—and never is that more true than during times of crisis. It always amazes me how big corporations will spend millions of dollars telling the public what’s happening, but forget to tell their own employees. A good leader will make every person feel personally involved in the recovery. Many years ago, when Chrysler was fighting for its life, I went to every single plant so I could speak directly to the workers. I thanked them for hanging in there during those hard times, and I asked them to join me in restoring the company to greatness. There were a lot of cheers and some boos, but I got them involved.
If you haven’t visited every plant this year, get out there and do it. Tell the workers what’s happening, and enlist them in the fight. Meet with the plant supervisors and ask for their suggestions. Go to the dealers and the suppliers and hold strategy sessions: What should the priorities be? What should be cut? What should be changed?
Assemble a top team
The quality of your team will make or break your program. Remember, it’s never just one person. Every so often, we get enamored of an individual, and start thinking that person is some kind of magician. Right now in the auto industry, that so-called boy wonder is a guy named Carlos Ghosn, who is credited with turning around Nissan, and he did a great job. But to say that Ghosn alone turned around Nissan is like saying that I alone turned around Chrysler. I brought eighty-eight guys with me from Ford—including a top management team. They helped save my ass. I guess what I’m saying is, there’s not going to be a savior, just a team of seasoned leaders.
And make sure that team includes top talent in design, engineering, and manufacturing, because that’s your only priority—to build cars people want to buy. Hot styling still sells them, but quality keeps them sold.
When I was head of Chrysler, I couldn’t walk into a plant and instantly see whether it was running efficiently or not. But I had people who could—notably Dick Dauch and Steve Sharf, who were my secret weapons in manufacturing and brought real quality to our products in a short period of time.
Share the sacrifice
In the coming months and years, you’re going to have to make more painful choices. Not everyone will survive, and those who do will have to take a haircut and maybe a shave, too. You must demonstrate equality of sacrifice. When you ask everyone to join the cause, you’ll get no cooperation if the workers are grumbling, “Why am I taking a beating? The fat cats are up there earning millions, and you want to cut my what?”
We saved Chrysler for one reason. Everyone shared in the sacrifice—starting with me. You see, it wouldn’t have gone down too well if I’d asked the rank and file to tighten their belts while I was putting extra notches in mine. So I cut my salary to one dollar a year. That is an example of leadership, born in a crisis. Then I went to the executives and asked them to take a pay cut. Finally, I went to Doug Fraser of the UAW and asked what the union could give. The workers really came through. Over a nineteen-month period, the workers made $2.5 billion in concessions. It was the workers more than the government loan that saved the company.
Simplify!
It’s time to get back to basics. There are too many models, and you have to get rid of some of them. The complexity of your product lines is killing you. Remember, Toyota only has three brands—its name-plate Toyota, Lexus, and a funky little car called the Scion.
I know this is a controversial idea, but you need to retire the Sloan model. Alfred Sloan was a genius in his day. Back in the 1920s, he had a vision that took hold of the nation. A car for everyone. Not just the elite, but ordinary people, too. Sloan’s vision was so effective that even during the height of the Depression, President Herbert Hoover defined the American birthright as “a chicken in every pot and a car in every garage.”
Sloan’s model of a car for every income level motivated people to trade upward as they progressed in life. In other words, you started with a Chevy and were buried in a Cadillac hearse. Sloan’s brand concept built GM into a powerhouse, and Ford and Chrysler followed suit. But the Sloan model just doesn’t work anymore. Your companies are being smothered by a glut of brands and models within a brand. GM, in particular, is saddled with an unwieldy breadth of market. Does every brand really need a minivan, a big SUV, a little SUV, a crossover, a station wagon, a two-door coupe, a four-door sedan, and a convertible? That’s just plain crazy. It confuses the customers, kills the dealers, and plays havoc with assembly plants, making it almost impossible to build a production schedule to meet market demand.
American car companies need a new, leaner rule of the road that builds brand identity and allows them to streamline the manufacturing process. It would be nice if you could always utilize plants to full capacity, but that’s hard to do these days. A plant’s optimum capacity is about 250,000 vehicles a year, and there aren’t too many models with that instant appeal anymore. So an efficient plant has to be able to build up to five models of about 50,000 each—and that means commonal
ity of parts. I’ve been impressed by Chrysler’s new flexible manufacturing plan that allows them to do just that. Their robots are amazing. You can change the hands on a robot and build an entirely different car. Now, that’s real innovation.
Shuck the losers
Make a list of the three most profitable brands—at the factory level and at the dealer level. Then take the three or so least profitable brands and give them one year to break even. If they can’t get into the black, drop them.
Car companies—like all other big bureaucracies—have a real aversion to giving up on something once they’ve poured a ton of cash into it. There’s always an attitude that success is just around the corner. I hate to say it, but it’s time to cut and run on some of these products. I give GM high marks for dropping Oldsmobile a couple of years ago. It must have been an agonizing decision. Here was a brand that had been around for over one hundred years, but GM rightly determined it was time to end Oldsmobile’s run.
After making such a tough decision with Oldsmobile, closing Saturn should be a no-brainer. Saturn was a mistake to begin with when Roger Smith first imagined building his Japan-beating small car, and the mistake keeps growing. I’ve heard that Saturn has never turned a profit in its thirteen-year life. You have to ask: What is the franchise that GM is protecting?
Ford’s recent mistakes have been costly, and its identity crisis has been demoralizing. I’ve never understood why Ford needed to acquire nameplates like Jaguar, Volvo, Aston Martin, and Land Rover. Sometimes I look at Ford and I feel like asking, “What do you want to be when you grow up?” Ford thought it could buy its way into the luxury car market. It didn’t work.
