Redesigning an Industry Icon

Ford Motor Co. CEO Alan Mulally was a runaway winner of the 2010 MarketWatch CEO of the year, easily beating out Steve Jobs, Vikram Pandit, Jeff Bezos and Reed Hastings.  Since the hiring of Mulally in 2006, Ford has been on a roll.  While Ford continued to post financial losses through 2008, the company turned the corner in 2009 and started to reap the benefits of Mulally’s turnaround strategy.  Sales and profits are up, the stock quadrupled in 2009 and doubled again in 2010 and the company has gained market share in back-to-back years for the first time since 1993.  The company even posted its best third quarter profit ($1.7 billion) in over 20 years.

So how did an old aerospace guy with no automotive experience turnaround a struggling industrial icon?  Let’s look at six elements of Mulally’s strategy that have enabled Ford to transform their financial and cultural picture in four short years:

Create a Simple and Compelling Message – By defining a simple, but powerful mission to build higher quality, more fuel efficient, safer cars, Mulally gave Ford’s employees something they craved: a message they could rally around and a vision of a company in which they could believe.  “The more each of us knows what we’re really contributing to, the more motivated and excited and inspired we are.”

Make it About the Long Term – Second, Mulally invested in a long-range plan to create a global design language he called “One Ford.”  The One Ford strategy meant selling off higher profile brands (Land Rover, Jaguar, Aston Marton and Volvo), bringing back a completely redesigned Taurus, and designing cars on a global platform.

Exude Contagious Optimism – Mullally understands that his positive energy is contagious.  He exudes an optimism that is both inspiring and credible.  He has an unwavering belief in his team’s plan, balanced by relentless realism about current market conditions, and a willingness to make adjustments along the way.

Develop a Truth Telling Culture – Mulally has created a culture in which telling the truth is paramount and gets rewarded.  As an example, Mulally presides over a weekly “Business Plan Review” where the heads of Ford’s four profit centers and its 12 functional heads report on progress relative to their targets, share problems and collaborate on ideas for improvement.

Be Profitable on Lower Volumes – Under Mulally’s leadership Ford has reduced structural costs by more than $10 billion and will have reduced its production capacity by 40% by the end of next year.  In a drive to be right-sized, Ford now has fewer factories, each producing more vehicles, which has allowed the company to be profitable at near-record-low sales levels.

Create Intimate Customer Relationships – Led by Scott Monty and his talented social media team, Ford has created an extensive online presence committed to creating transparency during the turnaround.  In addition, Monty launched “The Ford Story,” a social media hub which builds intimate customer relationships through Facebook, Twitter, YouTube and other online communities.

Regardless of your size, industry or business goals, Mulally’s vision and values are equally relevant to every leader responsible for aligning people and driving change.  If you want to dramatically increase your effectiveness and post unprecedented results, “stand for something beyond profit…rally your employees around a shared mission…practice realistic optimism…and tell the truth without fear.”

Managing Rapid Change on a Large Scale

For Starbucks, the world’s leading retailer, roaster, and brand of speciality coffee, 2008 was a tough year.  Amid a struggling economy and increased competition from cheaper rivals, the company’s net income during the first three months of the year fell 28 percent compared to the same period in 2007. Starbucks’ founder Howard Schultz announced that the company had “lost its way,” becoming too standard and corporate, and less entrepreneurial—less like a local coffee shop.  Shultz resumed the role of CEO and president, and for the first time the company closed stores on a broad scale.

Fast forward a year.  Starbucks posts a 4-percent growth in total sales, comparable store sales are up 4 percent (driven by increases in store traffic and average ticket price), and the company’s margins are up 8.5 percent.  As a result, the company’s earnings jump to $241.5 million in the final quarter of 2009, more than three times the $64.3 million seen a year earlier.  Even more impressive is that Starbucks’ consumer research shows higher satisfaction in every major indicator, such as value perception and experience, compared with 2008.

So why should you care about Starbucks’ turnaround?

Aside from the obvious financial success, the methodology behind the transformation reveals important lessons about driving rapid change on a large-scale.  Although many analysts would argue that the turnaround was due to store closures, aggressive cost cutting, and price increases, Shultz would take offense at this “financially focused” view of the transformation.  Starbucks did shore up key financial metrics, but Shultz’s vision for the company’s turnaround was to reconnect with its past: build upon the legacy of innovation and provide customers with a distinctive “Starbucks experience.”

In the July/August 2010 issue of Harvard Business Review, Shultz discussed his views of the four key elements to the dramatic turnaround at Starbucks:

Own the issues.  The first step of the turnaround was to challenge the leadership team to accept responsibility for the self-induced mistakes.  This started with Shultz.  As chairman of the board, Shultz acknowledged to the entire company that he was just as much to blame for the current situation as operational leaders.  An often overlooked step in the process, leaders “owning reality” is critical to expediting change.  Without the willingness to take responsibility, leaders spend their time justifying past decisions and protecting sacred cows, rather than learning from mistakes and making immediate course corrections.

Engage leadership in the process.  It was critical to Shultz that all managers and leaders own the relationship between each barista and customer.  “One cup of coffee, one customer, one barista at a time.”  To help ensure this, Shultz created a very public expression of this commitment to be accountable and responsible for each and every customer experience.  In the midst of financial woes, the company spent $30 million and took all 10,000 store managers to New Orleans for a company conference.  Prior to the start of the conference, every manager participated in five hours of community service (50,000 hours in total).  Using their hands, heads, legs, and backs, the team kicked off their renewed commitment to customer service by doing service.

Raise revenue and cut cost. After getting buy-in from company leaders, the team initiated a number of improvements aimed at quickly changing the financial condition of the company.  During the course of the first year, the company cut $581 million in costs, of which 99 percent were permanent and not customer-facing.  The company also made a number of changes in the stores to better align product and service offerings, including reintroducing Pike’s Place blend, selling healthier snacks, and launching a new loyalty card.  Finally, Starbucks ignored conventional advice and launched its highly popular VIA instant coffee.  With $100 million in annual sales during its first year, VIA provided a much needed shot in the arm as well as opened more than 30,000 new points of distribution for the company.

Focus on the customer experience.  As Shultz stated, Starbucks brand is based on quality coffee, but more important, on the relationship each customer has with a barista.  In a society where good service is rare and basic decency is often absent, Shultz decided the company would take a stand and demonstrate civility, respect, and trust in each customer interaction.  In addition, much to the dismay of Wall Street, Shultz got rid of reporting monthly metrics at the store level to move the pressure from producing good numbers to producing a good experience.  Finally, Starbucks launched www.mystarbucksidea.com as part of a new social networking strategy to connect the company with its customers in real time.  My Starbucks Idea is a portal that allows customers to suggest improvements to the store, products, and pricing, and for other customers to vote and identify the most popular ideas.  Actual Starbucks employees engage with the customers each week, respond to the ideas, and when an idea is selected, provide timetables and commentary on the implementation.  The portal generated more than 75,000 ideas in its first year alone.

At its core, “Starbucks represents something beyond a cup of coffee,” says Shultz.  While targeted revenue and cost improvements are one of the four primary elements of Starbucks’ transformation, Shultz emphatically states that it was the focus on the leadership engagement and creating a unique customer experience that were the secret to the success.

Like Starbucks, if we want to create an environment where passion drives our people and people drive our profits, we need to view change as something beyond the tools and techniques of continuous improvement.  Developing a lean culture is not the byproduct of achieving financial results through targeted kaizen events and Six Sigma projects.  In our desire to drive business results, we often let data, metrics, and financial impacts take precedence over crafting an inspiring vision and creating an emotional connection between our people and a larger purpose.

To accelerate your results, spend less time defining the what and how of continuous improvement, and more time defining who and why.  Engage people with an inspiring vision and connect their activities through aligned management systems.  By pointing the organization toward a customer-centric future state and giving people the autonomy to change products, services, and processes to achieve their goals, the organization can exponentially increase its success.