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Ford Motors The Turnaround Success Story

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In Q4 2014, Ford had much to celebrate about, this was its 22nd consecutive pre-tax profit, it has been steadily increasing its market share in Asia, and the operating results in most global operations have been positive.  Spurred by this financial success, Ford had increased its dividends to $0.15 a quarter from $0.13, at a stock price of about $16.17 (as of mid-March 2015), this was a 3.71% dividend yield.  

The times were not always this smooth, going back a little less than a decade ago, Ford Motors was a contrast to what it is today.  This article will take a glimpse at Ford in the mid-2000, its hiring of Alan Mulally, and explain how Ford managed to pull off one of corporate history's successful turnarounds.

In 2006, Ford was bleeding cash and its operating loss was a staggering $12.6 billion.  This road to a slow financial ruin was a result of poor management, a lack of cohesive product development, and lax cost controls.

The turning point came when Ford hired its new CEO in 2006, Alan Mulally from Boeing.  The hiring of Mulally was considered a risky move at the time because CEOs were generally promoted from within the automotive industry, Mulally was an outsider with no auto industry experience.  

During Mulally at the CEO helm, Ford saw a number of drastic measures that would help put Ford onto the right track: the implementation of Ford’s “The Way Forward”, the borrowing of $23.4 billion, the dismantling of PAG, and a revamp of the company culture.

The Way Forward

The Way Forward was a strategy devised by Mark Fields (Ford Americas Division President at the time) at the request of the Chairman Bill Ford.  It was released in 2006 just before Mulally becoming CEO.  This new direction was trying to cut its fixed costs and to focus on crossover vehicles.  It included a plan to rightsize the company to reflect its current market share.  By 2006, Ford auto sales had plummeted to a point where it was no longer efficient to have a large workforce.  30,000 jobs (28% of the total work force) had to be eliminated.  Other initiatives also included developing new processes such as the Global Product Develop System (GPDS) to cut cycle time.

At the end, The Way Forward proposal shrunk the company lowering overall fixed costs and freed up capital for investments into other areas such as a single car platform.  These initiatives together gave Ford the brief breathing room it needed to turn things around. 

$23.4 Billion Mortgage

To carry out The Way Forward, Ford needed money.  Laying off 28% of the work force requires a severance pay and Ford wanted to make continue the $7.5 billion annual research and development budget.  The implementation and development of new systems also meant spending even more money at a time when Ford was losing so much of it.  

Ford needed money and needed it fast, as a backstop safety cushion, Mulally secured $23.4 billion in credit.  This was completed by mortgaging the entire company and the Ford logo itself.  This money would help finance the $17 billion turnaround and mitigate any economic risk if the economy was to ever go under.  By 2008, the US economy did just that and entered a recession.  The $23.4 billion no longer seemed like a crazy move but a smart one.  Some people had believed this was a desperate attempt by the company and it would be a matter of time before it went bankrupt.  While the other big two auto firms - GM and Chrysler were forced to obtain loans from the US government, Ford was able to continue operating without government interference.  

The Dismantling of PAG (Premier Auto Group)

The Premier Auto Group also known as PAG was a strategy formed by the prior CEO, Jacques Nasser (CEO  from 1998 to 2001).  The group consisted of the Aston Martin (purchased in 1994), Jaguar and Land Rover (purchased in 1989), and Volvo (purchased in 2000).  Ford for a brief time placed its own luxury car brand, Lincoln, into the group as well.   The PAG was an attempt at the time to diversify its product offerings into different global luxury brands.  For a brief time Ford had placed its bet on the PAG.  Each car brand within the group had a distinct market and appealed to a certain type of consumer.  But because of the economic downturn in 2004, the automotive industry declined, and so, the luxury car brands took a significant hit.   

By 2005, it became too costly to fund the various brands and a total of $17 billion had already been spent to support and acquire these companies.  As well, it was becoming costly to spend scarce financial resources to develop the next generation of new cars for each respective brands.  A strategic review was completed and the difficult decision was made to dismanle the PAG and sell off the brands in the group.  In 2006, Aston Martin was put up for sale and sold to a group of private investors.  Jagaur and Land Rover followed in 2007 and sold to Tata Motors.  The last premium brand Volvo was Geely in the mid-2008.  

The dismantling of the PAG allowed Ford time to focus on its own turnaround and concentrate its efforts on “The Way Forward”.


Company Culture Change

The fix for Ford was not just a simple sell off of unprofitable car brands and mortgaging all of Ford’s assets.  Those initiatives only bought Ford time to start a turnaround strategy.  Mulally also had to change the company culture because it was the culture that was damaging all aspects of the business.

At the time, some of the common problems were a lack of communication.  The teams rarely talked to each other.  There were reports that internal meetings at Ford were very combative.  Many executives were more concerned with protecting their positions than actually collaborating with each other.  It was culture that was highly political.  

Another problem with the culture was people were quick to rationalize the mistakes instead of coming up with a solution to fix it.  Mulally came in and strongly encouraged teams to admit their mistakes and to listen to what the customers want.  

Mulally also implemented a series of operational benchmarks to make sure various teams were on track and on budget.  He also lengthened job tenures of executives to ensure executives are focused on long term growth and collaboration.

The Steady Crawl Back to Relevance

There were so many factors that was slowing Ford down at the time, and in so many ways, Mulally was able to find ways around it.  Facing a cash bleeding company and unprofitable margins, he cut what he could and divested its other brands.  Mulally positioned Ford to focus on its one brand: Ford.  To fuel the restructuring, Mulally took out an - all or nothing - loan to fuel a turnaround, knowing that if the restructuring fails, the company will go down as well.  He began a gradual shift away from a poisonous culture and rewarded teams that focused on problem solving and collaboration. 

In the beginning a lot of people had doubted Mulally’s ability to turnaround the company, and doubted Ford because it was a huge behemoth that was a little too late to save.  But in a short span of 8 years, Ford came back on its feet, and became a force to be reckoned with.  It will be exciting to see where Ford will be in the next 8 years.



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