This is the third in my posts on the industrial economy. There may be one more. I haven't decided. I want to talk a little bit about corporate turnarounds. I'm not going to spend any time looking at a financial analysis because I generally think it's futile. But, concepts such as cash burn rate, free cash flow, debt loads, etc are surely determinant factors in any company's return to profitability. For me, it's a little too much of stabbing in the dark to make the assumptions used by most financial analysts. It's basically trend following. In turnarounds, trend following is almost by definition an oxymoron. Should any company in need of a transformational turnaround continue at trend, they will perish. As long as a company is reasonably capitalized and other things being equal, one has to really focus on a company's ability to execute as a primary driver in business transformation. All things being equal includes a compelling business model. It's different for Kodak than it is for Ford as an example. Ford has a very viable business model. Kodak is in the throws of trying to migrate from an annuity based razor-razor blade model (cameras-film) to the digital world. Does Kodak have a viable business model? That's much harder to determine because they are turning their old business model upside down in an attempt to survive.
In this post, I am talking about publicly traded companies
. I must remind the readers I am not an investment advisor nor is any of this post to be construed as investment advice. I am simply sharing my experiences and perspectives. Re-read my disclaimer located in the left margin of my blog and make sure you clearly understand this. If not, you should cease reading this post, leave this blog never to return and find a new pastime
because I take no responsibility for the reader's actions. It's sad I need to say this but some people have odd hobbies of blaming others for their mistakes.
Let's get going because this is a long post. What company was I talking about in the first post on the industrial economy? The company that has been decimated by competition, has an arrogant culture, inbred organizational structure, tired products and being slaughtered by Japan Inc? The company was Caterpillar a few decades ago when they were given up for dead. They were much worse off than Ford or GM. Since being given up for dead, a $10,000 investment in Caterpillar is now worth over $2.4 million. Would you be surprised to hear Caterpillar is now the most admired industrial company on earth? And, what if I told you it was also one of the most admired knowledge companies on earth?
Uttered In the same breath as Google, Hewlett Packard, Microsoft and Apple? What did you say they make? Bulldozers? Pshaw, you say!
Today, everywhere I look people are talking about Toyota. Toyota to pass GM. Toyota passes Ford. Toyota to build plant in India. Toyota to introduce new pickup. Toyota introduces hybrid. Toyota, Toyota, Toyota. Now, don't get me wrong. Toyota is the god of auto manufacturers and an awesome industrial company. They are far from the insular, self defeating cultures of Ford or GM. They have a tremendous paranoia about failure and as Andy Grove stated, "Only the paranoid survive.".
Or maybe more appropriately, Andy should be credited with realizing only the paranoid thrive. Forty years ago who would have predicted GM and Ford would be on the trash heap and Toyota would be the largest industrial company on earth? Who is willing to bet Ford might be a dominant, nimble industrial leader worthy of fear by the great Toyota forty years from now? "I'll never buy a Ford." "Ford will never get my money." Really? Do you think clients said the same thing about Caterpillar a few decades ago? They surely did.
While many are advocating a buy of Toyota or Honda stock here and now, I couldn't disagree more. There is no doubt they are the top two car companies on the planet but that is also factored into a premium equity valuation for both companies. In addition, it doesn't get any better than this for both companies. Two of the top three auto makers on the planet are going through the worst crisis in their history. Beating Ford and GM today requires little effort. All Toyota and Honda need to do is show up to win. Tomorrow, next year, five years from now, the competition from Ford and GM will be significantly more intense. Maybe brutally intense. No, the time to buy Toyota and Honda was four years ago at the start of this bull market. Now, buying Toyota and Honda is obvious to the main stream investor. That means reasonable odds are smart money will be distributing shares to uninformed investors at some point. Nobody likes Ford. Nobody believes. Nobody. And, that's why I love Ford Motor Company as a deep turnaround play. Because you never, ever, say never. Not with the incredible global franchise, global brand, tremendous technology, incredible talent and now a leader I believe has the right stuff, Alan Mulally
Ford is a potentially powerhouse organization as is GM. I hear so many emotional responses when I mention Ford or GM as transformational stories. Did you know Ford is the only automobile company with a global brand and a strong history? Ford has been in international markets longer than many car companies have been in existence. Many people have never heard of GM because of its fragmented global branding efforts. Honda still doesn't have the global reach. Toyota is arguably the only equal of Ford's global brand. Is the Ford brand destroyed by recent troubles? Hardly. 95% of the world's population has not had a negative experience with a Ford product. Even today, in every continent sans the U.S., Ford is still building strong product and a dominant player. The hot European Mondeo
has drawn rave reviews. Ford's S-MAX won the 2007 car of the year
in Europe. Even in the U.S. where Ford is terribly weak on product right now, the company has a dominant position in the pickup truck market and a reasonably strong brand in the auto segment. If Ford can hold down the number two position in the U.S. with such a weak product line, what could it do were it firing on all cylinders?
Now, Ford was just downgraded to sell by a Wall Street firm. Yet another just upgraded them. Focus on the turnaround not the noise. How many Wall Street firms had a buy on Caterpillar when it was given up for dead? Zacks
did a study a while back and found that companies with the fewest buy ratings are often
the best investments. In other words, Wall Street is not the place to look for guidance on business transformation.
I like Ford over GM for many reasons. Let's look at a few. First, I don't believe GM has suffered the pain Ford has. Hence, I'm not convinced GM's
leadership team has the passion and sense of urgency needed to really drive the company to new heights as it pertains to transformational change. Yet, I could be wrong. GM may have hit bottom but I am dubious. On the positive front, there is no doubt GM has stolen the thunder of nearly every mainstream competitor with their new product introductions and alternative energy concept vehicles. Ford is structurally alot
more dysfunctional than GM and it is priced accordingly. GM has already progressed significantly down the path of global procurement, global manufacturing, global engineering and life cycle management. Ford is just coming to grips with these initiatives. Yet, Ford is extremely serious. They are levering the company in a bet that the current turnaround will be successful. Ford has hired a proven turnaround expert who understands lean manufacturing and worships Toyota's culture of excellence. He understands innovation, he's very focused in the customer and he realizes great product are key to their efforts. The new boss has quickly moved to align corporate strategy and organizational models to win globally instead of the local turf skirmishes of the old Ford. In other words, bring the global resources of Ford Motor Company to bear in winning your business. Finally, he has quickly instituted a culture of personal responsibility, empowerment and accountability that was lacking in Ford.
Looking at the pricing action of Ford's stock, there is a reasonable chance that all investors who want out of Ford are out. Ford recently had a powerfully capitulative
month where nearly two billion shares changed hands. Drastically more than any time in its history. And, in doing so, the stock actually made a higher low. A very bullish sign of a possible washout. A prior bottom was reached four years ago at this level and the long term chart below shows strong support at the $7-8 range going back decades. Is this a double bottom in the making? While most lay investors look to weeks or months for bottoming patterns, turnaround stories of battered companies sometimes take many years to form. Let's look at some historical precedence in the form of Caterpillar. Caterpillar's double bottom in its stock price took eleven
years. That's right. Eleven years of muddling through mismanagement, lack of focus and poor execution. Now, Ford's success is partly tied to a reasonably healthy economy and battered companies always face more uncertainty in late economic cycles. Therefore, reasonable risk exists if the global economy see a hard landing at some point. Ford may move lower or even enter bankruptcy if any down turn is very protracted. But, that isn't going to happen any time soon. The ingredients are in place for a Harvard business school case study.
Let's look at the similarities between Ford and Caterpillar. The comparisons are frighteningly similar.
1) UAW rank and file
2) Old line industrial company
3) Strong global franchise and brand
4) Lack of strong leadership
5) Inward looking and insular organizational constructs
6) Inept execution starting with inept leadership
7) Poor customer service
8) Lack of focus on customer needs
9) Innovation and engineering choked off by bureaucratic control of the company
10) Thrown on the garbage pile as being unable to compete with the Japanese
11) A culture rife with no accountability or personal responsibility
Being part of many transformational successes, I think I have a nose for the success or failure of turnarounds. There is a certain je ne sais quoi
they have in common. Some key initiatives I believe are key to successful turnarounds include:
1) Align organizational resources to fit strategy and objectives: global design, global branding, global procurement, global engineering.
2) The entire team must be reading from the same playbook. Common goals and plans must resonate with the alignment in both personal success and financial reward
3) Listen to the complainers and encourage positive dissension within the framework of constructive feedback. Vocal critics must be listened to and their suggestions taken seriously. Many are loyal leaders who are passionate about the success of their company.
4) The entire company needs to understand there is no room efforts of half attempts
by anyone. We are all in this together and we all must pull our weight and more.
5) Recreate an entrepreneurial zeal and pride of ownership. Unlock the creative juices of the tremendous talent inside Ford.
6) Encourage an environment of risk. No risk, no reward. Innovation and success requires prudent risk taking with bold moves.
7) Encourage failure. This goes hand in hand with risk. Too often insular cultures breed "just enough" thought processes rather than putting it out there.
8) Create an environment of accountability and processize
it. This goes hand in hand with alignment of key resources and organizational structure. Leaders want the challenge and will rise to the effort regardless of their title or role in the organization.
9) People need to understand it is a team effort and you are either on the team or you aren't. Healthy debate and alternative ideas are positive but in the end, it's all about the team. When decisions are made, the culture needs to embrace those decisions and move forward with strong conviction and execution.
Most senior executives fail to realize turnarounds are social movements. That is likely why so few are good at it. Team work, empowerment and leading leaders are not commonly had skills. A great leader is oft transparent because it's really not about them. Do you have any idea who runs Toyota or Honda? Likely not. Is that a coincidence? Likely not. Alan Mulally
has many tough tasks ahead. But, in the end, he will strive to unlock the industriousness, creativity and pride of his employees onto the market place. In other words, it is less about Alan Mulally
and more about his ability to unlock Ford's tremendous talent onto free markets. While it may sound simple, every bureaucracy resists change. Ford has resisted it for forty years. Yet I am quite confident he clearly understands how to do it. And, how to put the right people in a position to make it happen. In effect, successful organizations mimic democratic and capitalistic ideals within the organization. Debate, brainstorming, focus on the client, excellence, industriousness, execution, empowerment, responsibility, innovation, pride, risk, teamwork and financial rewards for doing so. As I have written before, Ford Motor Company and GM will rise from the ashes to become great industrial powers again.
There is not a single doubt that Ford is one of the greatest sources of talent, intellectual capital and knowledge on this planet. The goal is simply to unlock those resources and get them pointed in the right direction. Make no mistake, the talent and capability inside Ford and GM is every bit as good or better than inside Toyota or Honda. Once the tremendous talent inside Ford is organized constructively and freedom is given to that talent, the cream will rise to the top. While it would be fantastic if Ford had a great pipeline of new products hitting U.S. show rooms this year, they don't. Yet, by 2010, the entire Ford portfolio of products is set to be re-released. The biggest issue I see is inability to break the bureaucracy and legacy health care costs. But, with Goodyear's creative solution of putting health care into a trust, precedence may be set to lift that burden from Ford and GM.