Ford Posts Loss of $5.8 Billion, Worst Since ’92

New York Times
By MICHELINE MAYNARD

DEARBORN, Mich., Oct. 23 — The Ford Motor Company reported its worst financial results in more than 14 years Monday and warned that its business was likely to worsen further in the months ahead, as it and other Detroit auto companies struggle to reinvent themselves.

Indeed, the new chief executive at Ford, Alan R. Mulally, a former Boeing executive, said the automaker would require a full transformation in the way it thought about consumers and approached the American market.

The typical Detroit turnaround, based on plant closings and introducing a few hit vehicles but with little change in attitude, will not be enough to see Ford through, Mr. Mulally said in an interview at Ford’s headquarters here on Monday.

The company, posting a $5.8 billion loss for the third quarter, has to first acknowledge the grim realities of the marketplace and then realign itself to be more productive and nimble.

“The most important thing to watch,” Mr. Mulally said, “is do the leaders have a view that’s different than the way it’s being done today. Because if they don’t, we are surely not going to get there.”

But there will not be much good news anytime soon for Ford or for the Chrysler Group, which is expected to join Ford on Wednesday in reporting dismal results for the last three months.

Only General Motors, which is slowly bouncing back from one of the worst stretches in its history with savings from deep cost cuts, is expected by Wall Street to earn a profit in the third quarter, of about $300 million, though its American operations may well remain in the red.

The dire straits in Detroit represent the continuing fallout from the auto companies’ too-long reliance on gasoline-consuming sport utility vehicles, as well as their failure to develop new cars and trucks to fend off their Asian competitors, particularly Toyota and Honda of Japan and Hyundai of South Korea.

Those foreign companies have built factories in the United States during the last two decades and focused on fuel-efficient vehicles , even as they added S.U.V.’s and pickup trucks to compete in Detroit’s last stronghold. That two-part approach paid off in record sales for the Asian makers this summer, when gasoline prices soared above $3 a gallon on average nationwide.

The rapid shift in the preferences of American consumers has been especially hard on Ford and Chrysler, which have been slow to wean themselves away from big vehicles and the outsize profits that such vehicles typically produce.

Including the loss reported Monday — Ford’s worst showing since early 1992 — the company could be on track to lose more than the $10.6 billion that G.M. did last year, even though G.M. is one-third bigger. Ford’s recent losses were deeper than it, and many on Wall Street, had expected.

Ford executives said the company’s operating performance in the final three months of the year would be even worse than its results in the quarter recently ended. And it indicated that it expected its problems to continue through at least the first half of 2007.

At Chrysler, meanwhile, executives are warning Wall Street that it will lose at least $1.5 billion for the last three months when it reports on Wednesday. That is twice as much as Chrysler previously cautioned analysts to expect.

And in another unexpected disclosure, Chrysler acknowledged Monday that it had nearly 100,000 more unsold vehicles on hand this summer than it previously disclosed, at a time when its backlog soared well above industry norms.

The worsening conditions at Ford and Chrysler have, by contrast, made G.M. appear healthier. It began a plan nearly a year ago to cut 30,000 jobs and close all or parts of a dozen plants by 2008.

G.M. has curbed its North American losses, gaining a valuable head start on Ford, said John Casesa, a longtime auto industry analyst.

“This is where G.M. was a year ago,” Mr. Casesa said of Ford. Like G.M., “Ford can do two things: borrow more money and sell assets” to buy time until their operations problems are fixed.

Ford already has put a British maker of luxury cars, Aston Martin, up for sale and is believed to be seeking buyers for its other British marques, Land Rover and Jaguar. It has begun a restructuring plan, called the Way Forward, which includes more than 40,000 job cuts and a dozen or more plant closings through 2008.

As a sign of its need for fresh thinking, Ford reached outside the auto industry for a new chief executive, Mr. Mulally, who succeeded William Clay Ford Jr. in the post last month. Mr. Ford continues as chairman.

Mr. Mulally said the company’s restructuring plan, devised before he arrived, would continue.
But he is also mounting efforts of his own to make Ford more productive and eventually profitable, following similar steps he took at Boeing. During his time there, Mr. Mulally streamlined production and helped the company remain profitable even when airlines reduced orders after the September 2001 attacks.

At the same time, he must convince Ford employees, shaken by job cuts and the threat to long-cherished benefits like health care, that the company has a vibrant future. Ford, once among the most respected names in corporate America, has been rattled in recent years by a series of high- and midlevel departures, producing a brain drain.

“Even more than turnaround, I would use the word transformation,” Mr. Mulally said. “It will require a transformation of the product line and a transformation of the business. You can’t do one without the other.”

For now, Mr. Mulally is still in a sort of honeymoon period, which, analysts said, may last longer than that of the typical auto company executive, given his newcomer status. After just two weeks on the job, he sent Ford employees an e-mail message telling them that he had three priorities: people, products and productivity.

“I know that the people of Ford have been through some tough times in the past few years,” he wrote. “I wasn’t here to share that with you, but I am here now to help move us forward,” adding that it is “at once the most humbling and exciting prospect of my professional life.”
This year, Toyota, which had lagged behind the three Detroit companies in American sales, has passed DaimlerChrysler, which includes its Mercedes and Chrysler Group divisions, to rank by sales as the No. 3 auto company in the United States.

Given the slide at Ford, Toyota is likely to pass it, too, in the next few years. Ford executives have already acknowledged that their company is likely to hold only 14 percent to 15 percent of the American market once its transformation is complete, or about 10 percentage points less than at the beginning of the decade.

In fact, Ford’s market share declined to 15.5 percent in the third quarter, a drop of two percentage points from the corresponding period in 2005, and a central reason for its significant loss, which included more than $3 billion in special charges related to the Way Forward plan.

That in itself did not shake Wall Street, but investors were surprised when Ford’s chief financial officer, Donat R. Leclair, said in a conference call with analysts that the company expected fourth-quarter performance to be worse than that in the third quarter.

In trading Monday, Ford shares fell 11 cents, to $7.90.

Yet these heavy losses. and the prospect of more, come as the company is seeking to enter the market with a new group of small, more fuel-efficient vehicles.

These include a new crossover vehicle, the Edge, which Ford introduced last week, and it is promising to eventually introduce a subcompact to compete with models sold by G.M., Toyota, Honda and Nissan. Unfortunately for Ford, the smaller vehicles come with an expectation of smaller profits.

In revising its Way Forward plan last month, Ford said it did not expect to earn money in North America until 2009, a year later than it originally predicted. Mr. Leclair said in an interview Monday that Ford anticipated a profit of 3 percent to 5 percent once it emerged from the red.

But getting there will be difficult. Mr. Mulally said Mr. Ford had been “really clear” during its courtship of him that grim days lay ahead. But he said he was not deterred.

“The Ford company is looking at business reality and dealing with it,” Mr. Mulally said.

Ford’s third-quarter loss, equivalent to $3.08 a share, is more than 20 times that a year earlier, when it lost $284 million, or 15 cents a share.

“Let me make it clear — these results are unacceptable,” Mr. Mulally said in the conference call, his first, with analysts and journalists.

Ford also disclosed that it would restate its financial results because of incorrect accounting of derivatives linked to interest rate by its finance arm, Ford Motor Credit.

The company said it was still studying most of the period affected, from 2001 through the third quarter of 2006, but that earnings from 2002 “will improve materially.”

Through the first nine months of the year, Ford has lost $7.24 billion, with more than 80 percent of that coming from June to September. By contrast, it earned $1.8 billion in the comparable nine months of 2005.

In the third quarter, Ford’s automotive operations lost $1.2 billion, or 62 cents a share, roughly what analysts had expected.

To reduce its work force, Ford is offering buyouts and other incentives valued as high as $140,000 each to all 75,000 hourly workers in the United States. Those workers have until Nov. 27 to decide whether to take one of eight severance packages, while white-collar workers who are offered buyouts are expected to leave by spring.

Shelly Lombard, a senior high-yield bond analyst with the research firm Gimme Credit in New York, said, “We don’t expect to see any improvement until the second half of next year, when most of the employees who take the buyout will have exited.”

Mr. Casesa said Monday that Mr. Mulally’s presence was a rare bright spot for Ford.

“You’ve got a new C.E.O. with a fresh pair of eyes on Ford’s problems,” he said. “Increasingly, the market will look to this new C.E.O. for some creative ideas to reinvigorate the revenue line.”

For his part, Mr. Mulally said he took the job “because I think we can do this.”

“This is an important industry” and Ford has so much opportunity for improvement, he added.
Asked whether he felt pressure from the expectations being placed on his performance, Mr. Mulally replied, “There’s no reason why we can’t do this, so it’s no pressure.”

Nick Bunkley contributed reporting from Detroit.

The salvation of Ford will come from One person, with One idea, giving One hundred percent everyday. Do you believe in the Power of One?

Big Hairy Audacious Goal

What Are Learning Organizations, and What Do They Really Do?

Cheif Learning Officer
Dr. Warren Wilhelm
October 2006

For years we’ve been hearing the term “learning organization” used to describe a company or other entity. It is usually used as a compliment: being such an organization is a good thing. Yet even as we use the term, we might not be sure what it means exactly.

Learning organizations and the people in them learn constantly from everything they do. They use their own experience and that of others to improve their performance. They learn from their successes and also from their failures. Continuous learning is systemically built into the organization’s DNA and infrastructure. The value of continuous learning is espoused, driven and modeled by the CEO and senior management. There is no doubt in every organization member’s mind that continuous learning is expected and will be rewarded.

In a true learning organization, communication is open and widespread, people at all levels are included in most communications and it’s assumed everyone “needs to know.”

Further, senior leaders demonstrate they are learning constantly by communicating what they are learning as they learn; people are rewarded for learning with recognition, growth jobs, promotions and even financial compensation, and people who don’t learn are managed out of the organization.

To be a learning organization provides a competitive advantage: learning organizations are superior competitors, they have brand equity their competitors cannot match, and they attract and retain the best talent.

With all these advantages, one would think that most organizations would strive to be learning organizations. And, in fact, many do.

But to become one is not so easy. Becoming and sustaining a true learning organization requires a lot of work and dedication, and it takes time, energy and resources. Many are thwarted in their attempts to become a learning organization by the press of daily work, inability to persevere, lack of support from the top or the unwillingness to fully commit to the idea.

Yet, despite all these obstacles, we can cite examples of organizations that have been true learning organizations for many years, if not decades. Their long-term success is testimony to the value of continuous learning. Examples include:

General Electric: Its Crotonville learning center drives continuous learning by managers and other leaders, as they return to Crotonville to learn and teach at critical transitions in their careers.

Goldman Sachs: Its Pine Street learning center provides essential learning to a large segment of its managerial population on an ongoing basis.

Pizza Hut: It constantly invents and implements new technology and by recognizing the lifetime value of their customers, it treats them as long-term assets.

Honeywell: By applying Six-Sigma approaches, quality is constantly improved, while costs are simultaneously decreased.

Microsoft: It successfully made the massive shift in mindset from desktop to Internet when its marketplace changed.

Johnson & Johnson: Driven by its famous credo, it constantly improves products and invents new ones, always with the user at the center of its focus.

Apple: It perceives unrecognized marketplace needs and creates new products to fill them.

Toyota Motor Co.: It uses lean manufacturing and continuous improvement to make small but never-ending improvements in products and processes.

USA Today: It invented and kept reinventing publishing technology to move information colorfully and electronically, as well as to manage distribution.

What’s common to all these successful companies is their foundation of solid basic principles and values, as well as their continuous learning to keep them thinking and acting ahead of their competition.

They constantly create markets, market approaches, products and greater customer value constantly, and they never squander the market advantage they have worked so hard to acquire by letting their competition think or act ahead of them or faster than they can.

As long as these companies remain true learning organizations, it’s safe to assume their future success.

So if we want to create a true learning organization, how do we do it? Someone at the top must believe in the value of continuous learning, and senior leaders must clearly communicate the value the organization places in learning by words, and more importantly by their actions.

Senior leaders need to demonstrate how they themselves continuously learn, and they can do so in many ways, including:

• Personally conduct after-action reviews.
  
• Review projects at key junctures.
  
• Talk freely about what they are learning from outside the organization’s boundaries.
  
• Publicly question others about what they are learning.
  
• Work to eliminate any resistance to learning that might appear.
  
• Force themselves to stay open to learning, even when business conditions make it difficult.

Structural enablers also should exist to create mechanisms for information transmittal and diffusion such as brief reports, standup meetings, daily e-mails and town meetings, rewarding people for using these mechanisms, and disciplining people who do not and creating central repositories of relevant knowledge.

Some organizations have helped to imbed these structural enablers by creating the position of chief knowledge officer (CKO). This person’s role is to manage information throughout the organization.

He or she oversees the flow of information coming into the organization from across its external boundaries and assures it is directed to where it will be most useful. We most often see this role in intellectual capital companies, such as consulting firms, whose basic products are essentially information.

A CKO is different from a CLO — the CKO assures the collection and dissemination of information, while a CLO is responsible for organization members’ learning what is most necessary and useful to them at any given time. Both these roles can be critical to maintaining a learning organization.

The most successful learning organizations perpetuate their advantage by encouraging people at all levels to collect information across all boundaries, being sure that information is shared — not forgotten or hoarded — and encouraging casual information sharing as a way of organizational life. (Advances in electronic media over the past decade or so have made this much easier.)

In the best learning organizations, all employees or members constantly are involved in feedback loops. This means they seek feedback from their colleagues on ideas they have or actions they’ve taken. They routinely give feedback to others and also give “feedforward” ideas and suggestions to their associates on a regular basis. This dynamic activity assures that everyone is learning from everyone else all the time.

Once a true learning organization has been created, continuous learning must become a way of life: It is ingrained into the organizational culture. Once started, learning must not be allowed to slow down or stop.

Examples of other learning organizations that have mastered the art of continuous learning and product adaptation include:

Southwest Airlines: built on innovative concepts for its industry (point-to-point travel, no assigned seats, rapid loyalty rewards, etc.), it continues to thrive by constant innovation and an unflappable commitment to customer service.

Intel: based on its cultural norm of “paranoid collaboration,” it continues to outrun its many competitors by constant new product development and occasionally redefining its industry.

Cisco Systems: building on the huge base of its installed products, it encourages and rewards creative thinking, which allows it to stay ahead of its imitators.

Wal-Mart: entering a market niche which already existed (Costco, Target, Kmart, etc.), it has taken ownership of the low-price segment by constantly inventing new sourcing and distribution practices. It leverages its rapid growth to obtain always more favorable costs from its suppliers, which in turn allows lower prices at retail.

Charles Schwab: the first to define its market niche, it has continued to innovate practices attractive to the individual investor. Quick to perceive new market needs, it strives to be the “first mover” to offer new products to the investment community.

Disney: based on a few unchangeable core values (family entertainment, high quality, ethical but still hard-nosed business practices), Disney continues to invent new forms of entertainment. Its ability to recruit and retain the best talent allows for creativity that surpasses its competitors’ products: film, music, television or theme parks.

Dell: Its founding business concept of assembling computers to order and delivering them very quickly has not only persevered but allowed the company to expand successfully into markets other than personal computers. It has learned how to be equally successful in the commercial marketplace (servers, etc.), and continue to innovate attractive new products for that market.

All these companies were built on unique premises, and they have flourished because they never stopped learning and moving forward into new frontiers related to their core premise. Other companies have not fared so well, largely because they stopped learning at some point in their history.

Examples include:

• The American railroads (Amtrak).
• "Followers” in the oil industry (Gulf, Amoco).
• Greyhound Bus Co.
• Followers in the computer industry (RCA, Compaq).
• The Great Atlantic and Pacific Tea Company (A&P).
• Woolworth’s, Kmart and some department stores.

What causes companies to stop learning? Many phenomena come into play here, and most are rooted in the company’s culture and the leadership of senior executives.

For some companies that fall behind, it is the result of life just being too good. They nigh own the market for their products, have high profit margins, have no competitors of any consequence and have no new competitive products on the horizon.

Consequently, the organization sees no reason to continue to learn — people in the company relax and enjoy their good fortune. This is the perfect recipe for disaster because their lack of market sensitivity makes them blind to new challengers, and by the time they wake up to the danger, it is usually too late to respond effectively.

For other companies that cease to learn, it is the result of senior leaders turning their attention away from the realities of their marketplace — many executives would prefer to see their world as they’d like it to be rather than as it really is.

This lessening of their attention is quickly reflected in all the organization’s members, who look to their senior executives to set the patterns for all employees’ mindsets and behaviors. Once learning begins to atrophy in the company, it is very difficult, if not impossible, to re-instill a learning mindset in all employees.

Yet another reason for the decline of organizational learning can be reverence for products or markets that have been immensely successful in the past but are about to be displaced by a major discontinuity in the market environment.

Past successes cause leaders to be blinded to the quantum change, and they deny they are happening. While they continue to pursue the products and markets that have been successful, upstart competitors are busy making advances into the new markets.

Examples of this phenomenon are IBM’s missing the turn from mainframes to personal computers and Kodak missing the massive shift from film imaging to digital photography. Fortunately, IBM has recovered and now offers attractive products to the changed marketplace, but Kodak still struggles to the point that its very survival as a free-standing company might be at risk.

For all companies and organizations, at some point in their history, survival might depend on becoming a learning organization. Efforts to move in that direction are never wasted, and in fact, they might help guarantee the survival of ideas, products and jobs for their members.

There might be no clearer example of this than the problems facing the American auto industry today – it has not appeared to learn from changes in its marketplace or from the success of their non-American competitors. This lack of learning might prove fatal, unless the auto industry can “learn to learn” more efficiently in the future.

The U.S. auto industry’s plight provides for all organizations a model of why continuous learning is so critical, and what can happen if learning is ignored or not pursued vigorously enough.

Dr. Warren Wilhelm has been chief learning officer at two large companies: Amoco Corp. and AlliedSignal Corp. He has an MBA and a doctorate from Harvard Business School. He conducts research on leadership and consulting, and he teaches executives at Thunderbird, the Garvin School of International Management and Southern Methodist University. He can be reached at wwilhelm@clomedia.com.