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Nissan’s U-Turn: 1999–2001

Nissan’s U-Turn: 1999–2001

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Nissan’s U-Turn: 1999–2001

Summary

The article Nissan’s U-Turn: 1999–2001 written by Kathryn Hughes, Jean-Louis Barsoux, and Jean-Francois Manzoni is a blow-by-blow account of the restructuring and reinvention of Nissan from a struggling company in a flagging Japanese economy back to a leader in the car manufacturing industry. According to the article, the radical steps taken during the three critical years, 1999–2001, can be credited for the success that Nissan currently enjoys as one of the top car manufacturers in the world.

The story of Nissan’s revival began in March 1999 when French company Renault announced an alliance with Nissan. Renault would inject $5.4 billion into Nissan; in return, Nissan would give away more than thirty-six percent of its equity stakes (Hughes, Jean-Louis, & Jean-Francois, 2003). The cash injection would go a long way in reducing Nissan’s massive debt. The merger was also beneficial to Renault, as the French auto manufacturer would expand its market to include North America and Asia.

However, while the partnership appeared perfect on paper, observers and analysts were not too impressed by it, stating severe reservations based on many factors prevailing in both companies. The article highlights four significant problems that instigated the speculation on the efficacy of the deal (Hughes, Jean-Louis, & Jean-Francois, 2003). The first difficulty was Nissan’s financial crisis—in six of seven years, the auto manufacturer had endured major losses; in the Japanese market, only four Nissan models, out of  the more than forty models produced, were profitable. Moreover, Nissan was drowning in debt and attempts to get foreign investors by the then chairman Yoshikazu Hanawa were unfruitful. The second issue was the dubious ability of Renault to rescue companies. The organization had already had an unsuccessful merger with Volvo in the early 1990s, which was said to have collapsed because of cultural differences. Therefore, critics were not very optimistic of the success of yet another merger, which also included the sensitive Japanese culture. Thirdly, 44% of Renault was still owned by the state, and the merger was viewed as a French attempt to breathe life into the Japanese economy, which was considered the root of Nissan’s woes. Lastly, Nissan’s major issues were caused by an inefficient number of plants, car platforms, suppliers, and dealers notably in Japan, which resulted in a major strain on the resources. Moreover, the Japanese business culture, which allowed the creation of informal business groups like the keiretsu, made it very difficult to bring about any radical reforms that could reverse the losses suffered by Nissan.

According to the article, the solution to Nissan’s problems came in the form of Carlos Ghosn, who had supervised the restructuring of Michelin’s operations in North America. Ghosn had also increased Renault’s profits by applying an uncompromising cost-reducing plan. Ghosn’s methods were so radical and bold that he was often called the “cost killer” and as such nothing less than a miracle turnover was expected of him as he took over at Nissan.

Carlos Ghosn demanded a free hand in directing the company and informed all the vice presidents at Nissan that they had to report to him directly (Hughes, Jean-Louis, & Jean-Francois, 2003). One of the most radical moves that Ghosn made was personally selecting twenty executives to go with him to Japan—he believed that the change in Nissan did not require many people; just a few motivated and open-minded people who would induce action in stalling fields and departments.

The article maintains that Ghosn was very thorough and wanted a clear assessment of the situation. He visited production plants, dealers, research facilities, and other Nissan related facilities to gauge the extent of the problem which would, in turn, help him formulate a workable solution for Nissan. On June 25, 1999, Ghosn became Chief Operating Officer (COO) and, along with two other associates, who were to supervise finance and product development, was made a board member. He hit the ground running, and the first order of business was to scale back the board, which had thirty-seven members, to ten members. This was meant to ease the decision-making process (Hughes, Jean-Louis, & Jean-Francois, 2003). As the COO, he followed a very hands-on approach. He maintained that he was eager to work with anyone who was willing and ready to invest his or her time and expertise to the revitalization of the business (Ghosn, 2002). Breaking with tradition, Ghosn invited the press to a shareholder meeting as he believed that transparency was needed to set the Japanese people’s mind at rest that he and the board were working hard to bring back Nissan to profitability at the earliest possible date.

The authors then highlighted the moves that Ghosn made in the first few months as the COO, including the steps taken in the restructuring process. First and foremost, he awarded the thirty executive officers with incentives in the form of quasi-stock options (Hughes, Jean-Louis, & Jean-Francois, 2003). Second, he set up a new policy—English was to be the language of all important meetings and all reports were to be written in English. Japanese being the official language, all Nissan employees had to undergo an intensive English course. Third on his agenda was the creation of nine cross-functional teams (CFTs). The purpose of the CFTs was to create ideas and provide recommendations for change in important departments like engineering, purchasing, and R&D. According to the authors, Ghosn hated confusion, and so, he ensured that team members were aware of the strategy and goal of the CFTs as well as the role they played in the company’s total overhaul. He interacted with all members of his staff so that all ideas were utilized and any problem that occurred was solved across all offices around the globe.

Ghosn used the publicity and attendance that the biennial Tokyo Motor Show garnered to unveil Nissan’s restructuring plan. The speech was heard not only by the people at the motor show and the press, but by thousands of Nissan employees all over the world to whom it was broadcast (Hughes, Jean-Louis, & Jean-Francois, 2003). Ghosn started by stating that Nissan’s production had fallen by more than 600,000 cars since 1991, which was an abysmal performance compared to competitors like Volvo. He then analyzed Nissan’s problem by saying that the company was not oriented toward making profit, did not focus on customer satisfaction, had no globally uniform standards of work, did not have a sense of urgency to solve its own problems, and finally did not have a common goal supported by a long-standing strategy. Ghosn said that one of the solutions involved the re-introduction of the “Z” car, one of Nissan’s most famous models.  Nissan also had to strengthen its brand image as its cars were being sold for much less than cars of the same value sold by competitors. Ghosn said that they would have to work at bringing this differential in prices down in three years and totaling eliminating it in ten years. Working toward this goal of strengthening Nissan’s brand image, the organization would be backed by the recruitment of Isuzu’s top designer, Shiro Nakamura, as the head the design team.

The article further highlights the three radical propositions that Ghosn wanted to bring about.  Nissan had to cut down twenty percent of its purchasing budget by buying from the global market instead of depending on expensive suppliers; in fact, it had to reduce the number of suppliers by fifty percent. Moreover, suppliers were expected to offer discounts after which they would be rewarded with increased business as the company recovered. Second, the company had to bring down the keiretsu network of suppliers and only retain those that fit the cost–benefits formula to be used by Nissan henceforth. Third, Nissan needed to reduce capacity utilization by thirty percent from fifty-three percent, which meant the closure of three auto plants and two engine-transmission plants in Japan (Hughes, Jean-Louis, & Jean-Francois, 2003). This was viewed as controversial as it would amount to the loss of over 2100 jobs in three years. Ghosn reiterated that this was necessary to create a way for making Nissan an industry leader. The Nissan Revival Plan (NRP), as it was dubbed, would start making profit by the financial year 2000; by 2002, the debt would be reduced by fifty percent and the profit would be at least 4.5% of sales.

Ghosn then made a decision that was to later pay off—to build an assembly plant worth $930 million in Mississippi. This plant would supply the US market which contributed a lion’s share of Nissan’s total sales. Ghosn also addressed the 26-year problem of losses in the Japanese market through advertisements both on television and newspaper to regain customer confidence in the home market. The writers of the article say that, despite all the strides made and all the efforts by the top brass, market confidence was still shaky, especially as they were wary of the influence the outsider would have in making the company less Japanese.

In many ways, the market was right to be wary. Nissan implemented many solutions and practices that were either different or the opposite of Japanese and company traditions. For instance, Ghosn implemented a scheme by which bonuses and promotions would only be awarded based on profits and performance of individuals and not on seniority and production levels, which was what was followed earlier in Nissan. Performance and profit based promotions acted as an incentive to produce quality work. Ghosn enacted various changes in the HR systems and demanded total commitment and availability from all workers. As a manager, Ghosn inspired a complete shift in attitude which broke the hierarchical system of leadership and placed more responsibility on the younger generation.

Nissan revealed plans to revitalize its product line in mid-May 2000 by releasing twenty-two new car models in three years with ten especially made for the American market. Despite all these ventures, Nissan showed a $6.4 billion loss that year; however, Ghosn and the Nissan board believed that the NRP was on track (Hughes, Jean-Louis, & Jean-Francois, 2003). In 2001, the fruits of the restructuring were felt as payment of dividends resumed for the first time since 1998. Ghosn even provided an increase of six percent in salary to all employees. The same year, Nissan recorded a two percent increase in sales; debt had decreased by nearly fifty percent, and purchasing cost had decreased by eleven percent. The NRP goals had been achieved a year ahead of schedule.

The surpassing of the goals required a new plan that would ensure that the changes in the company become real and permanent. Nissan embarked on a post-NRP plan that would ensure longevity. This was Plan 180 that included the selling of 1 million more cars, getting an 8% operating margin, and achieving zero company debt by 2005, which ironically coincided with the decline of Renault. The change in tides was shown in the rise of Nissan stocks; it meant that suppliers, employees, as well as shareholders were rewarded for placing faith in an outsider. Ghosn became a national hero in Japan. According to the article, the ability of Nissan to achieve its mandate a year ahead of schedule was due to the focus, priorities, plan, and shrewdness of Ghosn who brought an outside perspective to the problem.

Criticism

The article evaluates the problems and the steps taken by Ghosn and his team to redeem Nissan from collapse, loss, and debt. It highlights the strengths and weaknesses of Ghosn as a manager and how that affected the turnaround of Nissan. Ghosn was prepared both professionally and psychologically to make hard decisions even when the decisions made the majority unhappy. He studied Nissan thoroughly before taking up the COO position, which ensured that he was aware of the problems he had to face and what was expected of him. Ghosn used a hands-on approach that broke the hierarchical bureaucracy fostered by the Japanese business culture. It allowed him to listen to opinions and ideas of all staff members irrespective of age, gender, seniority or citizenship and gave him a wealth of information on how to deal with any situation. He had a multidimensional approach to all problems which allowed him to look at the issues Nissan was facing from all perspectives, including employees, suppliers, dealers, and customers, and tailor a solution that was best, thus, enabling his team to achieve the goals a year ahead of schedule. Moreover, Ghosn ensured that he delegated the duties among the various units he created to ensure that all individuals performed their very best and success was a collective effort. The senior management officials at Nissan also appear to have been quick learners, who grasped the problems, recognized the urgency for the company’s turn around, and motivated their teams to push harder to revitalize the company products.

The team personally selected by Ghosn brought an outside perspective to the problems Nissan was facing, and as indicated in the article, they coached and led their teams to ensure permanent and prompt solutions (Gold, Hirano, & Yokoyama, 2001). They created small groups which reduced the chance of debating over an issue for long and made the decision-making a quicker process. The team set a clear long-term goal and mission that guaranteed that while at first, the ventures would appear pointless and ruthless, the long-term profits and progress was assured. Nissan also invested a lot in brand recognition to boost customer confidence in Nissan products. The commitment exhibited by the employees of the company was also a major contributing factor to the success.

However, while a lot of work and resources were pooled to ensure the success of the merger between Renault and Nissan, there were a lot of issues that were contentious. For instance, Ghosn and his team had little to no regard for the Japanese business culture, and as such, they violated a lot of trust and relationships that Nissan had forged over the years. It is important to note that for expatriates to thrive in a new country, they need to adhere to the practices and general culture of the host country. Ghosn was reprimanded for failing to follow the simple greeting protocol of bowing and was accused on numerous occasions of having monologues in board meetings. Additionally, while the company needed to cut cost, it was not very just to urge old and loyal employees to take forced pension schemes. It was also not very reasonable to fire top officials for the failure or stagnation of their departments. All in all, however, despite Ghosn being termed as ruthless by some, his methods ensured the revitalization of Nissan and led it to become the leader in the vehicle manufacturing industry.

Analysis

The collaboration between Renault and Nissan was projected to not only help the latter settle its massive debt but also consolidate its position in the Europe and Latin America vehicles market. The partnership was mutually beneficial in that it exposed both companies to skills each lacked. Renault could gain knowledge from Nissan’s proficiency in manufacturing and engineering while Nissan would gain from its counterpart’s aptitude in marketing and design. The authors paint Ghosn as a shrewd leader who wanted his team of executives to act as coaches and team players to the team and employees they would find in Japan. Before departing for Japan, the team underwent a crash program that would ease their transition into Japanese culture with the sole mission of fixing Nissan’s problems.

The creation of the CFTs was a move that would break down roles in the company, reduce redundancy, and ensure timely decision making. The CFTs were to draw membership from employees of all departments, divisions, and countries, of age 30–40, as Ghosn wanted active but experienced members of staff. Only ten members were allowed in each team but the teams could create sub-teams that would be tasked with different aspects of the departments (Shirouzu, White, & Zaun, 2000).

The authors clearly highlight the challenges that the radical solutions were to the Japanese economy and Nissan globally. Phasing out suppliers was a contentious issue as Ghosn was viewed as an outsider who did not respect the relationships established by previous leaderships. However, he promised that the suppliers which were finally selected had higher chances of gaining access to Renault and as such, it was mutually beneficial. The manner in which Ghosn and his team addressed challenges exhibited excellent leadership skills, expertise, and an understanding that the long-term goal of the company was more important than the short term. This enabled the company to achieve the goals of the NRP a year sooner than anticipated.

Recommendation

As highlighted in the criticism section, there are a number of things that Ghosn and his team could have done differently and still yield similar results. Ghosn has been accused of creating an organization whose structure is so complex that in the event of his retirement or departure, Nissan would be unmanageable (Dumaine, 2014). Therefore, it would be better to simplify the system and ensure that the division and specialization of labor do not hinder the achievement of the organization after his departure. A good leader must create an organizational structure that survives whether he or she is the leader or not. In the article, it has been stated that on some occasions, Ghosn made unilateral decisions that affected many people; he expected the staffers to adhere to these new rules or decrees. It is true that an authoritarian leadership reduces the time of a lengthy decision-making process; however, consultations ensure that the best idea is implemented. Additionally, it is essential that a foreigner moving to another country try and adhere to the traditional and business practices in the new state to ensure cooperation from the locals. Moreover, it is the responsibility of individuals in a position of power to ensure that the role they play, the policy they implement, and the change they effect have some semblance of respect to the culture they are embedded in, despite the urgency of the solution-seeking process. However, though Ghosn appeared insensitive to the culture in Japan, he did keep his promises and pledge to completely turn Nissan from a collapsing firm to the successful corporation it is today.

 

References

Dumaine, B. (2014, December 29). Renault-Nissan: Can anyone succeed Carlos Ghosn? Retrieved from

www.fortune.com: http://fortune.com/2014/12/29/renault-nissan-carlos-ghosn/

Ghosn, C. (2002). Saving the business without losing the company. Harvard Business Review, 3-11.

Gold, A., Hirano, M., & Yokoyama, Y. (2001). An outsider takes Japan. The McKinsey Quarterly, 1, 94-105.

Hughes, K., Jean-Louis, B., & Jean-Francois, M. (2003). Nissan’s U-Turn: 1999-2001. INSEAD, pp. 1-23.

Shirouzu, N., White, J., & Zaun, T. (2000). A revival at Nissan shows there’s hope for Jpan Inc. Asian Wall Street Journal, 17, 1.

 

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