Sunday, November 30, 2008

What the Big 3 can learn from LPO 3450

We are all aware of the economic situation in the United States at this point. Every time I check, the 6 o’clock news, or get a text message from my friends who are worried about choosing to major in Economics, there are talks about another bailout to a financial firm, industry, etc. The Big 3 (GM, Ford, and Chrysler) have requested $25 billion in government loans to cover costs due to the worst U.S. auto sales downturn in 25 years. However, Congress has abandoned a vote on the bailout because the CEOs have failed to produce clear plans on how they will change the way they do business. The CEOs will make another trip to Washington with detailed plans on how they will use the money to save the industry. These CEOs would benefit from a crash course on what we have learned in LPO 3450. Although, it is not practical to learn or become a leader based on the frameworks overnight, it would help to guide their decisions with respect to changing the structure and practices of the auto industry.

With respect to the state of the economy, which ultimately affects consumer decisions, the vision of the company must adapt to the changing external environment. Americans are finally starting to avoid purchasing automobiles with inefficient gas mileage. The days of buying a gas-guzzling, 12 mile per gallon SUV are long gone. Although gas prices are back down to around $2 per gallon, it is hard for Americans to forget last summer when prices were at least $4 per gallon. So the question remains, why are the Big 3 not producing cars that Americans want? In order to meet the needs of consumers, which will inevitably affect the bottom line or profit, the vision must change to reflect consumer demands. Nadler and Tushman would describe the current state of the Big 3 as in need of a re-creation, which is described as a risky endeavor initiated under crisis conditions and under sharp time constraints. It is important to note that most re-creations involve a change in the vision, core values, and structure of the organization. The key challenge for executives facing turbulent environments is to learn how to effectively initiate, lead, and manage re-creations.

In addition to changes in the vision, the abilities of charismatic leadership will facilitate the change or re-creation of the industry. Charismatic leadership is characterized by a clear collective vision and the ability to communicate it effectively to all employees. Similar to Choi’s definition of the components of charismatic leadership (envisioning, empathy, and empowerment), Nadler and Tushman use similar words to describe the same components: envision, energize, and enable. In order for the employees of the auto industry to implement the vision, the leaders must be able to energize and enable their employees to carry out practices that align with the adapted vision or re-creation of the industry.

However, visionary and charismatic leadership alone are not sufficient to re-create the industry. The auto industry must embody the characteristics of the learning organization (Senge) and the knowledge creating organization (Nonaka). Senge states “the impulse to learn, at its heart, is an impulse to be generative, expanding our capability.” He explains further that the learning organization must focus on generative learning, which is about creating, and adaptive learning, which is about coping. The culture of the auto industry has been more reactive than it has been proactive. In an industry, in which survival is dependent on having a competitive edge, generative learning is critical. This way the industry will focus on proactively generating new innovations as opposed to producing or creating as a response to increasing competition. Another important characteristic of the learning organization is leading though creative tension instead of problem solving. Senge explains that creative tension is the gap between current reality and the desirable future state. Leading through creative tension, organizations are motivated by accomplishing the vision. However, problem solving focuses on rectifying the problems and the motivation is based solely on the desire to escape the current undesirable state. The auto industry must avoid problem solving and begin to lead through creative tension, thereby constantly remaining ahead in the competition.

The reactive culture of the auto industry is a result of fear of failure. Risky decisions are avoided, which in turn prevents the development of new innovations. The industry tries to avoid the mistakes that can lead to innovative successes. This makes it difficult to make the shift from a play-it-safe corporate culture to an innovation-driven culture, which is an imperative to thrive in a globally competitive market. Nonaka uses specific words such as redundancy, metaphors, spiral of knowledge, etc to describe aspects of the knowledge creating company. These words are likely to be unpopular among CEOs and senior leadership of the Big 3. However, Nonaka explains that these aspects of the company that involve risk taking are characteristic of “the best Japanese companies that have the ability to respond quickly to customers, create new markets, rapidly develop new products, and dominate emergent technologies.” The Big 3 CEOs must understand that fear of failure and mistakes is an obstacle. However, this does not suggest that failure should be embraced to the point of losing profit. The failure to produce a plan on how the Big 3 will change business practices is a clear example of fear to change and take risks. Risk-taking will be necessary to develop new innovations, change practices, and restructure the industry.

It is clear that the CEOs of the Big 3 have a very complex situation at hand. However, there is no one solution, no “cookie cutter” approach that can be applied to the auto industry. Therefore, it is critical to focus on a holistic approach, which entails drawing from various leadership frameworks. Understanding the importance of the key points from each leadership framework can shape the new and/or reformed business practices of the Big 3. A clear plan, which incorporates the points addressed above as well as others, may prove to be more appealing to Congress.