“Turnaround at Nissan”
Read the case study “Turnaround at Nissan” and answer the questions at the end of the reading.Turnaround at NissanIn 1999, Nissan was in a state of serious decline and had lost money in all but one ofthe previous eight years. Only Renault’s willingness to assume part of Nissan’s debt saved theJapanese company from going bankrupt. As part of the deal, the French automaker appointedCarlos Ghosn to become Nissan’s chief operating officer. However, there was widespread skepti-cism that the alliance between Renault and Nissan could succeed, or that someone who was notJapanese could provide effective leadership at Nissan.During the three months prior to assuming the position of COO at Nissan, Ghosn metwith hundreds of people, including employees, union officials, suppliers, and customers, to learnmore about the company and its strengths and weaknesses. From these meetings and earlierexperiences with turnaround assignments, Ghosn understood that major changes would not besuccessful if they were dictated by him and the experts he brought with him from Renault. Soonafter assuming his new position at Nissan in June 1999, Ghosn created nine cross‐functionalteams and gave them responsibility for determining what needed to be done to revive thecompany. Such teams had never been used before at Nissan, and it was unusual in a Japanesecompany to involve a broad cross‐section of managers in determining major changes.The cross‐functional teams examined different aspects of company operations to identifyproblems and recommend solutions to Ghosn and the executive committee. Several interre-lated problems were identified, and they were mostly consistent with Ghosn’s initial impres-sions. The poor financial performance at Nissan was a joint result of declining sales andexcessive costs, and weak management was the primary reason for the failure to resolve theseproblems. Management lacked a coherent strategy, a strong profit orientation, and a clear focus on customers. There was little cooperation across functions, and there was no urgency aboutthe need for major change.One reason for excessive costs at Nissan was that only half of the available capacity in thecompany’s factories was being used; production capacity was sufficient to build almost a mil-lion more cars a year than the company could sell. To reduce costs, Ghosn decided to close fivefactories in Japan and eliminate more than 21,000 jobs, which was 14 percent of Nissan’s globalworkforce. To simplify production operations at the remaining factories and make them moreefficient, Ghosn planned to reduce the number of car platforms by half and the number of pow-ertrain combinations by a third. Plant closings can undermine relations with employees, andGhosn took steps to ensure that employees knew why they were necessary and who would beaffected. In general, he understood that most employees prefer to learn what would happento them and prepare for it, rather than remaining in a state of uncertainty and anxiety. Ghosnattempted to minimize adverse effects on employees by selling subsidiaries and using naturalattrition, early retirements, and opportunities for part‐time work at other company facilities.Purchasing costs represent 60 percent of the operating costs for an automaker, and Nissanwas paying much more than necessary for the parts and supplies used to build its cars. Aftercomparing expenses at Nissan and Renault, Ghosn discovered that Nissan’s purchasing costswere 25 percent higher. One reason was the practice of purchasing small orders from manysuppliers instead of larger orders from a smaller number of global sources. It would be neces-sary to reduce the number of suppliers, even though this action was unprecedented in a coun-try where supplier relationships were considered sacrosanct. Higher purchasing costs werealso a result of overly exacting specifications imposed on suppliers by Nissan engineers. Theengineers who worked with the cross‐functional team on purchasing initially defended theirspecifications, but when they finally realized that they were wrong, the team was able to achievegreater savings than expected. Excessive purchasing costs are not the type of problem that canbe solved quickly, but after three years of persistent effort it was possible to achieve Ghosn’s goalof a 20 percent reduction.Years of declining sales at Nissan were caused by a lack of customer appeal for most of thecompany’s cars. When Ghosn made a detailed analysis of sales data, he discovered that only4 of the 43 different Nissan models had sufficient sales to be profitable. Final decisions aboutthe design of new models were made by the head of engineering. Designers were taking orders from engineers who focused completely on performance, and there was little effort to determinewhat types of cars customers really wanted. To increase the customer appeal of Nissan vehicles,Ghosn hired the innovative designer Shiro Nakamura, who became another key leader in theturnaround effort. The designers would now have more authority over design decisions, andGhosn encouraged them to be innovative rather than merely copying competitors. For the firsttime in over a decade, Nissan began coming up with cars that excited customers both in Japanand abroad. Ghosn planned to introduce 12 new models over a three‐year period, but the timenecessary to bring a new model into production meant that few would be available until 2002.Another reason for declining sales was Nissan’s weak distribution network. In Japan strongbrand loyalty is reinforced by efforts to maintain close relationships with customers, and it isessential for the dealerships to be managed by people who can build customer loyalty and convertit into repeat sales. In 1999, many Nissan dealerships in Japan were subsidiaries managed byNissan executives nearing retirement, and they viewed their role more in social terms than as anentrepreneur responsible for helping the company to increase market share and profits. Ghosnreduced the number of company‐owned dealerships (10 percent were closed or sold), and hetook steps to improve management at the remaining dealerships. Saving Nissan would also require major changes in human resource practices, such as guar-anteed lifetime employment and pay and promotion based on seniority. Transforming thesestrongly embedded aspects of the company culture without engendering resentment and demor-alizing employees was perhaps the most difficult challenge. The changes would primarily affectnonunionized employees at Nissan, including the managers. A merit pay plan was established,and instead of being rewarded for seniority, employees were now expected to earn their promo-tions and salary increases through effective performance. Areas of accountability were sharplydefined so that performance could be measured in relation to specific goals. New bonuses pro-vided employees an opportunity to earn up to a third of their annual salary for effective perfor-mance, and hundreds of upper‐level managers could also earn stock options. These and otherchanges in human resource practices would make it possible for Ghosn to gradually replace weakmiddle‐ and upper‐level managers with more competent successors.In October 1999, Ghosn announced the plan for revitalizing Nissan. He had been carefulto avoid any earlier leaks about individual changes that would be criticized without understand-ing why they were necessary and how they fit into the overall plan. The announcement includeda pledge that Ghosn and the executive committee would resign if Nissan failed to show a profitby the end of 2000. It was an impressive demonstration of his sincerity and commitment, and itmade what he was asking of others seem more acceptable. Fortunately, the primary objectivesof the change were all achieved on schedule, and by 2001 earnings were at a record high for thecompany. That year Ghosn was appointed as the chief executive officer at Nissan, and in 2005, hewould become the CEO of Renault as well. Questions1. What was done to improve efficiency, adaptation, and human relations, and how were thepotential trade‐offs among these performance determinants handled?2. What effective change management practices were used at Nissan?3. What traits and skills can help to explain the successful strategic leadership by Ghosn?