Ford’s CEO Faces Reality

Alan Mulally, who became CEO of Ford after serving at Boeing, has demonstrated in several ways that he understands lean principles. Perhaps the most important demonstration is his willingness to face reality.

I wrote previously about Mulally’s global strategy and his efforts to copy Toyota in establishing a global product strategy. Another key aspect of his leadership is what I will call his attempt to “right-size” Ford.

At the Automotive News World Congress recently (and on other occasions), Mulally talked about his desire to match capacity to demand – in other words, to embrace the lean principle of building only what the customer wants.

Like the other American automakers, Ford has too much capacity. That’s what happens when your share of the U.S. market goes from 25 percent down to about 15 percent.

Ford can’t afford to maintain all that excess capacity, which means closing facilities and laying off people. Similarly, there is now considerable excess capacity among automotive suppliers, where major consolidation is taking place. And third, there are too many dealers for American automobiles, and consolidation is necessary there as well – particularly in urban areas.

Ford is making progress. The company recently reported earnings, and while Ford lost a lot of money in 2007, it lost far less than it had in 2006.

Closing operations to eliminate excess capacity is not what I would call a lean strategy. In this type of situation I would normally say the manufacturer should aggressively pursue lean initiatives, improve operations to gain a competitive edge and do everything possible to regain the lost business.

However, I believe Mulally recognizes the reality of the situation, even if he didn’t say so specifically at the recent conference. And the reality is that those 10 percentage points of lost market share are not coming back.

They were lost to companies like Toyota and Honda, and no matter how lean Ford might become in the future, it is not going to leapfrog ahead of Toyota.

Ford may return to profitability some day. But the growth that will enable it to do so will occur in China, India, Russia and other overseas locations, not in the United States.

Mulally has said publicly he is more concerned with profitability than with market share. That is a necessary and refreshing change for an American automaker.