When Transformation Fails: Twelve Case Studies in the American Automobile Industry
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Journal of Enterprise Transformation, 5:71–112, 2015 Copyright C IIE, INCOSE ISSN: 1948-8289 print / 1948-8297 online DOI: 10.1080/19488289.2015.1019654 WHEN TRANSFORMATION FAILS: TWELVE CASE STUDIES IN THE AMERICAN AUTOMOBILE INDUSTRY Chen Liu,1 William B. Rouse,2 and Zhongyuan Yu1 1School of Systems and Enterprises, Stevens Institute of Technology, Babbio Center, Hoboken, NJ, USA 2Center for Complex Systems and Enterprises, Stevens Institute, Babbio Center, Hoboken, NJ, USA 2 The demise of 12 American automobile brands over the past century is discussed. Companies can respond to various difficulties by making decisions on their automobile offerings. These decisions are central to relationships between companies and consumers. These decisions included broadening their offerings to address a larger portion of the automobile market, narrowing their offerings to address the company’s financial situation, focusing on current offerings to keep them successful, or switching to other offerings to achieve greater profits. A case-based approach is used to explore the detailed nature of this range of attempts to change. Due to a variety of factors characterized in terms of four levels of explanation, these brands failed. Consequently, these companies’ attempts to transform via offering-related decisions failed. These failures reflect, to a great extent, inabilities to balance the tension between differentiated offerings and economies of scale or market demands. Keywords enterprise transformation; automobile industry; production costs; brand differentiation; globalization; case studies 1. INTRODUCTION Downloaded by [William Rouse] at 05:47 14 June 2015 Fundamental transformation of a large enterprise is very difficult. Recent data on the Fortune 500 reported in The Economist supports this assertion (Schumpeter, 2009). • During 1956–1981, an average of 24 firms dropped out of the Fortune 500 list every year. This amounted to 120% turnover in that 25-year period. Address correspondence to William B. Rouse, Center for Complex Systems and Enterprises, Stevens Institute, 505 Babbio Center, Hoboken, NJ 07030, USA. E-mail: [email protected] Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/ujet. 71 72 C. Liu et al. • During 1982–2006, an average of 40 firms dropped out of the Fortune 500 list every year. This amounted to 200% turnover in the more recent 25-year period. Thus, successful enterprise transformation is not only very difficult, it is becoming more difficult and the failure rate is very high. Of course, we do not know that these 1,600 firms attempted transformation. Our presumption is that not many of them willingly left the Fortune 500. It seems reasonable to further assume that many of them noticed that something was happening and made some attempts to counter the consequences. One way to understand this phenomenon is in terms of a theory of enterprise transformation (Rouse, 2005, 2006): Enterprise transformation is driven by experienced and/or anticipated value deficiencies that result in significantly redesigned and/or new work processes as determined by management’s decision making abilities, limita- tions, and inclinations, all in the context of the social networks of manage- ment in particular and the enterprise in general. Creative destruction is usually driven by external sources that the company cannot successfully counteract. Those leaving the Fortune 500 are likely to have experienced value deficiencies, and failed to remediate these deficien- cies by redesigning and/or creating new work processes to provide offerings that the marketplace valued as well as or better than their current offerings. This is a common outcome, perhaps the predominant outcome (Rouse, 1996, 2006). The transformation framework in Figure 1 suggests how enterprises might pursue transformation (Rouse, 2006). Ends can range from redefin- ing markets, as done by Amazon and Wal-Mart, to providing broader or new offerings, to changing perceptions of offerings, to decreasing costs of Downloaded by [William Rouse] at 05:47 14 June 2015 offerings. More examples can be found in Rouse (2006). The 12 case studies discussed in this article involve automobile companies that focused primarily on offerings. For example, Chrysler and Ford expanded their vehicle offer- ings, trying to emulate Alfred Sloan’s business model at General Motors. Companies also had to address perceptions and costs of offerings. Per- ceptions were associated with brand identity and pricing, which had impli- cations for production costs. A major finding of this article is the inability of companies to balance the tension between differentiated offerings and economies of scale or market demands. Some of the more recent case studies also focused on the ends of reduc- ing costs by sharing production lines, chasses, and parts, such as pursued by the Big Three. Many of these efforts resulted in undermining perceptions of vehicle offerings, effectively rendering the vehicles badges as meaningless. The overall result is the failure of these brands. When Transformation Fails 73 FIGURE 1 Transformation framework. The scope of these endeavors was usually focused on an automobile brand, i.e., an organization in Figure 1. The means was usually strategy, while more attention to technology, processes, and skills seemed to be less than warranted. For example, quality problems with the new vehicles were sometimes a significant issue. Downloaded by [William Rouse] at 05:47 14 June 2015 This article proceeds as follows. We first provide a brief review of the evolution of the automobile industry from its founding until present time. We then present the broad context of the 12 case studies discussed in this article. Our overall case-based methodology is then reviewed—with each case briefly summarized in the Appendix. Each case analysis is then presented and causes of failures discussed in the context of a four-level characterization of the influences of the economy, market, company, and product. Dominant causes are summarized and future work is discussed. 2. AUTOMOBILE INDUSTRY By 1898, there were 50 automobile companies. The first commercially successful American-made automobile was the 3-horsepower Oldsmobile in 74 C. Liu et al. 1901. This automobile was named after Ransom Eli Olds, a pioneer in the automobile industry. Between 1904 and 1908, 241 automobile companies went into business. After impacts of major historical events, like the Great Depression, World War II, the energy crisis, and the late 20th century’s globalization, the number of American automakers shrank to just three. The number of American automobile brands decreased dramatically. Interestingly, competition among technologies was not fully resolved at the turn of the century, as evidenced by the fact that, at that point, 40% of U.S. automobiles were powered by steam, 38% by electricity, and 22% by gasoline. Also of interest, the automobile was not an instant success in the mass market. Henry Ford produced eight versions of his cars—models A, B, C, F, K, N, R, S—before he was successful with the Model T in 1908. With the Model T, the mass market could now afford to own an automobile. James Womack, Daniel Jones, and Daniel Roos chronicle the subsequent development of the automobile industry in “The Machine that Changed the World” (1991). They emphasize that Ford’s success in producing a car for “everyman” was due to his transformation of manufacturing from centuries of craft production into the age of mass production. Forty years later, Eiji Toyoda and Taiichi Ohno in Japan transformed mass production into lean production. The problem with craft production—despite its appealing images of hand-crafted quality products—is that it costs too much. The prices of the resulting products are too high for most people to afford. By employing ex- treme specialization, Ford was able to substantially reduce costs and thereby enable mass markets. A highly skilled workforce, extreme decentralization, general-purpose tools, and low production volumes characterize craft production. Since no company could exercise a monopoly over these types of resources, it was very easy to enter the automobile business in its early years. Consequently, Downloaded by [William Rouse] at 05:47 14 June 2015 by 1905 hundreds of companies in Western Europe and North America were producing small volumes of autos using craft techniques. The high costs of this method of production naturally resulted in high prices and an automobile market limited to the upper middle class and higher. The impact of mass production can be measured in terms of the average cycle time—the average time before a particular production worker repeated the same operation. Prior to Ford’s innovations (discussed below), the av- erage cycle time was 514 minutes. With interchangeability, simplicity, and ease of attachment, the average cycle time was reduced to 2.3 minutes. In 1913, Ford added continuous flow assembly lines and the average decreased to 1.2 minutes. Ford also perfected the interchangeability of workers. Mass production jobs were so simplified that they only required a few minutes of training. When Transformation Fails 75 Consequently, untrained and unskilled workers could readily fill these jobs. Of course, industrial engineers had to think through how the parts would all come together and just what each assembler would do. In this way, the engineers became the “knowledge workers” and replaced the machine shop owners and factory foremen of the earlier craft era. Henry Ford founded the Ford Motor Company in 1903 (Watts, 2006). By the spring of 1905, the company was producing 25 Model A vehicles per day and employing 300. The Ford Manufacturing Company was incorporated on November 22, 1905 to make profits on parts rather than continue to outsource parts to the Dodge Brothers. Further, 8,423 Model N vehicles were sold in 1906–1907. Ford was determined to produce a reliable, low-cost car affordable for the working class people. The Model T was announced in the autumn of 1908 and by 1920 ac- counted for almost half of the vehicles in the U.S.