caso 7 - renault nissan the challenge of sustaining strategic change

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Copyright © 2008 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

Kannan Ramaswamy

Renault-Nissan: The Challenge of Sustaining Strategic Change

Twenty-six years! Twenty-six years of decline! I was amazed. In a company where you have 26 years of decline of the market, you have a lot of things to do first to stop, then reverse, the trend. It’s not that in a couple of months you are going to fix this problem. We know it will require new products that we are bringing [out], higher brand power, more marketing, promotion, [and] advertising skills.

Mr. Carlos Ghosn in conversation with BusinessWeek, April 19, 2000.

So, is it time to write off Mr. Ghosn as a gifted turnaround artist who began to believe his own pub-licity and overreached himself when he took on the running of Renault as well as Nissan in 2005? And is the much-touted alliance between the two companies really superior, as he claims, to the car industry’s usual approach of mergers, which often go wrong and destroy value?

The Economist, September 15, 2007.

Eight years had flown by since Renault and Nissan had announced their historic alliance in 1999. Nissan, at that time, seemed to have exhausted all avenues to revive itself. Saddled by a huge debt burden, a bloated supply chain structure, declining global market share, and dim prospects for the future, Nissan had turned to Renault as its partner of last resort. Renault had sized up the realities of the emerging shakeout in the global marketplace, and appeared to be determined to reshape itself so that it could engage in the intense rivalry that was emerging globally.

Louis Schweitzer, then CEO of Renault, signed an alliance deal with Nissan, invested $5.4 billion in the company, and chose Carlos Ghosn to take charge of the Nissan turnaround. In just three years, Ghosn had managed to dramatically turn the company around, a feat that successive CEOs at Nissan had been unable to engineer even over a couple of decades. However, Nissan’s performance path after the crisis years seemed to have become increasingly rocky. A softening of demand in key markets, along with a resettling of the internal crisis within the company, appeared to have depleted its store of resolve and its will to continue striving. Renault itself was in deep trouble and struggling with an aging product line, strong unions, and lingering questions about its continued profitability. By early 2008, many questions had emerged about Ghosn’s ability to maintain the momentum for change at both Nissan and Renault. Anything short of spectacular performance threatened to sully his meteoric rise in the world of global business. (Appendix 1 provides historical performance data for Renault and Nissan.)

The Global Automotive Industry in 1999The late 1990s promised to reshape the evolution of the automotive industry in fundamental ways. Mergers and acquisitions dominated the landscape with $71.4 billion worth of deals announced in 1999 alone.1 Fuelled by declining returns to shareholders and an intense competition for new customers, most automotive manufac-tures faced formidable odds against their success. Western Europe and North America comprised the two most

January 5, 2009

This document is authorized for use only in ESTRATEGIA Y COMPETITIVIDAD 4 by GUSTAVO MOLINA, Universidad ICESI from February 2016 to August 2016.

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important markets for the industry, accounting for roughly 65% of global product sales. Japan and the rest of Asia accounted for 21%, giving the industry a tripartite power structure. Although growth in key regions such as the United States was driven by the overall health of the economy, incentives that eased the customer price had become the rule of the game. Dealer and customer incentives ranged between 11% and 15%, depending on the size of the car and the dealer structure involved. This “pay to sell” approach had begun to drain the economic health of the major companies and only served to continue the illusion of acceptable performance.

Exhibit 1. Global Automotive Sales by Region in 1999

Source: “Setting the Stage for the Next 100 Years,” Bear Stearns, November 2000.

Customers had become a central driving force in the business. Characterized by a general reluctance to pay ever-increasing prices, they had begun to assert their power by delaying purchases and demanding more features for the money they were paying. They were no longer content with the usual six-year model cycles complemented by annual incremental facelifts and makeovers. Platform consolidation, the process of combining multiple product lines into a smaller set of chassis and drive train combinations, promised requisite efficiencies that would allow manufacturers to offer more variety while at the same time holding down manufacturing costs. They had relied on value engineering, supply chain rationalization, and careful planning of product lines to reduce operating costs while offering a better value proposition to customers. Many leading companies had been able to reduce costs significantly, especially in replacement models, selling cars for several thousands of dollars lower than earlier versions in the same model line. Often, these later models were much better equipped, even at the base trim levels, and presented a winning value proposition to customers, especially when packaged with monetary incentives such as “0” down or 0% interest. For the manufacturers, these cost and innovation pressures had a direct impact on the bottom line. This spending pattern was expected to grow significantly with the advent of new technologies, more stringent emission standards, and the demands for greater fuel efficiency.

The entire supply chain felt the shift toward cost reduction and value focus. Many of the auto parts manu-facturers faced the very same downward costs and margin pressures that the automakers were facing. Seeking to build efficiency through scale, many of the bigger players had bought out the smaller players, thus thinning the ranks of auto parts companies worldwide. By the turn of the century, six automotive groups controlled 82% of the industry and, remarkably, none of the six groups had existed in their current form even two years earlier.2 Analysts believed that automakers had to move aggressively into new and emerging markets, purely as a matter of survival. Bear Stearns analysts had observed, “With the largest markets being most mature, it is essential for the current players to seek growth in emerging markets….foreign assets in a region where an automaker does not have a local presence can be extremely valuable if they are accompanied with a developed distribution system that can be leveraged to bring other products to the market.”3


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The Renault-Nissan AllianceIt’s a marriage of desperation for both parties. In the global consolidation race sweeping the indus-try, neither was the pick of the pack. Other big Japanese outfits rejected Renault’s advances, while Nissan’s attempts to cuddle up to both DaimlerChrysler and Ford Motor Co. flopped. But each of the two perennial wallflowers has something the other needs.

“Dangerous Liaison: It Could Take 10 Years for Renault-Nissan to Yield a Return,” BusinessWeek, March 29, 1999.

Renault and Nissan were both jilted partners in the automotive world of the mid ’90s. Although they each had their own unique desires for the pursuit of partnerships, they had been unable to attract any viable suitors. Renault had been quite a profitable company, with profits jumping a massive 63% in 1999. It had been very successful in launching a new line of cars reflecting the design savvy that it had come to be known for in Europe. The Megane line of cars and the Scenic minivan had become hot sellers for the company. The company had undergone a major restructuring process resulting in a compact supply chain and prudent cost control systems, although productivity and quality seemed to hold back the company from growing quickly. Many analysts believed that Renault lacked the engineering and productivity skills needed to further trim its cost structure to meet global benchmarks.

Renault’s product line had limited appeal outside the immediate Western European market. Its early foray into the U.S. marketplace was met with stiff customer resistance. Finding the cars quite small, underpowered, and poorly appointed, American buyers had not embraced the brand. The bland styling and poor product quality proved insurmountable, leading to Renault’s exit from the U.S. in 1986. It sold off its holdings in American Mo-tor Company (AMC) and returned to its home markets. The decade of the 1990s had been one of regeneration for the company. It had established many design partnership programs to create a flair for its products, a critical missing ingredient when it retreated from the U.S. It had also embarked on a major realignment program that saw plant closings, layoffs, and cost-cutting measures implemented across the board. By 1999, the company seemed to be poised to seize the next major opportunity.

The first such opportunity emerged when Renault bid for the Swedish carmaker Volvo, a deal that would have consolidated its position in Europe. The deal, however, failed to materialize. Cultural incompatibilities were one of the many reasons that were blamed for the outcome. Renault did not have much of a global footprint like many of the bigger European and American counterparts in the business, however. It sold four of every five cars it manufactured within the Western European market, mostly France. Its emphasis on small cars and smaller

Exhibit 2. Global Production of Major Automobile Manufacturers in 1999

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(000’s)

Source: “Setting the Stage for the Next 100 Years,” Bear Stearns, November 2000; and Company Annual Reports.


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engines meant that it did not have the broad portfolio needed to confidently enter the global marketplace in locations such as the U.S. where minivans, SUVs, and light trucks were the rage. In an increasingly globalized industry, with the global consolidation race well under way worldwide, Renault’s future remained uncertain.

Nissan, on the other hand, had been teetering on the brink of collapse. It had been losing market share globally for eight years in a row, and had seen home-based rivals chipping away at its market position in Japan. It had lost market share in its home market for 26 years straight with no end in sight. Over the years, the benevolent banking system in Japan had given Nissan a wide berth by extending significant loans that helped it tide over its misfortunes. In the face of widespread economic stagnation in the country, even the friendly banks, however, decided to call in the loans and pressured the company to find a partner willing to bail it out. The automotive debt burden for Nissan had risen to $20 billion by that time, while overall debt exceeded $38 billion dollars—four times the company’s market capitalization.

The reasons for the dramatic failure were manifold. Nissan was viewed as a bureaucratic company, run much like a state-owned enterprise, complete with multiple layers of decision making, lax control, and a weak performance culture. It had fairly complex supply chains encompassing more than 3,000 suppliers supporting 25 different platforms. Only four of its 43 models were profitable,4 and it had an excess capacity of roughly 50%—a production network it had built in the heyday of the luxury business when the company had attempted to double its sales to 1.5 million units in a short time. The projected demand never materialized, and the company had nothing to show for its investments but an annual interest bill that totaled $1 billion in 1998. Three successive CEOs had tried to stem the decline by launching transformation programs. Yukata Kume, the CEO in 1992, made the first attempt to save the sinking ship by launching a program that called for plant closings, rationalization of models and supply chains, and overall cost reductions. However, his plan did not achieve much traction, and the situation continued to deteriorate when Yoshifumi Tsuji took over in 1993. Tsuji drafted another transformation program that was quite similar to the one established by his predecessor. However, by 1996 there were still no signs of a real turnaround. Yoshikazu Hanawa took over the reins of the company at that time and was blessed with a fortuitous decline in the Japanese yen, which helped lift the company’s exports, placing Nissan in second position behind Honda in Japan. This blessing was short lived because the underinvestment in its plants caught up with the company, forcing it to extend model years and cut R&D expenditure. Hanawa launched another transformation effort in 1998 following disappointing losses, and started the quest for partners.

Renault and Nissan initiated talks in July 1998, and began to seriously explore the potential for a deal over the next six to eight months. This period of due diligence was characterized by intense cooperation between the two companies, and involved a fairly large group of top leaders as well as middle managers.5 Three sets of people simultaneously examined the potential benefits of the deal. They included the two leaders of the companies, Louis Schweitzer and Y. Hanawa, five lead negotiators for Renault, and four lead negotiators for Nissan, representing functions ranging from finance to legal and corporate planning functions, and about a hundred engineers and specialists from each side.6 Twenty-one joint study teams were formed to examine each distinct element of the operations of both companies. The study teams offered personnel from both groups the opportunity to understand organizational priorities, organizational culture practices, and to build trust across the firms even before the deal was signed. The negotiations stalled at a critical juncture when the legalities of establishing a joint venture structure threatened to get in the way of the deal. Schweitzer sought counsel from his trusted adviser Carlos Ghosn, who was not directly involved in the process of negotiations or due diligence. Ghosn advised Schweitzer to drop the joint venture approach and pursue an alliance instead. This proved to be a critical rallying point during the process and helped the teams overcome the legal wrangling and smooth out their differences.

In March 1999, Schweitzer and Hanawa signed an alliance agreement allowing Renault to buy 36.8% of Nissan for $5.4 billion. Renault was also given the right to increase its holding to 44.4% from May 2001 if it so desired. Nissan took a 10% stake in Renault. The deal was promoted as an alliance. The main distinction was that both firms would keep their identities separate and would be run by separate management teams. However, they would leverage common synergies through custom-built processes spanning a range of functions from design to engineering, and product development


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to distribution. This organizational design caused further consternation among industry watchers who had already discounted the potential for the deal. The deal was variously described as an alliance of the weak, and a marriage of the poor.7 One European CEO summed up the prospects by observing, “Two mules don’t make a race horse.” Bob Lutz, then CEO of Chrysler, remarked that investing $5 billion in Nissan would be tantamount to putting the money in a container and sinking it in the ocean.

Implementing the Deal: Carlos Ghosn Comes to Tokyo…for a recently turned-around Renault, the Nissan link is a dangerous liaison. Auto-industry experts figure it could be 8 to 10 years before Renault saw a real return on its investment, if all goes well. Meantime, potential conflicts over everything from management control to cost-cutting loom large—even though Renault’s 35% stake would enable it to veto decisions it doesn’t like. And if Nissan’s makeover fails, the wasted investment could kill Renault’s chances of remaining independent.

“Dangerous Liaison: It Could Take 10 Years for Renault-Nissan to Yield a Return,” BusinessWeek, March 29, 1999.

Having signed the alliance agreement, Louis Schweitzer called on Carlos Ghosn to head to Japan to oversee the Nissan turnaround. Although Ghosn himself rated the probability of his success at 50%, Schweitzer had much greater confidence in his abilities, and was convinced that he had a very good shot at achieving success.8 Schweitzer had seen Ghosn in action when they had to shut down a plant and make some tough decisions in Viloorde, Belgium. Ghosn had displayed remarkable skill in cutting costs, restructuring operations, and maintaining employee morale all through the layoffs. The complexities involved in turning Nissan around were undeniably greater. Colored by a very strong business culture, a proud automotive heritage, and a deeply ingrained sense of process, restructuring Nissan would prove to be a formidable challenge.

Carlos Ghosn: Credentials to Get the Job Done*1

Carlos Ghosn was born in Porto Bello, Brazil, to parents of Lebanese origin. After a period of schooling at a Jesuit institution, Ghosn was accepted to the famous École Polytechnique in Paris. He was fluent in English, French, Arabic, and Portuguese. After completing studies at the Polytechnique, Ghosn continued his education at another grande école, L’ École des Mines. Michelin recruited him even before his graduation to oversee construction of a new tire plant in Brazil. After stints in corporate R&D, he rose to become the COO of Michelin’s South American operations at the young age of 30. In Brazil, he learned the skills to manage under extreme uncertainty, given poor economic conditions that prevailed with hyperinflation. His success was soon rewarded with a transfer to the U.S. as COO of North American operations in 1989. The assignment centered on integrating the operations of Uniroyal Goodrich, a company that Michelin had acquired. Ghosn was caught between two completely dif-ferent corporate cultures, ownership philosophies, and working styles. Being a family-owned company, Michelin emphasized long-term growth, while Uniroyal focused on short-term earnings. During the U.S. recession at the time, Michelin sought predictable sales volumes that were guaranteed by OEM (original equipment manufactur-ers) contracts with leading car companies. Uniroyal, however, focused on the replacement market, where margins were much higher. This was reflective of the fundamental differences that Ghosn had to blend into a successful operation. He quickly realized the neither the French approach nor the U.S. approach to management was ideal, and for best results he had to merge the best elements of both while minimizing the unique downsides that each brought. He crafted a new governance structure built on cross-functional teams (CFTs) to meet those ends. After the recession in 1994, Michelin reported its first sizable profits in the U.S., and Ghosn attributed the results partly to the CFTs that helped rally different functional interests toward achieving organizational objectives. In 1996, Renault extended him an offer to join them in Paris as their new EVP of Operations, spanning functions such as manufacturing, engineering, product development, purchasing, and cost control. The company had just reported losses of $1 billion that year.

Ghosn wasted no time in drafting plans for cost reductions of $2.4 billion over three years. The central themes of his initiative encompassed elimination of excess production capacity, improving the speed and agility of the product development and engineering process, rationalizing car platforms, and shrinking the supplier

*Much of this section is drawn from Carlos Ghosn’s 2004 autobiography, Shift: Inside Nissan’s Historic Revival, Currency Books.


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network. In helping create the momentum for these significant changes, he introduced the CFT concept that had worked so well in Michelin, Brazil. By 1998, Renault had become a healthy, profitable car company.

The Nissan Challenge

In a sense, Ghosn was expecting to be called upon to lead the Nissan turnaround. “I suppose I was a natural candidate for the job, as I had contributed to the turnaround at Renault….I had been in challenging situations before then as well,” he observed.9 Despite the professional excitement surrounding the assignment, Ghosn had to tackle some organizational issues before deciding to go to Japan. He realized that the job would require a great deal of latitude from Renault headquarters, and that he would not have the time to wait for approval on critical decisions. He discussed his reservations with the company and obtained top leadership approval to make decisions locally in Japan without reverting to Paris. He also reserved the right to pick his own team.

He assembled a small group of executives that included many Renault veterans and other potential high fliers. Only one member spoke Japanese, and none had worked in Japan before. Ghosn was more concerned about the innate abilities of his team to make dramatic changes and act as catalysts of change in a fairly staid and stodgy environment. Prior to his departure for Tokyo, the group met for a three-day briefing on “do’s and don’ts” but, more importantly, to focus on the key messages that Ghosn wanted them to fully embrace. He wanted them to know that they were not going to Japan as missionaries of social change, preaching new ideas about the role of women in society, or the merits of a performance culture vs. a hierarchy based on seniority. Instead, he wanted them to focus on fixing Nissan exclusively without getting mired in social debates about prevailing business custom and practice in the country.

He was officially appointed as the COO of Nissan in June 1999, with Hanawa continuing in the role of president of the company. Ghosn, along with two other Renault executives, Patrick Pelata and Thierry Moulonguet, was nominated to the board of Nissan. Hanawa was looking to Ghosn for some guidance about board appointees from Nissan, but Ghosn demurred, emphasizing that Hanawa should have the final say and pick executives he thought would complement Ghosn well. In the spirit of forging close links between the two companies, Tsumoto Sawada, the former EVP of Manufacturing and Engineering at Nissan, was appointed as an adviser to Schweitzer. This helped Renault gain a vantage position to help transfer technologies across the companies, especially in the areas of engineering.

Structural Changes

Ghosn believed in maintaining an open mind during all stages of the transformation process. He observed, “You must start with a clean sheet of paper, because the worst thing you can have is prefabricated solutions….you have to start with a zero base of thinking, cleaning everything out of your mind. You have to have the approach of a scientist. [A scientist] has a lot of knowledge, but his knowledge is only a tool. Observation of fact brings him the solution.”10 In keeping with this belief, he did not have a well-hewn plan to turn Nissan around when he arrived in Japan. He did hit the ground running, however. Traveling to all of Nissan’s plants, he engaged in conversation with the entire cadre of the company, ranging from shop floor employees to executives. Aided by translators, he was curious to hear from the shop floor workers about their views on what ailed Nissan and what they thought needed fixing. He also showed the same curiosity in conversations with Nissan dealers, primarily focusing on issues such as product design and appeal, possible new offerings, and the key impediments in the marketplace. These conversations were characterized by respect and trust, the twin qualities that Ghosn believed were essential in cementing interorganizational relationships.

Taking a page from his previous management experience at Michelin and Renault, Ghosn created a structure around Cross-Company Teams (CCTs) and Cross-Functional Teams (CFTs). The eleven CCTs were organized around “synergy” areas such as purchasing, manufacturing, product platforms, and technology. Staffed by 10 members each, almost exclusively from middle management ranks, the CCTs were the key drivers for generating the revival plan for the company. Appointments to the CCTs were made solely on the basis of merit. Smaller teams that lent specialized expertise in focus areas such as capacity planning and investments supported the CCTs. The work of the CCTs was complemented by the CFTs within each of the companies. As Ghosn saw it,


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“The cross-company teams and the cross-functional teams working separately inside Nissan and Renault have complementary roles: the company CFTs serve as guardians of each company’s revival plan, while the CCTs feed the alliance.”11

Ghosn used the team selection process as a vehicle to convey the gravity of the situation as well as his intent to rely on middle management expertise. To this end, he asked that 1,500 profiles of leading Nissan candidates for these assignments, both from Japanese as well as international operations, be posted at headquarters so that choices could be made on the basis of merit. He was personally interested in this important task, and shaped choice assignments himself. As one executive observed, “Ghosn brought a lot of mavericks with him. He has shown those are the kinds of people he likes.”12 The teams were given 90 days to prepare actionable plans for the turnaround. There were no sacred cows, and everything was on the table for discussion and change. As the teams began the hard work to draft specific plans, Ghosn was priming the employees for change. He unfailingly mentioned the fact that Nissan had just ceded the #2 spot in the market to Honda, and that the revival plan that the teams were working on represented the last hope for Nissan. Very visible on plant floors across the Nissan network, Ghosn engaged in conversations with the rank and file to elicit their ideas and impressions. His instincts, sharpened while at Michelin and Renault, proved right. The workers on the shop floor did have important insights about the problems that plagued the company and possible solutions that could fix them.

English was chosen as the common language of communication for all official exchanges under the alliance. English language courses were offered to both Nissan and Renault employees, while Ghosn himself was taking Japanese conversation courses. He took the additional step of creating a dictionary of sorts, because he realized that some key English terms such as commitment, targets, and transparency had different meanings in Japan and France. He urged his top management team to be transparent in thought, word, and action. “What we think, what we say, and what we do must be the same. We have to be impeccable in ensuring that our words correspond to our actions. If there are discrepancies between what we profess and how we behave, that will spell disaster.”13 In a break with tradition, Ghosn insisted that the press be invited to the first annual meeting. Ghosn started his address in Japanese and switched to English, outlining the challenges that lay ahead. He told the audience, “I have not come to Japan for Renault, but for Nissan. I will do everything in my power to bring Nissan back to profitability at the earliest date possible and revive it as a highly attractive company.”14

The Nissan Revival Plan was ready for launch in October 1999, three months after the new governance structure had been implemented. On the eve of the annual Tokyo Motor Show, Ghosn presented the restructur-ing plan to a wide audience of journalists and car enthusiasts worldwide. This was the first time most Nissan employees themselves heard about the plan and its projections. He made the case for change rather succinctly by recalling the abysmal performance history of the company, declining market share, enormous debt burden, lack of profitable exciting new models, and a culture that seemed to take poor performance in its stride. He then proceeded to identify the key milestones for the transformation. Purchasing costs that had ballooned on the backs of multiple platforms, bloated supply chains, and a benevolent keiretsu system would be reined in by 20% over three years. Manufacturing capacity, which was estimated at 53% excess, would be cut by 30% through plant closures and platform consolidation. Nissan’s shareholding in nonstrategic keiretsu networks would be

Exhibit 3. Renault-Nissan Governance Structure

Global Alliance Committee“C” Level Leaders from Renault and Nissan

Cross-Company Teams (Includes Renault and Nissan Employees led by Nissan or Renault)

Alliance Coordination Bureau International Advisory Group

Cross-Functional Teams (within Renault and Nissan)

Global Alliance Committee“C” Level Leaders from Renault and Nissan

Cross-Company Teams (Includes Renault and Nissan Employees led by Nissan or Renault)

Alliance Coordination Bureau International Advisory Group

Cross-Functional Teams (within Renault and Nissan)


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liquidated to fund the transformation plan and pay down Nissan debt. For example, Nissan had an investment of $216 million in Fuji Heavy Industries, a company that made Subaru cars, Nissan’s competitor. Central to this major transformation would be a rekindling of the innovative spirit of design and product excellence within the company. Toward that end, Ghosn announced that Nissan would be reviving the “Z,” an icon of design and engineering prowess that had been discontinued due to a lack of funding.

In his closing remarks, Ghosn acknowledged that if the revival plan succeeded, it would have many fathers, but if it failed, it would have only one—himself. He summarized his objectives in three areas: (1) a return to profitable operations by 2000, (2) operating margin of at least 4.5% by 2002, and (3) decrease Nissan’s out-standing debt to $6.3 billion by 2002. The top management would be personally accountable for meeting these objectives, he added. “The big risk is that if you announce ambitious goals, people will not believe you. They’ll say, ‘He said 100%, but if he gets 50% he will be happy’….Well, we want 100 and we’re going to get 100. If we don’t get it next year, that’s it: we will resign…”15

Delivering on the Promise“What people see is what we execute. Part of my Latin surroundings is an ability to talk too much and not implement. I’ve seen it in many places—Brazil, France, and Italy—where people tend to think about a problem and talk about it without doing anything about it. The temptation to talk is so big. I consider it pleasant on a personal level; extremely unpleasant in business.”

D. Magee, Turnaround: How Carlos Ghosn Rescued Nissan, Harper Collins: NY, 2003.

Ghosn focused his energies almost exclusively within the company to keep the employees motivated and driven to succeed. Realizing that massive changes usually bring forth significant uncertainty, he assured all employees that everyone would have a role in Nissan, provided they were willing to abide by the new performance expecta-tions and keep the best interests of the company in mind. Although plant closings would result in a reduction of the workforce by 21,000 jobs over three years, there would be no layoffs. Instead, the company would use attritions, early retirements, and relocations to ease the pain of plant closings.

The message was clearly one of positive engagement and implementation of revival plans under very tight deadlines. The governance structure originally created to develop the revival plans was continued because it seemed to offer a good approach to bringing the best of both companies together. It was apparent that a change in mindset was crucial to achieving a successful transformation. Ghosn consistently told employees that they should spend 95% of their time on implementation and only 5% of their time in planning, contrary to the tradition at Nissan and Renault. The cultures on both sides had to become more receptive to new ideas, new ways of looking at existing obstacles, and creative approaches to leveraging new opportunities that were emerging.

The exchange of ideas across companies was fostered through several mechanisms in addition to the CCTs that were in place. Teams of Renault engineers and production employees visited Nissan and vice versa to share their expertise. Those on deputation were explicitly told that they should not think of themselves as Nissan em-ployees working at Renault or Renault employees working at Nissan. Instead, they were to consider themselves as working for the alliance. Nissan’s production supervisors, adept at controlling operating and engineering processes, were quite visible on plant floors in Renault plants. The Asian Wall Street Journal reported a scene where a Japanese shop floor supervisor was demonstrating to a group of French workers the right way to hold a wrench while performing a particular process and how the workers seemed to be listening with rapt attention despite the apparent cultural differences between them and the Japanese demonstrator.16

On the Nissan side of the equation, Patrick Pelata, who was overseeing some of the key marketing functions, learned that the brand identity for Nissan was quite a confusing mix of messages that differed significantly across key markets. In forging a common identity, Nissan’s design team was relocated from the engineering group to the marketing group. Some of the top executives were stationed in major markets such as the U.S. as opposed to Tokyo as had been the usual practice. A global marketing team was created to coordinate Nissan’s activities across the globe, offering much higher levels of clarity and transparency. Regional presidencies in Europe and North America were folded down and replaced by a committee structure with both area and function VPs jointly deciding on geographic strategies. This had the beneficial impact of reducing miscommunication and again


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emphasized clear strategic direction and responsibility traceable to the very top of the organization. By mid-2002, 30% of all purchasing was jointly done between Renault and Nissan. This required some deft handling of sensitivities across the two companies, since both parties felt that they had more exacting standards than the other. Within the purchasing organization, there was a new structure in place with a general manager overseeing each of the major input areas, namely power trains, vehicle parts, and materials and services. Under each of the general managers, there were Global Supplier Account Managers (GSAMs) who negotiated with large suppliers worldwide. Deputy GSAMs assisted the GSAMs. When the GSAM was a Renault employee, the DGSAM was a Nissan employee, and vice versa. This “mirror-effect” helped immensely since the decision-makers were talking to counterparts who shared similar concerns and perspectives on the other side. They spoke the same language of the function, i.e., purchasing. Global structures were established for managing finance, manufacturing, IT, and R&D functions. Similar changes (see Exhibit 4) were introduced to seek synergies in a range of areas spanning product design and manufacturing to managing dealerships.

Changing MindsetsManagement of talent and human resources was an integral part of the change effort. Ghosn saw that his plans would only be successful if he could replace key elements of the administrative heritage of Nissan, and that ob-viously called for radical changes in managing people. There were three key dimensions that warranted further examination; namely, (1) the seniority system of career growth and advancement, (2) a culture of blame, and (3) lack of clear motivation and rewards.

Like most Japanese companies, managers were promoted from within on the basis of seniority; hence, the longer they stayed in the firm, the more power and monetary rewards they were able to garner indepen-dent of their performance. Having risen in rank, they had little incentive to adopt new methods, or radically new ideas, choosing instead to maintain the consensus-driven status quo. Although this proved to be a major impediment in the transformation, Ghosn did not want to challenge the system directly. Instead, he made sure that all nominations for promotions and compensation rewards would be based entirely on performance. He created and headed a team called the Nomination Advisory Committee to review promotion recommendations in the company. It was mandated that within a year, every promotion had to be ratified by this committee solely on performance considerations before it could take effect. In so doing, he was able to elevate a younger cadre

Exhibit 4. Alliance Actions and Benefits

Action Remarks Benefits

Joint Purchasing By 2007, 82% of purchasing was done jointly. The companies share 64% of the same suppliers.

Input costs account for 70% of a car’s value. The Alliance has been able to gain a 4% price reduction each year.

Common Platforms The Alliance has seven common platforms. Nissan has also reduced its platforms from 25 to about 15.

Platform synergies include sharing common parts, design specifications, and manufacturing processes.

Joint R&D The Alliance has pooled resources to pursue fuel cell technologies and new designs for more fuel-efficient engines.

Economies of scale and scope are realized. Knowledge-sharing benefits can magnify research potential.

Common Manufacturing

The Alliance shares factories in Brazil, Spain, South Africa, and Mexico

Savings in CAPEX, economies of scale, increased capacity utilization.

Joint Distribution Nissan merged its admin. operations with Renault in Europe and obtained greater access to South America through Renault. Renault entered Australia, Taiwan, and Indonesia

Market access and economies of scope. Costs benefits in overhead cost reduction through shared facilities.


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of high-performing managers through the ranks at a pace that would have been impossible in the traditional company. Two VPs who were in their early 40s were promoted to Senior VP rank, an unheard-of progression in the company. However, he made sure that they did not discriminate against managers solely on the basis of their age. In fact, most of the senior VPs the committee nominated during the first two years were long-serving veterans who had delivered results.

Performance bonuses were instituted with much tighter definitions as to what constituted superior perfor-mance. In the past, most employees received a bonus independent of their performance levels. The high perform-ers were only marginally better compensated than others. This extended all the way to top management. Using a stock options program, Ghosn spearheaded a more individualized system that set targets and commitments, almost completely new terms in the Nissan lexicon. Performance outcomes were closely monitored and rewarded almost immediately. Cash incentives, spot promotions, and other motivational devices were introduced. Ghosn appeared willing to take a chance on younger managers who demonstrated performance although they did not have a long track record.

The performance-oriented culture required clear delineation of responsibilities and expectations at all levels, something that was absent at Nissan. This critical lapse had led to departmental battles where one department would blame the other for missed targets or other performance shortfalls. Designers would blame engineering, who would in turn blame manufacturing, who would then blame finance, and so on. In a clear departure from the past, even the most senior leaders were held accountable, and there were indeed some who were let go. Cross-functional teams, global functions, and periodic personnel rotations fostered a climate where people began gaining a clearer picture of their interconnected roles.

Emerging VictoriousIn May 2001, when the first full-year results after the transformation began were announced, there was reason for at least cautious celebration. Sales had grown by 1.9% to nearly $50 billion and debt had shrunk nearly 50%. Operating margins had tripled to 4.75%. In many ways, Ghosn had not only fulfilled some of the key promises he made when unveiling the revival plan, but in fact delivered the promises in a much shorter time frame than had been expected. For the first time in 26 years, Nissan seemed to have found the right road to prosperity. At the Tokyo Auto Show later that year, the first-half results for 2001 were revealed to be more promising. Nissan’s operating margin had reached 6.8%, and 18 of its 38 models were now profitable. Ghosn’s colleagues and in-dustry analysts waxed poetic at this miraculous turnaround. Executive VP and Board member Norio Matsumura observed, “His greatest performance is that he was able to restructure people’s mindsets.”17 A shareholder com-mented, “Japanese managers couldn’t have done what he has done. They’d have felt too many obligations. They wouldn’t have been able to take bold measures”18

No matter how promising your resources, you will never be able to turn them into gold unless you get the corporate culture right. A good corporate culture taps into the productive aspects of a coun-try’s culture, and in Nissan’s case we have been able to exploit the uniquely Japanese combination of keen competitiveness and sense of community that has driven the likes of Sony and Toyota—and Nissan itself in earlier times…people have to believe that they can speak the truth and that they can trust what they hear from others…

C. Ghosn, “Saving the Business without Losing the Company,” Harvard Business Review, January 2002.

New Responsibilities and New ChallengesLouis Schweitzer announced his retirement from Renault in the summer of 2005. While Nissan had shown prom-ising signs of rebirth and revival, Renault had taken a turn for the worse. Profitability had declined precipitously, and the products it had to offer were too old and stodgy for a dynamic marketplace. It had also been unable to profitably enter new emerging markets and still depended on Europe for 72% of its revenues. The competition at home was getting tougher. Toyota had joined hands with French rival Citroën to boost its market share in France. Renault, in the meantime, still encountered quality and productivity problems. Nissan proved to be a great portfolio investment for Renault in retrospect, because its 44.4% stake in that company yielded 50% of its


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entire profitability in 2004. Although not as dire as Nissan’s situation in 1999, Carlos Ghosn was tapped once again to take over the reins from Schweitzer, and arrived in Paris in May 2005.

He set out a revival plan dubbed Commitment 2009, which called for an increase in sales of about 800,000 vehicles, an increase in operating profit of 6% from 3.2%, and an increase in dividends per share from €1.80 to €4.50. No mass manufacturer other than BMW had achieved a margin of 6% in Europe. By 2007, the news was far from good. One of the key projects, a luxury car named Vel Setis, failed due to poor styling and other performance considerations. Operating margins hovered around 2.5%. Forays into markets such as Russia had proven to be expensive with an initial run of negative double-digit operating margins.

Since taking over as CEO of Renault, Ghosn was the first leader to run two major automobile companies in tandem. This had begun to take its toll. There were critical setbacks in the U.S. market for Nissan. The plant in Canton, Ohio, was just coming up to speed, having fixed many of the quality problems that had plagued it since its inception. In February of 2007, Nissan issued its first profit warning since the turnaround, and reported its first annual loss immediately after. The company had indicated that it would miss its sales target of 4.2 million vehicles in 2009. Operating margins had declined by 11%, and sales in its home market were not promising either. Nissan had dropped its market share from 18.4% to 16.6% in its home market, and the overall industry itself was in the grip of a 20-year low in Japan.

Many were beginning to question whether Ghosn would be able to manage a comeback for Nissan in view of the ominous signs on the horizon. Combined with a faltering Renault that was just barely beginning to show signs of resurgence, would he be able to manage the monumental task of making a course correction for both companies? Some believed that Ghosn had driven a bit too hard at Nissan, and continuing the pace of transformation would be quite difficult now that the crisis had passed. As The Economist observed, “Much will depend on his ability to rekindle the sense of urgency that helped bring Nissan back from the brink eight years ago. In today’s less dramatic circumstances, it will not be easy.”19

Notes1 “Megamergers Accelerating Strong Trends That Are Reshaping the Global Automotive Industry’s Approach to the Car Buyer,” Business Wire, May 16, 2000.2 “Global Auto Consolidation,” CommerzBank, 14 September 2000.3 “Setting the Stage for the Next 100 Years,” Bear Stearns, November 2000.4 “Renissant?” The Economist, March 20, 1999, pp. 65-66.5 S. Miller, “Renault Steers Forward. After a Failed Marriage to Volvo, Schweitzer Gets It Right with Nissan,” The Wall Street Journal, February 15, 2001.6 Pierre-Yves Gomez, H. Korine, and O. Masclef, “Generating Cooperative Behavior Between the Unacquainted: A Case Study of the Renault/Nissan Alliance Formation Process,” Working Paper, EM Lyon and London Business School, 2002.7 Y. Ono, “Lesson for Today: When in Japan, Bow to Shareholders,” The Asian Wall Street Journal, June 21, 2000.8 G. Edmondson, “How Renault Jump-Started Nissan, BusinessWeek, October 1, 2004.9 C. Ghosn, “Saving the Business without Losing the Company,” Harvard Business Review, January 2002, pp. 3-11.10 D. Magee, Turnaround: How Carlos Ghosn Rescued Nissan, Harper Collins: NY, 2003.11 Ghosn, “Saving the Business without Losing the Company.”12 T. Burt, and A. Harney, “Le Cost Killer Makes His Move,” Financial Times, November 9, 1999.13 V. Emerson, “An Interview with Carlos Ghosn,” Journal of World Business, Spring 2001, pp. 3-11.14 S. Strom, “In a Change, Nissan Opens Annual Meeting to Press,” New York Times, June 26, 1999.15 T. Peterson, “Nissan’s Carlos Ghosn: No If ’s, No And’s, No But’s,” BusinessWeek, January 18, 2000.16 S. Miller, and T. Zaun, “Nissan Intends to Return a Favor to a French Ally,” The Asian Wall Street Journal, April 5-7, 2002.17 A. Taylor, “Nissan’s U-Turn to Profits,” Fortune, February 18. 2002.18 I. Williams, “Japan’s New Superstar,” Sunday Telegraph, July 1, 2001.19 “Tough Ghosn; Face Value,” The Economist, September 15, 2007.


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Appendix

1999 2000 2001 2002 2003 2004 2005 2006Historical Performance Trends for Renault (Thousands of Euros)Sales Revenues 36278 38583 34617 34586 35658 38772 39978 40097Cost of Goods Sold 28264 30214 28240 28178 29273 31162 32137 32499Operating Income 2205 2022 473 1483 1402 2418 1323 1063Operating Margin % 6.08 5.24 1.37 4.29 3.93 6.24 3.31 2.65Income from Nissan -330 56 497 1335 1705 1767 2275 1871EPS 2.23 4.5 4.38 7.53 9.32 13.35 13.19 11.17Shares Outstanding 239798 239798 239998 259560 265960 265960 255177 256994

Historical Performance Trends for Nissan (Millions of Yen)Sales revenues 5977075 6089620 6196241 6828588 7429219 8576277 9428292 10468583Cost of Sales 4568233 4633780 4546526 4872324 5310172 6351269 7040987 8027186Operating Income 82565 290314 489215 737230 824855 861160 871841 776939Operating Margin % 1.38 4.77 7.90 10.80 11.10 10.04 9.25 7.42EPS -179.98 83.53 92.61 117.75 122.02 125.16 126.94 112.33Employees 141526 133833 125099 127625 123748 183607* 183356 186336

*Increase in employees due to growth activity and acquisitions in China and elsewhere.

Source: Company annual reports.


caso 7 - renault nissan the challenge of sustaining strategic change

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